1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999.
Commission file number 0-15839
EMPIRE BANC CORPORATION
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(Exact name of registrant as specified in its charter)
Michigan
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(State or other jurisdiction of incorporation or organization)
1227 E. Front Street
Traverse City, Michigan
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(Address of principal executive offices)
38-2727982
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(IRS Employer Identification Number)
49686-2928
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(Zip code)
(616) 922-2111
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, address and fiscal year, if changed since last report)
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.
Yes X No
The number of shares outstanding of each of the issuer's classes of common
stock was 3,011,790 shares of no par common stock outstanding as of March 31,
1999.
2
Empire Banc Corporation - Consolidated Balance Sheet
March 31 December 31 March 31
(in thousands, except share data) 1999 1998 1998
Assets
Cash and due from banks $ 12,900 $ 15,740 $ 23,201
Federal funds sold 15,300 5,600 19,000
-------- -------- --------
Cash and cash equivalents 28,200 21,340 42,201
Securities
Available for sale, at fair value 112,579 120,399 64,568
Held to maturity 32,000
(fair value: 3/31/98-$32,218)
Loans 326,280 325,774 298,949
Less: Allowance for loan losses (5,050) (4,825) (4,325)
-------- -------- --------
Net loans 321,230 320,949 294,624
Premises and equipment, net 5,549 5,503 5,043
Accrued income and other assets 11,230 9,773 9,159
-------- -------- --------
Total assets $478,788 $477,964 $447,595
======== ======== ========
Liabilities
Deposits
Non-interest-bearing $ 53,228 $ 61,221 $ 55,561
Interest-bearing 357,316 348,918 329,231
-------- -------- --------
Total deposits 410,544 410,139 384,792
Federal Home Loan Bank advances 17,000 17,000 17,000
Accrued expense and other liabilities 9,304 10,069 8,540
-------- -------- --------
Total liabilities 436,848 437,208 410,332
Shareholders' equity
Preferred stock-$1 par value,
2,000,000 shares authorized, none outstanding
Common stock-no par value, 5,000,000 shares authorized,
shares outstanding: 3/31/99-3,011,790;
12/31/98-2,957,398; 3/31/98-1,963,182 31,027 30,283 29,943
Retained earnings 10,353 9,509 6,965
Net unrealized gain on securities, net of tax 560 964 355
-------- -------- --------
Total shareholders' equity 41,940 40,756 37,263
-------- -------- --------
Total liabilities and shareholders' equity $478,788 $477,964 $447,595
======== ======== ========
- -------------------------------------------------------------------------------------------
See accompanying notes.
3
Empire Banc Corporation - Consolidated Statement of Income
Year to Date
March 31
(in thousands, except per share data) 1999 1998
Interest income
Loans, including fees $ 7,428 $ 7,081
Securities: taxable 1,599 1,414
tax-exempt 80 71
Federal funds sold 148 142
------- -------
Total interest income 9,255 8,708
Interest expense
Deposits 3,748 3,749
Federal Home Loan Bank advances
and other borrowings 254 230
------- -------
Total interest expense 4,002 3,979
------- -------
Net interest income 5,253 4,729
Provision for loan losses 256 282
------- -------
Net interest income after
provision for loan losses 4,997 4,447
Non-interest income
Mortgage sales and servicing 740 720
Service charges on deposit accounts 384 358
Trust income 832 760
Other service charges and fees 165 146
Other income 267 110
------- -------
Total non-interest income 2,388 2,094
Non-interest expense
Salaries and employee benefits 3,141 2,936
Premises and equipment 654 513
Other 1,183 1,101
------- -------
Total non-interest expense 4,978 4,550
------- -------
Income before federal income taxes 2,407 1,991
Federal income taxes 797 654
------- -------
Net income $ 1,610 $ 1,337
======= =======
- ----------------------------------------------------------------
Earnings per share $ .53 $ .46
Diluted earnings per share .51 .42
Average shares outstanding 3,023 2,951
Diluted average shares outstanding 3,166 3,157
- ----------------------------------------------------------------
See accompanying notes.
