<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, 1998. 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, no 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 18, 1999, computed by reference to the
average of the closing bid and asked price for such stock on that date
was $77,644,000. 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 18, 1999, there were outstanding 3,011,790 shares of the
registrants' no par common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be
held May 13, 1999 are incorporated by reference into Part III.
The Exhibit Index is located on page number 61.
<PAGE> 2
PART I
Item 1 - Business.
Empire Banc Corporation (the "Corporation") 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>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest and fees on loans 65% 67% 67%
Other interest income 16% 16% 17%
Non-interest income 19% 17% 16%
---- ---- ----
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, 1998, the Bank employed 210 full-time and 28 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, 1998 totaled over $293 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.
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
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, 1998 and 1997, 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.
<PAGE> 4
As of December 31, 1998, 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 the Federal Deposit Insurance Corporation Improvement Act of 1991,
"FDICIA", 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 well-capitalized institutions displaying little risk, to 27 basis
points for under capitalized 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.
<PAGE> 5
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.
Information furnished in accordance with Exchange Act Guide 3: Statistical
Disclosure by Bank Holding Companies is included in Management's Discussion
and Analysis of Financial Condition and Results of Operations, Item 7, and
Financial Statements and Supplementary Data, Item 8.
Information about the executive officers of the Corporation is set forth
below.
<TABLE>
<CAPTION>
Name and Age Position
- --------------------------- -------------------------------------
<S> <C>
James E. Dutmers, Jr. Chairman and Chief Executive Officer of the
(55) Corporation and Empire National Bank
Robert L. Israel President and Chief Operating Officer of the
(55) Corporation and Empire National Bank
William T. Fitzgerald, Jr. Vice President, Secretary/Treasurer of the
(53) Corporation; Division Vice President and
Chief Financial Officer of Empire National Bank
Marilyn J. McCool Vice President of the Corporation;
(52) Division Vice President and Director of
Personnel of Empire National Bank
James M. Merenda Vice President of the Corporation;
(54) Division Vice President and Senior
Trust Officer of Empire National Bank
Bruce W. Reavely Vice President of the Corporation;
(50) Division Vice President and Senior Operations
Officer of Empire National Bank
Daniel G. Stoudt Vice President of the Corporation;
(52) Division Vice President and Senior
Loan Officer of Empire National Bank
</TABLE>
<PAGE> 6
Item 2 - Properties.
The executive offices of the Corporation and the Bank are maintained at
the main office of the Bank, 1227 East Front St., Traverse City, Michigan.
The Bank leases its main office and seven additional branch and automated
teller machine locations. The leases expire at various times through
the year 2011 and all include renewal periods. Net aggregate annual
rentals for banking facilities in 1998 were $460,000.
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 remote automated teller
machines for customer use in its market area.
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 1998 to
a vote of the Corporation's security holders.
<PAGE> 7
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 531
holders of the Corporation's common stock as of December 31, 1998.
Quarterly cash dividends were declared during 1998 and 1997 totaling
$0.98 and $0.87 per common share per year. Note 19 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 three for two stock split declared
in the second quarter of 1998.
<TABLE>
<CAPTION>
Price Range
Quarter High Low Dividends
- ----------------------------------------------------------------
<S> <C> <C> <C>
1998
Fourth $39.50 $39.13 $.250
Third 45.00 37.25 .250
Second 45.00 35.50 .250
First 35.50 30.67 .233
1997
Fourth 30.67 27.27 .233
Third 27.27 24.70 .212
Second 24.70 23.64 .212
First 23.64 22.43 .212
Amounts retroactively adjusted for stock splits and dividends.
</TABLE>
<PAGE> 8
Item 6 - Selected Financial Data - Empire Banc Corporation
<TABLE>
<CAPTION>
(in thousands, except share data)
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest income $ 36,559 $ 33,419 $ 30,599 $ 28,606 $ 23,628
Interest expense 16,435 15,189 14,066 13,231 9,839
-------- -------- -------- -------- --------
Net interest income 20,124 18,230 16,533 15,375 13,789
Provision for loan losses 1,215 1,459 1,686 745 796
Non-interest income 8,759 6,809 5,850 5,017 4,843
Non-interest expense 18,539 15,737 13,861 13,494 12,241
-------- -------- -------- -------- --------
Income before taxes 9,129 7,843 6,836 6,153 5,595
Federal income taxes 3,032 2,598 2,259 2,007 1,841
-------- -------- -------- -------- --------
Net income $ 6,097 $ 5,245 $ 4,577 $ 4,146 $ 3,754
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------
Per Share:
Earnings $ 2.06 $ 1.81 $ 1.60 $ 1.46 $ 1.33
Diluted earnings 1.93 1.68 1.48 1.36 1.24
Dividends 0.98 0.87 0.73 0.59 .53
Book value 13.78 12.42 11.34 10.50 9.32
- ----------------------------------------------------------------------------------
Ratios Based on Net Income:
Return on average equity 15.85% 15.36% 14.72% 14.81% 14.72%
Return on average assets 1.33 1.26 1.20 1.18 1.17
Dividend payout ratio 47.71 48.08 45.90 40.30 39.93
Average shareholders' equity
as a percent of average assets 8.37 8.23 8.14 7.96 7.92
- ----------------------------------------------------------------------------------
Balance Sheet:
Assets $477,964 $442,953 $400,819 $372,426 $336,951
Loans 325,774 302,469 272,182 259,102 243,583
Securities 120,399 98,754 98,578 84,312 64,231
Deposits 410,139 386,670 344,354 319,540 297,989
Shareholders' equity 40,756 36,199 32,673 30,005 26,332
- ----------------------------------------------------------------------------------
Per share amounts have been adjusted for stock splits and 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 1998, the Corporation achieved record earnings of $6,097,000, an
increase of $852,000, or 16.2 percent, over the $5,245,000 earned in
1997. In 1997, net income increased $668,000, or 14.6 percent.
Earnings Per Share
Earnings per share were $2.06 for 1998, compared to $1.81 in 1997 and $1.60
in 1996. Diluted earnings per share were $1.93, compared to $1.68 in 1997
and $1.48 in 1996.
Return on Average Shareholders' Equity
Return on average shareholders' equity measures how profitably the
shareholders' invested capital is employed. Return on average equity was
15.8 percent for 1998, compared to 15.4 percent and 14.7 percent in 1997
and 1996.
Return on Average Assets
Return on average assets, a measure of profitability, was 1.33
percent in 1998, compared to 1.26 percent and 1.20 percent in 1997 and
1996.
Book Value Per Share
Book value per share of common stock increased 11 percent to $13.78 at
December 31, 1998, compared to $12.42 and $11.34 at December 31, 1997 and
1996.
<PAGE> 10
Summary of Operating Results
The following is a summary of the major components of the consolidated
operating results:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $20,124 $18,230 $16,533
Add: Taxable equivalent (TE) adjustment 144 135 127
------- ------- -------
Net interest income - (TE) 20,268 18,365 16,660
Provision for loan losses 1,215 1,459 1,686
Non-interest income 8,759 6,809 5,850
Non-interest expense 18,539 15,737 13,861
------- ------- -------
Income before tax - (TE) 9,273 7,978 6,963
Income taxes,
including TE adjustment 3,176 2,733 2,386
------- ------- -------
Net income $ 6,097 $ 5,245 $ 4,577
======= ======= =======
- ----------------------------------------------------------------------
</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) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
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* $309,664 $29,269 9.45% $289,828 $27,081 9.34% $261,251 $24,552 9.40%
Taxable securities 100,571 6,227 6.19% 89,331 5,728 6.41% 86,783 5,397 6.22%
Tax-exempt securities* 5,507 379 6.89% 5,213 369 7.08% 4,989 361 7.24%
-------- ------- -------- ------- -------- -------
Securities 106,078 6,606 6.23% 94,544 6,097 6.45% 91,772 5,758 6.27%
Federal funds sold 15,483 828 5.27% 6,882 376 5.46% 7,882 416 5.28%
------- ------- -------- ------- -------- -------
Earning assets 431,225 36,703 8.51% 391,254 33,554 8.58% 360,905 30,726 8.51%
Cash and due from banks 17,465 14,950 13,318
Other assets 10,937 8,578 7,733
-------- -------- --------
Total assets $459,627 $414,782 $381,956
======== ======== ========
Liabilities and Equity
CDs over $100,000 $ 10,603 547 5.09% $ 10,690 566 5.29% $ 11,204 595 5.31%
Savings and
interest checking 71,155 1,564 2.17% 64,526 1,427 2.21% 61,987 1,351 2.18%
Money market deposits 113,435 4,953 4.37% 98,357 4,321 4.39% 77,578 3,214 4.14%
Time deposits 139,969 8,362 5.97% 134,480 8,119 6.04% 130,359 7,908 6.07%
-------- ------- -------- ------- -------- -------
Interest-bearing
Deposits 335,162 15,426 4.60% 308,053 14,433 4.69% 281,128 13,068 4.65%
Federal funds purchased 233 13 5.54% 651 37 5.68% 461 27 5.86%
FHLB advances 16,507 996 6.03% 12,219 719 5.88% 16,262 971 5.97%
-------- ------- -------- ------- -------- -------
Interest-bearing
Liabilities 351,902 16,435 4.67% 320,923 15,189 4.73% 297,851 14,066 4.72%
Demand deposits 60,589 52,794 46,844
Other liabilities 8,677 6,918 6,172
Shareholders' equity 38,459 34,147 31,089
-------- ------- -------- ------- -------- -------
Total liabilities
and equity $459,627 $414,782 $381,956
======== ======== ========
Net interest income (TE) $20,268 $18,365 $16,660
======= ======= =======
Net interest spread (TE) 3.84% 3.85% 3.79%
==== ==== ====
Net interest margin (TE) 4.70% 4.69% 4.62%
==== ==== ====
- --------------------------------------------------------------------------------------------------------
*Interest income on tax-exempt securities and certain tax-exempt loans have been adjusted to a
tax equivalent basis.
</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) 1998 vs. 1997 1997 vs. 1996
- -------------------------------------------------------------------------------------
Average Average
-------------- ---------------
Balance Rate Net Balance Rate Net
----------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Loans, including fees $1,820 $ 368 $2,188 $2,561 $ (32) $2,529
Taxable securities 701 (202) 499 157 174 331
Tax-exempt securities 20 (10) 10 16 (8) 8
------ ------ ------ ------ ------ ------
Securities 721 (212) 509 173 166 339
Federal funds sold 460 (8) 452 (56) 16 (40)
------ ------ ------ ------ ------ ------
Changes in interest income 3,001 148 3,149 2,678 150 2,828
Interest expense
CDs over $100,000 (5) (14) (19) (29) -- (29)
Savings and interest checking 143 (6) 137 53 23 76
Money market deposits 658 (26) 632 904 203 1,107
Consumer CDs 329 (86) 243 249 (38) 211
------ ------ ------ ------ ------ ------
Interest-bearing deposits 1,125 (132) 993 1,177 188 1,365
FHLB advances and other 236 17 253 (227) (15) (242)
------ ------ ------ ------ ------ ------
Changes in interest expense 1,361 (115) 1,246 950 173 1,123
------ ------ ------ ------ ------ ------
Changes in net interest income $1,640 $ 263 $1,903 $1,728 $ (23) $1,705
====== ====== ====== ====== ====== ======
- --------------------------------------------------------------------------------------
Any variance attributable jointly to volume and rate changes is allocated to volume and rate in
proportion to the relationship of 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) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Average Net Average Net Average Net
Earning Interest Interest Earning Interest Interest Earning Interest Interest
Assets Spread Income Balance Spread Income Assets Spread Income
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Source of funding
Interest-bearing
liabilities $351,902 3.84% $13,518 $320,923 3.85% $12,331 $297,851 3.79% $11,288
Non-interest-bearing
liabilities and
equity capital 79,323 8.51% 6,750 70,331 8.58% 6,034 63,054 8.51% 5,372
-------- ------- -------- ------- -------- -------
$431,225 $20,268 $391,254 $18,365 $360,905 $16,660
======== ======= ======== ======= ======== =======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest income (TE) increased $1.9 million, or 10 percent, in 1998
as average earning assets increased $40 million, or 10 percent, and the
net interest margin (net interest income as a percentage of average
earning assets) remained stable at 4.70 percent. Earning assets funded
with interest-bearing liabilities increased $31 million, or 10 percent,
adding $1.2 million in net interest income. Earning assets funded with
non-interest-bearing liabilities and equity capital increased $9 million,
or 13 percent, and the earning asset rate decreased 7 basis points,
contributing an additional $716,000 to the increase in net interest income.
The increase in average earning assets was principally due to growth in
the loan portfolio, which increased $20 million, or 7 percent, and the
average rate increased 11 basis points. Mortgage loans increased $2
million, or 2 percent, and commercial loans increased $10 million, or 7
percent and average consumer loans increased $8 million, or 10 percent,
in 1998. Investment securities increased $12 million, or 12 percent, and
the average rate earned on the security portfolio decreased 22 basis points.
Overnight federal funds sold increased on average $9 million and the rate
earned on these funds decreased 19 basis points from 1997 following a trend
of declining rates in the overall economy.
<PAGE> 14
The primary funding source is interest-bearing deposits. Interest-bearing
deposits increased $27 million, or 9 percent, and the average rate decreased
9 basis points from 1997. The increase in average interest-bearing deposits
was primarily in money market investment accounts, which increased $15
million, or 15 percent. Average short-term time certificates in denominations
of $100,000 or more approximated 3 percent of average total deposits in 1998,
1997 and 1996, significantly below the levels of banks of comparable size.
