<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934(Fee Required)
For the fiscal year ended December 31, 1996 Commission file number 33-20417
----------------- --------
Capital Directions, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2781737
- ------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
322 South Jefferson St., Mason, Michigan 48854-0130
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 676-0500
--------------
Securities registered pursuant to Section 12(b) of the act: None
--------------
Securities registered pursuant to Section 12(g) of the act: None
--------------
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 (or for such period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [x]
The registrant estimates that as of March 20, 1997, the aggregate market value
of the voting stock held by non-affiliates of the registrant was approximately
$10,318,070. This is based on a market price of $43.50 per share for the
Registrant's stock.
As of March 20, 1997, the registrant had outstanding 297,428 shares of common
stock having a par value of $5 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the Year Ended December 31, 1996 (Form 10-K,
Part I, Part II, Part III, and Part IV)
Proxy Statement for the Annual Meeting of Shareholders to be held
April 24, 1997 (Form 10-K, Part III)
<PAGE> 2
PART_I
Item 1. Business
Capital Directions, Inc. (the "Registrant") is a one-bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The
Registrant was incorporated on August 11, 1987 and formed for the purpose of
enabling Mason State Bank (the "Bank") to form a one-bank holding company and
engage in any other related activity allowed. Mason State Bank was consolidated
with Mason Bank on July 22, 1988, thereby causing Mason State Bank to become a
wholly-owned subsidiary of the Registrant.
Mason State Bank purchased Lakeside Insurance Services, Inc. in 1994 to
take advantage of the expanded insurance powers granted to Banks in 1994.
Lakeside is licensed in Michigan to sell life insurance and variable annuity
contracts.
Monex Financial Services, Inc., commenced operations in October 1988 as a
wholly-owned subsidiary of the Registrant. Monex Financial Services, Inc. is a
Michigan corporation which was capitalized with 50,000 shares of $1.00 par
value common stock.
Regulatory approval to engage in providing tax planning and preparation
services, consumer counseling services, and investment broker-dealer services
was granted in 1992. The Registrant offered these services under non-banking de
novo subsidiaries of Monex Financial Services, Inc. The sale of the products
through these subsidiaries ceased in 1996 and their operations closed down.
The Registrant has no substantial assets except the investment in Mason
State Bank. The Registrant and its primary subsidiary, Mason State Bank,
operate in the banking industry, which accounts for substantially all of their
assets, revenues and operating income. Further discussion of the operations of
the Registrant and its subsidiaries is discussed under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in The 1996
Annual Report to the Shareholders, incorporated herein by reference. The
Registrant's primary competition is substantially the same as Mason State
Bank's as discussed below.
The Bank was organized in 1886 under the laws of Michigan and is subject
to the Michigan Banking Code of 1969. It is insured by the Bank Insurance Fund
through the Federal Deposit Insurance Corporation. The Bank is regulated by
the Michigan Financial Institutions Bureau and the Federal Deposit Insurance
Corporation. The Registrant is regulated by the Federal Reserve Board. The
Bank's principal office is located at 322 South Jefferson Street, Mason,
Michigan. It also operates a branch at 661 North Cedar Street, Mason, Michigan.
The Registrant is also supervised and regulated by The Federal Reserve Board.
Banking services are provided to individuals, businesses, local, state and
federal governmental units and institutional customers located in Mason and the
surrounding areas. Services include demand deposits, savings and time
deposits, collections, cash management, night depositories and personal,
installment, commercial and real estate loans. The Bank offers a credit card
program affiliated with the Visa and MasterCharge Inter-Bank charge card
system.
The Bank maintains a correspondent relationship with several of the major
banks in the Detroit area and elsewhere, in order to provide for the clearance
of checks, the transfer of funds, the periodic purchase and sale of Federal
funds, and participation in large loans which would be beyond the Bank's legal
lending limit if made by the Bank alone.
The Bank has full and part-time employees (38 full-time equivalents) and
owns its main office and bank premises. The Bank operates primarily within
Ingham County. Competing with the Bank in Ingham County are several other
commercial banks and financial institutions, some of which have significantly
greater total resources than the Bank.
-1-
<PAGE> 3
ITEM 1. BUSINESS-STATISTICAL DISCLOSURE
I. (A) DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; (B)
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth average balances for major categories of
interest earning assets and interest bearing liabilities, the interest earned
(on a fully taxable equivalent basis) or paid on such amounts, and average
interest rates earned or paid thereon.
<TABLE>
<CAPTION>
1996 1995
---------------------------- -----------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------
ASSETS (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans,
including fees(1) ...... $49,507 $ 4,455 9.00% $51,111 $ 4,683 9.16%
Taxable investment
securities.............. 14,262 939 6.58 11,331 702 6.20
Non-taxable investment
securities(2)........... 5,105 394 7.72 5,329 388 7.28
Federal funds sold....... 2,154 115 5.34 1,692 99 5.85
------- ------- ------- -------
Total Interest
Earning Assets.......... 71,028 5,903 8.31 69,463 5,872 8.45
------- ------- ------- -------
Cash and due
from banks.............. 2,786 2,754
Other assets, net........ 2,298 2,783
------- -------
Total Non-interest
Earning Assets......... 5,084 5,537
------- -------
Total Assets.......... $76,112 $75,000
======= =======
LIABILITIES
Interest bearing
demand deposits......... $10,328 220 2.13 $11,084 260 2.35
Savings deposits......... 17,093 489 2.86 16,573 492 2.97
Time deposits under
$100,000................ 21,378 1,225 5.73 22,542 1,276 5.66
Time deposits of
$100,000 or more........ 6,686 380 5.68 6,210 365 5.88
Other borrowings......... 2,093 129 6.16 817 48 5.88
------- ----- ------- -----
Total Interest
Bearing Liabilities.... 57,578 2,443 4.24 57,226 2,441 4.27
------- ----- ------- -----
Demand deposits.......... 8,515 8,473
Other Liabilities........ 1,054 1,042
Shareholders' equity..... 8,965 8,259
------- -------
Total Non-interest
Bearing Liabilities
and Equity............. 18,534 17,774
------- -------
Total liabilities
and Equity............. $76,112 $75,000
======= =======
Net Interest Income...... $3,460 $3,431
Net Yield on Interest ====== ======
Earning Assets(2)....... 4.87% 4.94%
</TABLE>
-2-
<PAGE> 4
ITEM 1. BUSINESS (Continued)
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL (Continued)
(1) Average balances for loans include non-accrual loans. The inclusion of
non-accrual loans and fees does not have a material effect on either
the average balance or the average interest rate.
(2) Interest on non-taxable investment securities is reflected on a fully
tax equivalent basis using an effective tax rate of 34% for 1996 and
1995.
I.(C) INTEREST RATES AND DIFFERENTIAL
The following table summarizes the changes in interest income (on a fully
taxable equivalent basis) and interest expense resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1996 Over 1995 1995 Over 1994
------------------------------- --------------------------
Volume(1) Rate(1) Total Volume(1) Rate(1) Total
--------- ------- ----- --------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans.......................... $ (145) $ (83) $(228) $ 212 $ 264 $ 476
Taxable investment
securities.................... 191 46 237 (71) 97 26
Non-taxable investment
securities(2)................. (17) 23 6 (76) (30) (106)
Federal funds sold............. 25 (9) 16 27 19 46
------ ----- ----- ------ ----- -----
Total Interest
Income...................... 54 (23) 31 92 350 442
------ ----- ----- ------ ----- -----
Interest Expense
Interest bearing
demand deposits............... (17) (23) (40) 18 35 53
Savings deposits............... 15 (18) (3) (57) 34 (23)
Time deposits under $100,000... (67) 16 (51) (110) 174 64
Time deposits of
$100,000 or more.............. 27 (12) 15 103 86 189
Other borrowings............... 79 2 81 21 2 23
------ ----- ----- ------ ----- -----
Total Interest
Expense..................... 37 (35) 2 (25) 331 306
------ ----- ----- ------ ----- -----
Net Interest Income............. $ 17 $ 12 $ 29 $ 117 $ 19 $ 136
</TABLE>
(1) The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
(2) Interest on tax-exempt investment securities is based on a fully taxable
equivalent basis.
-3-
<PAGE> 5
ITEM 1. BUSINESS (Continued)
II. INVESTMENT PORTFOLIO
(A) A table of carrying values of the investment portfolio as of
December 31, 1996 and 1995 is set forth in Note 3 on pages 18 and 19 of
the 1996 Annual Report to Shareholders. Such information is incorporated
herein by reference.
(B) The following table shows the relative maturities and weighted yields of
investment securities at December 31, 1996: (dollars in thousands)
<TABLE>
<CAPTION>
Held-to-Maturity
1 Year 1 Year - 5 Years - After
or less 5 Years 10 Years 10 Years
--------------- -------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Agencies.........(2) $ 418 7.35% $ 795 6.40% $ 1,460 6.83% $ 824 8.70%
States and
Political
Subdivisions
Non-taxable.....(1) 1,121 6.72 2,235 7.89 2,068 8.72 $ 58 8.22
(2)
Collateralized
Mortgage
Obligations......(2) 54 6.24
------ ------ ------- -----
Total........... $1,539 6.89% $3,030 7.50% $ 3,528 7.94% $ 936 8.53%
====== ====== ======= =====
<CAPTION>
Available-for-Sale
1 Year 1 Year - 5 Years - After
or less 5 Years 10 Years 10 Years
---------------- ---------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Agencies.............(2) $ 510 5.78% $ 3,369 6.34% $ 726 6.36%
Corporate
Securities...........(2) 2,222 5.84 3,273 6.60
------ ------- -----
Total.............. $2,732 5.83% $ 6,642 6.47% $ 726 6.36%
====== ======= =====
</TABLE>
(1) Weighted average yield adjusted to a taxable equivalent basis using a
federal income tax rate of 34 percent.
(2) Mortgage Backed Securities, Collateralized Mortgage Obligations, and
Corporate Securities, as reflected in the above schedules, consider
anticipated pre-payments and calls.
(C) The Registrant held no investment securities of a single issuer,
except U.S. Government and Agency Securities, in an amount greater than
ten percent of shareholders' equity as of December 31, 1996.
-4-
<PAGE> 6
ITEM 1. BUSINESS (Continued)
III. LOAN PORTFOLIO
(A) A table of loans outstanding as of December 31, 1996 and 1995 is set forth
in Note 4 on page 19 of the 1996 Annual Report to Shareholders. Such
information is incorporated herein by reference.
The loan portfolio is systematically reviewed and the results reported to
the Board of Directors of the Registrant. The purpose of these reviews is to
assist in assuring proper loan documentation, to provide for the early
identification of potential problem loans and to help ensure the adequacy of
the allowance for loan losses.
(B) The following table sets forth the remaining maturity of total loans
outstanding (excluding real estate mortgages, installment and lease financing)
at December 31, 1996, according to scheduled repayments of principal (in
thousands) and considering the banks "rollover policy." (1)
1 Year 1 Year- After
or less 5 Years 5 Years Total
------- ------- ------- -------
Commercial and Agricultural.... $ 1,423 $ 1,450 $ 1,139 $ 4,012
Real estate-construction....... 441 441
------- ------- ------- -------
Total........................ $ 1,864 $ 1,450 $ 1,139 $ 4,453
======= ======= ======= =======
The following table sets forth commercial and agricultural and real-estate
construction loans due after one year which have predetermined interest rates
and/or adjustable interest rates at December 31, 1996. (in thousands)
Fixed Adjustable
Rate Rate Total
------ ---------- -----
Due after one but within five years. $ 435 $ 1,015 $ 1,450
Due after five years................ 1,139 -- 1,139
------ ------- -------
Total............................. $1,574 $ 1,015 $ 2,589
====== ======= =======
(1) The "rollover policy" is to generally write the terms of these loans
for a shorter time than the expected payments. The purpose of this is to
re-evaluate the term and credit of the respective borrower. We estimate
that this happens on approximately 80% of these borrowings and is
reflected as such in the schedule.
