-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2JVHua8oLIjjvin0Fy+r3QGL/rwPoG2E91Do8sKgovhcHvRqkvEE8TrVPLnw5Q3 e4e8n0CABwYM6/v49+Cf3g== 0000810830-96-000002.txt : 19960322 0000810830-96-000002.hdr.sgml : 19960322 ACCESSION NUMBER: 0000810830-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMPIRE BANC CORP CENTRAL INDEX KEY: 0000810830 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 382727982 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15839 FILM NUMBER: 96536778 BUSINESS ADDRESS: STREET 1: 1227 FRONT STREET CITY: TRAVERSE CITY STATE: MI ZIP: 49686 BUSINESS PHONE: 6169225864 MAIL ADDRESS: STREET 1: 1227 E FRONT ST CITY: TRAVERSE STATE: MI ZIP: 49684 10-K 1 ANNUAL REPORT FOR THE YEAR ENDED 12/31/95 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, 1995. Commission file Number 0-15839 EMPIRE BANC CORPORATION MICHIGAN (Exact name of registrant as (State or other jurisdiction of specified in its charter) incorporation or organization) 1227 E. FRONT STREET 49686 TRAVERSE CITY, MICHIGAN (Zip code) (Address of principal executive offices) 38-2727982 (616) 922-2111 (IRS Employer Identification Number) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common stock, $5.00 par value (title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 15, 1996, computed by reference to the average of the closing bid and asked price for such stock on that date was $37,766,000. 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 March 15, 1996, there were outstanding 1,649,093 shares of the registrants' common stock, $5.00 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting to be held May 14, 1996 are incorporated by reference into Part III. The Exhibit Index is located on page number 62. 2 PART I Item 1 - Business. Empire Banc Corporation (the "Registrant") was incorporated under the laws of the state of Delaware on February 6, 1987, for the purpose of becoming a bank holding company. The Empire National Bank of Traverse City (the "Bank"), is a wholly-owned subsidiary of the Registrant. On June 1, 1994 the Registrant changed its state of incorporation from Delaware to Michigan. The Bank was established under the banking laws of the State of Michigan in 1912 in Empire, Michigan. In 1961 the Bank converted its charter from a state bank to a national banking association. The Bank's deposits are insured by the Bank Insurance Fund, administered by the Federal Deposit Insurance Corporation, and the Bank is regulated by the U.S. Comptroller of the Currency. In December 1991, the Traverse City and Grayling, Michigan branches of Great Lakes Bancorp were purchased by the Bank. In exchange for assuming deposit liabilities, the Bank received loans, property, equipment and cash. The acquisition provided entry into the Grayling-Crawford County market, opportunity to consolidate branches and improve customer service in the Traverse City market and a source of core deposits for increased funding of loans and investments. The Bank is engaged in the general commercial banking business, providing a full range of loan and deposit products. These Bank services include customary retail and commercial banking services, including checking and savings accounts, time deposits, interest-bearing transaction accounts, safe deposit facilities, trust services, real estate mortgage lending and direct and indirect consumer financing. It makes secured and unsecured commercial loans and also operates a trust department providing fiduciary, investment and other related trust services. The Bank has contracted with a full-service securities brokerage firm to make available a variety of investment products to the Bank's customers. This program operates from two of the Bank's principal branch offices. The principal source of revenue for the Registrant is dividends upstreamed from the Bank. The Bank's principal source of revenue is interest and fees on loans. The sources of income for the three most recent years are as follows.
1995 1994 1993 - ---------------------------------------------------------- Interest and fees on loans 70.9% 71.1% 68.6% Other interest income 14.2% 11.9% 12.5% Non-interest income 14.9% 17.0% 18.9% ------ ------ ------ 100.0% 100.0% 100.0% ====== ====== ======
3 The Bank's primary market area is the northwestern portion of the lower peninsula of Michigan. The Bank is headquartered in Traverse City, Michigan, County of Grand Traverse. The Bank maintains offices in Grand Traverse, Leelanau, Kalkaska, and Crawford counties. The population of these counties combined is approximately 100,000. The Bank operates ten full service offices, provides drive-in convenience at seven locations and has automatic teller machines operating at ten locations. The Bank has no foreign operations. As of December 31, 1995, the Bank employed approximately 177 full-time and 34 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. There are principally six banking institutions with offices is this area. Three of the competing banks with offices in this market are members of holding companies with substantially more assets than the Registrant. 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 Registrant. In addition to these other banks, the Bank also competes for loans with savings and loan associations, credit unions, and certain large national retailers, and competes for deposits with investment firms and money market funds. In order to successfully compete, management has developed a sales and service culture, stresses and rewards excellent customer service and designs products to meet the needs of the customer. The Bank also utilizes its ability to sell loans in the secondary market. The Bank makes mortgage, commercial and installment loans to customers primarily in northwestern lower Michigan. Fees may be charged for these services. Commitments to make loans and unused lines of credit outstanding are detailed in Note 16 of the Notes to Consolidated Financial Statements. Historically, the Bank has predominantly sold its secondary market conforming residential mortgage loans. The mortgage loan portfolio serviced by the Bank for others, primarily the Federal Home Loan Mortgage Corporation, at December 31, 1995 totaled over $190 million. Mortgage banking activity is detailed in Note 6 of the Notes to Consolidated Financial Statements. The Bank supports the growth of the service industry, with its year round resort and related businesses, manufacturing, the medical community, and many other activities important to growth in the greater Grand Traverse area. Designated as a Preferred Lender by the Small Business Administration (SBA), the Bank underwrites government guaranteed business loans, contributing to the economic growth in northern Michigan. 4 The Bank also arranges loan relationships with national and regional participating banks, increasing the amount of funds available for local businesses to grow. There are no material concentrations of credit to, nor have material portions of the Bank's deposits been received from, a single person, persons, industry or group. In 1993, the Bank joined the Federal Home Loan Bank of Indianapolis, which generates an additional source of liquidity and long-term funds. Membership in the Federal Home Loan Bank also provides access to additional advantageous lending programs. The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and the Affordable Housing Program grants advances to fund lending for long- term low- and moderate-income owner occupied and affordable rental housing at subsidized interest rates. 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 and four percent of total deposits at December 31, 1995 and 1994, respectively. The Bank also uses federal funds purchased from correspondent banks and the Federal Reserve Bank to respond to deposit fluctuations and temporary loan demands. As of December 31, 1995, 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. As a bank holding company under the Bank Holding Company Act of 1956, the Registrant is regulated and examined by the Federal Reserve Board. This Act requires that the Registrant obtain prior Federal Reserve Board approval for bank and nonbank acquisitions and restricts the permissible activities of the Registrant. In addition, the Act formerly restricted the acquisition of shares of out-of-state banks unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. Under the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994, this restriction was repealed effective September 29, 1995, and the Federal Reserve Board generally is authorized to approve bank acquisitions by out-of-state bank holding companies whether or not such acquisition is prohibited by state law. Federal law also regulates transactions between the Registrant 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. 5 The Comptroller of the Currency has established guidelines with respect to the maintenance of appropriate levels of capital for the Bank. The Federal Reserve Board has also established similar guidelines for the Registrant. Compliance with such standards can also limit the amount of dividends which the Bank can pay to the Registrant and the amount of dividends the Registrant can pay to its shareholders. The banking industry is also affected by the monetary and fiscal policies of the federal government, including the Federal Reserve Board, which exerts considerable influence over the cost and availability of funds obtained for lending and investing. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly affects the operation of banks and their relationship with federal regulatory agencies. Under FDICIA, the FDIC has implemented a system of risk based premiums for deposit insurance pursuant to which the premiums paid by a depository institution are based on the probability that the applicable insurance fund will incur a loss in respect of such institution. Also under FDICIA federal regulatory agencies are developing comprehensive safety and soundness standards. FDICIA also prescribes various supervisory 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. 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 Registrant are, however, impossible to predict. Item 2 - Properties. The executive offices of the Registrant and the Bank are maintained at the main office of the Bank, 1227 East Front St., Traverse City, Michigan. The Bank leases its main office and the following branch offices and automated teller machine facilities: Grand Traverse Mall Office, 3160 South Airport Rd, Traverse City, Michigan 49684; Kalkaska Office, 302 West Mile Road, Kalkaska, Michigan 49646; Acme Office, 3880 M-72 East, Acme, Michigan 49610; Woodmere Office, 859 Woodmere Avenue, Traverse City, Michigan 49686; Meijer Handy Teller ATM, 3955 South Memorial Highway, Traverse City, Michigan 49684. The leases expire at various times through the years 2011 and all include renewal periods. Net aggregate annual rentals for banking facilities in 1995 were $415,000. In addition, the Bank owns and operates the following facilities none of which are encumbered: Northport Office, 122 Nagonaba, Northport, Michigan 49670; Leland Office, 111 North Main Street, Leland, Michigan 49654; Empire Office, 10210 Front Street, Empire, Michigan 49630; Cherryland Office, 1114 South Airport Road, Traverse City, Michigan 49686; Downtown Traverse City Office, 427 West Front St. Traverse City, Michigan 49684; Grayling Office, 2195 S. James St. Grayling, Michigan 49738. The Bank operates drive-thru facilities at most of its office locations and has ten automatic teller machines for customer use in its market area. 6 Information about the executive officers of the Registrant is set forth below.
Name and Age Position - --------------------------- ------------------------------------- James E. Dutmers, Jr. Chairman and Chief Executive Officer (52) of the Registrant and Empire National Bank Robert L. Israel President and Chief Operating Officer (52) of the Registrant and Empire National Bank William T. Fitzgerald, Jr. Vice President, Secretary/Treasurer (50) of the Registrant; Division Vice President and Chief Financial Officer of Empire National Bank Marilyn J. McCool Vice President of the Registrant; (49) Division Vice President and Director of Personnel of Empire National Bank James M. Merenda Vice President of the Registrant; (51) Division Vice President and Senior Trust Officer of Empire National Bank Bruce W. Reavely Vice President of the Registrant; (47) Division Vice President and Senior Operations Officer of Empire National Bank Daniel G. Stoudt Vice President of the Registrant; (49) Division Vice President and Senior Loan Officer of Empire National Bank
7 Item 3 - Legal Proceedings. The Bank is routinely engaged in litigation, both as plaintiff and defendant, which is incident to its business. In certain proceedings, claims or counter-claims have been asserted against it. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of such litigation and threats of litigation will have a material effect on the financial statements of the Registrant. Item 4 - Submission of Matters to a Vote of Security Holders. No matters were submitted during the fourth quarter of fiscal 1995 to a vote of the Registrant's security holders. PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of Empire Banc Corporation is traded on the electronic bulletin board system of the National Association of Securities Dealers, symbol EMBM. The primary market is the State of Michigan. Principal market makers of common stock transactions are F.J. Morrisey & Co., First of Michigan Corp, Howe, Barnes & Co., McDonald & Co., Robert W. Baird & Co., Roney & Co. and Stifel Nicolaus & Co. Quarterly cash dividends were declared during 1995 and 1994 totaling $1.02 and $0.92 per common share per year, respectively. 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 the five-for-four stock split, effected in the form of a 25% stock dividend, paid in November, 1995.
Quarter High Low Dividends - ---------------------------------------------------------------- 1995 Fourth $31.25 $28.40 $.30 Third 28.40 25.60 .24 Second 25.60 23.80 .24 First 23.80 22.60 .24 1994 Fourth 25.20 22.60 .32 Third 26.40 25.20 .20 Second 25.80 23.80 .20 First 23.80 22.40 .20
8 Item 6 - Selected Financial Data - Empire Banc Corporation
(In Thousands, Except Per Share Data) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------- Summary of Operations: Interest income $ 28,606 $ 23,628 $ 21,775 $ 22,822 $ 24,003 Interest expense 13,231 9,839 8,842 10,243 12,623 -------- -------- -------- -------- -------- Net interest income 15,375 13,789 12,933 12,579 11,380 Provision for loan losses 745 796 447 727 827 Non-interest income 5,017 4,843 5,063 4,232 3,181 Non-interest expense 13,494 12,241 12,542 11,648 9,843 -------- -------- -------- -------- -------- Income before taxes 6,153 5,595 5,007 4,436 3,891 Federal income taxes 2,007 1,841 1,600 1,359 1,145 -------- -------- -------- -------- -------- Net income $ 4,146 $ 3,754 $ 3,407 $ 3,077 $ 2,746 ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------- Per Share: Earnings $ 2.36 $ 2.15 $ 1.98 $ 1.81 $ 1.66 Dividends 1.02 .92 .72 .63 .54 Book value 18.20 16.15 15.09 13.71 12.44 - ---------------------------------------------------------------------------------- Ratios Based on Net Income: Return on average equity 14.81% 14.72% 14.61% 14.56% 14.31% Return on average assets 1.18 1.17 1.15 1.08 1.06 Dividend payout ratio 40.30 39.93 34.22 32.95 31.97 Average shareholders' equity as a percent of average assets 7.96 7.92 7.85 7.43 7.40 - ---------------------------------------------------------------------------------- Balance Sheet: Assets $372,426 $336,951 $313,054 $293,557 $288,368 Loans 259,102 243,583 218,380 197,130 192,598 Securities 84,312 64,231 65,830 64,810 64,249 Deposits 319,540 297,989 279,541 267,855 264,971 Shareholders' equity 30,005 26,332 24,504 22,215 20,152 - ---------------------------------------------------------------------------------- Per share amounts have been adjusted for stock dividends.