Federal Home Loan Bank advances on average increased $4 million during 1998.
In 1997, net interest income increased $1.7 million, or 10 percent, as average
earning assets increased $29 million, or 8 percent, and the net interest
margin increased 7 basis points. The increase in earning assets funded with
interest-bearing liabilities, at a increased interest spread, accounted for
$1.1 million of the increase in net interest income. The increase in earning
assets funded with non-interest-bearing liabilities, at an increased rate,
added $662,000 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 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, 1998, loans to borrowers in the industries of "Offices of
Physicians" (13.7%) and "Lessors of Non-Residential Buildings" (10.3%)
comprised more than ten (10) percent of total loans. The medical community
in the Corporation's service area is led by a highly rated regional provider
of health services. The growth potential of the medical community and the
strong personal earnings and financial strength of medical professionals is
a source of future loan, deposit and trust asset management growth for the
Corporation.
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) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $153,115 $132,310 $122,322 $120,369 $106,447
Mortgage 77,432 80,641 71,346 63,809 56,009
Consumer 64,069 61,850 59,031 63,328 71,023
Revolving Credit 31,158 27,668 19,483 11,596 10,104
--------- --------- --------- --------- ---------
$325,774 $302,469 $272,182 $259,102 $243,583
========= ========= ========= ========= =========
- ---------------------------------------------------------------------------
</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, 1998, 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 $40,954 $196,865 $87,955 $325,774
Less:
Residential mortgage
and consumer loans 13,567 98,494 60,598 172,659
------- -------- ------- --------
$27,387 $ 98,371 $27,357 $153,115
======= ======== ======= ========
Loans maturing with:
Fixed interest rates $15,622 $ 90,165 $12,317 $118,104
Variable interest rates 11,765 8,206 15,040 35,011
------- -------- ------- --------
$27,387 $ 98,371 $27,357 $153,115
======= ======== ======= ========
- ----------------------------------------------------------------------------
</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) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $1,283 $ 893 $2,131 $ 867 $1,228
Renegotiated loans 408 210 408 606 644
------ ------ ------ ------ ------
Total non-performing loans 1,691 1,103 2,539 1,473 1,872
Other real estate 221 177 -- 280 53
------ ------ ------ ------ ------
Total non-performing assets $1,912 $1,280 $2,539 $1,753 $1,925
====== ====== ====== ====== ======
Non-performing assets as
a percent of total loans .59% .42% .93% .68% .79%
Accruing loans 90 days or
more past due $ 189 $ 367 $ 172 $ 72 $ 128
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 16
In 1998, total non-performing assets increased $632,000, or 49 percent.
Non-accrual loans increased $390,000, renegotiated loans $198,000 and
other real estate increased $44,000 from year-end 1997. The ratio of
non-performing assets as a percent of total loans was 0.59 percent of
total loans at December 31, 1998. In addition to loans classified as
non-performing, or 90 days past due, there are other loans totaling
$2.4 million at December 31, 1998, on which management closely
monitors the borrowers' ability to comply with payment terms.
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 1998 on the $1,283,000 of non-accrual loans amounted
to $113,000 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 $16,000.
All loans classified for regulatory purposes as loss, doubtful, or
substandard have been included in the above disclosures. There were no
other interest bearing assets at December 31, 1998 that would be required
to be disclosed as non-performing or potential problem loans.
There were no foreign loans outstanding at December 31, 1998.
<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) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision for loan losses $1,215 $1,459 $1,686 $ 745 $ 796
Net loan losses 515 859 1,361 445 526
Year-end allowance for loan losses 4,825 4,125 3,525 3,200 2,900
Allowance as a percent of
year-end loans 1.48% 1.36% 1.30% 1.24% 1.19%
Net loan losses to average loans
outstanding .17% .30% .52% .18% .23%
- -------------------------------------------------------------------------------
</TABLE>
In 1998, the allowance for loan losses increased $700,000 to 1.48 percent
of loans. Management believes this increase in the allowance for loan
losses is prudent with the continued growth in the loan portfolio - $23
million in 1998 - coupled with the sustained period of national and local
economic growth. The allowance was 252 percent of non-performing assets
at year-end, compared to 322 percent and 139 percent at December 31, 1997
and 1996. Net loan losses in 1998 declined to 0.17 percent of average
loans outstanding.
<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) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan
losses, beginning of period $ 4,125 $ 3,525 $ 3,200 $ 2,900 $ 2,630
-------- -------- -------- -------- --------
Loans charged off:
Commercial 284 556 1,005 17 112
Real estate mortgages 4 49 7
Consumer 386 408 514 575 539
Revolving credit 67 98 49 51 67
- --------------------------------------------------------------------------
Total charge-offs 741 1,111 1,568 650 718
- --------------------------------------------------------------------------
Recoveries:
Commercial 18 73 11 55 85
Real estate mortgages 2 2
Consumer 188 161 182 135 89
Revolving credit 18 18 14 13 18
- --------------------------------------------------------------------------
Total recoveries 226 252 207 205 192
- --------------------------------------------------------------------------
Net charge-offs 515 859 1,361 445 526
- --------------------------------------------------------------------------
Provision charged to expense 1,215 1,459 1,686 745 796
- --------------------------------------------------------------------------
Allowance for possible loan
losses, end of period $ 4,825 $ 4,125 $ 3,525 $ 3,200 $ 2,900
==========================================================================
Total loans outstanding at
end of period $325,774 $302,469 $272,182 $259,102 $243,583
======== ======== ======== ======== ========
Average total loans
outstanding for the year $309,664 $289,828 $261,251 $249,769 $230,251
======== ======== ======== ======== ========
Ratio of net charge offs
to daily average loans
outstanding .17% .30% .52% .18% .23%
==== ==== ==== ==== ====
- --------------------------------------------------------------------------
</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>
1998 Allowance amount $1,947 $ 538 $ 224 $2,116 $4,825
% loans/total loans 47.0% 29.2% 23.8% -- 100%
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%
- -------------------------------------------------------------------------
</TABLE>
Non-Interest Income
Total non-interest income increased $1,950,000, or 29 percent, from 1997.
Income from the origination, sales and servicing of mortgage loans increased
$1.4 million or 80 percent, as mortgage loan activity, origination and sales
increased 86 percent. Trust income increased $249,000, or 9 percent, in 1998
as funds under management increased $44 million, or 10 percent. Deposit fees
increased $48,000, or 3 percent, and other service charges and fees, fueled
by increased consumer credit insurance and automated teller machine fees,
increased $78,000, or 11 percent during the year. Other income increased
$69,000, or 19 percent, primarily due to revenue from the sale of non-deposit
investment products. Security gains of $143,000 were recorded in 1998.
In 1997, total non-interest income increased $959,000, or 16 percent from
1996. Trust fees increased $549,000, or 26 percent, due to a 23 percent
increase in assets under management. Income from the origination, sales and
servicing of mortgage loans increased $185,000, or 12 percent. Deposit fees
increased $152,000, or 12 percent, and other service charges and fees
increased $130,000, or 23 percent.
<PAGE> 20
Non-Interest Expense
In 1998, total non-interest expense increased $2.8 million, or 18 percent.
Total personnel expense increased $1.6 million, or 16 percent. Salaries
and wages increased $979,000, or 16 percent, fueled by commission expense
related to the 86 percent increase in mortgage lending activity.Other
personnel costs increased $650,000 from 1997, including a $144,000, or 16
percent, increase in the profit sharing incentive award.
Occupancy costs remained relatively stable in 1998, increasing $38,000, or
4 percent, during the year. Equipment expense for 1998 increased $284,000,
or 32 percent, due primarily to costs associated with technology enhancements
which increased $270,000, or 46 percent.
Other operating expense increased $851,000, or 22 percent, in 1998.
Increasing loan and deposit relationships fueled increased activity-based
expense by $289,000, or 22 percent. Marketing expense increased $201,000, or
99 percent due to the development of a new image campaign. Business taxes
increased $314,000, or 88 percent, due to increased operating income and a
liability for compensation expense related to the Corporation's stock price.
Other areas of expense increased due to the general growth of the Corporation.
In 1997, total non-interest expense increased $1.9 million, or 14 percent.
Personnel expense increased $1.5 million, or 18 percent, as salaries and
wages increased $567,000, or 10 percent, due to increased staffing and
normal salary increases. Total benefit costs increased $964,000, or 37
percent, from 1996, with costs based upon the Corporation's stock price
increasing $457,000, or 68 percent, during the year and the profit sharing
incentive award increasing $284,000 or 47 percent. Occupancy expense
remained stable in 1997 and equipment expense increased $78,000, or 10
percent, due to increased technology costs. Other operating expense
increased $240,000, or 7 percent, from 1996 due primarily to increased
legal and professional fees attributable to non-earning loans.
Federal Income Taxes
Federal income tax expense for 1998 was $3,032,000, compared to $2,598,000
in 1997 and $2,259,000 in 1996, due to the increased profitability of the
Corporation. The Corporation's effective tax rate has been substantially
unchanged from 1996 through 1998 due to the consistency of statutory tax
rates and the relative percentage of tax-exempt income.
Capital Resources and Cash Dividends
The foundation of a strong financial institution is a strong capital base.
In 1998, shareholders' equity increased $4.6 million, or 13 percent, to
$40.8 million at year-end. During 1997, total shareholders' equity
increased $3.5 million, or 11 percent, over 1996. Shareholders' equity
was 8.5 percent of total assets at December 31, 1998, comparable to 1997.
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 17 to the Consolidated Financial Statements details the Corporation's
regulatory capital and the capital standards.
<PAGE> 21
Total cash dividends in 1998 were $2,909,000, or $.98 per share, compared
to $2,522,000, or $.87 per share, in 1997, a 13 percent increase. The
dividend payout ratio was 48 percent in 1998 and 1997, and 46 percent in
1996. A three-for-two stock split was declared in the second quarter of 1998.
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 18
percent since 1991. Future dividends, if any, are declared at the discretion
of the board of directors and may be determined by the financial performance,
future prospects and capital requirements of the Corporation.
The Corporation's principal source of funds to pay cash dividends is the
earnings of its subsidiary, Empire National Bank. Consequently, cash
dividends depend upon the earnings, capital needs, regulatory restraints
and other factors affecting the Bank. See Note 19 to the Consolidated
Financial Statements.
The Corporation maintains a five-year capital plan and utilizes a formal
strategic planning process. Management and the board monitor long-term
goals, which include maintaining capital growth in relation to asset
growth and the retention of earnings to fund growth, while providing
returns to shareholders.
Interest Rate Sensitivity and Liquidity
Asset and liability management involves the development and implementation
of strategies to maximize net interest income, minimize the vulnerability
of earnings to major changes in interest rates and allow the Bank to
profitably compete in all phases of the business cycle. This process is
carried out through monthly meetings of senior officers representing
lending, deposit-gathering, funds management and marketing.
Interest rate risk arises when the maturity or repricing characteristics
of assets differ significantly from the maturity or the repricing
characteristics of liabilities. One of the goals of asset and liability
management is to balance the various factors that create interest rate
risk, thereby maintaining the interest rate risk of the Bank within
acceptable levels.
While controlling interest rate risk is an important objective,
accommodating customer maturity and repricing preferences is an equally
important objective. It is the function of asset and liability management
to develop strategies to reconcile these objectives. Management has
developed definitive policies and procedures to mitigate interest rate risk.
These include the sale of long-term residential mortgages in the secondary
market, long-term commercial loans written with three- and five-year balloons
and long-term fixed rate SBA guaranteed loans 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 rate 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
<PAGE> 22
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 1994 through 1998 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>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest margin 4.70% 4.69% 4.62% 4.66% 4.60%
- -----------------------------------------------------------------
</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 available for sale portfolio. This portfolio had
net unrealized gains of $1,460,000 and $535,000 at December 31, 1998 and
1997. The price fluctuations experienced during 1998 and 1997 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 of the Bank. The regulatory agencies do not
include the net unrealized gain in the calculation of regulatory capital.
<PAGE> 23
An analysis of securities for the five years ended December 31 were as
follows:
<TABLE>
<CAPTION>
Available for sale
(in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government
and agency $ 55,524 $37,302 $32,119 $27,154 $21,857
State and municipal 13,589 -- -- -- --
Mortgage-backed 24,366 23,592 27,202 18,250 7,980
Other 24,367 2,373 -- -- --
Equity 2,553 2,508 2,453 2,425 1,495
-------- ------- ------- ------- -------
Total $120,399 $65,775 $61,774 $47,829 $31,332
======== ======= ======= ======= =======
</TABLE>
Held to maturity
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. government
and agency $ -- $ 9,515 $17,489 $23,530 $24,320
State and municipal -- 8,581 7,872 5,171 3,354
Mortgage-backed -- -- -- -- 811
Other -- 14,883 11,443 7,782 4,414
------- ------- ------- ------- -------
Total $ -- $32,979 $36,804 $36,483 $32,899
======= ======= ======= ======= =======
- -----------------------------------------------------------------------
</TABLE>
Other than securities guaranteed by the U.S. Government or its agencies,
the Bank held no investment securities from any one issuer that exceeded
ten percent of stockholders' equity at December 31, 1998
During 1998 the Bank implemented a regulatory approved program for reducing
the amount of daily reserve balances required to be held with the Federal
Reserve. Required reserve balances at December 31, 1998 were $617,000 versus
the $6,695,000 required 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. For 1998 and 1997 core deposits have
averaged over 97 percent of total deposits.