-5-
<PAGE> 7
ITEM 1 BUSINESS (Continued)
III. LOAN PORTFOLIO (Continued)
(C)(1) Nonaccrual, Past Due, Impaired and Restructured Loans
A table and discussion of nonaccrual, past due, impaired and
restructured loans for the years ended December 31, 1996 and 1995 is in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 9 under Provision and Allowance for
Loan Losses, Note 1 under "Loans" and "Allowance for Loan Losses" on
pages 16 and 17 and in Note 5 on page 20 in the 1996 Annual Report to
Shareholders. Such information is incorporated herein by reference.
Gross interest income that would have been recorded in 1996
if the loans had been current in accordance with their original terms
and outstanding throughout the period or since origination was $3,756.
No income was included in interest income on these in 1996.
2) There are no material loans that are current as to which management has
serious doubts as to the ability of the borrower to comply with the loan
repayment terms, or which are expected to need adjustments in their
repayment terms, or which are believed to require additional provisions
for loan losses.
(3) There were no foreign outstandings as of December 31, 1996 and 1995.
(4) There were no concentrations of loans exceeding 10% of total loans
which have not been already disclosed as a category at December 31, 1996.
(D)
As of December 31, 1996, there were no other interest- bearing
assets that would be required to be disclosed under Item III, Parts
(C)(1) or (C)(2) of the Loan Portfolio listing if such assets were loans.
-6-
<PAGE> 8
ITEM 1 BUSINESS
IV. SUMMARY OF LOAN LOSS EXPERIENCE
(A) The following table sets forth loan allowance balances and summarizes the
changes in the allowance for loan losses for each of the two years ended
December 31: (dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Balance, beginning of period..... $ 995 $ 792
Loans charged off
Commercial and Agricultural..... - 5
Real estate-construction........ - -
Real estate-mortgages........... - -
Lease financing................. - -
Installment and Others.......... 68 35
--------- ---------
Total.......................... 68 40
--------- ---------
Recoveries of loans charged off
Commercial and Agricultural..... 28 4
Real estate-construction........ - -
Real estate-mortgages........... - -
Lease financing................. - -
Installment and Others.......... 65 46
--------- ---------
Total.......................... 93 50
--------- ---------
Net Charge Offs (Recoveries)..... (25) (10)
Additions charged to operations - 193
--------- ---------
Balance at end of period......... $ 1,020 $ 995
========= =========
Average gross loans outstanding $ 49,507 $ 51,111
========= =========
Percent of net charge offs (re-
coveries) during the period to
average gross loans outstanding (0.05)% (0.02)%
===== =====
</TABLE>
Further discussion of the provision and allowance for loan losses as well
as non-performing and impaired loans is presented in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on page 9, Note
1 on pages 16 and 17 and Note 5 on page 20 in The 1996 Annual Report to
Shareholders, incorporated herein by reference.
-7-
<PAGE> 9
ITEM 1 BUSINESS
IV. SUMMARY OF LOAN LOSS EXPERIENCE (Continued)
(B) The following table presents an allocation of the allowance for loan losses
to the various loan categories at December 31: (dollars in thousands)
1996 1995
---------------------- --------------------
% of % of
Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
--------- ----------- --------- -----------
Commercial and Agricultural $ 55 7.75% $ 63 11.81%
Real estate-construction... - .85 - 3.39
Real estate-mortgages...... 3 84.18 5 72.96
Installment and Others..... 8 7.22 82 11.84
Unallocated................ 954 845
------- ------ ------- ------
Total..................... $ 1,020 100.00% $ 995 100.00%
======= ====== ======= ======
All the allowance allocations above were deemed by management to be
amounts reasonably necessary to provide for the possibility of future losses
being incurred in the various loan categories.
V. DEPOSITS
The following table sets forth average deposit balances and the weighted
average rate paid for each of the two years ended December 31: (dollars in
thousands)
1996 1995
--------------- --------------
Average Average
Non Interest-Bearing Balance Rate Balance Rate
Demand Deposits.................. $ 8,515 $ 8,473
Interest-bearing demand deposits. 10,328 2.13% 11,084 2.35%
Savings deposits................. 17,095 2.86 16,573 2.97
Time deposits under $100,000..... 21,378 5.73 22,542 5.66
Time deposits of $100,000 or more 6,686 5.68 6,210 5.88
--------- --------
Total.......................... $ 64,002 3.62% $ 64,882 3.69%
========= ========
The following table summarizes time deposits in amounts of $100,000 or
more by time remaining until maturity as of December 31, 1996.
(in thousands)
Three months or less.............. $ 6,300
Over three through six months..... 1,776
Over six months through one year..
Over one year..................... 1,142
--------
Total............................ $ 9,218
========
-8-
<PAGE> 10
ITEM 1 BUSINESS
VI RETURN ON EQUITY AND ASSETS
The following table presents the ratios indicated for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Net income to average total assets................... 1.49% 1.40%
Net income to average shareholders' equity........... 12.67 12.71
Cash dividend payout ratio........................... 29.84 29.46
Average shareholders' equity to average total assets. 11.78 11.01
</TABLE>
VII SHORT TERM BORROWINGS - Not applicable
ITEM 2 PROPERTIES
The Bank owns the land on which the Bank's main office is located; the
land measures 85' by 170' and bears the municipal address of 322 South
Jefferson Street, Mason, Michigan. The permanent building, also owned by Mason
State Bank has approximately 6,800 square feet, including banking facilities,
storage and personnel lounge areas. This brick structure was built in the mid
1800's and has gone through several remodelings the last one being in 1986 and
is in good general condition. Part of the property is occupied by a parking
area with spaces to accommodate 20 vehicles; part is occupied by two drive-in
banking stations.
The Bank also owns the land used as a Branch Office; the land measures
368' by 297' and bears the municipal address of 661 North Cedar Street, Mason,
Michigan. The permanent building, built in the 1960's, also owned by Mason
State Bank measures approximately 2,400 square feet, including banking
facilities, storage and personnel lounge areas. This building is also in good
condition. Part of the property is occupied by a parking area with spaces to
accommodate 24 vehicles; part is occupied by 4 drive-in banking stations.
The Registrant and its other wholly owned subsidiary, Monex Financial
Services Inc., operates its business at the same address as Mason State Banks'
main office. As of March 20, 1997, the Registrant owned no properties.
There are no liens or mortgages on the above mentioned properties.
ITEM 3 LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Registrant or
its subsidiaries is a party or to which any of its property is subject, except
for proceedings which arise in the ordinary course of business. In the opinion
of management, pending legal proceedings will not have a material effect on the
consolidated financial statements of the Registrant or its subsidiaries.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
-9-
<PAGE> 11
ADDITIONAL ITEM - EXECUTIVE OFFICERS
Executive officers of the Registrant are appointed annually by the Board
of Directors at the meeting of Directors following the Annual Meeting of
Shareholders. There are no family relationships among these officers and/or
Directors of the Registrant nor any arrangement or understanding between any
officer and any other person pursuant to which the officer was elected.
The following sets forth certain information with respect to the
Registrant's executive Officers and Directors as of December 31, 1996.
Position with First elected as an
Name(Age) Registrant officer of the registrant
- --------- ------------- -------------------------
Douglas W. Dancer (56) Chairman 1994
Gerald Ambrose (47) Vice Chairman 1994
Timothy P. Gaylord (42) President and 1995
C.E.O.
Terry Shultis (60) Senior Management
Advisor 1988
George A. Sullivan (64) Secretary 1988
Robert G. Kennedy (50) Treasurer 1988
Mr. Dancer is a Director of the registrant, Chairman of the Board of
Directors of Mason State Bank and is a Director of Monex Financial Services,
Inc.
Mr. Ambrose is a Director of the registrant, Vice Chairman of the Board of
Directors of Mason State Bank and is a Director of Monex Financial Services,
Inc.
Mr. Shultis is a Director of the registrant and Senior Management Advisor
of the registrant, Mason State Bank and Monex Financial Services, Inc.
Mr. Gaylord is a Director of the registrant, President and Chief Executive
Officer of Mason State Bank.
Mr. Sullivan is a Director of the registrant, Secretary of the Board of
Directors of Mason State Bank and a Director of Monex Financial Services, Inc.
Mr. Kennedy is the Controller-Cashier of Mason State Bank and an Officer
of Monex Financial Services, Inc.
-10-
<PAGE> 12
PART II
The information called for by the items within this part is included in
the Capital Directions, Inc. Annual Report to Shareholders for the year ended
December 31, 1996, and is incorporated herein by reference, as follows:
Pages in 1996
Annual Report
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters.............. 7
Item 6. Selected Financial Data...................... 6
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 11
Item 8. Financial Statements and Supplementary Data.. 12 - 25
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 Capital Directions, Inc. 1996 Proxy Statement, dated April 01, 1997, and is
incorporated herein by reference, as follows:
Pages in 1996
Proxy Statement
Item 10. Directors and Executive Officers of
the Registrant............................... 3 - 4
(In addition, reference is made to additional
item under Part I of this Form 10-K report on
page 10.)
Item 11. Executive Compensation....................... 4 - 6
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................ 2 - 3
Item 13. Certain Relationships
and Related Transactions..................... 6 - 7
The information appearing in the Corporation's Proxy
Statement and in Note 4 on page 20 of the Notes to Consolidated
Financial Statements of the 1996 Annual Report to Shareholders is
incorporated herein by reference in response to this item.
-11-
<PAGE> 13
PART IV
ITEM 14 EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of Capital Directions,
Inc. included in the 1996 Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated herein by reference in item 8:
Pages in 1996
Annual Report
Consolidated balance sheets -
December 31, 1996 and 1995......................... 12
Consolidated statements of income for the years
ended December 31, 1996, 1995, and 1994............ 13
Consolidated statements of cash flows for the
years ended December 31, 1996, 1995, and 1994...... 14
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1996,
1995 and 1994...................................... 15
Notes to consolidated financial statements.......... 16 - 25
Report of Independent Auditors...................... 26
2. Financial Statement Schedules
Not applicable
3. Exhibits
(3a) Articles of Incorporation and (3b) Bylaws (previously filed as
Exhibits included in Capital Directions, Inc.'s Registration
Statement Amendment No. 1 to Form S-4, No. 33-20417, Dated
March 17, 1988).
(10) Material Contracts
(a) Incentive Compensation Plans (previously filed as Exhibits
included in Capital Directions, Inc.'s 1988 10-K report dated
March 29, 1989 and the 1993 10-K report dated March 29, 1994).
(b) Directors Deferred Compensation Plan (previously filed as
Exhibits included in Capital Directions, Inc.'s 1988 10-K
report dated March 29, 1989). (c) Supplementary Executive
Retirement Plan (previously filed as Exhibits included in
Capital Directions, Inc.'s 1988 10-K report dated
March 29, 1989).
(13) Annual Report to Shareholders for the year ended December 31, 1996
(filed herewith).
(22) Subsidiaries of registrant (previously filed as Exhibits included in
Capital Directions, Inc.'s 1988 10-K report dated March 29, 1989).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year
covered by this report.
-12-
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on March 20, 1997.
CAPITAL DIRECTIONS, INC.
/s/ Timothy P. Gaylord Timothy P. Gaylord
- ------------------------------- (President and Chief Executive Officer)
/s/ Robert G. Kennedy Robert G. Kennedy
- ------------------------------- (Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed by the following persons in the capacities
indicated on March 20, 1997.
