EXHIBIT 13
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL
DIRECTIONS,
INCORPORATED
[CDI LOGO]
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
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.
[CDI LOGO]
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
TABLE OF CONTENTS
A message to the shareholders..................................................... 2
Shareholder returns 1992-2002..................................................... 3
Stock and shareholder information................................................. 4
Market for common stock and related
security holder matters......................................................... 4
Financial highlights.............................................................. 4
Management. officers and directors ............................................... 5
Selected financial data........................................................... 6
Management's discussion and analysis of
financial condition and results
of operations .................................................................. 7-11
CAPITAL DIRECTIONS. INC.
CONSOLIDATED FINANCIAL STATEMENTS:
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, 2002, 2001 and 2000) ............................................. 17-28
[CDI LOGO]
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
TO THE SHAREHOLDERS:
Capital Directions is proud to report another record year in growth and
earnings, making 2002 the 13th consecutive year of increases. Dividends paid
have also grown for eight consecutive years and this year is the highest at
$1.54 per share. Much praise and gratitude goes to our dedicated employees who
have contributed so much time and effort to the company's continued success. My
appreciation also extends to the Board for their dedication to our customers and
shareholders.
NET INCOME for 2002 grew to $1,910,000, which represents a 9.90% increase from
the prior year. Return on shareholders' equity of 13.66% and return on assets of
1.56% mirror this excellent operating performance.
ASSET QUALITY remains high with non-performing loans to total loans decreasing
to .09% or less than 20% of peer bank's levels. Minimal loan charge offs also
reflect the attention to underwriting standards and monitoring of the loan
portfolio. Net charge offs for the year totaled less than $5,000 on an average
portfolio in excess of $99,000,000.
MORTGAGE ACTIVITY reached record levels as the low rate environment encouraged
many homeowners to refinance their current mortgage or purchase a new home.
Mason State enjoys an excellent reputation as a mortgage lender and continues to
build market share in the Greater Lansing area. Customer surveys show high
satisfaction with Mason State and customer referrals continue to be our leading
source of new business. During mid-year the bank established a mortgage company,
Mason State Mortgage Company, LLC, to take advantage of more liberal branching
requirements and favorable tax treatment. Kathy Baker was named President of the
new company.
IMPROVED EFFICIENCY has allowed the corporation to continue to have flexibility
in pricing when needed. An efficiency ratio of 48.90% ranks Capital Directions,
Inc. as a national leader in expense control. New sources of fee income and cost
reduction ideas are regular topics of the bank product development and
operations committees. Shrinking margins require more revenue be generated from
fee income. Financial services such as annuities and insurance will continue to
become more important sources of future revenue.
CAPITAL levels are determined based on many factors including regulatory
requirements, cost of operating, sources of capital, prevailing interest rates,
present credit risks and liquidity needs. Capital Directions maintains a strong
capital position. This strong capital base, along with a consistently high level
of earnings, has earned the recognition of national financial rating agencies.
NATIONAL BANK RATINGS have shown Mason State Bank to be a thriving asset, not
only for the city of Mason, but a mark of success to the state of Michigan.
Specifically, Mason State Bank received the Blue Ribbon Bank Commendation of
Excellence by Veribanc, Inc. Veribanc is the oldest independent rating company
serving the general public for rating safety and soundness of banks. Even more
exciting, the highly regarded Weiss Rating, Inc. gave Mason State Bank an A+
rating. Mason State Bank was one of only four Michigan banks to receive this top
honor. Weiss issues safety ratings on more than 15,000 national financial
institutions. The Weiss Safety Ratings assess the future financial stability of
a bank as a way of helping investors place their money with a financially sound
company.
THE ULTIMATE MEASURE of performance is a company's ability to increase
shareholder value over time. Even with the stock market's poor showing this past
fiscal year, Capital Directions, Inc. proved to be an excellent investment. As a
result of an ongoing improvement in earnings, Capital Directions increased
dividends paid by 10.79% per share over 2001 levels. An investment made on
December 31, 2001 has increased in value from $39.42 to $43.50 per share at
year-end. This increase, along with the dividend yield, provided a total annual
return of over 14%. 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 20.44%. As the following chart illustrates, an
investment in Capital Directions, Inc. has historically proven to be an
outstanding one. The President's new tax proposal, if passed, is expected to
have a favorable impact on corporations, such as Capital Directions, who have a
history of increasing earnings and dividends along with a strong capital base.
We are ideally positioned to benefit should tax-free dividends become law.
THANK YOU for all your support and faith in Capital Directions. We look forward
to visiting with you at the Annual Meeting of Shareholders on April 24, 2003.
Sincerely,
/s/ Timothy Gaylord
Timothy Gaylord President & CEO
[PHOTO] [CDI LOGO]
TWO
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
SHAREHOLDER RETURNS 1992-2002
[BAR GRAPH]
NET INCOME
(In thousands) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
$835 $869 $930 $1,050 $1,136 $1,235 $1,334 $1,449 $1,650 $1,738 $1,910
[BAR GRAPH]
RETURN ON EQUITY
(ROE) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
13.10% 12.62% 12.48% 12.71% 12.67% 12.47% 12.53% 13.06% 13.28% 12.94% 13.66%
[BAR GRAPH]
RETURN ON ASSETS
(ROA) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
1.10% 1.14% 1.24% 1.40% 1.49% 1.56% 1.47% 1.44% 1.54% 1.53% 1.56%
[BAR GRAPH]
BOOK VALUE
PER SHARE
(Retroactively
adjusted for stock
splits) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
$11.14 $12.17 $12.86 $14.45 $15.80 $17.17 $18.48 $19.82 $21.46 $23.09 $24.36
[BAR GRAPH]
SHAREHOLDERS'
EQUITY TO TOTAL
ASSETS 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
8.47% 9.52% 10.05% 11.04% 11.91% 12.78% 10.97% 11.19% 11.16% 11.74% 11.37%
STOCK PERFORMANCE
THE 5-YEAR THE 10-YEAR Capital Directions, Inc. shareholders taking advantage
ANNUALIZED RETURN ON ANNUALIZED RETURN ON of the dividend reinvestment program experienced an overall annual
CAPITAL DIRECTIONS, INC. CAPITAL DIRECTIONS, INC. compounded rate of return of 12.26% since December of 1997(1).
STOCK WAS 12.26%(1) STOCK WAS 20.44%(1)
$10,000 $18,196
December 31, 1997 December 31, 2002
(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.
THREE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
STOCK AND SHAREHOLDER INFORMATION
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 with only a minimal fee.
DIRECT DEPOSIT
The Company 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, Treasury and Administrative Officer, at (517) 676-0500.
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting for the year ended December 31, 2002 will be held at Mason
State Bank's Main Office, 322 S. Jefferson Street, Mason, Michigan on Thursday,
April 24, 2003 at 6:30 p.m.