<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 have averaged less than 3 percent of total deposits for 1998
and 1997.
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 $17 million at December 31, 1998
and 1997. 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, on page 21. 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, 1998. 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. Similarly, 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, 1998.
<PAGE> 25
<TABLE>
<CAPTION>
Expected Maturity Date - Year Ended December 31
December
1998 1997
------------- -------------
There- Fair Fair
(in millions) 1999 2000 2001 2002 2003 after Total Value Total Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed rate loans $73.5 $50.8 $31.8 $30.3 $16.1 $ .5 $203.0 $206.5 $173.7 $177.2
Avg interest rate 8.7% 8.8% 8.9% 9.0% 8.7% 8.2% 8.7% 8.9%
Variable rate loans$40.5 $36.1 $21.0 $10.2 $10.0 $ 5.0 $122.8 $123.3 $128.7 $129.0
Avg interest rate 8.8% 8.5% 9.2% 8.6% 8.5% 8.3% 8.7% 9.3%
Fixed rate
debt securities $43.8 $27.7 $17.1 $12.6 $ 4.6 $ 9.2 $115.0 $115.0 $ 94.0 $ 94.6
Avg interest rate 6.1% 6.1% 5.8% 5.7% 5.9% 5.1% 5.9% 6.2%
Variable rate
debt securities $ .7 $ .5 $ .4 $ .3 $ .2 $ .8 $ 2.9 $ 2.9 $ 1.9 $ 1.9
Avg interest rate 6.1% 6.1% 6.1% 6.1% 6.2% 6.4% 6.2% 6.7%
Equity securities -- -- -- -- -- $ 2.6 $ 2.6 $ 2.6 $ 2.3 $ 2.5
Liabilities
Non-interest-bearing
checking $28.0 $10.0 $10.0 $ 6.1 $ 6.1 $ 1.0 $ 61.2 $ 61.2 $ 62.5 $ 62.5
Avg interest rate 0.0% 0.0%
Savings & interest-bearing
checking $58.4 $51.9 $51.9 $ 7.6 $ 7.6 $15.1 $192.5 $192.5 $177.0 $177.0
Avg interest rate 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.6%
Time deposits $87.4 $27.5 $11.5 $13.6 $ 7.8 $ 8.6 $156.4 $159.8 $147.2 $149.2
Avg interest rate 5.4% 6.2% 5.9% 6.2% 5.6% 6.8% 5.7% 6.1%
Fixed rate
borrowings $ 3.0 $ 4.0 -- -- $ 10.0 -- $ 17.0 $ 17.4 $ 12.0 $ 12.1
Avg interest rate 6.1% 6.4% 5.8% 6.0% 5.8%
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 26
The table below shows the rate sensitivity of earning assets and interest
bearing liabilities as of December 31, 1998. Loans and investments are
categorized using their scheduled payment dates, where applicable. Savings,
interest checking and money market deposit accounts are considered to be
immediately repriceable. All other liabilities are reported by their
scheduled maturities, and no adjustments for possible prepayments are
included in the table.
Interest Sensitivity Summary
<TABLE>
<CAPTION>
0-90 91-365 1-5 over 5
(in millions) Days Days Years Years Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans $ 91.0 $ 55.8 $155.3 $ 23.7 $325.8
Securities and fed funds sold 26.1 32.7 61.4 5.8 126.0
------- ------- ------ ------ ------
Total earning assets 117.1 88.5 216.7 29.5 451.8
Savings and interest checking 75.8 -- -- -- 75.8
Money market deposits 116.8 -- -- -- 116.8
Time deposits 38.4 48.9 60.4 8.7 156.4
FHLB advances 3.0 -- 14.0 -- 17.0
------- ------- ------ ------ ------
Total interest-bearing
liabilities 234.0 48.9 74.4 8.7 366.0
------- ------- ------ ------ ------
Net funding gap $(116.9) $ 39.6 $142.3 $ 20.8 $ 85.8
======= ======= ====== ====== ======
Cumulative gap $(116.9) $ (77.3) $ 65.0 $ 85.8
Cumulative gap ratio .50 .73 1.18 1.24
Cumulative gap as a
percent of total assets -24.5% -16.2% 13.6% 18.0%
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
Other Matters
The Corporation has a comprehensive written Year 2000 plan approved by the
board of directors and a Year 2000 management committee overseeing the efforts.
The plan includes all facets of the Corporation's business from physical plant
and equipment issues through all computer hardware and software and major
customers.
The Corporation uses major external third-party vendors to the banking
industry for the mainframe and all personal computer hardware and software.
These well-known, national third-party providers for mission critical systems
have provided written assurances that they are Year 2000 ready and their
systems have been fully tested internally and through proxy at customer sites.
The Corporation does not use any custom-programmed software. Another area
under review is systems which utilize embedded microchips, such as heating,
air conditioning, security and other related systems. Vendors for these
systems have been contacted to evaluate their Year 2000 compliance and assess
any potential risk.
While the Corporation's current UNISYS mainframe hardware and software is Year
2000 compliant, a new system is scheduled to be installed during the first
quarter of 1999, substantially increasing the capacity and efficiency of
operations. This new system will allow the testing of this banking software
from Information Technology, Inc. during the installation of the hardware,
without any disruption to daily processing and customer service. All testing
will be completed by June 30, 1999, within the FFIEC published guidelines. No
disruption in service due to a Year 2000 issue is anticipated.
Management has addressed the financial implications of preparing for the Year
2000. The readiness of the software used for mission critical systems is
included in the cost of normal maintenance of those systems and management
does not expect any additional charges. Some minor hardware replacements will
be needed. Those expenditures will be less than $50,000. The Corporation has
the necessary technology staffing and has allocated the resources within its
1999 technology plan to complete the testing and implementation of its Year
2000 plan.
Since mission critical systems are Year 2000 compliant, system failure that
would require a new provider and conversion to a new system is not expected.
During the second quarter of 1999, business resumption plans will be developed
as testing is completed. The detail and depth of those plans will depend on
results of the final tests and the resulting risk assessment.
Major loan and deposit customers have been surveyed to evaluate the level of
Year 2000 planning and readiness and to assess any potential risk.
The board of directors, executive management team and the Office of the
Comptroller of the Currency are updated on a quarterly basis. Because of the
systematic approach used to prepare Empire Banc Corporation for the Year 2000
date change, management does not anticipate any material effect on financial
performance.
Certain statements contained in the section "Other Matters" constitute
"forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied by such forward looking statements.
<PAGE> 28
Such factors may include, but are not limited to, the severity of problems
discovered with the Corporation's own systems as Year 2000 testing continues,
the cost of remedying such problems, the severity of Year 2000 problems
encountered by third party service providers and the Corporation's borrowers,
additional initiatives by regulators, and the costs of Year 2000 professionals
generally in the event problems are encountered.
Forward-looking statements in this Form 10-K are based on current expectations
and/or the assumptions made in the earnings simulation analyses, but numerous
factors could cause variances in these projections, and their underlying
assumptions, such as changes in interest rates, demand, the degree of
competition and changes in laws, regulations or policy.
<PAGE> 29
Item 8 - Financial Statements and Supplementary Data
Consolidated Balance Sheet-Empire Banc Corporation
<TABLE>
<CAPTION>
December 31
(in thousands, except share data) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 15,740 $ 25,433
Federal funds sold 5,600 6,800
-------- --------
Cash and cash equivalents 21,340 32,233
Securities
Available for sale, at fair value 120,399 65,775
Held to maturity -- 32,979
(fair value: 1997-$33,234)
Loans 325,774 302,469
Less: Allowance for loan losses (4,825) (4,125)
-------- --------
Net loans 320,949 298,344
Premises and equipment, net 5,503 4,985
Accrued income and other assets 9,773 8,637
-------- --------
Total assets $477,964 $442,953
======== ========
Liabilities
Deposits
Non-interest-bearing $ 61,221 $ 62,492
Interest-bearing 348,918 324,178
-------- --------
Total deposits 410,139 386,670
Federal Home Loan Bank advances 17,000 12,000
Accrued expense and other liabilities 10,069 8,084
-------- --------
Total liabilities 437,208 406,754
Shareholders' Equity
Preferred stock-$1 par value,
2,000,000 shares authorized, none outstanding
Common stock-no par value, 5,000,000 shares authorized,
shares outstanding: 1998-2,957,398; 1997-1,943,081 30,283 29,525
Retained earnings 9,509 6,321
Net unrealized gain on securities, net of tax 964 353
-------- --------
Total shareholders' equity 40,756 36,199
-------- --------
Total liabilities and shareholders' equity $477,964 $442,953
======== ========
- --------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 30
Consolidated Statement of Income-Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands, except share data) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans, including fees $29,240 $27,059 $24,536
Securities: taxable 6,227 5,728 5,397
tax-exempt 264 256 250
Federal funds sold 828 376 416
------- ------- -------
Total interest income 36,559 33,419 30,599
Interest expense
Deposits 15,426 14,433 13,068
Federal Home Loan Bank advances
and other borrowings 1,009 756 998
------- ------- -------
Total interest expense 16,435 15,189 14,066
------- ------- -------
Net interest income 20,124 18,230 16,533
Provision for loan losses 1,215 1,459 1,686
------- ------- -------
Net interest income after
provision for loan losses 18,909 16,771 14,847
Non-interest income
Mortgage sales and servicing 3,042 1,685 1,500
Deposit fees 1,476 1,428 1,276
Trust 2,897 2,648 2,099
Service charges 778 700 570
Other income 423 354 405
Security gains (losses) 143 (6) --
------- ------- -------
Total non-interest income 8,759 6,809 5,850
Non-interest expense
Salaries and employee benefits 11,609 9,980 8,450
Occupancy 1,097 1,059 1,031
Furniture and equipment 1,179 895 817
Other expense 4,654 3,803 3,563
------- ------- -------
Total non-interest expense 18,539 15,737 13,861
------- ------- -------
Income before federal income taxes 9,129 7,843 6,836
Federal income taxes 3,032 2,598 2,259
------- ------- -------
Net income $ 6,097 $ 5,245 $ 4,577
======= ======= =======
- --------------------------------------------------------------------------
Earnings per share $ 2.06 $ 1.81 $ 1.60
Diluted earnings per share $ 1.93 $ 1.68 $ 1.48
Average shares outstanding 2,960,330 2,901,791 2,868,517
Diluted average shares outstanding 3,164,082 3,127,686 3,094,994
- --------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 31
Consolidated Statement of Comprehensive Income
Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $6,097 $5,245 $4,577
Other comprehensive income
Unrealized holding gains on securities
the held-to-maturity to the available-
for-sale category, net 416 -- --
Unrealized gains (losses) on securities, net 289 175 (160)
Reclassification adjustment for amounts
realized on security sales included in
net income, net (94) 4 --
------ ------ ------
Comprehensive income $6,708 $5,424 $4,417
====== ====== ======
- --------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 32
Consolidated Statement of Cash Flows-Empire Banc Corporation
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 6,097 $ 5,245 $ 4,577
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 926 727 704
Provision for loan losses 1,215 1,459 1,686
Mortgage loans originated for sale (150,999) (60,650) (60,761)
Sale of mortgage loans 149,619 61,516 60,936
Net (gain)loss on securities available for sale (143) 6 --
Net amortization/accretion on securities 58 146 315
Change in:
Deferred taxes (342) (163) (361)
Interest receivable (347) (43) (9)
Interest payable (10) 95 --
Other assets (447) (1,527) 187
Other liabilities 2,174 1,967 294
------- ------- -------
Total adjustments 1,704 3,533 2,991
------- ------- -------
Net cash from operating activities 7,801 8,778 7,568
Investing activities
Securities available for sale
Proceeds from sales 399 992 --
Proceeds from maturities 31,948 16,876 20,145
Purchases (46,434) (12,001) (34,542)
Securities held to maturity
Proceeds from maturities 18,422 15,749 15,272
Purchases (24,970) (21,673) (15,698)
Loans granted, net of repayments (22,440) (32,012) (14,616)
Premises and equipment expenditures (1,444) (1,727) (1,066)
-------- -------- -------
Net cash from investing activities (44,519) (33,796) (30,505)
Financing activities
Net increase in deposits 23,469 42,316 24,814
Change in federal funds purchased -- (5,500) 5,500
Cash dividends paid (2,849) (2,453) (1,983)
Federal Home Loan Bank advances 10,000 -- --
Federal Home Loan Bank repayments (5,000) -- (5,000)
Issuance of common stock 205 285 351
------- ------- -------
Net cash from financing activities 25,825 34,648 23,682
------- ------- -------
Net change in cash and cash equivalents (10,893) 9,630 745
Beginning cash and cash equivalents 32,233 22,603 21,858
------- ------- -------
Ending cash and cash equivalents $21,340 $32,233 $22,603
======= ======= =======
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
Consolidated Statement of Cash Flows-Empire Banc Corporation (continued)
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $16,445 $15,094 $14,066
Income taxes paid 2,856 2,584 2,575
Transfer of securities to available-for-sale 39,590 -- --
- ------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE> 34
Consolidated Statement of Changes in Shareholders' Equity
Empire Banc Corporation
<TABLE>
<CAPTION>
Net Total
Unrealized Share-
Common Retained Gain holders'
(in thousands, except share data) Shares Stock Earnings (Loss) Equity
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,648,767 $17,621 $12,050 $ 334 $30,005
Net income for 1996 4,577 4,577
Common stock issued 14,352 322 322
5% stock dividend 82,890 3,108 (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 - $.73 per share (2,100) (2,100)
--------- ------- ------- ----- -------
Balance at December 31, 1996 1,746,009 21,080 11,419 174 32,673
Net income for 1997 5,245 5,245
Common stock issued 21,314 504 504
10% stock dividend 175,758 7,821 (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 - $.87 per share (2,522) 2,522)
--------- ------- ------- ----- ------
Balance at December 31, 1997 1,943,081 29,525 6,321 353 36,199
Net income for 1998 6,097 6,097
Common stock issued 32,726 648 648
3 for 2 stock split 981,591
Directors deferred compensation plan 110 110
Net unrealized holding gains on
securities transferred from the held-
to-maturity to the available-for-sale
category, net of tax of $215 416 416
Change in net unrealized gain (loss)
on securities available for sale,
net of tax of $99 195 195
Cash dividends - $.98 per share (2,909) (2,909)
--------- ------- ------- ----- -------
Balance at December 31, 1998 2,957,398 $30,283 $ 9,509 $ 964 $40,756
========= ======= ======= ===== =======
- -----------------------------------------------------------------------------------------
See accompanying notes
</TABLE>
<PAGE> 35
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation - 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.
