<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, 1997 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 Indentification 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 of 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 19, 1998, the aggregate market value
of the voting stock held by non-affiliates of the registrant was approximately
$14,940,608. This is based on a market price of $32.00 per share for the
Registrant's stock.
As of March 19, 1998, the registrant had outstanding 595,056 shares of common
stock having a par value of $5 per share.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the Year Ended December 31, 1997 (Form 10-K,
Part I, Part II, Part III, and Part IV)
Proxy Statement for the Annual Meeting of Shareholders to be held April 23,
1998 (Form 10-K, Part III)
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.
The Registrant has no substantial assets except the investments 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 1997 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 operates a branch at 661 North Cedar Street, Mason, Michigan.
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.
2
<PAGE> 3
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, and 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 (39 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.
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.
3
<PAGE> 4
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
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) $ 54,870 $ 4,962 9.04% $ 49,507 $ 4,455 9.00%
Taxable investment
securities . . . . . . . . . . . . . . 12,893 878 6.81 14,262 939 6.58
Non-taxable investment
securities (2) . . . . . . . . . . . . 4,545 357 7.85 5,105 394 7.72
Federal funds sold . . . . . . . . . . . 1,295 68 5.25 2,154 115 5.34
---------- --------- --------- --------
Total interest earning assets . . . . . 73,603 6,265 8.51% 71,028 5,903 8.31%
Cash and due from banks . . . . . . . . 2,710 2,786
Other assets, net . . . . . . . . . . . 3,074 2,298
---------- ---------
Total non-interest earning
assets . . . . . . . . . . . . . . . . 5,784 5,084
Total assets . . . . . . . . . . . $ 79,387 $ 76,112
========== =========
LIABILITIES
Interest bearing demand
deposits . . . . . . . . . . . . . . . $ 9,299 182 1.96% $ 10,328 220 2.13%
Savings deposits . . . . . . . . . . . . 16,586 487 2.94 17,093 489 2.86
Time deposits under $100,000 21,133 1,213 5.74 21,378 1,225 5.73
Time deposits of $100,000 or
more . . . . . . . . . . . . . . . . . 8,551 493 5.77 6,686 380 5.68
Other borrowings . . . . . . . . . . . . 3,501 219 6.26 2,093 129 6.16
---------- --------- --------- --------
Total interest bearing
liabilities . . . . . . . . . . . . 59,070 2,594 4.39% 57,578 2,443 4.24%
Demand deposits 8,674 8,515
Other liabilities 1,743 1,054
Shareholders' equity . . . . . . . . . . 9,900 8,965
---------- ---------
Total non-interest bearing
liabilities and equity . . . . . . . 20,317 18,534
---------- ---------
Total liabilities and equity . . . . . $ 79,387 $ 76,112
========== =========
Net interest income . . . . . . . . . . $ 3,671 $ 3,460
========= ========
Net yield on interest earning
assets (2) . . . . . . . . . . . . . . 4.99% 4.87%
==== ====
</TABLE>
(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 1997 and 1996.
4
<PAGE> 5
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>
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 COMPARED TO 1996 1996 COMPARED TO 1995
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME VOLUME(1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Loans $485 $22 $507 ($145) ($83) ($228)
Taxable investment securities (92) 31 (61) 191 46 237
Non-taxable investment securities(2) (44) 7 (37) (17) 23 6
Federal funds sold (45) (2) (47) 25 (9) 16
--------- ------- ----- -------- ------ -----
Total interest income 304 58 362 54 (23) 31
INTEREST EXPENSE
Interest bearing demand deposits (21) (17) (38) (17) (23) (40)
Savings deposits (15) 13 (2) 15 (18) (3)
Time deposits under $100,000 (14) 2 (12) (67) 16 (51)
Time deposits of $100,000 or more 107 6 113 27 (12) 15
Other borrowings 88 2 90 79 2 81
--------- ------- ----- -------- ------ -----
Total interest expense 145 6 151 37 (35) 2
Net interest income $159 $52 $211 $17 $12 $29
--------- ------- ----- -------- ------ -----
</TABLE>
(1) The change in interest due to both volume and rate has been
allocated to volume and rate 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.
II. Investment portfolio
(A) A table of carrying values of the investment portfolio as of
December 31, 1997 and 1996 is set forth in Note 3 on pages 17 and 18
of the 1997 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, 1997: (dollars in
thousands)
5
<PAGE> 6
Item 1. Business (Continued)
II. Investment Portfolio (Continued)
Held-to-maturity
<TABLE>
<CAPTION>
1 Year or less 1 Year - 5 Years 5 Years - 10 Years After 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agencies (2) $ $ 1,184 6.62% $ 672 6.78% $ 1,052 8.28%
States and
Political Subdivisions
Non-taxable (1) 853 7.15% 1,135 7.84% 892 8.70% 1,204 8.26%
Taxable 455 6.60%
Collateralized
mortgage
obligations (2) 36 6.49%
--------- -------- --------- --------
Total $ 1,308 6.96% $ 2,319 7.22% $ 1,564 7.88% $ 2,292 8.25%
========= ======== ========= ========
</TABLE>
Available-for-sale
<TABLE>
<CAPTION>
1 Year or Less 1 Year - 5 Years 5 Years - 10 Years
Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
agencies (2) $ 1,499 6.40% $ 1,289 6.52% $ 709 6.68%
Corporate securities (2) 2,774 6.76%
--------- -------- ---------
Total $ 1,499 6.40% $ 4,063 6.68% $ 709 6.68%
========= ======== =========
</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 prepayments 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,
1997.
III. Loan Portfolio
(A) A table of loans outstanding as of December 31, 1997 and 1996
is set forth in Note 4 of page 19 of the 1997 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.
6
<PAGE> 7
(B) The following table sets forth the remaining maturity of
total loans outstanding (excluding real estate mortgages,
installment and lease financing) at December 31, 1997, according to
scheduled payments of principal (in thousands) and considering the
banks "rollover policy."(1)
(In thousands)
<TABLE>
<CAPTION>
1 Year 1 Year - After
or less 5 Years 5 Years Total
-------- ------- ------ ------
<S> <C> <C> <C> <C>
Commercial and agricultural $1,867 $1,763 $611 $4,241
======== ======= ===== ======
</TABLE>
The following table sets forth commercial and agricultural loans due
after one year, which have predetermined interest rates and/or
adjustable interest rates at December 31, 1997.
<TABLE>
<CAPTION>
Fixed Adjustable
rate rate Total
------ ---------- ------
<S> <C> <C> <C>
(In thousands)
Due after one but within five years $651 $1,112 $1,763
Due after five years 239 372 611
------ ---------- ------
Total $890 $1,484 $2,374
====== ========== ======
</TABLE>
(1) The "rollover policy" is to generally write terms of
these loans for a shorter time then 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 this schedule.
7
<PAGE> 8
Item 1. Business (Continued)
III. Loan Portfolio
(C) Risk elements
(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, 1997 and
1996 is in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 5, 6 and 7 under
Provision and Allowance for Loan Losses, Note 1 under "Loans" and
"Allowance for Loan Losses" on pages 15 and 16 and in Note 5 on
page 19 in the 1997 Annual Report to the Shareholders. Such
information is incorporated herein by reference.
Gross interest income that would have been recorded in 1997 on
such loans if the loans had been current in accordance with their
original terms and outstanding throughout the period or since
origination was $8,363. No income was included in interest income
on these loans in 1997.
(2) Potential problem loans
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) Foreign outstandings
There were no foreign outstandings as of December 31, 1997 and
1996.
(4) Loan concentrations
There were no concentrations of loans exceeding 10% of total
loans that have not been already disclosed as a category at
December 31, 1997.
(D) Other interest-bearing assets
As of December 31, 1997, 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.
