<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of The Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1999 Commission file number 33-20417
----------------- --------
Capital Directions, Inc.
------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Michigan 38-2781737
- ------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
<S> <C>
322 South Jefferson St., Mason, Michigan 48854-0130
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 676-0500
Securities registered pursuant to Section 12 (b) of the act: NONE
Securities registered pursuant to Section 12 (g) of the act: NONE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--------- --------
Indicate by check mark if disclosure of delinquent 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. [X]
The registrant estimates that as of February 17, 2000 the aggregate market value
of the voting stock held by non-affiliates of the registrant was approximately
$19,378,965. This is based on a market price of $41.50 per share for the
Registrant's stock as of that date.
As of February 17, 2000 the registrant had outstanding 596,622 shares of common
stock having a par value of $5 per share.
1
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the Year Ended December 31, 1999 (Form 10-K,
Part I, Part II, Part III, and Part IV)
Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 2000
(Form 10-K, Part III)
PART I
Item 1. Business
Capital Directions, Inc. (the "Registrant") is a one-bank holding company
registered under the Bank Holding Company Act of 1956, as amended. The
Registrant was incorporated on August 11, 1987 and formed for the purpose of
enabling Mason State Bank (the "Bank") to form a one-bank holding company and
engage in any other related activity allowed. Mason State Bank was consolidated
with Mason Bank on July 22, 1988, thereby causing Mason State Bank to become a
wholly-owned subsidiary of the Registrant.
Mason State Bank purchased Lakeside Insurance Services, Inc. in 1994 to take
advantage of the expanded insurance powers granted to banks in 1994. Lakeside is
licensed in Michigan to sell life insurance and variable annuity contracts.
The Registrant has no substantial assets except the investments in Mason State
Bank. The Registrant and its primary subsidiary, Mason State Bank, operate in
the banking industry, which accounts for substantially all of their assets,
revenues and operating income. Further discussion of the operations of the
Registrant and its subsidiaries is discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1999 Annual
Report to the Shareholders, incorporated herein by reference. The Registrant's
primary competition is substantially the same as Mason State Bank's as discussed
below.
The Bank was organized in 1886 under the laws of Michigan and is subject to the
Michigan Banking Code of 1969. It is insured by the Bank Insurance Fund through
the Federal Deposit Insurance Corporation. The Bank is regulated by the Michigan
Financial Institutions Bureau and the Federal Deposit Insurance Corporation. The
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 (37 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.
2
<PAGE> 3
Item 1. Business-Statistical Disclosure
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.
3
<PAGE> 4
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
- ------
Loans, including fees(1) $ 86,397 $6,782 7.85% $ 69,172 $5,870 8.49%
Taxable investment
securities 7,588 505 6.66 10,095 662 6.56
Non-taxable investment
securities(2) 3,859 300 7.77 4,051 324 8.00
Federal funds sold 798 40 5.01 2,487 134 5.39
--------- ------ --------- ------
Total earning assets 98,642 7,627 7.73% 85,805 6,990 8.15%
Cash and due from 2,768 2,337
banks
Other assets, net 2,934 2,473
--------- ---------
Total non interest
earning assets 5,702 4,810
--------- ---------
Total assets $ 104,344 $ 90,615
========= =========
LIABILITIES
- -----------
Interest bearing
demand deposits $ 11,603 116 1.00% $ 10,213 156 1.53%
Savings deposits 19,380 522 2.69 17,592 522 2.97
Time deposits under
$100,000 20,176 1,111 5.51 20,923 1,218 5.82
Time deposits of
$100,000 or more 11,568 603 5.21 10,173 576 5.66
Other borrowings 18,682 1,088 5.82 10,816 653 6.04
--------- ------ --------- ------
Total interest bearing
liabilities 81,409 3,440 4.23% 69,717 3,125 4.48%
------ ------
Demand deposits 9,977 8,870
Other liabilities 1,481 1,381
Shareholders' equity 11,477 10,647
--------- ---------
Total non-interest
bearing liabilities and
equity 22,935 20,898
--------- ---------
Total liabilities and
equity $ 104,344 $ 90,615
========= =========
Net interest income $4,187 $3,865
====== ======
Net yield on interest
earning assets(2) 4.24% 4.50%
==== ====
</TABLE>
(1) Average balances for loans include non-accrual loans. The inclusion
of non-accrual loans and fees does not have a material effect on
either the average balance or the average interest rate.
(2) Interest on non-taxable investment securities is reflected on a
fully tax equivalent basis using an effective tax rate of 34%.
4
<PAGE> 5
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:
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 Compared to 1998 1998 Compared to 1997
- -------------------------------------------------------------------------------------------------------------
Change due to: Volume(1) Rate(1) Total Volume(1) Rate(1) Total
<S> <C> <C> <C> <C> <C> <C>
Earnings assets
Loans $ 1,377 ($465) $ 912 $ 1,225 ($265) $ 960
Taxable investment securities (167) 10 (157) (185) (31) (216)
Non tax investment securities (2) (15) (9) (24) (39) 6 (33)
Federal funds sold (85) (9) (94) 64 2 66
-------- ------ ----- ------- ------- ------
Total interest income $ 1,110 ($473) $ 637 $ 1,065 ($288) $ 777
Interest bearing liabilities:
Interest bearing demand deposits $ 19 ($59) ($40) $ 17 ($43) ($26)
Savings deposits 50 (50) - 30 5 35
Time deposits under 100,000 (43) (64) (107) (12) 17 5
Time deposits $100,000 or more 75 (48) 27 92 (9) 83
Other borrowings 459 (24) 435 442 (8) 434
-------- ------ ----- ------- ------- ------
Total interest expense $ 560 ($245) $ 315 $ 569 ($38) $ 531
Net interest income $ 550 ($228) $ 322 $ 496 ($250) $ 246
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The change in interest due to both volume and rate has
been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of the change
in each.
(2) Interest on tax-exempt investment securities is based on a
fully taxable equivalent basis using an effective tax rate
of 34%.
II. Investment Portfolio
(A) A table of carrying values of the investment portfolio as of
December 31, 1999 and 1998 is set forth in Note 3 on page 18 of
the 1999 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, 1999: (dollars
in thousands)
<TABLE>
<CAPTION>
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
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies (1) $ 351 6.37% $2,905 5.85% $ 0 0.00% $ 748 7.52%
State and political
subdivisions (2) 496 6.96 2,909 7.66 393 8.02 76 8.33
Corporate securities (1) 1,364 6.77 509 6.13 0 0.00 0 0.00
------ ------ ------ ------
Total $2,211 6.75% $6,323 6.70% $ 393 8.02% $ 824 7.59%
====== ====== ====== ======
</TABLE>
(1) Mortgage Backed securities and Corporate securities, as
reflected in the above schedules consider anticipated
prepayments and calls.
(2) Weighted average yield adjusted to a taxable equivalent basis
using a federal income tax rate of 34 percent.
5
<PAGE> 6
II. Investment Portfolio (continued)
(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, 1999.
III. Loan Portfolio
(A) A table of loans outstanding as of December 31, 1999 and 1998 is
set forth in Note 4 on page 19 of the 1999 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, 1999, according to scheduled
payments of principal (in thousands) and considering the banks
"rollover policy."(1)
<TABLE>
<CAPTION>
(In thousands)
1 Year 1 Year - After
or less 5 Years 5 Years Total
------- -------- ------- -----
<S> <C> <C> <C> <C>
Commercial and
Agricultural $ 1,543 $ 2,435 $ 1,290 $ 5,268
======= ======= ======== ========
</TABLE>
The following table sets forth commercial and agricultural loans
due after one year, which have predetermined interest rates and/or
adjustable interest rates at December 31, 1999.
<TABLE>
<CAPTION>
(In thousands)
Fixed Adjustable
Rate Rate Total
----- ---------- -----
<S> <C> <C> <C>
Due after one but within five
years $ 768 $ 1,667 $ 2,435
Due after five years 1,142 148 1,290
------- -------- -------
Total $ 1,910 $ 1,815 $ 3,725
======= ======== =======
</TABLE>
(1) The "rollover policy" is to generally write terms of these
loans for a shorter time then the expected payments. The
purpose of this is to re-evaluate the term and credit of the
respective borrower. We estimate that this happens on
approximately 80% of these borrowings and is reflected as such
in this schedule.
(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,
1999 and 1998 is in "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" on pages 7 and 8 under Provision and
allowance for loans losses, Note 1 under "Loans" and
"Allowance for Loan Losses" on page 17 and in Note 5 on
page 19 in the 1999 Annual Report to Shareholders. Such
information is incorporated herein by reference.