9 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis is designed to provide shareholders of Empire Banc Corporation (the Corporation) with a more comprehensive review of the results of operations and financial position of the Corporation and its wholly-owned subsidiary, Empire National Bank (the Bank), than could be obtained from an examination of the consolidated financial statements alone. This discussion should be read in conjunction with the consolidated financial statements beginning on page 28 and the related footnotes. Summary of Earnings In 1995, the Corporation achieved record earnings of $4,146,000, an increase of $392,000, or 10.4 percent, over the $3,754,000 earned in 1994. In 1994, net income increased $347,000, or 10.2 percent, over the $3,407,000 earned in 1993. Earnings Per Share Earnings per share, computed on the average number of common shares and common equivalents outstanding during the year, increased 9.8 percent to $2.36, compared to the $2.15 earned in 1994 and $1.98 earned in 1993. Return on Average Shareholders' Equity Return on average shareholders' equity measures how profitably the shareholders' invested capital is employed. Return on average equity was 14.8 percent for 1995 compared to 14.7 percent and 14.6 percent in 1994 and 1993, respectively. Return on Average Assets Return on average assets, a key measure of bank profitability, was 1.18 percent in 1995 compared to 1.17 percent and 1.15 percent in 1994 and 1993, respectively. Book Value Per Share Book value per share of common stock increased 12.7 percent to $18.20 at December 31, 1995, compared to $16.15 and $15.09 at December 31, 1994 and 1993, respectively. Summary of Operating Results The following is a summary of the major components of the Corporation's consolidated operating results for the three years ended December 31:
(In Thousands) 1995 1994 1993 - ---------------------------------------------------------------------- Net interest income $15,375 $13,789 $12,933 Taxable equivalent (FTE) adjustment 106 116 153 ------- ------- ------- Net interest income--FTE 15,481 13,905 13,086 Provision for loan losses 745 796 447 Non-interest income 5,017 4,843 5,063 Non-interest expense 13,494 12,241 12,542 ------- ------- ------- Income before tax--FTE 6,259 5,711 5,160 Income taxes, including FTE 2,113 1,957 1,753 ------- ------- ------- Net income $ 4,146 $ 3,754 $ 3,407 ======= ======= =======
10 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, the interest earned on investments and loans is measured and expressed on a fully taxable equivalent (FTE) basis. Tax-exempt interest income is increased to an amount comparable to interest subject to federal income taxes in order to properly evaluate the effective yields earned on earning assets. The tax equivalent adjustment is based on a federal income tax rate of 34 percent. Net interest income is influenced primarily by changes in the balance and mix of earning assets and interest-bearing liabilities, the proportion of earning assets that are funded by demand deposits and equity capital, and market interest rates. Some of these factors may be controlled to a certain extent by management. 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 financial 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 an FTE basis and interest expense, as well as the average rates earned and paid on these assets and liabilities. 11 Net Interest Income Average Balances, Interest Income/Expense, Average Rates
1995 1994 1993 --------------------------- ---------------------------- ---------------------------- Average Average Average Average Average Average (Fully Taxable Equivalent, Balance Interest Rate Balance Interest Rate Balance Interest Rate In Thousands) --------------------------- ---------------------------- ---------------------------- Assets Loans, including fees 1,2 $248,165 $ 23,835 9.60% $228,711 $ 20,238 8.85% $203,331 $ 18,431 9.06% Securities Taxable 68,634 4,004 5.83 60,676 2,904 4.79 56,758 2,757 4.86 Tax-exempt 1 3,348 286 8.54 4,334 349 8.05 6,934 505 7.28 -------- -------- -------- -------- -------- -------- Total 71,982 4,290 5.96 65,010 3,253 5.00 63,692 3,262 5.12 Federal funds sold 10,072 587 5.83 6,227 253 4.06 8,012 235 2.93 -------- -------- -------- -------- -------- -------- Total earning assets/ interest income 330,219 28,712 8.69% 299,948 23,744 7.92% 275,035 21,928 7.97% Cash and due from banks 11,972 11,840 11,264 Other assets 9,342 10,191 10,818 -------- -------- -------- Total $351,533 $321,979 $297,117 ======== ======== ======== Liabilities and Equity CDs over $100,000 $ 9,734 589 6.05% $ 10,867 449 4.13% $ 6,542 226 3.45% Savings and interest checking 60,703 1,371 2.26 64,547 1,407 2.18 62,101 1,424 2.29 Money market deposits 73,336 3,246 4.43 63,165 2,015 3.19 61,480 1,714 2.79 Consumer CDs 120,714 7,210 5.97 105,492 5,596 5.30 102,987 5,476 5.32 -------- -------- -------- -------- -------- -------- Total 264,487 12,416 4.69 244,071 9,467 3.88 233,110 8,840 3.79 Federal funds purchased 27 1 6.14 446 18 4.15 40 2 5.00 FHLB advances 11,597 814 7.02 7,499 354 4.72 -- -- -- -------- -------- -------- -------- -------- -------- Total interest-bearing funds/interest expense 276,111 13,231 4.79% 252,016 9,839 3.91% 233,150 8,842 3.79% -------- -------- -------- -------- -------- -------- Demand deposits 42,858 40,447 38,102 Other liabilities 4,568 4,021 2,551 Shareholders' equity 27,996 25,495 23,314 -------- -------- -------- Total $351,533 $321,979 $297,117 ======== ======== ======== Net interest spread (FTE) 3.90% 4.01% 4.18% ===== ===== ===== Net interest income (FTE) $ 15,481 $ 13,905 $ 13,086 ======== ======== ======== Net interest margin (FTE) 4.69% 4.64% 4.76% ===== ===== ===== 1 Interest income on tax-exempt securities and certain tax-exempt loans have been adjusted to a tax-equivalent basis. 2 Non-accrual loans are excluded.
12 An analysis of the changes in net interest income from period to period is presented in the following table. This analysis highlights the relative effect of the changes in interest income or expense due to changes in the average balances of earning assets and interest-bearing liabilities and changes in interest rates. Analysis of Changes in Net Interest Income
(Fully Taxable Equivalent, In Thousands) 1995 vs. 1994 1994 vs. 1993 - ------------------------------------------------------------------------------------------------------------- Average Average Net Average Average Net Increase (decrease) due to change in: Balance Rate Change Balance Rate Change ------------------------------ ----------------------------- Interest income Loans, including fees $ 1,908 $ 1,689 $ 3,597 $ 2,256 $ (449) $ 1,807 Securities Taxable 414 686 1,100 153 (6) 147 Tax-exempt (83) 20 (63) (206) 50 (156) -------- -------- -------- -------- -------- -------- Total 331 706 1,037 (53) 44 (9) Federal funds sold 196 138 334 (59) 77 18 -------- -------- -------- -------- -------- -------- Changes in interest income 2,435 2,533 4,968 2,144 (328) 1,816 - ------------------------------------------------------------------------------------------------------------- Interest expense CDs over $100,000 (51) 191 140 172 51 223 Savings and interest checking (88) 52 (36) 55 (72) (17) Money market deposits 361 870 1,231 48 253 301 Consumer CDs 862 752 1,614 133 (13) 120 -------- -------- -------- -------- -------- -------- Total interest-bearing deposits 1,084 1,865 2,949 408 219 627 Federal funds purchased (23) 6 (17) 16 -- 16 FHLB advances 243 217 460 354 -- 354 -------- -------- -------- -------- -------- -------- Changes in interest expense 1,304 2,088 3,392 778 219 997 -------- -------- -------- -------- -------- -------- Changes in net interest income $ 1,131 $ 445 $ 1,576 $ 1,366 $ (547) $ 819 ======== ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------- 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.
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.
1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Average Net Average Net Average Net Earning Interest Interest Earning Interest Interest Earning Interest Interest (Fully Taxable Equivalent, Assets Spread Income Assets Spread Income Assets Spread Income in Thousands) --------------------------------------------------------------------------------------------- Source of funding Interest-bearing liabilities $276,111 3.90% $ 10,779 $252,016 4.01% $ 10,109 $233,150 4.18% $ 9,748 Non-interest-bearing liabilities and equity capital 54,108 8.69% 4,702 47,932 7.92% 3,796 41,885 7.97% 3,338 -------- -------- -------- -------- -------- -------- $330,219 $ 15,481 $299,948 $ 13,905 $275,035 $ 13,086 ======== ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------------
Net interest income (FTE) increased $1,576,000 or 11.3 percent, in 1995 as average earning assets increased $30.3 million, or 10.1 percent, and the net interest margin (net interest income as a percentage of average earning assets) increased 5 basis points. Earning assets funded with interest-bearing liabilities increased $24.1 million, or 9.6 percent, as the interest spread decreased 11 basis points, adding $670,000 in net interest income. Earning assets funded with non-interest-bearing liabilities and equity capital increased $6.2 million, or 12.9 percent, with an improved interest spread of 77 basis points, contributing $906,000 to the increase in net interest income. The increase in average earning assets of $30.3 million was principally in loans, which increased $19.5 million or 8.5 percent, and the average rate on loans increased 75 basis points. Investment securities increased $7.0 million, or 10.7 percent, and the average rate increased 96 basis points. The primary funding for earning assets is interest-bearing deposits which increased $20.4 million, or 8.4 percent, and the average rate increased 81 basis points over 1994. In 1994, net interest income increased $819,000, or 6.3 percent, due to increases in average earning assets of $24.9 million, or 9.1 percent, and the net interest margin decreased 12 basis points. The increase in earning assets funded with interest-bearing liabilities, at a decreased interest spread, accounted for $361,000 of the increase in net interest income. The increase in earning assets funded with non-interest-bearing liabilities, at a reduced interest spread, added $458,000 in net interest income. 14 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 adheres to internally established written loan policies and procedures. Management has established a loan review process which provides for frequent review of the loan portfolio in order to monitor loan portfolio quality and performance. In addition, management conducts a review of loan concentrations which could have an impact on the financial condition of the Bank. As of December 31, 1995, there were no industry concentrations in which the total loans to borrowers in one industry comprised 10 percent or more of total loans. Loans outstanding at year-end for the five years ended December 31, are shown in the following table according to the type of loan:
(In Thousands) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------- Commercial $ 115,084 $ 106,447 $ 96,138 $ 88,704 $ 83,093 Mortgage 63,809 56,009 46,967 40,075 39,977 Consumer 63,328 71,023 66,946 48,338 43,806 Revolving Credit 11,596 10,104 8,329 10,034 11,797 Commercial Paper 5,285 -- -- 9,979 13,925 --------- --------- --------- --------- --------- $ 259,102 $ 243,583 $ 218,380 $ 197,130 $ 192,598 ========= ========= ========= ========= =========
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, 1995, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity to changes in interest rates.
- -------------------------------------------------------------------------- (In Thousands) Total - -------------------------------------------------------------------------- In one year or less $ 66,813 After one year but within five years Interest rates are floating or adjustable 190 Interest rates are fixed or predetermined 44,665 After five years Interest rates are floating or adjustable 29 Interest rates are fixed or predetermined 6,894 ------- Total $118,591 ======== - --------------------------------------------------------------------------
15 Non-Performing Assets and Problem Loans The following table is a summary of non-performing assets as of December 31:
(In Thousands) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------- Non-accrual loans $ 867 $1,228 $1,497 $1,280 $2,406 Renegotiated loans 606 644 486 196 193 ------ ------ ------ ------ ------ Total non-performing loans 1,473 1,872 1,983 1,476 2,599 Other real estate 280 53 838 2,407 1,175 ------ ------ ------ ------ ------ Total non-performing assets $1,753 $1,925 $2,821 $3,883 $3,774 ====== ====== ====== ====== ====== Non-performing assets as a percent of total loans .68% .79% 1.29% 1.97% 1.96% Accruing loans 90 days or more past due $ 72 $ 128 $ 1 $ 376 $ 212 - --------------------------------------------------------------------------
In 1995, total non-performing assets decreased $172,000, or 8.9 percent, as other real estate owned increased $227,000 and non-performing loans decreased $399,000. In addition to loans classified as non-performing or 90 days past due, there were other loans totaling $3,213,000 at December 31, 1995, on which payments were current and management closely monitors the borrowers' ability to comply with payment terms. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as amended by Statement No. 118 (SFAS 118). Implementation of SFAS 114 and SFAS 118 did not have a material impact on the consolidated financial position and results of operations in 1995 as disclosed in Note 5, Loans, to the Consolidated Financial Statements. See Note 2, Significant Accounting Policies, to the Consolidated Financial Statements, for a description of SFAS 114 and SFAS 118. Management regularly reviews the loan portfolio to identify loans for which there are concerns that the borrower will be unable to satisfy existing payment terms. Management reports monthly, to the Board of Directors, information regarding significant past-due and problem loans, non-accrual loans and other real estate owned. Non-performing assets are carried at estimated realizable values and the known losses of principal have been recognized. Management cannot predict which, if any, loans will eventually result in losses. Included in other assets is $1,041,000 of cash value of life insurance which has been classified non-accrual. The Trustee for the insurer/debtor has signed an agreement in principle with a new insurer to assume these policies at full value. The definitive agreement is being drafted and the transfer to the new insurer is expected in 1996. 16 The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that collection of interest is doubtful. The gross interest income that would have been recorded in 1995 on the $867,000 of non-accrual loans amounted to $128,000 if the loans would have been current in accordance with their original terms and outstanding throughout the period. The amount of interest income included in net income on these loans amounted to $6,000. All loans classified for regulatory purposes as loss, doubtful, substandard or special mention have been included in the above disclosures. There were no other interest bearing assets at December 31, 1995 that would be required to be disclosed as non-performing or potential problem loans. There were no foreign loans outstanding at December 31, 1995. 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:
(In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------- Provision for loan losses $ 745 $ 796 $ 447 Net loan losses 445 526 267 Allowance for loan losses at year-end 3,200 2,900 2,630 Allowance as a percent of year-end loans 1.24% 1.19% 1.20% Ratio of net loan losses to average total loans outstanding during the year .18 .23 .13 - -------------------------------------------------------------------------
In 1995, the decrease in the provision for loan losses of $51,000 was primarily due to a decrease in net loan charge-offs of $81,000. The ratio of net loan losses to average loans of 0.18 percent for 1995 and 0.23 percent for 1994 are substantially below historical industry norms. A sustained period of national and local economic growth has resulted in substantial growth in the loan portfolio. In 1995, the allowance for loan losses increased $300,000 and was 1.24 percent of loans at December 31, 1995. The allowance for loan losses was considered adequate by management and was 183 percent of non-performing assets at year-end compared to 151 percent at December 31, 1994. In 1994, the $349,000 increase in the provision for loan losses was due to an increase in net loan charge-offs of $259,000, primarily indirect consumer loans, and growth in the loan portfolio of over 11 percent. 17 Summary of Loan Loss Experience Additional information relative to the allowance for possible loan losses is presented in the following table. This table summarizes loan balances at the end of each period and daily average balances, changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off by loan category, and additions to the allowance for possible loan losses through provisions charged to expense. Factors which influence management's judgement in determining the provision for loan losses each period include establishing specific loss allowances for selected loans (including large loans, non-accrual loans, and problem and delinquent loans) and consideration of historical loss information and local economic conditions.