HOW TO ORDER FORM 10-K
The Company's 2002 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
Capital Directions, Inc. stock is not listed on any exchange. Its shares are
traded through the local brokers of Stifel, Nicolaus & Co., Inc., Monroe
Securities, Howe Barnes Investments, Inc., 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, 2002, there were 422 holders of the Company's
common stock. Dividends are declared on a quarterly basis with a total of
$923,000 declared in 2002 and $849,000 in 2001.
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
2002
High ............. $ 39.50 $ 41.95 $ 43.00 $ 43.50
Low .............. 38.00 38.25 39.60 40.61
Dividend per share
declared ....... 0.39 0.39 0.39 0.39
2001
High ............. $ 40.00 $ 39.75 $ 40.25 $ 41.00
Low .............. 36.25 36.37 37.00 37.55
Dividend per share
declared ....... 0.34 0.35 0.36 0.37
FINANCIAL HIGHLIGHTS
Change Change
2002 2001 Amount Percent
INCOME STATEMENT
Net interest income ................................................ $ 4,525,000 $ 4,334,000 $ 191,000 4.41%
Net income ......................................................... 1,910,000 1,738,000 172,000 9.90
Basic earnings per share ........................................... 3.23 2.91 0.32 11.00
Cash dividend declared per share ................................... 1.56 1.42 0.14 9.86
RATIOS
Return on average shareholders' equity ............................. 13.66% 12.94%
Return on average assets ........................................... 1.56 1.53
Standard efficiency(l) ............................................. 48.90 50.29
Average shareholders' equity as a percentage of average assets ..... 11.44 11.83
BALANCE SHEET
Total assets ....................................................... $ 126,214,000 $ 117,277,000 $8,937,000 7.62%
Total earning assets ............................................... 119,287,000 111,330,000 7,957,000 7.15
Total loans, net ................................................... 96,055,000 91,784,000 4,271,000 4.65
Total deposits ..................................................... 74,707,000 70,933,000 3,774,000 5.32
(1) Calculated as noninterest expense divided by the sum of net interest income,
on a fully taxable equivalent basis, plus noninterest income.
FOUR
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CAPITAL DIRECTIONS, INC.
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Gerald W. Ambrose
Chairman, Capital Directions,
Inc., and County Controller,
Ingham County
Marvin B. Oesterle
Vice Chairman, Capital
Directions, Inc., and Partner,
Oesterle Brothers Seed Corn
Timothy P. Gaylord
President and Chief Executive
Officer, Capital Directions, Inc.
Douglas W. Dancer
Secretary, Capital Directions, Inc.,
and Realtor, Vision Real Estate
James W. Leasure
Owner, Showtime, Inc., and
Wash Express
Paula J. Johnson
Co-owner, Vision Real Estate,
and Developer, PAL, LLC (i.e.
Vision Village Condominiums)
OFFICERS
Gerald W. Ambrose
Chairman
Marvin B. Oesterle
Vice Chairman
Timothy P Gaylord
President and Chief Executive
Officer
Douglas W. Dancer
Secretary
Lois A. Toth
Treasurer
MASON STATE BANK MANAGEMENT
Timothy P. Gaylord
President and Chief Executive
Officer
Thomas L. Peterson
Senior Vice President, Retail
Banking and Operations
Thomas W. Schroeder
Vice President, Commercial Loans
Lois A. Toth
Vice President and Controller
Elizabeth J. Luttrell-Wilson
Assistant Vice President, Human
Resources and Security
Robert D. Warnke
Director of Branch
Administration and Marketing
Kimberly A. Dockter
Treasury and Administrative
Officer
Kathy M. Wakefield
Branch Officer
Thelma Hines
Customer Service Officer
MASON STATE MORTGAGE COMPANY, LLC MANAGEMENT
Timothy P. Gaylord
Chairman, Chief Executive
Officer and Manager
Thomas L. Peterson
Vice Chairman and Manager
Kathleen R. Baker
President and Manager
Lois A. Toth
Secretary, Treasurer and
Manager
MASON STATE BANK 2002
PROMOTIONS
KATHLEEN R. BAKER
[PHOTO]
During 2002, Mason State Bank promoted Kathleen R. Baker, Vice President of
Mortgage Loans, to President, Mason State Mortgage Company, LLC, a subsidiary of
Mason State Bank.
KIMBERLY A. DOCKTER
[PHOTO]
Kimberly A. Dockter, CPS, who served as Executive Secretary to the President,
was promoted to Treasury and Administrative Officer. A 15-year employee, Kim, in
addition to her duties of heading Shareholder Services is now also responsible
for funding procurement and investment sources.
NEW FACES
PETER D. HOUK
[PHOTO]
Peter D. Houk joined the Capital Directions, Inc. Board of Directors. Houk is a
Partner in the law firm of Fraser, Trebilcock, Davis and Dunlap. Previously he
was an Ingham County Circuit Court Judge and is a member of the Michigan State
and Ingham County Bar Associations and the Michigan Judges Association.
KATHY M. WAKEFIELD
[PHOTO]
In the second quarter 2002, Kathy M. Wakefield was welcomed as Branch Officer of
the Leslie Office. She brings over 15 years of banking experience in branch
management and mortgage lending. Kathy is excited to be returning to the
community where she attended high school.
ROBERT D. WARNKE
[PHOTO]
Robert D. Warnke joined Mason State Bank as Director of Marketing and Branch
Administration. Prior to joining Mason State Bank, Bob was with Financial
Technology, Inc., an East Lansing investment advisory firm and Community First
Bank of Lansing.
FIVE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share data) 2002 2001 2000 1999 1998
SUMMARY OF OPERATIONS
Interest and dividend income ................................ $ 7,897 $ 8,049 $ 7,958 $ 7,525 $ 6,880
Interest expense ............................................ 3,372 3,715 3,798 3,440 3,125
Net interest income ......................................... 4,525 4,334 4,160 4,085 3,755
Provision for loan losses ................................... -- -- 6 48 (23)
Noninterest income .......................................... 1,005 819 794 592 565
Noninterest expense ......................................... 2,752 2,640 2,569 2,471 2,461
Income before income tax expense ............................ 2,778 2,513 2,379 2,158 1,882
Income tax expense .......................................... 868 775 729 659 548
Net income.................................................. $ 1,910 $ 1,738 $ 1,650 $ 1,499 $ 1,334
PER SHARE
Average shares outstanding .................................. 591,830 598,017 597,704 596,200 595,064
Basic earnings .............................................. $ 3.23 $ 2.91 $ 2.76 $ 2.51 $ 2.24
Diluted earnings ............................................ 3.20 2.88 2.74 2.49 2.22
Dividends declared .......................................... 1.56 1.42 1.27 1.14 0.96
Book value .................................................. 24.36 23.09 21.46 19.82 18.48
RATIOS BASED ON NET INCOME
Net income to average shareholders' equity .................. 13.66% 12.94% 13.28% 13.06% 12.53%
Net income to average assets ................................ 1.56 1.53 1.54 1.44 1.47
BALANCE SHEET
Assets ...................................................... $ 126,214 $ 117,277 $ 115,023 $ 105,713 $ 100,229
Net loans ................................................... 96,055 91,784 84,596 88,057 80,904
Short-term investments ...................................... 5,246 4,331 5,963 54 626
Securities .................................................. 15,425 14,167 17,637 10,726 12,383
Deposits .................................................... 74,707 70,933 72,423 72,030 72,389
Federal Home Loan Bank
borrowings ................................................ 35,401 31,125 28,339 18,861 15,593
Shareholders' Equity ........................................ 14,350 13,763 12,834 11,828 10,997
SIX
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
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. (the "Company") 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. Mason
State Mortgage Company, LLC was formed on July 16, 2002 to allow the expansion
of mortgage offerings and to realize certain tax savings. This was facilitated
by a 99% ownership by Mason State Bank and a 1 % ownership by Capital
Directions, Inc.