4
Empire Banc Corporation - Consolidated Statement of Comprehensive Income
Year to date
March 31
-----------------
(in thousands) 1999 1998
- --------------------------------------------------------------------
Net income $1,610 $1,337
Other comprehensive income
Unrealized gains (losses) on securities, net (404) 2
------ ------
Comprehensive income $1,206 $1,339
====== ======
- --------------------------------------------------------------------
See accompanying notes.
5
Empire Banc Corporation - Consolidated Statement of Cash Flows
Year to Date March 31
(in thousands) 1999 1998
Operating activities
Net income $ 1,610 $ 1,337
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 248 201
Provision for loan losses 256 282
Mortgage loans originated for sale (33,270) (35,252)
Sale of mortgage loans 37,168 36,442
Net amortization/accretion on securities 103 29
Change in
Interest receivable (175) (157)
Interest payable (1) 73
Other assets (1,282) (366)
Other liabilities 154 656
------- -------
Total adjustments 3,201 1,908
------- -------
Net cash from operating activities 4,811 3,245
Investing activities
Securities available for sale
Proceeds from maturities 17,686 7,594
Purchases (10,581) (6,411)
Securities held to maturity
Proceeds from maturities -- 3,965
Purchases -- (2,987)
Loans granted net of repayments (4,435) 2,248
Premises and equipment expenditures (294) (259)
------- -------
Net cash from investing activities 2,376 4,150
Financing activities
Net increase in deposits 405 (1,878)
Cash dividends paid (753) (686)
Federal Home Loan Bank advances -- 5,000
Issuance of common stock 21 137
------- -------
Net cash from financing activities (327) 2,573
------- -------
Net change in cash and cash equivalents 6,860 9,968
Beginning cash and cash equivalents 21,340 32,233
------- -------
Ending cash and cash equivalents $28,200 $42,201
======= =======
- ---------------------------------------------------------------------------------------
Interest paid $ 4,002 $ 3,906
Income taxes paid 30 --
- ---------------------------------------------------------------------------------------
See accompanying notes.
6
Empire Banc Corporation - Consolidated Statement of Changes in
Shareholders' Equity
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------
Balance January 1 $40,756 $36,199
Net income 1,610 1,337
Common stock issued 744 418
Dividends declared (766) (693)
Net change in security valuation (404) 2
------- -------
Balance March 31 $41,940 $37,263
======= =======
- ------------------------------------------------------------------------------------------
See accompanying notes.
Notes to Consolidated Financial Statements
Note-1 The consolidated financial statements include the accounts of Empire
Banc Corporation and its wholly-owned subsidiary, Empire National Bank, after
elimination of significant inter-company transactions and accounts. The
statements have been prepared by management without audit by independent
certified public accountants. However, these statements reflect all
adjustments (consisting of normal recurring accruals) and disclosures which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods presented and should be read in conjunction
with the notes to financial statements included in the Empire Banc
Corporation's Form 10-K for the year ended December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
Because the results of operations are so closely related to and responsive
to changes in economic conditions, the results for any interim period are
not necessarily indicative of the results that can be expected for the
entire year.
7
Note-2 Earnings per share is based on weighted-average common and
contingently issuable shares outstanding. Diluted earnings per share
further assumes the dilutive effect of additional common shares issuable
under stock options. A reconciliation of earnings per share and diluted
earnings per share is presented below:
Three Months Ending
March 31,
(in thousands, except per share data) 1999 1998
- ----------------------------------------------------------------
Net income $ 1,610 $ 1,337
======= =======
Earnings per share
Average common shares outstanding 3,012 2,943
Average contingently issuable shares 11 8
----- -----
3,023 2,951
===== =====
Earnings per share $ .53 $ .46
===== =====
Diluted earnings per share
Average shares outstanding, per above 3,023 2,951
Effect of stock options 143 206
----- -----
3,166 3,157
===== =====
Diluted earnings per share $ .51 $ .42
===== =====
- ----------------------------------------------------------------
8
Management's Discussion and Analysis
Summary
Empire Banc Corporation's 1999 first quarter earnings were $1,610,000,
a 20% increase over 1998 first quarter results. Diluted earnings per share
increased from $.42 per share in 1998 to $.51 in 1999. The return
on assets was 1.34% for the quarter versus 1.22% in 1998. The return on
equity was 15.42% compared to 14.47% in the prior year quarter.