- -------------------------------------------------------------------------- (In thousands) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------- Allowance for possible loan losses, beginning of period $ 2,900 $ 2,630 $ 2,450 $ 2,310 $ 2,100 -------- -------- -------- -------- -------- Loans charged off: Commercial 17 112 97 323 235 Real estate mortgages 7 Consumer 575 539 236 325 461 Revolving credit 51 67 84 106 122 - -------------------------------------------------------------------------- Total charge-offs 650 718 417 754 818 - -------------------------------------------------------------------------- Recoveries: Commercial 55 85 3 58 44 Real estate mortgages 2 Consumer 135 89 119 83 151 Revolving credit 13 18 28 26 6 - -------------------------------------------------------------------------- Total recoveries 205 192 150 167 201 - -------------------------------------------------------------------------- Net charge-offs 445 526 267 587 617 - -------------------------------------------------------------------------- Provision charged to expense 745 796 447 727 827 - -------------------------------------------------------------------------- Allowance for possible loan losses, end of period $ 3,200 $ 2,900 $ 2,630 $ 2,450 $ 2,310 ========================================================================== Total loans outstanding at end of period $259,102 $243,583 $218,380 $197,130 $192,598 ======== ======== ======== ======== ======== Average total loans outstanding for the year $249,769 $230,251 $205,410 $191,029 $176,102 ======== ======== ======== ======== ======== Ratio of net charge offs to daily average loans outstanding 0.18% 0.23% 0.13% 0.31% 0.35% ==== ==== ==== ==== ==== - --------------------------------------------------------------------------
18 Allocation of the Allowance for Loan Losses The allocation of the allowance for possible loan losses for the years ended December 31 is:
- -------------------------------------------------------------------------- Real estate Consumer mortgage/ (In thousands) Commercial and other construction Unallocated Total - -------------------------------------------------------------------------- 1995 Allowance amount $1,378 $ 602 $ 75 $1,145 $3,200 % loans/total loans 46.5% 28.9% 24.6% -- 100% 1994 Allowance amount $1,055 $ 574 $ 60 $1,211 $2,900 % loans/total loans 43.7% 33.3% 23.0% -- 100% 1993 Allowance amount $1,104 $ 495 $ 95 $ 936 $2,630 % loans/total loans 43.9% 34.5% 21.6% -- 100% 1992 Allowance amount $ 729 $ 340 $ 12 $1,369 $2,450 % loans/total loans 47.8% 30.9% 21.3% -- 100% 1991 Allowance amount $ 861 $ 312 $ 7 $1,130 $2,310 % loans/total loans 46.5% 31.1% 22.4% -- 100% - -------------------------------------------------------------------------
Non-Interest Income Total non-interest income increased $174,000, or 3.6 percent, from 1994. Income from the origination, sales and servicing of mortgage loans decreased $71,000, or 6.2 percent. The higher level of interest rates in 1995 compared to 1994 substantially reduced mortgage activity in the industry and created a tightening of fees earned on new loans. Fees and gains on loans sold in 1995 were $589,000, a decrease of $123,000, or 17.3 percent, from 1994. Effective July 1, 1995 the Bank adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). This standard requires capitalizing the cost of mortgage servicing rights on loans sold. The capitalized cost of the mortgage servicing rights is amortized over the estimated period of servicing income. This standard also requires periodic evaluation of the capitalized servicing rights for impairment. The adoption of SFAS 122 increased gains on loans sold $154,000 in 1995. Servicing income on loans sold increased $52,000, or 12.1 percent, over 1994. Trust income increased $254,000, or 16.3 percent, in 1995, as funds under management increased $43 million, or 16.7 percent. Other service charges and fees increased 7.1 percent due to income earned from credit card fees and ATM fees. In 1994, total non-interest income decreased $220,000, or 4.3 percent, due primarily to decreases in income from the origination, sales and servicing of mortgage loans of $637,000, or 35.8 percent, as fees and gains on loans sold decreased 50 percent, or $708,000, due to the substantially reduced new loan volume from the record levels of 1992 and 1993. Loan servicing 19 income increased $71,000, or 19.8 percent over 1993. Trust fees increased $181,000, or 13.1 percent, due to a 17.2 percent increase in assets under management. Other significant increases were in service charges and fees on deposit accounts of 5.2 percent; other service charges and fees of 6.9 percent; and other income of 58.7 percent due to increased fees earned through investment product sales by a third party vendor in the Bank's branches and gains on sales of other real estate owned. Non-Interest Expense In 1995, total non-interest expense increased $1,253,000, or 10.2 percent. Total personnel expense increased $1,079,000, or 15.9 percent, as benefit costs related to the 38 percent increase in the Corporation's stock price during the year increased $698,000 and the profit sharing incentive award paid to all employee partners increased $110,000, or 24.6 percent. Occupancy expense for 1995 increased $68,000, or 7.2 percent, due to increased lease and branch remodeling costs. Other operating expenses increased $59,000, or 1.6 percent, in 1995. FDIC insurance expense decreased $254,000, or 41.1 percent, due to the reduction in FDIC rates from $.23 per $100 of deposits to $.04, effective June 1, 1995. For 1996, the rate has been reduced to the statutory minimum of $2,000 per year for well-capitalized banks. The rate continues at $.23 for deposits purchased from savings associations. The FDIC is proposing a one-time charge on all deposits purchased from savings associations and savings association deposits to bring the Savings Association Insurance Fund to the required level and reduce the premium rate to the level equivalent to the commercial banks' rate. Although legislation to implement the proposed one-time charge has not been enacted, management currently anticipates that any such charge would not have a significant impact on the Corporation's financial position or results of operations. Legal and professional fees increased $69,000, or 25.4 percent, and business taxes increased $54,000, or 17 percent. Other areas of expense increased due to increased activity levels in the overall growth of the Bank. In 1994, total non-interest expense decreased $301,000, or 2.4 percent. Personnel expense decreased $121,000, or 1.8 percent, due to the $420,000, or 80.7 percent, decrease in benefit costs related to the change in the Corporation's stock price from year to year and the decrease in the profit sharing incentive award of $56,000, or 11.1 percent. Equipment expense increased 6.4 percent for investment in technology. Other operating expense declined $233,000, or 5.9 percent, in 1994. Legal and professional fees decreased $73,000, or 21.2 percent, and expenses associated with the sale of other real estate owned decreased $201,000, or 93 percent. Other areas of expense increased due to increased activity levels and overall growth of the Company. Federal Income Taxes Federal income tax expense for 1995 was $2,007,000 compared to $1,841,000 in 1994 and $1,600,000 in 1993 due to the increased profitability of the Corporation. The Corporation's effective tax rate has been substantially unchanged from 1993 through 1995 due to the consistency of statutory tax rates and the relative percentage of tax-exempt income. 20 Capital Resources and Cash Dividends The foundation of a strong financial institution is a strong capital base. Shareholders' equity in 1995 increased $3.7 million, or 13.9 percent, to $30 million at year-end 1995. During 1994, total shareholders' equity increased $1.8 million, or 7.5 percent, over 1993. Shareholders' equity was 8.1 percent and 7.8 percent of total assets at December 31, 1995 and 1994, respectively. The Federal bank regulatory agencies have established capital standards for financial institutions. The Corporation's capital ratios are all significantly above the guidelines for well-capitalized institutions, the highest capital standard. Note 19 to the consolidated financial statements details the Corporation's regulatory capital and the capital standards. Total dividends in 1995 were $1,671,000, or $1.02 per share, compared to the $1,499,000, or $.92 per share in 1994, a 10.9 percent increase. The dividend payout ratio was 40 percent in 1995 and 1994, and 34 percent in 1993. A 25 percent stock dividend was paid in November of 1995. Cash dividends per share have increased at an average annual rate of 17.3 percent since 1990. Future dividends 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, the Bank. Consequently, cash dividends depend upon the earnings, capital needs, regulatory restraints and other factors affecting the Bank. Under current banking laws and regulations, during 1996 the Bank can distribute to the Corporation cash dividends in the amount of $4,831,000 plus 1996 net profits. The Company maintains a five-year capital plan and utilizes a formal strategic planning process. Management and the Board continue to monitor long-term goals which include maintaining capital growth in relation to asset growth and the retention of earnings to fund growth while providing above-average 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 functions. Interest rate risk arises when the maturity or repricing characteristics of assets differ significantly from the maturity or the repricing characteristics of liabilities. One of the goals of asset and liability management is to balance the various factors that create interest rate risk, thereby maintaining the interest rate risk of the Bank within acceptable levels. While controlling interest rate risk is an important objective, accommodating customer maturity and repricing preferences is an equally important objective. It is the function of asset and liability management to develop strategies to reconcile these objectives. Management has developed definitive policies and procedures to sell the current production of long-term residential mortgages in the secondary market to mitigate 21 interest rate risk. Long-term commercial loans are generally written with three- and five-year balloons and long-term fixed rate SBA guaranteed loans are sold in the secondary market. One measure of interest rate risk is "gap," which represents the cumulative difference between the amount of assets and liabilities maturing or repricing at various time intervals. In measuring the interest rate risk gap, management estimates loan repayments and early withdrawals of deposits and the interest sensitivity of assets and liabilities which do not mature or reprice. Because assets and liabilities do not reprice in the same manner as interest levels change, the gap should not be viewed as a sole indicator of how the net interest income of the Bank will be affected by changes in interest rates. The Bank continually monitors and has maintained within its policy a one-year rate sensitive asset-to- liability ratio (RSA-RSL) of between 0.8 and 1.2. The one year RSA-RSL ratio was 0.93 and 0.88 at December 31, 1995 and 1994, respectively.
The following table represents rate sensitivity analysis of interest- bearing assets and liabilities at December 31, 1995: - ---------------------------------------------------------------------------- Interest Sensitivity Period 0-90 91-365 0-365 OVER 1 (In Thousands) DAYS DAYS DAYS YEAR TOTAL - ---------------------------------------------------------------------------- Assets Loans $ 87,633 $51,608 $139,241 $119,861 $259,102 Securities 11,329 27,307 38,636 45,676 84,312 Federal funds sold 8,000 -- 8,000 -- 8,000 -------- ------- -------- -------- -------- Total interest-earning assets 106,962 78,915 185,877 165,537 351,414 -------- ------- -------- -------- -------- Liabilities and Equity Savings & Interest Checking 62,187 -- 62,187 -- 62,187 Money Market Deposits 76,028 -- 76,028 -- 76,028 Time Deposits 24,887 25,714 50,601 84,022 134,623 FHLB advances 5,000 5,000 10,000 7,000 17,000 -------- ------- ------- -------- -------- Total interest-bearing liabilities 168,102 30,714 198,816 91,022 289,838 -------- ------- ------- -------- -------- Interest-earning assets less interest-bearing liabilities ($61,140) $48,201 ($12,939) $ 74,515 $ 61,576 ======== ======= ========= ======== ======== - ----------------------------------------------------------------------------
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 the projected changes in market interest rates and alternative rate scenarios, the amount of change in the rate of individual interest rate sensitive assets and liabilities, changes in rate of growth and rate of prepayment of assets and liabilities and the effect of competition. Through this analysis, management is able to more realistically measure the projected effect on net interest income than by traditional gap analysis. 22 The period of 1993 through 1995 included periods of sustained significant interest rate decreases and increases as well as changes in the shape of the yield curve. The steady increase in net interest income demonstrates the effectiveness of these risk management techniques. Liquidity management for a commercial bank is closely related to asset and liability management. The goal of liquidity management is to maintain the availability of 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 securities portfolio is to invest in securities of high quality that will provide a fair and 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 Corporation adopted on January 1, 1994, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The adoption of SFAS 115 requires management to designate as available for sale those securities which are intended to be used for interest rate risk management, liquidity needs and portfolio management. The Board of Directors has established policies regarding the potential price fluctuation of the available for sale portfolio. At December 31, 1995, the available for sale portfolio had a net unrealized gain of $506,000 compared to a net unrealized loss of $774,000 at December 31, 1994. The price fluctuations experienced during 1994 and 1995 were primarily due to changes in market interest rates and were well within the policies established by the Board of Directors. Realization of any unrealized gain or loss will depend upon the future portfolio management, interest rate risk management and liquidity needs of the Bank. The regulatory agencies do not include the SFAS 115 adjustment in the calculation of regulatory capital. Please see Note 2, Significant Accounting Policies, for a description of SFAS 115.