8
<PAGE> 9
Item 1. Business
IV. Summary of Loan Loss Experience
(A) The following table sets forth loan allowance balances and
summarizes changes in the allowance for loan losses for each
of the two years ended December 31
Analysis of the allowance for loan losses
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Balance, beginning of period $1,020 $995
--------- --------
Loans charged-off
Commercial and agricultural 7 0
Real estate-construction 0 0
Real estate-mortgages 0 0
Lease financing 0 0
Installment and others 19 68
--------- --------
Total 26 68
Recoveries of loans charged off
Commercial and agricultural 6 28
Real estate-construction 0 0
Real estate-mortgages 0 0
Lease financing 0 0
Installment and others 35 65
--------- --------
Total 41 93
Net charge-offs (recoveries) (15) (25)
Additions charged to operations 0 0
--------- --------
Balance at end of period $1,035 $1,020
========= ========
Average gross loans outstanding $54,870 $49,507
========= ========
Ratio of net charge-offs (recoveries)
during the period to average gross
loans outstanding during the period -0.03% -0.05%
========= ========
</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 pages 5, 6 and 7 Note 1 on page 15 and 16 and Note 5 on page 19 in The
1997 Annual Report to the Shareholders, incorporated herein by reference.
9
<PAGE> 10
IV. Summary of Loan Loss Experience (Continued)
(B) The following table presents an allocation for loan losses to the
various loan categories at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
% of % of
Allowance Loans to Allowance Loans to
(In thousands) Amount Total Loans Amount Total Loans
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 74 6.92% $ 55 8.60%
Real estate-mortgages 4 87.21 3 84.18
Installment and other 7 5.87 8 7.22
Unallocated 950 N/A 954 N/A
---------- ----------- --------- ------------
Total $ 1,035 100.00% $ 1,020 100.00%
========== =========== ========= ============
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ---------------------------
Average Average
(Dollars In thousands) Balance Rate Balance Rate
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Non interest-bearing demand deposits $ 8,674 $ 8,515
Interest-bearing demand deposits 9,299 1.96% 10,328 2.13%
Savings deposits 16,586 2.94 17,093 2.86
Time deposits under $100,000 21,133 5.74 21,378 5.73
Time deposits of $100,000 or more 8,551 5.77 6,686 5.68
------------ ---------
Total $ 64,243 3.70% $ 64,000 3.62%
============ =========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or
more by time remaining until maturity as of December 31, 1997:
<TABLE>
<S> <C>
(In thousands)
Three months or less $5,527
Over three months through six months 1,677
Over six months through one year 226
Over one year 1,848
------
Total $9,278
======
</TABLE>
As of December 31, 1997 the registrant had no foreign deposits.
10
<PAGE> 11
Item 1. Business (Continued)
VI. Return on Equity and Assets
The following table presents the ratios indicated for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net income to average total assets 1.56% 1.49%
Net income to average shareholders' equity 12.47 12.67
Cash dividend payout ratio per share 33.65 29.84
Average shareholders' equity to average total assets 12.47 11.78
</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. A parking area with spaces to accommodate 20 vehicles
occupies part of the property; 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. A parking area with spaces to
accommodate 24 vehicles occupies part of the property; part is occupied
by 4 drive-in banking stations.
The Registrant operates its business at the same address as Mason State
Banks' main office. As of March 19, 1998, 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
11
<PAGE> 12
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 or 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, 1997.
<TABLE>
<CAPTION>
Position with First elected as an
Name (Age) Registrant officer of the registrant
- ---------- ------------- -------------------------
<S> <C> <C>
Douglas W. Dancer (57) Chairman 1990
Gerald Ambrose (48) Vice Chairman 1994
Timothy P. Gaylord (43) President and C.E.O. 1995
George A. Sullivan (65) Secretary 1988
</TABLE>
Mr. Dancer is a Director of the registrant and Chairman of the Board of
Directors of Mason State Bank.
Mr. Ambrose is a Director of the registrant and Vice Chairman of the Board of
Directors of Mason State Bank.
Mr. Gaylord is a Director of the registrant and President and Chief Executive
Officer of Mason State Bank.
Mr. Sullivan is a Director of the registrant and Secretary of the Board of
Directors of Mason State Bank.
PART II
I. The information required by this item appears in the Capital Directions,
Inc. Annual Report to Shareholders for the year ended December 31, 1997,
and is incorporated herein by reference, as follows:
<TABLE>
<CAPTION>
Pages in 1997
Annual Report
-------------
<S> <C> <C>
Item 5. Market for registrant's common equity
and related stockholders matters 3
Item 6. Selected financial data 4
Item 7. Management's discussion and analysis of
financial condition and results of operations 5 - 9
Item 7a. Quantitative and qualitative disclosures about Not required as
market risk company meets
requirements to be a
small business filer
Item 8. Financial statements and supplementary data 10 - 25
Item 9. Changes in and disagreements with accountants
on accounting and financial disclosure None
</TABLE>
12
<PAGE> 13
PART III
The information required by this item is included in the Capital Directions,
Inc. 1998 Proxy Statement, dated April 1, 1998, and is incorporated herein by
reference, as follows:
<TABLE>
<CAPTION>
Pages in 1997
Proxy Statement
---------------
<S> <C>
Item 10. Directors and executive officers of the registrant 4 - 5
(In addition, reference is made to additional
item - executive officers under Part I of this
Form 10-K report on page 12)
Item 11. Executive compensation 6 - 8
Item 12. Security ownership of certain beneficial owners
and management 3 - 4
Item 13. Certain relationships and related transactions 9
</TABLE>
The information appearing in the Corporation's Proxy Statement and in Note
4 on page 19 of the Notes to Consolidated Financial Statements of the 1997
Annual Report to Shareholders is incorporated herein by reference in response
to this item.
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 1997 Annual Report to Shareholders for
the year ended December 31, 1997, are incorporated herein by reference
in Item 8:
<TABLE>
<CAPTION>
Pages in 1997
Annual Report
-------------
<S> <C>
Consolidated balances sheets -
December 31, 1997 and 1996 11
Consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995 12
Consolidated statements of cash flows for the years
ended December 31, 1997, 1996 and 1995 13
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Pages in 1997
Annual Report
-------------
<S> <C>
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1997, 1996
and 1995 14
Notes to consolidated financial statements 15 - 25
Report of Independent Auditors 10
</TABLE>
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 Plans (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,
1997 (filed herewith).
(22) Subsidiaries of registrant (previously filed as Exhibits
included in Capital Directions, Inc.'s 1988 10-K report dated
March 29, 1989).
(23) Consents of experts. Consent of Crowe, Chizek and Company LLP.
(27) Financial Data Schedule for EDGAR filer.
(b) Reports of Form 8-K
No reports of Form 8-K were filed during the last quarter
of the year covered by this report.
14
<PAGE> 15
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 19, 1998.
CAPITAL DIRECTIONS, INC.
/s/ Timothy P. Gaylord Timothy P. Gaylord
- ---------------------------------- (President and Chief Executive Officer)
/s/ Lois A. Toth Lois A. Toth
- ---------------------------------- (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 19, 1998.
/s/ Douglas W. Dancer Douglas W. Dancer
- ---------------------------------- Chairman of Board of Directors
/s/ Gerald Ambrose Gerald Ambrose
- ---------------------------------- Vice Chairman of Board of Directors
/s/ George A. Sullivan George A. Sullivan
- ---------------------------------- Secretary of Board of Directors
/s/ Timothy P. Gaylord Timothy P. Gaylord
- ---------------------------------- President and Chief Executive
Officer
/s/ Marvin B. Oesterle Marvin B. Oesterle
- ---------------------------------- Director
/s/ Paula Johnson Paula Johnson
- ---------------------------------- Director
15
<PAGE> 16
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 From 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, 1997
(filed herewith).
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]).
23 Consents of experts. Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule for EDGAR filer.
16
<PAGE> 1
EXHIBIT 13
Capital Directions, Inc.
Annual Report 1997
<PAGE> 2
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 of Contents
<TABLE>
<S> <C>
A message from the President
& CEO .................................. i
Shareholder returns 1991-1997 .......... 1
Financial highlights 2
Stock and shareholder information ...... 2
Management, officers, and directors .... 3
Market for common stock and
related security holder matters ........ 3
Selected financial data ................ 4
Management's discussion and analysis
of financial condition and results
of operations .......................... 5-9
Report of independent auditors ......... 10
Capital Directions, Inc.
consolidated balance sheets ............ 11
Capital Directions, Inc.
consolidated statements of income ...... 12
Capital Directions, Inc.
consolidated statements of cash flows .. 13
Capital Directions, Inc.
consolidated statements of changes
in shareholders' equity ................ 14
Notes to consolidated financial
statements (December 31, 1997,
1996, and 1995) ........................ 15-25
1997 Highlights ........................ 26
</TABLE>
<PAGE> 3
i
A message from the President & CEO
Nineteen ninety-seven was another record year for Mason State Bank and Capital
Directions, Inc. (CDI). Net income of $1,235,000 represents the highest
earnings in the Corporation's history. Basic earnings per share were $2.08 in
1997 compared to $1.91 in 1996. A return on average shareholders' equity (ROE)
of 12.47% and return on average total assets (ROA) of 1.56% represents
continued solid operating performance.
[Photo of Timothy P. Gaylord]
The strong performance of CDI stock in the marketplace resulted in a
two-for-one stock split in the form of a 100% stock dividend. The stock split
was declared by the Board of Directors on October 16, 1997. As a result,
shareholders of record as of November 3 received one additional share of CDI
common stock, par value $5.00, for each whole share of common stock held,
payable December 1, 1997.