The consolidated financial statements include Empire Banc Corporation (the
Corporation) and its wholly owned subsidiary, Empire National Bank (the
Bank). Intercompany transactions are eliminated.
Segments - Empire Banc Corporation, through the branch network of its
subsidiary, Empire National Bank, provides a broad range of financial
services to individuals and companies in Michigan's northern lower
peninsula. These services include demand, time and savings deposits, lending
and trust services. While the decision makers monitor the revenue streams
of the various products and services, operations are managed and financial
performance is evaluated on a corporate-wide basis. Accordingly, all of the
Corporation's banking operations are considered by management to be aggregated
in one reportable operating segment.
Use of Estimates - To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses and
fair values of financial instruments are particularly subject to change.
Cash Flows - Cash and cash equivalents includes cash on hand, demand deposits
in other institutions and federal funds sold. Net cash flows are reported
for loan and deposit transactions and short-term borrowings with original
maturities of 90 days or less.
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 and other comprehensive income. 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.
Loans - Loans are reported at the principal balance outstanding net of
unearned interest, deferred loan fees and costs and an allowance for loan
losses. Loans held for sale are reported at the lower of cost or market, on
an aggregate basis. Interest income is reported on the interest method and
includes amortization of net deferred loan fees and costs over the loan term.
Loans are placed in non-accrual status at 90 days or more past due and interest
is considered a loss unless the loan is well-secured and in the process of
<PAGE> 36
collection. Loans delinquent 180 days or more are charged off unless both
well-secured and in the process of collection.
Allowance for Loan Losses - The allowance for loan losses represents the
amount management estimates is adequate to provide for losses inherent in
the loan portfolio. Management determines the allowance for loan losses by
reviewing selected loans (including large loans, non-accrual loans and problem
and delinquent loans) and establishing specific loss allocations on these
loans. Historical loss information and local economic conditions are
considered in establishing allowances on the remaining loans. The allowance
is increased by provisions charged to expense and reduced by loan losses, net
of recoveries.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller balance loans of similar nature,
such as residential mortgage, consumer and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate or at the
fair value of collateral if repayment is expected solely from the collateral.
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.
Foreclosed Assets - Assets acquired through or instead of loan foreclosure
are initially recorded at fair value when acquired, establishing a new cost
basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
Servicing Rights - The Bank originates and purchases mortgage loans for sale
to the secondary market and sells the loans with servicing retained.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights by stratifying them based on predominant risk
characteristics of the underlying serviced loans. These risk characteristics
include interest rate, loan type, term and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
Income Taxes - Income tax expense is based on the taxes due on the tax
return plus the change in deferred tax assets and liabilities. Deferred tax
assets and liabilities measure the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized.
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. All per-share data is restated for the three-for-two
stock split in 1998 and the 10% and 5% stock dividends in 1997 and 1996.
Long-lived Assets - These assets are reviewed for impairment when events
indicate that the carrying amount may not be recoverable. If impaired,
the assets are recorded at discounted amounts.
<PAGE> 37
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 accounting guidelines. No stock options were granted in
1998, 1997 or 1996 requiring pro forma disclosures of net income and earnings
per share under SFAS 123.
Comprehensive Income - Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale which are also recognized as
separate components of equity.
New Accounting Pronouncements - Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), requires all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be
recorded by offsetting gains and losses on the hedge and on the hedged item,
even if the fair value of the hedged item is not otherwise recorded. As of
October 1, 1998, the Corporation adopted this statement and, in accordance
with its provisions, chose to reclassify certain securities from held-to-
maturity to available-for-sale. The amortized cost of those securities was
$39,590,000. The Corporation does not have derivative instruments in its
portfolio to account for under provisions of this statement.
Loss Contingencies - Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can
be reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Fair Values of Financial Instruments - Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
more fully disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Reclassifications - Certain prior-year amounts have been reclassified
to conform with the current year's presentation.
Note 2 - 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,
1998 and 1997 were $617,000 and $6,695,000.
<PAGE> 38
Note 3 - 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>
1998
U.S. government and agency $ 54,851 $ 679 $ 6 $ 55,524
State and municipal 13,317 275 3 13,589
Mortgage-backed 24,204 202 40 24,366
Other 24,243 139 15 24,367
Equity 2,324 229 -- 2,553
-------- ------ --- --------
$118,939 $1,524 $64 $120,399
======== ====== === ========
1997
U.S. government and agency $ 37,089 $ 235 $22 $ 37,302
Mortgage-backed 23,446 168 22 23,592
Other 2,375 -- 2 2,373
Equity 2,330 178 -- 2,508
-------- ------ --- --------
$ 65,240 $ 581 $46 $ 65,775
======== ====== === ========
</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
======== ====== === ========
- ---------------------------------------------------------------------------
</TABLE>
Proceeds from sales of available-for-sale securities in 1998 amounted
to $399,000 with realized gains of $143,000. Proceeds from sales in 1997
amounted to $992,000 with realized losses of $6,000. There were no sales
of securities during 1996.
<PAGE> 39
As of October 1, 1998, the Corporation adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." In accordance with provisions
in that statement, the Corporation chose to reclassify certain securities from
held-to-maturity to available-for-sale. The amortized cost of those
securities was $39,950,000 and the unrealized net gain was $631,000, which is
included in stockholders' equity, net of income tax effect of $215,000. The
Corporation has no derivative instruments to account for under provisions of
this statement.
Scheduled maturities of securities at December 31, 1998 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 $ 37,648 $ 37,828 6.07%
Due from one to five years 53,303 54,156 5.99%
Due from five to ten years 1,460 1,496 6.37%
Mortgage-backed 24,204 24,366 6.19%
Equity 2,324 2,553 7.68%
-------- --------
$118,939 $120,399 6.09%
======== ========
- -----------------------------------------------------------
</TABLE>
Investment securities with a book value of $16,952,000 at December 31,
1998 were pledged to secure public deposits and Federal Home Loan Bank
advances and for other purposes.
Note 4 - Loans
The following is a summary of loans at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Commercial $153,115 $132,310
Mortgage 71,259 77,896
Mortgage loans held for sale 6,173 2,745
Consumer 64,069 61,850
Revolving credit 31,158 27,668
-------- --------
325,774 302,469
Less: allowance for loan losses (4,825) (4,125)
-------- --------
$320,949 $298,344
======== ========
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 40
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1 $4,125 $3,525 $3,200
Loans charged off (741) (1,111) (1,568)
Recoveries 226 252 207
------ ------ ------
Net loans charged off (515) (859) (1,361)
Provision for loan losses 1,215 1,459 1,686
------ ------ ------
Balance December 31 $4,825 $4,125 $3,525
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
Impaired loans
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans with reserves $ 360 $ 312 $2,138
Impaired loans without reserves 879 562 278
------ ------ ------
Impaired loans outstanding at year-end $1,239 $ 874 $2,416
====== ====== ======
Amount of allowance allocated for impaired $ 188 $ 184 $ 820
Average of impaired loans during the year 1,151 1,810 $ 1,578
Interest income recognized during impairment 9 24 86
Cash-basis interest income recognized 34 17 79
- ---------------------------------------------------------------------------
</TABLE>
Non-accrual loans - Non-accrual loans outstanding at December 31, 1998 and
1997 were $1,283,000 and $893,000. Substantially all non-accrual loans are
considered impaired. If the non-accrual loans were accruing, additional
income of $97,000, $104,000 and $155,000 would have been recorded in 1998,
1997 and 1996.
<PAGE> 41
Note 5 - Secondary Mortgage Market Activities
Loans serviced for others, which are not reported as assets, totaled
$293,000,000 and $243,000,000 at December 31, 1998 and 1997.
Activity for capitalized mortgage servicing rights and the related
valuation allowance was as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Servicing Rights
Balance January 1 $ 815 $ 537 $ 151
Additions 1,187 434 454
Amortization (550) (156) (68)
------ ------ ------
Balance December 31 $1,452 $ 815 $ 537
====== ====== ======
Fair value $1,703 $1,169 $ 840
====== ====== ======
Valuation Allowance
Balance January 1 $ -- $ -- $ --
Additions expensed 52 -- --
Reductions credited to expense -- -- --
------ ------ ------
Balance December 31 $ 52 $ -- $ --
====== ====== ======
- ----------------------------------------------------------------------
</TABLE>
Note 6 - Premises and Equipment
Premises and equipment at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 694 $ 693
Buildings and improvements 5,055 4,963
Equipment 8,804 7,588
------- -------
Total cost 14,553 13,244
Less: accumulated depreciation and amortization (9,050) (8,259)
------- -------
Net book value $ 5,503 $ 4,985
======= =======
- --------------------------------------------------------------------------
Rental expenses for 1998, 1997 and 1996 were $460,000, $437,000 and
$426,000. Depreciation and amortization for 1998, 1997 and 1996 was
$926,000, $727,000 and $704,000.
</TABLE>
<PAGE> 42
Note 7- Time Deposits
The aggregate amount of short-term certificates of deposit of $100,000
or more at December 31, 1998 and 1997 was $13,209,000 and $9,202,000.
Following are the scheduled maturities of certificates of deposit at
December 31, 1998:
<TABLE>
<CAPTION>
(in thousands) 1998
- ---------------------------------------------
<S> <C>
1999 $ 87,379
2000 27,554
2001 11,460
2002 13,563
2003 7,814
After 8,605
--------
$156,375
========
- ---------------------------------------------
</TABLE>
Note 8 - Federal Home Loan Bank Advances
Advances from the Federal Home Loan Bank of Indianapolis at December
31 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Maturity Rate
1998 5.05% $ -- $ 5,000
1999 6.09% 3,000 3,000
2000 6.42% 4,000 4,000
2003 5.76% 10,000 --
------- -------
$17,000 $12,000
======= =======
- -------------------------------------------------------------------
</TABLE>
Each advance is payable at its maturity date, with a prepayment penalty
determined by market rates at the time of prepayment. Loans of
$20,948,000 and securities of $5,216,000 were pledged at December 31,
1998 to collateralize these advances.
<PAGE> 43
Note 9 - Other Non-Interest Expense
Other non-interest expense for the years ended December 31 was:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Marketing $ 405 $ 204 $ 244
Outside services 857 618 617
Legal and professional 324 499 326
Business taxes 670 356 336
Other 2,398 2,126 2,040
------ ------ ------
$4,654 $3,803 $3,563
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
Note 10- Federal Income Taxes
Income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current expense $3,383 $3,043 $2,339
Deferred benefit (351) (445) (80)
------ ------ ------
Total federal income tax $3,032 $2,598 $2,259
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
Effective tax rates differ from federal statutory rates applied to
financial statement income due to the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate applied to income
before federal income tax $3,104 $2,667 $2,324
(Deduct) add:
Effect of tax-exempt interest (95) (89) (83)
Other 23 20 18
------ ------ ------
Total Federal income tax $3,032 $2,598 $2,259
====== ====== ======
Effective tax rate 33.2% 33.1% 33.0%
====== ====== ======
- -------------------------------------------------------------------
</TABLE>
<PAGE> 44
Year-end deferred tax assets and liabilities were due to the following:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $1,236 $ 998
Deferred compensation 1,866 1,581
Other 122 164
------ ------
Total deferred tax assets 3,224 2,743
------ ------
Deferred tax liabilities
Security accretion (55) (113)
Cash value of life insurance (34) (34)
Mortgage servicing (476) (277)
Net unrealized appreciation on
securities available for sale (496) (182)
Other -- (9)
------ ------
Total deferred tax liabilities (1,061) (615)
------ ------
Net deferred tax asset $2,163 $2,128
====== ======
- ------------------------------------------------------------------
</TABLE>
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.