The Company 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 Company is not aware of any current recommendations by regulatory
authorities that will have such affect if implemented.
PERFORMANCE SUMMARY
In 2002, Capital Directions, Inc. and its subsidiaries reported record net
earnings of $1,910,000. This is an increase of 9.90% over the previous year.
Basic earnings per share were $3.23 in 2002 compared to $2.91 in 2001. In 2002,
return on average assets increased to 1.56% from 1.53% in 2001. This increase is
attributable to the growth percentage in net income of the Company exceeding the
percentage growth in total average assets during 2002. Return on shareholders'
equity was 13.66%, up from 12.94% in 2001. As of December 31, 2002 the leveraged
capital ratio, which excludes the net unrealized gain or loss on securities
available for sale was 10.65%, down from 11.6% 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
2002 compared to the same components in 2001:
(In thousands)
2001 NET INCOME ....................................................... $ 1,738
Increase (decrease) in net income
Interest income .......................................................... (152)
Interest expense ......................................................... 343
Provision for loan losses ...........................................
Noninterest income.................................................... 186
Noninterest expense................................................... (112)
Income taxes.............................................................. (93)
2002 NET INCOME ....................................................... $ 1,910
In 2001, net income for the Company was $1,738,000, which was an increase of
5.33% over net earnings of $1,650,000 for 2000. Basic earnings per share
increased to $2.91 in 2001 compared to $2.76 in 2000. The 2001 return on average
assets decreased slightly to 1.53% from 1.54% in 2000. Return on average
shareholders' equity was 12.94%, down from 13.28% in 2000. The leveraged capital
ratio for the year ending December 31, 2001 was 11.6%, up from 11.4% the prior
year.
The operations of our Holding Company did not materially affect the consolidated
financial results for 2002, 2001 or 2000.
NET INTEREST INCOME
The largest segment of the Company'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 2002, on a fully taxable equivalent basis, was
$4,623,000, an increase of $192,000 over 2001. For 2001, net interest income, on
a fully taxable equivalent basis, increased $173,000 over 2000. 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 2002 generally due to the
impact of volume increases on interest earning assets exceeding the impact of
volume increases on interest-bearing liabilities, and in 2001 generally due to
the impact of rate decreases on interest-bearing liabilities exceeding the
impact of rate decreases on interest earning assets.
Yields on assets and funding rates were lower in 2002 compared to 2001,
reflecting a declining rate environment. Average tax equivalent yields on
earning assets decreased to 6.89% in 2002 from 7.55% in 2001. Interest-bearing
liability rates decreased to 3.53% in 2002 from 4.20% in 2001. Despite an
increase in net interest income related primarily to increased volume, the tax
equivalent net interest margin decreased by 13 basis points. This was primarily
related to the change in the structure of earning assets and the Bank's
liability sensitive GAP position. As mortgage loan demand increased throughout
the year, funds were deployed in loans which tend to be at lower yields as
compared to commercial or other consumer loan products. In addition, because of
the Bank's liability sensitive position, as discussed more fully below, and
considering the falling interest rate environment during 2002, the Bank's
interest-bearing liabilities repriced at lower rates at a faster pace than the
Bank's interest-bearing assets.
SEVEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
TABLE 1
(Dollars in 2002 2001 2000
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 ......................... $ 99,415 $ 7,058 7.10% $ 86,794 $ 6,852 7.89% $ 87,651 $ 7,063 8.06%
Other
earning
assets ...................... 16,626 932 5.61 21,035 1,294 6.15 14,220 993 6.98
-------- -------- -------- -------- -------- --------
Total
earning
assets ...................... 116,041 7,990 6.89 107,829 8,146 7.55 101,871 8,056 7.91
Other
assets ...................... 6,214 5,733 5,309
-------- -------- --------
Total ......................... $122,255 $113,562 $107,180
======== ======== ========
Interest-
bearing
liabilities ................. $ 95,334 $ 3,372 3.54% $ 88,487 $ 3,715 4.20% $ 83,689 $ 3,798 4.54%
Non interest
bearing
liabilities
and
equity ...................... 26,921 25,075 23,491
-------- -------- --------
Total ......................... $122,255 $113,562 $107,180
======== ======== ========
Net interest
income ...................... $ 4,618 $ 4,431 $ 4,258
======== ======== ========
Net interest
margin on
earning
assets ...................... 3.98% 4.11% 4.18%
* Fully taxable equivalent basis.
TABLE 2
(Dollars in thousands) 2002 COMPARED TO 2001 2001 COMPARED TO 2000
CHANGE DUE TO: VOLUME RATE TOTAL VOLUME RATE TOTAL
Earning assets*:
Loans ........................................ $ 921 $(729) $ 192 $ (68) $(143) $(211)
Other earning assets ......................... (188) (160) (348) 395 (94) 301
Total interest income .......................... $ 733 $(889) $(156) $ 327 $(237) $ 90
Interest-bearing liabilities:
Interest-bearing liabilities ................. $ 204 $(547) $(343) $ 337 $(420) (83)
Net interest income* ........................... $ 529 $(342) $ 187 $ (10) $ 183 $ 173
* Fully taxable equivalent basis.
EIGHT
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
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. No provision for loan losses was recognized in 2002 due to excellent
loan portfolio performance. Based on contraction due to diminished demand in the
Bank's loan portfolio in 2001 and 2000, the provision for loan losses was
eliminated in 2001 and was $6,000 in 2000.
Net charge-offs for 2002 totaled $4,000, while 2001 totaled $5,000. Excellent
loan portfolio performance 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 $1,044,000
allowance or 1.08% allowance to total loans appropriate to cover inherent losses
in the portfolio at year-end 2002.
