Item 1 - Business.
Empire Banc Corporation (the "Corporation") was incorporated under the laws of the state of Delaware on February 6, 1987, for the purpose of becoming a bank holding company. The Empire National Bank of Traverse City (the "Bank"), is a wholly-owned subsidiary of the Corporation. On June 1, 1994 the Corporation changed its state of incorporation from Delaware to Michigan.
The Bank was established under the banking laws of the State of Michigan in 1912 in Empire, Michigan. In 1961 the Bank converted its charter from a state bank to a national banking association. The Bank's deposits are insured by the Bank Insurance Fund, administered by the Federal Deposit Insurance Corporation, and the Bank is regulated by the U.S. Comptroller of the Currency.
The Bank is engaged in the general commercial banking business, providing a full range of loan and deposit products. These Bank services include customary retail and commercial banking services, including checking and savings accounts, time deposits, interest-bearing transaction accounts, safe deposit facilities, trust services, real estate mortgage lending and direct and indirect consumer financing. It makes secured and unsecured commercial loans and also operates a trust department providing fiduciary, investment and other related trust services. The Bank has contracted with a full-service securities brokerage firm to make available a variety of investment products to the Bank's customers. This program operates from two of the Bank's branch offices.
The principal source of revenue for the Corporation is dividends upstreamed from the Bank. The Bank's principal source of revenue is interest and fees on loans. The sources of income for the three most recent years are as follows.
The Bank's primary market area is the northwestern portion of the lower peninsula of Michigan. The Bank is headquartered in Traverse City, Michigan, County of Grand Traverse. The Bank maintains offices in Grand Traverse, Leelanau, Kalkaska, and Crawford counties. The population of these counties combined is approximately 100,000. The Bank operates ten full service offices, provides drive-in convenience at seven locations and has automatic teller machines operating at ten locations. The Bank has no foreign operations.
As of December 31, 1996, the Bank employed approximately 194 full-time and 31 part-time employees.
Banking is a highly competitive business. The Bank competes primarily with other financial institutions in its market areas for loans, deposits, and trust accounts. In its primary market, which includes the Grand Traverse, Kalkaska and Leelanau counties, the Bank maintains the second largest deposit base, or approximately 25 percent of the deposit market share. There are principally six banking institutions with offices is this area. Three of the competing banks with offices in this market are members of holding companies with substantially more assets than the Corporation.
The Bank is the only independent community bank in the Crawford County market. The Bank is the third largest in terms of deposits in the Crawford County market and competes with three financial institutions that are members of holding companies with substantially more assets than the Corporation.
In addition to these other banks, the Bank also competes for loans and deposits with savings and loan associations, credit unions, investment firms and money market funds. In order to successfully compete, management has developed a sales and service culture, stresses and rewards excellent customer service and designs products to meet the needs of the customer. The Bank also utilizes its ability to sell loans in the secondary market.
The Bank makes mortgage, commercial and installment loans to customers primarily in northwestern lower Michigan. Fees may be charged for these services. Commitments to make loans and unused lines of credit outstanding are detailed in Note 15 of the Notes to Consolidated Financial Statements.
Historically, the Bank has predominantly sold its secondary market conforming residential mortgage loans. The mortgage loan portfolio serviced by the Bank for others, primarily the Federal Home Loan Mortgage Corporation, at December 31, 1996 totaled over $220 million. Mortgage banking activity is detailed in Note 6 of the Notes to Consolidated Financial Statements.
The Bank supports the growth of the service industry, with its year round resort and related businesses, manufacturing, the medical community, and many other activities important to growth in the greater Grand Traverse area. Designated as a Preferred Lender by the Small Business Administration (SBA), the Bank underwrites government guaranteed business loans, contributing to the economic growth in northern Michigan.
The Bank also arranges loan relationships with national and regional participating banks, increasing the amount of funds available for local businesses to grow. There are no industry concentrations in which total loans to borrowers in one industry comprised 10% or more of total loans, nor have material portions of the Bank's deposits been received from, a single person, persons, industry or group.
In 1993, the Bank joined the Federal Home Loan Bank of Indianapolis, which generates an additional source of liquidity and long-term funds. Membership in the Federal Home Loan Bank also provides access to additional advantageous lending programs. The Community Investment Program makes advances to be used for funding community-oriented mortgage lending, and the Affordable Housing Program grants advances to fund lending for long- term low- and moderate-income owner occupied and affordable rental housing at subsidized interest rates. Using the Affordable Housing Program, the
Bank has sponsored the construction of two low-income homes with Habitat for Humanity.
The economy of the market areas of the Bank is affected by summer and winter tourism activities and, accordingly, the Bank experiences seasonal consumer and commercial deposit growth, with substantial growth increases from May to September. The Bank regularly assesses its ability to raise funds through the issuance of certificates of deposit in denominations of $100,000 or more in the local and regional market area and has established conservative guidelines for the total funding to be provided by these deposits. These deposits were less than three percent of total deposits at December 31, 1996 and 1995, respectively. The Bank also uses federal funds purchased from correspondent banks and the Federal Reserve Bank to respond to deposit fluctuations and temporary loan demands.
As of December 31, 1996, the Bank had no risks attendant to foreign sources. Compliance with federal, state and local statutes and/or ordinances relating to the protection of the environment is not expected to have material effect upon the Bank's capital expenditures, earnings or competitive position.
SUPERVISION AND REGULATION Banking is a highly regulated industry, with numerous federal and state laws and regulations governing the organization and operation of banks, bank holding companies, and their affiliates. The following summary of certain laws and regulations affecting the Corporation and the Bank is qualified in its entirety by such laws and regulations, which are subject to change based on pending and future legislation and action by regulatory agencies.
