Annual Report for Capital Directions, Inc.

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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OvBTQGq8FrkSH5Nsx49YGbhQwAjnLgFLa5njorQEC0AjARoqVW85IzKffQHkZOQ4 MeLgYhy6eXAIeDriNvHZzg== 0000950124-03-000991.txt : 20030331 0000950124-03-000991.hdr.sgml : 20030331 20030331085019 ACCESSION NUMBER: 0000950124-03-000991 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL DIRECTIONS INC CENTRAL INDEX KEY: 0000830157 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382781737 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-20417 FILM NUMBER: 03627222 BUSINESS ADDRESS: STREET 1: 322 S JEFFERSON ST CITY: MASON STATE: MI ZIP: 48854 BUSINESS PHONE: 5176760500 MAIL ADDRESS: STREET 2: P O BOX 130 CITY: MASON STATE: MI ZIP: 48854-0130 10-K 1 k74291e10vk.htm ANNUAL REPORT Annual Report for Capital Directions, Inc.

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of The Securities Exchange Act of 1934 (Fee Required)


For the fiscal year ended December 31, 2002	Commission file number 33-20417

Capital Directions, Inc.
(Exact name of registrant as specified in its charter)


Michigan		38-2781737

(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


322 South Jefferson St., Mason, Michigan (Address of principal executive offices)		48854-0130 (Zip Code)

Registrant’s telephone number, including area code:		(517) 676-0500

Securities registered pursuant to Section 12 (b) of the act:		NONE

Securities registered pursuant to Section 12 (g) of the act:		Common Stock, par value $5.00 per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark if disclosure of delinquent filer pursuant to item 405 of Registration S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No x

The registrant estimates that as of June 28, 2002, the last business day of the registrant’s most recently completed second quarter the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $19,108,196. This is based on a market price of $41.95 per share for the Registrant’s stock as of that date.

As of January 31, 2003 the registrant had outstanding 588,043 shares of common stock having a par value of $5 per share.

TABLE OF CONTENTS


PART I
Analysis of the Allowance For Loan Losses
PART II
PART III
OPTION GRANTS IN LAST FISCAL YEAR
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
EMPLOYMENT AGREEMENT
PRINCIPAL SHAREHOLDERS
SIGNATURES
Certifications
Certifications
Index to Exhibits
Employment Agreement with Timothy Gaylord
Annual Report to Shareholders
Consents of Experts
Certification
Certification

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the Year Ended December 31, 2002 (Part I, Part II, and Part III)

Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

PART I

Item 1. Business

Capital Directions, Inc. (the “Registrant”) is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Registrant was incorporated on August 11, 1987 and formed for the purpose of banking and to engage in any other related activity allowed. Mason State Bank (“the Bank”) was consolidated with Mason Bank on July 22, 1988, thereby causing Mason State Bank to become a wholly-owned subsidiary of the Registrant.

Mason State Bank purchased Lakeside Insurance Services, Inc. in 1994 to take advantage of the expanded insurance powers granted to banks in 1994. Lakeside is licensed in Michigan to sell life, accident and health, multiple line property and casualty insurance and variable annuity contracts.

Mason State Mortgage Company, LLC was formed on July 16, 2002 to allow for expansion of mortgage product offerings as well as certain tax savings. This was facilitated by a 99% ownership by Mason State Bank and a 1% ownership by Capital Directions, Inc.

The Registrant has no substantial assets except the investments in Mason State Bank. The Registrant and its primary subsidiary, Mason State Bank, operate in the banking industry, which accounts for substantially all of their assets, revenues and operating income. Further discussion of the operations of the Registrant and its subsidiaries is discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2002 Annual Report to the Shareholders, incorporated herein by reference. The Registrant’s primary competition is substantially the same as Mason State Bank’s as discussed below.

The Bank was organized in 1886 under the laws of Michigan and is subject to the Michigan Banking Code of 1969. It is insured by the Bank Insurance Fund through the Federal Deposit Insurance Corporation. The Bank is regulated by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation. The Federal Reserve Board regulates the Registrant. The Bank’s Principal office is located at 322 South Jefferson Street, Mason, Michigan. It operates branches at 661 North Cedar Street, Mason, Michigan and at 810 W. Bellevue, Leslie, Michigan.

Banking services are provided to individuals, businesses, local, state and federal governmental units and institutional customers located in Mason, Leslie and the surrounding areas. Services include demand deposits, savings and time deposits, collections, cash management, night depositories and personal, installment, commercial and real estate loans. The Bank offers a credit card program affiliated with the Visa and MasterCharge Inter-Bank charge card system.

The Bank maintains a correspondent relationship with several of the major banks in the Detroit area and elsewhere, in order to provide for the clearance of checks, the transfer of funds, the periodic purchase and sale of Federal funds, and participation in large loans which would be beyond the Bank’s legal lending limit if made by the Bank alone.

The Bank has full and part-time employees (38 full-time equivalents) and owns its main office and Cedar Street office. The facility in Leslie is operated under a lease agreement. The Bank operates primarily within Ingham County. Competing with the Bank in Ingham County are several other commercial banks and financial institutions, some of which have significantly greater total resources than the Bank.

Item 1. Business-Statistical Disclosures

I. Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential


	(A), (B)	The following table sets forth average balances for major categories of interest earning assets and interest bearing liabilities, the interest earned (on a fully taxable equivalent basis) or paid on such amounts, and average interest rates earned or paid thereon.


	2002							2001							2000

	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

ASSETS
Loans, including fees⁽¹⁾	$	98,933	$	7,028		7.10	%	$	86,284	$	6,808		7.89	%	$	87,270	$	7,029		8.05	%
Loans, non-taxable⁽²⁾		260		16		6.15			510		44		8.63			381		34		8.92
Taxable securities		10,326		630		6.10			13,143		872		6.63			8,854		600		6.78
Non-taxable securities⁽²⁾		3,503		255		7.28			3,077		241		7.83			3,109		252		8.11
Loans held for sale		222		14		6.31			—		—		—			—		—		—
Federal funds sold and other		2,797		47		1.68			4,815		181		3.76			2,257		141		6.25

Total earning assets⁽²⁾		116,041		7,990		6.89	%		107,829		8,146		7.55	%		101,871		8,056		7.91	%
Cash and due from banks		2,760							2,490							2,570
Other assets, net		3,454							3,243							2,739

Total non-interest earning assets		6,214							5,733							5,309

Total assets	$	122,255						$	113,562						$	107,180

LIABILITIES
Interest bearing demand deposits	$	10,374	$	59		0.57	%	$	9,305	$	56		0.60	%	$	10,426	$	83		0.80	%
Savings deposits		23,733		348		1.47			18,911		393		2.08			18,963		553		2.92
Time deposits under $100,000		19,504		792		4.07			19,631		1,040		5.30			20,559		1,148		5.58
Time deposits of $100,000 or more		7,305		254		3.48			11,443		543		4.75			12,088		722		5.97
Federal funds purchased		311		6		1.93			7		1		6.73			206		13		6.31
Other borrowings		34,107		1,913		5.61			29,190		1,682		5.76			21,447		1,279		5.96

Total interest bearing Liabilities		95,334		3,372		3.54	%		88,487		3,715		4.20	%		83,689		3,798		4.54	%

Demand deposits		11,195							10,171							9,842
Other liabilities		1,744							1,468							1,227
Shareholders’ equity		13,982							13,436							12,422

Total non-interest bearing liabilities and equity		26,921							25,075							23,491

Total liabilities and equity	$	122,255						$	113,562						$	107,180

Net interest income			$	4,618						$	4,431						$	4,258

Interest spread						3.35	%						3.35	%						3.37	%
Net yield on interest earning assets⁽²⁾						3.98	%						4.11	%						4.18	%

⁽¹⁾ Average balances for loans include non-accrual loans. The inclusion of non-accrual loans and fees does not have a material effect on either the average balance or the average interest rate.

⁽²⁾ Interest on non-taxable investment securities and non-taxable loans is reflected on a fully tax equivalent basis using an effective tax rate of 34%.

I. Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Differential (continued)

(C) The following table summarizes the changes in interest income (on a fully taxable equivalent basis) and interest expense resulting from changes in volume and changes in rates:


(Dollars in thousands)
		2002 Compared to 2001									2001 Compared to 2000

Change due to:		Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
Earnings assets
	Loans	$	939		$	(719	)	$	220		$	(79	)	$	(142	)	$	(221	)
	Loans, non-taxable⁽²⁾		(18	)		(10	)		(28	)		11			(1	)		10
	Taxable securities		(176	)		(66	)		(242	)		285			(13	)		272
	Non-taxable securities⁽²⁾		32			(18	)		14			(3	)		(8	)		(11	)
	Loan held for sale		14			—			14			—			—			—
	Federal funds sold and other		(58	)		(76	)		(134	)		113			(73	)		40

Total interest income⁽²⁾		$	733		$	(889	)	$	(156	)	$	327		$	(237	)	$	90
Interest bearing liabilities:
	Interest bearing demand deposits	$	6		$	(3	)	$	3		$	(8	)	$	(19	)	$	(27	)
	Savings deposits		87			(132	)		(45	)		(2	)		(158	)		(160	)
	Time deposits under 100,000		(7	)		(241	)		(248	)		(51	)		(57	)		(108	)
	Time deposits $100,000 or more		(166	)		(123	)		(289	)		(37	)		(142	)		(179	)
	Federal funds purchased		5			—			5			(13	)		—			(13	)
	Other borrowings		279			(48	)		231			448			(44	)		404

Total interest expense		$	204		$	(547	)	$	(343	)	$	337		$	(420	)	$	(83	)
Net interest income⁽²⁾		$	529		$	(342	)	$	187		$	(10	)	$	183		$	173

⁽¹⁾ The change in interest due to both volume and rate has been allocated to volume and rate in proportion to the relationship of the absolute dollar amounts of the change in each.

⁽²⁾ Interest on tax-exempt investment securities and loans is based on a fully taxable equivalent basis using an effective tax rate of 34%.

II. Investment Portfolio

(A) A table of carrying values of the investment portfolio as of December 31, 2002 and 2001 is set forth in Note 2 on page 20 of the 2002 Annual Report to Shareholders. Such information is incorporated herein by reference.

(B) The following table shows the relative maturities and weighted yields of investment securities at December 31, 2002: (dollars in thousands)


		Available-For Sale

		1 Year or less					1 Year - 5 Years					5 Years-10 Years					After 10 Years

		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

U.S. Government agencies⁽¹⁾		$	2,325		6.47	%	$	2,849		4.06	%	$	123		9.00	%	$	238		6.90	%
State and political subdivisions ⁽²⁾			1,016		6.07			2,939		5.00			1,420		5.90			206		4.55
Corporate securities ⁽¹⁾			1,528		7.24			—		0.00			—		0.00			—		0.00

	Total	$	4,869		6.63	%	$	5,788		4.54	%	$	1,543		6.15	%	$	444		5.81	%


		Held-To-Maturity

		1 Year or less					1 Year - 5 Years					5 Years-10 Years					After 10 Years

		Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

Trust Preferred securities		$	—		0.00	%	$	—		0.00	%	$	—		0.00	%	$	400		5.41	%

	Total	$	—		0.00	%	$	—		0.00	%	$	—		0.00	%	$	400		5.41

II. Investment Portfolio (continued)


	(1)	Mortgage Backed securities and Corporate securities, as reflected in the above schedules consider anticipated prepayments and calls.
	(2)	Weighted average yield is adjusted to a taxable equivalent basis using a federal income tax rate of 34 percent.

(C)	The Registrant held no investment securities of a single issuer, except U.S. Government Agency securities, in an amount greater than ten percent of shareholders’ equity as of December 31, 2002.

III. Loan Portfolio

(A) A table of loans outstanding as of December 31, 2002 and 2001 is set forth in Note 3 on page 21 of the 2002 Annual Report to Shareholders. Such information is incorporated herein by reference.

The loan portfolio is systematically reviewed and the results reported to the Board of Directors of the Registrant. The purpose of these reviews is to assist in assuring proper loan documentation, to provide for the early identification of potential problem loans and to help ensure the adequacy of the allowance for loan losses.

(B) The following table sets forth the remaining maturity of loans outstanding (excluding real estate mortgages, installment and lease financing) at December 31, 2002, according to scheduled payments of principal (in thousands) and considering the banks “rollover policy.”(1)

(In thousands)


	1 Year		1 Year -		After
	or less		5 Years		5 Years		Total

Commercial and agricultural	$	2,267	$	3,586	$	137	$	5,990

The following table sets forth commercial and agricultural loans due after one year, which have predetermined interest rates and/or adjustable interest rates at December 31, 2002.

(In thousands)


		Fixed		Adjustable
		Rate		Rate		Total

Due after one but within five years		$	2,141	$	1,445	$	3,586
Due after five years			116		21		137

	Total	$	2,257	$	1,466	$	3,723


	(1)	The “rollover policy” is to generally write terms of these loans for a shorter time than the expected payments. The purpose of this is to re-evaluate the term and credit of the respective borrower. We estimate that this happens on approximately 80% of these borrowings and is reflected as such in this schedule.

(C)	Risk Elements

	(1)	Nonaccrual, Past Due, Impaired and Restructured Loans. A table and discussion of nonaccrual, past due, impaired and restructured loans for the years ended December 31, 2002 and 2001 is in Note 1 under “Loans” and “Allowance for Loan Losses” on pages 17 and 18 and in Note 4 “Allowance For Loan Losses” on

III. Loan Portfolio (continued)


		page 21 in the 2002 Annual Report to Shareholders. Such information is incorporated herein by reference

		Gross interest income that would have been recorded in 2002 on nonaccrual loans if the loans had been current in accordance with their original terms and outstanding throughout the period or since origination was $6,265. No interest income was recognized on these loans during 2002.

	(2)	Potential Problem Loans

		There are no material loans that are current as to which management has serious doubts as to the ability of the borrower to comply with the loan repayment terms, or which are expected to need adjustments in their repayment terms, or which are believed to require additional reserves in the allowance for loan losses.

	(3)	Foreign Outstandings

		There were no foreign outstandings as of December 31, 2002.

	(4)	Loan Concentrations

		There were no concentrations of loans exceeding 10% of total loans that have not been already disclosed as a category at December 31, 2002.

(D)	Other Interest Bearing Assets

		As of December 31, 2002, there were no other interest bearing assets that would be required to be disclosed under Item III, Parts (C) (1) or (C) (2) of the loan portfolio listing if such assets were loans.

IV. Summary of Loan Loss Experience

(A) The following table sets forth loan allowance balances and summarizes changes in the allowance for loan losses for each of the three years ended December 31.

Analysis of the Allowance For Loan Losses


(Dollars in thousands)			2002			2001			2000

Balance, beginning of period			$	1,048		$	1,053		$	1,055

Loans charged-off
	Commercial and agricultural			(3	)		(3	)		(15	)
	Real estate-construction			—			—			—
	Real estate-mortgages			(2	)		(16	)		—
	Lease financing			—			—			—
	Installment and others			(9	)		(17	)		(12	)

		Total		(14	)		(36	)		(27	)

Recoveries of loans charged-off
	Commercial and agricultural			2			15			—
	Real estate-construction			—			—			—
	Real estate-mortgages			—			—			—
	Lease financing			—			—			—
	Installment and others			8			16			19

		Total		10			31			19

Net charge-offs				(4	)		(5	)		(8	)
Additions charged to operations				—			—			6

Balance at end of period			$	1,044		$	1,048		$	1,053

Average gross loans outstanding			$	99,193		$	86,794		$	87,651

Ratio of net charge-offs during the period to average gross loans outstanding during the period				0.00	%		0.01	%		0.01	%

Further discussion of the provision and allowance for loan losses as well as non-performing and impaired loans is presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page 9, Note 1 on pages 17 and 18 and Note 4 on page 21 in the 2002 Annual Report to the Shareholders, incorporated herein by reference.