Capital levels are determined based on many factors, including regulatory
requirements, costs of alternative sources of capital, prevailing interest
rates, perceived credit risks and liquidity needs. Capital Directions, Inc.
continues to maintain a strong capital position. The combination of a strong
capital position and an excellent earnings record has earned Mason State Bank
continual Bauer 5-star ratings. Even more impressive, in 1997, the Bank was
named one of the highest rated banks in America by Sheshunoff Business
Information Group. To receive these honors, the Bank's performance ratios for
capital adequacy, asset quality, earnings and liquidity were at the top of its
asset size peer group.
Net interest income increased 6.73% or $224,000 above 1996 levels. This was due
primarily to a 18.42% growth in the loan portfolio. The impressive increase was
accomplished while adhering to approved underwriting guidelines and maintaining
a quality loan portfolio. In addition, a net loan recovery was achieved for the
fifth consecutive year.
PRIMEVEST came on line in November. Customer response has been positive and we
expect to see a sizable improvement in brokerage fee income in 1998. Our
investment in Michigan Bankers Title Company of Mid Michigan, LLC has proven to
be an excellent strategic decision. After only ten months of operation over
100% of our initial investment has been returned to the Corporation. We will
continue to selectively add insurance services to our product mix.
In 1997, investments were made in new technology to improve cash management
services. Systems and programming for the Year 2000 are currently undergoing
careful scrutiny. This initiative resulted in a substantial investment to
upgrade check processing technology. In addition, Bank management continues to
study the best method of offering Internet banking once the issue of security
is resolved.
Ultimately, the performance of a company is measured by its ability to increase
shareholder value over time. And 1997 proved to be an especially good year for
our shareholders! Due to continued improvement in earnings, CDI increased
dividends paid by 23% over 1996 levels. This performance, coupled with a strong
stock market and specifically banks stocks, allowed shareholders to watch as
the value of their stock increased from $21.75 at December 31, 1996 (figure
adjusted for stock split) to $30.00 at December 31, 1997. This increase,
combined with the dividend yield, provided an annualized return of 42.53%. This
is an excellent return, and even more outstanding is that those taking
advantage of the dividend reinvestment program since December 31, 1992 have
received an annually compounded rate of return of 30.58%. As the following
chart illustrates, an investment in Capital Directions, Inc. common stock has
historically proven to be a good one!
Sincerely,
/s/ Timothy P. Gaylord
Timothy P. Gaylord, President & CEO
Capital Directions, Inc. and Mason State Bank
I would like to personally thank Terry Shultis for his many years
of service to Capital Directions, Inc. and Mason State Bank.
- -------------------------------------------------------------------
Capital Directions, Inc.
stock performance [Bar Chart]
Shareholders taking advantage of the $10,000 $37,970
dividend reinvestment program 12/31/92 12/31/97
experienced an overall annual
compounded rate of return of
30.58% since December of 1992.
- -------------------------------------------------------------------
<PAGE> 4
1
Shareholder returns 1991-1997
[Bar Chart]
<TABLE>
<CAPTION>
Net Income (In thousands)
<S> <C>
1991 $ 678
1992 $ 835
1993 $ 869
1994 $ 930
1995 $1,050
1996 $1,136
1997 $1,235
</TABLE>
[Bar Chart]
<TABLE>
<CAPTION>
Return on Equity (ROE)
<S> <C>
1991 11.54%
1992 13.10%
1993 12.62%
1994 12.48%
1995 12.71%
1996 12.67%
1997 12.47%
</TABLE>
[Bar Chart]
<TABLE>
<CAPTION>
Return on Assets (ROA)
<S> <C>
1991 .85%
1992 1.10%
1993 1.14%
1994 1.24%
1995 1.40%
1996 1.49%
1997 1.56%
</TABLE>
[Bar Chart]
<TABLE>
<CAPTION>
Book Value Per Share
(Retroactively adjusted for stock splits)
<S> <C>
1991 $10.23
1992 $11.14
1993 $12.17
1994 $12.86
1995 $14.45
1996 $15.80
1997 $17.17
</TABLE>
[Bar Chart]
<TABLE>
<CAPTION>
Shareholders' Equity to Total Assets
<S> <C>
1991 7.69%
1992 8.47%
1993 9.52%
1994 10.05%
1995 11.04%
1996 11.91%
1997 12.78%
</TABLE>
<PAGE> 5
2
Financial highlights
<TABLE>
<CAPTION>
Change Change
1997 1996 Amount Percent
----------- ----------- --------- -------
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income .................. $ 3,550,000 $ 3,326,000 $224,000 6.73
Net income ........................... 1,235,000 1,136,000 99,000 8.71
Basic earnings per share(1), (2)...... 2.08 1.91 .17 8.90
Cash dividend declared(1) ............ 0.70 0.57 .13 22.81
RATIOS
Return on average shareholders' equity 12.47% 12.67%
Return on average assets ............. 1.56 1.49
Average shareholders' equity as a
percentage of average assets ......... 12.47 11.78
BALANCE SHEET
Total assets ......................... $79,957,000 $78,920,000 $1,037,000 1.31
Total earning assets ................. 75,452,000 74,228,000 1,224,000 1.65
Total loans, net ..................... 60,299,000 50,772,000 9,527,000 18.76
Total deposits ....................... 64,421,000 66,509,000 (2,088,000) (3.14)
- -------------------------------------------------------------------------------
</TABLE>
(1) A 2-for-1 stock split was declared on the common stock November 3, 1997
and paid December 1, 1997. Earnings and dividends per share figures have been
restated to give retroactive effect to this split.
(2) Restated to reflect adoption of FFAS No. 128 on December 31, 1997.
The 1-year
annualized return on Capital
Directions, Inc. stock was 42.53%
The 5-year
annualized return on Capital
Directions, Inc. stock was 30.58%
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
Kimberly A. Dockter, CPS, Executive Secretary, at (517) 676-0500.
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting for the year ended December 31, 1997 will be held at the
Ingham County Community Building, 700 East Ash Street, Mason, Michigan on
Thursday, April 23, 1998 at 5:30 p.m.
HOW TO ORDER FORM 10-K
The Corporation's 1997 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 Lois A. Toth,
Treasurer, Capital Directions, Inc., P.O. Box 130, Mason, Michigan 48854-0130
or call (517) 676-0500.
<PAGE> 6
3
Capital Directions, Inc. board of directors and officers
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.
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
OFFICERS
DOUGLAS W. DANCER, Chairman
GERALD AMBROSE, Vice Chairman
TIMOTHY P. GAYLORD, President & Chief Executive Officer
GEORGE A. SULLIVAN, Secretary
LOIS A. TOTH, 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
MELANIE J. GREENE
Assistant Vice President, Director
of Marketing
ELIZABETH J. LUTTRELL
Assistant Vice President, Human Resources & Security
LOIS A. TOTH
Controller
VIRGINIA TAYLOR
Auditor & Compliance Officer
THELMA HINES
Customer Services Officer
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, Dean Witter Reynolds,
Inc., 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, 1997, there were approximately 411 holders of
the Company's common stock. Dividends are declared on a quarterly basis with a
total of $415,000 declared in 1997 and $339,000 in 1996.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
High ......................... $21.88 $22.07 $24.25 $30.00
Low .......................... 20.75 20.75 21.50 21.50
Dividend per share declared .. 0.16 0.17 0.18 0.19
1996
High ......................... $18.75 $20.00 $20.75 $21.75
Low .......................... 17.25 19.00 19.50 20.88
Dividend per share declared .. 0.13 0.14 0.15 0.15
- ------------------------------------------------------------------
</TABLE>
A 2-for-1 stock split was declared on the common stock November 3, 1997 and
paid December 1, 1997.
Earnings, dividends, book value and price per share figures have been restated
to give retroactive effect to this split.
<PAGE> 7
4
Selected financial data
<TABLE>
<CAPTION>
(In thousands, except per share data)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest and dividend income ........ $ 6,144 $ 5,769 $ 5,740 $ 5,262 $ 5,535
Interest expense .................... 2,594 2,443 2,441 2,135 2,462
-------- -------- -------- -------- --------
Net interest income ................. 3,550 3,326 3,299 3,127 3,073
Provision for loan losses ........... -- -- 193 25 63
Non interest income ................. 516 723 1,046 735 848
Non interest expense ................ 2,340 2,479 2,714 2,580 2,703
-------- -------- -------- -------- --------
Income before income
tax expense ........................ 1,726 1,570 1,438 1,257 1,155
Income tax expense .................. 491 434 388 327 286
-------- -------- -------- -------- --------
Net income .......................... $ 1,235 $ 1,136 $ 1,050 $ 930 $ 869
======== ======== ======== ======== ========
PER SHARE(1)
Average shares outstanding .......... 594,926 594,856 594,856 594,856 594,856
Basic earnings(2) ................... $ 2.08 $ 1.91 $ 1.77 $ 1.56 $ 1.46
Diluted earnings(2) ................. 2.07 1.90 1.76 1.56 1.46
Dividends declared .................. 0.70 0.57 0.52 0.50 0.50
Book value .......................... 17.17 15.80 14.45 12.86 12.17
RATIOS BASED ON NET INCOME
Net income to average
shareholders' equity ............... 12.47% 12.67% 12.71% 12.48% 12.62%
Net income to average
assets ............................. 1.56 1.49 1.40 1.24 1.14
BALANCE SHEET
Assets .............................. $ 79,957 $ 78,920 $ 77,835 $ 76,112 $ 76,027
Net loans ........................... 60,299 50,772 48,689 50,550 47,245
Federal funds sold/money
market investments ................. -- 2,800 6,050 800 2,250
Securities .......................... 14,118 19,497 16,055 17,713 20,665
Deposits ............................ 64,421 66,509 66,208 66,880 67,698
Long-term Federal Home
Loan Bank borrowings ............... 3,670 1,913 1,880 430 --
Shareholders' equity ................ 10,216 9,397 8,594 7,648 7,239
- -------------------------------------------------------------------------------------------
</TABLE>
(1) A 2-for-1 stock split was declared on the common stock November 3, 1997 and
paid December 1, 1997. Also, 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 these splits.