6
<PAGE> 7
III. Loan Portfolio (continued)
Gross interest income that would have been recorded in
1999 on nonaccrual loans if the loans had been current
in accordance with their original terms and outstanding
throughout the period or since origination was $7,066.
No income was included in interest income on these loans
in 1999.
(2). Potential Problem Loans
There are no material loans that are current as to
which management has serious doubts as to the ability of
of the borrower to comply with the loan repayment terms,
or which are expected to need adjustments in their
repayment terms, or which are believed to require
additional provisions for loan losses.
(3). Foreign Outstandings
There were no foreign outstandings as of December 31,
1999 and 1998.
(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, 1999.
(D). Other Interest Bearing Assets
As of December 31, 1999, 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.
7
<PAGE> 8
IV. Summary of Loan Loss Experience
(A). The following table sets forth loan allowance balances and
summarizes changes in the allowance for loan losses for each
of the two years ended December 31.
Analysis of the Allowance For Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
---- ----
<S> <C> <C>
Balance, beginning of period $ 1,011 $ 1,035
------- --------
Loans charged-off
Commercial and agricultural 0 0
Real estate-construction 0 0
Real estate-mortgages 0 0
Lease financing 0 0
Installment and others 37 30
------- --------
Total 37 30
Recoveries of loans charged-off
Commercial and agricultural 0 3
Real estate-construction 0 0
Real estate-mortgages 0 0
Lease financing 0 0
Installment and others 33 26
------- --------
Total 33 29
Net charge-offs 4 1
Additions charged (credited)
to operations 48 (23)
------- --------
Balance at end of period $ 1,055 $ 1,011
======= ========
Average gross loans outstanding $86,397 $ 69,172
======= ========
Ratio of net charge-offs(recoveries)
during the period to average gross
loans outstanding during the
period 0.00% 0.00%
======= =========
</TABLE>
Further discussion of the provision and allowance for loan losses as
well as non-performing and impaired loans is presented in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" on pages 7 and 8, Note 1 on pages 17 and 18 and Note 5 on
page 19 in the 1999 Annual Report to the Shareholders, incorporated
herein by reference.
8
<PAGE> 9
IV. Summary of Loan Loss Experience (continued)
(B) The following table presents an allocation for loan losses
to the various loan categories at December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
% of % of
(Dollars in thousands) Allowance Loans to Allowance Loans to
Amount Total Loans Amount Total Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 157 5.91% $ 81 6.77%
Real estate-mortgages 438 88.96 491 89.12
Installment and other 34 5.13 45 4.11
Unallocated 426 N/A 394 N/A
------- ------ ------- ------
Total $ 1,055 100.00% $ 1,011 100.00%
======= ====== ======= ======
</TABLE>
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 budgeted
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, conservative 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.
When economic conditions or other factors warrant, a qualitative
factor is applied against all loan categories. Management declared
that such a factor be instituted for 1999 and 1998 given the
unprecedented eight year expansion of the United States economy
and the expectation of a reversal of this trend in the near
future. The factor applied to the current outstanding of all loan
balances is equal to the eight year average of net charge-offs to
average loans for the eight year period prior to the start of the
current economic expansion (years 1984 through 1991).
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, 1999 and 1998.
9
<PAGE> 10
V. Deposits
The following table sets forth average deposit balances and the
weighted average rate paid for each of the two years ended December 31:
<TABLE>
<CAPTION>
1999 1998
(Dollars in thousands) Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Non interest-bearing demand deposits $ 9,977 $8,870
Interest-bearing demand deposits 11,603 1.00% 10,213 1.53%
Savings deposits 19,380 2.69 17,592 2.97
Time deposits under $100,000 20,176 5.51 20,923 5.82
Time deposits of $100,000 or more 11,568 5.21 10,173 5.66
--------- ---------
Total $ 72,704 3.24% $ 67,771 3.65%
========= =========
</TABLE>
The following table summarizes time deposits in amounts of $100,000 or
more by time remaining until maturity as of December 31, 1999:
<TABLE>
<S> <C>
(In thousands)
Three months or less $ 7,582
Over three months through six months 1,787
Over six months through one year 1,039
Over one year 1,993
--------
Total $ 12,401
========
</TABLE>
As of December 31, 1999 the registrant had no foreign deposits.
VI. Return on Equity and Assets
The following table presents the ratios for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income to average total assets 1.44% 1.47%
Net income to average shareholders' equity 13.06 12.53
Cash dividend payout ratio per share 45.42 42.63
Average shareholders' equity to average total assets 11.00 11.75
</TABLE>
VII. Short Term Borrowings - Not applicable
Item 2. Properties
The Bank owns the land on which the Bank's main office is located. The
land measures 85' by 170' and bears the municipal address of 322 South
Jefferson Street, Mason, Michigan. The permanent building, also owned
by Mason State Bank, has approximately 6,800 square feet including
banking facilities, storage and personnel lounge areas. This brick
structure was built in the mid 1800's and has gone through several
remodelings, the last one being in 1986 and is in good general
condition. A parking area with spaces to accommodate 20 vehicles
occupies part of the property; part is occupied by two drive-in banking
stations.
The Bank also owns the land used as a Branch office. The land measures
368' by 297' and bears the municipal address of 661 North Cedar Street,
Mason, Michigan. The permanent building, built in the 1960's, also
owned by Mason State Bank, measures approximately 2,400 square feet,
including banking facilities, storage and personnel lounge areas. This
building is also in good
10
<PAGE> 11
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 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 February 18, 2000, 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, 1999.
Position With First Elected as an
Name (Age) Registrant Officer of the Registrant
George A. Sullivan (67) Chairman 1988
Gerald W. Ambrose (50) Vice Chairman 1994
Timothy P. Gaylord (45) President and C.E.O. 1995
Douglas W. Dancer (59) Secretary 1990
Lois A. Toth (49) Treasurer 1998
Mr. Sullivan is a Director of the Registrant and Chairman of the Board
of Directors of Mason State Bank.
Mr. Ambrose is a Director of the Registrant and Vice Chairman of the
Board of Directors of Mason State Bank.
Mr. Gaylord is a Director of the Registrant and President and Chief
Executive Officer of Mason State Bank.
Mr. Dancer is a Director of the Registrant and Secretary of the Board
of Directors of Mason State Bank.
Ms. Toth is Controller and Cashier of Mason State Bank.
11
<PAGE> 12
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, 1999, and is incorporated herein by reference, as
follows:
<TABLE>
<CAPTION>
Pages in 1999
Annual Report
-------------
<S> <C> <C>
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 4
Item 6. Selected Financial Data 6
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 - 24
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure None
Part III
The information required by this item is included in the Capital
Directions, Inc. 2000 Proxy Statement, dated March 31, 2000, and is
incorporated herein by reference, as follows:
<CAPTION>
Page in 2000
Proxy Statement
---------------
<S> <C>
Item 10. Directors and Executive Officers of the Registrant 4 - 6
(In addition, reference is made to Additional Item -
Executive Officers under Part I, Item 4, of this Form 10-K
report on page 11)
Item 11. Executive Compensation 6 - 7
Item 12. Security Ownership of Certain Beneficial Owners
and Management 4
Item 13. Certain Relationships and Related Transactions 9 - 10
The information appearing in the Corporation's Proxy
Statement and in Note 4 on page 19 of the Notes to
Consolidated Financial Statements of the 1999 Annual Report
to Shareholders is incorporated by reference in response to
this item.
</TABLE>
12
<PAGE> 13
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a). The following documents are filed as part of this report:
1. The following consolidated financial statements of Capital
Directions, Inc. included in the 1999 Annual Report to
Shareholders for the year ended December 31, 1999, are
incorporated herein by reference in Item 8:
<TABLE>
<CAPTION>
Page in 1999
Annual Report
-------------
<S> <C>
Consolidated balance sheets -
December 31, 1999 and 1998 13
Consolidated statements of income for the years
ended December 31, 1999, 1998, and 1997 14
Consolidated statements of cash flows for the years
ended December 31, 1999, 1998, and 1997 15
Consolidated statements of changes in shareholders'
equity for the years ended December 31, 1999,
1998, and 1997 16
Notes to consolidated financial statements 17 - 24
Report of Independent Auditors 12
</TABLE>
2. Financial Statement Schedules
Not applicable
3. Exhibits
(3a) Articles of Incorporation and (3b) Bylaws (previously
filed as Exhibits included in Capital Directions, Inc.