IV. Summary of Loan Loss Experience (continued)

(B) The following table presents an allocation for loan losses to the various loan categories at December 31:


		2002					2001
				% of					% of
(Dollars in thousands)		Allowance		Loans to			Allowance		Loans to
		Amount		Total Loans			Amount		Total Loans

Commercial and agricultural		$	203		6.17	%	$	242		5.59	%
Real estate-mortgages			420		92.05			546		91.97
Installment and other			20		1.78			41		2.44
Unallocated			401		N/A			219		N/A

	Total	$	1,044		100.00	%	$	1,048		100.00	%

Mason State Bank is committed to the maintenance of an allowance for loan losses in amounts sufficient to absorb loan and lease losses inherent in the loan portfolio. To assure the adequacy of balances and the resulting provision allocations, measurements against historical performance and current analyses of asset quality are undertaken on a periodic basis with consideration for qualitative factors. These evaluations support the allowance provisions and the traditional philosophy of accounting for losses as they are recognized.

On a predetermined basis, a Loan Loss Allowance Model (LLAM) is completed quarterly for the Bank. The results of the LLAM provide a consistent management tool for quantifying the amount of risk in the loan portfolio. This LLAM computes a suggested allowance balance to be compared to the actual allowance for loan losses. The difference between the suggested and actual allowance is monitored and maintained at an amount considered reasonable to provide for potential losses inherent in the portfolio.

To determine the suggested allowance balance, two tests are applied to the various loan categories. The test with the most conservative (greatest) allowance allocation is selected for each category. The two tests are then combined with a separate qualitative factor spread against all loan categories.

The first test includes establishment of a minimum allocation percentage for each loan (primarily commercial) based upon its loan grade. The second test involves computing the actual loss experience over the last five years for each of the loan categories (primarily consumer and residential real estate loans). The factor applied to the current outstanding loan balances of these loan categories is equal to at least the five-year average of net charge-offs to average loans for the appropriate loan portfolio.

Economic conditions or other factors may warrant a qualitative factor be applied to all loan categories. Management declared that such a factor be instituted for 2002 and 2001. A review of the regional trends show insured financial institutions experienced increasing levels of past due and non-accrual loans relative to the prior five year average. The factor applied to current loan outstandings reflects the net percentage change in the past due and non-accruing financial institution experience applied to the Mason State Bank factor.

Mason State Bank has not added additional funds to the allowance for loan losses during the years 2002 and 2001 due to our excellent loan quality and low net charge-offs. Due to these factors, the unallocated portion of the allowance has increased even though the total allowance for loan losses has decreased during the same period.

The allowance allocations above were deemed by management to be amounts reasonably necessary to provide for the inherent losses in the various loan categories as of December 31, 2002 and 2001.

V. Deposits

The following table sets forth average deposit balances and the weighted average rate paid for each of the three years ended December 31:


		2002					2001					2000
(Dollars in thousands)		Average					Average					Average
		Balance		Rate			Balance		Rate			Balance		Rate

Non interest-bearing demand deposits		$	11,195				$	10,171				$	9,842
Interest-bearing demand deposits			10,374		0.57	%		9,305		0.60	%		10,426		0.80	%
Savings deposits			23,733		1.47			18,911		2.08			18,963		2.92
Time deposits under $100,000			19,504		4.04			19,631		5.30			20,559		5.58
Time deposits of $100,000 or more			7,305		3.48			11,443		4.75			12,088		5.97

	Total	$	72,111		2.01	%	$	69,461		2.93	%	$	71,878		3.49	%

The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity as of December 31, 2002:


(In thousands)
Three months or less		$	1,770
Over three months through six months			1,726
Over six months through one year			748
Over one year			2,449

	Total	$	6,693

As of December 31, 2002 the registrant had no foreign deposits.

VI. Return on Equity and Assets

The following table presents the ratios for the years ended December 31:


	2002			2001			2000

Net income to average total assets		1.56	%		1.53	%		1.54	%
Net income to average shareholders’ equity		13.66			12.94			13.28
Cash dividend payout ratio per share		48.32			48.80			46.01
Average shareholders’ equity to average total assets		11.44			11.83			11.59

VII. Short Term Borrowings — Not applicable

Item 2. Properties

The Bank owns the land on which the Main Office is located. The parcel measures 85’ by 170’ and bears the municipal address of 322 South Jefferson Street, Mason, Michigan. The permanent building, also owned by Mason State Bank, has approximately 6,800 square feet and includes banking facilities, storage and personnel lounge areas. This brick structure was built in the mid 1800’s and has undergone several remodelings, the most recent of which was completed in 2001. The building is in generally good condition. A parking area with spaces to accommodate 20 vehicles occupies part of the property; also on site are three drive-in banking stations which operate via remote monitors located within the banking facility.

The Bank also owns the land used as a Branch office. The land measures 368’ by 297’ and bears the municipal address of 661 North Cedar Street, Mason, Michigan. The permanent building, built in the 1960’s, also owned by Mason State Bank, measures approximately 2,400 square feet, including banking facilities, storage and personnel lounge areas. This building is also in good

Item 2. Properties (continued)

condition. A parking area with spaces to accommodate 24 vehicles occupies part of the property; part is occupied by 4 drive-in banking stations.

In October 1998, the Bank established an in-store branch located within the Felpausch Food Center, 810 W. Bellevue Street, Leslie, Michigan. The Bank entered into a lease arrangement and occupies 709 square feet of the southeast corner of the store. Prior to occupancy, this space was renovated to provide full service banking accommodations. Customer parking is readily available and maintained by Felpausch Food Center.

The Registrant operates its business at the same address as Mason State Bank’s main office. As of January 31, 2003, the Registrant owned no properties.

Item 3. Legal Proceedings

There are no material pending legal proceedings to which the Registrant or its subsidiaries is a party or to which any of its property is subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial statements of the Registrant or its subsidiaries.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable

Additional Item — Executive Officers

Executive officers of the Registrant are appointed annually by the Board of Directors at the meeting of Directors following the Annual Meeting of Shareholders. There are no family relationships among these officers and/or Directors of the Registrant or any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

The following sets forth certain information with respect to the Registrant’s Executive Officers and Directors as of December 31, 2002.


	Position With	First Elected as an
Name (Age)	Registrant	Officer of the Registrant

Gerald W. Ambrose (53)	Chairman	1994
Marvin B. Oesterle (51)	Vice Chairman	1981
Timothy P. Gaylord (48)	President and C.E.O	1995
Douglas W. Dancer (62)	Secretary	1990
Lois A. Toth (52)	Treasurer	1998

Mr. Ambrose is a Director of the Registrant and Chairman of the Board of Directors of Mason State Bank.

Mr. Oesterle is a Director of the Registrant and Vice Chairman of the Board of Directors of Mason State Bank.

Mr. Gaylord is a Director of the Registrant and President and Chief Executive Officer of Mason State Bank.

Mr. Dancer is a Director of the Registrant and Secretary of the Board of Directors of Mason State Bank.

Ms. Toth is Vice President, Controller and Cashier of Mason State Bank.