An analysis of securities for the five years ended December 31 were as follows: Available for sale - ------------------------------------------------------------------------- (In Thousands) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------ Equity $ 2,425 $ 1,495 $ -- $ -- $ -- US Government and agency 27,154 21,857 -- -- -- ------- ------- ------- ------- ------- Total $29,579 $23,352 $ -- $ -- $ -- ======= ======= ======= ======= ======= Mortgage-backed $18,250 $ 7,980 $ -- $ -- $ -- ======= ======= ======= ======= =======
23
Held to maturity - ----------------------------------------------------------------------- (In Thousands) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------- US Government and agency $23,530 $24,320 $46,148 $37,848 $41,167 State and municipal 5,171 3,354 6,339 7,120 6,935 Other 7,782 4,414 6,220 4,659 2,843 ------- ------- ------- ------- ------- Total $36,483 $32,088 $58,707 $49,627 $50,945 ======= ======= ======= ======= ======= Mortgage-backed $ -- $ 811 $ 7,123 $15,183 $13,304 ======= ======= ======= ======= ======= - -----------------------------------------------------------------------
Other than securities guaranteed by the US Government or its agencies, the Bank held no investment securities from any one issuer that exceed ten percent of stockholders' equity at December 31, 1995. Management believes that deposit growth through core deposits provides the primary funding for increases in loans and investment securities. Core deposits include demand deposits, savings and money market accounts and certificates of deposit of consumer and corporate customers. Core deposits represented 97 percent and 96 percent of total deposits at December 31, 1995 and 1994, respectively. Management also regularly assesses the ability of the Bank 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 4 percent of total deposits at December 31, 1995 and 1994. 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 established substantial federal funds lines with correspondent banks and may borrow from the Federal Reserve Bank. The Bank is a member of the Federal Home Loan Bank of Indianapolis, which provides an additional source of liquidity and long-term funds to meet the borrowing needs of customers. Advances from the Federal Home Loan Bank of Indianapolis are secured through the pledge of investment securities or mortgage loans. Federal Home Loan Bank advances were $17 million and $8 million at December 31, 1995 and 1994, respectively. Management believes that with the combination of federal funds lines and borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, the Bank has more than adequate resources available to meet liquidity needs and to provide for growth. 24 Sources and Uses of Funds Trends This table is an analysis of the changes in the average balances for the last two years: Analysis of Changes in Average Balances
(In Thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Increase/(Decrease) Increase/(Decrease) Average ------------------ Average ------------------- Average Balance Amount Percent Balance Amount Percent Balance -------------------------------- -------------------------------- -------- Assets: Loans $248,165 $ 19,454 8.5% $228,711 $ 25,380 12.5% $203,331 Securities: Taxable 68,634 7,958 13.1 60,676 3,918 6.9 56,758 Tax-exempt 3,348 (986) (22.8) 4,334 (2,600) (37.5) 6,934 -------- -------- -------- -------- -------- Total 71,982 6,972 10.7 65,010 1,318 2.1 63,692 Federal funds sold 10,072 3,845 61.7 6,227 (1,785) (22.3) 8,012 -------- -------- -------- -------- -------- Total earning assets 330,219 30,271 10.1 299,948 24,913 9.1 275,035 Cash and due from banks 11,972 132 1.1 11,840 576 5.1 11,264 Other assets 9,342 (849) (8.3) 10,191 (627) (5.8) 10,818 -------- -------- -------- -------- -------- Total $351,533 $ 29,554 9.2% $321,979 $ 24,862 8.4% $297,117 ======== ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------------- Liabilities and Equity: CDs over $100,000 $ 9,734 $ (1,133) (10.4)% $ 10,867 $ 4,325 66.1% $ 6,542 Savings and interest checking 60,703 (3,844) (6.0) 64,547 2,446 3.9 62,101 Money market deposits 73,336 10,171 16.1 63,165 1,685 2.7 61,480 Consumer CDs 120,714 15,222 14.4 105,492 2,505 2.4 102,987 -------- -------- -------- -------- -------- Total 264,487 20,416 8.4 244,071 10,961 4.7 233,110 Federal funds purchased 27 (419) (93.9) 446 406 1,015.0 40 FHLB advances 11,597 4,098 54.6 7,499 7,499 100.0 -- -------- -------- -------- -------- -------- Total interest-bearing funds 276,111 24,095 9.6 252,016 18,866 8.1 233,150 Demand deposits 42,858 2,411 6.0 40,447 2,345 6.2 38,102 Other liabilities 4,568 547 13.6 4,021 1,470 57.6 2,551 Shareholders' equity 27,996 2,501 9.8 25,495 2,181 9.4 23,314 -------- -------- -------- -------- -------- Total $351,533 $ 29,554 9.2% $321,979 $ 24,862 8.4% $297,117 ======== ======== ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------------
Total average earning assets increased $30.3 million, or 10.1 percent, in 1995. Total average loans increased $19.5 million, or 8.5 percent. The increase in average loans was primarily in mortgage loans, which increased $12.4 million, or 26.1 percent. Commercial loans increased $10.5 million, or 10.4 percent. Average consumer loans decreased $3.5 million, or 4.3 percent, as management reduced the emphasis on indirect lending and continues to concentrate on direct consumer lending. Average investment securities increased $7.0 million, or 10.7 percent. 25 The increase in average earning assets was funded by a $24.1 million, or 9.6 percent, increase in total average interest-bearing funds. Total average interest-bearing core deposits increased $21.5 million, or 9.2 percent. With increases in interest rates, consumers increased their investments in certificates of deposit, which grew $15.2 million, or 14.4 percent, in 1995 and money market accounts, which increased $10.2 million, or 16.1 percent. Total non-interest bearing funds invested in earning assets increased $6.2 million, or 12.9 percent. Average time certificates in denominations of $100,000 or more decreased $1.1 million and represented 3 percent of average total deposits in 1995, compared to 4 percent in 1994 and 2 percent in 1993, significantly below the levels of banks of comparable size. With the growth in average earning assets, deposit funding was augmented with Federal Home Loan Bank advances which increased $4.1 million, or 54.6 percent, in 1995. In 1994, total average earning assets increased $24.9 million, or 9.1 percent. Total average loans increased $25.4 million, or 12.5 percent, due to increases in consumer loans of $11.6 million, or 16.9 percent, and commercial loans of $12.4 million, or 13.9 percent. Mortgage loans increased $2.4 million, or 5.4 percent. Average investment securities increased $1.3 million. The increase in average earning assets in 1994 was funded by an $18.9 million, or 8.1 percent, increase in total average interest-bearing funds. Average interest-bearing core deposits increased $6.6 million, or 2.9 percent. Average time deposits in denominations of $100,000 or more increased $4.3 million in 1994. Total non-interest bearing funds invested in earning assets increased $6.0 million, or 14.4 percent. Federal Home Loan Bank advances averaged $7.5 million in 1994. 26 Item 8 - Financial Statements and Supplementary Data Consolidated Balance Sheet-Empire Banc Corporation
(In Thousands, Except Share Data) December 31 1995 1994 Assets Cash and due from banks $ 13,858 $ 14,527 Federal funds sold 8,000 7,100 -------- -------- Cash and cash equivalents 21,858 21,627 Securities Available for sale, at fair value 29,579 23,352 Held to maturity 36,483 32,088 (fair value: 1995-$36,946, 1994-$31,434) Mortgage-backed securities Available for sale, at fair value 18,250 7,980 Held to maturity (fair value: 1994-$786) -- 811 Loans 259,102 243,583 Less: allowance for loan losses (3,200) (2,900) - -------------------------------------------------------------------------- Net loans 255,902 240,683 - -------------------------------------------------------------------------- Premises and equipment, net 3,623 3,939 Other real estate 280 53 Accrued income and other assets 6,451 6,418 - -------------------------------------------------------------------------- Total assets $372,426 $336,951 ========================================================================== Liabilities Deposits Non-interest-bearing $ 46,702 $ 44,150 Interest-bearing 272,838 253,839 - -------------------------------------------------------------------------- Total deposits 319,540 297,989 - -------------------------------------------------------------------------- Federal Home Loan Bank advances 17,000 8,000 Accrued expense and other liabilities 5,881 4,630 Total liabilities 342,421 310,619 - -------------------------------------------------------------------------- Shareholders' equity Preferred stock-$1 par value, 2,000,000 shares authorized, none outstanding Common stock-$5 par value, 5,000,000 shares authorized, shares outstanding: 1995-1,648,767; 1994-1,304,302 8,244 6,521 Paid-in-capital 9,377 9,098 Retained earnings 12,050 11,224 Net unrealized gain (loss) on securities available for sale, net of tax liability of $172 in 1995 and tax asset of $263 in 1994 334 (511) -------- -------- Total shareholders' equity 30,005 26,332 - -------------------------------------------------------------------------- Total liabilities and shareholders' equity $372,426 $336,951 ========================================================================== The accompanying notes are an integral part of these consolidated financial statements.
27 Consolidated Statement of Income-Empire Banc Corporation
Year Ended December 31 (In Thousands, Except Share Data) 1995 1994 1993 Interest Income Loans, including fees $23,820 $20,233 $18,426 Taxable securities Available for sale 2,233 1,481 -- Held to maturity 1,771 1,422 2,757 Tax-exempt securities-held to maturity 195 239 356 Federal funds sold 587 253 236 - -------------------------------------------------------------------------- Total interest income 28,606 23,628 21,775 - -------------------------------------------------------------------------- Interest Expense Deposits 12,416 9,467 8,840 Federal funds purchased 1 18 1 Federal Home Loan Bank advances 814 354 1 - -------------------------------------------------------------------------- Total interest expense 13,231 9,839 8,842 - -------------------------------------------------------------------------- Net interest income 15,375 13,789 12,933 Provision for loan losses 745 796 447 ------ ------ ------ Net interest income after provision for loan losses 14,630 12,993 12,486 - -------------------------------------------------------------------------- Non-Interest Income Mortgage sales and servicing 1,070 1,141 1,778 Service charges on deposit accounts 1,302 1,324 1,258 Trust income 1,817 1,563 1,382 Other service charges and fees 482 450 421 Other income 351 354 223 Security (losses) gains (5) 11 1 - -------------------------------------------------------------------------- Total non-interest income 5,017 4,843 5,063 - -------------------------------------------------------------------------- Non-Interest Expense Salaries and employee benefits 7,866 6,787 6,908 Occupancy 1,006 938 934 Furniture and equipment 859 812 763 Other expense 3,763 3,704 3,937 - -------------------------------------------------------------------------- Total non-interest expense 13,494 12,241 12,542 - -------------------------------------------------------------------------- Income before federal income taxes 6,153 5,595 5,007 Federal income taxes 2,007 1,841 1,600 - -------------------------------------------------------------------------- Net income $ 4,146 $ 3,754 $ 3,407 ========================================================================== Earnings per share * $ 2.36 $ 2.15 $ 1.98 Average shares outstanding* 1,754,016 1,744,957 1,718,129 * Retroactively adjusted for a 25% stock dividend in November 1995. The accompanying notes are an integral part of these consolidated financial statements.
28 Consolidated Statement of Cash Flows-Empire Banc Corporation
(In Thousands) Year Ended December 31 1995 1994 1993 Operating Activities Net income $ 4,146 $ 3,754 $ 3,407 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 780 747 733 Provision for loan losses 745 796 447 Mortgage loans originated for sale (42,904) (49,533) (79,785) Sale of mortgage loans 42,210 51,655 77,878 Net loss (gain) on securities available for sale 5 (11) (1) Net amortization/accretion on securities 471 987 338 Change in: Deferred taxes (504) (234) (244) Interest receivable (407) (271) 48 Interest payable 211 128 (35) Other real estate (227) 785 1,569 Other assets 443 464 (375) Other liabilities 1,090 296 504 ------- ------- -------- Total adjustments 1,913 5,809 1,077 - ---------------------------------------------------------------------------------- Net cash from operating activities 6,059 9,563 4,484 - ---------------------------------------------------------------------------------- Investing activities Securities available for sale Proceeds from sales 1,995 1,010 -- Proceeds from maturities 10,130 7,247 -- Purchases (24,645) (12,710) -- Securities held to maturity Proceeds from maturities 17,271 22,010 45,340 Purchases (24,028) (17,708) (46,697) Loans granted, net of repayments (15,270) (27,851) (19,561) Premises and equipment expenditures (464) (514) (663) Proceeds from disposal of assets -- -- 29 - ---------------------------------------------------------------------------------- Net cash from investing activities (35,011) (28,516) (21,552) - ---------------------------------------------------------------------------------- Financing activities Net increase in deposits 21,550 18,448 11,686 Cash dividends paid (1,698) (1,302) (1,113) Federal Home Bank advances 9,000 3,000 5,000 Issuance of common stock 331 84 48 - ---------------------------------------------------------------------------------- Net cash from financing activities 29,183 20,230 15,621 - ---------------------------------------------------------------------------------- Net change in cash and cash equivalents 231 1,277 (1,447) - ---------------------------------------------------------------------------------- Cash and cash equivalents Beginning of year 21,627 20,350 21,797 -------- -------- -------- End of year $ 21,858 $ 21,627 $ 20,350 ==================================================================================
29 Consolidated Statement of Cash Flows-Empire Banc Corporation (continued)
(In Thousands) Year Ended December 31 1995 1994 1993 Cash paid during the year for: Interest $13,019 $ 9,712 $ 8,877 Income taxes 2,315 2,103 1,920 Reclassification of securities from held to maturity to available for sale upon adoption of SFAS 115 26,708 Transfer of securities from held to maturity to available for sale at fair value December 31, 1995 2,883 - --------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements.
30 Consolidated Statement of Changes in Shareholders' Equity- Empire Banc Corporation
Net Total Unrealized Share Common Paid-In Retained Gain holders' (In Thousands, Except Share Data) Shares Stock Capital Earnings (Loss) Equity - ------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1993 1,178,174 $ 5,891 $ 6,351 $ 9,973 $ -- $ 22,215 Net income for 1993 -- -- 3,407 -- 3,407 10% stock dividend 118,028 589 2,656 (3,245) -- -- Common stock issued 3,100 16 32 -- -- 48 Cash dividends - $.72 per share -- -- (1,166) -- (1,166) --------- --------- --------- --------- --------- --------- Balance at December 31, 1993 1,299,302 6,496 9,039 8,969 -- 24,504 - ------------------------------------------------------------------------------------------------------------------- Net unrealized gain on securities available for sale at January 1, 1994 net of tax of $55 -- -- -- 107 107 Net income for 1994 -- -- 3,754 -- 3,754 Common stock issued 5,000 25 59 -- -- 84 Change in net unrealized gain/loss on securities available for sale, net of tax of $318 -- -- -- (618) (618) Cash dividends - $.92 per share -- -- (1,499) -- (1,499) --------- --------- --------- --------- --------- --------- Balance at December 31, 1994 1,304,302 6,521 9,098 11,224 (511) 26,332 - ------------------------------------------------------------------------------------------------------------------- Net income for 1995 -- -- 4,146 -- 4,146 Common stock issued 15,650 79 257 -- -- 336 25% stock dividend 328,815 1,644 -- (1,649) -- (5) Directors deferred compensation plan -- 22 -- -- 22 Change in net unrealized gain/loss on securities available for sale, net of tax of $435 -- -- -- 845 845 Cash dividends - $1.02 per share -- -- (1,671) -- (1,671) --------- --------- --------- --------- --------- --------- Balance at December 31, 1995 1,648,767 $ 8,244 $ 9,377 $ 12,050 $ 334 $ 30,005 ========= ========= ========= ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------- Per share amounts have been adjusted for stock dividends. The accompanying notes are an integral part of these consolidated financial statements.
