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