1
2000 ANNUAL REPORT TABLE OF CONTENTS
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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.
A message from the President and CEO.......................... 2
Shareholder returns 1990-2000................................. 3
Stock and shareholder information............................. 4
Market for common stock and related security holder matters... 4
Management, officers, and directors........................... 4-5
Financial highlights.......................................... 5
Selected financial data....................................... 6
Management's discussion and analysis
of financial condition and results of operations.............. 7-11
Report of independent auditors................................ 12
Capital Directions, Inc. consolidated balance sheets.......... 13
Capital Directions, Inc. consolidated statements of income.... 14
Capital Directions, Inc. consolidated statements of
cash flows.................................................... 15
Capital Directions, Inc. consolidated statements of changes
in shareholders' equity....................................... 16
Notes to consolidated financial statements
(December 31, 2000, 1999 and 1998)............................ 17-24
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ANNUAL REPORT 2000
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TO OUR SHAREHOLDERS
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[TIMOTHY P. GAYLORD PHOTO]
RECORD EARNINGS
I am pleased to report that 2000 was a year of record-setting results for
Capital Directions, Inc. Net income grew to $1,650,000 which represents the
eleventh consecutive increase in annual earnings and set a benchmark as the
highest annual earnings in corporate history. In addition, September of 2000 was
the best month of earnings in Mason State Bank's 114 year history. As a result,
basic earnings per share increased to $2.76 compared with $2.51 in 1999. This
represents an increase of 10%. Return on shareholder's equity of 13.28% and
return on assets of 1.54% mirrors this excellent operating performance.
NON INTEREST INCOME
The fluctuating prime rate truly helped make 2000 an interesting year to watch
the stock market. In an economy punctuated by interest rate volatility and
shrinking margins, Mason State Bank heightened emphasis on non interest income.
Increasing sales of investment services, re-pricing deposit services and
initiating new vendor relationships caused non interest income to increase by
over 34%. Our strategic objective is to become less dependent on interest income
and keep earnings on track even as margins continue to narrow industry wide. We
clearly met this objective in 2000 and look for continued opportunities in 2001.
CONTROLLING EXPENSES
As margins continue to shrink, the ability to control expenses is fundamental to
the success of a community bank. A measurement of a bank's expense control is
the efficiency ratio. An efficiency ratio of 50.82 ranks Capital Directions in
the top 10% of peer banks.
In an effort to control expenses while remaining customer-focused, Mason State
Bank undertook a major renovation project at the Main Office. The remodel has
created greater efficiency in the drive-up with a tube system that delivers the
customer's transaction directly to the lobby teller area. Now, any available
teller is able to serve customers in the drive-up. This is a much more efficient
use of employee time and reduces customer wait periods. The remodel also allowed
for a redesigned teller area that provides a more secure environment as well as
private offices for customers to meet with our Personal Bankers.
CREDIT QUALITY
If a financial institution loosens credit quality, a weakening economy often
leads to problem assets and loan losses. The continued adherence to a strong
credit culture has minimized credit risk for Mason State Bank. Credit quality
across all portfolios continues to be very strong. Non-performing loans
decreased 59% from 1999 levels. Net charge-offs for 2000 totaled only $8,000.
BANKING ENVIRONMENT - MORTGAGE LOANS
Forecasts indicate a falling rate environment in 2001. When interest rates
decrease, activity in the mortgage loan and refinance area increases. This
presents the opportunity to gain additional share of wallet by offering
prospects the convenience of purchasing deposit and insurance products while
refinancing their loan.
BANKING ENVIRONMENT - CONSOLIDATIONS
Continuing consolidation within the banking industry presents both opportunities
and challenges. Merger activity within our markets continues to work in our
favor. The acquisition of prominent competitors by regional banks often
displaces many of their customers who prefer personal financial services. Mason
State Bank provides that personal service. Yet, we cannot lag far behind our
competitors in our use of new technologies. In an effort to ascertain the
technology needs of our customer base, a survey was mailed in November of 2000.
We will continue to research and implement proven cost-effective systems that
enhance our ability to serve our customers. In addition, we look to continue to
improve our data processing capabilities with an upgrade to our processing
system scheduled for the spring of 2001.
THANK YOU!
Two thousand was an excellent year for Capital Directions, Inc. Record earnings,
improvement in non interest income, increase in quarterly dividends, excellent
asset quality and a newly remodeled Main Office facility all contributed to
produce superior returns for our shareholders. Given Mason State Bank's capital
strength, credit quality and strong management, we are well positioned for the
future. As clients, employees and shareholders, we are excited about our future
potential.
Thank you for your continued support. We look forward to seeing you at the
Annual Shareholders' Meeting, April 26, 2001 at the Main Office in downtown
Mason, across from the courthouse.
Sincerely,
/s/ Timothy P. Gaylord
Timothy P. Gaylord
President and CEO
Capital Directions, Inc. and Mason State Bank
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ANNUAL REPORT 2000
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STOCK PERFORMANCE
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THE 5-YEAR ANNUALIZED RETURN ON CAPITAL DIRECTIONS, INC. STOCK WAS 18.61%(1)
THE 10-YEAR ANNUALIZED RETURN ON CAPITAL DIRECTIONS, INC. STOCK WAS 20.09%(1)
Capital Directions, Inc. shareholders taking advantage of the dividend
reinvestment program experienced an overall annual compounded rate of return of
18.61% since December of 1995(1).
12/31/00 $24,831
12/31/95 $10,000
SHAREHOLDER RETURNS 1990-2000
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET INCOME $ 578 $ 678 $ 835 $ 869 $ 930 $ 1,050 $ 1,136 $ 1,235 $ 1,334 $ 1,449 $ 1,650
(In thousands)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
RETURN ON EQUITY 10.41% 11.54% 13.10% 12.62% 12.48% 12.71% 12.67% 12.47% 12.53% 13.06% 13.28%
(ROE)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
RETURN ON ASSETS .76% .85% 1.10% 1.14% 1.24% 1.40% 1.49% 1.56% 1.47% 1.44% 1.54%
(ROA)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
BOOK VALUE PER SHARE $ 9.59 $10.23 $11.14 $12.17 $12.86 $ 14.45 $ 15.80 $ 17.17 $ 18.48 $ 19.82 $ 21.46
(Retroactively adjusted
for stock splits)
[BAR GRAPH]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
SHAREHOLDERS' EQUITY 7.13% 7.69% 8.47% 9.52% 10.05% 11.04% 11.91% 12.78% 10.97% 11.19% 11.16%
TO TOTAL ASSETS
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(1) Computation assumes quarterly reinvestment of dividends. Capital Directions,
Inc. stock is not listed on any exchange. Its shares are traded through local
brokers. 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.
Return is determined by an investment accumulation schedule using the beginning
value per share and the ending value per share including additional shares or
fractional shares earned through quarterly dividend reinvestment.
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ANNUAL REPORT 2000
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STOCK AND SHAREHOLDER INFORMATION
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STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
59 Maiden Lane
New York, New York 10038
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, 2000 will be held at the
Mason State Bank Main Office, 322 South Jefferson Street, Mason, Michigan on
Thursday, April 26, 2001 at 6:30 p.m.
HOW TO ORDER FORM 10-K
The Corporation's 2000 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.