Note 11 - Employee Benefit Plans
An integrated employee benefit plan structure provides basic retirement
income and the opportunity 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. A summary of the
plan follows:
<PAGE> 45
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Beginning benefit obligation $1,760 $1,374
Service cost 138 107
Interest cost 139 112
Liability (gain) loss 103 22
Change in assumptions 323 158
Benefits paid (28) (13)
------ ------
Ending benefit obligation 2,435 1,760
------ ------
Change in plan assets, at fair value
Beginning plan assets 1,342 1,012
Actual return 166 182
Employer contribution 173 161
Benefits paid (28) (13)
------ ------
Ending plan assets 1,653 1,342
------ ------
Funded status (782) (418)
Unrecognized net transition obligation 246 276
Unrecognized net actuarial loss 513 131
Unrecognized prior service cost (13) (14)
------ ------
Prepaid (accrued) benefit cost $ (36) $ (25)
====== ======
- -----------------------------------------------------------------------
Discount rate on benefit obligation 6.25% 7.00%
Long-term rate of investment return 9.00% 9.00%
Rate of compensation increase 4.50% 4.50%
- -----------------------------------------------------------------------
</TABLE>
Pension expense
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 138 $ 107 $ 103
Interest cost 139 112 99
Expected return on plan assets (125) (182) (119)
Net amortization and deferral 31 116 83
------ ------ ------
Net pension expense $ 183 $ 153 $ 166
====== ====== ======
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 46
A supplemental retirement program for certain executive officers provides
benefits which are integrated with the other benefit plans. A summary of the
plan follows:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation
Beginning benefit obligation $ 898 $ 694
Service cost 75 60
Interest cost 71 54
Liability (gain) loss 35 23
Change in assumptions 166 67
------ ------
Ending benefit obligation 1,245 898
------ ------
Funded status (1,245) (898)
Unrecognized net transition obligation 113 125
Unrecognized net actuarial loss 293 95
Unrecognized prior service cost 22 25
------ ------
Prepaid (accrued) benefit cost $ (817) $ (653)
====== ======
- -----------------------------------------------------------------------
Discount rate on benefit obligation 6.25% 7.00%
Rate of compensation increase 5.00% 5.00%
- -----------------------------------------------------------------------
</TABLE>
Supplemental retirement plan expense
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 75 $ 60 $ 58
Interest cost 71 54 45
Net amortization and deferral 18 14 14
----- ----- -----
Net supplemental retirement
plan expense $ 164 $ 128 $ 117
===== ===== =====
- ------------------------------------------------------------------------
</TABLE>
<PAGE> 47
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 employee's deferrals to a maximum of 3%. Expenses for 1998,
1997 and 1996 were $163,000, $141,000 and $121,000.
An Employee Stock Ownership Plan (ESOP) covers substantially all full-time
employees. At December 31, 1998 and 1997 the plan held 381,594 and 398,696
shares of stock with a fair market value of $15,072,000 and $12,228,000. All
shares are allocated to and voted on by employees. The annual contribution
to the ESOP is determined by the board of directors. Contributions for 1998,
1997, and 1996 were $182,000, $163,000 and $142,000.
Agreements granting death benefits funded with life insurance are provided
to certain officers while employed. The financial statement impact of
these arrangements is not material.
Note 12 - 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, 1998 all granted options and rights were vested.
The weighted average exercise price of the stock options at year-end 1998 was
$6.90 and the weighted average remaining option life was 1.9 years. The
range of exercise prices at December 31, 1998 was $5.44 to $10.60 for all
outstanding options. The expense for the stock appreciation rights for 1998,
1997 and 1996 was $1,124,000, $1,129,000 and $672,000. A summary of the
activity in the plan, restated for all stock dividends and splits, is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Rights Price
- -----------------------------------------------------------------
<S> <C> <C> <C>
Outstanding - 12/31/95 329,980 153,081 $6.31
Exercised (17,924) (8,962) 4.40
------- -------
Outstanding - 12/31/96 312,056 144,119 6.42
Exercised (28,462) (14,230) 4.61
------- -------
Outstanding - 12/31/97 283,594 129,889 6.60
Exercised (42,778) (21,388) 4.80
------- -------
Outstanding - 12/31/98 240,816 108,501 6.90
======= =======
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 48
Note 13 - 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 loan advances to such related
parties at December 31, 1998 amounted to $1,664,000. During 1998, new
loan advances to such related parties amounted to $1,045,000 and repayments
amounted to $2,074,000.
Note 14 - 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
other real and personal property. The Bank's policy is to require suitable
collateral prior to the disbursement of funds. The following is a summary of
commitments as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Commitments to make loans $49,223 $37,937
Unused lines of credit 57,223 55,062
Standby letters of credit 1,448 1,591
- ------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, commitments to make loans included $12.8
million and $16.4 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 $34 million and $12.2 million at
December 31, 1998 and 1997, which are intended for sale in the secondary
market upon closing. Other commitments include variable rate mortgage loans
of $2.4 million and $1.8 million at December 31, 1998 and 1997.
<PAGE> 49
Note 15 - 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 percent 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.
Note 16 - 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 Home Loan Bank advances: Fair values are estimated using
discounted cash flow based on current borrowing rates for similar
arrangements.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending commitments are based on fees currently charged for similar
agreements, considering the terms of the agreements and credit standing.
<PAGE> 50
Estimated fair values of financial instruments at December 31 were:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 21,340 $ 21,340 $ 32,233 $ 32,233
Securities
Available for sale 120,399 120,399 65,775 65,775
Held to maturity -- -- 32,979 33,234
Loans net of allowance 320,949 324,990 298,344 302,095
Accrued interest receivable 3,021 3,021 2,674 2,674
Financial liabilities
Deposits 410,139 413,565 386,670 388,674
Federal Home Loan Bank advances 17,000 17,388 12,000 12,054
Accrued interest payable 1,118 1,118 1,128 1,128
- -------------------------------------------------------------------------
</TABLE>
The fair value of off-balance-sheet instruments at December 31, 1998 and
1997 is not material.
<PAGE> 51
Note 17 - 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. Capital amounts are
also subject to qualitative judgments by regulators. To be considered
adequately capitalized (as defined) under the regulatory framework for
prompt corrective action, minimum capital ratios must be maintained.
Capital ratios for the Bank are consistent with the Corporation's capital
ratios. The Bank's 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) 1998
- ------------------------------------------------------------
<S> <C>
Tier 1 capital
Shareholders' equity $ 40,756
Less: Goodwill (317)
Net unrealized gains (964)
--------
Total tier 1 capital 39,475
Tier 2 capital 4,449
--------
Total qualifying capital $ 43,924
========
Risk-weighted assets $355,566
Average quarterly assets 479,524
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Regulatory
Capital Standards
------------------------
Adequately Well Actual
Capitalized Capitalized 1998
- ---------------------------------------------------------------
<S> <C> <C> <C>
Risk-based ratios
Tier 1 leverage 4.0% 5.0% 8.23%
Tier 1 risk-based 4.0% 6.0% 11.10%
Total risk-based 8.0% 10.0% 12.35%
Risk-based capital amounts
(in thousands)
Tier 1 leverage $19,181 $23,976 $39,475
Tier 1 risk-based 14,223 21,334 39,475
Total risk-based 28,445 35,557 43,924
- ---------------------------------------------------------------
</TABLE>
<PAGE> 52
Note 18 - Earnings Per Share
A reconciliation of earnings per share and diluted earnings per share
is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<C> <C> <C>
Net income (in thousands) $6,097 $5,245 $4,577
====== ====== ======
Earnings per share:
Average common shares outstanding 2,950,761 2,895,658 2,866,001
Average contingently issuable shares 9,569 6,133 2,516
--------- --------- ---------
2,960,330 2,901,791 2,868,517
========= ========= =========
Earnings per share $2.06 $1.81 $1.60
===== ===== =====
Diluted Earnings per share:
Average outstanding shares, per above 2,960,330 2,901,791 2,868,517
Effect of stock options 203,752 225,895 226,477
--------- --------- ---------
3,164,082 3,127,686 3,094,994
========= ========= =========
Diluted earnings per share $1.93 $1.68 $1.48
===== ===== =====
- ---------------------------------------------------------------------------
<PAGE> 53
Note 19 - Empire Banc Corporation
(Parent Company Only)
Condensed Financial Statements
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, 1998, $6,069,000 of the Bank's retained
earnings were available for dividend declaration without prior regulatory
approval. Dividends paid to the Corporation by the Bank were $2,905,000 in
1998 and $2,525,000 in 1997.
Following are condensed parent company financial statements:
</TABLE>
<TABLE>
<CAPTION>
Condensed Balance Sheet
December 31
(in thousands) 1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,533 $ 1,394
Investment in subsidiary 38,504 34,605
Other assets 1,289 797
------- -------
Total assets $41,326 $36,796
======= =======
Liabilities and shareholders' equity
Other liabilities $ 570 $ 597
Shareholders' equity 40,756 36,199
------- -------
Total liabilities and
shareholders' equity $41,326 $36,796
======= =======
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary $2,905 $2,525 $2,100
Net expense (147) (91) (142)
Federal income tax benefit 50 31 48
Equity in undistributed
subsidiary income 3,289 2,780 2,571
------ ------ ------
Net income 6,097 5,245 4,577
Change in unrealized gains/losses
on securities held by Bank 611 179 (160)
------ ------ ------
Comprehensive income $6,708 $5,424 $4,417
====== ====== ======
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended December 31
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities
Net income $ 6,097 $ 5,245 $ 4,577
Adjustments
Other (25) (8) (134)
Subsidiary net income (6,194) (5,305) (4,671)
------ ------ ------
Net cash from operating activities (122) (68) (228)
Cash flow from investing activities
Subsidiary dividends received 2,905 2,525 2,100
Cash flow from financing activities
Dividends paid (2,849) (2,453) (1,983)
Issuance of common stock 205 285 351
------- ------- -------
Net cash from financing activities (2,644) (2,168) (1,632)
Net change in cash and due from banks 139 289 240
Beginning cash and due from banks 1,394 1,105 865
------- ------- -------
Ending cash and due from banks $ 1,533 $ 1,394 $ 1,105
======= ======= =======
- --------------------------------------------------------------------------
</TABLE>
<PAGE> 55
Report of Independent Auditors
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, 1998 and 1997 and the related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 21, 1999
<PAGE> 56
Quarterly Financial Data
Empire Banc Corporation
The following is a summary of selected quarterly results of operations
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(in thousands, Quarter Ended
except share data) December 31 September 30 June 30 March 31
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Net interest income $5,479 $5,086 $4,830 $4,729
Provision for loan losses 298 552 83 282
Non-interest income 2,314 2,154 2,197 2,094
Non-interest expense 4,863 4,308 4,818 4,550
Income before income taxes 2,632 2,380 2,126 1,991
Net income 1,760 1,583 1,417 1,337
Earnings per share .59 .53 .48 .46
Diluted earnings per share .56 .50 .45 .42
- ---------------------------------------------------------------------------------
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 .50 .47 .43 .41
Diluted earnings per share .46 .44 .40 .38
- ---------------------------------------------------------------------------------
Per-share amounts have been adjusted for stock splits and dividends.
</TABLE>
<PAGE> 57
Item 9 - Changes in and disagreements with Accountants on Accounting
and Financial Disclosure.
None
PART III
The information called for by the items within this part is
included in the Corporation's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held May 13, 1999,
to be filed with the Commission, and is incorporated herein
by reference, as follows:
<TABLE>
<CAPTION>
Pages in 1999
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 13 of
the Notes to Consolidated Financial
Statements of this Form 10-K, is also
incorporated herein by reference in
response to this Item.
</TABLE>
<PAGE> 58
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(a) The following documents are filed as part of this report:
1. The following financial statements of the Corporation and
related items are included in this report on the pages
indicated:
Page(s)
-------
Consolidated Balance Sheet
as of December 31, 1998 and 1997 29
For each of the years in the three-year
period ended December 31, 1998
Consolidated Statement of Income 30
Consolidated Statement of
Comprehensive Income 31
Consolidated Statement of Cash Flows 32-33
Consolidated Statement of Changes
in Shareholders' Equity 34
Notes to Consolidated Financial
Statements 35-54
Report of Independent Auditors 55
2. All financial statement schedules for which provision is made
in the applicable accounting regulations of the Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
3. The following exhibits are required for this Report by Item
601 of Regulation S-K.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession. Not applicable.
(3a) Articles of Incorporation.
(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> 59
(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 Notes 1 and 18, Notes to Consolidated Financial
Statements.
(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, 1998.
</TABLE>
<PAGE> 60
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 18, 1999.
<TABLE>
<S> <C>
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, 1999.
/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/ Deborah J. Knudsen /s/ Louis A. Smith
----------------------------- -----------------------------
Deborah J. Knudsen Louis A. Smith
Director Director
/s/ Thomas G. McIntyre /s/ Ronald G. Reffitt, Sr.
----------------------------- -----------------------------
Thomas G. McIntyre Ronald G. Reffitt, Sr.
Director Director
/s/ John M. Rockwood, Jr. /s/ Laurence P. Skendzel, M.D.
----------------------------- ------------------------------
John M. Rockwood, Jr. Laurence P. Skendzel, M.D.
Director Director
</TABLE>
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -----------------------------------------------------------
<S> <C>
3.a1 Articles of Incorporation
3.a2 Certificate of Designation for Series A Junior
Participating Preferred Stock
3.a3 Certificate of Merger
3.a4 Amendment to the Articles of Incorporation
3.a5 Amendment to the Articles of Incorporation
23 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule
</TABLE>
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
Filed January 20, 1994
Articles of Incorporation
Article I
The name of the corporation is: Michigan Empire Banc Corporation
Article II
The purpose or purposes for which the corporation is formed is to engage in
any activity within the purposes for which corporations may be formed under
the Business Corporation Act of Michigan.
In particular, the Corporation is formed for the purpose of engaging in
activities authorized to be performed by bank holding companies pursuant to
The Bank Holding Company Act of 1956, as amended, being 12 U.S.C. 1841.