NONINTEREST INCOME
Noninterest income increased by $186,000 from the previous year. The largest
increases were attributable to gains on sales of loans, including recognition of
servicing rights. Decreases were recognized in merchant processing activity and
ATM fees. Investment commissions decreased due to continued less favorable
economic and stock market conditions throughout 2002. The change in noninterest
income from 2001 to 2000 was an increase of $25,000. This increase was
attributable to gains on sales of loans, including recognition of servicing
rights. In addition, investment commissions decreased due to the impact of less
favorable economic and stock market conditions.
NONINTEREST EXPENSE
Noninterest expense increased $112,000 during 2002. This increase is primarily
attributable to increased building expenses and depreciation, salary and wages,
employee benefits, consulting fees, legal fees, audit services and expenses
related to other real estate. Noninterest expense increased by $71,000 from 2000
to 2001. This increase was a result of increased salary and benefits costs,
expenses for outsourced services and increased building expenses and
depreciation.
INCOME TAX EXPENSE
The 2002 provision for income tax was $868,000, up from $775,000 in 2001. The
2001 provision was up $46,000 from the $729,000 provision in 2000. This figure
reflects a higher taxable income in 2002 and 2001.
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 $2,285,000 in federal
funds sold in 2002. 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. Since 1997
the Bank used this source of funding (see Note 7 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, 2002 the securities available for sale were valued at
$12,644,000. It is not anticipated that management will use these funds due to
the optional sources that may be available in 2003.
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 chart shown 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 2002, the percentage of rate sensitive assets to rate sensitive
liabilities within the one-year time horizon was 51 %.
NINE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
GAP MEASUREMENT
(Dollars in 0-30 31-90 2ND 3RD 4TH ANNUAL 1-3 3-5 OVER 5
thousands) DAYS DAYS QUARTER QUARTER QUARTER TOTAL YEARS YEARS YEARS TOTAL
ASSETS
Loans $ 3,024 $ 9,679 $ 2,416 $ 3,063 $ 3,299 $ 21,481 $ 2,960 $ 12,815 $ 59,843 $ 97,099
Allowance for loan
losses -- -- -- -- -- -- -- -- -- (1,044)
Loans Held-For-
Sale 635 -- -- -- -- 635 -- -- -- 635
Securities(1) 2,381 1,097 1,897 2,087 1,261 8,723 5,787 602 313 15,425
Short-term
Investments 4,156 991 -- -- -- 5,147 -- -- -- 5,147
Time deposits with
other financial
institutions -- -- 495 486 -- 981 -- -- -- 981
Other non earning
assets -- -- -- -- -- -- -- -- -- 7,971
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 10,196 $ 11,767 $ 4,808 $ 5,636 $ 4,560 $ 36,967 $ 8,747 $ 13,417 $ 60,156 $126,214
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
LIABILITIES
Noninterest-
bearing deposits $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 10,767
Interest-bearing
deposits 42,631 2,627 3,670 2,040 2,822 53,790 7,087 3,063 -- 63,940
FHLB
borrowings(2) 3,230 7,000 6,000 2,000 1,024 19,254 5,253 10,062 832 35,401
Other liabilities -- -- -- -- -- -- -- -- -- 1,756
Capital -- -- -- -- -- -- -- -- -- 14,350
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 45,861 $ 9,627 $ 9,670 $ 4,040 $ 3,846 $ 73,044 $ 12,340 $ 13,125 $ 832 $126,214
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
GAP $(35,665) $ 2,140 $ (4,862) $ 1,596 $ 714 $(36,077) $ (3,593) $ 292 $ 59,324
Cumulative GAP $(35,665) $(33,525) $(38,387) $(36,791) $(36,077) $(36,077) $(39,670) $(39,378) $ 19,946
GAP ratio 22% 122% 50% 140% 119% 51% 71% 102% 7,230%
- ----------------------
(1) Maturities reflect probable prepayments and calls.
(2) FHLB 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.
The chart shows the Bank's GAP position as of December 31, 2002. The Bank has a
liability sensitive position within one year of approximately $36,077,000, which
would normally indicate 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. The GAP model used by the Bank
differs from the chart above, in that actual loan prepayment and deposit
longevity experience are also factored into the calculation. Using this method,
the Bank's GAP position at December 31, 2002 was an asset sensitive position of
8.60% at one year. As rates have fallen over the past two years, the Bank has
experienced compression in its ability to lower deposit rates in a manner
equivalent to the decline in earning asset rates.
TEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CAPITAL RESOURCES
The adequacy of the Company'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 $689,000 or 5.11% to $14,178,000 at year-end 2002, which
represented 11.23% of total assets. At December 31, 2001, the similar ratio of
shareholders' equity to total assets was 11.50% of total assets. Dividends
declared per common share increased by 9.86% to $1.56 compared to $1.42 in 2001.
The Company has a strong capital position that will meet our needs in 2003.
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, 2002, the Bank
has a "risk-based" total capital to asset ratio of 19.12%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of the Company are monetary in nature and
therefore the Company 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
Company'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.
(Dollars in thousands) MINIMUM REQUIRED
TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
-------------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
DECEMBER 31, 2002
Total capital (to risk weighted assets) $14,238 19.12% $ 5,957 8.0% $7,447 10.0%
Tier 1 capital (to risk weighted assets) 13,306 17.87 2,979 4.0 4,468 6.0
Tier 1 capital (to average assets) 13,306 10.65 4,997 4.0 6,246 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 Company. Of the $14,238,000 in risk-based capital,
$7,170,000 is available for dividends to the parent Company in 2002 (before
considering 2003 net income and any changes in risk-based assets). The remaining
$7,068,000 is restricted based on the minimum risk-based capital requirements
and state bank regulations now in effect.
ELEVEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
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, 2002 and 2001, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 2002, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of its operations and its
cash flows for the years ended December 31, 2002, 2001 and 2000 in conformity
with accounting principles generally accepted in the United States of America.
Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
January 29, 2003
TWELVE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CAPITAL DIRECTIONS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In thousands, except share and per share data)
DECEMBER 31, 2002 2001
ASSETS
Cash and noninterest-bearing deposits ............................................................ $ 3,287 $ 2,642
Interest-bearing deposits in other financial institutions ........................................ 1,917 38
Federal funds sold ............................................................................... 3,230 4,293
-------- --------
Total cash and cash equivalents ........................................................ 8,434 6,973
Time deposits with other financial institutions .................................................. 981 --
Securities available for sale .................................................................... 12,644 12,200
Securities held to maturity (fair value: 2002 - $400) ............................................ 400 --
Federal Home Loan Bank (FHLB) stock .............................................................. 2,381 1,967
Loans held for sale .............................................................................. 635 --
Gross loans ...................................................................................... 97,099 92,832
Less allowance for loan losses ................................................................... (1,044) (1,048)
-------- --------
Net loans .............................................................................. 96,055 91,784
Premises and equipment, net ...................................................................... 1,029 1,107
Accrued interest receivable ...................................................................... 463 550
Bank owned life insurance ........................................................................ 1,794 1,728
Other assets ..................................................................................... 1,398 968
-------- --------
TOTAL ASSETS ........................................................................... $126,214 $117,277
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits: Noninterest-bearing .................................................................. $ 10,767 $ 10,470
Interest-bearing ..................................................................... 63,940 60,463
-------- --------
Total deposits ..................................................................... 74,707 70,933
Accrued interest payable ......................................................................... 277 286
Other liabilities ................................................................................ 1,479 1,170
FHLB borrowings .................................................................................. 35,401 31,125
-------- --------
Total liabilities ......................................................................... 111,864 103,514
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares authorized; 589,043 and 595,956 shares
outstanding in 2002 and 2001 ....................................................... 2,945 2,980
Additional paid-in capital ....................................................................... 2,231 2,494
Retained earnings ................................................................................ 9,002 8,015
Accumulated other comprehensive income, net of tax of $89 in 2002 and $141 in 2001 ............... 172 274
-------- --------
Total shareholders' equity ................................................................ 14,350 13,763
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................................ $126,214 $117,277
======== ========
See accompanying notes to consolidated financial statements.
THIRTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 2002, 2001 AND 2000
(In thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000
INTEREST AND DIVIDEND INCOME
Loans, including fees ................................... $7,052 $6,837 $7,051
Securities: Taxable ..................................... 505 726 506
Tax exempt .................................. 168 159 166
FHLB stock .............................................. 125 146 94
Federal funds sold and other ............................ 47 181 141
------ ------ ------
TOTAL INTEREST AND DIVIDEND INCOME ................. 7,897 8,049 7,958
INTEREST EXPENSE
Deposits ................................................ 1,453 2,032 2,506
FHLB borrowings and other debt .......................... 1,919 1,683 1,292
------ ------ ------
TOTAL INTEREST EXPENSE ............................. 3,372 3,715 3,798
------ ------ ------
NET INTEREST INCOME ....................................... 4,525 4,334 4,160
Provision for loan losses ................................. -- -- 6
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....... 4,525 4,334 4,154
NONINTEREST INCOME
Service charges on deposits ............................. 320 320 335
Net gain on sales of loans .............................. 350 74 --
Investment commission fees .............................. 49 54 93
Other ................................................... 286 371 366
------ ------ ------
TOTAL NONINTEREST INCOME ........................... 1,005 819 794
NONINTEREST EXPENSE
Salaries and employee benefits .......................... 1,576 1,473 1,467
Occupancy and equipment ................................. 345 326 308
Other ................................................... 831 841 794
------ ------ ------
TOTAL NONINTEREST EXPENSE .......................... 2,752 2,640 2,569
------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE .......................... 2,778 2,513 2,379
Income tax expense ........................................ 868 775 729
------ ------ ------
NET INCOME ................................................ $1,910 $1,738 $1,650
====== ====== ======
Basic earnings per common share ........................... $ 3.23 $ 2.91 $ 2.76
====== ====== ======
Diluted earnings per common share ......................... $ 3.20 $ 2.88 $ 2.74
====== ====== ======
See accompanying notes to consolidated financial statements.
FOURTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2002, 2001 AND 2000
(In thousands)
FOR THE YEARS ENDED DECEMBER 31, 2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 1,910 $ 1,738 $ 1,650
Adjustments to reconcile net income to net cash from operating activities
Depreciation ............................................................... 118 129 115
Provision for loan losses .................................................. -- -- 6
Net amortization (accretion) on securities ................................. 16 5 (1)
Loans originated for sale .................................................. (15,463) (3,815) --
Proceeds from sales of loans originated for sale ........................... 15,178 3,889 --
Net gain on sales of loans ................................................. (350) (74) --
Stock-based compensation expense ........................................... 1 -- --
Changes in assets and liabilities: Accrued interest receivable ............ 87 113 (148)
Accrued interest payable ............... (9) (71) 45
Other assets ........................... (444) (157) (34)
Other liabilities ...................... 299 83 64
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 1,343 1,840 1,697
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in time deposits with other financial institutions ................ (981) -- --
Securities available for sale: Purchases .................................... (4,908) (1,028) (8,202)
Maturities, calls, and principal payments .... 4,294 4,714 2,428
Securities held for sale: Purchases..................................... (400) -- --
Purchase of FHLB stock ....................................................... (414) -- (992)
Net change in loans .......................................................... (4,271) (7,188) 3,322
Premises and equipment expenditures .......................................... (40) (289) (294)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (6,720) (3,791) (3,738)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ....................................................... 3,774 (1,490) 393
Net change in federal funds purchased ........................................ -- -- (1,700)
Proceeds from FHLB borrowings ................................................ 17,500 7,000 12,700
Repayment of FHLB borrowings ................................................. (13,224) (4,214) (3,222)
Proceeds from shares issued upon exercise of stock options ................... 18 12 21
Repurchase of common stock ................................................... (317) (118) --
Cash dividends paid .......................................................... (913) (832) (736)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES 6,838 358 7,456
-------- -------- --------
Net change in cash and cash equivalents ........................................ 1,461 (1,593) 5,415
Cash and cash equivalents at beginning of year ................................. 6,973 8,566 3,151
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,434 $ 6,973 $ 8,566
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for: Interest ..................................... $ 3,381 $ 3,786 $ 3,753
Income taxes - federal ....................... 805 802 730
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Transfer from loans to other real estate owned ............................... -- -- 133
See accompanying notes to consolidated financial statements.
FIFTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
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, 2002, COMMON PAID-IN RETAINED INCOME, SHAREHOLDERS'
2001 AND 2000 STOCK CAPITAL EARNINGS NET OF TAX EQUITY
BALANCES, JANUARY 1, 2000 .................................. $ 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
Net income for the year .................................... -- -- 1,738 -- 1,738
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on securities
available for sale, net of tax of $75 .................... -- -- -- 146 146
--------
Comprehensive income ................................... 1,884
Issuance of 900 shares of common stock upon exercise of
stock options ............................................ 5 7 -- -- 12
Repurchase of 3,000 shares of common stock ................. (15) (103) -- -- (118)
Cash dividends ($1.42 per share) ........................... -- -- (849) -- (849)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 2001 ................................ $ 2,980 $ 2,494 $ 8,015 $ 274 $ 13,763
Net income for the year .................................... -- -- 1,910 -- 1,910
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on securities
available for sale, net of tax of ($52) .................. -- -- -- (102) (102)
--------
Comprehensive income ................................... 1,808
Issuance of 1,000 shares of common stock upon exercise of
stock options ............................................ 5 13 -- -- 18
Stock-based compensation expense ........................... -- 1 -- -- 1
Repurchase of 7,913 shares of common stock ................. (40) (277) -- -- (317)
Cash dividends ($1.56 per share) ........................... -- -- (923) -- (923)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 2002 ................................ $ 2,945 $ 2,231 $ 9,002 $ 172 $ 14,350
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
SIXTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING: Capital Directions, Inc. (the "Company") is a holding
company whose wholly owned subsidiary includes Mason State Bank (the "Bank").