Registration Statement Amendment No. 1 to Form S-4, No.
33-20417, Dated March 17, 1988).
(10) Material Contracts
(a) Incentive Compensation Plans (previously
filed as Exhibits included in Capital
Directions, Inc.'s 1988 10-K report dated
March 29, 1989 and the 1993 10-K report dated
March 29, 1994).
(b) Directors Deferred Compensation Plans
(previously filed as Exhibits included in
Capital Directions, Inc.'s 1988 10-K report
dated March 29, 1989).
(c) Supplementary Executive Retirement Plan
(previously filed as Exhibits included in
Capital Directions, Inc.'s 1988 10-K report
dated March 29, 1989).
(13) Annual Report to Shareholders for the year ended
December 31, 1999 (filed herewith).
(22) Subsidiaries of registrant (previously filed as
Exhibits included in Capital Directions, Inc.'s
1988 10-K report dated March 29, 1989).
13
<PAGE> 14
Part IV - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(23) Consents of experts. Consent of Crowe, Chizek and
Company LLP.
(27) Financial Data Schedule for EDGAR filer.
(b). Reports on Form 8-K
No reports of Form 8-K were filed during the last quarter of the
year covered by this report.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 27, 2000.
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 27, 2000.
/s/ George A. Sullivan George A. Sullivan
----------------------------- Chairman of Board of Directors
/s/ Gerald W. Ambrose Gerald W. Ambrose
----------------------------- 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/ Marvin B. Oesterle Marvin B. Oesterle
----------------------------- Director
/s/ Paula Johnson Paula Johnson
----------------------------- Director
15
<PAGE> 16
Index to Exhibits
The following exhibits are filed or incorporated by reference as part
of this report:
3(A) Articles of Incorporation of the Registrant as currently in
effect and any amendments thereto (Incorporated herein by
reference to Exhibit 3(A) of the Registrants' Form S-4
Registration Statement dated March 17, 1988 No. 33-20417).
3(B) Bylaws of the Registrant as currently in effect and any
amendments thereto (Incorporated herein by reference to Exhibit
3(B) of the Registrants' Form S-4 Registration Statement dated
March 17, 1988 No. 33-20417).
10(A) Incentive Compensation Plans (Incorporated herein by reference
to Exhibit 10(A) to Registrants' Report on Form 10-K for the
year ended December 31, 1988 and December 31, 1993 [1988 and
1993 10-K 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]).
13 Annual Report to Shareholders for the year ended December 31,
1999 (filed herewith).
22 List of Subsidiaries (Incorporated herein by reference to Exhibit
22 to Registrants' Report on Form 10-K for the year ended
December 31, 1988 [1988 10-K Report]).
23 Consents of experts. Consent of Crowe, Chizek and Company LLP.
27 Financial Data Schedule for EDGAR filer.
16
<PAGE> 1
EXHIBIT 13
CAPITAL DIRECTIONS, INC.
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.
[FDIC LOGO]
CONTENTS
A message from the President and CEO ............................... 2
Shareholder returns 1990-1999 ...................................... 3
Stock and shareholder information .................................. 4
Market for common stock and related security holder matters ........ 4
Management, officers, and directors ................................ 4-5
Financial highlights ............................................... 5
Selected financial data ............................................ 6
Management's discussion and analysis
of financial condition and results of operations ................... 7-11
Report of independent auditors ..................................... 12
Capital Directions, Inc. consolidated balance sheets ............... 13
Capital Directions, Inc. consolidated statements of income ......... 14
Capital Directions, Inc. consolidated statements of cash flows ..... 15
Capital Directions, Inc. consolidated statements of changes
in shareholders' equity ............................................ 16
Notes to consolidated financial statements
(December 31, 1999, 1998 and 1997) ................................. 17-24
1999 ANNUAL REPORT
1
<PAGE> 2
TO OUR SHAREHOLDERS
[TIMOTHY P. GAYLORD PHOTO]
The true test of performance for any company is its ability to increase
shareholder value over time. In 1999, basic earnings per share increased 12.05%
over the prior year to $2.51 per share. We are very pleased that our
shareholders saw a total return on their investment of 33.44% compared to an
industry average decline of 8.00%*. This represents an outstanding return, but
even more importantly, by taking advantage of our dividend reinvestment program,
many of our shareholders have received an annual compounded rate of return of
29.96% since December of 1994. As the chart on page 3 illustrates, an investment
in Capital Directions, Inc.'s common stock has proven to be a very wise one. The
groundwork laid during the past 10 years continues to show results. Among the
mega-mergers that create huge national and super-regional banks, Mason State
Bank continues to follow its strategic plan to remain an independent community
bank. This is truly a niche that large acquiring banks cannot fill. The role of
a community bank means exceeding the expectations consumers have about service,
having local decision making and ongoing community involvement. It means having
the products available to meet your customer's financial needs. And from the
Bank's and its shareholders' perspective, it also means controlling expenses. A
measurement of the Bank's ability to control expenses is its efficiency ratio.
Mason State Bank ranks in the top 10% of peer banks with an operating efficiency
of 52.08%. Using these principles, 1999 was another record year for the Company
and very rewarding for Capital Directions, Inc.'s shareholders.
The new state-of-the-art branch located in the Leslie Felpausch Food Center is
being warmly received and has exceeded our first year revenue projections. The
loan portfolio continues to perform well with net charge-offs for 1999 totaling
only $4,000. The adherence to a stringent credit culture has positioned the Bank
to perform in a strong economy or even in the event of an economic downturn. The
Bank continues to be highly rated by bank analysts for consistent earnings,
excellent asset quality and a strong capital position.
The Mason State Bank Y2K Committee was formed in 1997 and throughout 1998
completed the Assessment, Renovation and Upgrade phases of the Year 2000 plan.
In 1999, those individuals were charged with the development of a Business
Resumption Contingency Plan to ensure continued service to our customers in the
case of an event. The Year 2000 was ushered in without any effect on our
systems. For that, I would like to thank the individuals who participated in
each of these phases over the past three years.
In the year 2000, we see opportunities in commercial and consumer lending, and
expect moderate growth in these portfolios. Residential lending may decline
somewhat due to the challenging rate environment. We expect new construction and
the purchase of existing homes to remain strong. We also see opportunities to
expand our market share in our primary markets and increase the product
penetration or "share of wallet" within our existing customer base. Our primary
strategy will be utilizing the Marketing Customer Information File (MCIF) to
review the overall household relationship with the Bank. We will then market
additional products that benefit our customers while increasing the profit in
each client relationship.
Waiting for customers to walk through the door and order taking no longer
works-a bank must sell itself and its services. Our bankers are learning to use
their expertise as consultants. By learning more about the customer's needs and
tailoring solutions with the best products and services, a mutually satisfying
relationship evolves. These efforts will continue to gain momentum from the
evolving sales abilities of our staff. The year 2000 will see a renewed
dedication and approach to sales and customer service training.
We close 1999 recognizing our directors, management and staff in their ongoing
efforts to meet our customers' needs and continuously improving corporate
performance. I also thank our customers and shareholders for their loyalty and
support.
I look forward to seeing you at the Annual Shareholders' Meeting on April 27,
2000 at 6:00 p.m. at the Mason Area Historical Museum.
Sincerely,
/s/ Timothy P. Gaylord
Timothy Gaylord, President and CEO
Capital Directions, Inc. and Mason State Bank
* 1999 NASDAQ Bank Index Average
2
<PAGE> 3
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C>
STOCK PERFORMANCE $37,072
- --------------------------------------------------------------------------------------------------------------------------
The 1-year annualized The 5-year annualized Capital Directions, Inc. shareholders
return on Capital return on Capital taking advantage of the dividend
Directions, Inc. stock Directions, Inc. stock reinvestment program experienced an
was 33.44%(1) was 29.96%(1) overall annual compounded rate of return
of 29.96% since December of 1994(1). $10,000
12/31/94 12/31/99
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER RETURNS 1990-1999
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
NET INCOME
(In thousands) $578 $678 $835 $869 $930 $1,050 $1,136 $1,235 $1,334 $1,449
RETURN ON EQUITY
(ROE) 10.41% 11.54% 13.10% 12.62% 12.48% 12.71% 12.67% 12.47% 12.53% 13.06%
RETURN ON ASSETS
(ROA) .76% .85% 1.10% 1.14% 1.24% 1.40% 1.49% 1.56% 1.47% 1.44%
BOOK VALUE
PER SHARE
(Retroactively
adjusted for
stock splits) $9.59 $10.23 $11.14 $12.17 $12.86 $14.45 $15.80 $17.17 $18.48 $19.82
SHAREHOLDERS'
EQUITY TO TOTAL
ASSETS 7.13% 7.69% 8.47% 9.52% 10.05% 11.04% 11.91% 12.78% 10.97% 11.19%
</TABLE>
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.