As a bank holding company under the Bank Holding Company Act of 1956, the Corporation is regulated and examined by the Federal Reserve Board. This Act requires that the Corporation obtain prior Federal Reserve Board approval for bank and nonbank acquisitions and restricts the permissible activities of the Corporation. In addition, the Act formerly restricted the acquisition of shares of out-of-state banks unless such acquisition is specifically authorized by the laws of the state in which the bank to be acquired is located. Under the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act"), this restriction was repealed effective September 29, 1995, and the Federal Reserve Board generally is authorized to approve bank acquisitions by out-of-state bank holding companies whether or not such acquisition is prohibited by state law. The Interstate Act also provides for the nationwide interstate branching of banks. Commencing June 1, 1997, both national and state- chartered banks will be permitted to branch and merge across state lines. States may opt in or out of this interstate branching authority before June 1, 1997. The State of Michigan has adopted legislation opting in early to the interstate branching authority, subject to the existence of reciprocal legislation in the state of the bank wishing to acquire or establish a branch in Michigan.
Federal law also regulates transactions between the Corporation and the Bank, including the amount and nature of loans or other extensions of credit. The Bank is also subject to regulation and examination by the Comptroller of the Currency.
The Comptroller of the Currency has established guidelines with respect to the maintenance of appropriate levels of capital for the Bank. The Federal Reserve Board has also established similar guidelines for the Corporation. Noncompliance with such standards can limit the amount of dividends which the Bank can pay to the Corporation and thus the amount of dividends the Corporation can pay to its shareholders.
The banking industry is also affected by the monetary and fiscal policies of the federal government, including the Federal Reserve Board, which exerts considerable influence over the cost and availability of funds obtained for lending and investing.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") significantly affects the operation of banks and their relationship with federal regulatory agencies.
Under FDICIA, the FDIC has implemented a system of risk based premiums for deposit insurance pursuant to which the premiums paid by a depository institution are based on the probability that the applicable insurance fund will incur a loss in respect of such institution. On September 30, 1996, the federal Deposit Insurance Funds Act ("DIFA") was enacted. DIFA provided for a one-time special assessment by the FDIC on Savings Association Insurance Fund ("SAIF") assessable deposits, which raised the SAIF's reserve ratio to the designated level. This allowed the FDIC to effectively equalize the formerly disparate deposit insurance assessment ratios of the BIF and SAIF. As of January 1, 1996 the effective BIF assessment rate ranged from 0 basis points for well-capitalized institutions displaying little risk, to 27 basis points for undercapitalized institutions displaying high risk. Going forward, both BIF insured banks and SAIF insured thrifts are also required to pay interest on Financing Corporation (FICO) bonds issued in connection with the federal government's bail out of the thrift industry.
FDICIA also prescribes various supervisory or "prompt corrective" actions by federal regulatory agencies based on an insured institution's level of capital. These prescribed actions increase restrictions on and heighten regulatory scrutiny of the institution as its capital declines. The Bank is rated in the lowest risk category under regulatory guidelines, as detailed in Note 18 of the Notes to Consolidated Financial Statements.
Proposals to change the laws and regulations governing the operations and taxation of banks, and companies which control banks and other financial institutions, are frequently raised in Congress. The likelihood of any major changes and the impact such changes might have on the Corporation are, however, impossible to predict.
Item 2

Item 2 - Properties. The executive offices of the Corporation and the Bank are maintained at the main office of the Bank, 1227 East Front St., Traverse City, Michigan. The Bank leases its main office and the following branch offices and automated teller machine facilities: Grand Traverse Mall Office, 3160 South Airport Rd, Traverse City, Michigan 49684; Kalkaska Office, 302 West Mile Road, Kalkaska, Michigan 49646; Acme Office, 3880 M-72 East, Acme, Michigan 49610; Woodmere Office, 859 Woodmere Avenue, Traverse City, Michigan 49686; Meijer Handy Teller ATM, 3955 South Memorial Highway, Traverse City, Michigan 49684. The leases expire at various times through the years 2011 and all include renewal periods. Net aggregate annual rentals for banking facilities in 1996 were $426,000.
In addition, the Bank owns and operates the following facilities none of which are encumbered: Northport Office, 122 Nagonaba, Northport, Michigan 49670; Leland Office, 111 North Main Street, Leland, Michigan 49654; Empire Office, 10210 Front Street, Empire, Michigan 49630; Cherryland Office, 1114 South Airport Road, Traverse City, Michigan 49686; Downtown Traverse City Office, 427 West Front St. Traverse City, Michigan 49684; Grayling Office, 2195 S. James St. Grayling, Michigan 49738.
The Bank operates drive-thru facilities at most of its office locations and has eleven automatic teller machines for customer use in its market area.
Information about the executive officers of the Corporation is set forth below.
Item 3

Item 3 - Legal Proceedings. The Bank is routinely engaged in litigation, both as plaintiff and defendant, which is incident to its business. In certain proceedings, claims or counter-claims have been asserted against it. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of such litigation and threats of litigation will have a material effect on the financial statements of the Corporation.
Item 4

Item 4 - Submission of Matters to a Vote of Security Holders. No matters were submitted during the fourth quarter of fiscal 1996 to a vote of the Corporation's security holders.
PART II Item 5

Item 5 - Market for Corporation's Common Equity and Related Stockholder Matters. The common stock of Empire Banc Corporation is traded on the electronic bulletin board system of the National Association of Securities Dealers, symbol EMBM. The primary market is the State of Michigan. Principal market makers of common stock transactions are F.J. Morrisey & Co., First of Michigan Corp, Howe, Barnes & Co., McDonald & Co., Robert W. Baird & Co., Roney & Co. and Stifel Nicolaus & Co. There were 496 holders of the Corporation's common stock as of December 31, 1996.
On December 30, 1996, the Corporation issued 3,950 shares of its common stock, par value $5.00 per share, to The Empire National Bank Employee Stock Ownership Plan (the "ESOP") in exchange for $142,000 cash. The cash paid by the ESOP for the shares was attributable to the discretionary annual employer contribution by the Bank pursuant to the terms of the ESOP. The shares issued were not registered under the Securities Act of 1933 in reliance on Section 4(2) of the Act.