/s/ Doug Dancer Doug Dancer
- ------------------------------- Chairman of Board of Directors
- ------------------------------- Gerald Ambrose
Vice Chairman of Board of Directors
/s/ George Sullivan George Sullivan
- ------------------------------- Secretary of Board of Directors
/s/ Timothy P. Gaylord Timothy P. Gaylord
- ------------------------------- President and Chief Executive Officer
- ------------------------------- Terry Shultis
Senior Management Advisor
/s/ Marvin Oesterle Marvin Oesterle
- ------------------------------- Director
/s/ Paula Johnson Paula Johnson
- ------------------------------- Director
-13-
<PAGE> 15
INDEX TO EXHIBITS
The following exhibits are filed or incorporated by reference as part of this
report:
3(A) Articles of Incorporation of the Registrant as currently in effect
and any amendments thereto (Incorporated herein by reference to exhibit
3(A) of the Registrants' form S-4 Registration Statement dated
March 17, 1988 No. 33-20417).
3(B) Bylaws of the Registrant as currently in effect and any amendments
thereto (Incorporated herein by reference to exhibit 3(B) of the
Registrants' form S-4 Registration statement dated March 17, 1988
No. 33-20417).
10(A) Incentive Compensation Plans (Incorporated herein by reference to exhibit
10(A) to Registrants' Report on Form 10-K for the year ended
December 31, 1988 and December 31, 1993 [1988 and 1993 10-K Report]).
10(B) Directors Deferred Compensation Plan (Incorporated herein by
reference to exhibit 10(B) to Registrants' Report on Form 10-K for the
year ended December 31, 1988 [1988 10-K Report]).
10(C) Supplementary Executive Retirement Plan (Incorporated herein by
reference to exhibit 10(C) to Registrants' Report on Form 10-K for the
year ended December 31, 1988 [1988 10-K Report]).
13 Annual Report to Shareholders for the year ended December 31, 1996
(filed herewith). 15 - 46
22 List of Subsidiaries (Incorporated herein by reference to exhibit 22 to
Registrants' Report on Form 10 K for the year ended December 31, 1988
[1988 10-K Report]).
27 Financial Data Schedule for EDGAR filer
-14-
<PAGE> 1
EXHIBIT 13
CAPITAL DIRECTIONS, INC.
1996
ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
A message from the President & CEO...i
Financial highlights...1
Stock and shareholder information...1
Shareholder returns 1991-1996...2
To our shareholders...3-4
Management, officers, and directors...5
Selected financial data...6
Market for common stock and related security holder matters...7
Management's discussion and
analysis of financial condition and results of operations...7-11
Capital Directions, Inc. consolidated balance sheets...12
Capital Directions, Inc. consolidated statements of income...13
Capital Directions, Inc. consolidated statements of cash flows...14
Capital Directions, Inc. consolidated
statements of changes in shareholders' equity...15
Notes to consolidated financial statements
(December 31, 1996, 1995, and 1994)...16-25
Report of independent auditors...26
<PAGE> 3
[PHOTO]
Timothy Gaylord
President & CEO
A MESSAGE FROM THE PRESIDENT & CEO
It's my pleasure, on behalf of every member of the Capital Directions, Inc.
team, to present another exceptional year of accomplishments. Highlights of
1996 include record earnings, an 11.1% increase in quarterly dividends,
continued strong performance of the loan portfolio, the release of new products
and enhanced services. There is also a continued emphasis on improving sales
and delivery of quality products and services. Due to this strategic
combination of factors, the company remains competitive and continues to make
annual improvements in profitability.
Nineteen ninety-six marks the seventh consecutive year Capital Directions, Inc.
reports increased earnings. Net income grew 8.2% above 1995 levels due to
improved net interest income and reduced operating expenses. Stock value
continues to climb. Shares involved in the dividend reinvestment plan garnered
a 32.0% return on investment during 1996.
The overall quality of the loan portfolio is very strong with non-performing
loans decreasing 35.3% from 1995 levels. A net loan recovery was achieved for
the fourth consecutive year. This trend is a reflection of attention to
underwriting and continual monitoring of the loan portfolio.
An important long-term strategy is expense control. When used to our advantage,
technology is an important component to drive operating efficiencies. During
1996, the consolidation of loan processing clearly shows that combining
technology to improve the level of service also results in reduced expenses. At
Mason State Bank, this careful regard for controlling expenses has resulted in
an efficiency ratio of 56.7% which exceeds peer measurement of 63.0%.
The ability to purchase a full array of financial products and services means
our customers never need to go anywhere else. Due to our recent affiliation
with PrimeVest, enhanced, full-service brokerage will be available in 1997.
Mason State Bank also formed an association with Michigan banks that are
offering mortgage title insurance through a consortium-owned title insurance
company.
Customer comments and surveys indicate a parallel with the growing widespread
public demand for technologically advanced modes of banking. And we listened.
In 1996, the Bank upgraded technology to give customers the many advantages a
MasterMoney cheque card and automatic teller card provide. Account information
continues to be available 24 hours a day with our MONEY TALK automated teller
system. In addition, the Bank is positioned to make PC banking available to our
customers in late 1997.
Our industry and customers are constantly changing. Some companies look at
change as an obstacle. At Capital Directions, Inc. we see change as an
opportunity. The staff, management and directors are pleased that you've been a
part of our past success, and look forward to shared future rewards.
Sincerely,
/s/ Timothy Gaylord, President & CEO
Timothy Gaylord, President & CEO
I would like to personally thank Dr. Glenn Doran and
Dr. Thomas Hopp for their many years of dedicated
service to Capital Directions, Inc. and Mason State Bank.
CAPITAL DIRECTIONS, INC.
STOCK PERFORMANCE
Shareholders taking advantage of the dividend reinvestment program experienced
an overall annual compounded rate of return of 25.84% since December of 1991.
[BAR GRAPH]
<TABLE>
<S> <C> <C>
12/31/91 12/31/96
$10,000 $31,557
</TABLE>
i
<PAGE> 4
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Change
1996 1995 Amount Percent
----------- ------------ ---------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income ........................ $ 3,326,000 $ 3,299,000 $ 27,000 .82
Net income ................................. 1,136,000 1,050,000 86,000 8.19
Per share ................................. 3.82 3.53 .29 8.22
Cash dividend declared ..................... 1.14 1.04 .10 9.62
RATIOS
Return on average shareholders' equity...... 12.67% 12.71%
Return on average assets ................... 1.49 1.40
Average shareholders' equity as a
percentage of average assets ............... 11.78 11.01
BALANCE SHEE
Total assets ............................... $78,920,000 $77,835,000 $1,085,000 1.39
Total earning assets ....................... 74,228,000 71,789,000 2,439,000 3.40
Total loans -- net ......................... 50,772,000 48,689,000 2,083,000 4.28
Total deposits ............................. 66,509,000 66,208,000 301,000 .45
</TABLE>
THE 1-YEAR
ANNUALIZED
RETURN ON THE 5-YEAR
CAPITAL ANNUALIZED
DIRECTIONS, RETURN ON
INC. STOCK CAPITAL
WAS 32.01% DIRECTIONS,
INC. STOCK
WAS 25.84%
STOCK AND SHAREHOLDER INFORMATION
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street
46th Floor
New York, NY 10005
AUTOMATIC DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
Participating Capital Directions, Inc. shareholders take the opportunity to
reinvest the cash dividends paid on their shares to purchase additional shares
of Capital Directions, Inc. common stock. Participants may also purchase
additional shares through cash payment without paying fees or commissions.
DIRECT DEPOSIT
The Corporation continues to provide convenient
services to meet your needs. For quick transfer and availability, your cash
dividends may be deposited directly into your Mason State Bank checking,
savings, or money market account. To learn more about the Automatic Dividend
Reinvestment and Stock Purchase Plan, or to initiate direct deposit of your
cash dividends, please contact Kim Dockter, Executive Secretary,
(517) 676-0500.
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting for the year ended December 31, 1996 will be held at the
Eldorado Golf Course, 3750 West Howell Road, Mason, Michigan on Thursday,
April 24, 1997 at 6:30 p.m.
HOW TO ORDER FORM 10-K
The Corporation's 1996 Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission can be found on the Internet. It is also available,
without charge, to shareholders upon request. Send requests to Robert G.
Kennedy, Treasurer, Capital Directions, Inc., P.O. Box 130, Mason, Michigan
48854-0130 or call (517) 676-0500.
1
<PAGE> 5
Shareholder returns 1991-1996
[BAR GRAPH]
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
$ 678 $ 835 $ 869 $ 930 $1,050 $1,136 NET INCOME
(In thousands)
11.54% 13.10% 12.62% 12.48% 12.71% 12.67% RETURN ON EQUITY
(ROE)
.85% 1.10% 1.14% 1.24% 1.40% 1.49% RETURN ON ASSETS
(ROA)
$20.46 $22.27 $24.34 $25.72 $28.89 $31.59 BOOK VALUE
PER SHARE
(Retroactively
adjusted for
1994 stock split)
7.69% 8.47% 9.52% 10.05% 11.04% 11.91% SHAREHOLDERS'
EQUITY TO
TOTAL ASSETS
</TABLE>
2
<PAGE> 6
[PHOTO]
In 1996, Mason State Bank
implemented new retail
and sales strategies.
[PHOTO]
Mason State Bank is actively
involved in commercial
development in the Mason area.
TO OUR SHAREHOLDERS
Successful companies have a plan to guide them. The Mason State Bank strategic
plan serves as the road map which focuses all of our departments in a common
direction. Even with the constant change that's taking place in the financial
services industry, the mission remains the same. To remain competitive and
profitable. Individual plans are refined as conditions and needs change, but
everyone works continually from the same map. The result is a powerful
combination of individual performance.
OUR DECISIONS ARE DRIVEN BY CUSTOMERS' NEEDS
History shows Banks have been product-driven organizations, measuring success
by deposit balances, loans sold or number of accounts opened. When operating
under these guidelines, organizations rarely ask what customers want or develop
products to meet their needs. Mason State Bank is driven by customer
relationships, not by number of transactions. Every product, process and
procedure is continually examined to ensure everyone at Mason State Bank is
focused on building relationships that are beneficial for the customer and the
organization.
INNOVATIVE PRODUCTS AND IMPROVED SERVICES
Mason State Bank is in an environment where technology is accelerating the pace
of change and banks are competing with an increasing array of companies from
other industries. Surveys indicate our customers are looking for financial
products to be delivered in varied methods such as PC home banking, enhanced
ATM capabilities and debit cards. And convenience is the main consideration.
We're continuing to study, implement and promote products that will satisfy our
customer's needs.
In 1996, Mason State Bank joined with MagicLine and MasterCard to introduce the
MasterMoney Cheque Card and Mason Money ATM Card. Now you're able to present
the MasterMoney Cheque Card to pay for entertainment, meals and merchandise
wherever MasterCard is accepted. That's over 12 million locations worldwide.
Whether you're buying groceries, shopping for clothes, buying gasoline or
visiting a doctor, the MasterMoney Cheque Card allows convenient access to your
checking account without ever having to show ID or wait for check approval.
In keeping with a philosophy of providing innovative products and exceptional
services, negotiations were finalized in 1996 with one of the nation's largest
third-party providers of brokerage services. By entering into a partnership
with PrimeVest Financial Services, Inc., our customers have access to a
limitless array of mutual funds, stocks, bonds and annuities. The technology
and service offered by PrimeVest will provide our customers with more complete
financial coverage than ever before.
IMPROVED SALES AND CUSTOMER FOCUS
Mason State Bank's strategic plan is specifically dedicated to quality customer
service and the continual evolution of a quality culture within the
organization. This puts the customer at the center of everything we do.