3
<PAGE> 4
STOCK AND SHAREHOLDER INFORMATION
STOCK TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
AUTOMATIC DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Participating Capital Directions, Inc. shareholders take the opportunity to
reinvest the cash dividends paid on their shares to purchase additional shares
of Capital Directions, Inc. common stock. Participants may also purchase
additional shares through cash payment without paying fees or commissions.
DIRECT DEPOSIT
The Corporation continues to provide convenient services to meet your needs. For
quick transfer and availability, your cash dividends may be deposited directly
into your Mason State Bank checking, savings, or money market account. To learn
more about the Automatic Dividend Reinvestment and Stock Purchase Plan, or to
initiate direct deposit of your cash dividends, please contact Kimberly A.
Dockter, CPS, Executive Secretary, at (517) 676-0500.
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting for the year ended December 31, 1999 will be held at the
Mason Area Historical Museum, 200 East Oak Street, Mason, Michigan on Thursday,
April 27, 2000 at 6:00 p.m.
HOW TO ORDER FORM 10-K
The Corporation's 1999 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 First Union Securities, Morgan Stanley Dean
Witter and Raymond James & Assoc., Inc. Management has not verified the accuracy
of their bid reporting, nor will the price be reflective if the stock was listed
on an active exchange. At December 31, 1999, there were approximately 432
holders of the Company's common stock. Dividends are declared on a quarterly
basis with a total of $681,000 declared in 1999 and $568,000 in 1998.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1999
High.......... $ 36.75 $ 36.75 $ 39.25 $ 41.00
Low........... 31.25 35.00 35.25 39.50
Dividend
per share
declared.... 0.27 0.28 0.29 0.30
1998
High.......... $ 33.00 $ 33.00 $ 33.38 $ 31.25
Low........... 25.00 31.25 28.00 30.00
Dividend
per share
declared.... 0.19 0.23 0.27 0.27
</TABLE>
CAPITAL DIRECTIONS, INC.
BOARD OF DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
GEORGE A. SULLIVAN
Chairman, Capital Directions, Inc.
Private Practice Attorney
GERALD W. AMBROSE
Vice Chairman, Capital
Directions, Inc.
County Controller, Ingham County
TIMOTHY P. GAYLORD
President & Chief Executive
Officer, Capital Directions, Inc.
DOUGLAS W. DANCER
Secretary, Capital Directions, Inc.,
Realtor, CB Richard Ellis Martin
MARVIN B. OESTERLE
Partner, Golden Acres Farms and
Oesterle Brothers Seed Corn
PAULA JOHNSON
Co-owner, Vision Real Estate and
Developer, PAL, LLC (ie: Vision
Village Condominiums)
OFFICERS
GEORGE A. SULLIVAN
Chairman
GERALD W. AMBROSE
Vice Chairman
TIMOTHY P. GAYLORD
President & Chief Executive Officer
DOUGLAS W. DANCER
Secretary
LOIS A. TOTH
Treasurer
4
<PAGE> 5
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Change Change
1999 1998 Amount Percent
<S> <C> <C> <C> <C>
INCOME STATEMENT
Net interest income.................................... $ 4,085,000 $ 3,755,000 $ 330,000 8.79%
Net income............................................. 1,499,000 1,334,000 165,000 12.37
Basic earnings per share............................... 2.51 2.24 0.27 12.05
Cash dividend declared per share....................... 1.14 0.96 0.18 18.75
RATIOS
Return on average shareholders' equity................. 13.06% 12.53%
Return on average assets............................... 1.44 1.47
Average shareholders' equity as a
percentage of average assets.......................... 11.00 11.75
BALANCE SHEET
Total assets........................................... $ 105,713,000 $ 100,229,000 $ 5,484,000 5.47%
Total earning assets................................... 99,892,000 94,924,000 4,968,000 5.23
Total loans, net....................................... 88,057,000 80,904,000 7,153,000 8.84
Total deposits......................................... 72,030,000 72,389,000 (359,000) (0.50)
</TABLE>
MASON STATE BANK
MANAGEMENT
TIMOTHY P. GAYLORD
President & Chief Executive Officer
THOMAS L. PETERSON
Senior Vice President, Retail Banking
KATHLEEN BAKER
Vice President, Mortgage Loans
JEFF KUMFER
Vice President, Commercial Loans
ELIZABETH J. LUTTRELL
Assistant Vice President, Human
Resources & Security
MELANIE J. OLSON
Assistant Vice President, Director
of Marketing
THELMA HINES
Customer Service Officer
LOIS A. TOTH
Controller & Cashier
LEA L. AMMERMAN
Branch Manager
MARY E. BENJAMIN
Operations Officer
AT MASON STATE BANK
DURING 1999...
KELLEY MENDENALL
was named Employee of the Year
KIM DOCKTER
was named Volunteer of the Year
DEBBIE SATCHELL
was named Salesperson of the Year
MARY E. BENJAMIN
joined as Operations Officer
[MARY E. BENJAMIN PHOTO]
5
<PAGE> 6
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data)
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest and dividend income................. $ 7,525 $ 6,880 $ 6,092 $ 5,709 $ 5,740
Interest expense............................. 3,440 3,125 2,594 2,443 2,441
------------- ------------ ------------ ------------- ------------
Net interest income.......................... 4,085 3,755 3,498 3,266 3,299
Provision for loan losses.................... 48 (23) - - 193
Non interest income.......................... 592 565 568 783 1,046
Non interest expense......................... 2,471 2,461 2,340 2,479 2,714
------------- ------------ ------------ ------------- ------------
Income before income tax expense............. 2,158 1,882 1,726 1,570 1,438
Income tax expense........................... 659 548 491 434 388
------------- ------------ ------------ ------------- ------------
Net income................................... $ 1,499 $ 1,334 $ 1,235 $ 1,136 $ 1,050
============= ============ ============ ============= ============
PER SHARE(1)
Average shares outstanding................... 596,200 595,064 594,926 594,856 594,856
Basic earnings(2)............................ $ 2.51 $ 2.24 $ 2.08 $ 1.91 $ 1.77
Diluted earnings(2).......................... 2.49 2.22 2.07 1.90 1.76
Dividends declared........................... 1.14 0.96 0.70 0.57 0.52
Book value................................... 19.82 18.48 17.17 15.80 14.45
RATIOS BASED ON NET INCOME
Net income to average shareholders' equity... 13.06% 12.53% 12.47% 12.67% 12.71%
Net income to average assets................. 1.44 1.47 1.56 1.49 1.40
BALANCE SHEET
Assets....................................... $ 105,713 $ 100,229 $ 79,957 $ 78,920 $ 77,835
Net loans.................................... 88,057 80,904 60,299 50,772 48,689
Short-term investments....................... 54 626 188 2,800 6,050
Securities................................... 10,726 12,383 14,118 19,497 16,055
Deposits..................................... 72,030 72,389 64,421 66,509 66,208
Long-term Federal Home Loan Bank
borrowings................................. 18,861 15,593 3,670 1,913 1,880
Shareholders' equity......................... 11,828 10,997 10,216 9,397 8,594
</TABLE>
1 A 2-for-1 stock split was declared on the common stock November 3, 1997 and
paid December 1, 1997. Also, a 2-for-1 stock split was declared on the common
stock on December 15, 1994, and paid February 1, 1995. Earnings, dividends, book
value, and price per share figures have been restated to give retroactive effect
to these splits.
2 Restated to reflect adoption of SFAS No. 128 on December 31, 1997.
6
<PAGE> 7
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 "Corporation") and its wholly owned subsidiaries. It
should be read in conjunction with the consolidated financial statements and
supplemental data contained elsewhere in this report.
Capital Directions, Inc., a one-bank holding company, commenced operations on
July 22, 1988. This was facilitated by the acquisition of 100% of the
outstanding shares of Mason State Bank in an exchange of common stock.
The Corporation is not aware of any market or institutional trends, events, or
circumstances that will have or are reasonably likely to have a material effect
on liquidity, capital resources, or operations except as discussed herein. Also,
the Corporation is not aware of any current recommendations by regulatory
authorities that will have such affect if implemented.