Quarterly cash dividends were declared during 1996 and 1995 totaling $1.21 and $.97 per common share per year. Note 19 of the Notes to Consolidated Financial Statements details regulatory guidelines regarding payment of dividends. The following table sets forth, for the periods indicated, the high and low sale prices per share of the Corporation's common stock. All of the prices are adjusted for a five percent stock dividend paid in November, 1996.
Item 6

Item 6 - Selected Financial Data - Empire Banc Corporation
Item 7

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis is designed to provide readers with a comprehensive review of the results of operations and financial position. This discussion should be read in conjunction with the Consolidated Financial Statements and related footnotes.
Summary of Earnings In 1996, the Corporation achieved record earnings of $4,577,000, an increase of $431,000, or 10.4 percent, over the $4,146,000 earned in 1995. In 1995, net income increased $392,000, or 10.4 percent.
Earnings Per Share Earnings per share, computed on the average number of common shares and common equivalents outstanding during the year, were $2.44, compared to $2.25 in 1995 and $2.05 in 1994.
Return on Average Shareholders' Equity Return on average shareholders' equity measures how profitably the shareholders' invested capital is employed. Return on average equity was 14.7 percent for 1996 compared to 14.8 percent and 14.7 percent in 1995 and 1994.
Return on Average Assets Return on average assets, a measure of profitability, was 1.20 percent in 1996 compared to 1.18 percent and 1.17 percent in 1995 and 1994.
Book Value Per Share Book value per share of common stock increased 8 percent to $18.71 at December 31, 1996, compared to $17.33 and $15.38 at December 31, 1995 and 1994.
Summary of Operating Results The following is a summary of the major components of the consolidated operating results.
Net Interest Income
Net interest income is the difference between interest and fees earned on earning assets (loans and investments) and the interest paid on deposits and other interest-bearing funds. It is the major component of earnings for a financial institution. For analytical purposes, to evaluate the effective yields earned on earning assets, interest earned is expressed on a taxable equivalent (TE) basis by increasing tax-exempt interest income to an amount comparable to interest subject to income taxes. The taxable equivalent adjustment is based on a federal income tax rate of 34 percent.
Net interest income is influenced by changes in the balance and mix of earning assets and interest-bearing liabilities, the proportion of earning assets funded by demand deposits and equity capital and market interest rates.
Conditions beyond management's control may have a significant impact on changes in net interest income from one period to another. Examples of such external factors are Federal Reserve Board monetary policy, introduction of new deposit products by bank and non-bank competitors and the fiscal and debt management policies of the federal government.
The table on the following page details the key determinants of net interest income: the average daily balance sheet for each year - including the components of earning assets and supporting liabilities - the related interest income on a TE basis and interest expense, as well as the average rates earned and paid.
Net Interest Income Average Balance Sheet, Interest Income/Expense, Average Rates
An analysis of the changes in net interest income is presented in the following table. This analysis highlights the relative effect of changes in the average balances and interest rates.
Analysis of Changes in Net Interest Income
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.
Net interest income (TE) increased $1,179,000 or 8 percent, in 1996 as average earning assets increased $29.4 million, or 9 percent, and the net interest margin (net interest income as a percentage of average earning assets) decreased 6 basis points. Earning assets funded with interest-bearing liabilities increased $21.7 million, or 8 percent, and the net interest spread decreased by 8 basis points, adding $603,000 in net interest income. Earning assets funded with non-interest-bearing liabilities and equity capital increased $7.6 million, or 14 percent, and the earning asset rate declined by 14 basis points, contributing $576,000 to the increase in net interest income.
The increase in average earning assets was principally in investment securities, which increased $19.8 million, or 27 percent. The average rate on securities increased 31 basis points. Loans increased $11.8 million, or 5 percent, and the average rate decreased 15 basis points. The primary funding source is deposits. Interest-bearing deposits increased $16.6 million, or 6 percent, and the average rate decreased 4 basis points from 1995. Federal Home Loan Bank Advances increased $4.7 million and the average rate decreased 105 basis points.
In 1995, net interest income increased $1,576,000, or 11 percent, due to increases in average earning assets of $30.3 million, or 10 percent, and the net interest margin increased 5 basis points. The increase in earning assets funded with interest-bearing liabilities, at a decreased interest spread, accounted for $670,000 of the increase in net interest income. The increase in earning assets funded with non-interest-bearing liabilities, at an improved interest spread, added $906,000 in net interest income.
Loan Portfolio Management and Non-Performing Assets
Portfolio Quality
Loan portfolio quality, diversification of the portfolio and the monitoring of potential problem loans are the primary functions of loan portfolio management. The Bank has internally established written loan policies and procedures. Management has established a loan review process which provides for frequent review of the loan portfolio in order to monitor loan portfolio quality and performance. In addition, management conducts a review of loan concentrations which could have an impact on the financial condition of the Bank. As of December 31, 1996, there were no industry concentrations in which the total loans to borrowers in one industry comprised 10 percent or more of total loans.
Loans outstanding at year-end for the five years ended December 31, are shown in the following table according to the type of loan:
Maturity and Rate Sensitivity of Selected Loans
The following table presents the remaining maturity of total loans outstanding (excluding residential real estate mortgage and consumer loans) at December 31, 1996, according to scheduled repayments of principal. The amounts due after one year are classified according to the sensitivity to changes in interest rates.
Non-Performing Assets and Problem Loans
The following table is a summary of non-performing assets as of December 31:
In 1996, total non-performing assets increased $786,000, or 45 percent, due to one long-term credit relationship. After an extensive examination of the credit, it was determined to be in the best interest of the Corporation to classify the credit non-accrual, reduce the carrying value and add to the established reserves for the credit. In addition to loans classified as non-performing or 90 days past due, there were other loans totaling $2,062,000 at December 31, 1996, on which management closely monitors the borrowers' ability to comply with payment terms. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), as amended by Statement No. 118 (SFAS 118). Implementation of SFAS 114 and SFAS 118 did not have a material impact on the consolidated financial position and results of operations in 1995 as disclosed in Note 5 to the Consolidated Financial Statements. See Note 2 to the Consolidated Financial Statements, for a description of SFAS 114 and SFAS 118.