Lakeside Insurance Agency is a wholly owned subsidiary of the Bank. Mason State
Mortgage Co., LLC (the "Mortgage Company") was formed in July of 2002 and is 99%
owned by Mason State Bank. The remaining 1% is owned by Capital Directions, Inc.
The accounting policies of the Company and its subsidiaries conform with
accounting principles generally accepted in the United States of America 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. 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
accounting principles generally accepted in the United States of America
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.
CASH FLOW REPORTING: Cash and cash equivalents are defined to include cash on
hand, noninterest-bearing deposits in other institutions, short-term
interest-bearing deposits in other institutions and federal funds sold. Customer
loan and deposit transactions, cash management funds, 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.
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.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection. Consumer loans
are typically charged off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
SEVENTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. 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 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 reported at
the lower of fair value less cost to sell or cost. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in other
operating expense. There was no other real estate at December 31, 2002. There
was one property with a carrying value of approximately $117,000 held as other
real estate at December 31, 2001.
SERVICING ASSETS: Servicing assets represent purchased rights and the allocated
value of retained servicing rights on loans sold. Servicing rights are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated regularly based on the fair value of the assets, using
groupings of similar loan types and then, secondarily, as to prepayment
characteristics. Actual prepayment and adjustment of amortization speed is
evaluated on a quarterly basis. Servicing assets had a carrying value of
$310,000 and $71,000 at year-end 2002 and 2001.
BANK OWNED LIFE INSURANCE: The Company has purchased life insurance policies on
certain directors. Bank owned life insurance is recorded at its cash surrender
value, or the amount that can be realized, which was $1,794,000 and $1,728,000
at year-end 2002 and 2001.
EIGHTEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
STOCK COMPENSATION: The Company's only stock-based compensation plan is a stock
option plan, which is described more fully in Note 9. Prior to 2002, the Company
accounted for this plan under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based
compensation cost is reflected in 2001 or 2000 net income, as all options
granted under this plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. Effective January 1, 2002, the
Company adopted the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, prospectively to all employee awards
granted, modified, or settled after January 1, 2002. Awards under the Company's
plan vest over a five-year period. Therefore, the cost related to stock-based
compensation included in the determination of net income for 2002 is less than
that which would have been recognized if the fair value based method had been
applied to all awards since the original effective date of SFAS No. 123.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period.
(In thousands, except
per share data) 2002 2001 2000
Net income as reported ........... $ 1,910 $ 1,738 $ 1,650
Add: stock-based compensation
expense included in reported
net income ..................... 1 -- --
Deduct: stock-based compensation
expense determined under
fair value based method ........ (12) (11) (13)
------- ------- -------
PRO FORMA NET INCOME ............. $ 1,899 $ 1,727 $ 1,637
======= ======= =======
Basic earnings per share
as reported .................... $ 3.23 $ 2.91 $ 2.76
Pro forma basic earnings
per share ...................... 3.21 2.89 2.74
Diluted earnings per share
as reported .................... $ 3.20 $ 2.88 $ 2.74
Pro forma diluted earnings
per share ...................... 3.19 2.86 2.71
Stock-based compensation expense was computed using option
pricing models, using the following weighted average assumptions
as of the grant date:
2002 2001 2000
Risk-free interest rate 4.27% 4.95% 6.57%
Expected option life 5 years 5 years 5 years
Expected stock price volatility 3.65% 3.90% 4.64%
Expected dividend yield 4.15% 3.44% 3.16%
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.
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.
RESTRICTIONS ON CASH: Cash on hand or on deposit with the Federal Reserve Bank
of $592,000 and $401,000 was required to meet regulatory reserve and clearing
requirements at year-end 2002 and 2001. These balances do not earn interest.
NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Company's financial condition or
results of operations.
RECLASSIFICATIONS: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NINETEEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income were as
follows:
(In thousands) GROSS GROSS
FAIR UNREALIZED UNREALIZED
VALUE GAINS LOSSES
2002
Obligations of U.S. Government
treasuries and agencies ................ $ 5,535 $ 105 $ --
Obligations of states and
political subdivisions ................. 5,581 133 (1)
Corporate securities ................... 1,528 24 --
------- ------- -------
TOTALS ............................... $12,644 $ 262 $ (1)
======= ======= =======
2001
Obligations of U.S. Government
treasuries and agencies ................ $ 5,903 $ 202 $ --
Obligations of states and
political subdivisions ................. 3,182 99 --
Corporate securities ................... 3,115 114 --
------- ------- -------
TOTALS ............................... $12,200 $ 415 $ --
======= ======= =======
The carrying amount, unrecognized gains and losses, and fair value
of securities held to maturity were as follows:
(In thousands) GROSS GROSS
CARRYING UNRECOGNIZED UNRECOGNIZED FAIR
AMOUNT GAINS LOSSES VALUE
2002
Corporate
securities $ 400 $ -- $ -- $ 400
There were no securities held to maturity at year-end 2001.
The fair value of debt securities and carrying amount, if
different, at year-end 2002 by contractual maturity were as
follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
(In thousands) AVAILABLE
HELD-TO-MATURITY FOR SALE
---------------------- ---------
CARRYING FAIR FAIR
AMOUNT VALUE VALUE
Due in one year or less $ -- $ -- $ 4,831
Due from one to five years -- -- 5,787
Due from five to ten years -- -- 1,419
Due after ten years 400 400 206
Mortgage-backed -- -- 401
-------- ------ -------
TOTALS $ 400 $ 400 $12,644
======== ====== =======
Securities pledged at year-end 2002 and 2001 had a carrying amount
of $3,472,000 and $3,145,000, and were pledged to secure public
deposits and repurchase agreements.
At year-end 2002 and 2001, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
TWENTY
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 3 - LOANS
Year-end loans were as follows:
(In thousands) .................... 2002 2001
Commercial and agricultural ....... $ 5,990 $ 5,188
Real estate mortgage .............. 89,383 85,378
Installment ....................... 1,726 2,266
------- -------
TOTALS ........................ $97,099 $92,832
======= =======
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) ......................... 2002 2001
Balance, January 1 ..................... $ 2,048 $ 2,200
New loans .............................. 754 546
Repayments ............................. (1,276) (698)
------- -------
BALANCE, DECEMBER 31 ................... $ 1,526 $ 2,048
======= =======
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
(In thousands) ....................... 2002 2001 2000
Balance, beginning of period ......... $ 1,048 $ 1,053 $ 1,055
Loans charged-off .................... (14) (36) (27)
Recoveries ........................... 10 31 19
Provision for loan losses ............ -- -- 6
------- ------- -------
BALANCE, END OF PERIOD ............... $ 1,044 $ 1,048 $ 1,053
======= ======= =======
During 2002, 2001 and 2000, the Company had no loans which were considered
impaired.