Our operating results were achieved with growth in total revenues of 12%
over the first quarter of 1998. Net interest income grew 11%, primarily
due to the growth in average earning assets. Non-interest income increased
14% due to the growth in deposit and trust fees and a substantial increase
in fees from the sales of investment products. Non-interest expense
increased 9% from last year's first quarter.
In measuring asset quality net charge-offs were .04% of average loans
in the first quarter of 1999, substantially below industry norms, and
non-performing assets were .46% of loans at March 31, 1999. With the
continued growth in the loan portfolio, the allowance for loan losses was
increased $225,000 during the first quarter of 1999 to 1.55% of loans and
336% of non-performing assets at March 31, 1999.
Strong economic growth in the region, coupled with the Corporation's efforts
to attract and retain customer relationships led to total assets of $479
million at March 31, 1999, a 7% increase during the last twelve months. Total
deposits grew $26 million to $411 million and total loans increased 9% to
$326 million at the end of the quarter.
Total shareholders' equity increased 13% during the last twelve months
to $41.9 million, improving book value per share to $13.93 from the $12.65
at March 31, 1998.
Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the three months ended March 31, 1999.
Other Matters
The Corporation has a comprehensive written Year 2000 plan approved by the
board of directors and a Year 2000 management committee overseeing the efforts.
The plan includes all facets of the Corporation's business from physical plant
and equipment issues through all computer hardware and software and major
customers.
The Corporation uses major external third-party vendors to the banking
industry for the mainframe and all personal computer hardware and software.
These well-known, national third-party providers for mission critical systems
have provided written assurances that they are Year 2000 ready and their
systems have been fully tested internally and through proxy at customer sites.
The Corporation does not use any custom-programmed software. Another area
under review is systems which utilize embedded microchips, such as heating,
air conditioning, security and other related systems. Vendors for these
systems have been contacted to evaluate their Year 2000 compliance and assess
any potential risk.
9
While the Corporation's current UNISYS mainframe hardware and software is Year
2000 compliant, a new system was installed during the first quarter of 1999,
substantially increasing the capacity and efficiency of operations. This
new system allowed for the testing of this banking software from Information
Technology, Inc. during the installation of the hardware, without any
disruption to daily processing and customer service. All testing will be
completed by June 30, 1999, within the FFIEC published guidelines. No
disruption in service due to a Year 2000 issue is anticipated.
Management has addressed the financial implications of preparing for the Year
2000. The readiness of the software used for mission critical systems is
included in the cost of normal maintenance of those systems and management
does not expect any additional charges. Some minor hardware replacements will
be needed. Those expenditures will be less than $50,000. The Corporation has
the necessary technology staffing and has allocated the resources within its
1999 technology plan to complete the testing and implementation of its Year
2000 plan.
Since mission critical systems are Year 2000 compliant, system failure that
would require a new provider and conversion to a new system is not expected.
During the second quarter of 1999, business resumption plans will be developed
as testing is completed. The detail and depth of those plans will depend on
results of the final tests and the resulting risk assessment.
Major loan and deposit customers have been surveyed to evaluate the level of
Year 2000 planning and readiness and to assess any potential risk.
The board of directors, executive management team and the Office of the
Comptroller of the Currency are updated on a quarterly basis. Because of the
systematic approach used to prepare Empire Banc Corporation for the Year 2000
date change, management does not anticipate any material effect on financial
performance.
Certain statements contained in the section "Other Matters" constitute
"forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Such forward looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those expressed or implied by such forward looking statements.