Management regularly reviews the loan portfolio to identify loans about which there are concerns that the borrower will be unable to satisfy existing payment terms. Management reports monthly to the Board of Directors information regarding significant past-due and problem loans, non-accrual loans and other real estate owned. Non-performing assets are carried at estimated realizable values and the known losses of principal have been recognized. Management cannot predict which, if any, loans will eventually result in losses.
Included in other assets is $1,041,000 of cash value of life insurance which has been classified non-accrual. The court-approved Plan of Rehabilitation of the insurance carrier calls for a new insurer to assume these policies at full value. The assumption is currently expected to be completed by mid-1997.
The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that collection of interest is doubtful. The gross interest income that would have been recorded in 1996 on the $2,131,000 of non-accrual loans amounted to $171,000 if the loans would have been current in accordance with their original terms and outstanding throughout the period. The amount of interest income included in net income on these loans amounted to $16,000.
All loans classified for regulatory purposes as loss, doubtful, or substandard have been included in the above disclosures. There were no other interest bearing assets at December 31, 1996 that would be required to be disclosed as non-performing or potential problem loans.
There were no foreign loans outstanding at December 31, 1996.
Provision for Loan Losses
The following table summarizes the provision for loan losses, net loan losses and the allowance for loan losses over the last three years:
In 1996, the provision for loan losses increased $941,000 due to a $1.1 million provision related to the long-term credit relationship discussed above under "Non-Performing Assets and Problem Loans." The charge-down of the carrying value of the credit resulted in the increase in net loan losses in 1996. Excluding the charge-off for this credit, net loan losses as a percent of average loans would have been comparable to 1995 and 1994 and substantially below historical industry norms. The allowance for loan losses at 1.30 percent of loans was considered adequate by management and was 139 percent of non-performing assets at year-end compared to 183 percent and 151 percent at December 31, 1995 and 1994.
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.
Allocation of the Allowance for Loan Losses
The allocation of the allowance for possible loan losses for the years ended December 31 is:
Non-Interest Income Total non-interest income increased $833,000, or 17 percent, from 1995. Income from the origination, sales and servicing of mortgage loans increased $430,000, or 40 percent, due to an increase in fees and gains on loans sold of 71 percent in 1996. Effective July 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). This standard requires capitalizing the cost of mortgage servicing rights on loans sold which is then amortized over the estimated period of servicing income. The adoption of SFAS 122 increased gains on loans sold $454,000 in 1996 and $154,000 in 1995.
Trust income increased $282,000, or 16 percent, in 1996, as funds under management increased $53 million, or 18 percent. Other service charges and fees increased 18 percent due to income earned from the sale of credit life insurance. Other income increased due to the 42 percent growth in fees earned from the sale of investment products through a third party vendor with offices in the Bank's branches.
In 1995, total non-interest income increased $174,000, or 4 percent. Income from the origination, sales and servicing of mortgage loans decreased $71,000, or 6 percent, as fees and gains on loans sold decreased 17 percent, or $123,000, due to the reduced new loan volume resulting from higher rates in 1995. Loan servicing income increased $52,000, or 12 percent, over 1994. Trust fees increased $254,000, or 16 percent, due to a 17 percent increase in assets under management. Other service charges and fees increased 7 percent due to ATM and credit card fees.
Non-Interest Expense In 1996, total non-interest expense increased $367,000, or 3 percent. Total personnel expense increased $584,000, or 7 percent, as salaries and wages increased $509,000, or 10 percent, due to increased staffing and normal salary increases.
Equipment expense for 1996 decreased $42,000, or 5 percent, due to a $69,000 reduction in depreciation expense.
Other operating expenses decreased $200,000, or 5 percent, in 1996. FDIC insurance expense decreased $211,000, or 58 percent. As of June 1, 1995 FDIC rates were reduced from $.23 per $100 of deposits to $.04, and for 1996, the rate was the statutory minimum of $2,000 per year for well-capitalized banks. Included in 1996 expense was a $113,000 congressionally mandated payment to the Savings Association Insurance Fund (SAIF). For 1997, congress mandated a fee of $.013 per $100 of deposits for the FICO Bonds as part of the SAIF resolution (see "Item 1 - Business, Supervision and Regulation"). Other areas of expense were comparable to 1995.
In 1995, total non-interest expense increased $1,253,000, or 10 percent. Personnel expense increased $1,079,000, or 16 percent, due to the $698,000, or 38 percent, increase in benefit costs related to the change in the Corporation's stock price from year to year and the increase in the profit sharing incentive award of $110,000, or 25 percent. Occupancy expense increased 7 percent for branch remodeling costs.
Other operating expense increased $59,000, or 2 percent, in 1995. FDIC insurance expense decreased $254,000, or 41 percent, due to the reduction in FDIC rates. Legal and professional fees increased $69,000, or 25 percent. Other areas of expense increased due to the growth of the Bank.
Federal Income Taxes Federal income tax expense for 1996 was $2,259,000, compared to $2,007,000 in 1995 and $1,841,000 in 1994, due to the increased profitability of the Corporation. The Corporation's effective tax rate has been substantially unchanged from 1994 through 1996 due to the consistency of statutory tax rates and the relative percentage of tax-exempt income.
Capital Resources and Cash Dividends The foundation of a strong financial institution is a strong capital base. Shareholders' equity in 1996 increased $2.7 million, or 9 percent, to $32.7 million at year-end 1996. During 1995, total shareholders' equity increased $3.7 million, or 14 percent, over 1994. Shareholders' equity was 8.2 percent of total assets at December 31, 1996, comparable to 1995.