MARKET FOR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
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Capital Directions, Inc. stock is not listed on any exchange. Its shares are
traded through the local brokers of First Union Securities, Morgan Stanley Dean
Witter and Raymond James & Assoc., Inc. 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, 2000, there were approximately 437
holders of the Company's common stock. Dividends are declared on a quarterly
basis with a total of $760,000 declared in 2000 and $681,000 in 1999.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
2000
High............. $ 42.00 $ 40.75 $ 40.50 $ 40.50
Low.............. 39.25 39.50 35.00 36.25
Dividend
per share
declared....... 0.30 0.31 0.32 0.34
1999
High............. $ 36.75 $ 36.75 $ 39.25 $ 41.00
Low.............. 31.25 35.00 35.25 39.50
Dividend
per share
declared....... 0.27 0.28 0.29 0.30
CAPITAL DIRECTIONS, INC. BOARD OF DIRECTORS AND OFFICERS
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BOARD OF DIRECTORS
GEORGE A. SULLIVAN
Chairman, Capital Directions, Inc.
Private Practice Attorney
GERALD W. AMBROSE
Vice Chairman, Capital
Directions, Inc.
County Controller, Ingham County
TIMOTHY P. GAYLORD
President & Chief Executive
Officer, Capital Directions, Inc.
DOUGLAS W. DANCER
Secretary, Capital Directions,
Inc., Realtor, CB Richard Ellis
Martin
MARVIN B. OESTERLE
Partner, Golden Acres Farms and
Oesterle Brothers Seed Corn
PAULA JOHNSON
Co-owner, Vision Real Estate and
Developer, PAL, LLC (ie: Vision
Village Condominiums)
JAMES W. LEASURE
Owner, Paul's Marathon Service,
Inc., Owner, Showtime, Inc.
OFFICERS
GEORGE A. SULLIVAN
Chairman
GERALD W. AMBROSE
Vice Chairman
TIMOTHY P. GAYLORD
President & Chief Executive Officer
DOUGLAS W. DANCER
Secretary
LOIS A. TOTH
Treasurer
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ANNUAL REPORT 2000
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FINANCIAL HIGHLIGHTS
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CHANGE CHANGE
2000 1999 AMOUNT PERCENT
INCOME STATEMENT
Net interest income.............................. $ 4,160,000 $ 4,085,000 $ 75,000 1.84%
Net income....................................... 1,650,000 1,499,000 151,000 10.07
Basic earnings per share......................... 2.76 2.51 0.25 9.96
Cash dividend declared per share................. 1.27 1.14 0.13 11.40
RATIOS
Return on average shareholders' equity........... 13.28% 13.06%
Return on average assets......................... 1.54 1.44
Standard efficiency (1).......................... 50.82 51.53
Average shareholders' equity as a
percentage of average assets................... 11.59 11.00
BALANCE SHEET
Total assets..................................... $ 115,023,000 $ 105,713,000 $ 9,310,000 8.81%
Total earning assets............................. 109,249,000 99,892,000 9,357,000 9.37
Total loans, net................................. 84,596,000 88,057,000 (3,461,000) (3.93)
Total deposits................................... 72,423,000 72,030,000 393,000 0.55
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(1) Calculated as non interest expense divided by net interest income, on a
fully taxable equivalent basis, plus non interest income.
MASON STATE BANK MANAGEMENT
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TIMOTHY P. GAYLORD
President & Chief Executive Officer
THOMAS L. PETERSON
Senior Vice President, Retail
Banking & Operations
KATHLEEN BAKER
Vice President, Mortgage Loans
LOIS A. TOTH
Vice President & Controller
THOMAS W. SCHROEDER
Vice President, Commercial Loans
ELIZABETH J. LUTTRELL-WILSON
Assistant Vice President, Human
Resources & Security
MELANIE J. OLSON
Assistant Vice President, Director
of Marketing
THELMA HINES
Customer Service Officer
LEA L. AMMERMAN
Branch Manager
MARY E. BENJAMIN
Operations Officer
AT MASON STATE BANK DURING 2000
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[LOIS TOTH PHOTO]
LOIS TOTH who serves as Controller was promoted to Vice President of Mason State
Bank. She is also Treasurer of Capital Directions, Inc. Lois joined Mason State
Bank in 1998 and has over 28 years of diversified experience in financial
management accounting.
[TOM SCHROEDER PHOTO]
TOM SCHROEDER joined Mason State Bank as Vice President, Commercial Loans. He
brings over 20 years of experience in the banking field.
[JIM LEASURE PHOTO]
JIM LEASURE joined the Capital Directions, Inc. Board of Directors. Mr. Leasure
has owned and operated Paul's Marathon Service, Inc., an award winning
convenience store and deli, since 1976. Jim and his family also own and operate
several other businesses in the Mason area.
[MICHELLE CARIE PHOTO]
MICHELLE CARIE joined Mason State Bank as Loan Processing Supervisor. Michelle
brings over nine years of banking experience with special emphasis on mortgage
lending.
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ANNUAL REPORT 2000
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SELECTED FINANCIAL DATA
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(In thousands, except per share data)
2000 1999 1998 1997 1996
SUMMARY OF OPERATIONS
Interest and dividend income............. $ 7,958 $ 7,525 $ 6,880 $ 6,092 $ 5,709
Interest expense......................... 3,798 3,440 3,125 2,594 2,443
--------- --------- --------- --------- ---------
Net interest income...................... 4,160 4,085 3,755 3,498 3,266
Provision for loan losses................ 6 48 (23) -- --
Non interest income...................... 794 592 565 568 783
Non interest expense..................... 2,569 2,471 2,461 2,340 2,479
--------- --------- --------- --------- ---------
Income before income tax expense......... 2,379 2,158 1,882 1,726 1,570
Income tax expense....................... 729 659 548 491 434
--------- --------- --------- --------- ---------
Net income............................... $ 1,650 $ 1,499 $ 1,334 $ 1,235 $ 1,136
========= ========= ========= ========= =========
PER SHARE(1)
Average shares outstanding............... 597,704 596,200 595,064 594,926 594,856
Basic earnings(2)........................ $ 2.76 $ 2.51 $ 2.24 $ 2.08 $ 1.91
Diluted earnings(2)...................... 2.74 2.49 2.22 2.07 1.90
Dividends declared....................... 1.27 1.14 0.96 0.70 0.57
Book value............................... 21.46 19.82 18.48 17.17 15.80
RATIOS BASED ON NET INCOME
Net income to average shareholders'
equity................................. 13.28% 13.06% 12.53% 12.47% 12.67%
Net income to average assets............. 1.54 1.44 1.47 1.56 1.49
BALANCE SHEET
Assets................................... $ 115,023 $ 105,713 $ 100,229 $ 79,957 $ 78,920
Net loans................................ 84,596 88,057 80,904 60,299 50,772
Short-term investments................... 5,963 54 626 188 2,800
Securities............................... 17,637 10,726 12,383 14,118 19,497
Deposits................................. 72,423 72,030 72,389 64,421 66,509
Long-term Federal Home Loan Bank
borrowings............................. 28,339 18,861 15,593 3,670 1,913
Shareholders' equity..................... 12,834 11,828 10,997 10,216 9,397
(1) A 2-for-1 stock split was declared on the common stock November 3, 1997 and
paid December 1, 1997. Earnings, dividends, book value, price per share figures
and share amounts have been restated to give retroactive effect to this split.
(2) Restated to reflect adoption of SFAS No. 128 on December 31, 1997.
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ANNUAL REPORT 2000
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The following discussion and analysis provides additional information concerning
the consolidated financial condition and results of operations for Capital
Directions, Inc. (the "Corporation") 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 affect if implemented.
PERFORMANCE SUMMARY
In 2000, Capital Directions, Inc. and its subsidiaries reported record net
earnings of $1,650,000. This is an increase of 10.07% over the previous year.