31 Notes to Consolidated Financial Statements Note 1 - Nature of Operations Empire Banc Corporation, a one-bank holding company for Empire National Bank, is the largest independent bank holding company in northern Michigan. The Bank is engaged in the general commercial, retail and mortgage banking business, providing a full range of loan and deposit products. It also operates a trust department providing fiduciary, investment and other related services, and has contracted with a full-service brokerage firm to make available a variety of investment products to the Bank's customers. The Bank is headquartered in Traverse City, Michigan, which is the retail, medical and financial hub for northern Michigan. The Bank's primary market area is the northwestern portion of northern Michigan. Note 2 - Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Empire Banc Corporation (the Corporation) and its wholly- owned subsidiary, Empire National Bank (the Bank), after elimination of significant intercompany transactions and accounts. Statement of Cash Flows - Cash and cash equivalents includes cash on hand, demand deposits in other institutions, and federal funds sold. The Corporation reports net cash flows for customer loan transactions and deposit transactions and for deposits made with other financial institutions. Securities - Effective January 1, 1994 the Corporation adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). In adopting SFAS 115, certain securities have been identified as available for sale. Securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs, or other factors. Securities identified as available for sale are reported at their fair value and the net unrealized gain or loss is reported, net of related tax effect, as a separate component of shareholders' equity, until realized. In the event that a security available for sale is sold or called, the adjusted cost of the specific security is used to compute the applicable gain or loss. Securities held to maturity are those securities which management has the ability and positive intent to hold to maturity. Securities held to maturity are stated at amortized cost. Premiums and discounts are recognized in interest income using the interest method. Allowance for Loan Losses - The allowance for loan losses represents that amount which management estimates is adequate to provide for losses inherent in the loan portfolio. Management determines the adequacy of the allowance for loan losses by reviewing selected loans (including large loans, non-accrual loans and problem and delinquent loans) and establishes specific loss allowances on these loans. Historical loss information and local economic conditions are considered in establishing allowances on the remaining loan portfolio. The allowance is increased by provisions charged to expense and reduced by loan losses, net of recoveries. 32 Effective January 1, 1995 the Corporation adopted Statement of Financial Accounting Standards No. 114 (SFAS 114), later amended by Statement No. 118 (SFAS 118), on accounting and disclosure by creditors for impairment of a loan. These standards require that impaired loans be measured based on the present value of expected cash flows discounted at each loans' effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. Under this standard, loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require increase, such increase is reported as an additional provision for loan losses. The impact of adopting these standards on the Corporation's financial condition and results of operations in 1995 is not material. Smaller-balance homogeneous loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, automobile, home equity and second mortgage loans and are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. Under the Corporation's loan evaluation system, loans rated substandard, doubtful and loss are considered impaired, since it is probable that such loans will be not be collected under their contractual terms. Loans, or portions thereof, are charged-off when deemed uncollectible. SFAS No. 114 and No. 118 disclosures for impaired loans are not expected to be materially different from non-accrual and renegotiated loan disclosures or non-performing asset and past-due disclosures. Premises and Equipment - Premises and equipment are depreciated over their estimated useful lives and are stated at cost less accumulated depreciation. The provision for depreciation is computed principally using the straight-line method. Leasehold improvements are amortized over the shorter of the respective lease term or the asset's useful life. Expenditures for normal repairs and maintenance are charged to operations as incurred. Other Real Estate - Other real estate is carried at the lower of cost or fair value less estimated costs to sell. Any reduction to fair value at the time of acquisition from a related loan is accounted for as a loan loss. Any subsequent reduction in fair value is charged to other non- interest expense. The costs incurred to carry other real estate are expensed as incurred. Interest and Fees on Loans - Interest on loans is accrued over the term of the loans based upon the principal outstanding. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the collection of interest is doubtful. Loans are generally moved to non- accrual status at 90 days or more past due. Under SFAS No. 114, as amended by SFAS No. 118, the carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as reductions or increases to bad debt expense. 33 Loan origination and commitment fees and related costs are recognized over the life of the loan as an adjustment of yield. Fees on loans sold are recognized at the time of sale. Loan Servicing Rights - The Bank originates and purchases mortgage loans for sale to the secondary market, and sells the loans with servicing retained. Effective July 1, 1995 the Corporation adopted Statement of Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights." For servicing retained, this Statement requires capitalizing the cost of mortgage servicing rights, regardless of whether those rights were acquired through purchase or origination activities. Prior to adoption of SFAS 122, only purchased loan servicing rights were capitalized. Beginning July 1, 1995, the total cost of mortgage loans originated with the intent to sell is allocated between the loan servicing right and the mortgage loan without servicing based on their relative fair values at the date of origination. The capitalized cost of loan servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenue. Mortgage servicing rights are periodically evaluated for impairment by stratifying them based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (i.e., conventional or government insured, fixed or adjustable rate), term (i.e., 15 year or 30 year), and note rate. Impairment represents the excess of cost of an individual mortgage rights stratum over its fair value, and is recognized through a valuation allowance. Estimates of fair value include assumptions about prepayment, default and interest rates and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future. Income Taxes - In 1993, the Corporation adopted Statement of Financial Accounting Standards 109, "Accounting for Income Taxes," (SFAS 109). The Corporation records income tax expense based on the amount of taxes due on its return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using current tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Corporation and the Bank file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each entity filed a separate return. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas were estimates are used in the accompanying financial statements include the allowance for loan losses, carrying value of mortgage servicing rights, fair values of financial instruments, the accrued liability associated with the defined benefit pension plan and supplemental retirement plan, the carrying value of impaired loans, deferred tax assets, the estimated life of loans and 34 securities and the carrying value of other real estate. Estimates incorporated into the Corporation's financial statements which are more susceptible to change in the near term include the allowance for loan losses, carrying value of mortgage servicing rights, fair value of financial instruments, and the defined benefit pension plan and supplemental retirement plan liabilities. Actual results could differ from those estimates. Earnings Per Share - Earnings per share of common stock are computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the period. Common stock equivalents consist of common stock issuable under the assumed exercise of stock options granted under the Corporation's stock option plan, using the treasury stock method. All per share data presented in the consolidated financial statements is retroactively adjusted for all stock dividends and splits. The Corporation declared and issued a stock split effected in the form of a 25% stock dividend in November, 1995. Issued But Not Yet Adopted Accounting Standards - The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" (SFAS 121). The Statement requires that long- lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and establishes criteria for evaluating recoverability. The Statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell, with certain exceptions. The Corporation will adopt SFAS No. 121 effective January 1, 1996. Management does not expect the Statement to have a material impact on the consolidated financial condition and results of operations of the Corporation. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). This Statement establishes a fair value based method of accounting for employee stock options and similar equity instruments, such as warrants, and encourages all companies to adopt this method of accounting for all of their employee stock compensation plans. However, the Statement allows companies to continue measuring compensation cost for such plans using accounting guidelines in place prior to SFAS 123. Companies that elect to remain with the former method of accounting must make pro forma disclosures of net income and earnings per share as if the fair value method provided for in SFAS 123 had been adopted. The accounting and disclosure requirements of the Statement are required for the Corporation for transactions entered into in fiscal years that begin after December 15, 1995. The Corporation entered into no transactions in 1995 or 1994 for which the accounting treatment would differ between SFAS No. 123 and current accounting guidance or for which SFAS No. 123 would require pro forma disclosures. Further, the Corporation currently has no plans for transactions for which the fair value based method of accounting or disclosure, defined by SFAS No. 123, would apply. Accordingly, management does not expect the Statement to have material impact on the financial condition or results of the operations of the Corporation. Reclassifications - Certain 1994 and 1993 amounts have been reclassified to conform with the 1995 presentation. 35 Note 3 - Cash and Cash Equivalents The Bank is required to maintain non-interest-bearing deposits (required reserve balances) with the Federal Reserve, based on a percentage of deposits. The required reserve balances at December 31, 1995 and 1994 were $3,976,000 and $3,691,000, respectively. Note 4 - Securities The carrying amount of securities and their approximate fair values at December 31 were as follows:
Available for sale - --------------------------------------------------------------------------- Amortized Unrealized Fair (In Thousands) Cost Gains Losses Value - --------------------------------------------------------------------------- December 31, 1995 Equity securities $ 2,330 $ 95 $ -- $ 2,425 US Government & agency securities 26,930 301 77 27,154 -------- -------- -------- -------- 29,260 396 77 29,579 Mortgage-backed securities 18,063 221 34 18,250 -------- -------- -------- -------- Total $ 47,323 $ 617 $ 111 $ 47,829 ======== ======== ======== ======== December 31, 1994 Equity securities $ 1,440 $ 55 $ -- $ 1,495 US Government & agency securities 22,354 4 501 21,857 -------- -------- -------- -------- 23,794 59 501 23,352 Mortgage-backed securities 8,312 3 335 7,980 -------- -------- -------- -------- Total $ 32,106 $ 62 $ 836 $ 31,332 ======== ======== ======== ========
36 Note 4 - Securities (continued) The carrying amount of securities and their approximate fair values at December 31 were as follows:
Held to maturity - --------------------------------------------------------------------------- Amortized Unrealized Fair (In Thousands) Cost Gains Losses Value - --------------------------------------------------------------------------- December 31, 1995 US Government & agency securities $ 23,530 $ 292 $ 20 $ 23,802 State & municipal securities 5,171 101 7 5,265 Other securities 7,782 101 4 7,879 -------- -------- -------- -------- Total $ 36,483 $ 494 $ 31 $ 36,946 ======== ======== ======== ======== December 31, 1994 US Government & agency securities $ 24,320 $ -- $ 632 $ 23,688 State & municipal securities 3,354 55 8 3,401 Other securities 4,414 2 71 4,345 -------- -------- -------- -------- 32,088 57 711 31,434 Mortgage-backed securities 811 -- 25 786 -------- -------- -------- -------- Total $ 32,899 $ 57 $ 736 $ 32,220 ======== ======== ======== ======== - ---------------------------------------------------------------------------
Sales of securities available for sale during 1995 resulted in gross realized losses of $5,000 and no realized gains. Sales of securities available for sale during 1994 resulted in gross realized gains of $11,000 and no realized losses. There were no sales of securities held to maturity during 1995 or 1994. During 1993 there were no sales of securities; realized gains and losses during this period resulted from called securities. Pursuant to the FASB Special Report, "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," securities with a carrying value of $2,853,000, fair value of $2,883,000 and unrealized gain of $30,000, were transferred at fair value to the available for sale classification on December 31, 1995, classifying all mortgage-backed securities as available for sale. 37 The scheduled maturities of securities available for sale and held to maturity at December 31, 1995 were as follows:
Available for sale Held to maturity - -------------------------------------------------------------------------- Amortized Fair Amortized Fair (In Thousands) Cost Value Yield Cost Value Yield - -------------------------------------------------------------------------- Within one year $14,528 $14,517 5.20% $15,330 $15,337 5.52% One to five years 12,402 12,637 6.43% 20,078 20,517 6.62% Five to ten years -- -- 1,075 1,092 6.63% Equity securities 2,330 2,425 7.59% -- -- ------- ------- ------- ------- 29,260 29,579 5.91% 36,483 36,946 6.16% Mortgage-backed 18,063 18,250 6.61% -- -- ------- ------- ------- ------- Total $47,323 $47,829 6.18% $36,483 $36,946 6.16% ======= ======= ======= ======= - -------------------------------------------------------------------------- Investment securities with a book value of $18,267,000 at December 31, 1995 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes as required by law.
Note 5 - Loans
The following is a summary of loans at December 31: - -------------------------------------------------------------------------- (In Thousands) 1995 1994 - -------------------------------------------------------------------------- Commercial $115,084 $106,447 Mortgage 63,809 56,009 Consumer 63,328 71,023 Revolving credit 11,596 10,104 Commercial paper 5,285 -- -------- -------- 259,102 243,583 Less: allowance for loan losses (3,200) (2,900) -------- -------- Total loans $255,902 $240,683 ======== ======== - --------------------------------------------------------------------------
38
The following is an analysis of the changes in the allowance for loan losses for the years ended December 31: - -------------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - -------------------------------------------------------------------------- Balance at beginning of year $2,900 $2,630 $2,450 Additions (deductions): Provision for loan losses 745 796 447 Recoveries credited to allowance 205 192 150 Loans charged off (650) (718) (417) ------ ------ ------ Balance at end of year $3,200 $2,900 $2,630 ====== ====== ====== - --------------------------------------------------------------------------
Accounting and disclosure regarding impaired loans, as required by Statement of Financial Accounting Standards No. 114 and amended by No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," became effective for the Corporation in 1995. The average investment in impaired loans for the year ended December 31, 1995 is $1,919,000, with $98,000 interest income recognized, including $96,000 interest income recognized on a cash basis. At December 31, 1995 there is $1,429,000 outstanding in impaired loans, with $1,173,000 for which an allowance for credit losses is allocated, and $256,000 for which no allowance for loan losses is allocated. The portion of the allowance loan losses allocated to the impaired loan balance is $355,000 at December 31, 1995, although the entire allowance is available for charge-offs of any loans. Loans on which the accrual of interest was discontinued at December 31, 1995 amounted to $867,000 (including $777,000 that would be considered impaired under Statement No. 114). Non-accrual loans at December 31, 1994 amounted to $1,228,000. If the non-accrual loans had performed in accordance with their original terms, additional interest income would have been recorded in 1995, 1994 and 1993 of $122,000, $146,000 and $98,000, respectively. Marketable mortgage loans held for sale at December 31, 1995 and 1994, which are accounted for at the lower of aggregate cost or market, were $2,054,000 and $1,360,000, respectively. Loans with a book value of $12,762,000 at December 31, 1995 were pledged to secure Federal Home Loan Bank advances. 39 Note 6 - Mortgage Banking
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of these loans at December 31 are summarized as follows: - -------------------------------------------------------------------------- (In Thousands) 1995 1994 - -------------------------------------------------------------------------- Mortgage loan portfolios serviced for: Federal Home Loan Mortgage Corporation $164,514 $152,866 Federal National Mortgage Association 23,633 14,648 Other investors 2,211 1,588 -------- -------- Total loans serviced $190,358 $169,102 ======== ======== - -------------------------------------------------------------------------- Effective July 1, 1995 the Corporation adopted Statement of Financial Accounting Standards No. 122 (SFAS 122) on accounting for mortgage servicing rights. For servicing retained, this Statement requires capitalizing the cost of mortgage servicing rights. Loans serviced for others which were originated and sold after July 1, 1995, and thus are related to servicing rights that have been capitalized (as shown below) had an outstanding principal balance of $20,355,000 at December 31, 1995. The remaining balance of loans serviced for others also have servicing rights associated with them, however the related servicing rights arose prior to adoption of SFAS 122 and accordingly have not been capitalized on the balance sheet.
The carrying value and fair value of capitalized loan servicing rights consisted of the following as of December 31. - -------------------------------------------------------------------------- (In Thousands) 1995 - -------------------------------------------------------------------------- Unamortized cost $151 Valuation allowance 0 ---- Carrying value $151 ==== Fair value $256 ==== - --------------------------------------------------------------------------
40 Note 6 - Mortgage Banking (continued)
Following is an analysis of the activity for loan servicing rights. - -------------------------------------------------------------------------- (In Thousands) 1995 - -------------------------------------------------------------------------- Amortized cost Balance July 1, 1995 $ 0 Additions 154 Amortization (3) ---- Balance December 31, 1995 $151 ==== - --------------------------------------------------------------------------
Mortgage banking income and expense consists of the following: - -------------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - -------------------------------------------------------------------------- Income Net gains on sales of loans $ 542 $ 421 $ 953 Loan servicing income 481 429 358 Net fees 47 291 467 ------ ------ ------ 1,070 1,141 1,778 ------ ------ ------ Expense Salaries and employee benefits 763 765 713 Other expense 189 172 191 ------ ------ ------ 952 937 904 ------ ------ ------ Income before income taxes $ 118 $ 204 $ 874 ====== ====== ====== - --------------------------------------------------------------------------
41 Note 7 - Premises and Equipment
A summary of premises and equipment at December 31, by major category follows: - -------------------------------------------------------------------------- (In Thousands) 1995 1994 - -------------------------------------------------------------------------- Land and improvements $ 410 $ 409 Buildings and leasehold improvements 4,577 4,471 Equipment 5,680 5,399 ------- ------- Total cost 10,667 10,279 Less: accumulated depreciation and amortization (7,044) (6,340) ------- ------- Net balance $ 3,623 $ 3,939 ======= ======= - -------------------------------------------------------------------------- Included in occupancy expense are rental expenses for 1995, 1994 and 1993 of $415,000, $392,000 and $401,000, respectively. Depreciation and amortization charged to operating expense for 1995, 1994 and 1993 amounted to $780,000, $747,000 and $733,000, respectively.