The federal bank regulatory agencies have established capital standards for financial institutions. The Corporation's capital ratios are all significantly above the guidelines for well-capitalized institutions, the highest capital standard. Note 18 to the Consolidated Financial Statements details the Corporation's regulatory capital and the capital standards.
Total dividends in 1996 were $2,100,000, or $1.21 per share, compared to the $1,671,000, or $.97 per share in 1995, a 26 percent increase. The dividend payout ratio was 46 percent in 1996 and 40 percent in 1995 and 1994. A 5 percent and a 25 percent stock dividend were paid in November of 1996 and 1995. Cash dividends per share have increased at an average annual rate of 19 percent since 1991. Future dividends, if any, are declared at the discretion of the Board of Directors and may be determined by the financial performance, future prospects and capital requirements of the Corporation.
The Corporation's principal source of funds to pay cash dividends is the earnings of its subsidiary, Empire National Bank. Consequently, cash dividends depend upon the earnings, capital needs, regulatory restraints and other factors affecting the Bank. See Note 19 to the Consolidated Financial Statements.
The Corporation maintains a five-year capital plan and utilizes a formal strategic planning process. Management and the Board continue to monitor long-term goals, which include maintaining capital growth in relation to asset growth and the retention of earnings to fund growth while providing returns to shareholders.
Interest Rate Sensitivity and Liquidity Asset and liability management involves the development and implementation of strategies to maximize net interest income, minimize the vulnerability of earnings to major changes in interest rates and allow the Bank to profitably compete in all phases of the business cycle. This process is carried out through monthly meetings of senior officers representing lending, deposit-gathering, funds management and marketing.
Interest rate risk arises when the maturity or repricing characteristics of assets differ significantly from the maturity or the repricing characteristics of liabilities. One of the goals of asset and liability management is to balance the various factors that create interest rate risk, thereby maintaining the interest rate risk of the Bank within acceptable levels.
While controlling interest rate risk is an important objective, accommodating customer maturity and repricing preferences is an equally important objective. It is the function of asset and liability management to develop strategies to reconcile these objectives. Management has developed definitive policies and procedures to sell the current production of long-term residential mortgages in the secondary market to mitigate interest rate risk. Long-term commercial loans are generally written with three- and five-year balloons and long-term fixed rate SBA guaranteed loans are sold in the secondary market.
One measure of interest rate risk is "gap," which represents the cumulative difference between the amount of assets and liabilities maturing or repricing at various time intervals. In measuring the interest rate risk gap, management estimates loan repayments and early withdrawals of deposits and the interest sensitivity of assets and liabilities which do not mature or reprice. Because assets and liabilities do not reprice in the same manner as interest levels change, the gap should not be viewed as a sole indicator of how the net interest income of the Bank will be affected by changes in interest rates. The Bank continually monitors and has maintained within its policy a one-year rate sensitive asset-to-liability ratio (RSA-RSL) of between 0.8 and 1.2. The one-year RSA-RSL ratio was 0.8 and 0.9 at December 31, 1996 and 1995.
The Bank measures the impact of changes in interest rates on net interest income through a comprehensive analysis of the Bank's interest rate sensitive assets and liabilities. This analysis takes into consideration projected changes in market interest rates and alternative rate scenarios, change in the rate of individual interest rate sensitive assets and liabilities and the effect of competition. Through this quarterly analysis, management is able to measure the projected effect on net interest income. During the annual planning process, net interest income is projected using alternative interest rate scenarios to determine the effect of changing interest rates on net interest income.
The period of 1994 through 1996 included periods of sustained significant interest rate decreases and increases as well as changes in the shape of the yield curve. A stable net interest margin and the steady increase in net interest income demonstrates the effectiveness of these risk management techniques.
Liquidity management is closely related to asset and liability management. Liquidity management maintains the resources to fund withdrawals and other operating requirements. Monitoring maturities and future commitments and the use of short-term investments are integral parts of liquidity management.
The primary objective of the Bank's investment portfolio is to invest in securities of high quality that will provide a reasonable return and will allow the Bank to maintain a sound liquidity position. Management of the portfolio is an integral part of liquidity and interest rate risk management. The Bank does not have complex or leveraged derivatives or structured notes in its portfolio.
The Board of Directors has established policies regarding the potential price fluctuation of the portfolio of securities available for sale. This portfolio had net unrealized gains of $264,000 and $506,000 at December 31, 1996 and 1995. The price fluctuations experienced during 1996 and 1995 were primarily due to changes in market interest rates and were well within the policies established by the Board of Directors. Realization of any unrealized gain or loss will depend upon the future portfolio management, interest rate risk management and liquidity needs of the Bank. The regulatory agencies do not include the net unrealized gain in the calculation of regulatory capital.
Other than securities guaranteed by the US Government or its agencies, the Bank held no investment securities from any one issuer that exceed ten percent of stockholders' equity at December 31, 1996.
Deposit growth through core deposits provides the primary funding for increases in loans and investment securities. Core deposits include demand deposits, savings and money market accounts and certificates of deposit of consumer and corporate customers. Core deposits represented 98 percent and 97 percent of total deposits at December 31, 1996 and 1995.
Management regularly assesses the ability of the Bank to raise funds through certificates of deposit in denominations of $100,000 or more in the local and regional market area and has established conservative guidelines for the total funding to be provided by these deposits. These deposits were less than 3 percent of total deposits at December 31, 1996 and 1995.
Management also believes that an integral part of liquidity management is the development of other sources of funding. It is management's policy to actively cultivate and maintain relationships with correspondent and other banks for sales of loans for liquidity, credit and interest rate risk management. Additionally, the Bank has federal funds lines with correspondent banks and may borrow from the Federal Reserve Bank.
The Bank is a member of the Federal Home Loan Bank of Indianapolis, which provides an additional source of liquidity and long-term funds to meet the borrowing needs of customers. Advances from the Federal Home Loan Bank of Indianapolis are secured through the pledge of investment securities or mortgage loans. Federal Home Loan Bank advances were $12 million and $17 million at December 31, 1996 and 1995. Management believes that with the combination of federal funds lines and borrowings from the Federal Reserve Bank and the Federal Home Loan Bank, the Bank has more than adequate resources available to meet liquidity needs and to provide for growth.