(2) Restated to reflect adoption of FFAS No. 128 on December 31, 1997.
<PAGE> 8
5
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 that will have such effect if implemented.
PERFORMANCE SUMMARY
In 1997, Capital Directions, Inc. and its subsidiaries reported record net
earnings of $1,235,000. This is an increase of 8.71% over the previous year.
Basic earnings per share were $2.08 in 1997 compared to $1.91 in 1996. In 1997,
return on average assets increased to 1.56% from 1.49% in 1996. Return on
average shareholders' equity was 12.47% down from 12.67% in 1996. As of
December 31, 1997 the leveraged capital ratio, which excludes the net
unrealized gain or loss on securities available for sale, was 12.6%, up from
12.1% the prior year and well in excess of the minimum required by regulatory
authorities.
The following table provides a summary of the factors impacting net income in
1997 compared to the same components in 1996:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1996 NET INCOME ................. $ 1,136
Increase (decrease) in net income
Interest income ................ 375
Interest expense ............... (151)
Provision for loan losses ...... 0
Non interest income ............ (207)
Non interest expense ........... 139
Income taxes ................... (57)
-----------
1997 NET INCOME $ 1,235
- ----------------------------------------------
</TABLE>
The operation of our holding Corporation did not materially affect the
consolidated financial results for 1997, 1996 or 1995.
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 1997, on a fully taxable equivalent
basis, was $3,671,000, an increase of $211,000 over 1996. Average balances and
rates on major categories of interest earning assets and interest bearing
liabilities appear in Table 1 on the following page. The effect on net interest
income from changes in average balances ("volume") and yields, and rates
("rate") are quantified in Table 2 on the following page. As shown, net
interest income improved in 1997 generally due to volume increases in earning
assets.
Yields on assets and rates on funding were higher in 1997 than 1996, reflecting
a slightly higher interest rate environment. Average yields on earning assets
increased to 8.51% in 1997 from 8.31% in 1996. Interest bearing liability rates
increased from 4.24% in 1996 to 4.39% in 1997. An increase of 3.63% in earnings
assets compared to a 2.59% increase in interest paying liabilities combined
with the increase in interest rates resulted in a higher net interest income as
well as a twelve basis point increase in net interest margin over 1996.
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 1997 or 1996.
A net recovery of $15,000 was achieved in 1997. This is the fifth 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 consis-
<PAGE> 9
6
Table 1
<TABLE>
<CAPTION>
(Dollars in thousands)
1997 1996 1995
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 ............. $54,870 $4,962 9.04% $49,507 $4,455 9.00% $51,111 $4,683 9.16%
Other
earning
assets ........... 18,733 1,303 6.96 21,521 1,448 6.73 18,352 1,189 6.48
-------- ------- ---- ------- ------- ---- ------- ------ ----
Total
earning
assets ........... 73,603 6,265 8.51 71,028 5,903 8.31 69,463 5,872 8.45
Other
assets ........... 5,784 5,084 5,537
-------- ------- -------
Total ............. $ 79,387 $76,112 $75,000
======== ======= =======
Interest
bearing
liabilities ...... $ 59,070 $ 2,594 4.39% $57,578 $ 2,443 4.24% $57,226 $ 2,441 4.27%
------- ------- -------
Non interest
bearing
liabilities
and
equity ........... 20,317 18,534 17,774
-------- ------- -------
Total ............. $ 79,387 $76,112 $75,000
======== ======= =======
Net interest
income ........... $ 3,671 $ 3,460 $ 3,431
======= ======= =======
Net interest
margin on
earning
assets ........... 4.99% 4.87% 4.94%
- --------------------------------------------------------------------------------------------
</TABLE>
* Fully taxable equivalent basis.
Table 2
<TABLE>
<CAPTION>
1997 compared to 1996 1996 compared to 1995
(Dollars in thousands)
CHANGE DUE TO: Volume Rate Total Volume Rate Total
------ ----- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Earning assets*............... 304 58 362 54 (23) 31
Interest bearing liabilities.. 145 6 151 37 (35) 2
------ ----- ----- ------ ---- -----
Total net interest income..... 159 52 211 17 12 29
- -----------------------------------------------------------------------------
</TABLE>
* Fully taxable equivalent basis.
<PAGE> 10
7
tent monitoring of the portfolio. Mason State Bank management rates the overall
quality of the loan portfolio as good and the $1,035,000 allowance or 1.69%
allowance to total loans very strong at year-end 1997.
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, 1997, non-performing loans totaled
$209,000 or .34% of total loans. This represents a slight increase of $37,000
in non-performing loans from 1996 levels.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
-------- --------
<S> <C> <C>
Non-accrual......$ 48,000 $ 48,000
90 days or more
past due........ 161,000 70,000
Renegotiated..... -- 54,000
-------- --------
Total............$209,000 $172,000
- -----------------------------------
</TABLE>
All renegotiated loans shown in 1996 were in compliance with the modified terms
for the period.
A loan is considered impaired when full collection of principal and interest is
not expected. There were no impaired loans in the portfolio at December 31,
1997 or 1996.
NON INTEREST INCOME
Non interest income declined $207,000 from the previous year. This decrease is
largely the result of the closing of operations in December, 1996 of Monex
Investment Corporation. Excluding Monex, the decline in non interest income
from the prior year was $24,000 driven primarily by decreased service charge
income on deposit accounts and decreased gains on the sale of loans.
NON INTEREST EXPENSE
Non interest expense decreased $139,000 during 1997. Excluding the expenses
related to Monex in 1996, non interest expenses increased $83,000 over the
prior year. This increase is a result of several factors, including decreased
salaries and benefits offset by increased director expenses, marketing expenses
and shareholder related expenses.
INCOME TAX EXPENSE
The 1997 provision for income tax was $ 491,000, up from $434,000 in 1996. This
figure reflects a higher taxable income in 1997.
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 $ 1,295,000
in federal funds sold in 1997. 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.
Throughout 1996 and 1997 the Bank used this source of funding (see Note 8) to
directly offset loans of like terms and conditions.
Other sources of liquidity include: internally generated cash flow, repayments
and maturities of loans, other borrowing and growth in core deposits.
At December 31, 1997 the securities available for sale were valued at
$6,271,000. It is not anticipated that management will use these funds due to
the optional sources that may be available in 1998.
Interest rate sensitivity management seeks to maximize net interest margins
through periods of changing 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 following 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 1997, the percentage of rate sensitive assets to rate sensitive
liabilities within the one-year time horizon was 98%.
<PAGE> 11
8
<TABLE>
<CAPTION>
0-30 31-90 Second Third Fourth Annual 1-3 3-5 Over 5
GAP MEASUREMENT Days Days Quarter Quarter Quarter Total Years Years Years Total
(Dollars in ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans .................... $10,759 $ 5,277 $ 5,823 $4,648 $ 3,013 $29,520 $ 6,732 $ 6,954 $24,528 $67,734
Loan repayment
offset ................... -- -- -- -- -- -- -- -- -- (6,400)
Allowance for loan
losses ................... -- -- -- -- -- -- -- -- -- (1,035)
Federal funds sold ....... -- -- -- -- -- -- -- -- -- 0
Investments(1) ........... 1,839 671 851 1,102 565 5,028 4,629 925 4,336 14,918
Mortgage-backed
repayments ............... -- -- -- -- -- -- -- -- -- (800)
Other non-earning
assets ................... -- -- -- -- -- -- -- -- -- 5,540
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total .................... $12,598 $ 5,948 $ 6,674 $5,750 $ 3,578 $34,548 $11,361 $ 7,879 $28,864 $79,957
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
LIABILITIES
Non interest
bearing deposits ......... $ 507 $ 608 $1,000) $ 916 $ 916 $ 3,947 $ 2,083 $ 1,875 $ 417 $ 8,322
Interest bearing
deposits ................. 5,496 8,682 7,154 5,321 3,972 30,625 13,583 6,576 5,315 56,099
Federal funds
purchased ................ 450 -- -- -- -- 450 -- -- -- 450
Long-term FHLB
borrowings ............... -- 86 -- -- 142 228 1,917 1,395 130 3,670
Other liabilities ........ -- -- -- -- -- -- -- -- -- 1,200
Capital .................. -- -- -- -- -- -- -- -- -- 10,216
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total .................... $ 6,453 $ 9,376 $ 8,154 $6,237 $5,030 $35,250 $17,583 $ 9,846 $ 5,862 $79,957
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
GAP ...................... $ 6,145 $(3,428) $(1,480) $ (487) $(1,452) $ (702) $(6,222) $(1,967) $23,002 $ --
Cumulative GAP ........... 6,145 $ 2,717 $ 1,237 $ 750 $ (702) $ (702) $(6,924) $(8,891) $14,111 --
GAP ratio ................ 195% 63% 82% 92% 71% 98% 65% 80% 492% --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Maturities reflect probable prepayments and calls.