PERFORMANCE SUMMARY
In 1999, Capital Directions, Inc. and its subsidiaries reported record net
earnings of $1,499,000. This is an increase of 12.37% over the previous year.
Basic earnings per share were $2.51 in 1999 compared to $2.24 in 1998. In 1999,
return on average assets decreased to 1.44% from 1.47% in 1998. This decrease is
attributable to the growth percentage in the total average assets of the
Corporation exceeding the percentage growth in net income during 1999. Return on
shareholders' equity was 13.06%, up from 12.53% in 1998. As of December 31, 1999
the leveraged capital ratio, which excludes the net unrealized gain or loss on
securities available for sale was 11.1%, down from 11.2% the prior year, but
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
1999 compared to the same components in 1998:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 NET INCOME................................. $ 1,334
Increase (decrease) in net income
Interest income............................... 645
Interest expense.............................. (315)
Provision for loan losses..................... (71)
Non interest income........................... 27
Non interest expense.......................... (10)
Income taxes.................................. (111)
----------
1999 NET INCOME................................. $ 1,499
</TABLE>
In 1998, net income for the Corporation was $1,334,000, which was an increase of
8.02% over net earnings of $1,235,000 for 1997. Basic earnings per share
increased to $2.24 in 1998 compared to $2.08 in 1997. The 1998 return on average
assets decreased to 1.47% from 1.56% in 1997. Return on average shareholders'
equity was 12.53%, up from 12.47% in 1997. The leveraged capital ratio for the
year ending December 31, 1998 was 11.2%, down from 12.6% the prior year.
The operations of our Holding Corporation did not materially affect the
consolidated financial results for 1999, 1998 or 1997.
NET INTEREST INCOME
The largest segment of the Corporation's operating income is net interest
income. Net interest income is determined by adding interest and certain fees
from earning assets, then subtracting the interest paid on deposits and other
funding sources. This may be impacted by changes in volume and mix of earning
assets, funding sources, deposits, interest rates, loan demand, and other market
factors.
Net interest income for 1999, on a fully taxable equivalent basis, was
$4,187,000, an increase of $322,000 over 1998. For 1998, net interest income, on
a fully taxable equivalent basis, increased $246,000 over 1997. Average balances
and rates on major categories of interest earning assets and interest bearing
liabilities appear in Table 1 on the following page. The affect on net interest
income from changes in average balances ("volume") and yields, and rates
("rate") are quantified in Table 2 on page 9. As shown, net interest income
improved in 1999 and 1998 generally due to volume increases in earning assets.
Yields on assets and funding rates were lower in 1999 and 1998, reflecting a
decreasing interest rate environment, with customers moving to higher priced
deposit products. Average tax equivalent yields on earning assets decreased to
7.73% in 1999 from 8.15% in 1998. Interest bearing liability rates decreased to
4.23% in 1999 from 4.48% in 1998. Despite an increase in net interest income
related primarily to an increase of 14.96% in average earning assets, tax
equivalent net interest margin decreased by 26 basis points primarily related to
a 42 basis point decline in the average tax equivalent rate on earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Provision for losses on loans is charged to operations based on management's
evaluation of potential losses in the portfolio. Provision is based upon regular
review of the level and trend of non-performing assets; loans 90 days past due,
but not considered non-performing; charge-offs and recoveries; the mix of loans
in the portfolio; and anticipated economic conditions. Based on the growth
achieved in the Bank's loan portfolio in 1999, the provision for loan losses
recorded in 1999 was $48,000. A provision of ($23,000) was recorded in 1998.
7
<PAGE> 8
Net charge-offs for 1999 totaled $4,000, while 1998 totaled less than $500. This
was preceded by five consecutive years of net recoveries. Excellent loan
portfolio performance indicates a continued strong mid-Michigan business climate
and reflects attention to underwriting standards as well as consistent
monitoring of the portfolio. Mason State Bank management rates the overall
quality of the loan portfolio as good and concludes the $1,055,000 allowance or
1.18% allowance to total loans appropriate to cover inherent losses in the
portfolio at year-end 1999.
Non-performing loans are defined as all loans which are accounted for as
non-accrual; loans 90 days or more past due and still accruing interest; or
loans which have been renegotiated due to the borrowers' inability to comply
with the original terms. As of December 31, 1999, non-performing loans totaled
$338,000 or .38% of total loans. This represents a decrease of $35,000 in
non-performing loans from 1998 levels. Non-performing loans totaled .46% of
total loans in 1998. This was an increase of $164,000 from the 1997 levels.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
<S> <C> <C>
Non-accrual.............. $ 32,000 $ 243,000
90 days or more past due. 306,000 130,000
Renegotiated............. -- --
------------- -------------
Total.................... $ 338,000 $ 373,000
</TABLE>
A loan is considered impaired when full collection of principal and interest is
not expected under the original terms of the loan. There were no impaired loans
in the portfolio at December 31, 1999, 1998 or 1997.
TABLE 1
<TABLE>
<CAPTION>
1999 1998 1997
Interest Average Interest Average Interest Average
(Dollars in Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
thousands) Balance Expense* Rate* Balance Expense* Rate* Balance Expense* Rate*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans................ $ 86,397 $ 6,782 7.85% $ 69,172 $ 5,870 8.49% $ 54,870 $ 4,910 8.95%
Other
earning
assets............. 12,245 845 6.90 16,633 1,120 6.73 18,733 1,303 6.96
-------- ------- -------- ------- -------- -------
Total
earning
assets............. 98,642 7,627 7.73 85,805 6,990 8.15 73,603 6,213 8.44
Other
assets............. 5,702 4,810 5,784
-------- -------- --------
Total................ $104,344 $ 90,615 $ 79,387
======== ======== ========
Interest
bearing
liabilities........ $ 81,409 $ 3,440 4.23% $ 69,717 $ 3,125 4.48 $ 59,070 $ 2,594 4.39%
------- ------- -------
Non interest
bearing
liabilities
and
equity............. 22,935 20,898 20,317
--------- ------- -------
Total................ $ 104,344 $90,615 $79,387
========= ======= =======
Net interest income.. $ 4,187 $ 3,865 $ 3,619
======= ======= =======
Net interest margin on
earning assets..... 4.24% 4.50% 4.92%
</TABLE>
* Fully taxable equivalent basis.
8
<PAGE> 9
TABLE 2
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 compared to 1998 1998 compared to 1997
Change due to: Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Earning assets*
Loans.................................... $ 1,377 $ (465) $ 912 $ 1,225 $ (265) $ 960
Taxable investment securities............ (167) 10 (157) (185) (31) (216)
Non-tax investment securities............ (15) (9) (24) (39) 6 (33)
Federal funds sold....................... (85) (9) (94) 64 2 66
-------- -------- -------- --------- -------- --------
Total interest income...................... $ 1,110 $ (473) $ 637 $ 1,065 $ (288) $ 777
Interest bearing liabilities:
Interest bearing demand deposits......... $ 19 $ (59) $ (40) $ 17 $ (43) $ (26)
Savings deposits......................... 50 (50) -- 30 5 35
Time deposits under $100,000............. (43) (64) (107) (12) 17 5
Time deposits $100,000 or more........... 75 (48) 27 92 (9) 83
Other borrowings......................... 459 (24) 435 442 (8) 434
-------- -------- -------- --------- -------- --------
Total interest expense..................... $ 560 $ (245) $ 315 $ 569 $ (38) $ 531
Net interest income........................ $ 550 $ (228) $ 322 $ 496 $ (250) $ 246
</TABLE>
- - Fully taxable equivalent basis.
NON INTEREST INCOME
Non interest income increased by $27,000 from the previous year. Deposit service
charges as well as investment commission fees increased in 1999. In addition,
there were no gains or losses incurred on securities called or sold in 1999. The
change in non interest income from 1998 to 1997 was a decline of $3,000.
Investment commission fees as well as ATM transaction fees increased in 1998.
These increases were offset by an increase in net losses on securities of
$13,000 in 1998.
NON INTEREST EXPENSE
Non interest expense increased $10,000 during 1999. This increase is a result of
several factors, including increased benefit costs, as well as data processing
costs and expenses for outsourced services. In addition, premises and equipment
costs increased in 1999 due to the completion of the new Leslie, Michigan office
that opened in October 1998. These expenses were partially offset by lower
marketing expenses in 1999. Non interest expense increased by $121,000 from 1997
to 1998. These increases were related to increased salary and benefit costs,
data processing costs and net occupancy expenses.