Note 8 - Time Deposits
Interest-bearing deposits at December 31, 1995 include total time deposits of $134,622,000 that have the following maturity distribution. - ----------------------------------------------------------------------- (In Thousands) 1995 - ----------------------------------------------------------------------- 1996 $ 50,600 1997 25,343 1998 17,001 1999 20,441 2000 11,743 2001 and after 9,494 -------- Total time deposits $134,622 ======== - -----------------------------------------------------------------------
42 Included within total time deposits are time deposit liabilities issued in denominations of $100,000 or more. At December 31, 1995 and 1994, these deposits amounted to $8,899,000 and $11,114,000, respectively. Interest expense on time deposits issued in denominations of $100,000 or more for 1995, 1994 and 1993 amounted to $589,000, $449,000 and $227,000, respectively. Maturities of time deposits of $100,000 or more outstanding at December 31, 1995 are summarized below:
- ------------------------------------------------------------------ (In Thousands) 1995 - ------------------------------------------------------------------ Three months or less $7,362 Over three through six months 1,048 Over six months through twelve months 117 Over twelve months 372 ------ Total time deposits of $100,000 or more $8,899 ====== - ------------------------------------------------------------------
Note 9 - Federal Home Loan Bank Advances
The Bank had outstanding the following advances from the Federal Home Loan Bank of Indianapolis at December 31: - ------------------------------------------------------------------- (In Thousands) 1995 1994 - ------------------------------------------------------------------- 5.49% fixed-rate advance due November 1996 $ 5,000 $ -- 7.15% fixed-rate advance due March 1997 4,000 -- 6.09% fixed-rate advance due March 1999 3,000 3,000 Floating rate advance due January 1999 5,000 5,000 ------- ------- Total advances $17,000 $ 8,000 ======= ======= - -------------------------------------------------------------------
The $5,000,000 floating rate advance due January 1999 carries a current interest rate of 7.65 percent, which is adjusted annually based on the one- year constant maturity treasury rate. This advance was prepaid on January 16, 1996. The fixed rate advances have no prepayment provisions. Prepayment of these notes would be subject to the credit policy of the Federal Home Loan Bank. Securities and mortgage loans have been pledged to fully collateralize these advances. 43 Note 10 - Other Non-Interest Expense
The following are the components of other non-interest expense for the years ended December 31: - ------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------- Deposit insurance $ 364 $ 618 $ 596 Outside services 454 466 489 Legal and professional 341 272 345 Business taxes 371 317 316 Other 2,233 2,031 2,191 ------ ------ ------ Total $3,763 $3,704 $3,937 ====== ====== ====== - -------------------------------------------------------------------
Note 11 - Federal Income Taxes
The following are the components of federal income taxes for the years ended December 31: - ------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------- Current expense $2,511 $2,083 $1,844 Deferred benefit (504) (242) (244) ------ ------ ------ Total federal income tax $2,007 $1,841 $1,600 ====== ====== ====== - -------------------------------------------------------------------
44
The following is a reconciliation of total federal income taxes and the amount computed by applying the federal statutory rate of 34 percent to income before federal income tax: - ---------------------------------------------------------------- (In Thousands) 1995 1994 1993 - ---------------------------------------------------------------- Statutory rate applied to income before federal income tax $2,092 $1,902 $1,702 (Deduct) add: Effect of tax-exempt interest (69) (76) (101) Other (16) 15 (1) ------ ------ ------ Total federal income tax $2,007 $1,841 $1,600 ====== ====== ====== Effective tax rate 32.6% 32.9% 32.0% ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are presented below: - -------------------------------------------------------------------- (In Thousands) 1995 1994 - -------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 683 $ 581 Deferred compensation 959 633 Deferred loan fees 138 140 Net unrealized depreciation on securities available for sale -- 263 Other 108 65 ------ ------ Total deferred tax assets 1,888 1,682 ------ ------ Deferred tax liabilities: Premises and equipment (20) (90) Cash value of life insurance (33) (34) Net unrealized appreciation on securities available for sale (172) -- Other (50) (14) ------ ------ Total deferred tax liabilities (275) (138) ------ ------ Net deferred tax asset $1,613 $1,544 ====== ====== 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.
45 Note 12 - Employee Benefit Plans The Bank maintains an integrated employee benefit plan structure designed to provide basic retirement income for employees on a non-contributory basis, and to provide opportunities for employees to build additional retirement savings through tax-deferred voluntary contributions and participation in the Bank's success through stock ownership in the Corporation. A description of the individual plan components of this integrated structure follows. A non-contributory, defined benefit pension plan which covers substantially all full-time employees was established in 1991. The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Prior service cost is amortized on a straight-line basis. The plan assets consist of equity and fixed income securities at December 31, 1995. The following sets forth the plan's funded status and amounts included in the consolidated balance sheet at December 31, 1995 and 1994.
- ------------------------------------------------------------------------ (In Thousands) 1995 1994 - ------------------------------------------------------------------------ Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $ (702) $ (501) Non-vested (72) (47) ------- ------- Total $ (774) $ (548) ======= ======= Projected benefit obligation for service rendered to date $(1,293) $ (912) Plan assets at fair value 770 518 ------- ------- Funded status (523) (394) Unrecognized net transition obligation 335 364 Unrecognized prior service cost (17) (18) Additional liability -- (3) Unrecognized loss 192 21 ------- ------- Accrued pension liability $ (13) $ (30) ======= =======
46 Note 12 - Employee Benefit Plans (continued)
- -------------------------------------------------------------------------- (In Thousands) 1995 1994 1993 - -------------------------------------------------------------------------- Net pension cost includes the following: Service cost-benefits earned $ 76 $ 86 $ 74 Interest cost on projected benefit obligation 79 74 67 Actual return on plan assets (119) -- (37) Net amortization and deferral 98 (4) 40 -------- -------- -------- Net pension cost $ 134 $ 156 $ 144 ======== ======== ======== - --------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7 percent in 1995 and 8 percent and 7 percent in 1994 and 1993, respectively. The rate of increase in future compensation used was 4.5 percent in each period presented. As a result of the change in the discount rate for 1995, the accumulated benefit obligation and the projected benefit obligation have increased by $124,000 and $228,000, respectively. The expected long-term rate of return on assets was 9 percent for all periods presented. As a result of the change in the discount rate for 1994, the accumulated benefit obligation and the projected benefit obligation decreased by $111,000 and $204,000, respectively. In 1991, the Bank established a supplemental retirement program for certain executive officers. This plan provides benefits which are integrated with certain of the Bank's other benefit plans.
- ------------------------------------------------------------------------ (In Thousands) 1995 1994 - ------------------------------------------------------------------------ Accumulated benefit obligation $ (184) $ (119) ====== ====== Projected benefit obligation $ (651) $ (578) Unrecognized net transition obligation 149 161 Unrecognized prior service cost 28 31 Unrecognized loss 66 98 ------ ------ Accrued pension liability $ (408) $ (288) ====== ====== - ------------------------------------------------------------------------
47 Note 12 - Employee Benefit Plans (continued)
- ------------------------------------------------------------------------ (In Thousands) 1995 1994 1993 - ------------------------------------------------------------------------ Net plan cost includes the following: Service cost-benefits earned $ 50 $ 45 $ 34 Interest cost on projected benefit obligation 52 36 27 Net amortization 18 16 12 ------ ------ ------ Net plan cost $ 120 $ 97 $ 73 ====== ====== ====== - ------------------------------------------------------------------------
The weighted average discount rate and rate of increase in future compensation used for the supplemental executive retirement plan in determining the actuarial present value of the projected benefit obligation were 7 percent and 5 percent, respectively in 1995, 8 percent and 6 percent, respectively in 1994 and 7 percent and 5 percent, respectively, in 1993. As a result of the change in the rates for 1995, the accumulated benefit obligation has increased $22,000 and the projected benefit obligation has decreased $46,000. As a result of the change in the rates for 1994, the accumulated benefit obligation decreased $24,000 and the projected benefit obligation increased $31,000. The Bank has a profit sharing 401(k) plan covering substantially all of its full-time employees. Under this plan, participants may elect to defer up to 10 percent of their salaries and the Bank may match 50 percent of the employees' deferrals to a maximum of three percent. The Bank contributions for 1995, 1994 and 1993 amounted to $107,000, $103,000 and $90,000, respectively. The Bank has an Employee Stock Ownership Plan (ESOP) covering substantially all of its full-time employees. At December 31, 1995 the plan had no indebtedness and held 226,643 shares of stock allocated and voted on by employees. The amount of the annual contribution to the ESOP is determined by the Board of Directors. The contributions for 1995, 1994, and 1993 amounted to $129,000, $123,000 and $115,000, respectively. The Bank has agreements with certain officers to provide benefits upon death prior to retirement which are funded with life insurance contracts. The financial statement impact from these arrangements is not material. 48 Note 13 - Long-Term Incentive Plan The Corporation has a long-term incentive plan granting certain officers stock options and tandem stock appreciation rights. All options and rights under the plan have been granted. The right to exercise the stock options and related stock appreciation rights vest over a five year period and expire ten years and one day from the date of grant. As of December 31, 1995, 169,473 stock options and 81,299 stock appreciation rights were vested. The expense related to the tandem stock appreciation rights for 1995, 1994 and 1993 amounted to $798,000, $100,000 and $520,000, respectively. The following is a summary of stock options and rights, granted and exercised, for the years presented, restated for all stock dividends and splits.
- ------------------------------------------------------------------------- Options/Rights -------------- Exercise Price Stock Appreciation Per Share Options Rights - ------------------------------------------------------------------------- Outstanding - December 31, 1992 $ 7.62 - $16.18 208,541 100,832 Granted in 1993 18.36 6,875 --- Exercised in 1993 7.62 (4,137) (2,069) - ------------------------------------------------------------------------- Outstanding - December 31, 1993 7.62 - 16.18 211,279 98,763 Exercised in 1994 7.62 (6,250) (3,125) - ------------------------------------------------------------------------- Outstanding - December 31, 1994 7.62 - 16.18 205,029 95,638 Exercised in 1995 7.62 (14,563) (7,280) - ------------------------------------------------------------------------- Outstanding - December 31, 1995 $ 7.62 - $18.36 190,466 88,358 - -------------------------------------------------------------------------
49 Note 14 - Related Party Transactions Certain directors and executive officers of the Corporation and the Bank (including family members, affiliates, and companies in which they are principal owners) had loans outstanding with the Bank in the ordinary course of business. A summary of the aggregate loans outstanding which exceeded $60,000 to these individuals follows:
- ------------------------------------------------------- (In Thousands) - ------------------------------------------------------- Balance at December 31, 1994 $ 3,551 New loans 3,238 Payments (1,726) Other changes (412) ------- Balance at December 31, 1995 $ 4,651 ======= - -------------------------------------------------------
Note 15 - Restrictions on Subsidiary Retained Earnings Regulations issued by the Office of the Comptroller of the Currency limit the amount of dividends that the Bank may declare to the Corporation. The regulations specify the amount to be the sum of the current year's "net profit" and "retained net profits" for the previous two years, as defined in the regulations. The aggregate amount of cash dividends which may be paid to the Corporation by the Bank in 1996 approximates $4,831,000 plus current 1996 net profits. Dividends paid to the Corporation by the Bank amounted to $1,700,000 in 1995, $1,564,000 in 1994 and $1,432,000 in 1993. 50 Note 16 - Off-Balance Sheet Financial Instruments The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to make loans and unused lines of credit. The Bank's 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 to be provided prior to the disbursement of funds. The following is a summary of commitments as of December 31:
- ------------------------------------------------------------------ (In Thousands) 1995 1994 - ------------------------------------------------------------------ Commitments to make loans $22,712 $14,202 Unused lines of credit 35,313 33,252 Standby letters of credit 1,707 1,801 - ------------------------------------------------------------------
At December 31, 1995 and 1994, commitments to make loans included $5.8 million and $4.8 million, respectively, of primarily variable rate commercial loans. These commitments generally have fixed termination dates of 90 days or less and may require payment of a fee. Commitments to make loans also include primarily fixed rate mortgage loans of $11.3 million and $6.0 million at December 31, 1995 and 1994, respectively, which are intended for sale in the secondary market upon closing. Other commitments include variable rate mortgage loans of $4.5 million and $2.0 million at December 31, 1995 and 1994, respectively. Note 17 - Shareholder Rights Plan In December 1990, the Corporation's Board of Directors adopted a Shareholder Rights Plan which is designed to protect shareholders against unsolicited attempts to acquire control of the Corporation in a manner that does not offer a fair price to all shareholders. The Corporation has reserved 500,000 shares of preferred stock for issuance as Series A Junior Participating Preferred Stock upon the exercise of certain preferred stock purchase rights issued to holders of and in tandem with shares of the common stock. The description and terms of the rights are set forth in a Rights Agreement dated December 19, 1990 between the Corporation and the Bank as Rights Agent. Generally, in the event a person or group acquires or announces a tender offer which could result in ownership of 20 percent or more of the Corporation's common stock, and the acquiror engages in certain business transactions involving the Corporation as specified in the Rights Agreement, each right, other than those held by the acquiror, shall entitle the holder thereof to acquire common stock or other securities having a market value of twice the $50 per right exercise price. The Corporation may redeem the rights at a price of one cent per right at anytime until 20 days after a 20 percent position has been acquired. 51 Note 18 - Fair Value Disclosure The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein. Short-term financial instruments: For these instruments, the carrying value is deemed a reasonable estimate of fair value due to the relatively short period to maturity of the instruments. This approach applies to cash and cash equivalents and accrued interest receivable and payable. Securities held to maturity and available for sale: Fair values for securities is 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 the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The value of long-term relationships with depositors is not taken into account in estimating the fair value disclosures. Short-term borrowings: The carrying amounts of federal funds purchased, and other short-term borrowings maturing within 90 days approximate their fair value. Federal Home Loan Bank advances: The fair values of the Bank's long-term debt are estimated using discounted cash flow analyses based on the Bank's current incremental borrowing rates for similar types of borrowing arrangements. Off-balance sheet instruments: Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. 52 Note 18 - Fair Value Disclosure (continued) The estimated fair values of the Corporation's financial instruments were as follows at December 31:
1995 1994 - -------------------------------------------------------------------- Carrying Fair Carrying Fair (In Thousands) Amount Value Amount Value - -------------------------------------------------------------------- Financial assets Cash and cash equivalents $21,858 $21,858 $21,627 $21,627 Securities Available for sale 47,829 47,829 31,332 31,332 Held to maturity 36,483 36,946 32,899 32,220 Loans net of allowance 255,902 259,016 240,683 238,878 Accrued interest receivable 2,622 2,622 2,215 2,215 Financial liabilities Deposits 319,540 322,431 297,989 297,927 Federal Home Loan Bank advances 17,000 17,094 8,000 7,737 Accrued interest payable 1,033 1,033 822 822 - -------------------------------------------------------------------- The fair value of off-balance sheet instruments at December 31, 1995 and 1994 is not material.
53 Note 19 - Regulatory Capital The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The regulations require the Corporation to meet specific capital adequacy guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. To be considered adequately capitalized, as defined under the regulatory framework for prompt corrective action, the Corporation must maintain minimum tier 1 leverage, tier 1 risk-based and total risk-based ratios as set forth in the table below. As shown, the Corporation's capital ratios are significantly above the well-capitalized standards.