Such factors may include, but are not limited to, the severity of problems
discovered with the Corporation's own systems as Year 2000 testing continues,
the cost of remedying such problems, the severity of Year 2000 problems
encountered by third party service providers and the Corporation's borrowers,
additional initiatives by regulators, and the costs of Year 2000 professionals
generally in the event problems are encountered.
Forward-looking statements in this Form 10-Q are based on current expectations
and/or the assumptions made in the earnings simulation analyses, but numerous
factors could cause variances in these projections, and their underlying
assumptions, such as changes in interest rates, demand, the degree of
competition and changes in laws, regulations or policy.
10
Net Interest Income
Quarter Ending
March 31
(in thousands) 1999 1998
- -----------------------------------------------------------
Interest income $9,255 $8,708
Taxable equivalent adjustment 41 40
------ ------
Interest income (TE) 9,296 8,748
Interest expense 4,002 3,979
------ ------
Net interest income (TE) $5,294 $4,769
====== ======
Increase (decrease) due to change in:
Volume $ 422 $ 469
Rate 103 99
------ ------
Total $ 525 $ 568
====== ======
- -----------------------------------------------------------
First quarter net interest income on a taxable equivalent ("TE")
basis was $5.3 million, a 11% increase from the $4.8 million earned
in the year ago quarter. Average earning assets increased 10% or
$42 million while net interest margin, the other principal determinant
of net interest income, increased from 4.72% to 4.76% in the quarter to
quarter comparison. The prime rate declined 75 basis points ("bp") from
8.5% in the first quarter of 1998 to average 7.75% in 1999.
Average loans increased $21.1 million or 7%, from the first quarter of 1998,
to $324.8 million for the current quarter. The commercial portfolio grew 19%
or $25.2 million to average $157.6 million and average consumer loans
increased 5% or $4.3 million to average $93.3 million. The mortgage loan
portfolio declined $8.4 million, or 10% to average $73.9 million in the first
quarter of 1999. The average rate earned on the loan portfolio declined 19 bp,
influenced by the general decline in the prime rate, to average 9.28% in the
current quarter.
Securities on average grew $18 million, or 19% from the first quarter of
1998. The average rate earned decreased 32 bp to 6.02% in the quarter to
quarter comparison. The rate earned on overnight funds sold declined 78 bp
and the average outstandings increased $2.2 million, to average $12.7
million.
Incremental funding for the earning asset growth came mainly from the
$31.7 million or 10% growth in interest bearing deposits. Money market
deposits increased $21.3 million, or 20%, time deposits grew $3.3 million,
or 2%, savings and interest checking increased $3 million, or 4%, and rate
sensitive time deposits over $100,000 increased on average $4 million or 42%.
Federal Home Loan Bank advances increased $1.5 million on average. The
average rate paid on interest bearing funds was 4.36%, compared to the 4.76%
average paid in the first quarter of 1998. Non-interest bearing funds
supporting earning assets increased 12% or $8.4 million compared to last
year's first quarter.