INCOME TAX EXPENSE
The 1999 provision for income tax was $659,000, up from $548,000 in 1998. The
1998 provision was up $57,000 from the $491,000 provision in 1997. This figure
reflects a higher taxable income in 1999 and 1998.
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 $798,000 in federal
funds sold in 1999. The Bank is a member of the Federal Home Loan Bank system
for several reasons: access to an alternative funding source, lower costs for
credit services, and an alternative tool to manage interest rate risk.
Throughout 1996, 1997, 1998 and 1999 the Bank used this source of funding (see
Note 8 to the consolidated financial statements) to directly offset loans of
like terms and conditions.
Other sources of liquidity include: internally generated cash flow, repayments
and maturities of loans, other borrowings and growth in core deposits.
At December 31, 1999 the securities available for sale were valued at
$9,751,000. It is not anticipated that management will use these funds due to
the optional sources that may be available in 2000.
9
<PAGE> 10
Interest rate sensitivity management seeks to maximize net interest margins
through periods of changing interest rates. The Bank develops strategies to
assure that desired levels of interest sensitive assets and interest bearing
liabilities mature or reprice within selected time frames. Strategies include
the use of variable rate loan products as well as managing deposit accounts and
maturities in the investment portfolio. The chart below, 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 1999,
the percentage of rate sensitive assets to rate sensitive liabilities within the
one-year time horizon was 71%.
<TABLE>
<CAPTION>
0-30 31-90 Second Third Fourth Annual 1-3
GAP MEASUREMENT Days Days Quarter Quarter Quarter Total Years
(Dollars in
thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans ..................... $ 6,296 $ 1,222 $ 3,318 $ 2,847 $ 2,982 $ 16,665 $ 12,561
Allowance for loan losses.. -- -- -- -- -- -- --
Investments(1)............. 1,380 623 926 386 523 3,838 3,498
Other non earning assets -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total ..................... $ 7,676 $ 1,845 $ 4,244 $ 3,233 $ 3,505 $ 20,503 $ 16,059
======== ======== ======== ======== ======== ======== ========
LIABILITIES
Non interest
bearing deposits .......... $ 67 $ 134 $ 201 $ 201 $ 201 $ 804 $ 2,413
Interest bearing deposits.. 7,995 3,189 5,668 4,740 3,586 25,178 9,881
Federal funds
purchased ................. 1,700 -- -- -- -- 1,700 --
Long-term FHLB
borrowings ................ -- 20 1,070 -- 132 1,222 1,437
Other liabilities ......... -- -- -- -- -- -- --
Capital ................... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total ..................... $ 9,762 $ 3,343 $ 6,939 $ 4,941 $ 3,919 $ 28,904 $ 13,731
======== ======== ======== ======== ======== ======== ========
GAP ....................... $ (2,086) $ (1,498) $ (2,695) $ (1,708) $ (414) $ (8,401) $ 2,328
Cumulative GAP ............ (2,086) $ (3,584) $ (6,279) $ (7,987) $ (8,401) $ (8,401) $ (6,073)
GAP ratio ................. 79% 55% 61% 65% 89% 71% 117%
<CAPTION>
3-5 Over 5
GAP MEASUREMENT Years Years Total
(Dollars in
thousands)
<S> <C> <C> <C>
ASSETS
Loans ..................... $ 16,688 $ 43,198 $ 89,112
Allowance for loan losses -- -- (1,055)
Investments(1)............. 2,825 619 10,780
Other non earning assets... -- -- 6,876
--------- --------- ---------
Total ..................... $ 19,513 $ 43,817 $ 105,713
========= ========= =========
LIABILITIES
Non interest
bearing deposits .......... $ 626 $ 5,041 $ 8,884
Interest bearing deposits 4,516 23,571 63,146
Federal funds
purchased ................. -- -- 1,700
Long-term FHLB
borrowings ................ 13,280 2,922 18,861
Other liabilities ......... -- -- 1,294
Capital ................... -- -- 11,828
--------- --------- ---------
Total ..................... $ 18,422 $ 31,534 $ 105,713
========= ========= =========
GAP ....................... $ 1,091 $ 12,283
Cumulative GAP ............ $ (4,982) $ 7,301
GAP ratio ................. 106% 139%
</TABLE>
1 Maturities reflect probable prepayments and calls.
10
<PAGE> 11
The chart shows the Bank's GAP position as of December 31, 1999. The Bank has a
liability sensitive position within one year of approximately $8,401,000 which
indicates higher net interest income may be earned if rates decrease during the
period and lower net interest income may be earned if rates increase during the
period. Due to the limitations of GAP analysis, modeling is also used to enhance
measurement and control.
CAPITAL RESOURCES
The adequacy of the Corporation's capital is reviewed regularly to ensure that
sufficient capital is available to meet current and future funding needs and
comply with regulatory requirements.
Shareholders' equity, excluding the net unrealized gain on securities available
for sale, increased $840,000 or 7.67% to $11,795,000 at year-end 1999, which
represented 11.16% of total assets. At December 31, 1998, the similar ratio of
shareholders' equity to total assets was 10.93%. Dividends declared per common
share increased by 18.75% to $1.14 in 1999 compared to $ .96 in 1998. The
Corporation has a strong capital position that will meet our needs in 2000.
Regulators established "risk-based" capital guidelines that became effective
December 31, 1990. Under the guidelines, minimum capital levels, which may
include all or a portion of the allowance for loan losses, are based on the
perceived risk in asset categories and certain off-balance-sheet items, such as
loan commitments and standby letters of credit. On December 31, 1999, the Bank
has a "risk-based" total capital to asset ratio of 17.9%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
CAPITAL
(Dollars in thousands) Risk-based Leverage
<S> <C> <C>
Actual amount................... $ 12,612 $ 11,729
Actual percentage............... 17.9% 11.1%
Required amount................. $ 5,639 $ 4,225
Required percent................ 8.0% 4.0%
EXCESS AMOUNT................... $ 6,973 $ 7,504
</TABLE>
Federal and State banking laws and regulations place certain restrictions on the
amount of dividends and loans that a bank can pay its parent Corporation. Of the
$12,612,000 in risk-based capital, $5,325,000 is available for dividends to the
parent Corporation in 2000 (before considering 2000 net income and any changes
in risk-based assets). The remaining $7,287,000 is restricted based on the
minimum risk-based capital requirements now in effect.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of the Corporation are monetary in nature
and therefore the Corporation differs greatly from most commercial and
industrial companies that have significant investments in fixed assets and
inventories. However, inflation does have an important impact on the growth of
assets in the banking industry and the resulting need to increase equity capital
at higher than normal rates in order to maintain an appropriate equity to assets
ratio. Inflation significantly affects other expenses, which tend to rise during
periods of general inflation.
Management believes the most significant impact on financial results is the
Corporation's ability to react to changes in interest rates. Management seeks to
maintain an essentially balanced position between interest sensitive assets and
liabilities and actively manage the amount of securities available for sale in
order to protect against the effects of wide interest rate fluctuations on net
income and shareholders' equity.
IMPACT OF YEAR 2000 COMPLIANCE
During 1999, Capital Directions, Inc. completed its comprehensive Year 2000
(Y2K) Plan which has been a top priority since 1997. This extensive undertaking
addressed potential problems the Corporation may face with the proper
interpretation of dates after December 31, 1999. As outlined in the Plan, the
scope of the Y2K project includes compliance of all computer operating systems
and hardware on all technological platforms, working with third-party vendors,
assessing major borrowing or deposit customer relationships, and developing
contingency plans for all mission critical systems within the Corporation. The
Corporation has not experienced any disruption in service levels through this
transition.
The cost of implementing the Y2K Plan had no material affect on the financial
performance of the Corporation and did not delay other capital expenditures. The
Y2K project costs included some hardware and software upgrades along with
internal salary expenses that equaled less than $50,000.
Although unlikely, we recognize there may be circumstances beyond our control,
including problems associated with non-compliant third parties and disruptions
to the economy in general. We will continue to monitor the Corporation's
business processes throughout 2000 and address any issues that may arise.
11
<PAGE> 12
REPORT OF INDEPENDENT AUDITORS
[CROWE CHIZEK LOGO]
Board of Directors and Shareholders
Capital Directions, Inc.
Mason, Michigan
We have audited the accompanying consolidated balance sheets of Capital
Directions, Inc. as of December 31, 1999 and 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1999, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capital Directions,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity
with generally accepted accounting principles.