Basic earnings per share were $2.76 in 2000 compared to $2.51 in 1999. In 2000,
return on average assets increased to 1.54% from 1.44% in 1999. This increase is
attributable to the growth percentage in net income of the Corporation exceeding
the percentage growth in total average assets during 2000. Return on
shareholders' equity was 13.28%, up from 13.06% in 1999. As of December 31, 2000
the leveraged capital ratio, which excludes the net unrealized gain or loss on
securities available for sale was 11.4%, up from 11.1% the prior year and well
in excess of the 4.0% minimum required by regulatory authorities.
The following table provides a summary of the factors impacting net income in
2000 compared to the same components in 1999:
(In thousands)
1999 NET INCOME........................ $ 1,499
Increase (decrease) in net income....
Interest income...................... 433
Interest expense..................... (358)
Provision for loan losses............ 42
Non interest income.................. 202
Non interest expense................. (98)
Income taxes......................... (70)
-----------
2000 NET INCOME $ 1,650
In 1999, net income for the Corporation was $1,499,000, which was an increase of
12.37% over net earnings of $1,334,000 for 1998. Basic earnings per share
increased to $2.51 in 1999 compared to $2.24 in 1998. The 1999 return on average
assets decreased to 1.44% from 1.47% in 1998. Return on average shareholders'
equity was 13.06%, up from 12.53% in 1998. The leveraged capital ratio for the
year ending December 31, 1999 was 11.1%, down from 11.2% the prior year.
The operations of our Holding Corporation did not materially affect the
consolidated financial results for 2000, 1999 or 1998.
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 2000, on a fully taxable equivalent basis, was
$4,258,000, an increase of $55,000 over 1999. For 1999, net interest income, on
a fully taxable equivalent basis, increased $338,000 over 1998. Average balances
and rates on major categories of interest earning assets and interest bearing
liabilities appear in Table 1. The affect on net interest income from changes in
average balances ("volume") and yields, and rates ("rate") are quantified in
Table 2. As shown, net interest income improved in 2000 generally due to rate
increases in earning assets and in 1999 generally due to volume increases in
earning assets.
Yields on assets and funding rates were higher in 2000 compared to 1999,
reflecting a rising rate environment. Average tax equivalent yields on earning
assets increased to 7.91% in 2000 from 7.75% in 1999. Interest bearing liability
rates increased to 4.53% in 2000 from 4.23% in 1999. Despite an increase in net
interest income related primarily to increased rates, the tax equivalent net
interest margin decreased by 8 basis points. This was primarily related to the
change in the structure of earning assets and the Bank's liability sensitive GAP
position. As loan demand declined throughout the year, these funds were used to
increase the securities portfolio, which tend to be at lower yields as compared
to loans. In addition, because of the Bank's liability sensitive position, as
shown on the following page, and considering the rising interest rate
environment during 2000, the Bank's interest bearing liabilities repriced at
higher rates faster than the Bank's interest bearing assets.
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TABLE 1
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(Dollars in 2000 1999 1998
thousands) INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE* RATE* BALANCE EXPENSE* RATE* BALANCE EXPENSE* RATE*
Loans $ 87,651 $ 7,063 8.06% $ 86,397 $ 6,798 7.87% $ 69,172 $ 5,870 8.49%
Other
earning
assets....... 14,220 993 6.98 12,245 845 6.90 16,633 1,120 6.73
---------- ---------- ---------- -------- --------- ---------
Total
earning
assets....... 101,871 8,056 7.91 98,642 7,643 7.75 85,805 6,990 8.15
Other
assets....... 5,309 5,702 4,810
---------- ---------- ---------
Total.......... $ 107,180 $ 104,344 $ 90,615
========== ========== =========
Interest
bearing
liabilities.. $ 83,689 $ 3,798 4.54% $ 81,409 $ 3,440 4.23% $ 69,717 $ 3,125 4.48%
---------- -------- ---------
Non interest
bearing
liabilities
and
equity....... 23,491 22,935 20,898
---------- ---------- ---------
Total.......... $ 107,180 $ 104,344 $ 90,615
========== ========== =========
Net interest
income....... $ 4,258 $ 4,203 $ 3,865
========== ======== =========
Net interest
margin on
earning
assets....... 4.18% 4.26% 4.50%
* Fully taxable equivalent basis.
TABLE 2
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(Dollars in thousands) 2000 COMPARED TO 1999 1999 COMPARED TO 1998
CHANGE DUE TO: VOLUME RATE TOTAL VOLUME RATE TOTAL
Earning assets*
Loans.............................................. $ 122 $ 157 $ 279 $ 1,366 $ (462) $ 904
Loans (nontaxable)................................. (23) 9 (14) 12 12 24
Taxable investment securities...................... 88 9 97 (162) 10 (152)
Investment securities (nontaxable)................. (60) 12 (48) (15) (9) (24)
Federal funds sold and other....................... 87 12 99 (90) (9) (99)
--------- --------- --------- --------- ----------- ---------
Total interest income................................ $ 214 $ 199 $ 413 $ 1,111 $ (458) $ 653
Interest bearing liabilities:
Interest bearing demand deposits................... $ (11) $ (22) $ (33) $ 19 $ (59) $ (40)
Savings deposits................................... (11) 42 31 50 (50) --
Time deposits under $100,000....................... 21 16 37 (43) (64) (107)
Time deposits $100,000 or more..................... 28 91 119 75 (48) 27
Federal funds purchased............................ (13) 6 (7) 20 (1) 19
Other borrowings................................... 191 20 211 436 (20) 416
--------- --------- --------- --------- ----------- ---------
Total interest expense............................... $ 205 $ 153 $ 358 $ 557 $ (242) $ 315
Net interest income* $ 9 $ 46 $ 55 $ 554 $ (216) $ 338
* Fully taxable equivalent basis.
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ANNUAL REPORT 2000
9
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; charge-offs and
recoveries; the mix of loans in the portfolio; and anticipated economic
conditions. Based on contraction due to diminished demand in the Bank's loan
portfolio in 2000, the provision for loan losses was reduced in 2000 to $6,000
as compared to $48,000 in 1999. A provision of ($23,000) was recorded in 1998.
Net charge-offs for 2000 totaled $8,000, while 1999 totaled $4,000. Excellent
loan portfolio performance indicates a continued strong mid-Michigan business
climate and reflects attention to underwriting standards as well as consistent
monitoring of the portfolio. Mason State Bank management rates the overall
quality of the loan portfolio as good and concludes the $1,053,000 allowance or
1.23% allowance to total loans appropriate to cover inherent losses in the
portfolio at year-end 2000.
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, 2000, non-performing loans totaled
$137,000 or .16% of total loans. This represents a decrease of $201,000 in
non-performing loans from 1999 levels. Non-performing loans totaled .38% of
total loans in 1999. This was a decrease of $35,000 from the 1998 levels.
DECEMBER 31, 2000 1999
Non-accrual...................... $ -- $ 32,000
90 days or more past due......... 137,000 306,000
Renegotiated..................... -- --
------------- ---------------
Total............................ $ 137,000 $ 338,000
A loan is considered impaired when full collection of principal and interest is
not expected under the original terms of the loan. There were no impaired loans
in the portfolio at December 31, 2000, 1999 or 1998.