Nonperforming loans were as follows:
(In thousands) ............................... 2002 2001
Loans past due over 90 days still on accrual.. $ 5 $255
Nonaccrual loans ............................. 59 20
Renegotiated loans ........................... 24 28
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
(In thousands) ................................. 2002 2001
Land ........................................... $ 86 $ 86
Buildings and improvements ..................... 1,465 1,471
Furniture and equipment ........................ 2,567 2,623
------- -------
Total cost .................................. 4,118 4,180
Less accumulated depreciation .................. (3,089) (3,073)
------- -------
PREMISES AND EQUIPMENT, NET .................... $ 1,029 $ 1,107
======= =======
TWENTY-ONE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 6 - INTEREST-BEARING DEPOSITS
Year-end interest-bearing deposits were as follows:
(In thousands) 2002 2001
Interest-bearing demand .............................. $11,391 $10,177
Savings............................................... 25,374 20,003
Time: In denominations less than $100,000............. 20,482 18,505
In denominations of $100,000 or more ........... 6,693 11,778
------- -------
TOTAL INTEREST-BEARING DEPOSITS....................... $63,940 $60,463
======= =======
At year-end 2002, stated maturities of time deposits were as follows:
(In thousands)
2003............ $13,981
2004............ 5,527
2005............ 2,178
2006............ 1,519
2007............ 3,970
Thereafter...... --
-------
TOTAL .......... $27,175
=======
Related party deposits totaled approximately $1,072,000 and $1,049,000 at
year-end 2002 and 2001.
NOTE 7 - FHLB BORROWINGS
At year-end 2002, the Company had $35,401,000 in advances from the Federal Home
Loan Bank with maturities ranging from January 2003 to April 2012 and rates,
which were primarily fixed, ranging from 3.83% to 7.61% and averaging 5.44%. At
year-end 2001, the Company had $31,125,000 in advances from the Federal Home
Loan Bank with maturities ranging from January 2003 to December 2010 and rates,
which were primarily fixed, ranging from 4.98% to 7.61% and averaging 5.63%.
At year-end 2002, $11,000,000 of the Company's outstanding advances were
putable, for which 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 $72,643,000 and $63,741,000 of first mortgage
and small business association loans under a blanket lien arrangement at
year-end 2002 and 2001.
At year-end 2002, scheduled principal reductions on these advances were:
(In thousands)
2003............ $ 9,254
2004............ 1,025
2005............ 3,228
2006............ 8,030
2007............ 3,032
Thereafter...... 10,832
-------
TOTAL .......... $35,401
=======
TWENTY-TWO
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 8 - 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 $51,000 in 2002, $44,000 in 2001 and
$42,000 in 2000.
An incentive compensation plan is also maintained for certain employees and is
based upon key performance factors. The expense for the plan was approximately
$87,000 in 2002, $71,000 in 2001 and $67,000 in 2000.
A 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. 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
January 1, 2000 ........ 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
Granted .................. (4,000) 4,000 40.00 2.75
Exercised ................ -- (900) 12.75
Forfeited ................ 1,300 (1,300) 39.65
------ ------
Balance
December 31, 2001....... 13,893 22,007 32.12
Granted .................. (4,000) 4,000 38.00 1.10
Exercised ................ -- (1,000) 18.00
Forfeited ................ -- -- --
------ ------
BALANCE
DECEMBER 31, 2002 ...... 9,893 25,007 $33.63
====== ====== ======
Options outstanding at year-end 2002 were as follows:
OUTSTANDING EXERCISABLE
------------------------------ ------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
NUMBER LIFE PRICE NUMBER PRICE
RANGE OF EXERCISE PRICES
$12.75 - $21.875............. 5,467 3.62 $19.76 5,467 $19.76
$32.00 - $35.75.............. 7,240 5.65 33.82 5,996 33.47
$38.00 - $41.50.............. 12,300 7.73 39.68 1,565 40.86
------ ------
Outstanding at year end...... 25,007 6.42 $33.63 13,028 $28.61
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 $91,000 in 2002, $96,000 in
2001 and $93,000 in 2000.
TWENTY-THREE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 9 - INCOME TAX
Income tax expense consists of:
(In thousands) 2002 2001 2000
Taxes currently payable ............... $ 818 $ 746 $ 742
Deferred expense (benefit)............. 50 29 (13)
----- ----- -----
TOTAL.................................. $ 868 $ 775 $ 729
===== ===== =====
Year-end deferred tax assets and liabilities consist of:
(In thousands) 2002 2001 2000
Deferred tax assets
Allowance for loan losses ....... $ 240 $ 240 $ 240
Deferred compensation ........... 349 333 326
Other ........................... 8 3 1
----- ----- -----
597 576 567
Deferred tax liabilities
Fixed assets .................... (59) (54) (48)
Net unrealized gain on
securities available for sale.. (89) (141) (66)
Mortgage servicing rights ....... (105) (24) --
Other ........................... (7) (22) (14)
----- ----- -----
(260) (241) (128)
----- ----- -----
TOTAL .............................. $ 337 $ 335 $ 439
===== ===== =====
An allowance against deferred tax assets has not been recorded for 2002, 2001 or
2000.
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) 2002 2001 2000
Statutory rate .................... 34% 34% 34%
Income tax computed at
statutory rate .................. $ 944 $ 854 $ 809
Tax effect of: Nontaxable income .. (53) (56) (56)
Other .............. (23) (23) (24)
----- ----- -----
TOTAL ............................. $ 868 $ 775 $ 729
===== ===== =====
NOTE 10 - 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) 2002 2001 2000
Basic earnings per common share:
Net income available to common
shareholders ...................... $1,910 $1,738 $1,650
====== ====== ======
Weighted average common
shares outstanding ................ 592 598 598
====== ====== ======
BASIC EARNINGS PER
COMMON SHARE ...................... $ 3.23 $ 2.91 $ 2.76
====== ====== ======
Diluted earnings per common share:
Net income available to common
shareholders ...................... $1,910 $1,738 $1,650
====== ====== ======
Weighted average common
shares outstanding for basic
earnings per common share ......... 592 598 598
Add: dilutive effect of assumed
exercise of stock options ......... 4 5 5
------ ------ ------
Weighted average common
shares outstanding for diluted
earnings per common share ......... 596 603 603
====== ====== ======
DILUTED EARNINGS PER
COMMON SHARE ...................... $ 3.20 $ 2.88 $ 2.74
====== ====== ======
Stock options for 3,700, 8,000 and 4,000 shares of common stock were not
considered in computing diluted earnings per common share in 2002, 2001 and 2000
because they were not dilutive.