As disclosed in Note 1, on April 1, 1999 the Company changed its method of
accounting for derivative instruments and hedging activities to comply with new
accounting guidance.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 3, 2000
12
<PAGE> 13
CAPITAL DIRECTIONS, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share and per share data) DECEMBER 31, 1999 1998
<S> <C> <C>
ASSETS
Cash and non interest bearing deposits .............................................. $ 3,097 $ 2,695
Interest bearing deposits ........................................................... 54 26
Federal funds sold .................................................................. -- 600
--------- ---------
Total cash and cash equivalents ........................................... 3,151 3,321
Securities available for sale ....................................................... 9,751 5,320
Securities held to maturity (fair value of $6,484 in 1998) .......................... -- 6,276
Federal Home Loan Bank (FHLB) stock ................................................. 975 787
Total loans ......................................................................... 89,112 81,915
Less allowance for loan losses ...................................................... (1,055) (1,011)
--------- ---------
Net loans ................................................................. 88,057 80,904
Premises and equipment, net ......................................................... 768 784
Accrued interest receivable ......................................................... 515 509
Other assets ........................................................................ 2,496 2,328
--------- ---------
TOTAL ASSETS............................................................... $ 105,713 $ 100,229
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits: Non interest bearing ................................................... $ 8,884 $ 10,288
Interest bearing ....................................................... 63,146 62,101
--------- ---------
Total deposits ....................................................... 72,030 72,389
Accrued interest payable .......................................................... 229 232
Other liabilities ................................................................. 1,065 1,018
Federal funds purchased ........................................................... 1,700 --
Long-term FHLB borrowings ......................................................... 18,861 15,593
--------- ---------
Total liabilities ......................................................... 93,885 89,232
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares authorized; 596,622 and
595,123 shares outstanding in 1999 and 1998 ....................................... 2,983 2,976
Additional paid-in capital ........................................................ 2,576 2,561
Retained earnings ................................................................. 6,236 5,418
Accumulated other comprehensive income, net of tax of $17 in 1999 and $22 in 1998.. 33 42
--------- ---------
Total shareholders' equity ................................................ 11,828 10,997
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $ 105,713 $ 100,229
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans, including fees............................................................. $ 6,782 $ 5,870 $ 4,910
Federal funds sold................................................................ 40 134 68
Securities: Taxable -- available for sale......................................... 403 422 552
Taxable -- held to maturity........................................... 25 188 295
Tax exempt -- available for sale...................................... 142 -- --
Tax exempt -- held to maturity........................................ 56 214 236
Dividends on FHLB stock........................................................... 75 45 29
Other interest income............................................................. 2 7 2
---------- ---------- ----------
TOTAL INTEREST AND DIVIDEND INCOME............................................ 7,525 6,880 6,092
INTEREST EXPENSE
Deposits.......................................................................... 2,352 2,472 2,375
Federal funds purchased........................................................... 20 1 12
Long-term FHLB borrowings......................................................... 1,068 652 207
---------- ---------- ----------
TOTAL INTEREST EXPENSE........................................................ 3,440 3,125 2,594
---------- ---------- ----------
NET INTEREST INCOME................................................................. 4,085 3,755 3,498
Provision for loan losses........................................................... 48 (23) --
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................................. 4,037 3,778 3,498
NON INTEREST INCOME
Service charges on deposits....................................................... 283 260 260
Net loss on securities............................................................ -- (18) (5)
Net gain on sales of loans........................................................ -- 3 7
Investment commission fees........................................................ 50 47 14
Other income...................................................................... 259 273 292
---------- ---------- ----------
TOTAL NON INTEREST INCOME..................................................... 592 565 568
NON INTEREST EXPENSE
Salaries and wages................................................................ 1,023 1,101 1,048
Pension and other employee benefits............................................... 344 325 314
Net occupancy expense of premises................................................. 162 144 139
Equipment rentals, depreciation, and maintenance.................................. 143 162 194
Other operating expense........................................................... 799 729 645
---------- ---------- ----------
TOTAL NON INTEREST EXPENSE.................................................... 2,471 2,461 2,340
---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE.................................................... 2,158 1,882 1,726
Income tax expense.................................................................. 659 548 491
---------- ---------- ----------
NET INCOME.......................................................................... $ 1,499 $ 1,334 $ 1,235
========== ========== ==========
Basic earnings per common share..................................................... $ 2.51 $ 2.24 $ 2.08
========== ========== ==========
Diluted earnings per common share................................................... $ 2.49 $ 2.22 $ 2.07
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 1,499 $ 1,334 $ 1,235
Adjustments to reconcile net income to net cash from operating activities
Depreciation................................................................... 118 120 120
Provision for loan losses...................................................... 48 (23) --
Net amortization (accretion) on securities..................................... 25 (14) 52
Loans originated for sale...................................................... -- (1,051) --
Proceeds from sales of loans originated for sale............................... -- 1,053 --
Net loss on securities......................................................... -- 18 5
Net gain on sales of loans originated for sale................................. -- (2) --
Net gain on sales of non-residential loans..................................... -- (1) (7)
Changes in assets and liabilities: Accrued interest receivable................. (6) 35 (42)
Accrued interest payable.................... (3) 39 (2)
Other assets................................ (163) (146) (82)
Other liabilities........................... 28 (36) 77
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 1,546 1,326 1,356
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale: Purchases.......................................... (2,439) (6,437) (1,446)
Maturities, calls, and principal payments.......... 3,980 7,408 3,548
Sales.............................................. -- -- 1,674
Securities held to maturity: Purchases.......................................... -- (1,246) (180)
Maturities, calls, and principal payments.......... 265 2,451 1,719
Purchase of FHLB stock............................................................ (188) (423) --
Proceeds from sales of non-residential loans...................................... -- 68 188
Net change in loans............................................................... (7,201) (20,649) (9,708)
Premises and equipment expenditures............................................... (102) (286) (171)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (5,685) (19,114) (4,376)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits............................................................ (359) 7,968 (2,088)
Net change in federal funds purchased............................................. 1,700 (450) 450
Proceeds from long-term FHLB borrowings........................................... 4,000 12,150 2,000
Repayment of long-term FLHB borrowings............................................ (732) (227) (243)
Proceeds from shares issued upon exercise of stock options........................ 22 1 3
Dividends paid.................................................................... (662) (521) (391)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES 3,969 18,921 (269)
-------- -------- --------
Net change in cash and cash equivalents............................................. (170) 1,133 (3,289)
Cash and cash equivalents at beginning of year...................................... 3,321 2,188 5,477
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,151 $ 3,321 $ 2,188
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for: Interest $ 3,443 $ 3,086 $ 2,596
Income taxes -- federal............................ 660 571 524
SUPPLEMENTAL DISCLOSURES OF NON CASH TRANSACTIONS
Transfer from securities held to maturity to securities available for sale........ $ 6,011 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
FOR THE YEARS ENDED Common Paid-In Retained Income, Shareholders'
DECEMBER 31, 1999, Stock Capital Earnings Net of Tax Equity
1998 and 1997
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1997 ............................... $ 1,487 $ 2,559 $ 5,319 $ 32 $ 9,397
Net income for the year ................................. -- -- 1,235 -- 1,235
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on
securities available for sale, net of tax of ($3)...... -- -- -- (4) (4)
--------
Comprehensive income .................................... 1,231
Issuance of 100 shares of common stock upon
exercise of stock options ............................. 1 2 -- -- 3
Issuance of 297,528 shares of common stock
for two-for-one stock split ........................... 1,487 -- (1,487) -- --
Cash dividends ($.70 per share) ......................... -- -- (415) -- (415)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1997 ............................. $ 2,975 $ 2,561 $ 4,652 $ 28 $ 10,216
Net income for the year ................................. -- -- 1,334 -- 1,334
Other comprehensive income, net:
Net change in net unrealized gain on
securities available for sale, net of tax of $8 ....... -- -- -- 14 14
--------
Comprehensive income .................................... 1,348
Issuance of 67 shares of common stock upon
exercise of stock options ............................. 1 -- -- -- 1
Cash dividends ($.955 per share) ........................ -- -- (568) -- (568)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1998 ............................. $ 2,976 $ 2,561 $ 5,418 $ 42 $ 10,997
Net income for the year ................................. -- -- 1,499 -- 1,499
Other comprehensive income (loss), net:
Net change in net unrealized gain (loss) on
securities available for sale, net of tax of ($70)..... -- -- -- (134) (134)
Net unrealized gain on securities transferred
from held to maturity to available for sale,
net of tax of $65 ..................................... -- -- -- 125 125
--------
Total other comprehensive income (loss), net ............ (9)
--------
Comprehensive income .................................... 1,490
Issuance of 1,499 shares of common stock upon
exercise of stock options ............................. 7 15 -- -- 22
Cash dividends ($1.14 per share) ........................ -- -- (681) -- (681)
-------- -------- -------- -------- --------
BALANCES, DECEMBER 31, 1999 ............................. $ 2,983 $ 2,576 $ 6,236 $ 33 $ 11,828
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DECEMBER 31, 1999, 1998 AND 1997)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING: Capital Directions, Inc. (the "Company") is a holding
company whose wholly-owned subsidiaries include Mason State Bank (the "Bank")
and Monex Financial Services, Inc. ("Monex"). Lakeside Insurance Agency is a
wholly-owned subsidiary of the Bank. Monex Financial Services, Inc. was
liquidated and dissolved during 1999. The accounting policies of the Company and
its subsidiaries conform with generally accepted accounting principles and
prevailing practices within the banking and securities industry. The accrual
basis of accounting is followed for all major items in the preparation of the
consolidated financial statements. All material intercompany balances and
transactions are eliminated in consolidation.