Article III
The total authorized shares:
1. Common Shares - 5,000,000 shares with $5.00 par value
Preferred Shares - 2,000,000 shares with $1.00 par value
2. A statement of all or any of the relative rights, preferences and
limitations of the shares of each class is as follows: See Attachment.
Article IV
The address of the registered office is:
1227 East Front Street, Traverse City, Michigan 49684
The name of the resident agent at the registered office is:
William T. Fitzgerald, Jr.
Article V
The name and address of the incorporator is as follows:
William T. Fitzgerald, Jr., 1227 East Front Street, Traverse City, MI 49684
Use space below for additional or for continuation of previous Articles.
Please identify any Article being continued or added. Attach additional pages
if needed.
See Attachment for Articles VI, VII, VIII, and IX.
I (We), the incorporator(s) sign my (our) name(s) this 18th day of January,
1994.
/s/ William T. Fitzgerald, Jr.
- ------------------------------
William T. Fitzgerald, Jr.
<PAGE> 2
ATTACHMENT
Article III
2. A statement of the relative rights, preferences, and limitations of the
shares of each class of stock is as follows:
Common Stock.
Subject to any preferential or other rights granted to any series of Preferred
Stock, the holders of shares of the Common Stock shall be entitled to receive
dividends out of the funds of this Corporation legally available therefor, at
the rate and at the time or times as may be provided by the Board of
Directors. The holders of shares of Common Stock, on the basis of one vote per
share, shall have the right to vote for the election of members of the Board
of Directors of this Corporation and the right to vote on all other matters,
except those matters in which a separate class of this Corporations'
shareholders vote by class or series. Subject to any preferential or other
rights granted to any series of Preferred Stock, the holders of the shares of
the Common Stock shall be entitled to receive distributions legally
payable to shareholders on the liquidation of this Corporation.
Preferred Stock.
The shares of Preferred Stock may be issued from time to time in one or more
series in any manner permitted by law and the provisions of these Articles of
Incorporation as determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance thereof,
prior to the issuance of any shares therefor. The Board of Directors shall
have the authority to fix and determine, subject to the provisions hereof,
the rights and preferences of the shares of any series so established,
including, without limitation, the rate of dividend, whether the dividend
shall be cumulative, whether shares may be redeemed and, if so, the
redemption price and the terms and conditions of redemption, the amount
payable upon shares in the event of voluntary or involuntary liquidation,
sinking fund provisions, if any, for the redemption or purchase of shares,
the terms and conditions, if any, on which shares may be converted, and
voting rights, if any.
Article VI
In connection with the exercise of its judgment in determining what is in
the best interest of the Corporation and its shareholders when evaluating a
Business Combination Transaction or a proposal by another person or persons
to make a tender or exchange offer, the Board of Directors of the Corporation
shall, in addition to considering the adequacy of the amount to be paid in
connection with any such transaction, consider all the following factors and
any other factors which it deems relevant: (i)the social and economic effects
of the transaction on the Corporation and its subsidiaries, employees,
depositors, loan and other customers, creditors, and other elements of the
communities in which the Corporation and its subsidiaries operate or are
located; (ii) the business and financial conditions and earnings prospects
of the acquiring person or persons, including, but not limited to, debt
service and other existing or likely financial obligations of the acquiring
person or persons, and the possible effect of such conditions upon the
Corporation and its subsidiaries and the other elements of the communities
in which the Corporation and its subsidiaries operate or are located; and
(iii) the competence, experience, and integrity of the acquiring person or
persons and its or their management.
<PAGE> 3
To the extent that a greater vote is not required by the Michigan Business
Corporation Act, the affirmative vote of the holders of not less than eighty
percent (80%) of the Voting Stock shall be required for the approval or
authorization of any Business Combination Transaction with a Related Person,
or any Business Combination Transaction in which a Related Person has an
interest (except proportionately as a shareholder); provided, however, that
the eighty percent (80%) voting requirement shall not be applicable if (i)
the Continuing Directors, who at the time constitute at least a majority of
the entire Board of Directors of the Corporation, have expressly approved the
Business Combination Transaction by at least a two-thirds (2/3) vote of such
Continuing Directors, or (ii) all of the following conditions are satisfied:
(A) The Business Combination Transaction is a merger or consolidation and
cash or fair market value of property, securities, or other consideration
to be received per share by holders of Common Stock of the Corporation (other
than such Related Person) in the Business Combination Transaction is at least
equal in value to such Related Person's Highest Purchase Price;
(B) After such Related Person has become the Beneficial Owner of not less
than ten percent (10%) of the Voting Stock of the Corporation and prior to the
consummation of such Business Transaction, such Related Person shall not have
become the Beneficial Owner of any additional shares of Voting Stock or
securities convertible into Voting Stock, except (i) as a part of the
transaction which resulted in such Related Person becoming the Beneficial
Owner of not less than ten percent (10%) of the Voting Stock, or (ii) as a
result of a pro rata stock dividend or stock split; and
(C) Prior to the consummation of such Business Combination Transaction,
such Related Person shall not have, directly or indirectly, (i) received the
benefit (except proportionately as a shareholder) of any loan, advances,
guarantees, pledges, or other financial assistance or tax credits provided
by the Corporation or any of its subsidiaries, or (ii) caused any material
change in the Corporation's business or equity capital structure, including
the issuance of shares of capital stock of the Corporation to any third party.
For the Purpose of this Article
(i) The term "Business Combination Transaction" shall mean (a) any merger or
consolidation involving the Corporation or a subsidiary of the Corporation,
(b) any sale, lease, exchange, transfer, or other disposition (in one
transaction or a series of transactions), including, without limitation, a
mortgage or any other security device of all or any substantial part of the
assets either of the Corporation or of a subsidiary of the Corporation, (c)
any sale, lease, exchange, transfer, or other disposition of all or any
substantial part of the assets of an entity to the Corporation or a subsidiary
of the Corporation, (d) the issuance, sale, exchange, transfer, or other
disposition by the Corporation of the capital stock of any subsidiary of the
Corporation, (e) any recapitalization or reclassification of the Corporation's
securities (including, without limitation, any reverse stock split) or other
transaction that would have the effect of increasing the voting power of a
Related Person, (f) any liquidation, spin-off, split-up, or dissolution of the
Corporation, and (g) any agreement, contract or other arrangement providing
for any of the transactions described in this definition of Business
Combination Transaction.
(ii) The term "Related Person" shall (a) mean and include any individual,
corporation, partnership, group, association, or other person or entity which,
together with its affiliates and the associates, is the Beneficial Owner of
<PAGE> 4
not less than ten percent (10%) of the voting stock of the Corporation (x) at
the time the definitive agreement providing for the Business Combination
Transaction (including any amendment thereto) was entered into, (y) at the
time a resolution approving the Business Combination Transaction was adopted
by the Board of Directors of the Corporation, or (z) as of the record date
for the determination of shareholders entitled to notice of and to vote on,
or consent to, the Business Combination Transaction, and (b) shall mean and
include any affiliate or associate of any such individual, corporation,
partnership, group, association, or other person or entity; provided, however.
and nothwithstanding anything in the foregoing to the contrary, the term
"Related Person" shall not include the Corporation, a wholly owned subsidiary
of the Corporation, or any trustee of, or fiduciary with respect to, any plan
when acting in such capacity.
(iii) The term "Beneficial Owner" shall be defined by reference to Rule 13d-3
under the Securities and Exchange Act of 1934; provided, however, and without
limitation, any individual, corporation, partnership, group, association, or
other person or entity which has the right to acquire any Voting Stock at any
time in the future whether such right is contingent or absolute, pursuant to
any agreement, arrangement, or understanding upon exercise of the rights,
warrants, or options, or otherwise, shall be "Beneficial Owner" of such Voting
Stock.
(iv) The term "Highest Purchase Price" shall mean the highest amount of
consideration paid by such Related Person for a share of Common Stock of the
Corporation within two (2) years prior to the date such Related Person
became the Beneficial Owner of not less than ten (10%) of the Voting Stock;
and if such stock is not listed on any principal exchange, the highest closing
bid quotation with respect to a share of stock during the 30-day period
preceding the date in question, or if no quotations are available, the fair
market value on the date in question of a share of such stock as determined
by the Board of Directors of the Corporation in good faith.
(v) The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, considered for the purpose of this Article as one class; provided,
however, that if the Corporation has shares of Voting Stock entitled to more
or less than one vote for any such share, each reference to a proportion of
shares of Voting Stock shall be deemed to refer to such proportion of the
votes entitled to be case by such shares.
(vi) The term "Continuing Director" shall mean a director who either was a
member of the Board of Directors of the Corporation prior to the time such
Related Person became a Related Person or who subsequently became a director
of the Corporation and whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least three-quarters
(3/4) of the Continuing Directors then on the Board.
Article VII
Directors of the Corporation shall not be personally liable to the Corporation
or its shareholders for monetary damages for breach of fiduciary duties as a
director. This Article VII shall not apply and shall not eliminate personal
liability of a director: (i) for any breach of the director's duty of loyalty
to the Corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law,
<PAGE> 5
(iii) for a violation of Section 551(1) of the Michigan Business Corporation
Act, or (iv) for any transaction from which the director derived an improper
personal benefit.
Article IX
The business and affairs of the Corporations shall be managed by or under the
direction of the Board of Directors, the Directors being elected and appointed
as required by the Bylaws of the Corporation.
Article X
The Corporation reserves the right to amend and repeal all provisions
contained in these Articles of Incorporation by a vote of shareholders;
to the extent that a greater vote is not required by the Michigan Business
Corporation Act, the amendment or repeal of all articles except Article VI
shall require the affirmative vote of the holders of not less than sixty-
six and two-thirds percent (66 2/3%) of the voting stock of the Corporation
and the amendment or repeal of Article VI shall require the affirmative vote
of the holders of not less than eighty percent (80%) of the voting stock of
the Corporation.
MICHIGAN DEPARTMENT OF COMMERCE CORPORATION & SECURITIES BUREAU
Filed February 22, 1994
CERTIFICATE OF DESIGNATION FOR SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF MICHIGAN EMPIRE BANC CORPORATION PURSUANT TO SECTION 302 OF THE MICHIGAN
BUSINESS CORPORATION ACT
I, William T. Fitzgerald, Jr., Secretary, of Michigan Empire Banc Corporation
a corporation organized and existing under the laws of the State of Michigan
(the "Corporation"), DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Articles of Incorporation of the Corporation, the Board of Directors on
January 27, 1994, adopted the following resolution creating a series of fifty
thousand (50,000) shares of Preferred Stock designated as Series A Junior
Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors of
the Corporation in accordance with the provisions of its Articles of
Incorporation, a series of Preferred Stock of the Corporation be and is
hereby created, and that the designation and amount thereof and the voting
powers, preferences and the relative, participating, options, or other special
rights of the shares of such series, and the qualifications, limitations or
restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
Designated as "Series A Junior Participating Preferred Stock" and the number
of shares constituting such series shall be 50,000.
Section 2. Dividends and Distributions
(A) Subject to the prior and superior rights of the holders of any shares of
any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of January,
April, July, October in each year (each such date being referred to herein
as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $5.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions
other than a dividend payable in shares of Common Stock or a subdivision
of the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock, $5.00 par value per share, of the Corporation
(the "Common Stock") since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time after
January 27, 1994 (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
<PAGE> 2
the outstanding Common Stock into a smaller number of shares, then in each
such case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of share of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
dividend Payment Date, a dividend of $5.00 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of
Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock
entitled to receive a quarterly dividend and before such Quarterly Dividend
Payment Date, in either of which events such dividends shall begin to accrue
and be cumulative from such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the shares of
Series A Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the
January 27, 1994 (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
<PAGE> 3
(B) Except as otherwise provided herein or by law, the holders of shares
of Series A Preferred Stock and the holders of Shares of Common Stock shall
vote together as one class on all matters submitted to a vote of shareholders
of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall be in
arrears in an amount equal to four (4) quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "default period") which shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividends periods
and for the current quarterly dividend period on all shares of Series A
Preferred Stock then outstanding shall have been declared and paid or set
apart for payment. During each default period, all holders of Preferred
Stock (including holders of Series A Preferred Stock) with dividends in
arrears in an amount equal to four (4) quarterly dividends thereon, voting
as a class, irrespective of series, shall have the right to elect two (2)
Directors.
(ii) During any default period, such voting right of the holders of
Series A Preferred Stock may be exercised initially at a special meeting
called pursuant to subparagraph (iii) of the Section 3(C) or at any annual
meeting of shareholders, and thereafter at annual meetings of shareholders,
provided that neither such voting right nor the right of the holders of any
series of Preferred Stock, if any, to increase, in certain cases, the
authorized number of Directors shall be exercised unless the holders of ten
percent (10%) in number of shares of Preferred Stock outstanding shall be
present in person or by proxy. The absence of a quorum of the holders of
Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
Directors or, if such right is exercised at an annual meeting, to elect two
(2) Directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the Preferred Stock
shall have the right, subject to the limitation on number of directors set
forth in the Articles of Incorporation, to make such increase in the number of
Directors as shall be necessary to permit the election by them of the required
number. After the holders of the Preferred Stock shall have exercised their
right to elect Directors in any default period and during the continuance of
such period, the number of Directors shall not be increased or decreased
except by vote of the holders of Preferred Stock as herein provided or
pursuant to the rights of any equity securities ranking senior to or on a
parity with the Series A Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any shareholder or shareholders owning in
the aggregate not less than ten percent (10%) of the total number of shares
of Preferred Stock outstanding, irrespective of series, may request the
calling of a special meeting of the holders of Preferred Stock, which meeting
shall thereupon be called by the Chairman, the President, the Mergers and
Acquisitions Committee or the Board of Directors of the Corporation. Notice
of such meeting and of any annual meting at which holders of Preferred Stock
are entitled to vote pursuant to this paragraph (C)(iii) shall be given to
each holder of record of Preferred Stock by mailing a copy of such notice to
him at his last address as the same appears on the books of the Corporation.