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
Total average earning assets increased $29.4 million, or 9 percent, in 1996. The increase in average loans was primarily in mortgage loans, which increased $6.8 million, or 11 percent, particularly in residential construction loans. Commercial loans increased $7.3 million, or 7 percent. Average consumer loans decreased $2.3 million, or 3 percent, due to run-off on the indirect loan portfolio. Direct consumer lending increased substantially, particularly in home equity lines of credit. The substantial increase in the securities portfolio was in mortgage- backed and corporate securities with average lives and terms of five years or less.
The increase in average earning assets was primarily funded by a $21.7 million, or 8 percent, increase in average total interest-bearing funds. The increase in average interest-bearing deposits was in consumer certificates of deposit and money market accounts. Total non-interest bearing funds invested in earning assets increased $7.6 million, or 14 percent. Average time certificates in denominations of $100,000 or more represented 3 percent of average total deposits in 1996 and 1995 and 4 percent in 1994, significantly below the levels of banks of comparable size. With the growth in average earning assets, deposit funding was augmented with Federal Home Loan Bank advances.
In 1995, total average earning assets increased $30.3 million, or 10 percent, which was primarily in loans. The loan portfolio increase was in mortgage loans of $12.4 million, or 26 percent, and commercial loans of $10.5 million, or 10 percent. Consumer loans decreased $3.5 million, or 4 percent, due to a reduced emphasis on indirect lending and a concentration on direct lending.
The increase in average earning assets was funded primarily with interest- bearing deposits. Total non-interest-bearing funds invested in earning assets increased $6.2 million, or 13 percent.
Item 8

Item 8 - Financial Statements and Supplementary Data Consolidated Balance Sheet-Empire Banc Corporation
Consolidated Statement of Income-Empire Banc Corporation
Consolidated Statement of Cash Flows-Empire Banc Corporation
Consolidated Statement of Cash Flows-Empire Banc Corporation (continued)
Consolidated Statement of Changes in Shareholders' Equity Empire Banc Corporation
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations
Empire Banc Corporation, a one-bank holding company for Empire National Bank, is the largest independent bank holding company in northern Michigan. The Bank is in the general commercial, retail and mortgage banking business, providing a full range of loan and deposit products. It operates a trust department providing fiduciary, investment and other related services and has contracted with a full-service brokerage firm to make available a variety of investment products to the Bank's customers.
The Bank is headquartered in Traverse City, Michigan, which is the retail, medical and financial hub for northern Michigan. The Bank's primary market area is the northwestern portion of northern Michigan.
Note 2 - Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include the accounts of Empire Banc Corporation (the Corporation) and its wholly- owned subsidiary, Empire National Bank (the Bank), after elimination of significant intercompany transactions and accounts.
Statement of Cash Flows - Cash and cash equivalents includes cash on hand, demand deposits in other institutions and federal funds sold. Cash flows for customer loan and deposit transactions and for deposits made with other financial institutions are reported net.
Securities - Securities available for sale may be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Securities available for sale are reported at fair value and the net unrealized gain or loss is reported, net of related tax, as a separate component of shareholders' equity. If a security is sold or called, the adjusted cost of the specific security is used to compute the gain or loss. Securities held to maturity are those securities which management has the ability and positive intent to hold to maturity. Securities held to maturity are stated at amortized cost. Premiums and discounts are recognized in interest income using the interest method.
Allowance for Loan Losses - The allowance for loan losses represents the amount management estimates is adequate to provide for losses inherent in the loan portfolio. Management determines the allowance for loan losses by reviewing selected loans (including large loans, non-accrual loans and problem and delinquent loans) and establishing specific loss allocations on these loans. Historical loss information and local economic conditions are considered in establishing allowances on the remaining loans. The allowance is increased by provisions charged to expense and reduced by loan losses, net of recoveries.
Effective January 1, 1995 the Corporation adopted Statement of Financial Accounting Standards No. 114 (SFAS 114) and Statement No. 118 (SFAS 118), on loan impairment. Impaired loans are measured based on the present value of expected cash flows discounted at each loan's effective interest rate or at the fair value of collateral if the loan is collateral
dependent. Impaired loans are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses. Adopting these standards in 1995 was not material.
Smaller-balance homogeneous loans include residential first mortgage, residential construction, automobile, home equity and second mortgage loans, and are collectively evaluated for impairment. Commercial loans and first mortgage loans secured by other properties are evaluated individually for impairment. Non-accrual loans rated substandard, doubtful and loss under the Corporation's loan evaluation system, are considered impaired. Loans, or portions thereof, are charged off when deemed uncollectible. SFAS 114 and SFAS 118 disclosures for impaired loans are not materially different from non-accrual and renegotiated loan disclosures or non- performing asset and past-due disclosures.
Premises and Equipment - Premises and equipment are depreciated over their estimated useful lives and are stated at cost less accumulated depreciation. Depreciation is computed principally using the straight-line method.
Other Real Estate - Other real estate is carried at the lower of cost or fair value less estimated costs to sell. Reduction to fair value at acquisition from a related loan is accounted for as a loan loss. Subsequent reduction in fair value is charged to other non-interest expense. Costs incurred to carry other real estate are expensed.
Interest and Fees on Loans - Interest on loans is accrued over the term of the loans based upon the principal outstanding. Interest accrual is discontinued when management believes, after considering economic and business conditions and collection efforts, that collection of interest is doubtful. Loans are generally moved to non-accrual status at 90 days or more past due. Under SFAS 114 and SFAS 118, the carrying value of impaired loans is periodically adjusted for cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments of interest income are reported as such.
Loan origination and commitment fees and related costs are recognized over the life of the loan as a yield adjustment. Fees on loans sold are recognized upon sale.