NON INTEREST INCOME
Non interest income increased by $202,000 from the previous year. The largest
increases were recognized in increased deposit service charges as well as
investment commission fees. Service charges for all deposit products were
adjusted to reflect market rates within the area and will be adjusted
periodically as changes occur. Investment commissions increased due to favorable
economic and stock market conditions in the early part of 2000. In addition,
increases were realized from fees earned by outsourcing official check
processing, merchant processing and gains in the cash value of life insurance
policies. The change in non interest income from 1999 to 1998 was an increase of
$27,000. This increase was attributable to increased deposit service charges as
well as a slight increase in investment commission fees. In addition, 1998
included a net loss of $18,000 on the calls of securities.
NON INTEREST EXPENSE
Non interest expense increased $98,000 during 2000. This increase is primarily
attributable to increased salary and benefit costs. Salary and benefit costs in
2000 include some positions that were vacant for a portion of 1999. Non interest
expense increased by $10,000 from 1998 to 1999. This increase was a result of
increased data processing costs, expenses for out-sourced services and increased
benefit costs. This was partially offset by lower marketing expenses in 1999.
INCOME TAX EXPENSE
The 2000 provision for income tax was $729,000, up from $659,000 in 1999. The
1999 provision was up $111,000 from the $548,000 provision in 1998. This figure
reflects a higher taxable income in 2000 and 1999.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary objective of asset/liability management is to assure adequate
liquidity and net interest income by maintaining appropriate maturities and
balances between interest sensitive earning assets and interest bearing
liabilities. Liquidity management insures sufficient funds are maintained to
meet the cash withdrawal requirements of depositors and the credit demands of
borrowers.
Sources of liquidity include: federal funds sold, investment security maturities
and pay downs. The Bank maintained an average balance of $2,257,000 in federal
funds sold in 2000. The Bank is a member of the Federal Home Loan Bank system
for several reasons: access to an alternative funding source, lower costs for
credit services, and an alternative tool to manage interest rate risk.
Throughout 1996, 1997, 1998, 1999 and 2000 the Bank used this source of funding
(see Note 8 to the consolidated financial statements) to directly offset loans
of like terms and conditions.
Other sources of liquidity include: internally generated cash flow from
operations, repayments and maturities of loans, other borrowings and growth in
core deposits.
At December 31, 2000 the securities available for sale were valued at
$15,670,000. It is not anticipated that management will use these funds due to
the optional sources that may be available in 2001.
Interest rate sensitivity management seeks to maximize net interest margins
through periods of changing interest risks. 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 loan products as well as managing deposit accounts and
maturities in the investment portfolio. The following chart, 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 2000,
the percentage of rate sensitive assets to rate sensitive liabilities within the
one-year time horizon was 54%.
The following chart shows the Bank's GAP position as of December 31, 2000. The
Bank has a liability sensitive position within one year of approximately
$30,736,000, which indicates higher net interest income may be earned if rates
decrease during the period and lower net interest income may be earned if rates
increase during the period. Due to the limitations of GAP analysis, modeling is
also used to enhance measurement and control.
9
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ANNUAL REPORT 2000
10
GAP 0-30 31-90 SECOND THIRD FOURTH ANNUAL 1-3 3-5 OVER 5
MEASUREMENT DAYS DAYS QUARTER QUARTER QUARTER TOTAL YEARS YEARS YEARS TOTAL
(Dollars in
thousands)
ASSETS
Loans...............$ 5,623 $ 7,741 $ 3,899 $ 3,378 $ 3,853 $ 24,494 $ 6,572 $ 8,089 $ 46,494 $ 85,649
Allowance for loan
losses.............. -- -- -- -- -- -- -- -- -- (1,053)
Investments (1)..... 3,198 520 1,022 -- 711 5,451 9,920 1,510 756 17,637
Short-term
investments......... 5,963 -- -- -- -- 5,963 -- -- -- 5,963
Other non earning
assets.............. -- -- -- -- -- -- -- -- -- 6,827
----------- -------- -------- -------- -------- --------- --------- -------- --------- ----------
Total...............$ 14,784 $ 8,261 $ 4,921 $ 3,378 $ 4,564 $ 35,908 $ 16,492 $ 9,599 $ 47,250 $ 115,023
=========== ======== ======== ======== ======== ========= ========= ======== ========= ==========
LIABILITIES
Non interest
bearing deposits....$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 9,885
Interest bearing
deposits............ 36,332 4,248 5,218 5,204 2,871 53,873 7,052 1,487 126 62,538
Long-term FHLB
borrowings(2)....... 18 2,574 1,500 1,000 5,122 10,214 13,977 3,226 922 28,339
Other liabilities... -- -- -- -- -- -- -- -- -- 1,427
Capital............. -- -- -- -- -- -- -- -- -- 12,834
----------- -------- -------- -------- -------- --------- --------- -------- --------- ----------
Total...............$ 36,350 $ 6,822 $ 6,718 $ 6,204 $ 7,993 $ 64,087 $ 21,029 $ 4,713 $ 1,048 $ 115,023
=========== ======== ======== ======== ======== ========= ========= ======== ========= ==========
GAP.................$ (21,566) $ 1,439 $ (1,797) $ (2,826) $ (3,429) $ (28,179) $ (4,537) $ 4,886 $ 46,202
Cumulative GAP...... (21,566) (20,127) (21,924) (24,750) (28,179) (28,179) (32,716) (27,830) 18,372
GAP ratio........... 41% 121% 73% 54% 57% 56% 78% 204% 4,509%
(1) Maturities reflect probable prepayments and calls.
(2) FLHB borrowings include putable advances, which may be converted to
adjustable rates or prepaid without penalty beginning one, two or three years
after the purchase date. The above schedule reflects maturities at prepayment
date on the putable advances.
10
CDI
ANNUAL REPORT 2000
11
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 $911,000 or 7.72% to $12,706,000 at year-end 2000, which
represented 11.05% of total assets. At December 31, 1999, the similar ratio of
shareholders' equity to total assets was 11.16% of total assets. Dividends
declared per common share increased by 11.4% to $1.27 compared to $1.14 in
1999. The Corporation has a strong capital position that will meet our needs in
2000.
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, 2000, the Bank
has a "risk-based" total capital to asset ratio of 18.4%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
(Dollars in thousands) MINIMUM REQUIRED TO
MINIMUM REQUIRED BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 2000
Total capital (to risk weighted assets)........ $ 13,559 18.4% $ 5,888 8.0% $ 7,359 10.0%
Tier 1 capital (to risk weighted assets)....... 12,639 17.2 2,944 4.0 4,416 6.0
Tier 1 capital (to average assets)............. 12,639 11.4 4,424 4.0 5,530 5.0
Federal and State banking laws and regulations place certain restrictions on the
amount of dividends and loans that a bank can pay its parent Corporation. Of the
$13,559,000 in risk-based capital, $5,817,000 is available for dividends to the
parent Corporation in 2001 (before considering 2001 net income and any changes
in risk-based assets). The remaining $7,742,000 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.
11
CDI
ANNUAL REPORT 2000
12
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, 2000 and 1999 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 2000, 1999 and 1998. 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 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, 2000 and 1999, and the results of its operations and its
cash flows for the years ended December 31, 2000, 1999 and 1998 in conformity
with generally accepted accounting principles.