In 1996, a main focus of the corporation was developing a permanent
results-oriented sales culture. Our newly titled Personal Bankers and all
management staff involved in direct customer contact, attended extensive sales
and service training. Each member of the group made a commitment to attend each
class, review sales fundamentals, learn new skills and determine ways to apply
this knowledge at the Bank.
The desired results were evident in sales levels that exceeded goal during the
1996 Rapid Response Home Equity Promotion and Certificate of Deposit Promotion.
The personalized contact techniques that were used truly surpassed customer's
service expectations and led to enhanced banking relationships.
3
<PAGE> 7
The signs are everywhere...
Mason State Bank helps [PHOTO]
people own their own home.
[PHOTO
TO OUR SHAREHOLDERS
THE MAP OF SUCCESS...
Quality of service performance measurements indicate that Mason State Bank is
evolving from a product-driven institution to a market-driven organization. And
the income statement shows how sales and quality customer service do impact the
bottom line. Designing new products and incentive pricing for lower-cost
delivery systems, increased product bundling for profitable relationship
building, development of convenient investment offerings, continuous employee
training and extensive sales culture development continues to contribute to the
success of the organization. This has enabled us to set impressive targets for
the future. We're pleased to have you along as we continue our course on the
"map" of success.
DEDICATED CUSTOMER SERVICE...
This annual report shows many of the important ways Mason State Bank focuses on
quality customer service. When you're discussing dedication to customers, and
service that truly exceeds all expectations, one employee definitely comes to
mind. On June 12, 1996, Thelma Hines celebrated her 50th anniversary of
employment with Mason State Bank. Thelma started her career as a teller in 1946
upon graduation from Mason High School. She's been providing quality customer
service ever since!
When asked, "What is the most meaningful part of your job?", she answered
without hesitation, "I enjoy the people, and that's one of the biggest reasons
why I'm still here!" When Thelma started at Mason State Bank there were seven
employees, now there's over 40. It's very interesting to hear Thelma talk about
customers from the past, employees who have come and gone, and how the Bank is
moving toward the future.
It's amazing that no matter where you go, there's always someone who knows
Thelma. We'd like to applaud Thelma for the many years of truly dedicated
service to the most important part of our business--our customers.
BOARD OF DIRECTORS
We are pleased to note the addition of Paula Johnson to the Capital Directions,
Inc. Board of Directors during 1996. She was elected to the Board in July.
Paula is co-owner of Vision Real Estate located in Mason, Michigan. She is a
member of the Million Dollar Club, a prestigious title in the real estate
profession. Among her numerous community commitments, she has shared her
expertise with a diverse group of organizations including: Mason Mainstreet,
the Mason Area Chamber of Commerce, East Lansing Planning Commission and the
Central East Lansing Business Association.
Johnson has an impressive professional career including: Staff Director, Policy
and Programs Staff for the Michigan State Senate; Director of Downtown
Development and Marketing for the Lansing Regional Chamber of Commerce; 11
years of retail store management; and 10 years in real estate. Johnson's vast
background and keen insight will be a valuable asset to the Board that guides
and supports the strategic course set by the management of the organization.
4
<PAGE> 8
[PHOTO]
In December of 1996, two
promotions were
announced: Liz Luttrell was
named Assistant Vice
President, Human
Resources and Security;
Thomas Peterson was
named Senior Vice
President, Retail Banking.
[PHOTO]
MANAGEMENT, OFFICERS, AND DIRECTORS
CAPITAL DIRECTIONS, INC. BOARD OF DIRECTORS
DOUGLAS W. DANCER
Chairman, Capital Directions, Inc.
President, Dancer's Inc. Department Stores
GERALD AMBROSE
Vice Chairman, Capital Directions, Inc.
County Controller, County of Ingham
TIMOTHY P. GAYLORD
President & Chief Executive Officer,
Capital Directions, Inc.
TERRY SHULTIS
Senior Management Advisor,
Capital Directions, Inc.
GEORGE A. SULLIVAN
Secretary, Capital Directions, Inc., Attorney
MARVIN B. OESTERLE
Partner, Golden Acres Farms and
Oesterle Brothers Seed Corn
PAULA JOHNSON
Co-owner, Vision Real Estate Company
CAPITAL DIRECTIONS, INC. OFFICERS
DOUGLAS W. DANCER
Chairman
GERALD AMBROSE
Vice Chairman
TIMOTHY P. GAYLORD
President & Chief Executive Officer
TERRY SHULTIS
Senior Management Advisor
GEORGE A. SULLIVAN
Secretary
ROBERT G. KENNEDY
Treasurer
MASON STATE BANK MANAGEMENT
TIMOTHY P. GAYLORD
President & Chief Executive Officer
THOMAS L. PETERSON
Senior Vice President, Retail Banking
KATHLEEN BAKER
Vice President, Mortgage Loans
JEFF KUMFER
Vice President, Commercial Loans
JOANNE BOWERMAN
Assistant Vice President, Operations
ELIZABETH J. LUTTRELL
Assistant Vice President, Human Resources & Security
ROBERT G. KENNEDY
Controller/Cashier
THELMA HINES
Customer Services Officer
VIRGINIA TAYLOR
Auditor & Compliance Officer
MELANIE J. GREENE
Director of Marketing
5
<PAGE> 9
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest and dividend income .. $ 5,769 $ 5,740 $ 5,262 $ 5,535 $ 6,270
Interest expense .............. 2,443 2,441 2,135 2,462 3,030
-------- -------- -------- -------- --------
Net interest income ........... 3,326 3,299 3,127 3,073 3,240
Provision for loan losses ..... 193 25 63 234
Non interest income ........... 723 1,046 735 848 745
Non interest expense .......... 2,479 2,714 2,580 2,703 2,616
-------- -------- -------- -------- --------
Income before income
tax expense ................. 1,570 1,438 1,257 1,155 1,135
Income tax expense ............ 434 388 327 286 300
-------- -------- -------- -------- --------
Net income .................... $ 1,136 $ 1,050 $ 930 $ 869 $ 835
======== ======== ======== ======== ========
PER SHARE (1)
Average shares outstanding .... 297,428 297,428 297,428 297,428 297,428
Net income .................... 3.82 3.53 3.13 2.92 2.81
Dividends declared ............ 1.14 1.04 1.00 1.00 1.00
Book value .................... 31.59 28.89 25.72 24.34 22.27
RATIOS BASED ON NET INCOME
Net income to average
shareholders' equity ........ 12.67% 12.71% 12.48% 12.62% 13.10%
Net income to average
assets ...................... 1.49 1.40 1.24 1.14 1.10
BALANCE SHEET
Assets ........................ $ 78,920 $ 77,835 $ 76,112 $ 76,027 $ 78,188
Net loans ..................... 50,772 48,689 50,550 47,245 47,126
Federal funds sold/money
market investments .......... 2,800 6,050 800 2,250 3,550
Securities .................... 19,497 16,055 17,713 20,665 22,440
Deposits ...................... 66,509 66,208 66,880 67,698 70,557
Long-term Federal Home
Loan Bank borrowings ........ 1,913 1,880 430 ---- ----
Shareholders' equity .......... 9,397 8,594 7,648 7,239 6,624
</TABLE>
- --------------------------
(1) A 2-for-1 stock split was declared on the common stock December 15, 1994,
and paid February 1, 1995. Average shares outstanding, earnings, dividends,
book value, and price per share figures have been restated to give retroactive
effect to this split.
6
<PAGE> 10
MARKET FOR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Capital Directions, Inc. stock is not listed on any exchange. Its shares are
traded through the local brokers of Everen Securities, Baird & Co., and Roney &
Co. Management has not verified the accuracy of their bid reporting, nor will
the price be reflective if the stock was listed on an active exchange. At
December 31, 1996, there were approximately 411 holders of the Company's common
stock. Dividends are declared on a quarterly basis with a total of $339,068
declared in 1996 and $309,325 in 1995.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ---------
<S> <C> <C> <C> <C>
1996
High ......................... $ 37.50 $40.00 $41.50 $43.50
Low .......................... 34.50 38.00 39.00 41.75
Dividend per share declared .. .27 .27 .30 .30
1995
High ......................... $ 27.50 $27.25 $27.00 $34.00
Low .......................... 25.75 26.00 26.00 29.00
Dividend per share declared .. .25 .25 .27 .27
------------------------------ ------------ ------- ------- ---------
</TABLE>
A 2-for-1 stock split was declared on the common stock December 15, 1994, to be
paid February 1, 1995.
Earnings, dividends, book value, and price per share figures have been restated
to give retroactive effect to this split.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides additional information
concerning the consolidated financial condition and results of operations for
Capital Directions, Inc. and its wholly-owned subsidiaries. It should be read
in conjunction with the consolidated financial statements and supplemental data
contained elsewhere in this report.
Capital Directions, Inc., a one-bank holding company, commenced operations on
July 22, 1988. This was facilitated by the acquisition of 100% of the
outstanding shares of Mason State Bank in an exchange of common stock.
The Corporation is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or operations except as discussed herein.
Also, the Corporation is not aware of any current recommendations by regulatory
authorities which will have such effect if implemented.
PERFORMANCE SUMMARY
In 1996, Capital Directions, Inc. and its subsidiaries reported record net
income of $1,136,000. This is an increase of 8.19% over the previous year.
Earnings per share were $3.82 in 1996 compared to $3.53 in 1995. In 1996,
return on average assets increased to 1.49% from 1.40% in 1995. Return on
average shareholders' equity was 12.67% down slightly from 12.71% in 1995. As
of December 31, 1996 the leveraged capital ratio, which excludes the net
unrealized gain or loss on securities available for sale, was 12.10%, up from
11.30% a year prior and well in excess of the minimum required by regulatory
authorities.
The following table provides a summary of the factors
7
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
impacting net income in 1996 compared to the same components in 1995:
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
1995 Net income ................... $1,050
Increase (decrease) in net income
Interest income ................. 29
Interest expense ................ (2)
Provision for loan losses ....... 193
Non interest income ............. (323)
Non interest expense ............ 235
Income tax expense .............. (46)
------
1996 Net income ................... $1,136
------
</TABLE>
The combined operations of our non-bank subsidiary, Monex Financial Services,
Inc., accounted for a $13,000 loss to the 1996 Corporation earnings. Monex
Investment Company, the main active subsidiary, had an operating loss of
$13,000. Monex Investment Corporation ceased operations in December of 1996.
Mutual funds, stocks, bonds and annuities will now be available through
PrimeVest Financial Services, Inc. By entering into an agreement with one of
the nation's largest third-party providers of brokerage products, the
Corporation has provided uninterrupted and enhanced customer service. The
operation of our holding Corporation did not materially affect the consolidated
financial results for 1996, 1995 or 1994.
NET INTEREST INCOME
The largest segment of the Corporation's operating income is net interest
income. Net interest income is determined by adding interest and certain fees
from earning assets, then subtracting the interest paid on deposits and other
funding sources. This may be impacted by changes in volume and mix of earning
assets, funding sources, deposits, interest rates, loan demand, and other
market factors.
Net interest income for 1996, on a fully taxable equivalent basis, was
$3,460,000, an increase of $29,000 over 1995. Average balances and rates on
major categories of interest earning assets and interest bearing liabilities
appear in Table 1. The effect on net interest income from changes in average
balances ("volume") and yields, and rates ("rate") are quantified in Table 2.
As shown, net interest income improved in 1996 due to volume increases in
earning assets.