Such meeting shall be called for a time not earlier than 10 days and not
later than 60 days after such order or request; or in default of the calling
<PAGE> 4
of such meeting within 60 days after such order or request, such meeting may
be called on similar notice by any shareholder or shareholders owning in the
aggregate not less than 10% of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no
such special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
shareholders.
(iv) In any period the holders of Common Stock, and other classes of stock
of the Corporation if applicable, shall continue to be entitled to elect the
whole number of Directors until the holders of Preferred Stock shall have
exercised their right to elect two (2) Directors voting as a class, after the
exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which
Elected the Director whose office shall have become vacant. References in this
Paragraph (C) to Directors elected by the holders of a particular class of
Stock shall include Directors elected by such Directors to fill vacancies as
provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect Directors shall cease,
(y) the term of any Directors elected by the holders of Preferred Stock as a
class shall terminate, and (z) the number of Directors shall be such number
as may be provided for in the Articles of Incorporation or bylaws irrespective
of any increase made pursuant to the provisions of paragraph (C)(ii) of this
Section 3 (such number being subject, however, to change thereafter in any
manner provided by law or in the Articles of Incorporation or bylaws). Any
vacancies in the Board of Directors effected by the provisions of clauses (y)
and (z) in the preceding sentence may be filled by a majority of the
remaining Directors.
(D) Except as set forth herein, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be required (except
to the extent they are entitled to vote with holders of Common Stock as set
forth herein) for taking any corporate action.
Section 4. Certain Restrictions
(A) Whenever quarterly dividends or other dividends or distributions payable
on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
<PAGE> 5
the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire shares
of any such parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of Series
A Preferred Stock, or any shares of stock ranking on a parity with the Series
A Preferred Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration of
the respective annual dividend rates and other relative rights and preferences
of the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series of classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired or canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject
to the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $50.00 per share, plus an amount equal
to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation
Preference, no additional distributions shall be made to the holders of shares
of Series A Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph
C below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause
(ii), the "Adjustment Number"). Following the payment of the full amount of
the Series A Liquidation Preference and the Common Adjustment in respect of
all outstanding shares of Series A Preferred Stock and Common Stock,
respectively, holders of Series A Preferred Stock and holders of shares of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
<PAGE> 6
(B) In the event, however, that there are not sufficient assets available to
permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Preferred Stock, then such remaining assts
shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the January 27,
1994 (i) declare any dividend on Common Stock payable in shares in Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the Adjustment Number in effect immediately prior to such event shall
be adjusted by multiplying such Adjustment Number by a fraction the numerator
of which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares
of Series A Preferred Stock shall at the same time be similarly exchanged
or changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after January 27,
1994 (i) declare or pay any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine
the outstanding Common Stock into a smaller number of shares, then in each
case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. Ranking. The Series A Preferred Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 9. Amendment. The Articles of Incorporation of the Corporation shall
not be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Series A Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of two thirds or
more of the outstanding shares of Series A Preferred Stock, voting separately
as a class.
Section 10. Fractional Shares. Series A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in liquidating distributions and to have the benefit of all
other rights of holders of Series A Preferred Stock.
<PAGE> 7
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do
affirm the forgoing as true this 27th day of January, 1994.
/s/ William T. Fitzgerald, Jr.
- ------------------------------
William T. Fitzgerald, Jr.
Secretary and Vice President
MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
Filed June 1, 1994
Certificate of Merger
Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned
corporations execute the following Certificate:
1. The Plan of Merger is as follows:
a. The name of each constituent corporation and its corporation
identification number (CID) is:
EMPIRE BANC CORPORATION 627-246
MICHIGAN EMPIRE BANC CORPORATION 070-234
b. The name of the surviving corporation and its corporation
identification number (CID) is:
MICHIGAN EMPIRE BANC CORPORATION which name will by virtue of the merger
be changed to "EMPIRE BANC CORPORATION" 070-234
c. For each constituent corporation, state:
<TABLE>
<CAPTION>
Designation and
number of outstanding Indicate class or Indicate class or
shares in each class series of shares series entitled
Name of Corporation or series entitled to vote to vote as a class
<S> <C> <C> <C>
Empire Banc Corporation 1,304,302 common common none
Michigan Empire
Banc Corporation 1,000 common none none
</TABLE>
d. The terms and conditions of the proposed merger, including the manner
and basis of converting the shares of each constituent corporation into
shares, bonds, or other securities of the surviving corporation, or into
cash or other consideration, are as follows:
See Exhibit A hereto.
e. The amendments to the Articles of Incorporation of the surviving
corporation to be effected by the merger are as follows:
The name of the Surviving Corporation is changed from Michigan Empire
Banc Corporation to "Empire Banc Corporation."
f. Other provisions with respect to the merger are as follows:
See Exhibit A hereto.
<PAGE> 2
2. This merger is permitted by the laws of the State of Delaware, the
jurisdiction under which Empire Banc Corporation is formed and the
plan of merger was adopted and approved by such corporation pursuant
to and in accordance with the laws of that jurisdiction.
3. The number of outstanding shares of each class of the subsidiary
corporation and the number of shares of each class owned by the
parent corporation is as follows:
Total shares Share owned by
Class outstanding parent corporation
Common 1,000 1,000
4. N/A
5. The consent to the merger by the shareholders of the parent corporation
was obtained.
6. The merger shall be effective on the 1st day of June, 1994
Signed this 27th day of May, 1994
Empire Banc Corporation
By /s/ William T. Fitzgerald, Jr.
------------------------------
William T. Fitzgerald, Jr.
Vice President
<PAGE> 3
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is made and entered into as of January 27,
1994, between Empire Banc Corporation, a Delaware Corporation ("Delaware
Empire"), and Michigan Empire Banc Corporation, a Michigan corporation,
("Michigan Empire"). Delaware Empire and Michigan Empire are hereinafter
sometimes collectively referred to as the "Constituent Corporations".
RECITALS
Delaware Empire is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. As of January 27, 1994, the
authorized capital stock of Delaware Empire consists of 5,000,000 shares of
common stock, $5.00 par value per share ("Delaware Empire Common Stock"), of
which 1,299,302 were issued and outstanding, and 2,000,000 shares of preferred
stock, $1.00 par value per share, of which 50,000 shares have been designated
as Series A Junior Participating Preferred Stock, none of which are issued and
outstanding. All shares of Delaware Empire Common Stock issued and outstanding
shall be entitled to vote with respect to this Agreement and Plan of Merger.
The number of shares of Delaware Empire Common Stock are subject to change
prior to the Effective Time by issuance of additional shares as may be
authorized by the Board of Directors of Delaware Empire, from time to time, or
pursuant to various employee benefit plans of Delaware Empire. The number of
shares of Delaware Empire Series A Participating Preferred Stock is not
subject to change prior to the Effective Time.
Michigan Empire is a corporation duly organized and validly existing under the
laws of the State of Michigan. As of the date hereof, the authorized capital
of Michigan Empire consists of 5,000,000 shares of common stock, $5.00 par
value per share ("Michigan Empire Common Stock") of which 1,000 shares are
issued and outstanding, and 2,000,000 shares of Preferred Stock, $1.00 par
value per share, of which 50,000 shares have been designated as Series A
Junior Participating Preferred Stock, none of which were issued and
outstanding. No such issued and outstanding shares are entitled to vote with
respect to this Agreement and Plan of Merger. The number of shares is not
subject to change prior to the Effective Time.
The respective Boards of Directors of Michigan Empire and Delaware Empire deem
the Merger advisable and in the best interests of each such corporation and
their respective shareholders. The respective Boards of Directors of Michigan
Empire and Delaware Empire, by resolutions duly adopted, have approved this
Agreement and Plan of Merger, and this Agreement and Plan of Merger shall be
submitted to and approved by the requisite vote of Delaware Empire's
shareholders.
Therefore, in consideration of the premises and the mutual covenants and
agreements herein contained, the parties hereby covenant and agree as follows:
ARTICLE I
1.01 Merger of Delaware Empire into Michigan Empire. Delaware Empire shall be
merged into Michigan Empire (Michigan Empire is sometimes hereinafter referred
to as the "Surviving Corporation") upon the filing of the appropriate
Certificates of Merger with the Michigan Department of Commerce and the
Delaware Secretary of State, hereinafter referred to as the "Effective Time,"
<PAGE> 4
unless some other date or time is agreed to by the parties. The separate
corporate existence of Delaware Empire shall thereupon cease and Michigan
Empire shall be the surviving corporation.
1.02 Effect of the Merger. From and after the Effective Time:
(a) The separate existence of the Delaware Empire shall cease and be merged
into one, the Surviving Corporation, which shall possess all of the rights,
privileges, immunities, powers and franchises of a public as well as of a
private nature, and shall be subject to all the restrictions, disabilities and
duties, of each of Delaware Empire and Michigan Empire; and all singular
rights, privileges, immunities, powers and franchises of each of Delaware
Empire and Michigan Empire, and all property, real, personal and mixed, and
all debts due to either Delaware Empire or Michigan Empire on whatever
account, including subscriptions to shares, and all other things in action or
belonging to each of Delaware Empire and Michigan Empire shall be vested in
Surviving Corporation; and all property, rights, privileges, immunities,
powers, and franchises, and all and every interest, shall be thereafter as
effectually the property of the Surviving Corporation as they were of Delaware
Empire and Michigan Empire and the title to any real estate, or interest
therein, vested by deed or otherwise, in either of Delaware Empire and
Michigan Empire shall not revert or be in any way impaired by reason of the
Merger.
(b) All rights of creditors and all liens upon any property of Delaware
Empire or Michigan Empire shall be preserved unimpaired and all debts,
liabilities and duties of Delaware Empire or Michigan Empire shall thenceforth
attach to the Surviving Corporation and may be enforced against the Surviving
Corporation to the same extent as if said debts, liabilities and duties had
been incurred or contracted by it; provided, however, that all such liens
shall attach only to those assets to which they were attached prior to the
Effective Time.
(c) Any action or proceeding, whether civil, criminal or administrative,
pending by or against either Delaware Empire or Michigan Empire shall be
prosecuted as if the Merger had not taken place, and the Surviving Corporation
may be substituted as a party in such action or proceeding in place of
Delaware Empire or Michigan Empire.
1.03 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further
assignments or assurances in law or any other acts are necessary or
desirable to (a)vest, perfect or confirm, of record or otherwise, in the
Surviving Corporation its rights, title or interest in, to or under any
of the rights, properties or assets of Delaware Empire acquired or to be
acquired by the Surviving Corporation as a result of, or in connection
with, the Merger, or (b) otherwise carry out the purposes of this Agreement
and Plan of Merger, Delaware Empire and its proper officers and directors
shall be deemed to have granted to the Surviving Corporation an irrevocable
power of attorney to execute and deliver all such proper deeds, assignments
and assurances in law and to do all acts necessary or proper to vest, perfect
or confirm title to and possession of such rights, properties or assets in
the Surviving Corporation and otherwise to carry out the purposes of this
Agreement and Plan of Merger; and the proper officers and directors of the
Surviving Corporation are fully authorized in the name of Delaware Empire
or otherwise to take any and all such action.
<PAGE> 5
ARTICLE II
2.01 Name. The name of the Surviving Corporation shall be Empire Banc
Corporation.
2.02 Articles of Incorporation. From and after the Effective Time, the
Articles of Incorporation of Michigan Empire shall be the Articles of
Incorporation of the Surviving Corporation until duly amended in accordance
with law.
2.03 Bylaws. The Bylaws of Michigan Empire, as in effect immediately prior
to the Effective Time, shall be the Bylaws of the Surviving Corporation until
duly amended in accordance with law.
2.04 Directors and Officers. The directors and officers of Delaware Empire
immediately prior to the Effective Time shall be the directors and officers
of the Surviving Corporation.
ARTICLE III
3.01 Manner and Basis of Converting Shares of Michigan Empire Common Stock.
At the Effective Time, each share of Michigan Empire Common Stock that is
validly issued and outstanding immediately prior to the Effective Time shall
canceled and returned to the status of authorized but unissued shares.
3.01 Manner and Basis of Converting Shares of Delaware Empire Common Stock.
Each share of Delaware Empire Common Stock that is validly issued and
outstanding immediately prior to the Effective Time shall, without any action
on the part of the holder thereof, be converted into and shall represent the
right to receive and be exchangeable for one (1) fully paid and nonassessable
share of Michigan Empire Common Stock, par value $5.00 per share.