As disclosed in Note 1, on April 1, 1999 the Company changed its method of
accounting for derivative instruments and hedging activities to comply with new
accounting guidance.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 7, 2001
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ANNUAL REPORT 2000
13
CAPITAL DIRECTIONS, INC. CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands, except share and per share data) DECEMBER 31, 2000 1999
ASSETS
Cash and non interest bearing deposits........................................................... $ 2,603 $ 3,097
Interest bearing deposits........................................................................ 58 54
Federal funds sold............................................................................... 5,905 --
--------- ---------
Total cash and cash equivalents........................................................... 8,566 3,151
Securities available for sale.................................................................... 15,670 9,751
Federal Home Loan Bank (FHLB) stock.............................................................. 1,967 975
Total loans...................................................................................... 85,649 89,112
Less allowance for loan losses................................................................... (1,053) (1,055)
--------- ---------
Net loans................................................................................. 84,596 88,057
Premises and equipment, net...................................................................... 947 768
Accrued interest receivable...................................................................... 663 515
Other assets..................................................................................... 2,614 2,496
--------- ---------
TOTAL ASSETS.............................................................................. $ 115,023 $ 105,713
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits: Non interest bearing................................................................. $ 9,885 $ 8,884
Interest bearing..................................................................... 62,538 63,146
--------- ---------
Total deposits..................................................................... 72,423 72,030
Accrued interest payable....................................................................... 274 229
Other liabilities.............................................................................. 1,153 1,065
Federal funds purchased........................................................................ -- 1,700
Long-term FHLB borrowings...................................................................... 28,339 18,861
--------- ---------
Total liabilities......................................................................... 102,189 93,885
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares authorized; 598,056 and
596,622 shares outstanding in 2000 and 1999........................................ 2,990 2,983
Additional paid-in capital..................................................................... 2,590 2,576
Retained earnings.............................................................................. 7,126 6,236
Accumulated other comprehensive income, net of tax of $66 in 2000 and $17 in 1999.............. 128 33
--------- ---------
Total shareholders' equity................................................................ 12,834 11,828
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................................ $ 115,023 $ 105,713
========= =========
See accompanying notes to consolidated financial statements.
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ANNUAL REPORT 2000
14
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In thousands, except per share data) FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
INTEREST AND DIVIDEND INCOME
Loans, including fees............................................................................ $ 7,051 $ 6,782 $ 5,870
Federal funds sold............................................................................... 140 40 134
Securities: Taxable -- available for sale........................................................ 506 403 422
Taxable -- held to maturity.......................................................... -- 25 188
Tax exempt -- available for sale..................................................... 166 142 --
Tax exempt -- held to maturity....................................................... -- 56 214
Dividends on FHLB stock.......................................................................... 94 75 45
Other interest income............................................................................ 1 2 7
------- ------- -------
TOTAL INTEREST AND DIVIDEND INCOME.......................................................... 7,958 7,525 6,880
INTEREST EXPENSE
Deposits......................................................................................... 2,506 2,352 2,472
Federal funds purchased.......................................................................... 13 20 1
Long-term FHLB borrowings........................................................................ 1,279 1,068 652
------- ------- -------
TOTAL INTEREST EXPENSE...................................................................... 3,798 3,440 3,125
------- ------- -------
NET INTEREST INCOME................................................................................ 4,160 4,085 3,755
Provision for loan losses.......................................................................... 6 48 (23)
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................................................ 4,154 4,037 3,778
NON INTEREST INCOME
Service charges on deposits...................................................................... 335 283 260
Net loss on calls of securities.................................................................. -- -- (18)
Net gain on sales of loans....................................................................... -- -- 3
Investment commission fees....................................................................... 93 50 47
Other income..................................................................................... 366 259 273
------- ------- -------
TOTAL NON INTEREST INCOME................................................................... 794 592 565
NON INTEREST EXPENSE
Salaries and wages............................................................................... 1,102 1,023 1,101
Pension and other employee benefits.............................................................. 365 344 325
Net occupancy expense of premises................................................................ 161 162 144
Equipment rentals, depreciation, and maintenance................................................. 147 143 162
Other operating expense.......................................................................... 794 799 729
------- ------- -------
TOTAL NON INTEREST EXPENSE.................................................................. 2,569 2,471 2,461
------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE................................................................... 2,379 2,158 1,882
Income tax expense................................................................................. 729 659 548
------- ------- -------
NET INCOME......................................................................................... $ 1,650 $ 1,499 $ 1,334
======= ======= =======
Basic earnings per common share.................................................................... $ 2.76 $ 2.51 $ 2.24
======= ======= =======
Diluted earnings per common share.................................................................. $ 2.74 $ 2.49 $ 2.22
======= ======= =======
See accompanying notes to consolidated financial statements.
14
CDI
ANNUAL REPORT 2000
15
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(In thousands) FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................................. $ 1,650 $ 1,499 $ 1,334
Adjustments to reconcile net income to net cash from operating activities
Depreciation........................................................................ 115 118 120
Provision for loan losses........................................................... 6 48 (23)
Net amortization (accretion) on securities.......................................... (1) 25 (14)
Loans originated for sale........................................................... -- -- (1,051)
Proceeds from sales of loans originated for sale.................................... -- -- 1,053
Net loss on calls of securities..................................................... -- -- 18
Net gain on sales of loans originated for sale...................................... -- -- (2)
Net gain on sales of non-residential loans.......................................... -- -- (1)
Changes in assets and liabilities: Accrued interest receivable...................... (148) (6) 35
Accrued interest payable......................... 45 (3) 39
Other assets..................................... (34) (163) (146)
Other liabilities................................ 64 28 (36)
-------- ------- --------
NET CASH FROM OPERATING ACTIVITIES 1,697 1,546 1,326
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale: Purchases............................................ (8,202) (2,439) (6,437)
Maturities, calls, and principal payments............ 2,428 3,980 7,408
Securities held to maturity: Purchases............................................ -- -- (1,246)
Maturities, calls, and principal payments............ -- 265 2,451
Purchase of FHLB stock.............................................................. (992) (188) (423)
Proceeds from sales of non-residential loans........................................ -- -- 68
Net change in loans................................................................. 3,322 (7,201) (20,649)
Premises and equipment expenditures................................................. (294) (102) (286)
-------- ------- --------
NET CASH FROM INVESTING ACTIVITIES (3,738) (5,685) (19,114)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.............................................................. 393 (359) 7,968
Net change in federal funds purchased............................................... (1,700) 1,700 (450)
Proceeds from long-term FHLB borrowings............................................. 12,700 4,000 12,150
Repayment of long-term FLHB borrowings.............................................. (3,222) (732) (227)
Proceeds from shares issued upon exercise of stock options.......................... 21 22 1
Dividends paid...................................................................... (736) (662) (521)
-------- ------- --------
NET CASH FROM FINANCING ACTIVITIES 7,456 3,969 18,921
-------- ------- --------
Net change in cash and cash equivalents................................................... 5,415 (170) 1,133
Cash and cash equivalents at beginning of year............................................ 3,151 3,321 2,188
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,566 $ 3,151 $ 3,321
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for: Interest............................................. $ 3,753 $ 3,443 $ 3,086
Income taxes -- federal.............................. 730 660 571
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
Transfer from securities held to maturity to securities available for sale.......... $ -- $ 6,011 $ --
Transfer from loans to other real estate owned...................................... 133 -- --
See accompanying notes to consolidated financial statements.