<TABLE>
<CAPTION>
TABLE 1 (DOLLARS IN THOUSANDS) 1996 1995 1994
--------------------------- ------------------------- --------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE* RATE* BALANCE EXPENSE* RATE* BALANCE EXPENSE* RATE*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans .......................................... $49,507 $4,455 9.00% $51,111 $4,683 9.16% $48,724 $4,207 8.63%
Other earning assets ........................... 21,521 1,448 6.73 18,352 1,189 6.48 20,103 1,223 6.08
------- ------ ------- ------ ------- ------
Total earning assets ........................... 71,028 5,903 8.31 69,463 5,872 8.45 68,827 5,430 7.89
Other assets ................................... 5,084 5,537 6,084
------- ------- -------
Total .......................................... $76,112 $75,000 $74,911
======= ======= =======
Interest bearing liabilities ................... $57,578 $ 2,443 4.24% $57,226 $2,441 4.27% $58,074 $2,135 3.68%
Non interest bearing liabilities and equity .... 18,534 ------- 17,774 ------ 16,837 ------
------- ------- -------
Total .......................................... $76,112 $75,000 $74,911
======= ======= =======
Net interest income ............................ $ 3,460 $3,431 $3,295
======= ====== ======
Net interest margin on earning assets .......... 4.87% 4.94% 4.79%
</TABLE>
- --------------------
8
<PAGE> 12
* Fully taxable equivalent basis.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
TABLE 2 (IN THOUSANDS) 1996 COMPARED TO 1995 1995 COMPARED TO 1994
---------------------------- --------------------------------
CHANGE DUE TO: VOLUME RATE TOTAL VOLUME RATE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Earning assets ...................... $ 54 $ (23) $ 31 $ 92 $ 350 $ 442
Interest bearing liabilities ........ 37 (35) 2 (25) 331 306
---- ----- ---- ----- ---- -----
Total net interest income ........... $ 17 $ 12 $ 29 $ 117 $ 19 $ 136
==== ===== ==== ===== ===== =====
</TABLE>
- ---------------
* Fully taxable equivalent basis.
Yields on assets and rates on funding were lower in 1996 than 1995, reflecting
a slightly lower interest rate environment. Average yields on earning assets
decreased to 8.31% in 1996 from 8.45% in 1995. Interest bearing liability rates
decreased from 4.27% in 1995 to 4.24% in 1996. A greater increase in earning
assets than interest paying liabilities combined with slight declines in
interest rates resulted in a higher net interest income but a slightly lower
interest margin rate of 4.87%, a seven basis point decline over 1995.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Provision for losses on loans is charged to operations based on management's
evaluation of potential losses in the portfolio. Provision is based upon
regular review of the level and trend of non-performing assets; loans 90 days
past due, but not considered non-performing; charge offs and recoveries; the
mix of loans in the portfolio; and anticipated economic conditions. No
provision for loan losses was recorded in 1996.
A net recovery of $25,000 was achieved in 1996. This is the fourth consecutive
year of net recovery. Excellent loan portfolio performance indicates a
continued strong mid-Michigan business climate and reflects attention to
underwriting standards as well as consistent monitoring of the portfolio. Mason
State Bank management rates the overall quality of the loan portfolio as good
and the 1.97% or $1,020,000 allowance to total loans very strong at year-end
1996.
Non-performing loans are defined as all loans which are accounted for as
non-accrual; loans 90 days or more past due and still accruing interest; or
loans which have been renegotiated due to the borrowers' inability to comply
with the original terms. As of December 31, 1996, non-performing loans totaled
$172,000 or .33% of total loans. This represents a 35.34% decrease in
classified loans from 1995 levels.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 1995
-------- --------
<S> <C> <C>
Non-accrual ....... $ 48,000 $ 17,000
90 days or more
past due .......... 70,000 191,000
Renegotiated ...... 54,000 58,000
-------- --------
Total ............. $172,000 $266,000
======== ========
</TABLE>
The renegotiated loans are all in compliance with the modified terms for both
periods.
A loan is considered impaired when full collection of principal and interest is
not expected. At December 31, 1996 and 1995 there were no impaired loans in the
portfolio.
NON INTEREST INCOME
Non interest income (excluding the gain on sale of land in 1995) decreased
15.24%. The decrease is a result of the restructuring of the investment center
program. An expanded investment product line and more generous commission
sharing is expected to increase commission income in 1997.
NON INTEREST EXPENSE
Non interest expense decreased 8.66% during 1996. Excluding expenses related to
Monex, operating expenses decreased 6.17%. This $142,000 improvement is a
result of the lower Federal deposit insurance premium assessment and continued
efforts to control overhead while maintaining quality service levels. The
Bank's deposit insurance is currently assessed at the lowest rate, reflecting a
high level of safety and soundness.
INCOME TAX EXPENSE
The 1996 provision for income tax was $434,000, up from $388,000 in 1995. This
figure reflects a higher taxable income in 1996.
9
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management is to assure adequate
liquidity and net interest income by maintaining appropriate maturities and
balances between interest sensitive earning assets and interest bearing
liabilities. Liquidity management insures sufficient funds are maintained to
meet the cash withdrawal requirements of depositors and the credit demands of
borrowers.
Sources of liquidity include: federal funds sold, investment security
maturities, and pay downs. The Bank maintained an average balance of $2,154,000
in Federal Funds sold in 1996. The Bank is a member of the Federal Home Loan
Bank system for several reasons: access to an alternate funding source, lower
cost for credit services, and an alternate tool to manage interest rate risk.
In January of 1996, November of 1995, and February of 1994 the Bank used this
source of funding (see Note 10) to directly offset loans of like terms and
conditions.
Other sources of liquidity include: internally generated cash flow, repayments
and maturities of loans, borrowing, and growth in core deposits.
At December 31, 1996 the securities available for sale were valued at
$10,100,000. It is not anticipated that management will use these funds due to
the optional sources that may be available in 1997.
Interest rate sensitivity management seeks to maximize net interest margins
through periods of changing
<TABLE>
GAP MEASUREMENT 0-30 31-90 SECOND THIRD FOURTH ANNUAL 1-3 3-5 OVER 5
(DOLLARS IN THOUSANDS) DAYS DAYS QUARTER QUARTER QUARTER TOTAL YEARS YEARS YEARS TOTAL
----- ---- ------- ------- ------- ----- ----- ----- ------- -----
<S> <C>
ASSETS
Loans ....................... $ 11,958 $ 2,771 $ 5,318 $ 4,660 $ 5,514 $ 30,221 $ 7,023 $ 5,411 $ 15,537 $ 58,192
Loan repayment offset ....... -- -- -- -- -- -- -- -- -- (6,400)
Allowance for loan losses ... -- -- -- -- -- -- -- -- -- (1,020)
Interest bearing deposits ... 139 -- -- -- -- 139 -- -- -- 139
Federal funds sold .......... 2,800 -- -- -- -- 2,800 -- -- -- 2,800
Investments(1) .............. 1,582 2,288 1,376 200 2,622 8,068 6,402 1,548 4,279 20,297
Mortgage-backed repayments .. -- -- -- -- -- -- -- -- -- (800)
Other non-earning assets .... -- -- -- -- -- -- -- -- -- 5,712
-------- ------ ------- ------- ------- -------- ------- ------- -------- --------
Total ....................... $ 16,479 $ 5,059 $ 6,694 $ 4,860 $ 8,136 $ 41,228 $13,425 $ 6,959 $ 19,816 $ 78,920
======== ======= ======= ======= ======= ======== ======= ======= ======== ========
LIABILITIES
Non interest deposits ....... $ 526 $ 1,051 $ 1,577 $ 1,577 $ 1,577 $ 6,308 $ 4,048 $ -- $ -- $ 10,356
Interest bearing deposits ... 8,251 6,782 11,363 7,307 6,820 40,523 12,438 3,027 165 56,153
Long-term FHLB borrowing .... -- 86 -- -- 157 243 442 397 831 1,913
Other liabilities ........... -- -- -- -- -- -- -- -- -- 1,101
Capital ..................... -- -- -- -- -- -- -- -- 9,397 9,397
-------- ------ ------- ------- ------- -------- ------- ------- -------- --------
Total ....................... $ 8,777 $ 7,919 $12,940 $ 8,884 $ 8,554 $ 47,074 $16,928 $ 3,424 $ 10,393 $ 78,920
======== ======= ======= ======= ======= ======== ======= ======= ======== ========
GAP ......................... $ 7,702 $(2,860) $(6,246) $(4,024) $ (418) $ (5,846) $(3,503) $ 3,535 $ 9,423 $ --
Cumulative GAP .............. $ 7,702 $ 4,842 $(1,404) $(5,428) $(5,846) (5,846) $(9,349) $(5,814) $ 3,609 --
GAP ratio ................... 188% 64% 52% 55% 95% 88% 79% 203% 191% --
</TABLE>
- ------------------
(1) Maturities reflect probable prepayments and calls.
10
<PAGE> 14
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
interest rates. The Bank develops strategies to assure that desired levels of
interest sensitive assets and interest bearing liabilities mature or reprice
within selected time frames. Strategies include the use of variable rate loan
products as well as managing deposit accounts and maturities in the investment
portfolio. The chart on the previous page, using recommended regulatory
standards, reflects "the rate sensitive position" or the difference between
loans and investments, and liabilities that mature or reprice within the next
year and beyond. The financial industry has generally referred to this
difference as the "GAP" and its handling as "GAP Management." At year-end 1996,
the percentage of rate sensitive assets to rate sensitive liabilities within the
one-year time horizon was 88%.
The chart shows Capital Directions, Inc.'s GAP position as of December 31,
1996. The Corporation has a liability sensitive position within one year of
approximately $5.8 million, which indicates higher net interest income may be
earned if rates lower during the period. Due to the limitations of GAP
analysis, modeling is also used to enhance measurement and control.
CAPITAL RESOURCES
The adequacy of the Corporation's capital is reviewed regularly to ensure that
sufficient capital is available to meet current and future funding needs and
comply with regulatory requirements.
Shareholders' equity increased $797,000 or 9.30% to $9,365,000 at year end
1996, which represented 11.87% of total assets. This 1996 figure does not
include the $32,000, net of tax in net unrealized gains on available for sale
securities. At December 31, 1995, the similar ratio of shareholders' equity to
total assets was 11.01%. The Corporation has a strong capital position that
will meet our needs in 1997.
Regulators established "risk-based" capital guidelines which became effective
December 31, 1990. Under the guidelines, minimum capital levels, which may
include all or a portion of the allowance for loan losses, are based on the
perceived risk in asset categories and certain off-balance sheet items, such as
loan commitments and standby letters of credit. On December 31, 1996, the Bank
had a "risk-based" capital to asset ratio of 19.50%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
- ---------------------------------------------------
CAPITAL DECEMBER 31, 1996
(DOLLARS IN THOUSANDS) RISK-BASED LEVERAGE
- ---------------------------------------------------
<S> <C> <C>
Actual amount ............. $9,776 $9,150
Actual percent ............ 19.50% 12.10%
Required amount ........... $4,008 $3,028
Required percent .......... 8.00% 4.00%
EXCESS AMOUNT ............. $5,768 $6,122
</TABLE>
Federal and State banking laws and regulations place certain restrictions on
the amount of dividends and loans that a bank could pay its parent Corporation.
Of the $9,484,000 in risk-based capital, $5,175,000 is available for dividends
to the parent Corporation in 1997 (before considering 1997 net income and any
changes in risk-based assets). The remaining $4,309,000 is restricted based on
the minimum risk-based capital requirements and dividend regulations now in
effect.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of the Corporation are monetary in
nature and therefore the Corporation differs greatly from most commercial and
industrial companies that have significant investments in fixed assets and
inventories. However, inflation does have an important impact on the growth of
total assets in the banking industry and the resulting need to increase equity
capital at higher than normal rates in order to maintain an appropriate equity
to assets ratio. Inflation significantly affects other expenses, which tend to
rise during periods of general inflation.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. Management seeks
to maintain a balanced position between interest sensitive assets and
liabilities and actively manages the amount of securities available for sale in
order to protect against the effects of wide interest rate fluctuations on net
income and shareholders' equity.