<PAGE> 12
9
The chart shows the Bank's GAP position as of December 31, 1997. The Bank has a
liability sensitive position within one year of approximately $702,000, which
indicates higher net interest income may be earned if rates decrease 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, excluding the net unrealized gain on securities available
for sale, increased $823,000 or 8.79% to $10,188,000 at year-end 1997, which
represented 12.74% of total assets. At December 31, 1996, the similar ratio of
shareholders' equity to total assets was 11.87%. The Corporation has a strong
capital position that will meet our needs in 1998.
Regulators established "risk-based" capital guidelines that 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, 1997, the Bank
had a "risk-based" total capital to asset ratio of 19.7%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
<TABLE>
CAPITAL December 31, 1997
(Dollars in thousands) Risk-based Leverage
---------- --------
<S> <C> <C>
Actual amount .......... $10,799 $10,111
Actual percent ......... 19.7% 12.6%
Required amount ........ $ 4,375 $ 3,213
Required percent ....... 8.0% 4.0%
EXCESS AMOUNT .......... $ 6,424 $ 6,898
- -----------------------------------------------
</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 $10,799,000 in risk-based capital, $6,127,000 is available for dividends
to the parent Corporation in 1998 (before considering 1998 net income and any
changes in risk-based assets). The remaining $4,672,000 is restricted based on
the minimum risk-based capital requirements 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
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 an essentially balanced position between interest sensitive assets
and liabilities and actively manage 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.
IMPACT OF YEAR 2000 COMPLIANCE
The Corporation has received year 2000 vendor certifications on our primary
computer operating systems. Testing will be performed during the next year to
identify any applications that are not year 2000 compliant. In the event an
application is deemed to be non-compliant, corrective action will be taken. The
implementation of the Corporation's year 2000 plan is currently on schedule.
Costs associated with the year 2000 issue are currently deemed not to present a
material financial event.
<PAGE> 13
10
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, 1997 and 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and
its cash flows for the years ended December 31, 1997, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 27, 1998
<PAGE> 14
11
Capital Directions, Inc. consolidated balance sheets
<TABLE>
<CAPTION>
(In thousands, except share data) DECEMBER 31, 1997 1996
------- -------
<S> <C> <C>
ASSETS
Cash and non interest bearing deposits ...........................................................$ 2,188 $ 2,538
Interest bearing deposits ........................................................................ -- 139
Federal funds sold ............................................................................... -- 2,800
------- -------
Total cash and cash equivalents ............................................................ 2,188 5,477
Securities available for sale .................................................................... 6,271 10,100
Securities held to maturity (fair value of $7,705 in 1997 and $9,230 in 1996) .................... 7,483 9,033
Federal Home Loan Bank (FHLB) stock .............................................................. 364 364
Total loans ...................................................................................... 61,334 51,792
Less allowance for loan losses ................................................................... (1,035) (1,020)
------- -------
Net loans .................................................................................. 60,299 50,772
Premises and equipment, net ...................................................................... 618 567
Accrued interest receivable ...................................................................... 544 502
Other assets ..................................................................................... 2,190 2,105
------- -------
TOTAL ASSETS ...............................................................................$79,957 $78,920
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits: Non interest bearing .................................................................$ 8,322 $10,356
Interest bearing ..................................................................... 56,099 56,153
------- -------
Total deposits .......................................................................... 64,421 66,509
Accrued interest payable ........................................................................ 193 195
Other liabilities ............................................................................... 1,007 906
Federal funds purchased ......................................................................... 450 --
Long-term FHLB borrowings ....................................................................... 3,670 1,913
------- -------
Total liabilities .......................................................................... 69,741 69,523
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares authorized in 1997 and 1996, 595,056 and
297,428 shares outstanding in 1997 and 1996, respectively ....................................... 2,975 1,487
Additional paid-in capital ...................................................................... 2,561 2,559
Retained earnings ............................................................................... 4,652 5,319
Net unrealized gain on securities available for sale, net of tax of $14 in 1997 and $17 in 1996.. 28 32
------- -------
Total shareholders' equity ................................................................. 10,216 9,397
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................................$79,957 $78,920
======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 15
12
Capital Directions, Inc. consolidated statements of income
<TABLE>
<CAPTION>
(In thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees ................................ $4,962 $ 4,455 $ 4,683
Federal funds sold ................................... 68 115 99
Securities: Taxable -- available for sale ............ 552 621 342
Taxable -- held to maturity .............. 295 269 330
Tax exempt -- held to maturity ........... 236 260 256
Dividends on FHLB stock .............................. 29 29 30
Other interest income ................................ 2 20 --
------ ------- -------
TOTAL INTEREST AND DIVIDEND INCOME ................. 6,144 5,769 5,740
INTEREST EXPENSE
Deposits ............................................. 2,375 2,314 2,393
Federal funds purchased .............................. 12 1 15
Long-term FHLB borrowings ............................ 207 128 33
------ ------- -------
TOTAL INTEREST EXPENSE ............................. 2,594 2,443 2,441
------ ------- -------
NET INTEREST INCOME ................................... 3,550 3,326 3,299
Provision for loan losses ............................. -- -- 193
------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ... 3,550 3,326 3,106
NON INTEREST INCOME
Service charges on deposits .......................... 260 271 274
Merchant charge card fees ............................ 27 25 24
Net gain (loss) on sales of securities ............... (5) 6 --
Net gain on sales of loans ........................... 7 37 5
Gain on sale of land ................................. -- -- 193
Investment commission fees ........................... 14 197 364
Other income ......................................... 213 187 186
------ ------- -------
TOTAL NON INTEREST INCOME .......................... 516 723 1,046
Non interest expense
Salaries and wages ................................... 1,048 1,175 1,276
Pension and other employee benefits .................. 314 269 302
Net occupancy expense of premises .................... 139 155 148
Equipment rentals, depreciation, and maintenance ..... 194 208 258
Federal deposit insurance premium assessment ......... 8 2 76
Other operating expense .............................. 637 670 654
------ ------- -------
TOTAL NON INTEREST EXPENSE ......................... 2,340 2,479 2,714
------ ------- -------
INCOME BEFORE INCOME TAX EXPENSE ...................... 1,726 1,570 1,438
INCOME TAX EXPENSE .................................... 491 434 388
------ ------- -------
NET INCOME ............................................ $1,235 $ 1,136 $ 1,050
====== ======= =======
BASIC EARNINGS PER COMMON SHARE ....................... $ 2.08 $ 1.91 $ 1.77
====== ======= =======
DILUTED EARNINGS PER COMMON SHARE ..................... $ 2.07 $ 1.90 $ 1.76
====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 16
13
Capital Directions, Inc. consolidated statements of cash flows
<TABLE>
<CAPTION>
(In thousands) FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME .....................................................................................$ 1,235 $ 1,136 $ 1,050
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM
OPERATING ACTIVITIES
Depreciation ................................................................................ 120 114 121
Provision for loan losses.................................................................... -- -- 193
Net amortization (accretion) on securities .................................................. 52 83 130
Loans originated for sale ................................................................... -- (288) (2,019)
Proceeds from sales of loans originated for sale ............................................ -- 290 2,024
Net gain (loss) on sales of securities ...................................................... 5 (6) --
Net gain (loss) on sales of loans originated for sale ....................................... -- (2) (5)
Net gain (loss) on sales of non-residential loans ........................................... (7) (35) --
Gain on sale of land -- -- (193)
CHANGES IN ASSETS AND LIABILITIES: Accrued interest receivable ..... (42) (9) 5
Accrued interest payable ......... (2) (12) 37
Other assets ..................... (82) 65 248
Other liabilities ................ 77 (49) (44)
------- ------- -------
NET CASH FROM OPERATING ACTIVITIES.. 1,356 1,287 1,547
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale: Purchases ........................................................ (1,446) (4,328) (526)
Maturities, calls, and principal payments ....................... 3,548 2,382 743
Sales ............................................................ 1,674 -- --
Securities held to maturity: Purchases (180) (4,236) (1,549)
Maturities, calls, and principal payments ....................... 1,719 2,535 3,227
Cash management funds, net sales (purchases) ........................................................ -- 138 (55)
Proceeds from sales of non-residential loans ..................................................... 188 1,099 --
Net change in loans .............................................................................. (9,708) (3,147) 1,668
Proceeds from sale of land ....................................................................... -- -- 247
Premises and equipment expenditures .............................................................. (171) (32) (21)
------- ------- -------
NET CASH FROM INVESTING ACTIVITIES.. (4,376) (5,589) 3,734
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ........................................................................... (2,088) 301 (672)
Federal funds purchased .......................................................................... 450 -- --
Proceeds from long-term FHLB borrowings .......................................................... 2,000 262 1,500
Repayment of long-term FLHB borrowings ........................................................... (243) (229) (50)
Proceeds from shares issued upon exercise of stock options .......................................... 3 -- --
Dividends paid ................................................................................... (391) (330) (304)
------- ------- -------
NET CASH FROM FINANCING ACTIVITIES.. (269) 4 474
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................................. (3,289) (4,298) 5,755
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...................................................... 5,477 9,775 4,020
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................................................$ 2,188 $ 5,477 $ 9,775
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:Interest ............................................................$ 2,596 $ 2,455 $ 2,404
Income taxes -- federal.............................................. 524 529 373
</TABLE>
During 1995, $4,168 in securities held to maturity were transferred to
securities available for sale.