Loan Servicing Rights - The Bank originates and purchases mortgage loans for sale to the secondary market and sells the loans with servicing retained. Effective July 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 122 (SFAS 122). For servicing retained, this Statement requires capitalizing the cost of mortgage servicing rights, regardless of whether those rights were acquired through purchase or origination activities. Prior to adoption of SFAS 122, only purchased loan servicing rights were capitalized.
Beginning July 1, 1995, the cost of mortgage loans originated with the intent to sell is allocated between the servicing right and the loan
without servicing, based on their relative fair values. The capitalized cost of loan servicing rights is amortized in proportion to and over the period of estimated net servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment by stratifying them based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (i.e., conventional or government insured, fixed or adjustable rate), term (i.e., 15-year or 30-year), and note rate. Impairment represents the excess of cost of an individual mortgage rights stratum over its fair value and is recognized through a valuation allowance.
Income Taxes - Income tax expense is based on the taxes due on the tax return plus the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using current tax rates. Valuation allowances reduce deferred tax assets to the amounts expected to be realized.
Use of Estimates - Preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Areas where estimates are used include the allowance for loan losses, carrying value of mortgage servicing rights, fair values of financial instruments, the accrued liability associated with the defined benefit pension plan and supplemental retirement plan, the carrying value of impaired loans, deferred tax assets, the estimated life of loans and securities and the carrying value of other real estate. Estimates more susceptible to change in the near term include the allowance for loan losses, carrying value of mortgage servicing rights, fair value of financial instruments and the defined benefit pension plan and supplemental retirement plan liabilities.
Earnings Per Share - Earnings per share of common stock are computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the period. All per share data presented is retroactively adjusted for all stock dividends and splits. The Corporation declared and issued a 5% stock dividend in November 1996 and a stock split effected in the form of a 25% stock dividend in November 1995.
Long-lived Assets - Long-lived assets and certain identifiable intangibles are reviewed for impairment, pursuant to Statement of Financial Accounting Standards No. 121(SFAS 121), whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Stock-Based Compensation - The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). This Statement establishes a fair value based method of accounting for employee stock options and similar equity instruments and encourages all companies to adopt this method. However, the Statement allows companies to continue measuring compensation cost for such plans using accounting guidelines in place prior to SFAS 123. The accounting recognition provisions of SFAS 123 have not been adopted, as the Corporation measures compensation for employee stock plans using accounting guidance in place prior to
SFAS 123. There were no stock options granted in 1996 or 1995 requiring pro-forma disclosures of net income and earnings per share under SFAS 123.
Reclassifications - Certain prior year amounts have been reclassified to conform with current year's presentation.
Note 3 - Cash and Cash Equivalents
The Bank is required to maintain non-interest-bearing reserve balances with the Federal Reserve. Required reserve balances at December 31, 1996 and 1995 were $4,849,000 and $3,976,000.
Note 4 - Securities
Securities and their fair values at December 31 were as follows:
Note 4 - Securities (continued)
Sales of available for sale securities: There were no sales of securities available for sale during 1996.
Pursuant to the FASB Special Report on Statement No. 115, securities with a carrying value of $2,853,000, fair value of $2,883,000 and unrealized gain of $30,000, were transferred at fair value to available for sale on December 31, 1995.
Note 4 - Securities (continued)
Scheduled maturities of securities available for sale and held to maturity at December 31, 1996 were as follows:
Investment securities with a book value of $21,417,000 at December 31, 1996 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes.
Note 5 - Loans
Activity in the allowance for loan losses was as follows:
Impaired loans Accounting and disclosure regarding impaired loans under SFAS 114 and SFAS 118 became effective in 1995.
Note 5 - Loans (continued)
Non-accrual loans
If the non-accrual loans were accruing, additional interest income would have been $155,000, $122,000 and $146,000 in 1996, 1995 and 1994.
Mortgage loans held for sale at December 31, 1996 and 1995, at the lower of aggregate cost or market, were $1,879,000 and $2,054,000.
Loans of $21,924,000 at December 31, 1996 were pledged to secure Federal Home Loan Bank advances.
Note 6 - Mortgage Banking
Note 6 - Mortgage Banking (continued)
Note 6 - Mortgage Banking (continued)
Note 7 - Premises and Equipment
Note 8 - Time Deposits
Note 9 - Federal Home Loan Bank Advances
The fixed rate advances have no prepayment provisions. Securities and mortgage loans have been pledged to fully collateralize these advances.
Note 10 - Other Non-Interest Expense
Note 11 - Federal Income Taxes
Note 11 - Federal Income Taxes (continued)
Note 12 - Employee Benefit Plans
An integrated employee benefit plan structure provides basic retirement income and the opportunities to build retirement savings through tax- deferred voluntary contributions and participate in stock ownership of the Corporation. A description of the individual plan components of this integrated structure follows.
A defined benefit pension plan covers substantially all full-time employees. The maximum amount that can be deducted for federal income tax purposes is contributed annually and employees do not contribute. Plan assets consist of equity and fixed income securities. The plan's funded status and amounts included in the balance sheet at December 31 are:
Pension expense includes the following for the years ended December 31:
Note 12 - Employee Benefit Plans (continued)
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% in 1996 and 7% and 8% in 1995 and 1994. The increase in future compensation was 4.5% in each year. The change in the discount rate for 1996 decreases the accumulated benefit obligation and the projected benefit obligation by $76,000 and $136,000. The expected long-term rate of return on assets was 9% for all years.
A supplemental retirement program for certain executive officers provides benefits which are integrated with the other benefit plans.
Net plan cost includes the following:
The weighted average discount rate and the rate of increase in future compensation used in determining the projected benefit obligation were 7.5% and 5% in 1996, 7% and 5% in 1995 and 8% and 6% in 1994.
A 401 (k) profit sharing plan covers substantially all full-time employees. Participants may defer up to 12.5% of their salaries and the Bank may match 50% of the employees' deferrals to a maximum of 3%. Expenses for 1996, 1995 and 1994 were $121,000, $107,000 and $103,000.