11
<PAGE> 15
CAPITAL DIRECTIONS, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 1996 1995
------- -------
<S> <C> <C>
ASSETS
Cash and non interest bearing deposits ....................................................................... $ 2,538 $ 3,725
Interest bearing deposits .................................................................................... 139 --
Federal funds sold ........................................................................................... 2,800 6,050
------- -------
Total cash and cash equivalents .......................................................................... 5,477 9,775
Securities available for sale ................................................................................ 10,100 7,656
Securities held to maturity (fair value of $9,230 in 1996 and $8,261 in 1995) ................................ 9,033 8,035
Federal Home Loan Bank (FHLB) stock .......................................................................... 364 364
Total loans .................................................................................................. 51,792 49,684
Less allowance for loan losses ............................................................................... (1,020) (995)
------- -------
Net loans ................................................................................................ 50,772 48,689
Premises and equipment, net .................................................................................. 567 649
Accrued interest receivable .................................................................................. 502 493
Other assets ................................................................................................. 2,105 2,174
------- -------
TOTAL ASSETS ............................................................................................ $78,920 $77,835
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing ..................................................................................... $10,356 $ 8,853
Interest bearing ......................................................................................... 56,153 57,355
------- -------
Total deposits ....................................................................................... 66,509 66,208
Accrued interest payable ................................................................................... 195 207
Other liabilities .......................................................................................... 906 946
Long-term FHLB borrowings .................................................................................. 1,913 1,880
------- -------
Total liabilities ........................................................................................ 69,523 69,241
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares authorized in 1996 and 1995, 297,428
shares outstanding in 1996 and 1995 ...................................................................... 1,487 1,487
Additional paid-in capital ................................................................................. 2,559 2,559
Retained earnings .......................................................................................... 5,319 4,522
Net unrealized gain/(loss) on securities available for sale, net of tax of $17 in 1996 and $13 in 1995 ..... 32 26
------- -------
Total shareholders' equity ................................................................................. 9,397 8,594
------- -------
Total liabilities and shareholders' equity ............................................................... $78,920 $77,835
======= =======
</TABLE>
- -----------
See accompanying notes to consolidated financial statements.
12
<PAGE> 16
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees ................................................................. $ 4,455 $ 4,683 $ 4,207
Federal funds sold .................................................................... 115 99 53
Securities: Taxable -- available for sale ............................................ 621 342 143
Taxable -- held to maturity .............................................. 269 330 514
Tax exempt -- held to maturity ........................................... 260 256 326
Dividends on FHLB stock ............................................................... 29 30 19
Other interest income ................................................................. 20 -- --
------- ------- -------
TOTAL INTEREST AND DIVIDEND INCOME ................................................ 5,769 5,740 5,262
INTEREST EXPENSE
Deposits .............................................................................. 2,314 2,393 2,110
Short-term borrowings ................................................................. 1 15 3
Long-term FHLB borrowings ............................................................. 128 33 22
------- ------- -------
TOTAL INTEREST EXPENSE ............................................................ 2,443 2,441 2,135
------- ------- -------
NET INTEREST INCOME ..................................................................... 3,326 3,299 3,127
Provision for loan losses ............................................................... -- 193 25
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ..................................... 3,326 3,106 3,102
NON INTEREST INCOME
Service charges on deposits ........................................................... 271 274 302
Merchant charge card fees ............................................................. 25 24 12
Net gain on sales of securities ....................................................... 6 -- --
Net gain on sales of loans ............................................................ 37 5 68
Gain on sale of land .................................................................. -- 193 --
Investment commission fees ............................................................ 197 364 176
Other income .......................................................................... 187 186 177
------- ------- -------
TOTAL NON INTEREST INCOME ......................................................... 723 1,046 735
NON INTEREST EXPENSE
Salaries and wages .................................................................... 1,175 1,276 1,092
Pension and other employee benefits ................................................... 269 302 285
Net occupancy expense of premises ..................................................... 155 148 146
Equipment rentals, depreciation, and maintenance ...................................... 208 258 238
Federal deposit insurance premium assessment .......................................... 2 76 149
Other operating expenses .............................................................. 670 654 670
------- ------- -------
TOTAL NON INTEREST EXPENSE ........................................................ 2,479 2,714 2,580
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE ........................................................ 1,570 1,438 1,257
INCOME TAX EXPENSE ...................................................................... 434 388 327
------- ------- -------
NET INCOME .............................................................................. $ 1,136 $ 1,050 $ 930
======= ======= =======
EARNINGS PER COMMON SHARE ............................................................... $ 3.82 $ 3.53 $ 3.13
======= ======= =======
</TABLE>
- ---------
See accompanying notes to consolidated financial statements.
13
<PAGE> 17
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME ...................................................................................... $ 1,136 $ 1,050 $ 930
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Depreciation ................................................................................. 114 121 126
Provision for loan losses .................................................................... -- 193 25
Net amortization/accretion on securities ..................................................... 83 130 127
Loans originated for sale .................................................................... (288) (2,019) (2,599)
Proceeds from loans originated for sale ...................................................... 290 2,024 2,620
Net gain on sales of securities .............................................................. (6) -- --
Net gain on sales of loans originated for sale ............................................... (2) (5) (21)
Net gain on sales of non-residential loans ................................................... (35) -- (47)
Gain on sale of land ......................................................................... -- (193) --
CHANGES IN ASSETS AND LIABILITIES
Accrued interest receivable ................................................................ (9) 5 (5)
Accrued interest payable ................................................................... (12) 37 --
Other assets ............................................................................... 65 248 (428)
Other liabilities .......................................................................... (49) (44) 98
-------- -------- -------
NET CASH FROM OPERATING ACTIVITIES 1,287 1,547 826
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale: Purchases ..................................................... (4,328) (526) --
Maturities, calls, and principal payments ..................... 2,382 743 241
Securities held to maturity: Purchases ..................................................... (4,236) (1,549) (3,055)
Maturities, calls, and principal payments ..................... 2,535 3,227 5,333
Cash management funds, net sales (purchases) ................................................. 138 (55) (32)
Proceeds from sales of non-residential loans ................................................. 1,099 -- 1,189
Net change in loans .......................................................................... (3,147) 1,668 (4,474)
Proceeds from sale of land ................................................................... -- 247 --
Premises and equipment expenditures .......................................................... (32) (21) (34)
-------- -------- -------
NET CASH FROM INVESTING ACTIVITIES (5,589) 3,734 (832)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term FHLB borrowings ...................................................... 262 1,500 430
Repayment of long-term FLHB borrowings ....................................................... (229) (50) --
Net change in deposits ....................................................................... 301 (672) (818)
Dividends paid ............................................................................... (330) (304) (298)
-------- -------- -------
NET CASH FROM FINANCING ACTIVITIES 4 474 (686)
-------- -------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................................... (4,298) 5,755 (692)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................................... 9,775 4,020 4,712
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................................................... $ 5,477 $ 9,775 $ 4,020
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for: Interest ...................................................... $ 2,455 $ 2,404 $ 2,135
Income taxes -- federal ...................................................................... $ 529 $ 373 $ 323
</TABLE>
- --------------
During 1995, $4,168 in securities held to maturity were transferred to
securities available for sale. See accompanying notes to consolidated financial
statements.
14
<PAGE> 18
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NET UNREALIZED
DECEMBER 31, 1996, GAIN/(LOSS)
1995 AND 1994 ON SECURITIES
ADDITIONAL AVAILABLE TOTAL
(IN THOUSANDS, EXCEPT COMMON PAID IN RETAINED FOR SALE SHAREHOLDERS'
PER SHARE DATA) STOCK CAPITAL EARNINGS NET OF TAX EQUITY
------ ---------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES -- JANUARY 1, 1994 ..................... $ 744 $ 2,559 $ 3,893 $ 43 $ 7,239
Net income for the year ......................... -- -- 930 -- 930
Cash dividends ($1 per share) ................... -- -- (298) -- (298)
Two-for-one stock split ......................... 743 -- (743) -- --
Net change in unrealized gain/
(loss) on securities available
for sale, net of tax of ($115) ................ -- -- -- (223) (233)
------- ------- ------- ----- -------
BALANCES -- DECEMBER 31, 1994 ................... 1,487 2,559 3,782 (180) 7,648
Net income for the year ......................... -- -- 1,050 -- 1,050
Cash dividends ($1.04 per share) ................ -- -- (310) -- (310)
Net change in unrealized gain/
(loss) on securities available
for sale, net of tax of ($106) ................ -- -- -- 206 206
------- ------- ------- ----- -------
BALANCES -- DECEMBER 31, 1995 ................... 1,487 2,559 4,522 26 8,594
Net income for the year ......................... -- -- 1,136 -- 1,136
Cash dividends ($1.14 per share) ................ -- -- (339) -- (339)
Net change in unrealized gain/
(loss) on securities available
for sale, net of tax of $4 .................... -- -- -- 6 6
------- ------- ------- ----- -------
BALANCES -- DECEMBER 31, 1996 ................... $ 1,487 $ 2,559 $ 5,319 $ 32 $ 9,397
======= ======= ======= ===== =======
</TABLE>
- -------------
See accompanying notes to consolidated financial statements.
15
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING: Capital Directions, Inc. (the "Company") is a holding
company whose wholly-owned subsidiaries include Mason State Bank (the "Bank")
and Monex Financial Services, Inc. ("Monex"). Lakeside Insurance Agency is a
wholly-owned subsidiary of the Bank. The accounting policies of the Company and
its subsidiaries conform with generally accepted accounting principles and
prevailing practices within the banking and securities industry. The accrual
basis of accounting is followed for all major items of income and expense in
the preparation of the consolidated financial statements. All material
intercompany balances and transactions are eliminated in consolidation.
NATURE OF OPERATIONS: The Company provides a broad range of banking and
financial services. The Bank operates predominantly in Central Michigan as a
commercial bank. The Bank's primary services include accepting retail deposits
and making residential, consumer and commercial loans.
CONCENTRATION OF CREDIT RISK: The Company grants loans to and accepts deposits
from customers located primarily in its delineated community. The Company also
invests in securities issued by local governmental units.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided. Actual results could differ from those estimates. The allowance for
loan losses and fair values of securities and other financial instruments are
particularly susceptible to change in the near term.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might 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 classified as available for sale are reported at their fair
value and the unrealized holding gain or loss is reported, net of related
income tax effects, as a separate component of shareholders' equity, until
realized.
In November 1995, the Financial Accounting Standards Board issued a special
report, A Guide to Implementation of SFAS No. 115 on Accounting for Certain
Investments in Debt and Equity Securities ("Guide"). As permitted by the Guide,
on December 31, 1995, the Company made a one-time reassessment and transferred
securities from the held to maturity portfolio to the available for sale
portfolio. At the date of transfer, these securities had an amortized cost of
$4,168,000 and increased the unrealized gain on securities available for sale
by $10,000 and shareholders' equity by $7,000, net of tax of $3,000.
Gains and losses resulting from the sale of securities are computed by the
specific identification method. Premium amortization is deducted from, and
discount accretion is added to, interest income from securities using the
level-yield method.
The Company also invests in cash management funds which are comprised of U.S.
Government securities. These funds are accounted for at fair value.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or
market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
When full loan repayment is in doubt, interest income is not reported. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on its regular review of
nonperforming assets, as well as loans 90 days or more past due but not
considered nonperforming, charge-off and recoveries, growth and portfolio mix
of loans, general economic conditions, and other factors and estimates which
are subject to change over time. While management may periodically allocate
portions of the allowance for specific problem loan situations, the whole
allowance is available for any loan charge-offs that occur. A loan is
charged-off against the allowance by management as a loss when deemed
uncollectible, although collection efforts may continue and future recoveries
may occur.