- ------------------------------------------------------------------------- (In Thousands) 1995 1994 - ------------------------------------------------------------------------- Tier 1 capital Shareholders' equity $30,005 $26,332 Less: Goodwill (437) (477) Unrealized (gains) and losses (334) 511 ------- ------- Total tier 1 capital 29,234 26,366 Tier 2 capital 3,200 2,900 ------- ------- Total qualifying capital $32,434 $29,266 ======= ======= Risk-weighted assets $260,163 $243,591 Average quarterly assets 362,767 332,947 - -------------------------------------------------------------------------- Adequately / Well --------------------- Capitalized Standards 1995 1994 - -------------------------------------------------------------------------- Risk-based ratios Tier 1 leverage ratio 4% 5% 8.06% 7.93% Tier 1 risk-based capital 4 6 11.24 10.82 Total risk-based capital 8 10 12.47 12.01 - -------------------------------------------------------------------------
54 Note 20 - Empire Banc Corporation (Parent Company Only) Condensed Financial Statements
Presented below are condensed financial statements for the parent company: Condensed Balance Sheet - ----------------------------------------------------------------- December 31 (In Thousands) 1995 1994 - ----------------------------------------------------------------- Assets Cash and due from banks $ 865 $ 561 Investment in subsidiary 29,234 25,860 Other assets 304 321 ------- ------- Total Assets $30,403 $26,742 ======= ======= Liabilities and shareholders' equity Other liabilities $ 398 $ 410 Shareholders' equity 30,005 26,332 ------- ------- Total Liabilities and Shareholders' Equity $30,403 $26,742 ======= =======
Condensed Statement of Income - ----------------------------------------------------------------- Year Ended December 31 (In Thousands) 1995 1994 1993 - ----------------------------------------------------------------- Dividends from subsidiary $ 1,700 $ 1,564 $ 1,432 Net expense 126 169 147 -------- -------- -------- Income before Federal Income Taxes and Equity in Undistributed Net Income of Subsidiary 1,574 1,395 1,285 Federal income tax benefit 43 57 50 -------- -------- -------- Income before Equity in Undistributed Net Income of Subsidiary 1,617 1,452 1,335 Equity in undistributed net income of subsidiary 2,529 2,302 2,072 -------- -------- -------- Net Income $ 4,146 $ 3,754 $ 3,407 ======== ======== ========
55 Note 20 - Empire Banc Corporation (Parent Company Only) Condensed Financial Statements (continued)
Condensed Statement of Cash Flows - ---------------------------------------------------------------------- Year Ended December 31 (In Thousands) 1995 1994 1993 - ---------------------------------------------------------------------- Cash flow from operating activities Net income $ 4,146 $ 3,754 $ 3,407 Adjustments to reconcile net income to net cash from operating activities: Amortization 22 22 22 Change in income taxes payable 21 (89) 6 Subsidiary net income (4,229) (3,866) (3,504) Change in other assets/liabilities (11) (1) (2) ------- ------- ------- Net Cash from Operating Activities (51) (180) (71) Cash flow from investing activities Subsidiary dividends received 1,700 1,564 1,432 Purchase of securities -- -- (224) Cash flow from financing activities Dividends paid (1,698) (1,302) (1,113) Issuance of common stock 353 84 48 ------- ------- ------- Net Change in Cash and Cash Equivalents 304 166 72 Cash and cash equivalents: Beginning of year 561 395 323 ------- ------- ------- End of year $ 865 $ 561 $ 395 ======= ======= ======= - ----------------------------------------------------------------------
56 Independent Auditor's Report CROWE CHIZEK To the Shareholders and Board of Directors Empire Banc Corporation Traverse City, Michigan We have audited the accompanying consolidated balance sheet of Empire Banc Corporation as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Corporation changed its methods of accounting for mortgage servicing rights and impaired loans in 1995, securities in 1994, and income taxes in 1993, all to conform to new accounting standards. /s/ Crowe, Chizek and Company LLP - --------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan January 18, 1996 57 Quarterly Financial Data Empire Banc Corporation The following is a summary of selected quarterly results of operations for the years ended December 31, 1995 and 1994.
- ----------------------------------------------------------------------- (In Thousands, Quarter Except Share Data) First Second Third Fourth - ----------------------------------------------------------------------- 1995 Net interest income $3,605 $3,709 $3,918 $4,143 Provision for loan losses 241 118 266 120 Non-interest income 1,159 1,188 1,339 1,331 Non-interest expense 3,155 3,334 3,414 3,591 Income before income taxes 1,368 1,445 1,577 1,763 Net income 923 973 1,062 1,188 Earnings per share .53 .56 .60 .67 - ----------------------------------------------------------------------- 1994 Net interest income $3,119 $3,436 $3,588 $3,646 Provision for loan losses 61 244 268 223 Non-interest income 1,291 1,188 1,192 1,172 Non-interest expense 3,104 3,061 3,082 2,994 Income before income taxes 1,245 1,319 1,430 1,601 Net income 845 886 955 1,068 Earnings per share .49 .50 .55 .61 - ----------------------------------------------------------------------- Per share amounts have been adjusted for stock dividends.
58 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 Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 14, 1996, to be filed with the Commission, and is incorporated herein by reference, as follows:
Pages in 1996 Proxy Statement Item 10. Directors and Executive Officers of the Registrant 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 The information under the captions "Compensation Committee Report on Executive Compensation" and "Performance Graph" is not incorporated herein. Item 12. Security Ownership of Certain Beneficial Owners and Management 2-4 Item 13. Certain Relationships and Related Transactions: 11 The information appearing in Note 14 of the Notes to Consolidated Financial Statements of this Form 10-K, is also incorporated herein by reference in response to this Item.
59 PART IV ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as part of this report: 1. The following financial statements of the Registrant and related items are included in this report on the pages indicated: Page(s) ------- Consolidated Balance Sheet 26 Consolidated Statement of Income 27 Consolidated Statement of Cash Flows 28-29 Consolidated Statement of Changes in Shareholders' Equity 30 Notes to Consolidated Financial Statements 31-55 Independent Auditor's Report 56 2. All financial statement schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. The following exhibits are required for this Report by Item 601 of Regulation S-K. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not applicable. (3a) Articles of Incorporation. Previously filed as Exhibit B to Registrant's definitive Proxy Statement filed March 27, 1994 in connection with the Registrant's 1994 annual meeting of shareholders and incorporated herein by reference. (3b) Bylaws. Previously filed as an exhibit to Registrant'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 Registrant and the Bank as Rights Agent (previously filed as an exhibit to Registrant'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 Registrant's common stock (previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). (10) Material Contracts. * denotes executive compensation plans and arrangements in which the Registrant's executive officers participate.
60 (10a) * Form of management continuity agreement (with amendment) entered into and between the Registrant and each of six executive officers (previously filed as Exhibit (10a) to Registrant'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 Registrant'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 Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference). (10d) Empire Banc Corporation Directors' Deferred Compensation and Stock Investment Plan is filed herewith. (10e) Empire Banc Corporation Directors' Fee Deferral Plan is filed herewith. (11) Statement re computation of per share earnings. Not applicable. (12) Statements re computation of ratios. Not applicable. (18) Letter re change in accounting principles. Not applicable. (21) Subsidiaries of Registrant. The Bank is the only subsidiary of the Registrant. (22) Published report regarding matters submitted to vote of security holders. Not applicable. (23) Consent of Crowe, Chizek and Company LLP. (24) Power of attorney. Not applicable. (27) Financial Data Schedule (28) Information from reports furnished to state insurance regulatory authorities. Not applicable. (99) Additional exhibits. Not applicable. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1995.
61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 1996. 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 registrant and in the capacities indicated on March 20, 1996. /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/ William K. Kurtz ----------------------------- ----------------------------- Deborah J. Knudsen William K. Kurtz Director Director /s/ Thomas G. McIntyre /s/ Ronald G. Reffitt, Sr. ----------------------------- ----------------------------- Thomas G. McIntyre Ronald G. Reffitt, Sr. Director Director /s/ Laurence P. Skendzel, M.D. ----------------------------- ------------------------------ John M. Rockwood, Jr. Laurence P. Skendzel, M.D. Director Director /s/ Louis A. Smith ----------------------------- ----------------------------- Louis A. Smith Director
62 EXHIBIT INDEX
Exhibit - ----------------------------------------------------------- 10d Empire Banc Corporation Directors' Deferred Compensation and Stock Investment Plan 10e Empire Banc Corporation Directors' Fee Deferral Plan 23 Consent of Crowe Chizek and Company 27 Financial Data Schedule
EX-10.D 2 MATERIAL CONTRACTS EMPIRE BANC CORPORATION DIRECTORS' DEFERRED COMPENSATION AND STOCK INVESTMENT PLAN 1. Establishment. Empire Banc Corporation (the Company), hereby establishes the Empire Banc Corporation Directors' Deferred Compensation and Stock Investment Plan (the "Plan") for Eligible Directors of the Company. 2. Effective Date. The Plan shall become effective May 1, 1995, provided that it has been approved by the shareholders of the Company. 3. Purpose. The purpose of the Plan is to provide Eligible Directors with a means of expressing their commitment to the Company and an additional incentive to perform their duties in a manner that maximizes shareholder value by relating the rate of return on their deferred retainer fees to the stock market performance of the Company's stock. 4. Definitions. Reserve account. The term "Reserve Account" shall have meaning given in Paragraph 6 of the Plan. Committee. The term "Committee" shall mean the directors described in Section 8. Company. The term "Company" shall mean Empire Banc Corporation, and its successors and assigns. Dividend Payment Date. The term "Dividend Payment Date" shall mean the date on which dividends are paid to the Company's shareholders. Election Agreement. The term "Election Agreement" shall mean each and every Election Agreement executed by an Eligible Director and delivered to the Company hereunder, the form of which is attached to the Plan as Exhibit A, and is incorporated by reference herein. Eligible Director. The term "Eligible Director" shall mean any present or future director of the Company, Empire National Bank or any affiliate of Company that adopts this Plan, who is not an employee of the Company or any affiliate of the Company. Market Price. The term "Market Price" shall mean the average of the bid and ask price, on the OTC Bulletin Board, or if the Stock is reported on the NASDAQ/National Market System or any other national securities exchange, the closing price of the Stock on such national securities exchange, on the date of the required calculation or, if there were no Stock transactions on such day, on the next preceding day on which there were Stock transactions. Participating Director. The term "Participating Director" shall mean an Eligible Director who has executed and delivered an Election Agreement to the Company. 2 Payment Date. The term "Payment Date" shall mean the earliest to occur of the following dates: (i) The date of the Director's sixty-fifth birthday; or (ii) The date of the Participating Director's Retirement; or (iii) The Participating Director's death; or (iv) The Participating Director's total and permanent disability. Plan. The term "Plan" shall mean the Empire National Bank Director's Deferred Corporation and Stock Investment Plan, as it may be amended from time to time. Record Date. The term "Record Date" shall mean the date as of which the Shareholders of record are determined for purposes of paying Stock dividends. Plan Year. The Plan Year shall be May 1 to April 30, of each year. Retainer Fee. The entire "Retainer Fee" amount that would be paid to a Participating Director by the Company, Empire National Bank or any affiliate of the Company that has adopted the Plan during the Plan Year in question. In no event does the term Retainer Fee include any per diem amounts paid with respect to Board or committee meeting attendance. Retirement. The term "Retirement" shall mean the voluntary or involuntary resignation of a director, the removal of a director with or without cause or the conclusion of a director's term or office where the director is not reelected by shareholders of the Company to a succeeding term. Stock. The term "Stock" shall mean the $5 par value common stock of the Company. 5. Directors' Elections. (a) Retainer Fee Deferral Election. Each Eligible Director shall be given an opportunity by the Company on an annual basis to defer receipt of all (but not less than all) of the Retainer Fee which such Eligible Director has the opportunity to earn during the next succeeding Plan Year through service as an Eligible Director. In order to participate in the Plan for a particular Plan Year, an Eligible Director must elect in writing to participate, and such election must be made at least six months prior to the first day of the applicable Plan Year, except that the election for the first Plan Year may be made at any time prior to the first day of the Effective Date. To make an effective election, a properly completed and executed Election Agreement must be received by the Company at the address specified on such Election Agreement. 6. Reserve Account. (a) Establishment of Account. The Company shall establish and maintain a Reserve Account for each Participating Director. The Reserve Account shall reflect all entries required to be made pursuant to the terms and conditions of the Participating Director's Election Agreement. 3 (b) Credits to Account. The Company shall credit to a Participating Director's Reserve Account a number (to four decimal places) of units that is equal to 110% of the amount of the Participating Director's Retainer Fee deferred pursuant to an Election Agreement, divided by the Market Price on the day when such amounts are earned. For this purpose, the amounts of a Participating Director's Retainer Fee are deemed earned when paid. The Company shall credit to the Reserve Account on each Dividend Payment Date that number (to four decimal places) of units that is equal to the total number of units in the Participating Director's Reserve Account on the Record Date for such dividend, multiplied by the cash dividend per share of Stock divided by the Market Price on the Dividend Payment Date for such dividend. The number of units credited to a Reserve Account shall be adjusted appropriately by the Company in the event of any change in the Stock by reason of stock dividends, split-ups, recapitalizations, combinations, exchanges of shares and other like capital changes, but no adjustment shall be required by reason of any sales of shares of Stock by the Company at any price, whether below, at or above Market Price, and whether by or pursuant to warrant, option, right, conversion right or privilege or otherwise, and a Participating Director shall have no rights as a holder of Stock unless and until a certificate for shares of Stock is issued by the Company. 7. Payment of Account Value. (a) General. The Company shall, with respect to each Reserve Account for each Participating Director, cause to be delivered to such Participating Director (or any applicable alternate payee, as determined under the Plan or the applicable Election Agreement) on or promptly after the Applicable Payment Date, the Payment Date value of such Reserve Account in the form of shares of Stock, all pursuant to the express terms and conditions of the Plan and the applicable Election Agreement. A Participating Director may elect not to receive payment of his Reserve Account as of his sixty-fifth birthday, and instead to receive payments under this Plan as of the next applicable Payment Date. Such election must be made at least 90 days before, and in the calendar year prior to, his sixty-fifth birthday. (b) Disability. If a Payment Date occurs by reason of a determination by the Company that the Participating Director has become totally and permanently disabled, and if the disability is due to mental incapacity, the shares of Stock deliverable under the Plan and the applicable Election Agreement shall be issued in the name of and delivered to the Participating Director's legally appointed personal representative. If no such representative has been appointed, then delivery date shall be in the name of and to the participating Director's spouse, or if the Participating Director is then unmarried, then such shares of stock shall be held until the persons who would be entitled thereto, if the Participating Director were then to die interstate, make proper claim of the Company for such shares of stock or dollar amount. Such payment shall be made to the Participating Director if the disability is not due to mental incapacity. (c) Death. If a Payment Date occurs because the Participating Director shall die, the shares of Stock required to be delivered under the Plan and the applicable Election Agreement shall be promptly issued in the name of and delivered to the Participating Director's beneficiary 4 (or beneficiaries) as designated in the applicable Election Agreement, or, if none are so designated, in the name of and to the legally appointed personal representative of the Participating Director's estate. If no legal proceedings for such appointment have been instituted within sixty days after receipt by the Company of notice of the Participating Director's death, such delivery shall be in accordance with the last sentence of Paragraph 7(b) above. 