See accompanying notes to consolidated financial statements.
<PAGE> 17
14
Capital Directions, Inc. consolidated statements of changes
in shareholders' equity
<TABLE>
<CAPTION>
(In thousands, except share and Net Unrealized
per share data) Gain (Loss)
on Securities
FOR THE YEARS ENDED Additional Available Total
DECEMBER 31, 1997, Common Paid In Retained for Sale Shareholders'
1996 AND 1995 Stock Capital Earnings Net of Tax Equity
------ ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995.......... $1,487 $2,559 $ 3,782 $(180) $ 7,648
Net income for the year............ -- -- 1,050 -- 1,050
Cash dividends ($ .52 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 ($ .57 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
Net income for the year............ -- -- 1,235 -- 1,235
Cash dividends ($ .70 per share)... -- -- (415) -- (415)
Issuance of 100 shares of
common stock upon exercise
of stock options.................. 1 2 -- -- 3
Issuance of 297,528 shares of
common stock for
two-for-one stock split........... 1,487 -- (1,487) -- --
Net change in unrealized gain
(loss) on securities available
for sale, net of tax of ($3)...... -- -- -- (4) (4)
------ ---------- ------- --------- -----------
BALANCES, DECEMBER 31, 1997........ $2,975 $2,561 $ 4,652 $ 28 $10,216
====== ========== ======= ========= ===========
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
15
Notes to consolidated financial statements
(December 31, 1997, 1996 and 1995)
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. Securities are written down to fair value when a decline in fair
value is not temporary.
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
<PAGE> 19
16
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-offs 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.
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 repayment is expected solely from collateral. Loans
totaling $75,000 or more are evaluated for impairment when payments are
delayed, typically 90 days or more, or when it is probable that all principal
and interest will not be collected according to the original terms of the loan.
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 expense.
There were no properties held as other real estate at December 31, 1997 and
1996.
STOCK OPTIONS: No expense for stock options is recorded, as the grant price
approximates the market price of the stock at the date of grant. Proforma
disclosures in Note 9 show the effect on net income and earnings per common
share had the options' fair value been recorded using an option pricing model.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are 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. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
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 15. 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.
CASH FLOW REPORTING: Cash and cash equivalents are defined to include cash on
hand, non interest-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, long-term
interest-bearing deposits made with other financial institutions, and
short-term borrowings with an original maturity of 90 days or less are reported
on a net cash flow basis.
EARNINGS AND DIVIDENDS PER COMMON SHARE: Basic and diluted earnings per common
share are computed under a new accounting standard, SFAS No. 128, effective
beginning with the quarter ended December 31, 1997. All prior earnings per
common share amounts have been restated to be comparable. Basic earnings per
common share is based on net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
shows the dilutive effect of any additional potential common shares. Earnings
and dividends per common share are restated for all stock splits and stock
dividends, including the December 1, 1997 two-for-one stock split.
FUTURE ACCOUNTING CHANGES: A new accounting standard has been issued which will
require future reporting of comprehensive income. Comprehensive income is net
income plus changes in unrealized gains and losses on securities available for
sale.
RECLASSIFICATIONS: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 presentation.
<PAGE> 20
17
NOTE 2--RESTRICTIONS ON CASH AND NON INTEREST BEARING DEPOSITS
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 $402,000
and $399,000 at year end 1997 and 1996, respectively.
NOTE 3--SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
(In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
DECEMBER 31, 1997 AND 1996 Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
1997:
Obligations of U S Government agencies ........... $ 3,490 $ 22 $ (15) $ 3,497
Corporate securities .............................. 2,739 35 -- 2,774
--------- ---------- ---------- ---------
TOTALS ......................................... $ 6,229 $ 57 $ (15) $ 6,271
========= ========== ========== =========
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
========= ========== ========== =========
HELD TO MATURITY
1997:
Obligations of U S Government agencies ........... $ 2,908 $ 71 $ -- $ 2,979
Obligations of states and political subdivisions .. 4,539 151 -- 4,690
Collateralized mortgage obligations ............... 36 -- -- 36
--------- ---------- ---------- ---------
TOTALS ......................................... $ 7,483 $ 222 $ -- $ 7,705
========= ========== ========== =========
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
========= ========== ========== =========
</TABLE>
<PAGE> 21
18
The amortized cost and fair values of securities at year end 1997 by
contractual maturity, are shown below. 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>
(In thousands) Available For Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Due in one year or less ........... $ 495 $ 496 $ 1,308 $ 1,314
Due from one to five years ........ 3,742 3,777 1,135 1,164
Due from five to ten years ........ 513 501 892 930
Due after ten years ............... -- -- 1,204 1,282
---------- --------- ---------- ---------
$ 4,750 $ 4,774 $ 4,539 $ 4,690
Collateralized mortgage obligations
Variable rate .................... -- -- 36 36
U.S. Government mortgage-backed
securities
Fixed rate ....................... 866 868 2,383 2,430
Variable rate .................... 613 629 525 549
---------- --------- ---------- ---------
TOTALS ......................... $ 6,229 $ 6,271 $ 7,483 $ 7,705
========== ========= ========== =========
</TABLE>
During 1997 there were no sales or purchases of mutual funds. Net sales of
mutual funds were $138,000 in 1996. Net purchases of mutual funds were $55,000
in 1995. No gains or losses were realized on mutual fund sales in 1997, 1996 or
1995.
During 1997, $1,673,787 of securities classified as available for sale were
sold at a gross gain of $29,213 and a gross loss of $1,697. Net losses on calls
of securities totaled $32,674 in 1997. 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.
Securities with a carrying value of approximately $6,451,000 and $5,154,000 at
year end 1997 and 1996 were pledged to secure public deposits, long-term FHLB
borrowings and for other purposes as required or permitted by law.
<PAGE> 22
19
NOTE 4--LOANS
Year end loans were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
------- -------
<S> <C> <C>
Commercial and agricultural.... $ 4,241 $ 4,453
Real estate mortgage........... 53,492 43,600
Installment.................... 3,601 3,739
------- -------
TOTAL.......................... $61,334 $51,792
======= =======
</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) 1997 1996
------- ------
<S> <C> <C>
Balance, January 1..... $ 590 $ 633
New loans.............. 100 29
Repayments............. (73) (72)
Other charges, net..... (8) --
------- ------
BALANCE, DECEMBER 31,.. $ 609 $ 590
======= ======
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
NOTE 5--ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Balance, beginning
of period ............... $ 1,020 $ 995 $ 792
Provision for
loan losses ............. -- -- 193
Loans
charged-off ............. (26) (68) (40)
Recoveries .............. 41 93 50
-------- ------- ------
BALANCE, END OF PERIOD .. $ 1,035 $ 1,020 $ 995
======== ======= ======
</TABLE>
During 1997, 1996 and 1995, the Company had no loans which were considered
impaired.