16
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of the collateral if the loan is collateral dependent. Loans totaling
$75,000 or more are evaluated for impairment when payments are delayed,
typically 90 days or more, or when the internal grading system indicates a
doubtful classification.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated on both accelerated and straight-line
methods over asset useful lives. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or
fair value less costs to sell. Expenses, gains and losses on disposition, and
changes in the valuation allowance are reported in other operating expenses.
There were no properties held as other real estate at December 31, 1996 and
1995.
SERVICING RIGHTS: Certain mortgage loans are originated for sale to the
secondary market and sold with servicing retained. Effective January 1, 1996,
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights," requires capitalizing the rights to service
originated mortgage loans and amortizing the asset in proportion to, and over
the period of, estimated net servicing revenue. Prior to SFAS No. 122, only
purchased mortgage servicing rights were capitalized. The effect of SFAS No.
122 was not material during the year ended December 31, 1996.
INCOME TAXES: Income tax expense is based on the amount of taxes due or
refundable plus deferred taxes computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities, using enacted tax rates, adjusted for
allowances made for uncertainty regarding the realization of net tax assets.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed in Note 14. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
STATEMENT OF CASH FLOWS: For the purposes of the cash flow statement, cash and
cash equivalents are defined to include cash on hand, noninterest-bearing
deposits in other institutions, short-term interest-bearing deposits in other
institutions and federal funds sold. Customer loan and deposit transactions,
cash management funds, and long-term interest-bearing deposits made with other
financial institutions are reported on a net cash flow basis.
EARNINGS PER COMMON SHARE: Earnings per common share is computed based on the
weighted average outstanding shares during the year plus common stock
equivalents, if dilutive, using the average stock price. The average number of
shares was 297,428 in 1996, 1995 and 1994. The earnings and dividends per share
amounts have been retroactively adjusted for a two-for-one stock split,
declared on December 15, 1994 and paid February 1, 1995.
NEW ACCOUNTING PRONOUNCEMENT: SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The anticipated effect on the
consolidated financial statements has not yet been determined.
Also, in March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for 1997 and later will be
calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options and other common
stock equivalents. All prior calculations will be restated to be compatible to
the new methods. As the Company has not had significant dilution from stock
options, the new calculation methods will not significantly affect future basic
earnings per share and diluted earnings per share.
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform with the 1996 presentation.
17
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
NOTE 2--RESTRICTIONS ON CASH AND DUE FROM BANKS
To satisfy legal reserve and clearing requirements, non-interest bearing
balances are required to be maintained as deposits with the Federal Reserve or
as cash on hand. The total required reserve and clearing balances were $399,000
and $427,000 at year end 1996 and 1995, respectively.
NOTE 3--SECURITIES
Year-end securities were as follows (In thousands):
<TABLE>
<CAPTION>
GROSS GROSS
DECEMBER 31, 1996 AMORTIZED UNREALIZED UNREALIZED FAIR
AND 1995 COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
1996:
Obligations of U.S. Government agencies .............. $ 4,568 $ 50 $ (13) $ 4,605
Corporate securities ................................. 5,483 31 (19) 5,495
------- ----- ------ -------
TOTALS ........................................... $10,051 $ 81 $ (32) $10,100
======= ===== ====== =======
1995:
Obligations of U.S. Government agencies .............. $ 3,449 $ 30 $ (1) $ 3,478
Corporate securities ................................. 4,030 21 (11) 4,040
Equity securities .................................... 138 -- -- 138
------- ----- ------ -------
TOTALS ............................................... $ 7,617 $ 51 $ (12) $ 7,656
======= ===== ====== =======
HELD TO MATURITY
1996:
Obligations of U.S. Government agencies .............. $ 3,497 $ 71 $ (1) $ 3,567
Obligations of states and political subdivisions ..... 5,482 127 -- 5,609
Collateralized mortgage obligations .................. 54 -- -- 54
------- ----- ------ -------
TOTALS ........................................... $ 9,033 $ 198 $ (1) $ 9,230
======= ===== ====== =======
1995:
Obligations of U.S. Government agencies .............. $ 2,175 $ 78 $ -- $ 2,253
Obligations of states and political subdivisions ..... 5,630 147 -- 5,777
Collateralized mortgage obligations .................. 230 1 -- 231
------- ----- ------ -------
TOTALS ........................................... $ 8,035 $ 226 $ -- $ 8,261
======= ===== ====== =======
</TABLE>
18
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
The amortized cost and fair values of securities at year end 1996 by
contractual maturity, are shown below (in thousands). Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties. Securities
not due at a single maturity date are shown separately.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
(IN THOUSANDS) AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- --------------------------------------------------- --------- ------ --------- -------
<S> <C> <C> <C> <C>
Due in one year or less ........................... $ 2,230 $ 2,226 $ 1,121 $ 1,126
Due from one to five years ........................ 4,749 4,770 2,235 2,273
Due from five to 10 years ......................... 1,038 1,025 991 1,033
Due after 10 years ................................ -- -- 1,135 1,177
------- ------- ------- -------
$ 8,017 $ 8,021 $ 5,482 $ 5,609
Collateralized mortgage obligations
Variable rate ................................ -- -- 54 54
U.S. Government mortgage backed securities
Fixed rate ................................... -- -- 2,902 2,953
Variable rate ................................ 2,034 2,079 595 614
------- ------- ------- -------
Totals ....................................... $10,051 $10,100 $ 9,033 $ 9,230
======= ======= ======= =======
</TABLE>
Net sales of mutual funds were $138,000 in 1996. Net purchases of mutual funds
were $55,000 in 1995 and $32,000 in 1994. No gains or losses were realized on
mutual fund sales in 1996, 1995 or 1994.
During 1996, $323,775 of securities classified as held to maturity were sold
under the safe harbor provision rules of SFAS No. 115. Gross gains of $6,000
were realized on these sales. For purposes of the Consolidated Statements of
Cash Flows, these sales have been included as part of maturities of securities
held to maturity. There were no sales of securities in 1995 or 1994.
Securities with a book value of approximately $5,154,000 and $4,862,000 at year
end 1996 and 1995 were pledged to secure public deposits, long-term FHLB
borrowings and for other purposes as required or permitted by law.
NOTE 4--LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
------- -------
<S> <C> <C>
Commercial and agricultural .................. $ 4,453 $ 5,869
Real estate mortgage ......................... 43,600 37,927
Installment .................................. 3,739 5,888
------- -------
TOTAL LOANS ............................... $51,792 $49,684
======= =======
</TABLE>
Certain directors, executive officers and principal shareholders of the
Company, including associates of such persons, were loan customers of the
Company. A summary of activity related to these loans follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
<S> <C> <C>
Balance January 1 .................. $1,490 $1,375
New loans .......................... 110 445
Repayments ......................... (297) (330)
------ ------
BALANCE DECEMBER 31 ................ $1,303 $1,490
====== ======
</TABLE>
19
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
CONTINUED
NOTE 5--ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Balance -- beginning of period ................ $ 995 $ 792 $ 756
Provision for loan losses ..................... -- 193 25
Loans charged-off ............................. (68) (40) (49)
Recoveries .................................... 93 50 60
------ ------ ------
BALANCE -- END OF PERIOD .................... $1,020 $ 995 $ 792
====== ====== ======
</TABLE>
During 1996 and 1995, the Company had no loans which were impaired as defined
under the provisions of SFAS Nos. 114 and 118
NOTE 6--PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995
- ----------------------------------------------- ------- -------
<S> <C> <C>
Land ............................................. $ 86 $ 86
Buildings and improvements ....................... 909 899
Furniture and equipment .......................... 2,071 2,049
------- -------
Total cost ..................................... 3,066 3,034
Less accumulated depreciation .................... (2,499) (2,385)
------- -------
PREMISES AND EQUIPMENT, NET .................... $ 567 $ 649
======= =======
</TABLE>
NOTE 7--INTEREST BEARING DEPOSITS
Year-end interest bearing deposits were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995
- ----------------------------------------------- ------- -------
<S> <C> <C>
Interest bearing demand ......................... $ 9,083 $11,698
Savings ......................................... 16,969 17,192
Time
In denominations less than $100,000 ........ 20,883 21,924
In denominations of $100,000 or more ....... 9,218 6,541
------- -------
TOTAL INTEREST BEARING DEPOSITS .......... $56,153 $57,355
======= =======
</TABLE>
At year end 1996, stated maturities of time deposits were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- -------------------------------------- -------
<S> <C>
1997 ................................. $20,424
1998 ................................. 4,499
1999 ................................. 3,891
2000 ................................. 740
2001 ................................. 382
Thereafter ........................... 165
-------
TOTAL ............................. $30,101
=======
</TABLE>
- -----------------
Related party deposits totaled approximately $1,375,000 at year end 1996.
20
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
NOTE 8--LONG-TERM FHLB BORROWINGS
Advances at year end were (In thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995
- ------------------------------------------------------- ------ -------
<S> <C> <C>
5.67% FHLB advance, due February 15, 2001 ............. $ 327 $ 380
6.21% FHLB advance, due November 15, 2002 ............. 521 600
6.24% FHLB advance, due November 15, 2002 ............. 803 900
5.88% FHLB advance, due January 15, 2003 .............. 262 --
------ ------
TOTAL LONG-TERM FHLB BORROWINGS .................. $1,913 $1,880
====== ======
</TABLE>
- -------------
Securities safekept at the FHLB, with a carrying value of approximately
$2,400,000 at year end 1996, are pledged as collateral for these advances.
At year end 1996, scheduled principal reductions on these advances were:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997 ........................ $ 243
1998 ........................ 228
1999 ........................ 214
2000 ........................ 203
2001 ........................ 194
Thereafter .................. 831
------
TOTAL .................... $1,913
======
</TABLE>
- -----------
All notes have a prepayment penalty based upon the present value of the lost
cash flow to the FHLB.
NOTE 9--INCOME TAX
Income tax expense consists of (In thousands):
<TABLE>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------- ------ ------ ------
<S> <C> <C> <C>
Taxes currently payable ......................... $ 477 $ 458 $ 338
Deferred benefit ................................ (43) (70) (11)
------ ------ ------
TOTAL INCOME TAX EXPENSE .................... $ 434 $ 388 $ 327
====== ====== ======
</TABLE>
Year-end deferred tax assets and liabilities consist of (In thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 1995 1994
- -------------- ------- ------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net unrealized loss on securities available for sale ....................... $ -- $ -- $ 93
Allowance for loan losses .................................................. 230 230 164
Deferred compensation ...................................................... 273 229 184
Deferred loan fees ......................................................... 7 12 7
Other ...................................................................... 4 3 2
------ ------ -----
514 474 450
Deferred tax liabilities:
Fixed assets ............................................................... (40) (46) (52)
Net unrealized gain on securities available for sale ....................... (17) (13) --
Deferred gain on installment sale .......................................... (45) (46) --
Other ...................................................................... (25) (21) (14)
------ ------ -----
(127) (126) (66)
------ ------ -----
NET DEFERRED TAX ASSETS .................................................. $ 387 $ 348 $ 384
====== ====== =====
</TABLE>
- ----------
An allowance against deferred tax assets has not been recorded for 1996, 1995,
or 1994.
21
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995,
AND 1994)
The difference between the financial statement income tax expense and the
amounts computed by applying the federal income tax rate to pretax income is
reconciled as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, (IN THOUSANDS) 1996 1995 1994
- --------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Statutory rate ................................. 34% 34% 34%
Income tax computed at statutory rate .......... $ 534 $ 489 427
Tax effect of: Nontaxable income ............... (78) (77) (102)
Other ................................... (22) (24) 2
----- ----- -----
TOTAL ....................................... $ 434 $ 388 $ 327
===== ===== =====
</TABLE>
NOTE 10--RETIREMENT PLANS
A retirement and savings plan has been established for all full-time employees.