PART II

I. The information required by this item appears in the Capital Directions, Inc. Annual Report to Shareholders for the year ended December 31, 2002, and is incorporated herein by reference, as follows:

Pages in 2002

Annual Report

Item 5

Market for Registrant's Common Equity and

Related Stockholder Matters

Item 6

Selected Financial Data

Item 7

Management's Discussion and Analysis of

Financial Condition and Results of Operation

7 - 11

Item 7a

Quantitative and Qualitative Disclosures About

Market Risk

Not required as

Registrant meets

requirements to be

a small business filer

Item 8

Financial Statements and Supplementary Data

12 - 28

Item 9

Changes in and Disagreements With Accountants on

Accounting and Financial Disclosure

None

PART III

Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive Proxy Statement pursuant to Regulation 14A (the “proxy Statement”) not later than 120 days after the end of the fiscal year covered by this report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors and Executive Officers of the Registrant as of December 31, 2002


			Principal Occupation For			Amount and Nature
			Last Five Years	Director		of Beneficial		Percent
Name	Age		Or More	Since (1)		Ownership (2)		of Class

Gerald W. Ambrose		53	County Controller for the County of Ingham; Chairman of the Board, Mason State Bank and the Company		1990		1,011		(3	)

Douglas W. Dancer		62	Partner, Nu-Horizons, Inc., Realtor, Vision Real Estate; Former President, Dancer’s Inc. Department Stores; Secretary of the Board, Mason State Bank and the Company		1986		20,580		3.49

Timothy P. Gaylord		48	President & Chief Executive Officer of Mason State Bank and the Company		1995		9,126		1.55

Paula J. Johnson		56	Realtor, Vision Real Estate and Developer, PAL, LLC i.e.: Vision Village Condominiums		1996		450		(3	)

James W. Leasure		52	Owner, Showtime, Inc. and Wash Express		2000		8,348		1.42

Marvin B. Oesterle		51	Partner, Oesterle Brothers Seed Corn; Vice Chairman of the Board, Mason State Bank and the Company		1981		3,934		(3	)

Six directors as a group							43,449		7.38

(1) Includes service as a director of the Company’s wholly-owned subsidiary, Mason State Bank (the “Bank”). The Company was organized in 1988 to act, inter alia, as a holding company for Mason State Bank, and the Bank’s directors became directors of the Company.

(2) Includes shares owned by or jointly with spouse, or minor child, or other relative residing in same household, or as trustee.

(3) Less than one percent.

Reference is made to Additional Item — Executive Officers under Part I, Item 4, of this Form 10-K report on page 11.

The information required by item 405 of Regulation S-K is hereby incorporated by reference from the Company’s 2003 Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

Part III (continued)

Item 11. Executive Compensation

Each director of the Company is entitled to receive an annual retainer of $8,207. In lieu of payment of director fees, certain directors have elected to participate in a deferred compensation plan adopted in 1986. The plan was closed to new participants May 18, 1996. Douglas W. Dancer and Marvin B. Oesterle elected to participate in the plan which provides for retirement and death benefits to be paid to the participating directors or their beneficiaries over fifteen years. Deferred director fees are used to purchase life insurance policies of which the Bank is the owner and beneficiary.

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth compensation paid by the Company and its subsidiaries during the fiscal year ended December 31, 2002 to the Company’s Chief Executive Officer. There were no executive officers, other than the CEO, whose combined salary and bonus exceeded $100,000.

SUMMARY COMPENSATION TABLE


							Long-Term Compensation
			Annual Compensation				Awards
Name and									All Other
Principal Position	Year		Salary ($) (1)		Bonus ($)		Options (#) (2)		Compensation ($) (3)

Timothy P. Gaylord		2002	$	135,314	$	25,600		2,000	$	14,190
President and CEO		2001	$	127,514	$	23,121		2,000	$	15,355
		2000	$	121,240	$	22,000		2,000	$	11,603

(1)		Includes director’s fees of $7,899 for 2002; $7,595 for 2001; and $7,303 for 2000.

(2)		The amounts shown represent the number of shares covered by stock options granted under the Capital Directions, Inc. Incentive Stock Option Plan as more fully described in the Option Grants in Last Fiscal Year table set forth on the following page.

(3)		“All Other Compensation” is comprised of the following items: The Bank is accustomed to awarding a longevity bonus to all employees based on their salary and length of service at five year increments. Mr. Gaylord received an award of $1,196 for ten years of service in 2001. The Bank entered into a lease agreement on a vehicle for Mr. Gaylord’s use. The income benefit to Mr. Gaylord was $3,843 for 2002; $4,388 for 2001; and $2,628 for 2000. A contribution by the Bank for Mr. Gaylord’s benefit to the Bank’s 401(k) Plan of $10,347 for 2002; $9,771 for 2001; and $8,975 for 2000.

Part III (continued)

The following table presents information about stock options granted to the named executive officer during 2002 under the Capital Directions, Inc. Incentive Stock Option Plan (the “Stock Option Plan”).

OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants

Potential Realizable

Value at Assumed

Number of

% of Total

Annual Rates of Stock

Securities

Options

Exercise

Price Appreciation

Underlying

Granted to

or Base

for Option Term (2)

Options

Employees

Price

Expiration

Name

Granted (#) (1)

in Fiscal Year

($/Sh)

Date

5% ($)

10% ($)

Timothy P. Gaylord

2,000

50.00

38.00

2/21/12

47,796

121,124

(1)		The amounts shown are shares of the Company’s Common Stock covered by options granted under the Stock Option Plan. The vesting of Stock Options does not start until two years from the date of grant, February 21, 2002. The options vest over 3 years, with one-third of the covered shares becoming part of the exercisable portion each of the three years.

(2)		The potential realizable value is reported net of the option exercise price, but before income taxes associated with exercise. These amounts represent assumed annual compounded rates of appreciation of five percent and ten percent from the date of grant to the end of the option. Actual gains, if any, on stock option exercises are dependent on the future performance of the Company’s Common Stock, overall stock market conditions, and the optionees’ continued employment through the vesting period. The amounts reflected in this table may not necessarily be achieved.

The following table presents the number of shares covered by, and the value of, unexercised options held by the named executive officer at December 31, 2002. One Thousand (1,000) options were exercised by the named executive officer during 2002.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

Number of

Value of

Securities Underlying

Unexercised In-the-

Unexercised Options

Money Options

Shares

at FY-End (#) (1)

at FY-End ($) (2)

Acquired on

Value

Exercisable/

Name

Exercise (#)

Realized $

Unexercisable

Timothy P. Gaylord

1,000

25,500

7,001/5,999

103,756/25,994

(1)		On March 18, 1999, the Company’s Board of Directors, with the consent of each grantee, voted to rescind all outstanding SARs, which had been previously granted under the Company’s Incentive Stock Option Plan.

(2)		The value shown is based upon the market bid price at December 31, 2002 of $43.50 net of the option exercise price.

Part III (continued)

EMPLOYMENT AGREEMENT

The Company has entered into an agreement with Mr. Gaylord relating to his employment by the Company and the Bank. This agreement is summarized below. This summary is not intended to be complete and is qualified in its entirety by reference to the agreement.

The agreement among Mr. Gaylord, the Company, and the Bank (the “Agreement”) provides that Mr. Gaylord will be employed by the Company and the Bank as their President and Chief Executive Officer. The Agreement was automatically renewed in 2002 for a one-year period ending September 30, 2003 and is subject to automatic renewals of one-year periods unless terminated in accordance with the Agreement. The Agreement provided an annual salary rate in 1995 of $85,000, subject to adjustment by the Board of Directors in subsequent years during the term of the Agreement. During 2002, Mr. Gaylord’s salary was $127,415. Mr. Gaylord is also entitled to customary employee benefits and perquisites. The Agreement provides that in the event of a change in control of the Company or the Bank, if Mr. Gaylord’s employment is involuntarily terminated, or if Mr. Gaylord’s status and compensation are reduced without cause within one year of the change in control, Mr. Gaylord shall be entitled to payment of an amount equal to his annual salary. The Agreement provides that the Company and the Bank may terminate Mr. Gaylord’s employment at any time for cause without further obligation to compensate Mr. Gaylord. The Agreement broadly defines cause to generally include, among other things, misfeasance, malfeasance, and nonfeasance of Mr. Gaylord’s duties and breach of the Agreement. The Agreement further provides that Mr. Gaylord shall not, for a period of one year after Mr. Gaylord’s last day of employment, provide financial services or otherwise compete with the business of the Company and the Bank in the City of Mason, Michigan and a three mile radius surrounding it. Further, Mr. Gaylord shall not during that one year period, solicit customers of the Bank and its affiliates or solicit for hire any then current Bank or Company employees or contact them for the purpose of inducing them to leave the Bank or Company. The Agreement also requires Mr. Gaylord to maintain the confidentiality of certain information and trade secrets of the Company and the Bank following the termination of his employment.

Information under the captions “Report on Executive Compensation” and “Performance Graph” are furnished from the 2003 Proxy Statement pursuant to this Item 11 but shall not be deemed filed.