Note 12 - Employee Benefit Plans (continued)
An Employee Stock Ownership Plan (ESOP) covers substantially all full-time employees. At December 31, 1996 the plan had no indebtedness and held 239,955 shares of stock allocated and voted by employees. The annual contribution to the ESOP is determined by the Board of Directors. Contributions for 1996, 1995, and 1994 were $142,000, $129,000 and $123,000.
Agreements granting death benefits funded with life insurance are provided to certain officers while employed. The financial statement impact of these arrangements is not material.
Note 13 - Long-Term Incentive Plan
A long-term incentive plan grants certain officers stock options and tandem stock appreciation rights. All options and rights under the plan have been granted. The rights vest over five years and expire ten years from grant. As of December 31, 1996, 179,184 stock options and 84,540 stock appreciation rights were vested. The weighted average exercise price of the stock options at year-end 1996 was $10.59 and the weighted average remaining option life was 3.5 years. The expenses on the stock appreciation rights for 1996, 1995 and 1994 were $672,000, $798,000 and $100,000. The following is a summary of stock options and rights, granted and exercised, for the years presented, restated for all stock dividends and splits:
Note 14 - Related Party Transactions
Certain directors and executive officers of the Corporation and the Bank (including family members, affiliates and companies in which they are principal owners) had loans with the Bank in the ordinary course of business. The aggregate amount of loans to such related parties at December 31, 1996 amounted to $3,939,000. During 1996, new loans to such related parties amounted to $3,366,000 and repayments amounted to $2,986,000.
Note 15 - Off-Balance Sheet Financial Instruments
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to make loans and unused lines of credit. The exposure to credit loss is the contractual amount of these instruments, assuming the amounts are fully advanced and collateral or other security is of no value. Collateral for loans and letters of credit is usually in the form of cash, inventory, securities or other real estate and personal property. The Bank's policy is to require suitable collateral prior to the disbursement of funds. The following is a summary of commitments as of December 31:
At December 31, 1996 and 1995, commitments to make loans included $7.4 million and $5.8 million of primarily variable rate commercial loans. These commitments generally have termination dates of 90 days or less and may require a fee. Commitments to make loans also include commitments for primarily fixed rate mortgage loans of $11.7 million and $11.3 million at December 31, 1996 and 1995, which are intended for sale in the secondary market upon closing. Other commitments include variable rate mortgage loans of $4.3 million and $4.5 million at December 31, 1996 and 1995.
Note 16 - Shareholder Rights Plan
The Shareholder Rights Plan is designed to protect shareholders against unsolicited attempts to acquire control of the Corporation without offering a fair price to all shareholders. Five hundred thousand shares Series A Junior Participating Preferred Stock are reserved for purchase rights issued to holders of and in tandem with shares of common stock.
Generally, if a person or group acquires or announces a tender offer for 20% or more of the Corporation's common stock and the acquiror engages in certain business transactions, each right, other than those held by the acquiror, entitles the holder to acquire common stock or other securities with a market value twice the $50 per right exercise price.
The Corporation may redeem the rights at one cent per right until 20 days after a 20% position has been acquired.
Note 17 - Fair Value Disclosure
Fair values of financial instruments as estimated as follows:
Short-term financial instruments: The carrying value is a reasonable estimate of fair value for cash and cash equivalents and accrued interest.
Securities held to maturity and available for sale: Fair values are based on quoted market prices.
Loans: Fair value for certain homogeneous categories of loans, such as some residential mortgages, is estimated using quoted market prices for similar loans, adjusted for differences in loan characteristics. The fair values of other types of loans are estimated by discounting future cash flows, including estimates of prepayments, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same maturities.
Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits of similar maturities.
Federal funds purchased: The carrying amounts of borrowings maturing within 90 days approximate their fair value.
Federal Home Loan Bank advances: Fair values are estimated using discounted cash flow based on current borrowing rates for similar arrangements.
Off-balance sheet instruments: Fair values for off-balance sheet lending commitments are based on fees currently charged for similar agreements, considering the terms of the agreements and credit standing.
Note 17 - Fair Value Disclosure - (continued)
Estimated fair values of financial instruments were as follows at December 31:
The fair value of off-balance sheet instruments at December 31, 1996 and 1995 is not material.
Note 18 - Regulatory Capital
The Corporation is subject to various regulatory capital requirements administered by the federal banking agencies. The regulations require meeting specific capital adequacy guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. To be considered adequately capitalized (as defined) under the regulatory framework for prompt corrective action, minimum capital ratios must be maintained. The tier 1 leverage, tier 1 risk-based and total risk-based ratios are set forth in the table below. Capital ratios for the Bank are consistent with the Corporation's capital ratios. The Bank and Corporation's capital ratios are significantly above the well-capitalized standards. The following summarizes the consolidated Corporation's capital amounts and ratios:
Note 18 - Regulatory Capital (continued)
Note 19 - Empire Banc Corporation (Parent Company Only) Condensed Financial Statements
Note 20 - Empire Banc Corporation (Parent Company Only) Condensed Financial Statements - (continued)
Independent Auditor's Report
CROWE CHIZEK
To the Shareholders and Board of Directors Empire Banc Corporation Traverse City, Michigan
We have audited the accompanying consolidated balance sheet of Empire Banc Corporation as of December 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Empire Banc Corporation as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP - --------------------------------- Crowe, Chizek and Company LLP
Grand Rapids, Michigan January 23, 1997
Quarterly Financial Data Empire Banc Corporation
The following is a summary of selected quarterly results of operations for the years ended December 31, 1996 and 1995:
Item 9

Item 9 - Changes in and disagreements with Accountants on Accounting and Financial Disclosure.
None
PART III
The information called for by the items within this part is included in the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 13, 1997, to be filed with the Commission, and is incorporated herein by reference, as follows:
PART IV ITEM 14

ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 20, 1997.
EXHIBIT INDEX