15
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ANNUAL REPORT 2000
16
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
ACCUMULATED
OTHER
FOR THE YEARS ENDED ADDITIONAL COMPREHENSIVE TOTAL
DECEMBER 31, 2000, COMMON PAID-IN RETAINED INCOME, SHAREHOLDERS'
1999 AND 1998 STOCK CAPITAL EARNINGS NET OF TAX EQUITY
BALANCES, JANUARY 1, 1998.......................... $ 2,975 $ 2,561 $ 4,652 $ 28 $ 10,216
Net income for the year............................ -- -- 1,334 -- 1,334
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on
securities available for sale, net of tax of $8.. -- -- -- 14 14
--------
Comprehensive income............................... 1,348
Issuance of 67 shares of common stock upon
exercise of stock options........................ 1 -- -- -- 1
Cash dividends ($.955 per share)................... -- -- (568) -- (568)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1998........................ 2,976 2,561 5,418 42 10,997
Net income for the year............................ -- -- 1,499 -- 1,499
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on
securities available for sale, net of tax
of ($70)......................................... -- -- -- (134) (134)
Net unrealized gain on securities transferred
from held to maturity to available for sale,
net of tax of $65................................ -- -- -- 125 125
--------
Total other comprehensive income (loss), net....... (9)
--------
Comprehensive income............................... 1,490
Issuance of 1,499 shares of common stock
upon exercise of stock options................... 7 15 -- -- 22
Cash dividends ($1.14 per share)................... -- -- (681) -- (681)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1999........................ 2,983 2,576 6,236 33 11,828
Net income for the year............................ -- -- 1,650 -- 1,650
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on
securities available for sale, net of tax
of $49.......................................... -- -- -- 95 95
--------
Comprehensive income............................... 1,745
Issuance of 1,434 shares of common stock
upon exercise of stock options................... 7 14 -- -- 21
Cash dividends ($1.27 per share)................... -- -- (760) -- (760)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 2000........................ $ 2,990 $ 2,590 $ 7,126 $ 128 $ 12,834
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
16
CDI
ANNUAL REPORT 2000
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DECEMBER 31, 2000, 1999 AND 1998)
- --------------------------------------------------------------------------------
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. Monex Financial Services, Inc. was
liquidated and dissolved during 1999. 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 in the preparation of the
consolidated financial statements. All material intercompany balances and
transactions are eliminated in consolidation.
NATURE OF OPERATIONS AND LINES OF BUSINESS: The Company and its subsidiaries
provide a broad range of banking and financial services in the banking industry.
Substantially all revenues and services are derived from banking products and
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. While the Company's chief
decision-makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a
Company wide basis. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
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 net unrealized holding gain or loss is reported, net of related income tax
effects, as a separate component of other comprehensive income or loss and
shareholders' equity, until realized. Other securities such as Federal Home Loan
Bank stock are carried at cost. Securities are written down to fair value when a
decline in fair value is not temporary.
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.
Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Investments and Hedging Activities, all derivative instruments are
recorded at their fair values. If derivative instruments are designated as
hedges of fair values, both the change in the fair value of the hedge and the
hedged item are included in current earnings. Fair value adjustments related to
cash flow hedges are recorded in other comprehensive income or loss and
reclassified to earnings when the hedged transactions are reflected in earnings.
Ineffective portions of hedges are reflected in income currently. As of April 1,
1999, the Company adopted SFAS No. 133 and, in accordance with its provisions,
chose to reclassify certain securities from held-to-maturity to
available-for-sale. The amortized cost of the securities transferred to
available-for-sale was $6,011,000. The Company does not have derivative
instruments in its portfolio to account for under provisions of this statement.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or
market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
When full loan repayment is in doubt, interest income is not reported. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on its regular review of
nonperforming assets, as well as loans 90 days or more past due but not
considered nonperforming, charge-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 sim-
17
CDI
ANNUAL REPORT 2000
18
ilar 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 was
one property with a carrying value of approximately $133,000 held as other real
estate at December 31, 2000. There were no properties held as other real estate
at December 31, 1999.
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 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 a separate note. 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 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 stock splits and stock dividends.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income or loss. Other comprehensive income or loss includes net
unrealized gains and losses on securities available for sale, net of tax, which
are also recognized as a separate component of shareholders' equity.
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 $400,000
and $455,000 at year-end 2000 and 1999, respectively. These balances do not earn
interest.
NOTE 3 - SECURITIES
Year-end securities were as follows:
(In thousands) FAIR GROSS GROSS
VALUE GAINS LOSSES
AVAILABLE FOR SALE
DECEMBER 31, 2000:
- ------------------
Obligations of U.S. Government
treasuries and agencies ............. $ 7,019 $ 77 $ (2)
Obligations of states and political
subdivisions ........................ 3,608 87 (1)
Corporate securities ................ 5,043 34 (1)
------- ------- -------
TOTALS ........................... $15,670 $ 198 $ (4)
======= ======= =======
DECEMBER 31, 1999:
- ------------------
Obligations of U.S. Government
agencies ............................ $ 4,004 $ 22 $ (29)
Obligations of states and political
subdivisions ........................ 3,874 73 (15)
Corporate securities ................ 1,873 2 (3)
------- ------- -------
TOTALS ........................... $ 9,751 $ 97 $ (47)
======= ======= =======
The fair values of securities available for sale at year-end 2000 by contractual
maturity, are shown in the following chart. 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.
18
CDI
ANNUAL REPORT 2000
19
(In thousands) FAIR
VALUE
AVAILABLE FOR SALE
Due in one year or less .................................... $ 4,265
Due from one to five years ................................. 8,658
Due from five to ten years ................................. 1,068
Due after ten years ........................................ 473
-------
$14,464
U.S. Government mortgage-backed securities
Fixed rate ............................................... 737
Variable rate ............................................ 469
-------
TOTALS ................................................ $15,670
=======
There were no sales of securities in 2000, 1999 and 1998. Net losses on calls of
securities totaled $18,000 in 1998.
Securities with a carrying value of approximately $2,747,000 and $6,525,000 at
year end 2000 and 1999 were pledged to secure public deposits, and for other
purposes as required or permitted by law. Additional securities are pledged as
collateral to secure FHLB borrowings as disclosed in a separate note.
In conjunction with the adoption of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, in 1999, the Company transferred from
held-to-maturity to available-for-sale securities with amortized cost of
$6,011,000 and net unrealized gains of $190,000. Shareholder's equity increased
by $125,000, net of income tax of $65,000, as a result of the transfer.
NOTE 4 - LOANS
Year-end loans were as follows:
(In thousands) 2000 1999
Commercial and agricultural .............. $ 6,038 $ 5,268
Real estate mortgage ..................... 75,923 79,270
Installment .............................. 3,688 4,574
------- -------
TOTAL .................................... $85,649 $89,112
======= =======
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:
(In thousands) 2000 1999
Balance, January 1, .................. $ 1,051 $ 630
New loans ............................ 451 546
Repayments ........................... (549) (217)
Other changes, net ................... 1,247 92
------- -------
BALANCE, DECEMBER 31, ................ $ 2,200 $ 1,051
======= =======
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period. Other changes for 2000
primarily relate to the loans of a new director added during 2000.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
(In thousands) 2000 1999 1998
Balance, beginning of period ...... $ 1,055 $ 1,011 $ 1,035
Loans charged-off ................. (27) (37) (30)
Recoveries ........................ 19 33 29
Provision for loan losses ......... 6 48 (23)
------- ------- -------
BALANCE, END OF PERIOD ............ $ 1,053 $ 1,055 $ 1,011
======= ======= =======
During 2000, 1999 and 1998, the Company had no loans, which were considered
impaired. Nonperforming loans were not considered significant at December 31,
2000 and 1999.