Item 12. Security Ownership of Certain Beneficial Owners and Management

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information, as of March 3, 2003, as to the Common Stock beneficially owned by each person known by the Company to be the beneficial owner of more than five percent (5%) of the Common Stock:


	Name and Address	Amount and Nature	Percent
Title of Class	of Beneficial Owner	of Beneficial Ownership	of Class

Common Stock, $5 par value	June M. Oesterle Trust Lyle M. Oesterle Trust 1975 Okemos Road Mason, MI 48854	54,586 (1)		9.25	%

Common Stock, $5 par value	Colin J. Fingerle Trust 2505 Londonderry Road Ann Arbor, MI 48104	37,343		6.33	%

(1) Total of shares owned by both the June M. Oesterle Trust of which June M. Oesterle is the sole Trustee and the Lyle M. Oesterle Trust of which Lyle M. Oesterle, spouse of June M. Oesterle, is sole Trustee.

Part III (continued)

The information required by Item 201(d) of Regulation S-K is hereby incorporated by reference from the Company’s 2003 Proxy Statement under the caption “(2) Approval of the 2003 Stock Option Plan — Existing Equity Compensation Plans”.

In addition, reference is made to Directors — under Part III, Item 10, of this Form 10-K report on page 13.

Item 13. Certain Relationships and Related Transactions

Directors and officers of the Company and their associates were customers of, and had transactions with, subsidiaries of the Company in the ordinary course of business during 2002. All loans and commitments included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.

The information appearing in Note 3 on page 21 of the Notes to Consolidated Financial Statements of the 2002 Annual Report to Shareholders is incorporated by reference in response to this item.

Item 14. Controls and Procedures

Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of Capital Directions, Inc.’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Capital Directions, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in Capital Directions, Inc.’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report:

1. The following consolidated financial statements of Capital Directions, Inc. included in the 2002 Annual Report to Shareholders for the year ended December 31, 2002, are incorporated herein by reference in Item 8:


	Page in 2002
	Annual Report

Consolidated balance sheets — December 31, 2002 and 2001		13

Consolidated statements of income for the years ended December 31, 2002, 2001 and 2000		14

PART III — Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued)


		Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000			15

		Consolidated statements of changes in shareholders’ equity for the years ended December 31, 2002, 2001 and 2000			16

		Notes to consolidated financial statements			17 - 28

		Report of Independent Auditors			12

	2	Financial Statement Schedules

		Not applicable

	3	Exhibits

		(3a) Articles of Incorporation and (3b) Bylaws (previously filed as Exhibits included in Capital Directions, Inc. Registration Statement Amendment No. 1 to Form S-4, No. 33-20417, Dated March 17, 1988).

		(10)	Material Contracts

			(a)	Incentive Compensation Plans (previously filed as Exhibits included in Capital Directions, Inc.’s 1988 10-K report dated March 29, 1989 and the 1993 10-K report dated March 29, 1994).

			(b)	Directors Deferred Compensation Plans (previously filed as Exhibits included in Capital Directions, Inc.’s 1988 10-K report dated March 29, 1989).

			(c)	Supplementary Executive Retirement Plan (previously filed as Exhibits included in Capital Directions, Inc.’s 1988 10-K report dated March 29, 1989).

			(d)	Employment Agreement with Timothy Gaylord.

		(13)	Annual Report to Shareholders for the year ended December 31, 2002 (filed herewith).

		(22)	Subsidiaries of registrant (previously filed as Exhibits included in Capital Directions, Inc.’s 1988 10-K report dated March 29, 1989)

		(23)	Consents of experts. Consent of Crowe, Chizek and Company LLP.

		(99.1)	Certification of Chief Executive Officer.

		(99.2)	Certification of Treasurer.

(b)	Reports on Form 8-K

	Form 8-K was filed on November 1, 2002 relating to the implementation of a stock repurchase program.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.


CAPITAL DIRECTIONS, INC

/s/ Timothy P. Gaylord		Timothy P. Gaylord (President and Chief Executive Officer)

/s/ Lois A. Toth		Lois A. Toth (Treasurer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed by the following persons in the capacities indicated on March 31, 2003.


/s/ Gerald W. Ambrose		Gerald W. Ambrose Chairman of Board of Directors

/s/ Marvin B. Oesterle		Marvin B. Oesterle Vice Chairman of Board of Directors

/s/ Douglas W. Dancer		Douglas W. Dancer Secretary of Board of Directors

/s/ Timothy P. Gaylord		Timothy P. Gaylord President and Chief Executive Officer

/s/ Paula Johnson		Paula Johnson Director

/s/ James W. Leasure		James W. Leasure Director

Certifications

I, Timothy P. Gaylord, certify that:

1. I have reviewed this Annual Report on Form 10-K of Capital Directions, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, the involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: March 31, 2003

				/s/ Timothy P. Gaylord Timothy P. Gaylord Chief Executive Officer

Certifications

I, Lois A. Toth, certify that:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Dare;

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, the involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: March 31, 2003

				/s/ Lois A. Toth Lois A. Toth Treasurer

Index to Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

3(A) Articles of Incorporation of the Registrant as currently in effect and any amendments thereto (Incorporated herein by reference to Exhibit 3(A) of the Registrants’ Form S-4 Registration Statement dated March 17, 1988 No. 33-20417).

3(B) Bylaws of the Registrant as currently in effect and any amendments thereto (Incorporated herein by reference to Exhibit 3(B) of the Registrants’ Form S-4 Registration Statement dated March 17, 1988 No. 33-20417).

10(A) Incentive Compensation Plans (Incorporated herein by reference to Exhibit 10(A) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 and December 31, 1993 [1988 and 1993 10-K Reports]).

10(B) Directors Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10(B) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

10(C) Supplementary Executive Retirement Plan (Incorporated herein by reference to Exhibit 10(C) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

10(D) Employment Agreement with Timothy Gaylord.

13 Annual Report to Shareholders for the year ended December 31, 2002 (filed herewith).

22 List of Subsidiaries (Incorporated herein by reference to Exhibit 22 to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