11
Net Interest Income
Average Balances, Interest Income/Expense, Average Rates
Quarter Ending March 31, 1999 1998
- -------------------------------------------------------------------------------------------
Average Average Average Average
(in thousands, Balance Interest Rate Balance Interest Rate
taxable equivalent) ------------------------- ---------------------------
Assets
Loans, including fees* $324,792 $7,434 9.28% $303,693 $7,090 9.47%
Taxable securities 106,558 1,599 6.00% 89,824 1,414 6.30%
Tax-exempt securities* 7,343 116 6.29% 5,852 102 6.97%
-------- ------ -------- ------
Securities 113,901 1,715 6.02% 95,676 1,516 6.34%
Federal funds sold 12,735 147 4.63% 10,517 142 5.41%
-------- ------ -------- ------
Earning assets 451,428 9,296 8.35% 409,886 8,748 8.66%
Cash and due from banks 14,413 16,817
Other assets 13,087 10,361
-------- --------
Total assets $478,928 $437,064
======== ========
Liabilities and equity
CDs over $100,000 $ 13,860 160 4.62% $ 9,779 125 5.24%
Savings & interest checking 72,748 362 2.02% 69,733 387 2.25%
Money market deposits 126,564 1,218 3.90% 105,273 1,159 4.51%
Time deposits 142,249 2,008 5.72% 138,970 2,078 6.06%
-------- ------ -------- ------
Interest-bearing deposits 355,421 3,748 4.28% 323,755 3,749 4.72%
FHLB advances and other 17,062 254 6.04% 15,537 230 5.99%
-------- ------ -------- ------
Interest-bearing
liabilities 372,483 4,002 4.36% 339,292 3,979 4.76%
-------- ------ -------- ------
Demand deposits 55,222 52,959
Other liabilities 9,458 7,848
Shareholders' equity 41,765 36,965
-------- --------
Total liabilities
and equity $478,928 $437,064
======== ========
Net interest spread (TE) 3.99% 3.90%
==== ====
Net interest income (TE) $5,294 $4,769
====== ======
Net interest margin (TE) 4.76% 4.72%
==== ====
- -------------------------------------------------------------------------------------------
* Interest income on tax-exempt securities and certain tax-exempt
loans have been adjusted to a tax-equivalent basis.
12
Non-Interest Income
Quarter Ending
March 31
Increase (decrease)
(in thousands) Amount Percent
- -----------------------------------------------------
Mortgage sales and servicing $ 20 3%
Deposit fees 26 7%
Trust 72 9%
Service charges 19 13%
Other income 157 143%
------ ----
$ 294 14%
====== ====
Non-interest income for the first quarter totaled $2.4 million, a $294,000
or 14% increase from the first quarter of 1998. The change in other income
was primarily the result of increased fee income from the sale of investment
products, which grew $155,000 from the same period one year ago. Investment
product sales were influenced by the 56% increase in gross commissions and
the change from a managed program to a dual employee program beginning in
1999.
Non-Interest Expense
Quarter Ending
March 31
Increase (decrease)
(in thousands) Amount Percent
- -----------------------------------------------------
Salaries and employee benefits $ 205 7%
Premises and equipment 141 27%
Other 82 7%
------ ----
$ 428 9%
====== ====
Non-interest expenses for the first quarter totaled $5.0 million, an
increase of $428,000, or 9%, from the first quarter of 1998.
Personnel related expenses, influenced by activity based commissions,
merit increases and partner incentive award expense increased $205,000
or 7%. Premises and equipment expense was impacted principally by costs
associated with technology improvements, increasing $73,000 and with costs
of premises increasing $64,000, primarily attributable to enlargement of
the main office facility to meet growing trust and commercial lending
departments.
13
Asset Quality
Non-Performing Assets
(in thousands) 3/31/99 12/31/98 3/31/98
- -----------------------------------------------------------------------------------------
Non-accrual loans $ 847 $1,283 $1,213
Renegotiated loans 395 408 209
------ ------ ------
Total non-performing loans 1,242 1,691 1,422
Other real estate 260 221 204
------ ------ ------
Total non-performing assets $1,502 $1,912 $1,626
====== ====== ======
Non-performing assets as a percent of total loans .46% .59% .54%
Accruing loans 90 days or more past due $ 9 $ 189 $ 189
Total non-performing assets at March 31, 1999 decreased $124,000, or 8% from
March of 1998, primarily due to the decrease in non-accrual loans.
Non-performing assets are .46% of total loans at March 31, 1999 as compared
to .54% in the prior year quarter. Loans identified as potential problem
loans totaled $3.1 million at March 31, 1999, $2.4 million at December 31,
1998 and $2.5 million at March 31, 1998.
14
The following table summarizes the provision for loan losses, net loan
losses and the allowance for loan losses.