NOTE 6 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
(In thousands) 2000 1999
Land ..................................... $ 86 $ 86
Buildings and improvements ............... 1,149 1,133
Construction in progress ................. 175 --
Furniture and equipment .................. 2,481 2,400
------- -------
Total cost ............................. 3,891 3,619
Less accumulated depreciation ............ (2,944) (2,851)
------- -------
PREMISES AND EQUIPMENT, NET .............. $ 947 $ 768
======= =======
NOTE 7 - INTEREST BEARING DEPOSITS
Year-end interest bearing deposits were as follows:
(In thousands) 2000 1999
Interest bearing demand ......................... $ 9,801 $ 12,038
Savings ......................................... 19,237 18,984
Time: In denominations less than $100,000 .... 20,604 19,723
In denominations of $100,000 or more ... 12,896 12,401
---------- ---------
TOTAL INTEREST BEARING DEPOSITS ................. $ 62,538 $ 63,146
========== =========
At year-end 2000, stated maturities of time deposits were as follows:
(In thousands)
2001 ................................................ $ 24,835
2002 ................................................ 5,511
2003 ................................................ 1,541
2004 ................................................ 724
2005 ................................................ 763
Thereafter .......................................... 126
---------
TOTAL ............................................... $ 33,500
=========
Related party deposits totaled approximately $1,280,000 and $555,000 at year-end
2000 and 1999.
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ANNUAL REPORT 2000
20
NOTE 8 - LONG-TERM FHLB BORROWINGS
At year-end, advances from the Federal Home Loan Bank were as follows:
(In thousands) 2000 1999
Maturities May 1999 through January 2003,
primarily fixed rate at rates from 5.67% to 6.72%,
averaging 6.33% at year-end 2000 and
6.44% at year-end 1999 ........................... $ 1,525 $ 2,728
Maturities January 2003 through November 2008,
primarily fixed rate at rates from 4.86% to 6.02%,
averaging 5.75% at year-end 2000 and
5.66% at year-end 1999 ........................... 10,114 12,133
Maturities February 2004 through April 2005,
primarily fixed rate at rates from 5.19% to 5.82%,
averaging 5.62% at year-end 2000 and
year-end 1999 .................................... 4,000 4,000
Maturities February 2001 through December 2010,
primarily putable advances at rates from 4.98% to
7.61%, averaging 5.80% at year-end 2000 .......... 12,700 --
------- -------
TOTAL ............................................ $28,339 $18,861
======= =======
For the putable advances, the FHLB has the option to convert the advance to an
adjustable rate beginning one, two or three years after the purchase date,
depending on the advance, and quarterly thereafter.
Each advance has a prepayment penalty which is determined based upon the lost
cash flow to the FHLB. In addition to FHLB stock, the advances were
collateralized by approximately $60,713,000 and $58,214,000 of first mortgage
loans and securities under a blanket lien arrangement at year-end 2000 and 1999.
At year-end 2000, scheduled principal reductions on these advances were:
(In thousands)
2001.............................. $ 3,214
2002.............................. 723
2003.............................. 9,254
2004.............................. 2,026
2005.............................. 2,228
Thereafter........................ 10,894
----------
TOTAL............................. $ 28,339
==========
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 $42,000 in 2000, $40,000 in 1999, and
$43,000 in 1998.
An incentive compensation plan is also maintained for certain employees and is
based upon key performance factors. The expense for the plan was approximately
$67,000 in 2000, $59,000 in 1999, and $47,000 in 1998.
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 for stock options was recognized in
2000, 1999 and 1998. 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:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AVAILABLE OPTIONS EXERCISE GRANT DATE
FOR GRANT OUTSTANDING PRICE FAIR VALUE
Balance at
January 1, 1998 .... 28,400 11,400 $ 17.80
Granted ............. (4,400) 4,400 32.00 $ 3.21
Exercised ........... -- (67) 18.00
Cancelled ........... 66 (66) 18.00
Forfeited ........... 867 (867) 24.19
------ ------ ---------
Balance
December 31, 1998... 24,933 14,800 21.64
Granted ............. (5,133) 5,133 35.88 3.17
Exercised ........... -- (1,499) 15.10
Forfeited ........... 662 (662) 33.94
------ ------ ---------
Balance
December 31, 1999... 20,462 17,772 25.85
Granted ............. (5,000) 5,000 40.90 5.56
Exercised ........... -- (1,434) 14.34
Forfeited ........... 1,131 (1,131) 29.44
------ ------ ---------
BALANCE
DECEMBER 31, 2000... 16,593 20,207 $ 30.19
====== ====== =========
For the options outstanding at December 31, 2000, the range of exercise prices
was $12.75 to $41.50 per share with a weighted average remaining contractual
life of 7.27 years. At December 31, 2000, 1999 and 1998, 7,401, 5,532 and 3,466
options were exercisable at a weighted average exercise price of $20.28, $16.42
and $14.57 per share, respectively.
20
CDI
ANNUAL REPORT 2000
21
Had compensation cost for stock options been measured using SFAS No. 123, net
income and earnings per share would have been the pro forma amounts indicated
below. The pro forma effect may increase in the future if more options are
granted (in thousands, except per share data).
2000 1999 1998
Net income as reported ...... $ 1,650 $ 1,499 $ 1,334
Pro forma net income ........ 1,637 1,490 1,327
Basic earnings per share
as reported ................ 2.76 2.51 2.24
Pro forma basic earnings
per share .................. 2.74 2.50 2.23
Diluted earnings per share
as reported ................ 2.74 2.49 2.22
Pro forma diluted earnings
per share .................. 2.71 2.48 2.21
The pro forma effects are computed using option pricing models, using the
following weighted average assumptions as of the grant date.
2000 1999 1998
Risk-free interest rate ............... 6.57% 5.07% 5.47%
Expected option life .................. 5 years 5 years 5 years
Expected stock price volatility ....... 4.64% 6.28% 7.57%
Expected dividend yield ............... 3.16% 3.37% 3.56%
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 $93,000 in 2000, $85,000 in
1999 and $104,000 in 1998. 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) 2000 1999 1998
Supplies ....................... $ 59 $ 53 $ 54
State taxes .................... 70 75 65
Deferred compensation .......... 93 85 104
Other expense .................. 572 586 506
---- ---- ----
TOTAL .......................... $794 $799 $729
==== ==== ====
NOTE 11 - INCOME TAX
Income tax expense consists of:
(In thousands) 2000 1999 1998
Taxes currently payable ..... $ 742 $ 667 $ 602
Deferred benefit ............ (13) (8) (54)
----- ----- -----
TOTAL ....................... $ 729 $ 659 $ 548
===== ===== =====
Year-end deferred tax assets and liabilities consist of:
(In thousands) 2000 1999 1998
Deferred tax assets
Allowance for loan losses ....... $ 240 $ 237 $ 222
Deferred compensation ........... 278 309 301
Deferred loan fees .............. -- 1 2
Other ........................... 49 4 2
----- ----- -----
567 551 527
Deferred tax liabilities
Fixed assets .................... (48) (50) (37)
Net unrealized gain on
securities available for sale .. (66) (17) (22)
Other ........................... (14) (9) (6)
----- ----- -----
(128) (76) (65)
----- ----- -----
TOTAL ............................. $ 439 $ 475 $ 462
===== ===== =====
An allowance against deferred tax assets has not been recorded for 2000, 1999 or
1998.