23 Consents of experts. Consent of Crowe, Chizek and Company LLP.

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

22 EX-10.D 3 k74291exv10wd.txt EMPLOYMENT AGREEMENT WITH TIMOTHY GAYLORD Exhibit 10(D) EMPLOYMENT AGREEMENT This Employment Agreement is made on August 2, 1995, between Capital Directions, Inc. ("CDI"), Mason State Bank ("Bank"), and Timothy Gaylord ("Gaylord"). WHEREAS, CDI desires to employ Gaylord, and WHEREAS, Gaylord desires to be employed by CDI, and THEREFORE, CDI and Gaylord hereby enter into this Employment Agreement ("Agreement") on the following terms and conditions. 1. a. CDI owns all the voting common stock of the Bank. CDI agrees to employ Gaylord as its President and Chief Executive Officer for a term of 2 years, effective as of October 1, 1995. Bank agrees to employ Gaylord as its President and Chief Executive Officer for a term of 2 years, effective as of October 1, 1995. This agreement will automatically renew for subsequent 1 year periods, unless any party gives the other parties written notice at least 90 days before the end of the period of the intention not to renew the Agreement. Thus, if either CDI or the Bank or Gaylord gives such notice, this Agreement shall not be automatically renewed. In the event that the Bank or CDI gives such notice, Gaylord shall be paid a severance payment an amount equal to 6 months salary upon expiration of the Agreement. It is specifically understood that in the event of Gaylord's solely initiated termination, no severance payment shall be due to Gaylord as described above. b. Gaylord shall be an employee and officer of CDI and CDI may direct Gaylord to perform duties as President and Chief Executive Officer of one or more of its subsidiary corporations, including Bank. The Executive's activities as President and Chief Executive Officer of Bank shall in no way affect the enforceability of this Agreement and shall in no way diminish Gaylord's status as an employee of CDI or his right to compensation under this Agreement. 2. Bank, CDI, and Gaylord enter into this Agreement for the purpose of establishing Gaylord's salary and benefits, and to provide for Gaylord's income in the event that Bank or CDI is acquired by a bank holding company, financial institution, or a group of individuals acquiring majority control as defined by the federal Change in Bank Control Act. Acquisition or control of either CDI or the Bank shall hereinafter be referred to as acquisition or control of the Bank. 3. In the event the Bank is acquired or control of the Bank is acquired, as referred to hereinbefore, the following shall take effect: A. In the event of an involuntary termination or reduction in status and compensation in connection with a change of control of the Bank, all rights under the Bank's Incentive Stock Options Plan become immediately vested and exercisable. B. In the event Gaylord is dismissed without cause or if his status and compensation are reduced without cause by the acquiring bank holding company, financial institution or control group after acquisition or change in control but within 1 year of said acquisition or change in control, Gaylord shall be paid outright or in installments, at his option, an amount equal to his annual salary. C. In the event Gaylord voluntarily terminates his employment with CDI and/or Bank after its acquisition or change in control referred to hereinbefore, then there shall be no obligation for payment of any amount under the terms of this Agreement. Said voluntary termination shall terminate all of the obligations and liabilities of the Bank, CDI, and any acquiring organization or control group under this Agreement. D. In the event Gaylord's compensation (including salary and benefits) title and level of responsibility are, without cause, in any way reduced, then Gaylord shall have the election to effect the salary payout provided by Section 3.B. A reduction in Gaylord's compensation, including salary and benefits, or his title and level of responsibility, without cause, shall be considered the same as a dismissal of Gaylord as provided for in Section 3.B. 4. It is further agreed between the parties that Gaylord's annual salary shall be directly related to the Board of Director's reasonable and good faith determination of the value of his services to the Bank. A. Gaylord's annual salary rate for 1995 shall be $85,000. Any salary adjustments will become effective and payable as of October 1, 1995. B. Gaylord shall receive the following fringe benefits: Gaylord is entitled to all employee benefits provided for executive level employees as listed in the Capital Directions, Inc. and its Subsidiaries Administrative Regulations and Personnel Handbook. In addition, Gaylord will receive a fully paid club membership and dues, stock options, and bonuses as granted by the Board of Directors. Changes may be made to the salary and fringe benefits herein set forth and such changes shall be set forth in Attachment A. When Attachment A has been signed by the Chairmen of the Boards of both CDI and the Bank and the Executive, that salary and fringe benefits shall be effective. C. Gaylord agrees to fulfill the assigned responsibilities of President and Chief Executive Officer and to work diligently on behalf of Bank to achieve the goals and objectives set forth by the Bank's Board of Directors. 5. In the event of any violation by Gaylord of any terms of this Agreement, or if there is cause for termination of Gaylord, Gaylord's employment may be terminated immediately, without notice, at any time, and with compensation only to the date of the termination of Gaylord. "Cause" for termination shall include the following events, but this list is simply some examples and is not all-inclusive: 1. repeated unsatisfactory performance or repeated uncooperative conduct; 2. the death of Gaylord; 3. the disability of Gaylord rendering him unable to perform the services required under the Agreement for a period of 90 days within any 120-day period; 4. known substance abuse by Gaylord; 5. felony conviction or plea (of nolo contendere or otherwise) of Gaylord, if the felony involves moral turpitude; 6. misdemeanor conviction or plea (of nolo contendere or otherwise) of Gaylord, if the misdemeanor involves moral turpitude; 7. Gaylord's repeated unprofessional, irresponsible, or disruptive language or conduct in the performance of his duties; 8. Gaylord's dishonesty, breach of professional or corporate ethics, or criticism by a regulatory agency involving a serious violation of law or regulations; 9. for Gaylord's failure to meet the goals and objectives which shall be established by the Boards of CDI and the Bank from time to time; or 10. Gaylord's substantial breach of any significant term of this Agreement, including, but not limited to, continued unsatisfactory job performance. If criminal charges as described above in subsections (5) and (6) are made against Gaylord, the Bank shall have the discretion to suspend Gaylord for any period of time, except that the suspension shall end if charges do not result in a conviction or a plea (either of guilty or nolo contendere) of either the original charge or of any lesser charge. If a regulatory agency criticizes Gaylord for serious regulatory violations, the Bank shall have the discretion to suspend Gaylord for any period of time, except that if the alleged violations are resolved in his favor, the suspension shall end. A suspension, pursuant to items (5), (6), or (8), above, would entail the cessation of the performance of duties and all compensation. The Chairman of the Board of the Bank shall retain the power and authority to suspend Gaylord based on his determination that one of the events described above has occurred. Termination of this Agreement shall not relieve Gaylord of his responsibilities to complete any records, cooperate with the Bank and CDI on any litigation, claims, or investigations, and otherwise fulfill all responsibilities under this Agreement which should have been rendered prior to early termination. 6. a. All parties specifically and knowingly waive their rights to a jury trial. Any dispute or controversy concerning the termination of employment or the reduction of compensation, title, or level of responsibility between Gaylord and CDI or the Bank shall be resolved by arbitration under the laws of the State of Michigan. Venue for any arbitration will be Ingham County. b. The arbitration proceeding shall be conducted under the Employment Dispute Resolution Rules of the American Arbitration Association in effect at the time a demand for arbitration of the dispute is made. The decision and award of the arbitrator made under the AAA rules shall be exclusive, final, and binding on all parties, their heirs, representatives, successors, and assigns. Judgment upon the award rendered by the arbitrator may be rendered in any circuit court having jurisdiction of the matter. In the event Gaylord, CDI, or the Bank shall require equitable relief prior to the selection of any arbitrator to resolve the dispute, either party may seek temporary equitable relief from any court having jurisdiction of the dispute, subject to any final relief awarded by the arbitrator. c. Limited civil discovery shall be permitted for the production of documents and the taking of depositions, provided, however, that no party is permitted to take the deposition of more than three witnesses except by agreement of the other party or upon order of the arbitrator pursuant to the motion of a party. Subject to the foregoing limitations, discovery shall be conducted in accordance with the Federal Rules of Civil Procedure with any enforcement issues resolved by the arbitrator. d. The arbitration and all proceedings, discovery, and any award of the arbitrator, is confidential. Neither the parties nor the arbitrator shall disclose any information gained during the course of the arbitration to any person or entity who is not a party to the arbitration unless permitted by law. Attendance at the arbitration shall be limited to the parties and those called as witnesses. 7. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to CDI and the Bank: Mr. Douglas W. Dancer Chairman of the Boards of: a. Capital Directions, Inc. and b. Mason State Bank 322 S. Jefferson St., Box 130 Mason, MI 48854 If to Gaylord: Mr. Timothy Gaylord 1066 Killdeer Dr. Mason, MI 48854 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. No provisions of this Agreement may be modified, waived, or discharged unless such waiver, modification or discharge is agreed to in writing signed by Gaylord, CDI and the Bank. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similarly or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. 9. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. CDI agrees that the services Gaylord performs for any of its subsidiaries, including the Bank, ultimately redound to the benefit of CDI. Accordingly, CDI agrees that insofar as the Bank, for any reason whatsoever, is unable to perform any obligations assumed hereunder, CDI shall fully and timely perform the same. 11. In consideration of the payment of severance as provided in Paragraph 1.A., for a period of one (1) year after Gaylord's last day of employment, Gaylord agrees to not provide financial services or otherwise compete with the business of CDI and the Bank in the City of Mason and a three (3) mile radius. This prohibition includes services whether as an employee, independent contractor, officer, director, consultant, partner, or other affiliation. 12. Confidential Information a. In connection with Gaylord's employment with the Bank and CDI, Gaylord will have access to information or materials that are considered trade secret, confidential and/or proprietary ("Information"). Information includes, but is not limited to, compilations of data, strategic plans, sales and marketing plans, customer and supplier information, financial information, and proposed agreements, and applies to such Information whether communicated orally, in writing, electronically, or by any other means. b. Information created by Gaylord during Gaylord's employment with the Bank and CDI that relates to the business of the Bank or CDI (or prospective business opportunities), or uses the Bank and/or CDI information, or is created with Bank or CDI resources (including staff, premises, and equipment), belongs to the Bank and/or CDI. This Information includes copyrightable works of original authorship (including but not limited to reports, analyses, and compilations, business plans, new product plans), ideas, inventions (whether patentable or not), knowhow, processes, trademarks and other intellectual property. All works of original authorship created during Gaylord's employment with the Bank and CDI are "works for hire" as that term is used in connection with the U.S. Copyright Act. Gaylord hereby assigns to the Bank and CDI all rights, title, and interest in work product, including copyrights, patents, trade secrets, trademarks, and knowhow. c. Gaylord shall use Information only for the benefit of the Bank and CDI and not for Gaylord's own benefit. Gaylord shall not disclose Information to third parties, and shall not take Information or Bank and/or CDI materials upon termination of Gaylord's employment. d. Information will be used only by the Bank and CDI staff who have a need to access it in order to do their jobs, shall be maintained in secure physical locations, shall not be disclosed to any other company or person except in connection with Bank or CDI business activities. e. The confidentiality provisions of this Agreement survive termination of the employment relationship with the Bank and CDI and shall survive for so long a period of time as the Information (including Proprietary Materials) is maintained by the Bank and/or CDI as confidential. 13. Nonsolicitation of Bank and CDI Employees and Customers a. During the term of Gaylord's employment and for a period of one (1) year after Gaylord's last day of employment, Gaylord agrees not to solicit for hire, any then-current Bank or CDI employees, or to contact them for the purpose of inducing them to leave the Bank and/or CDI. b. During the term of Gaylord's employment and for a period of one (1) year after Gaylord's last day of employment, Gaylord agrees not to contact any then-current Bank or CDI customers for the purpose of inducing them to leave the Bank and CDI or to discourage them from doing business with the Bank or CDI. Gaylord agrees that, for such time period, Gaylord will not provide financial services to any person or business customer who was a customer of the Bank or CDI at the time of Gaylord's departure from the Bank or CDI. IN WITNESS WHEREOF, the parties have executed this Agreement, effective as of October 1, 1995. MASON STATE BANK CAPITAL DIRECTIONS, INC. ("Bank") ("CDI") By: /s/ Douglas W. Dancer By: /s/ Douglas W. Dancer -------------------------- ------------------------ Douglas W. Dancer Douglas W. Dancer Chairman of the Board Chairman of the Board ("Gaylord") /s/ Timothy Gaylord ----------------------------- Timothy Gaylord, Individually EX-13 4 k74291exv13.txt ANNUAL REPORT TO SHAREHOLDERS 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 EX-23 5 k74291exv23.txt CONSENTS OF EXPERTS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference and use of our report, dated January 29, 2003 on the consolidated financial statements of Capital Directions, Inc., which appears on Page 12 of Capital Directions, Inc.'s 2002 Annual Report to Shareholders, and is incorporated by reference in the Capital Directions, Inc. Annual Report on Form 10-K for the year ended December 31, 2002, in the registration statement on Form S-8 for the Capital Directions, Inc. Incentive Stock Option Plan. /s/ Crowe, Chizek and Company LLP ----------------------------------- Crowe, Chizek and Company LLP Grand Rapids, Michigan March 26, 2003 EX-99.1 6 k74291exv99w1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Timothy Gaylord, Chief Executive Officer of Capital Directions, Inc., certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Annual Report on Form 10-K for the year ended December 31, 2002 which this statement accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Annual Report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of operations of Capital Directions, Inc. Date: March 31, 2003 /s/ Timothy P. Gaylord -------------- -------------------------- Timothy Gaylord Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Capital Directions, Inc. and will be retained by Capital Directions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.2 7 k74291exv99w2.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Lois A. Toth, Treasurer of Capital Directions, Inc., certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Annual Report on Form 10-K for the year ended December 31, 2002 which this accompanies fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Annual Report on Form 10-K for the year ended December 31, 2002 fairly presents, in all material respects, the financial condition and results of the operations of Capital Directions, Inc. Date: March 31, 2003 /s/ Lois A. Toth -------------- ----------------------- Lois A. Toth Treasurer A signed original of this written statement required by Section 906 has been provided to Capital Directions, Inc. and will be retained by Capital Directions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----