NOTE 6--PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------- ---------
<S> <C> <C>
Land ............................ $ 86 $ 86
Buildings and improvements ...... 914 909
Furniture and equipment ......... 2,237 2,071
--------- ---------
Total cost....................... 3,237 3,066
========= =========
Less accumulated depreciation ... $ (2,619) $ (2,499)
--------- ---------
PREMISES AND EQUIPMENT, NET ..... $ 618 $ 567
========= =========
</TABLE>
NOTE 7--INTEREST-BEARING DEPOSITS
Year end interest-bearing deposits were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------- ----------
<S> <C> <C>
Interest-bearing demand .......... $ 9,976 $ 9,083
Savings .......................... 16,008 16,969
Time
In denominations less than
$100,000 ........................ 20,837 20,883
In denominations of $100,000
or more.......................... 9,278 9,218
--------- ----------
Total interest-bearing deposits... $ 56,099 $ 56,153
========= ==========
</TABLE>
At year end 1997, stated maturities of time deposits were as follows:
<TABLE>
<S> <C>
(In thousands)
1998 ............................ $ 18,165
1999 ............................ 5,807
2000 ............................ 3,431
2001 ............................ 476
2002 ............................ 2,236
TOTAL............................ $ 30,115
</TABLE>
Related party deposits totaled approximately $267,000 and $573,000 at year end
1997 and 1996.
<PAGE> 23
20
NOTE 8--LONG-TERM FHLB BORROWINGS
Advances at year end were:
<TABLE>
<CAPTION>
(In thousands)
1997 1996
------ ------
<S> <C> <C>
FHLB ADVANCES:
6.45%, due May 5, 1999 .............. $ 500 $ --
6.70%, due March 27, 2000 ........... 1,000 --
5.67%, due February 15, 2001 ........ 269 327
6.72%, due May 7, 2001 .............. 500 --
6.21%, due November 15, 2002 ........ 450 521
6.24%, due November 15, 2002 ........ 717 803
5.88%, due January 15, 2003 ......... 234 262
------ ------
TOTAL LONG-TERM FHLB BORROWINGS ..... $3,670 $1,913
====== ======
</TABLE>
Each advance carries a fixed interest rate with interest payable monthly.
Securities safekept at the FHLB, with a carrying value of approximately
$4,588,000 at year end 1997, are pledged as collateral for these advances.
At year end 1997, scheduled principal reductions on these advances were:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 .......... $ 228
1999 .......... 714
2000 .......... 1,203
2001 .......... 694
2002 .......... 701
Thereafter..... 130
------
Total ......... $3,670
======
</TABLE>
All notes have a prepayment penalty based upon the present value of the lost
cash flow to the FHLB.
NOTE 9--BENEFIT 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 1997 and 1996 and $45,000
in 1995.
An incentive compensation plan is also maintained for certain employees and is
based upon key performance factors. The expense for the plan was approximately
$42,000 in 1997, $37,000 in 1996 and $34,000 in 1995.
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. Under the plan, up to 40,000 unauthorized and newly
issued shares of common stock may be issued upon exercise of stock options
granted under the plan. 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. Accordingly, no compensation cost was recognized in 1997, 1996 and 1995.
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. All shares and per share amounts have been
restated for stock splits.
A summary of activity in the plan is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average
Available Out- Exercise
for Grant standing Price
--------- -------- --------
<S> <C> <C> <C>
Balance at
January 1, 1995 .... 40,000 -- $ --
Granted ............ (4,000) 4,000 12.75
--------- -------- --------
Balance
December 31, 1995 .. 36,000 4,000 12.75
Granted ............ (4,000) 4,000 18.00
--------- -------- --------
Balance
December 31, 1996 32,000 8,000 15.38
Granted ............ (4,000) 4,000 21.88
Exercised .......... -- (200) 12.75
Forfeited .......... 400 (400) 12.75
--------- -------- --------
BALANCE
DECEMBER 31, 1997 .. 28,400 11,400 $17.80
========= ======== ========
</TABLE>
<PAGE> 24
21
At December 31, 1997, 1,133 options were exercisable at an exercise price of
$12.75 per share. No options were exercisable at December 31, 1996 and 1995.
The proforma effect of the fair value of options granted on the Company's net
income and earnings per share was not material for 1997, 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 $85,000 in 1997, $105,000 in
1996 and $96,000 in 1995. Insurance on the lives of the participants has also
been purchased with the Bank as owner and beneficiary of the policies.
NOTE 10--OTHER OPERATING EXPENSE
Other operating expense consists of:
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Supplies ................... $ 53 $ 51 $ 60
State taxes ................ 66 68 82
Deferred
compensation ............... 85 105 96
Other expense............... 433 446 416
------ ----- -----
TOTAL ...................... $ 637 $ 670 $ 654
====== ===== =====
</TABLE>
NOTE 11--INCOME TAX
Income tax expense consists of:
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Taxes currently
payable .................. $ 517 $ 477 $ 458
Deferred benefit ......... (26) (43) (70)
------ ------ ------
TOTAL .................... $ 491 $ 434 $ 388
====== ====== ======
</TABLE>
Year end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Deferred tax assets
Allowance for
loan losses .............. $ 230 $ 230 $ 230
Deferred
compensation ............. 299 273 229
Deferred loan
fees ..................... 5 7 12
Other .................... 3 4 3
------- ----- -----
537 514 474
Deferred tax
liabilities
Fixed assets ............. (37) (40) (46)
Net unrealized
gain on
securities
available
for sale ................. (14) (17) (13)
Deferred gain
on installment
sale ..................... (43) (45) (46)
Other..................... (27) (25) (21)
------- ----- -----
(121) (127) (126)
------- ----- -----
TOTAL ..................... $ 416 $ 387 $ 348
======= ===== =====
</TABLE>
An allowance against deferred tax assets has not been recorded for 1997, 1996
or 1995.
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>
(In thousands)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory rate .... $ 34% $ 34% $ 34%
Income tax
computed at
statutory rate .... 587 534 489
Tax effect of
Nontaxable
Income .......... (72) (78) (77)
Other ........... (24) (22) (24)
------- ------- -------
TOTAL ............. $ 491 $ 434 $ 388
======= ======= =======
</TABLE>
<PAGE> 25
22
NOTE 12--EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic earnings per
common share and diluted earnings per common share computations for the years
ended is presented below:
<TABLE>
<CAPTION>
(In thousands, except per share data)
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per common share:
Net income available to common shareholders .... $ 1,235 $ 1,136 $ 1,050
--------- ---------- ----------
Weighted average common shares outstanding ..... 595 595 595
--------- ---------- ----------
Basic earnings per common share ................ $ 2.08 $ 1.91 $ 1.77
========= ========== ==========
Diluted earnings per common share:
Net income available to common shareholders .... $ 1,235 $ 1,136 $ 1,050
--------- ---------- ----------
Weighted average common shares outstanding for
basic earnings per common share ................ 595 595 595
Add: dilutive effect of assumed exercise of
stock options .................................. 3 2 1
--------- ---------- ----------
Weighted average common shares outstanding for
diluted earnings per common share .............. 598 597 596
--------- ---------- ----------
Diluted earnings per common share .............. 2.07 $ 1.90 $ 1.76
========= ========== ==========
</TABLE>
In February of 1998, the Company granted stock options for 4,400 shares of
common stock which may affect the computation of diluted earnings per common
share in future periods.
NOTE 13--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 unused lines
of credit, commitments to make loans and standby letters of credit 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 are as follows at year end:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
-------- --------
<S> <C> <C>
Unused lines of credit ...... $ 6,227 $ 5,565
Commitments to make loans ... 342 328
Standby lines of credit...... 269 315
</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 14--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,
<PAGE> 26
23
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>
Tier 1
Capital to Capital
Risk-Weighted Assets To Average
Total Tier 1 Assets
----- ------ ----------
<S> <C> <C> <C>
Well
capitalized ... 10% 6% 5%
Adequately
capitalized ... 8 4 4
Under-
capitalized ... 6 3 3
</TABLE>
At year end, Bank actual capital levels and minimum required levels were:
<TABLE>
<CAPTION>
(Dollars in thousands)
Minimum Required
To Be
Well Capitalized
Under
Minimum Required Prompt Corrective
For Capital Action
Actual Adequacy Purposes Regulations
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
1997
Total capital (to risk weighted assets) ..... $10,799 19.7% $ 4,375 8.0% $ 5,468 10.0%
Tier 1 capital (to risk weighted assets)..... 10,111 18.5 2,187 4.0 3,281 6.0
Tier 1 capital (to average assets) .......... 10,111 12.6 3,213 4.0 4,017 5.0
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 18.3 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
</TABLE>
The Bank was considered well capitalized at year end 1997 and 1996.
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 1997, the Bank could
pay approximately $6,127,000 in dividends to the parent company without prior
regulatory approval.
NOTE 15--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.