3.03 Manner and Basis of Converting Stock Options and Other Rights. Each
stock option and any other rights to purchase shares of Delaware Empire
Common Stock granted by Delaware Empire under or subject to the Empire Banc
Corporation Stock Option Plan of 1988 (the "Stock Option Plan") any of the
stock option plans of Delaware Empire or pursuant to the Rights Agreement
between Delaware Empire and Empire National Bank dated as of December 19, 1990
(the "Rights Agreement") and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and become a stock option or right to
purchase, upon the same terms and conditions, the number of shares of Delaware
Empire Common Stock (subject to future adjustment as provided in the governing
stock option plan or the Rights Agreement) which is equal to the number of
shares of Delaware Empire Common Stock which the holder thereof would have
received had such holder exercised the option or right in full immediately
prior to the Effective Time (whether or not such option or right was then
exercisable). The price per share payable upon exercise under each of said
options or rights shall (subject to future adjustment as provided in the
governing stock option plan or Rights Agreement) be equal to the exercise
price per share thereunder immediately prior to the Effective Time.
ARTICLE IV
4.01 Exchange.
(a) After the Effective Time, each certificate theretofore representing
shares of Delaware Empire Common Stock and/or rights to purchase shares of
Delaware Empire Common Stock shall for all purposes evidence ownership of and
represent the same number of shares of Michigan Empire Common Stock and/or
rights, as the case may be, and the registered owner on the books and records
<PAGE> 6
of Michigan Empire or its transfer agent of any such outstanding stock
certificate shall, until such certificate shall have been surrendered for
transfer or conversion or otherwise accounted for to Michigan Empire or its
transfer agent, have and be entitled to exercise any voting and other rights
with respect to, and to receive any dividend and other distributions upon,
the shares of Michigan Empire evidenced by such outstanding certificate as
above provided.
(b) At any time on or after the Effective Time, any holder of
certificates theretofore evidencing ownership of shares of Delaware Empire
Common Stock and/or rights to purchase shares of Delaware Empire Common
Stock will be entitled, upon surrender of such certificates to the transfer
and/or rights agent of the Surviving Corporation, to receive in exchange
therefor one or more new certificates evidencing ownership of the number of
shares of Michigan Empire Common Stock and/or rights into which such Delaware
Empire Common Stock and/or rights shall have been converted in the Merger,
except that separate certificates for rights pursuant to the Rights Agreement
shall be issued only in the circumstances contemplated by the Rights
Agreement. If any certificate representing shares of Michigan Empire Common
Stock and/or rights is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the certificate so surrendered shall
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange shall pay to the transfer and/or rights agent
(if separate certificates for common share purchase rights have been issued)
any transfer or other taxes required by reason of the issuance of a
certificate representing shares of Michigan Empire Common Stock and/or rights
in any name other than that of the registered holder of the certificate
surrendered, or otherwise required, or shall establish to the satisfaction of
the transfer and/or rights agent that such tax has been paid or is not
payable.
4.02 Option Rights and Rights Agreements. At the Effective Time, Michigan
Empire will assume and continue the Rights Agreement and the rights thereunder
and will also assume and continue the Stock Option Plan and all other
agreements pursuant to which stock of Delaware Empire may be issued from time
to time, and the Stock Option Plan and such agreements, and all outstanding
stock options and rights thereunder, shall immediately prior to the Effective
Time be automatically amended to the extent necessary to permit continuance of
the Rights Agreement, the Stock Option Plan and such other agreements and
continuance and conversion of said stock options and rights into those of
Michigan Empire following of the Merger, notwithstanding any provisions to the
contrary contained therein.
4.03 Other Employee Benefit Plans. At the Effective Time, Michigan Empire
will assume all obligations of Delaware Empire under any and all other
employee benefit plans or incentive compensation plans in effect as of the
Effective Time or with respect to which employee rights or accrued benefits
are outstanding as of the Effective Time and all such plans shall continue
to be plans of Michigan Empire as the Surviving Corporation.
ARTICLE V
The obligation of each of the parties hereto to consummate the transactions
contemplated by this Agreement and Plan of Merger are subject to the
satisfaction of the following conditions at or prior to the Effective Time:
<PAGE> 7
5.01 Approval by Affirmative Vote of Shareholders. This Agreement and Plan
of Merger shall have been duly approved, confirmed and ratified by the
requisite vote of the shareholders of Delaware Empire.
5.02 Approvals. All actions, consents or approvals, governmental or
otherwise, which are, or in the opinion of counsel for Delaware Empire or
Michigan Empire may be, necessary to permit or enable Michigan Empire, upon
and after the merger, to conduct all or any part of the activity and business
of Delaware Empire, in the manner in which such activity and business is
conducted up to the Effective Time, shall have been obtained without any
conditions which in the reasonable opinion of Delaware Empire or Michigan
Empire are materially adverse, and shall not have been withdrawn or stayed.
ARTICLE VI
6.01 Counterparts. This Agreement and Plan of Merger may be executed in one
or more counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one agreement.
6.02 Governing Law. This Agreement and plan of Merger shall be governed in
all respects, including, but not limited to, validity, interpretation, effect
and performance, by the laws of the State of Michigan.
6.03 Amendment. Subject to applicable law, this Agreement and Plan of Merger
may be amended, modified or supplemented only by written agreement of Delaware
Empire and Michigan Empire, by their respective officers thereunto duly
authorized, at any time prior to the Effective Time.
6.04 Waiver. Any of the terms or conditions of this Agreement and Plan of
Merger may be waived at any time by whichever of the constituent Corporations
is, or the shareholders of which are, entitled to the benefit thereof by
action taken by the Board of Directors of such Constituent Corporation.
6.05 Termination. This Agreement and Plan of Merger shall terminate by
resolution adopted by each of the Boards of Directors of Delaware Empire
and Michigan Empire, whether before or after shareholders' approval of this
Agreement and Plan of Merger, or on such earlier date, if any of the
conditions to the obligations of the parties hereto shall have become
impossible of fulfillment unless such condition is waived by the parties
hereto, and there shall be no liability on the part of any of the parties
hereto upon such termination (or any of their respective directors or
officers).
<PAGE> 8
IN WITNESS WHEREOF, each of the Constituent Corporations have caused this
Agreement and Plan of Merger to be executed on their behalf by their officers
hereunto duly authorized and their respective corporate seals to be affixed
hereto, all as of the date first above written.
ATTEST: EMPIRE BANC CORPORATION
By: /s/ William T. Fitzgerald, Jr. By: /s/ James E. Dutmers, Jr.
------------------------------ --------------------------
William T. Fitzgerald, Jr. James E. Dutmers, Jr.
Secretary Chairman and Chief
Executive Officer
State of Michigan )
) ss:
County of Grand Traverse )
On this 27th day of January, 1994, before me appeared the above-signed
Officers, who being duly sworn, deposed and said that they are officers of
Empire Banc Corporation, and are duly authorized by its Board of Directors
to sign, affirm and verify this Agreement and Plan of Merger and that this
Agreement and Plan of Merger has been approved by all requisite action of
the Board of Directors of Empire Banc Corporation and this Agreement and
Plan of Merger is the act and deed of the Corporation and the facts stated
herein are true to the best of their knowledge.
/s/ Susan E. Richardson
----------------------------------
Susan E. Richardson, Notary Public
Leelanau County, Michigan
Acting in Gr. Traverse Co., Michigan
My Commission Expire: 3-14-1995
<PAGE> 9
ATTEST: MICHIGAN EMPIRE BANC CORPORATION
By: /s/ William T. Fitzgerald, Jr. By: /s/ James E. Dutmers, Jr.
------------------------------ --------------------------
William T. Fitzgerald, Jr. James E. Dutmers, Jr.
Secretary Chairman and Chief
Executive Officer
State of Michigan )
) ss:
County of Grand Traverse )
On this 27th day of January, 1994, before me appeared the above-signed
officers, who being first duly sworn, deposed and said that they are officers
of Michigan Empire Banc Corporation and are duly authorized by its Board of
Directors to sign, affirm and verify this Agreement and Plan of Merger and
this Agreement and Plan of Merger has been approved by all requisite action
of the Board of Directors of Michigan Empire Banc Corporation and this
Agreement and Plan of Merger is the act and deed of the Corporation and the
facts stated herein are true to the best of their knowledge.
/s/ Susan E. Richardson
----------------------------------
Susan E. Richardson, Notary Public
Leelanau County, Michigan
Acting in Gr. Traverse Co., Michigan
My Commission Expire: 3-14-1995
MICHIGAN DEPARTMENT OF COMMERCE-CORPORATION AND SECURITES BUREAU
Filed May 30, 1995
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), the undersigned corporation executes the following Certificate:
1. The present name of the corporation is:
EMPIRE BANC CORPORATION
2. The identification number assigned by the Bureau is: 070-234
3. The location of the registered office is:
1227 East Front Street, Traverse City, Michigan 49684
4. Articles VIII, X and XI of the Articles of Incorporation is hereby
amended to read as follows:
(Article X is amended. Articles VIII and XI added)
see Attachment
5b. The foregoing amendment to the Articles of Incorporation was duly adopted
on the 16th day of May, 1995. The amendment was duly adopted in accordance
with Section 611(2) of the Act by the vote of the shareholders. The necessary
votes were cast in favor of the amendment.
Signed this 16th day of May, 1995
By /s/ William T. Fitzgerald, Jr.
------------------------------
William T. Fitzgerald, Jr.
Vice President
ATTACHMENT
ARTICLE VIII
Any director may be removed only for cause and only by the affirmative vote of
the holders of a majority of the shares then entitled to vote at an election
of directors.
ARTICLE X
To the extent that a greater vote is not required by the Michigan Business
Corporation Act, the amendment or repeal of Article VI hereof shall require
the affirmative vote of the holders of not less than 80% of the shares of
stock then entitled to vote at any regular or special meeting of the
shareholders, voting together a single class, and the amendment or repeal of
Article VII, Article VIII, Article IX, this Article X and Article XI hereof
shall require the affirmative vote of the holders of not less than 66-2/3%
of the shares of stock then entitled to vote at any regular or special
meeting of the shareholders, voting together as a single class.
<PAGE> 2
ARTICLE XI
The Bylaws of this Corporation shall be subject to alteration, amendment or
repeal, and new Bylaws may be adopted, (i) by the affirmative vote of the
holders of not less than a majority of the shares or stock then entitled to
vote at any regular or special meeting of the shareholders, voting together
as a single class, or (ii) by the Board of Directors, as provided in the
Bylaws; provided, that any alteration, amendment or repeal, or the adoption
of any provision inconsistent with Article 1, Section 1.2, Section 1.3 and
Section 1.11 and Article 2, Section 2.1, Section 2.2, Section 2.3, Section
2.4, Section 2.5 and Section 2.8, and Article 10 and Article 11 of the Bylaws
shall require, in case of shareholder action, the affirmative vote of the
holders of not less than 66 2/3% of the shares or stock then entitled to vote
at any regular meeting or special meeting of the shareholders, voting together
as a single class, or in the case of action by the Board of Directors, the
affirmative vote of such number of directors as shall be specified in the
Bylaws.
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
Filed May 28, 1998
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
EMPIRE BANC CORPORATION
CID #070-234
Resolutions Adopted by the Board of Directors on April 23, 1998
Pursuant to Section 301a of the Michigan Business Corporation Act Relating
to Deleting Reference to Par Value
WHEREAS, this Board of Directors deems it to be in the best interest of this
Corporation and its shareholders to amend the Articles of Incorporation to
Delete all reference to par value.
NOW, THEREFORE, BE IT RESOLVED, that pursuant to Section 301a of the Michigan
Business Corporation Act, Article III (and any series designation made with
respect thereto) of the Articles of Incorporation of this Corporation be and
hereby is amended to delete all reference to par value.
CERTIFICATE
The undersigned, William T. Fitzgerald, Jr. hereby certifies that he is a Vice-
President and the Secretary of Empire Banc Corporation, a Michigan corporation,
and the foregoing is a true and correct copy of a Preamble and Resolution duly
adopted at a meeting of the Board of Directors of said Corporation and held
April 23, 1998, at which a quorum was present and acting throughout and that
such Preamble and Resolution are in full force and effect and have not been
amended, rescinded or repealed as of the date hereof.
Dated: May 26, 1998 /s/ William T. Fitzgerald, Jr.
------------------------------
William T. Fitzgerald, Jr.
Vice-President and Secretary
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 21, 1999
on the consolidated financial statements of Empire Banc Corporation, as of
December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998, which report is included in the 1998 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 25, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,249
<INT-BEARING-DEPOSITS> 491
<FED-FUNDS-SOLD> 5,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,399
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 325,774
<ALLOWANCE> 4,825
<TOTAL-ASSETS> 477,964
<DEPOSITS> 410,139
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 10,069
<LONG-TERM> 14,000
0
0
<COMMON> 30,283
<OTHER-SE> 10,473
<TOTAL-LIABILITIES-AND-EQUITY> 477,964
<INTEREST-LOAN> 29,240
<INTEREST-INVEST> 6,491
<INTEREST-OTHER> 828
<INTEREST-TOTAL> 36,559
<INTEREST-DEPOSIT> 15,426
<INTEREST-EXPENSE> 16,435
<INTEREST-INCOME-NET> 20,124
<LOAN-LOSSES> 1,215
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 18,539
<INCOME-PRETAX> 9,129
<INCOME-PRE-EXTRAORDINARY> 6,097
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,097
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 1.93
<YIELD-ACTUAL> 4.70
<LOANS-NON> 1,283
<LOANS-PAST> 189
<LOANS-TROUBLED> 408
<LOANS-PROBLEM> 2,400
<ALLOWANCE-OPEN> 4,125
<CHARGE-OFFS> 741
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<ALLOWANCE-DOMESTIC> 2,709
<ALLOWANCE-FOREIGN> 0
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</TABLE>