TWENTY-FOUR
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 11 - 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) 2002 2001
Unused lines of credit ...... $7,093 $6,505
Commitments to make loans ... 757 1,542
Standby letters of credit ... 65 10
Commitments are generally made at variable rates, primarily tied to the Wall
Street Journal 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 12 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
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
2002
Total Capital (to risk weighted assets) .... $14,238 19.1% $ 5,957 $ 8.0% $ 7,447 10.0%
Tier 1 capital (to risk weighted assets) ... 13,306 17.9 2,979 4.0 4,468 6.0
Tier 1 capital (to average assets) ......... 13,306 10.7 4,997 4.0 6,246 5.0
2001
Total Capital (to risk weighted assets) .... $14,358 19.6% $ 5,877 8.0% $ 7,346 10.0%
Tier 1 capital (to risk weighted assets) ... 13,438 18.3 2,938 4.0 4,407 6.0
Tier 1 capital (to average assets) ......... 13,438 11.6 4,627 4.0 5,783 5.0
The Bank was considered well capitalized at year-end 2002 and 2001.
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 2002, the Bank could pay
approximately $7,170,000 in dividends to the parent company without prior
regulatory approval.
TWENTY-FIVE
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 13 - 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.
The estimated year-end fair values of financial instruments were as follows:
(In thousands) 2002 2001
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
FINANCIAL ASSETS
Cash and cash
equivalents ......... $ 8,434 $ 8,434 $ 6,973 $ 6,973
Time deposits with
other financial
institutions ........ 981 981 -- --
Securities available
for sale ............ 12,644 12,644 12,200 12,200
Securities held to
maturity ............ 400 400 -- --
FHLB stock ............. 2,381 2,381 1,967 1,967
Loans held for sale .... 635 635 -- --
Loans, net of
allowance for
loan losses ......... 96,055 101,532 91,784 92,155
Accrued interest
receivable .......... 463 463 550 550
FINANCIAL
LIABILITIES
Deposits ............... (74,707) (75,392) (70,933) (71,607)
FHLB
borrowings .......... (35,401) (38,113) (31,125) (31,298)
Accrued interest
payable ............. (277) (277) (286) (286)
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 2002 or 2001, 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 2002 and
2001 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 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 trained workforce,
customer goodwill and similar items.
TWENTY-SIX
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 14 - CAPITAL DIRECTIONS, INC. (PARENT COMPANY
ONLY) - CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
(In thousands) DECEMBER 31, 2002 2001
ASSETS
Cash, due from banks, and other
cash equivalents ............................. $ 33 $ 25
Investment in Mason State Bank ............... 13,509 13,719
Investment in Mason State Mortgage Co., LLC .. 796 --
Other assets ................................. 242 239
------- -------
TOTAL ASSETS .............................. $14,580 $13,983
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable ............................ $ 230 $ 220
Shareholders' equity ......................... 14,350 13,763
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ...................... $14,580 $13,983
======= =======
CONDENSED STATEMENTS OF INCOME (YEARS ENDED DECEMBER 31,)
(In thousands) 2002 2001 2000
OPERATING INCOME
Dividends from Mason State Bank ..... $1,723 $ 848 $ 760
OPERATING EXPENSES
Wages and benefits .................. 25 19 6
Other expenses and income tax
benefit ............................. 21 14 14
------ ------ ------
46 33 20
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES ........................ 1,677 815 740
Equity in undistributed net income
of Mason State Bank ................. 208 923 910
Equity in undistributed income
of Mason State Mortgage
Company, LLC ........................ 25 -- --
------ ------ ------
233 923 910
------ ------ ------
NET INCOME .......................... $1,910 $1,738 $1,650
====== ====== ======
Other comprehensive income and comprehensive income for the Parent Company are
equal to the amounts reported for the Consolidated Company for 2002, 2001 and
2000 as disclosed in the Consolidated Statements of Changes in Shareholders'
Equity.
CONDENSED STATEMENTS OF CASH FLOWS (YEARS ENDED DECEMBER 31,)
(In thousands) 2002 2001 2000
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income ........................... $ 1,910 $ 1,738 $ 1,650
Adjustments to reconcile
net income to net cash
from operating activities
Equity in undistributed net
income of subsidiaries ............ (233) (923) (910)
Change in other assets ............ (3) (27) (20)
------- ------- -------
Net cash from operating activities ... 1,674 788 720
CASH FLOWS FROM INVESTING
ACTIVITIES
Investment in Mason State
Mortgage Co., LLC .................... (771) -- --
Return of capital from Mason
State Bank ........................... 317 117 --
------- ------- -------
Net cash from investing activities ... (454) 117 --
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from shares issued
upon exercise of stock options ....... 18 12 21
Repurchase of common stock ........... (317) (118) --
Dividends paid ....................... (913) (832) (736)
------- ------- -------
Net cash from financing activities ... (1,212) (938) (715)
------- ------- -------
Net change in cash and cash
equivalents .......................... 8 (33) 5
Cash and cash equivalents at
beginning of year .................... 25 58 53
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR .......................... $ 33 $ 25 $ 58
======= ======= =======
TWENTY-SEVEN
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data) EARNINGS PER SHARE
NET ------------------
INTEREST INTEREST NET FULLY
INCOME INCOME INCOME BASIC DILUTED
2002
First quarter .................. $2,007 $1,173 $ 451 $ 0.76 $0.75
Second quarter ................. 1,959 1,112 443 0.75 0.74
Third quarter .................. 1,976 1,122 497 0.84 0.84
Fourth quarter ................. 1,955 1,118 519 0.88 0.87
2001
First quarter .................. $2,054 $1,060 $ 406 $ 0.68 $0.67
Second quarter ................. 2,019 1,078 443 0.74 0.74
Third quarter .................. 1,993 1,070 437 0.73 0.73
Fourth quarter ................. 1,983 1,126 452 0.76 0.74
CDI
TWENTY-EIGHT
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
THE
ANNUAL MEETING OF SHAREHOLDERS
WILL BE HELD AT
6:30 PM
ON THURSDAY, APRIL 24, 2003
AT THE
MASON STATE BANK
MAIN OFFICE
322 SOUTH JEFFERSON STREET
MASON, MICHIGAN
WITH
HORS D'OEUVRES AT
6:00 PM
PLEASE R.S.V.P. BY APRIL 10, 2003
CDI
TWO THOUSAND TWO
ANNUAL REPORT
CAPITAL DIRECTIONS, INC.
CDI