Three Months Twelve Months Three Months
Ended Ended Ended
(in thousands) 3/31/99 12/31/98 3/31/98
- ---------------------------------------------------------------------------
Provision for loan losses $ 256 $1,215 $ 282
Net loan losses 31 515 82
Period-end allowance for
loan losses 5,050 4,825 4,325
Allowance as a percent of
period-end loans 1.55% 1.48% 1.45%
Net loan losses to average
loans outstanding .04% .17% .11%
- ---------------------------------------------------------------------------
For the current quarter, net charge-offs decreased $51,000 from the same
period in 1998. The allowance for loan losses increased $725,000 over
the last twelve months and was 1.55% of total loans as of March 31, 1999.
Management believes the increase in the allowance for loan losses is prudent
with the continued growth in the commercial loan portfolio - $32 million from
1998 - coupled with the sustained period of national and local economic growth.
Under accounting guidance regarding impaired loans, at March 31, 1999
there were $1,062,000 in impaired loans with $547,000 for which an allowance
for loan losses is allocated. Impaired loans totaled $1,239,000 and
$1,130,000 at December 31, 1998 and March 31, 1998.
15
Investment Securities
Securities and their fair values at March 31, 1999 were as follows:
Available for sale
Amortized Unrealized Fair
(in thousands) Cost Gain Loss Value
- --------------------------------------------------------------------------------
U.S. government and agency $ 52,544 $ 376 $ 28 $ 52,892
State and municipal 13,802 156 19 13,939
Mortgage-backed 22,981 161 74 23,068
Other 20,081 80 21 20,140
Equity 2,324 216 -- 2,540
-------- ----- ----- --------
$111,732 $ 989 $ 142 $112,579
======== ===== ===== ========
There were no sales of securities during the three months ended March 31,
1999.
16
Shareholders' Equity and Capital Resources
Total equity at March 31, 1999 was $41.9 million, compared to
$40.8 million and $37.2 million at December 31, 1998 and March
31, 1998. The Corporation declared $766,000, or $.25 per share,
in dividends for the first quarter of 1999 as compared to $687,000,
or $.23 per share in the first quarter of 1998. The quarterly dividend
is a 7% increase over the first quarter 1998 cash dividend.
In April 1999 the board of directors of Empire Banc Corporation voted to
increase the regular quarterly cash dividend to shareholders $.05, or 20%,
to $.30 per share, effective with the second quarter. The dividend will be
payable on or before July 31, 1999 to shareholders of record July 16, 1999.
Recorded in stockholders' equity during the first quarter of 1999 were
unrealized losses of $404. Unrealized gains of $2 were recorded in the first
quarter of 1998. At March 31, 1999 and 1998, the net unrealized gains totaled
$560,000 and $355,000.
The following summarizes the consolidated Corporation's capital amounts and
ratios.
Regulatory
Capital Standards
Well Capitalized Actual
----------------- --------------------------------
(in thousands) 3/31/99 3/31/99 12/31/98 3/31/98
- ---------------------------------------------------------------------------------
Risk-based capital amounts
Tier 1 leverage $ 23,883 $ 41,073 $ 39,475 $ 36,651
Tier 1 risk-based 21,475 41,073 39,475 36,651
Total risk-based 35,791 45,554 43,924 40,504
Risk-weighted assets 357,910 355,566 315,059
Quarterly average assets 477,662 479,524 436,364
Risk-based ratios
Tier 1 leverage 5% 8.60% 8.23% 8.38%
Tier 1 risk-based 6% 11.48% 11.10% 11.60%
Total risk-based 10% 12.73% 12.35% 12.86%
Risk-based capital ratios for the Corporation continue to be well above
the guidelines established for well-capitalized institutions, which is
the highest capital standard.
17
Empire Banc Corporation
Part II - Other Information
Item 4. Submission of matters to a vote of security holders
(a) none
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Empire Banc Corporation
-----------------------
(Registrant)
Date: May 12, 1999
/s/ James E. Dutmers, Jr.
---------------------------------------
James E. Dutmers, Jr.
Chairman and Chief Executive Officer
Date: May 12, 1999
/s/ William T. Fitzgerald, Jr.
---------------------------------------
William T. Fitzgerald, Jr.
Secretary, Treasurer & Chief Financial
Officer