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:
(In thousands) 2000 1999 1998
Statutory rate ................... 34% 34% 34%
Income tax computed at
statutory rate ................. $ 809 $ 734 $ 640
Tax effect of: Nontaxable income.. (56) (68) (70)
Other ............. (24) (7) (22)
----- ----- -----
TOTAL ............................ $ 729 $ 659 $ 548
===== ===== =====
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CDI
ANNUAL REPORT 2000
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:
(In thousands, except per share data) 2000 1999 1998
Basic earnings per common share:
Net income available to common
shareholders ..................... $1,650 $1,499 $1,334
====== ====== ======
Weighted average common
shares outstanding ............... 598 596 595
====== ====== ======
BASIC EARNINGS PER
COMMON SHARE ..................... $ 2.76 $ 2.51 $ 2.24
====== ====== ======
Diluted earnings per common share:
Net income available to common
shareholders ..................... $1,650 $1,499 $1,334
====== ====== ======
Weighted average common
shares outstanding for basic
earnings per common share ........ 598 596 595
Add: dilutive effect of assumed
exercise of stock options ........ 5 6 5
------ ------ ------
Weighted average common
shares outstanding for diluted
earnings per common share ........ 603 602 600
====== ====== ======
DILUTED EARNINGS PER
COMMON SHARE ..................... $ 2.74 $ 2.49 $ 2.22
====== ====== ======
Stock options for 4,000, 600 and 4,100 shares of common stock were not
considered in computing diluted earnings per common share in 2000, 1999 and
1998, respectively, because they were not dilutive.
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
(In thousands) 2000 1999 1998
Net change in net unrealized
gain (loss) on securities
available for sale:
Unrealized net gain (loss) on
securities available for sale ........ $144 $(204) $ 4
Reclassification adjustments for
net unrealized gains on securities
transferred from held-to-maturity
to available-for-sale upon
adoption of SFAS No. 133 ............. -- 190 --
Reclassification adjustments for net
losses included in net income ........ -- -- 18
---- ----- ---
NET CHANGE IN NET UNREALIZED
GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE .................. 144 (14) 22
Tax expense (benefit) .................. 49 (5) 8
---- ----- ---
TOTAL OTHER COMPREHENSIVE
INCOME (LOSS), NET ..................... $ 95 $ (9) $14
==== ===== ===
NOTE 14 - 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:
(In thousands) 2000 1999
Unused lines of credit ........................ $ 6,188 $ 7,439
Commitments to make loans ..................... 169 19
Standby letters of credit ..................... 65 187
Commitments are generally made at variable rates, primarily tied to Bank One'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 15 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
22
CDI
ANNUAL REPORT 2000
23
expansion, and plans for capital restoration are required. The minimum
requirements are:
CAPITAL TO TIER 1
RISK-WEIGHTED ASSETS CAPITAL TO
AVERAGE
TOTAL TIER 1 ASSETS
Well capitalized ......... 10% 6% 5%
Adequately capitalized ... 8 4 4
Undercapitalized ......... 6 3 3
At year-end, the Bank's actual capital levels and minimum required levels were:
(Dollars in thousands) MINIMUM REQUIRED TO
MINIMUM REQUIRED BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
2000
Total capital (to risk weighted assets) ......................... $ 13,559 18.4% $ 5,888 8.0% $ 7,359 10.0%
Tier 1 capital (to risk weighted assets) ........................ 12,639 17.2 2,944 4.0 4,416 6.0
Tier 1 capital (to average assets) .............................. 12,639 11.4 4,424 4.0 5,530 5.0
1999
Total capital (to risk weighted assets) ......................... $ 12,612 17.9% $ 5,639 8.0% $ 7,049 10.0%
Tier 1 capital (to risk weighted assets) ........................ 11,729 16.6 2,819 4.0 4,229 6.0
Tier 1 capital (to average assets) .............................. 11,729 11.1 4,225 4.0 5,281 5.0
The Bank was considered well capitalized at year-end 2000 and 1999.
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 2000, the Bank could pay
approximately $5,817,000 in dividends to the parent company without prior
regulatory approval.
NOTE 16 - 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, FHLB stock 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 allowance for loan losses is considered
to be a reasonable estimate of discount for credit quality concerns. 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 costs that would
currently be charged to enter into or terminate such arrangements and are not
material to this presentation.
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 2000 or 1999, 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 2000 and
1999 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and other liabilities of the Company that are not
defined as financial instruments are not included in the following disclosures,
such as premises and equipment. Also, non-financial instruments
23
CDI
ANNUAL REPORT 2000
24
typically not recognized in financial statements nevertheless may have value but
are not included in the disclosures below. These include, among other items, the
estimated earnings power of core deposit accounts, the trained workforce,
customer goodwill and similar items.
The estimated year-end fair values of financial instruments were as follows:
2000 1999
(In thousands) CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
FINANCIAL ASSETS
Cash and cash
equivalents ...... $ 8,566 $ 8,566 $ 3,151 $ 3,151
Securities available
for sale ......... 15,670 15,670 9,751 9,751
FHLB stock ......... 1,967 1,967 975 975
Loans, net of
allowance for
loan losses ...... 84,596 83,398 88,057 85,751
Accrued interest
receivable ....... 663 663 515 515
FINANCIAL
LIABILITIES
Deposits ........... (72,423) (72,608) (72,030) (72,201)
Federal funds
purchased ........ -- -- (1,700) (1,700)
Long-term FHLB
borrowings ....... (28,339) (27,681) (18,861) (17,883)
Accrued interest
payable .......... (274) (274) (229) (229)
NOTE 17 - CAPITAL DIRECTIONS, INC. (PARENT COMPANY ONLY), CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
(In thousands) DECEMBER 31, 2000 1999
ASSETS
Cash, due from banks, and other
cash equivalents ................... $ 58 $ 53
Investment in Mason State Bank ..... 12,767 11,762
Other assets ....................... 212 192
------- -------
TOTAL ASSETS ............... $13,037 $12,007
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable .................. $ 203 $ 179
Shareholders' equity ............... 12,834 11,828
TOTAL LIABILITIES AND ------- -------
SHAREHOLDERS' EQUITY ....... $13,037 $12,007
======= =======
CONDENSED STATEMENTS OF INCOME (YEARS ENDED DECEMBER 31,)
(In thousands) 2000 1999 1998
OPERATING INCOME
Dividends from Mason State Bank .. $ 760 $ 680 $ 583
Dividends from Monex Financial
Services, Inc .................... -- 2 --
------ ------- ------
760 682 583
OPERATING EXPENSES
Wages and benefits ............... 6 5 4
Other expenses and income tax
benefit .......................... 14 17 19
------ ------- ------
20 22 23
------ ------- ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES ..................... 740 660 560
Equity in undistributed net income
of Mason State Bank .............. 910 843 774
Equity in excess distributed net
income of Monex Financial Ser-
vices, Inc. ...................... -- (4) --
------ ------- ------
910 839 774
------ ------- ------
NET INCOME ....................... $1,650 $ 1,499 $1,334
====== ======= ======
Other comprehensive income and comprehensive income for the Parent Company are
equal to the amounts reported for the Consolidated Company for 2000, 1999 and
1998 as disclosed in the Consolidated Statements of Changes in Shareholders'
Equity.
CONDENSED STATEMENTS OF CASH FLOWS (YEARS ENDED DECEMBER 31,)
(In thousands) 2000 1999 1998
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income .......................... $ 1,650 $ 1,499 $ 1,334
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed net
income of subsidiaries ............. (910) (839) (774)
Change in other assets ............. (20) (19) 8
------- ------- -------
Net cash from operating activities .. 720 641 568
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from shares issued
upon exercise of stock options ...... 21 22 1
Dividends paid ...................... (736) (662) (521)
------- ------- -------
Net cash from financing activities .. (715) (640) (520)
------- ------- -------
Net change in cash and cash
equivalents ......................... 5 1 48
Cash and cash equivalents at
beginning of year ................... 53 52 4
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ......................... $ 58 $ 53 $ 52
======= ======= =======
24
CDI
ANNUAL REPORT 2000