<PAGE> 27
24
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
(In thousands)
1997 1996
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents ................. $2,188 $ 2,188 $5,477 $5,477
Securities available for sale ............. 6,271 6,271 10,100 10,100
Securities held to maturity ............... 7,483 7,705 9,033 9,230
Loans, net of allowance for loan losses ... 60,299 61,162 50,772 51,448
Accrued interest receivable ............... 544 544 502 502
FINANCIAL LIABILITIES
Deposits .................................. (64,421) (64,597) (66,509) (66,798)
Federal funds purchased ................... (450) (450) -- --
Long-term FHLB borrowings ................. (3,670) (3,704) (1,913) (1,889)
Accrued interest payable .................. (193) (193) (195) (195)
</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 items at year end 1997 or 1996, 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 1997 and
1996 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 16--CAPITAL DIRECTIONS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) DECEMBER 31, 1997 1996
------- ------
<S> <C> <C>
ASSETS
Cash, due from banks, and other
cash equivalents ....................... $ 4 $ 14
Investment in Mason State Bank ......... 10,139 9,182
Investment in Monex Financial
Services, Inc .......................... 4 151
Other assets ........................... 182 139
------- ------
TOTAL ASSETS ........................... $10,329 $9,486
======= ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Dividends payable ...................... $ 113 $ 89
Shareholders' equity ................... 10,216 9,397
------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ................... $10,329 $9,486
======= ======
</TABLE>
<PAGE> 28
25
CONDENSED STATEMENTS OF INCOME
(YEARS ENDED DECEMBER 31,)
<TABLE>
<CAPTION>
(In thousands)
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
OPERATING INCOME
Dividends from
Mason State Bank ......... $338 $420 $351
Dividends from
Monex Financial
Services, Inc. ........... 148 -- 3
------ ------ ------
486 420 354
------ ------ ------
OPERATING EXPENSE
Wages and
benefits ................. 68 68 17
Other expense and
income tax benefit ....... (3) (6) 4
------ ------ ------
65 62 21
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED
NET INCOME OF SECURITIES.. 421 358 333
Equity in undistributed
net income of
Mason State Bank ......... 961 791 709
Equity in undistributed
(excess distributed)
net income of
Monex Financial
Services, Inc. ........... (147) (13) 8
------ ------ ------
814 778 717
------ ------ ------
NET INCOME................ $1,235 $1,136 $1,050
====== ====== ======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
(YEARS ENDED DECEMBER 31,)
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS
FROM OPERATING
ACTIVITIES
Net income ............. $1,235 $1,136 $1,050
Adjustments to
reconcile net
income to net cash
from operating
activities
Equity in
undistributed
net income of
subsidiaries .......... (814) (778) (717)
Change in
other assets .......... (43) (19) (40)
------ ------ ------
Net cash from
operating activities ... 378 339 293
CASH FLOWS
FROM FINANCING
ACTIVITIES
Proceeds from
shares issued upon
exercise of stock
options ................ 3 -- --
Dividends paid ......... (391) (330) (304)
------ ------ ------
Net cash from
financing activities ... (388) (330) (304)
------ ------ ------
NET CHANGE IN
CASH AND CASH
EQUIVALENTS ............ (10) 9 (11)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF
YEAR ................... 14 5 16
------ ------ ------
CASH AND CASH
EQUIVALENTS AT
END OF YEAR ............ $4 $14 $5
====== ====== ======
</TABLE>
<PAGE> 29
26
1997 HIGHLIGHTS
The 1997 Rapid Response Home Equity campaign was introduced during the first
quarter of 1997. The Home Equity Line product is a revolving line of credit
that offers a fixed rate through the end of the year, then converts to a tiered
rate on January 1 of the following year. Sales of this product resulted in a
20.8% increase in outstanding balances at December 31, 1997 compared to
December 31, 1996. Also included in the promotion is a fixed-rate Home Equity
product that provides an alternative for those who prefer a consistent payment
amount through the term of the loan.
The new Homebuyer's Free Checking Program was released in the first quarter.
The program is offered free of charge to all new and existing Mason State Bank
mortgage customers that choose to have their mortgage payment automatically
deducted from their checking account. This eliminates the worry of late
payments and fees, and frees our customers from the bother of payment coupons
or postage for the full term of their mortgage. Also included in the program is
a MasterMoney Cheque Card, a Checking Resource line of credit and discounts on
other Bank services. Over 26% of new mortgages written in 1997 took advantage
of this offer.
In September, Mason State Bank and G & R Felpausch Company finalized
negotiations for an in-store Bank in the Leslie Felpausch Food Center. "We are
delighted to be able to team up with Mason State Bank to bring the convenience
of a full range of banking services to our Leslie Felpausch customers," said
Parker T. Feldpausch, President of G & R Felpausch Company. This partnership
will provide a new level of convenience for Felpausch customers to bank while
they shop! The in-store branch will provide a full range of consumer and
commercial loan, deposit, investment and insurance products. Watch for upcoming
promotions and join us for the Grand Opening celebrations in 1998.
In November, Bonnie Kubicek joined PRIMEVEST Financial Services, Inc., an
independent, registered broker-dealer located at Mason State Bank. Bonnie, who
is a registered General Securities Representative with PRIMEVEST, is able to
provide investors with knowledgeable insight and guidance to help meet their
investment goals. PRIMEVEST, Financial is an experienced brokerage firm with a
national reputation, headquartered in St. Cloud, Minnesota. PRIMEVEST provides
mutual funds, stocks and bonds, tax-deferred annuities, and other investment
products to customers of financial institutions. Prior to joining PRIMEVEST
Financial, Bonnie was with Security First Group, Independence One Investment
Group, and Merrill Lynch, for a combined total of 20 years. Call Bonnie at
(517) 676-0534 for your personal financial analysis.
In the fourth quarter of 1997, Lois A. Toth was welcomed as the Controller for
Mason State Bank and Treasurer of Capital Directions, Inc. Lois brings over 26
years of diversified experience in financial and management accounting to the
position. Most recently Assistant Vice President and Accounting Manager of
Citizens Bank in Flint, Lois was responsible for financial management and
regulatory reporting for eight bank locations.
In the fourth quarter, the decision was made to implement a Marketing Customer
Information File (MCIF). An MCIF will let the Bank input customer, product and
account level information and combine them into one source which is accessed on
a personal computer. The system then checks all of the information and rebuilds
the files, condensing all information about the customer into one household. We
will have a complete picture of the relationships that any member of the
household has with Mason State Bank. This ultimately provides immediate and
accurate analysis of the customer base, and allows us to compare, summarize,
analyze, segment, research or even add information to any or all of the record.
This strategic action will be instrumental to future sales planning and
implementation.
Also instrumental in the success of Mason State Bank is the evolution of our
sales force. During 1997, the Bank showed an impressive increase in the loan
portfolio. This increase is attributed to both exceptional development of
individuals involved in the sales process and the business units that support
those sales activities. The Board and Management are very proud of the
accomplishments that are only possible when everyone works together as a team!
[PHOTO] [PHOTO]
Kimberly A. Dockter Bonnie Kubicek
CPS, Executive
Secretary was named PSI [PHOTO]
Secretary of the year. Lois M. Toth
[PHOTO] [PHOTO]
In June of 1997 Melanie J. Greene
Joanne R. Bowerman graduated from the
graduated from the Bank Marketing Association's
Michigan Bankers Association's 1997 School of Bank
1997 Robert M. Perry Schools Marketing and Management
of Banking General Banking in Boulder, CO.
School in Mount Pleasant, Michigan
<PAGE> 1
EXHIBIT 23
----------
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report, dated
February 27, 1998, on the consolidated financial statements of Capital
Directions, Inc. which appears on page 10 of Capital Directions, Inc.'s 1997
Annual Report to Shareholders and is incorporated by reference in Capital
Directions, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1997, in the registration statement on Form S-8 for the Capital Directions,
Inc. Incentive Stock Option Plan.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 ANNUAL
REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,188
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,271
<INVESTMENTS-CARRYING> 7,483
<INVESTMENTS-MARKET> 7,705
<LOANS> 61,334
<ALLOWANCE> 1,035
<TOTAL-ASSETS> 79,957
<DEPOSITS> 64,421
<SHORT-TERM> 450
<LIABILITIES-OTHER> 1,200
<LONG-TERM> 3,670
0
0
<COMMON> 2,975
<OTHER-SE> 7,241
<TOTAL-LIABILITIES-AND-EQUITY> 79,957
<INTEREST-LOAN> 4,962
<INTEREST-INVEST> 1,083
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 6,144
<INTEREST-DEPOSIT> 2,375
<INTEREST-EXPENSE> 2,594
<INTEREST-INCOME-NET> 3,550
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 2,340
<INCOME-PRETAX> 1,726
<INCOME-PRE-EXTRAORDINARY> 1,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,235
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 4.99
<LOANS-NON> 48
<LOANS-PAST> 161
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,020
<CHARGE-OFFS> 26
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 1,035
<ALLOWANCE-DOMESTIC> 85
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 950
</TABLE>