8. Administration. Directors of the Company, Empire National Bank, or any affiliate of the Company that adopts this Plan, who are not Eligible Directors shall be solely responsible for the administration of the Plan, but may delegate any portion of such responsibility that they determine to be appropriate. To the extent consistent with the terms of the Plan, such directors shall have the power to interpret any Plan provision, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations that it deems necessary or advisable to administer the Plan. Such directors shall constitute the Committee for the Plan. 9. Status of Account. The Company shall have full and unrestricted use of all property or amounts payable pursuant to the Plan, and title to and beneficial ownership of any assets which the Company may earmark to pay the amounts hereunder shall at all times remain in the Company and no Eligible Director shall have any property interest whatsoever in any specific assets of the Company. The Reserve Account is not intended to be a trust account or escrow account for the benefit of a Participating Director or any other person, or an asset segregation for the benefit of a Participating Director or any other person. The sole right of a Participating Director, or a Participating Director's heirs or personal representatives, is a right as an unsecured general creditor of the Company to claim any shares of Stock or dollar amount to which the Participating Director's Election Agreement and the Plan. Notwithstanding the above provisions, the Company may establish a grantor trust to provide additional security to Participating Directors that amounts under this Plan will be properly paid, provided that the status of Participating Directors with respect to assets of the grantor trust remains that of general unsecured creditors. The Company shall provide each Participating Director with an annual report of his or her Reserve Account balance within 30 days following the end of each Plan Year. 10. Amendment or Termination. The Committee may, at any time and from time to time, terminate the Plan or make such amendments as it deems advisable; provided, however, that no such termination or amendment shall adversely affect or impair the contract rights of a Participating Director with respect to an effective Election Agreement, unless such Participating Director shall consent in writing to such termination or amendment. Such amendment may not, without the approval of the Company's shareholders, materially increase the benefits accruing to Eligible Directors under the Plan, increase the number of shares of Stock distributed under the Plan, or materially modify the requirements as to eligibility under the Plan. 11. Stock Subject to Plan. The maximum number of shares of Stock that shall be reserved for issuance under the Plan shall be 40,000 shares, subject to adjustment upon changes in the capitalization of the Company as provided in Paragraph 6 of the Plan. 5 12. Compliance with Securities Laws. With respect to persons subject to Section 16 of the Securities Exchange Act of 1934 ("1934 Act"), transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 13. Non-Plan Deferral Arrangements. The Company does not intent that this Plan replace or supersede any presently existing retainer deferral arrangement or preclude the Company from implementing additional deferral arrangements. 14. Costs of Enforcement. The Company shall pay all expenses of a Director, including but not limited to attorney fees, incurred in enforcing payments by the Company pursuant to this Plan. 15. Future Director Terms. Nothing in this Plan or in any Election Agreement shall obligate a director to continue as such, or to accept any nomination for a future term as a director of the Company, or require the Company to nominate or cause the nomination of the director for a future term as a director of the Company. For purposes of this provision, the term "Company" shall include Empire National Bank and any affiliate of the Company that adopts this Plan. 16. No Alienation. No shares of Stock amount deliverable under the Plan or under an Election Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or change, other than by will or the laws of descent and distribution. 17. Withholding. The Company is entitled to withhold and deduct from any amounts due from the Company to a Participating Director, all legally required amounts necessary to satisfy any federal, state or local withholding and employment-related taxes arising directly or indirectly in connection with the Plan or any Election Agreement, and the Company may require the Participating Director to remit promptly to the Company the amount of such taxes before taking any future actions with respect to the Participating Director's Reserve Account or Election Agreement. For purposes of this provision, the term "Company" shall include Empire National Bank, and any affiliate of the Company that has adopted this plan. 18. Binding Effect. This Agreement shall bind the Director, the Company, Empire National Bank, and any affiliate of the Company that has adopted the Plan, and their beneficiaries, survivors, executors, administrators and transferees. 19. Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of Michigan, except to the extent preempted by the laws of the United States of America. 6 CERTIFICATION The foregoing Plan was duly adopted by the Board of Directors on the 26th day of January, 1995, subject to approval by the Company's shareholders. EMPIRE BANC CORPORATION By: /s/ William T. Fitzgerald, Jr. ------------------------------ Its: Secretary
EX-10.E 3 MATERIAL CONTRACTS EMPIRE BANC CORPORATION DIRECTORS' FEE DEFERRAL PLAN 1. Establishment. Empire Banc Corporation (the Company), hereby establishes the Empire Banc Corporation Directors' Fee Deferral Plan and (the "Plan") for Eligible Directors of the Company. 2. Effective Date. The Plan shall become effective May 1, 1995. 3. Purpose. The purpose of the Plan is to provide Eligible Directors with the opportunity to defer the payment of income taxes on Directors' Fees and to establish a rate of return on such deferrals that provide additional incentives to eligible Directors to perform their duties in a manner that enhances the Company's financial performance. 4. Definitions. Reserve Account. The term "Reserve Account" shall have the meaning given in Paragraph 6 of the Plan. Bank. The term "Bank" shall mean Empire National Bank. Committee. The term "Committee" shall mean the Compensation Committee of the Company's Board of Directors. Company. The term "Company" shall mean Empire Banc Corporation, and its successors and assigns. Crediting Rate. For any Plan Year, the term "Crediting Rate" shall mean the Bank's average earning asset rate for the immediately preceding fiscal year, as reported to shareholders in the Company's annual report. Election Agreement. The term "Election Agreement" shall mean each and every Election Agreement executed by an Eligible Director and delivered to the Company hereunder, the form of which is attached to the Plan as Exhibit A, and is incorporated by reference herein. Eligible Director. The term "Eligible Director" shall mean any present or future director of the Company, the Bank or any affiliate of the Company that adopts this Plan. Meeting Fees. The "Meeting Fees" that would be paid to a Participating Director by the Company, the Bank, or any affiliate of the Company that has adopted the Plan during the Plan Year in question. In no event does the term Meeting Fee include any retainer fee paid by the Company, the Bank, or any affiliate of the Company. Participating Director. The term "Participating Director" shall mean an Eligible Director who has executed and delivered an Election Agreement to the Company. Payment Date. The term "Payment Date" shall mean the earliest to occur of the following dates: 2 (i) The date of the Director's sixty-fifth birthday; or (ii) The date of the Participating Director's Retirement; or (iii) The Participating Director's death; or (iv) The Participating Director's total and permanent disability. Plan. The term "Plan" shall mean the Empire Banc Corporation Directors' Fee Deferral Plan, as it may be amended from time to time. Plan Year. The Plan Year shall be January 1 to December 31, of each year, except that the first Plan Year shall be May 1 to December 31. Retirement. The term "Retirement" shall mean the voluntary or involuntary resignation of a director, the removal of a director with or without cause or the conclusion of a director's term of office where the director is not reelected by shareholders of the Company to a succeeding term. 5. Directors' Elections. (a) Meeting Fee Deferral Election. Each Eligible Director shall be given an opportunity by the Company on an annual basis to defer receipt of all (but not less than all) of the Meeting Fees, which such Eligible Director has the opportunity to earn during the next succeeding Plan Year through service as an Eligible Director. In order to participate in the Plan for a particular Plan Year, an Eligible Director must elect in writing to participate, and such election must be made prior to the first day of the applicable Plan Year, except that the election for the first Plan Year may be made at any time prior to the first day of the Effective Date. To make an effective election, a properly completed and executed Election Agreement must be received by the Company at the address specified on such Election Agreement. 6. Reserve Account. (a) Establishment of Account. The Company shall establish and maintain a Reserve Account for each Participating Director. The Reserve Account shall reflect all entries required to be made pursuant to the terms and conditions of the Participating Director's Election Agreement. (b) Credits to Account. The Company shall credit to a Participating Director's Reserve Account the Meeting Fees that would be payable to the Participating Director, had the Participating Director not elected to participate in the Plan. The amounts that are credited to Participating Director's Reserve Account shall accrue interest at an annual rate equal to the Crediting Rate, credited on a monthly basis, such interest shall be calculated based on the average monthly balance of the Participating Director's Reserve Account during each Plan Year. The Committee shall keep such records as are necessary to determine the value of a Participating Director's Reserve Account. The Committee shall adjust the Crediting Rate as of the first day of each Plan Year to reflect the then current earning asset rate of the Bank. 7. Payment of Account Value. (a) General. The Company shall, with respect to the Reserve Account for each Participating Director, cause to be paid to such Participating Director (or any applicable alternate payee, as determined under the Plan or the applicable Election Agreement) on or promptly 3 after the applicable Payment Date, the value of such Reserve Account in 120 substantially equal payments, which shall be determined by assuming that the rate of return on the Reserve Account, while it is being paid to the Participating Director, is the Crediting Rate in effect on the Payment Date, all pursuant to the express terms and conditions of the Plan and the applicable Election Agreement. A Participating Director may elect not to receive payment of his Reserve Account as of his sixty-fifth birthday, and instead to receive payments under this Plan as of the next applicable Payment Date. Such election must be made at least 90 days before, and in the calendar year prior to, his sixty-fifth birthday. A Participating Director may also elect to receive a lump sum payment of his initial Reserve Account, as of his payment date, provided that such election is made at least 90 days before and in the calendar year prior to the Payment Date. (b) Disability. If a Payment Date occurs by reason of a determination by the Company that the Participating Director has become totally and permanently disabled, and if the disability is due to mental incapacity, the payments deliverable under the Plan and the applicable Election Agreement shall be issued in the name of and delivered to the Participating Director's legally appointed personal representative. If no such representative has been appointed, then delivery date shall be in the name of and to the Participating Director's spouse, or if the Participating Director is then unmarried, then such shares of stock shall be held until the persons who would be entitled thereto, if the Participating Director were then to die interstate, make proper claim of the Company for such dollar amount. Such payment shall be made to the Participating Director if the disability is not due to mental incapacity. (c) Death. If a Payment Date occurs because the Participating Director shall die, the payments required to be delivered under the Plan and the applicable Election Agreement shall be promptly issued in the name and delivered to the Participating Director's beneficiary (or beneficiaries) as designated in the applicable Election Agreement, or, if none are so designated, in the name of and to the legally appointed personal representative of the Participating Director's estate. If no legal proceedings for such appointment have been instituted within sixty days after receipt by the Company of notice of the Participating Director's death, such delivery shall be in accordance with the last sentence of Paragraph 7(b) above. If payments have already commenced to a Participating Director and the Participating Director dies, then the remaining payments shall be made to the individuals or entities as otherwise determined in this Paragraph 7(c), at the same time such payments would have been made to the Participating Director. 8. Administration. The Committee shall be solely responsible for the administration of the Plan, but may delegate any portion of such responsibility that they determine to be appropriate. To the extent consistent with the terms of the Plan, the Committee shall have the power to interpret any Plan provision, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations that it deems necessary or advisable to administer the Plan. 9. Status of Account. The Company shall have full and unrestricted use of all property or amounts payable pursuant to the Plan, and title to and beneficial ownership of any assets which the Company may earmark to pay the amounts hereunder shall at all times remain in the Company and no Eligible Director shall have any property interest whatsoever in any 4 specific assets of the Company. The Reserve Account is not intended to be a trust account or escrow account for the benefit of a Participating Director or any other person, or an asset segregation for the benefit of a Participating Director or any other person. The sole right of a Participating Director, or a Participating Director's heirs or personal representatives, is a right as an unsecured general creditor of the Company to claim any dollar amount to which the Participating Director's Election Agreement and the Plan. Notwithstanding the above provisions, the Company may establish a grantor trust to provide additional security to Participating Directors that amount under this Plan will be properly paid, provided that the status of Participating Directors with respect to assets of the grantor trust remains that of general unsecured creditors. The Company shall provide each Participating Director with an annual report of his or her Reserve Account balance within 30 days following the end of each Plan Year. 10. Amendment or Termination. The Company may, at any time and from time to time, terminate the Plan or make such amendments as it deems advisable; provided, however, that no such termination or amendment shall adversely affect or impair the contract rights of a Participating Director with respect to an effective Election Agreement, unless such Participating Director shall consent in writing to such termination or amendment. The Company's right to amend the Plan shall include the right to amend prospectively the initial Crediting Rate and to change the form of payments that may be made from the Plan. 11. Non-Plan Deferral Arrangements. The Company does not intent that this Plan replace or supersede any existing retainer deferral arrangement or preclude the Company from implementing additional deferral arrangements. 12. Costs of Enforcement. The Company shall pay all expenses of a Director, including but not limited to attorney fees, incurred in enforcing payments by the Company pursuant to this Plan. 13. Future Director Terms. Nothing in this Plan or in any Election Agreement shall obligate a director to continue as such, or to accept any nomination for a future term as a director of the Company, or require the Company to nominate or cause the nomination of the director for a future term as a director of the Company. For purposes of this provision, the term "Company" shall include Empire National Bank and any affiliate of the Company that adopts this Plan. 14. No Alienation. No shares of Stock amount deliverable under the Plan or under an Election Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrances or change, other than by will or the laws of descent and distribution. 15. Withholding. The Company is entitled to withhold and deduct from any amounts due from the Company to a Participating Director, all legally required amounts necessary to satisfy any federal, state or local withholding and employment-related taxes arising directly or indirectly in connection with the Plan or any Election Agreement, and the Company may require the Participating Director to remit promptly to the Company the amount of such taxes before taking any future actions with respect to the Participating Director's Reserve Account or Election Agreement. For purposes of this provision, the term "Company" shall include Empire National Bank, and any affiliate of the Company that has adopted this Plan. 5 16. Binding Effect. This Agreement shall bind the Director, the Company, Empire National Bank, and any affiliate of the Company that has adopted the Plan, and their beneficiaries, survivors, executors, administrators and transferees. 17. Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of Michigan, except to the extent preempted by the laws of the United States of America. CERTIFICATION The foregoing Plan was duly adopted by the Board of Directors on the 26th day of January, 1995. EMPIRE BANC CORPORATION By: /s/ William T. Fitzgerald, Jr. ------------------------------ Its: Secretary
EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Empire Banc Corporation on Form S-8 (Registration Statement No. 33- 58578), of our report dated January 18, 1996 on the consolidated financial statements of Empire Banc Corporation, as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, which report is included in the 1995 Annual Report on Form 10-K of Empire Banc Corporation. /s/ Crowe, Chizek and Company LLP ---------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan March 20, 1996
EX-27 5 ARTICLE 9 FDS FOR 10-K
9 1,000 12-MOS DEC-31-1995 DEC-31-1995 13,697 161 8,000 0 47,829 36,483 36,946 259,102 3,200 372,426 319,540 5,000 5,881 12,000 0 0 8,244 21,761 372,426 23,820 4,199 587 28,606 12,416 13,231 15,375 745 (5) 13,494 6,153 6,153 0 0 4,146 2.36 2.36 8.69 867 72 606 3,213 2,900 650 205 3,200 2,055 0 1,145
-----END PRIVACY-ENHANCED MESSAGE-----