Includes service as a director of the Company’s wholly-owned subsidiary, Mason State Bank (the “Bank”). The Company was organized in 1988 to act, inter alia, as a holding company for Mason State Bank, and the Bank’s directors became directors of the Company.

Includes shares owned by or jointly with spouse, or minor child, or other relative residing in same household, or as trustee.

Less than one percent.


	⁽¹⁾ Average balances for loans include non-accrual loans. The inclusion of non-accrual loans and fees does not have a material effect on either the average balance or the average interest rate.

	⁽²⁾ Interest on non-taxable investment securities and non-taxable loans is reflected on a fully tax equivalent basis using an effective tax rate of 34%.

			⁽¹⁾	The change in interest due to both volume and rate has been allocated to volume and rate in proportion to the relationship of the absolute dollar amounts of the change in each.

			⁽²⁾	Interest on tax-exempt investment securities and loans is based on a fully taxable equivalent basis using an effective tax rate of 34%.

		(A)	A table of carrying values of the investment portfolio as of December 31, 2002 and 2001 is set forth in Note 2 on page 20 of the 2002 Annual Report to Shareholders. Such information is incorporated herein by reference.

		(B)	The following table shows the relative maturities and weighted yields of investment securities at December 31, 2002: (dollars in thousands)

	(A)		A table of loans outstanding as of December 31, 2002 and 2001 is set forth in Note 3 on page 21 of the 2002 Annual Report to Shareholders. Such information is incorporated herein by reference.

			The loan portfolio is systematically reviewed and the results reported to the Board of Directors of the Registrant. The purpose of these reviews is to assist in assuring proper loan documentation, to provide for the early identification of potential problem loans and to help ensure the adequacy of the allowance for loan losses.

	(B)		The following table sets forth the remaining maturity of loans outstanding (excluding real estate mortgages, installment and lease financing) at December 31, 2002, according to scheduled payments of principal (in thousands) and considering the banks “rollover policy.”(1)

			(In thousands)

		Mason State Bank is committed to the maintenance of an allowance for loan losses in amounts sufficient to absorb loan and lease losses inherent in the loan portfolio. To assure the adequacy of balances and the resulting provision allocations, measurements against historical performance and current analyses of asset quality are undertaken on a periodic basis with consideration for qualitative factors. These evaluations support the allowance provisions and the traditional philosophy of accounting for losses as they are recognized.

		On a predetermined basis, a Loan Loss Allowance Model (LLAM) is completed quarterly for the Bank. The results of the LLAM provide a consistent management tool for quantifying the amount of risk in the loan portfolio. This LLAM computes a suggested allowance balance to be compared to the actual allowance for loan losses. The difference between the suggested and actual allowance is monitored and maintained at an amount considered reasonable to provide for potential losses inherent in the portfolio.

		To determine the suggested allowance balance, two tests are applied to the various loan categories. The test with the most conservative (greatest) allowance allocation is selected for each category. The two tests are then combined with a separate qualitative factor spread against all loan categories.

		The first test includes establishment of a minimum allocation percentage for each loan (primarily commercial) based upon its loan grade. The second test involves computing the actual loss experience over the last five years for each of the loan categories (primarily consumer and residential real estate loans). The factor applied to the current outstanding loan balances of these loan categories is equal to at least the five-year average of net charge-offs to average loans for the appropriate loan portfolio.

		Economic conditions or other factors may warrant a qualitative factor be applied to all loan categories. Management declared that such a factor be instituted for 2002 and 2001. A review of the regional trends show insured financial institutions experienced increasing levels of past due and non-accrual loans relative to the prior five year average. The factor applied to current loan outstandings reflects the net percentage change in the past due and non-accruing financial institution experience applied to the Mason State Bank factor.

		Mason State Bank has not added additional funds to the allowance for loan losses during the years 2002 and 2001 due to our excellent loan quality and low net charge-offs. Due to these factors, the unallocated portion of the allowance has increased even though the total allowance for loan losses has decreased during the same period.

		The allowance allocations above were deemed by management to be amounts reasonably necessary to provide for the inherent losses in the various loan categories as of December 31, 2002 and 2001.

V.		Deposits

		The following table sets forth average deposit balances and the weighted average rate paid for each of the three years ended December 31:

		As of December 31, 2002 the registrant had no foreign deposits.