Annual matching contributions are made based on a percentage of participants'
compensation plus a discretionary amount determined by the Board of Directors.
The expense for the plan was approximately $43,000 in 1996, $45,000 in 1995 and
$49,000 in 1994.
An incentive compensation plan is also maintained for certain employees and is
based upon key performance factors. The expense for the plan was approximately
$37,000 in 1996, $34,000 in 1995 and $23,000 in 1994.
An incentive stock option plan was approved in 1994 to provide officers and
other key employees an opportunity to acquire a proprietary interest in the
Company with an incentive to their continued employment and efforts to promote
the Company's success. The plan provides for stock options to be granted at
prices that approximate the fair value of the stock at the respective dates of
grant. Under the plan, up to 20,000 unauthorized and newly issued shares of
common stock may be issued upon exercise of stock options granted under the
plan. The vesting of stock options does not start until two years from the date
of grant. After two years, the options will vest evenly over a three year
period. The plan terminates on May 20, 2003.
In 1994, no options were granted. Options totaling 2,000 shares were granted at
an option price of $36 per share in 1996 and options totaling 2,000 shares were
granted at an option price of $25.50 per share in 1995. Options totalling 4,000
shares remain outstanding at December 31, 1996. No options were exercisable at
year end 1996.
SFAS No. 123, "Accounting for Stock-Based Compensation," became effective for
1996 and requires proforma disclosures for stock-based compensation awarded
after December 15, 1995 for companies that do not adopt its fair value
accounting method for stock-based compensation. The proforma effects on the
Company's net income and earnings per share under the provisions of SFAS No.
123 were not material for 1996 and 1995. In future years, as additional options
are granted, the proforma effect on net income and earnings per share may
increase.
A deferred compensation plan has been adopted to provide retirement benefits to
the directors, at their option, in lieu of annual directors' fees. The present
value of future benefits are accrued annually over the period of active service
of each participant. The expense for the plan was $105,000 in 1996, $96,000 in
1995 and $86,000 in 1994. Insurance on the lives of the participants has also
been purchased with the Bank as owner and beneficiary of the policies.
NOTE 11--OTHER OPERATING EXPENSES
Other operating expenses consist of (In thousands):
<TABLE>
AT DECEMBER 31, 1996 1995 1994
- --------------- ----- ----- -----
<S> <C> <C> <C>
Supplies ....................................... $ 51 $ 60 $ 51
State taxes .................................... 68 82 74
Deferred compensation .......................... 105 96 86
Other expense .................................. 446 416 459
----- ----- -----
TOTAL ...................................... $ 670 $ 654 $ 670
===== ===== =====
</TABLE>
22
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
NOTE 12--COMMITMENTS AND CONTINGENCIES
Periodically, in the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend credit
and guarantees, which are not reflected in the accompanying consolidated
financial statements. The exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to make loans, standby letters of credit, and financial guarantees is
represented by the contractual amount of those instruments. The same credit
policy to make commitments is followed for those loans recorded in the
consolidated financial statements.
The contract amounts of these financial instruments (in thousands) are as
follows at year end:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Unused lines
of credit ................. $ 5,565 $ 4,665
Commitments
to make loans ............. 328 284
Standby letters
of credit ................. 315 340
</TABLE>
Commitments are generally made at variable rates, primarily tied to NBD's prime
rate, with maximum commitment periods generally around 365 days. Since many of
the commitments to make loans expire without being used, the amount does not
necessarily represent future cash commitments. Collateral obtained upon the
exercise of the commitments is determined using management's credit evaluation
of the borrower and may include real estate, vehicles, business assets,
deposits and other items. In management's opinion, these commitments represent
normal banking transactions and no material losses are expected to result.
NOTE 13--REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments
by regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital To Tier 1
Risk-Weighted Capital To
Assets Average
Total Tier 1 Assets
----- ------ ----------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
23
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
At year end, Bank actual capital levels and minimum required levels (in
thousands) were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1996
Total capital (to risk weighted assets) ......... $ 9,776 19.5% $ 4,008 8.0% $ 5,010 10.0%
Tier 1 capital (to risk weighted assets) ........ 9,150 13.3 2,004 4.0 3,006 6.0
Tier 1 capital (to average assets) .............. 9,150 12.1 3,028 4.0 3,785 5.0
1995
Total capital (to risk weighted assets) ......... $ 8,995 17.7% $ 4,071 8.0% $ 5,088 10.0%
Tier 1 capital (to risk weighted assets) ........ 8,359 16.4 2,035 4.0 3,053 6.0
Tier 1 capital (to average assets) .............. 8,359 11.3 2,966 4.0 3,707 5.0
</TABLE>
The Bank was considered well capitalized at year end 1996 and 1995.
Federal and state banking laws and regulations place certain restrictions on
the amount of dividends and loans a bank can pay to its parent company. Under
the most restrictive of these regulations, as of year end 1996, the Bank could
pay approximately $5,175,000 in dividends to the parent company without prior
regulatory approval.
NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair
values for cash and cash equivalents, demand and savings deposits, short-term
borrowings, accrued interest, and variable rate loans or deposits that reprice
frequently and fully. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and on
information about the issuer. For fixed rate loans or time deposits and for
variable rate loans or time deposits with infrequent repricing or repricing
limits, the fair value is estimated by discounted cash flow analysis using
current market rates for the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable. Fair value of loans held for sale is based
on market estimates. The fair value of debt is based on currently available
rates for similar financing. The fair value of off-balance-sheet items is based
on the fees or cost that would currently be charged to enter into or terminate
such arrangements and are not material to this presentation.
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
1996 1995
(IN THOUSANDS) CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
- -------------------------------------------------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents ...................... $ 5,477 $ 5,477 $ 9,775 $ 9,775
Securities available for sale .................. 10,100 10,100 7,656 7,656
Securities held to maturity .................... 9,033 9,230 8,035 8,261
Loans, net of allowance for loan losses ........ 50,772 51,448 48,689 48,817
Accrued interest receivable .................... 502 502 493 493
Financial liabilities
Deposits ....................................... (66,509) (66,798) (66,208) (66,342)
Long-term FHLB borrowings ...................... (1,913) (1,889) (1,880) (1,872)
Accrued interest payable ....................... (195) (195) (207) (207)
</TABLE>
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such
24
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DECEMBER 31, 1996, 1995, AND 1994)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME--DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from Mason State Bank ..................................................... $ 420 $ 351 $ 337
Dividends from Monex Financial Services, Inc. ....................................... -- 3 --
------- ------- -------
Total operating income .............................................................. 420 354 337
OPERATING EXPENSES
Wages and benefits .................................................................. 68 17 --
Other expenses ...................................................................... (6) 4 9
------- ------- -------
Total operating expenses ............................................................ 62 21 9
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES ........................................................................ 358 333 328
Equity in undistributed net income of Mason State Bank ................................... 791 709 609
Equity in undistributed net income (loss) of Monex Financial Services, Inc. .............. (13) 8 (7)
------- ------- -------
Total equity in undistributed net income of subsidiaries ............................ 778 717 602
------- ------- -------
NET INCOME .......................................................................... $ 1,136 $ 1,050 $ 930
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS--DECEMBER 31,
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 1,136 $ 1,050 $ 930
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
FROM OPERATING ACTIVITIES
Equity in undistributed net income of subsidiaries ................................ (778) (717) (602)
Change in other assets ............................................................ (19) (40) 1
------- ------- -------
Net cash from operating activities ....................................................... 339 293 329
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Monex Financial Services, Inc. ........................................ -- -- (40)
------- ------- -------
Net cash from investing activities ....................................................... -- -- (40)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ...................................................................... (330) (304) (298)
------- ------- -------
Net cash from financing activities ....................................................... (330) (304) (298)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................. 9 (11) (9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................................... 5 16 25
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................................. $ 14 $ 5 $ 16
======= ======= =======
</TABLE>
items at year end 1996 or 1995, the estimated fair values would necessarily
have been achieved at that date, since the market values may differ depending
on various circumstances. Also, the use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The estimated fair values at year end 1996 and 1995 should not
necessarily be considered to apply at subsequent dates.
In addition, other assets and liabilities of the Company that are not defined
as financial instruments are not included in the above disclosures, such as
premises and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the
estimated earnings power of core deposit accounts, the earnings potential of
loan servicing rights, the trained workforce, customer goodwill and similar
items.
NOTE 15--CAPITAL DIRECTIONS, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS DECEMBER 31,
(IN THOUSANDS) 1996 1995
- ------------------------------------- ------ -----
<S> <C> <C>
ASSETS
Cash, due from banks,
and other cash equivalents ......... $ 14 $ 5
Investment in Mason
State Bank ......................... 9,128 8,385
Investment in Monex
Financial Services, Inc. ........... 151 164
Other assets ....................... 139 120
------- -------
TOTAL ASSETS ..................... $ 9,486 $ 8,674
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable ................. $ 89 $ 80
Shareholders' equity ............... 9,397 8,594
TOTAL LIABILITIES AND ------- -------
SHAREHOLDERS' EQUITY ............. $ 9,486 $ 8,674
======= =======
</TABLE>
25
<PAGE> 29
REPORT OF INDEPENDENT AUDITORS
[CROWE, CHIZEK LOGO]
Board of Directors and Shareholders
Capital Directions, Inc.
Mason, Michigan
We have audited the accompanying consolidated balance sheets of Capital
Directions, Inc. as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1996, 1995 and 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the 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 Capital Directions,
Inc. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1996, 1995 and 1994 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 12, 1997
26
<PAGE> 30
THE MISSION OF MASON STATE BANK
IS TO OPERATE AS A FINANCIAL SERVICES
ORGANIZATION IN A SAFE, SECURE, AND
ETHICAL MANNER AND TO PRODUCE
SUPERIOR RETURNS FOR OUR SHAREHOLDERS.
THIS WILL BE ACCOMPLISHED BY BEING
CUSTOMER FOCUSED AND PROVIDING
QUALITY SERVICES AND PRODUCTS
DELIVERED THROUGH A STAFF OF HIGHLY
TRAINED AND MOTIVATED PROFESSIONALS.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1996 ANNUAL
REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,538
<INT-BEARING-DEPOSITS> 139
<FED-FUNDS-SOLD> 2,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,100
<INVESTMENTS-CARRYING> 9,033
<INVESTMENTS-MARKET> 9,230
<LOANS> 51,792
<ALLOWANCE> 1,020
<TOTAL-ASSETS> 78,920
<DEPOSITS> 66,509
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,101
<LONG-TERM> 1,913
0
0
<COMMON> 1,487
<OTHER-SE> 7,910
<TOTAL-LIABILITIES-AND-EQUITY> 78,920
<INTEREST-LOAN> 4,455
<INTEREST-INVEST> 1,150
<INTEREST-OTHER> 164
<INTEREST-TOTAL> 5,769
<INTEREST-DEPOSIT> 2,314
<INTEREST-EXPENSE> 2,443
<INTEREST-INCOME-NET> 3,326
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 2,479
<INCOME-PRETAX> 1,570
<INCOME-PRE-EXTRAORDINARY> 1,136
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,136
<EPS-PRIMARY> 3.82
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.87
<LOANS-NON> 48
<LOANS-PAST> 70
<LOANS-TROUBLED> 54
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 995
<CHARGE-OFFS> 68
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 1,020
<ALLOWANCE-DOMESTIC> 66
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 954
</TABLE>