VI.		Return on Equity and Assets

		The following table presents the ratios for the years ended December 31:


	The Bank owns the land on which the Main Office is located. The parcel measures 85’ by 170’ and bears the municipal address of 322 South Jefferson Street, Mason, Michigan. The permanent building, also owned by Mason State Bank, has approximately 6,800 square feet and includes banking facilities, storage and personnel lounge areas. This brick structure was built in the mid 1800’s and has undergone several remodelings, the most recent of which was completed in 2001. The building is in generally good condition. A parking area with spaces to accommodate 20 vehicles occupies part of the property; also on site are three drive-in banking stations which operate via remote monitors located within the banking facility.

	The Bank also owns the land used as a Branch office. The land measures 368’ by 297’ and bears the municipal address of 661 North Cedar Street, Mason, Michigan. The permanent building, built in the 1960’s, also owned by Mason State Bank, measures approximately 2,400 square feet, including banking facilities, storage and personnel lounge areas. This building is also in good


	condition. A parking area with spaces to accommodate 24 vehicles occupies part of the property; part is occupied by 4 drive-in banking stations.

	In October 1998, the Bank established an in-store branch located within the Felpausch Food Center, 810 W. Bellevue Street, Leslie, Michigan. The Bank entered into a lease arrangement and occupies 709 square feet of the southeast corner of the store. Prior to occupancy, this space was renovated to provide full service banking accommodations. Customer parking is readily available and maintained by Felpausch Food Center.

	The Registrant operates its business at the same address as Mason State Bank’s main office. As of January 31, 2003, the Registrant owned no properties.


	Not applicable

	Additional Item — Executive Officers

	Executive officers of the Registrant are appointed annually by the Board of Directors at the meeting of Directors following the Annual Meeting of Shareholders. There are no family relationships among these officers and/or Directors of the Registrant or any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

	The following sets forth certain information with respect to the Registrant’s Executive Officers and Directors as of December 31, 2002.


	Mr. Ambrose is a Director of the Registrant and Chairman of the Board of Directors of Mason State Bank.
	Mr. Oesterle is a Director of the Registrant and Vice Chairman of the Board of Directors of Mason State Bank.
	Mr. Gaylord is a Director of the Registrant and President and Chief Executive Officer of Mason State Bank.
	Mr. Dancer is a Director of the Registrant and Secretary of the Board of Directors of Mason State Bank.
	Ms. Toth is Vice President, Controller and Cashier of Mason State Bank.


	Item 11. Executive Compensation

	Each director of the Company is entitled to receive an annual retainer of $8,207. In lieu of payment of director fees, certain directors have elected to participate in a deferred compensation plan adopted in 1986. The plan was closed to new participants May 18, 1996. Douglas W. Dancer and Marvin B. Oesterle elected to participate in the plan which provides for retirement and death benefits to be paid to the participating directors or their beneficiaries over fifteen years. Deferred director fees are used to purchase life insurance policies of which the Bank is the owner and beneficiary.

	COMPENSATION OF EXECUTIVE OFFICERS

	The following table sets forth compensation paid by the Company and its subsidiaries during the fiscal year ended December 31, 2002 to the Company’s Chief Executive Officer. There were no executive officers, other than the CEO, whose combined salary and bonus exceeded $100,000.

	SUMMARY COMPENSATION TABLE


	The Company has entered into an agreement with Mr. Gaylord relating to his employment by the Company and the Bank. This agreement is summarized below. This summary is not intended to be complete and is qualified in its entirety by reference to the agreement.

	The agreement among Mr. Gaylord, the Company, and the Bank (the “Agreement”) provides that Mr. Gaylord will be employed by the Company and the Bank as their President and Chief Executive Officer. The Agreement was automatically renewed in 2002 for a one-year period ending September 30, 2003 and is subject to automatic renewals of one-year periods unless terminated in accordance with the Agreement. The Agreement provided an annual salary rate in 1995 of $85,000, subject to adjustment by the Board of Directors in subsequent years during the term of the Agreement. During 2002, Mr. Gaylord’s salary was $127,415. Mr. Gaylord is also entitled to customary employee benefits and perquisites. The Agreement provides that in the event of a change in control of the Company or the Bank, if Mr. Gaylord’s employment is involuntarily terminated, or if Mr. Gaylord’s status and compensation are reduced without cause within one year of the change in control, Mr. Gaylord shall be entitled to payment of an amount equal to his annual salary. The Agreement provides that the Company and the Bank may terminate Mr. Gaylord’s employment at any time for cause without further obligation to compensate Mr. Gaylord. The Agreement broadly defines cause to generally include, among other things, misfeasance, malfeasance, and nonfeasance of Mr. Gaylord’s duties and breach of the Agreement. The Agreement further provides that Mr. Gaylord shall not, for a period of one year after Mr. Gaylord’s last day of employment, provide financial services or otherwise compete with the business of the Company and the Bank in the City of Mason, Michigan and a three mile radius surrounding it. Further, Mr. Gaylord shall not during that one year period, solicit customers of the Bank and its affiliates or solicit for hire any then current Bank or Company employees or contact them for the purpose of inducing them to leave the Bank or Company. The Agreement also requires Mr. Gaylord to maintain the confidentiality of certain information and trade secrets of the Company and the Bank following the termination of his employment.

	Information under the captions “Report on Executive Compensation” and “Performance Graph” are furnished from the 2003 Proxy Statement pursuant to this Item 11 but shall not be deemed filed.

	Item 12. Security Ownership of Certain Beneficial Owners and Management


(1)		Total of shares owned by both the June M. Oesterle Trust of which June M. Oesterle is the sole Trustee and the Lyle M. Oesterle Trust of which Lyle M. Oesterle, spouse of June M. Oesterle, is sole Trustee.


	The information required by Item 201(d) of Regulation S-K is hereby incorporated by reference from the Company’s 2003 Proxy Statement under the caption “(2) Approval of the 2003 Stock Option Plan — Existing Equity Compensation Plans”.

	In addition, reference is made to Directors — under Part III, Item 10, of this Form 10-K report on page 13.

	Item 13. Certain Relationships and Related Transactions

	Directors and officers of the Company and their associates were customers of, and had transactions with, subsidiaries of the Company in the ordinary course of business during 2002. All loans and commitments included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.

	The information appearing in Note 3 on page 21 of the Notes to Consolidated Financial Statements of the 2002 Annual Report to Shareholders is incorporated by reference in response to this item.

	Item 14. Controls and Procedures

	Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of Capital Directions, Inc.’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Capital Directions, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in Capital Directions, Inc.’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

	1.		I have reviewed this Annual Report on Form 10-K of Capital Directions, Inc.;

	2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we have:

		a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

		b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

		c)		presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

		a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b)		any fraud, whether or not material, the involves management or other employees who have a significant role in the registrant’s internal controls; and

	3(A)		Articles of Incorporation of the Registrant as currently in effect and any amendments thereto (Incorporated herein by reference to Exhibit 3(A) of the Registrants’ Form S-4 Registration Statement dated March 17, 1988 No. 33-20417).

	3(B)		Bylaws of the Registrant as currently in effect and any amendments thereto (Incorporated herein by reference to Exhibit 3(B) of the Registrants’ Form S-4 Registration Statement dated March 17, 1988 No. 33-20417).

	10(A)		Incentive Compensation Plans (Incorporated herein by reference to Exhibit 10(A) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 and December 31, 1993 [1988 and 1993 10-K Reports]).

	10(B)		Directors Deferred Compensation Plan (Incorporated herein by reference to Exhibit 10(B) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

	10(C)		Supplementary Executive Retirement Plan (Incorporated herein by reference to Exhibit 10(C) to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

	10(D)		Employment Agreement with Timothy Gaylord.

	13		Annual Report to Shareholders for the year ended December 31, 2002 (filed herewith).

	22		List of Subsidiaries (Incorporated herein by reference to Exhibit 22 to Registrants’ Report on Form 10-K for the year ended December 31, 1988 [1988 10-K Report]).

	23		Consents of experts. Consent of Crowe, Chizek and Company LLP.

	99.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.