NATURE OF OPERATIONS AND LINES OF BUSINESS: The Company and its subsidiaries
provide a broad range of banking and financial services in the banking industry.
Substantially all revenues and services are derived from banking products and
services. The Bank operates predominantly in Central Michigan as a commercial
bank. The Bank's primary services include accepting retail deposits and making
residential, consumer and commercial loans. While the Company's chief
decision-makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a
Company wide basis. Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable operating segment.
CONCENTRATION OF CREDIT RISK: The Company grants loans to and accepts deposits
from customers located primarily in its delineated community. The Company also
invests in securities issued by local governmental units.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided. Actual results could differ from those estimates. The allowance for
loan losses and fair values of securities and other financial instruments are
particularly susceptible to change in the near term.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold prior to maturity due to changes in interest rates, prepayment risks, yield
and availability of alternative investments, liquidity needs, or other factors.
Securities classified as available for sale are reported at their fair value and
the net unrealized holding gain or loss is reported, net of related income tax
effects, as a separate component of other comprehensive income or loss and
shareholders' equity, until realized. Securities are written down to fair value
when a decline in fair value is not temporary.
Gains and losses resulting from the sale of securities are computed by the
specific identification method. Premium amortization is deducted from, and
discount accretion is added to, interest income from securities using the
level-yield method.
Under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Investments and Hedging Activities, all derivative instruments are
recorded at their fair values. If derivative instruments are designated as
hedges of fair values, both the change in the fair value of the hedge and the
hedged item are included in current earnings. Fair value adjustments related to
cash flow hedges are recorded in other comprehensive income or loss and
reclassified to earnings when the hedged transactions are reflected in earnings.
Ineffective portions of hedges are reflected in income currently. As of April 1,
1999, the Company adopted SFAS No. 133 and, in accordance with its provisions,
chose to reclassify certain securities from held-to-maturity to
available-for-sale. The amortized cost of the securities transferred to
available-for-sale was $6,011,000. The Company does not have derivative
instruments in its portfolio to account for under provisions of this statement.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or
market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
When full loan repayment is in doubt, interest income is not reported. Payments
received on such loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on its regular review of
nonperforming assets, as well as loans 90 days or more past due but not
considered nonperforming, charge-offs and recoveries, growth and portfolio mix
of loans, general economic conditions, and other factors and estimates which are
subject to change over time. While management may periodically allocate portions
of the allowance for specific problem loan situations, the whole allowance is
available for any loan charge-offs that occur. A loan is charged-off against the
allowance by management as a loss when deemed uncollectible, although collection
efforts may continue and future recoveries may occur.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of 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
17
<PAGE> 18
the collateral if repayment is expected solely from collateral. Loans totaling
$75,000 or more are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that all principal and
interest will not be collected according to the original terms of the loan.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated on both accelerated and straight line methods
over asset useful lives. These assets are reviewed for impairment when events
indicate the carrying amount may not be recoverable.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the valuation allowance are reported in other operating expense. There were
no properties held as other real estate at December 31, 1999 and 1998.
STOCK OPTIONS: No expense for stock options is recorded, as the grant price
approximates the market price of the stock at the date of grant. Proforma
disclosures in a separate note shows the effect on net income and earnings per
common share had the options' fair value been recorded using an option pricing
model.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
CASH FLOW REPORTING: Cash and cash equivalents are defined to include cash on
hand, non interest bearing deposits in other institutions, short-term interest
bearing deposits in other institutions and federal funds sold. Customer loan and
deposit transactions, cash management funds, long-term interest bearing deposits
made with other financial institutions, and short-term borrowings with an
original maturity of 90 days or less are reported on a net cash flow basis.
EARNINGS AND DIVIDENDS PER COMMON SHARE: Basic earnings per common share is
based on net income divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share shows the
dilutive effect of any additional potential common shares. Earnings and
dividends per common share are restated for all stock splits and stock
dividends, including the December 1, 1997 two-for-one stock split.
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.
RECLASSIFICATIONS: Certain amounts in the 1998 and 1997 financial statements
have been reclassified to conform with the 1999 presentation.
NOTE 2 - RESTRICTIONS ON CASH AND NON INTEREST BEARING DEPOSITS
To satisfy legal reserve and clearing requirements, non interest bearing
balances are required to be maintained as deposits with the Federal Reserve or
as cash on hand. The total required reserve and clearing balances were $455,000
and $424,000 at year-end 1999 and 1998, respectively.
NOTE 3 - SECURITIES
Year-end securities were as follows:
<TABLE>
<CAPTION>
(In thousands) GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
1999 AND 1998 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
1999:
- ----
Obligations of
U.S. Government
agencies......... $ 4,011 $ 22 $ (29) $ 4,004
Obligations of states
and political
subdivisions..... 3,816 73 (15) 3,874
Corporate
securities....... 1,874 2 (3) 1,873
-------- ------ ------- --------
TOTALS......... $ 9,701 $ 97 $ (47) $ 9,751
======== ====== ======= ========
1998:
- ----
Obligations of
U.S. Government
agencies......... $ 1,520 $ 16 $ -- $ 1,536
Obligations of states and political
subdivisions..... 501 8 -- 509
Corporate
securities....... 3,235 40 -- 3,275
-------- ------ ------- --------
TOTALS......... $ 5,256 $ 64 $ -- $ 5,320
======== ====== ======= ========
HELD TO MATURITY
1998:
- ----
Obligations of
U.S. Government
agencies......... $ 1,798 $ 49 $ -- $ 1,847
Obligations of states
and political subdivisions..... 4,478 159 -- 4,637
-------- ------ ------- --------
TOTALS......... $ 6,276 $ 208 $ -- $ 6,484
======== ====== ======= ========
</TABLE>
18
<PAGE> 19
The amortized cost and fair values of securities available for sale at year-end
1999 by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Securities not
due at a single maturity date are shown separately.
<TABLE>
<CAPTION>
(In thousands) AVAILABLE FOR SALE
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less................ $ 1,857 $ 1,861
Due from one to five years............. 4,479 4,465
Due from five to ten years............. 842 857
Due after 10 years..................... 855 884
------- -------
$ 8,033 $ 8,067
U.S. Government mortgage-backed securities
Fixed rate........................... 1,077 1,085
Variable rate........................ 591 599
------- -------
TOTALS............................. $ 9,701 $ 9,751
======= =======
</TABLE>
There were no sales of securities in 1999 and 1998. Net losses on calls of
securities totaled $18,000 in 1998. During 1997, $1,674,000 of securities
classified as available for sale were sold at a gross gain of $29,000 and a
gross loss of $2,000. Net losses on calls of securities totaled $32,000 in 1997.
Securities with a carrying value of approximately $6,525,000 and $1,927,000 at
year-end 1999 and 1998 were pledged to secure public deposits, and for other
purposes as required or permitted by law. Additional securities are pledged as
collateral to secure FHLB borrowings as disclosed in a separate note.
In conjunction with the adoption of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities in 1999, the Company transferred from
held-to-maturity to available-for-sale securities with amortized cost of
$6,011,000 and net unrealized gain of $190,000. Shareholders' equity increased
by $125,000, net of income tax of $65,000 as a result of the transfer.
NOTE 4 - LOANS
Year-end loans were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Commercial and agricultural............ $ 5,268 $ 5,547
Real estate mortgage................... 79,270 73,000
Installment............................ 4,574 3,368
------- -------
TOTAL.................................. $89,112 $81,915
======= =======
</TABLE>
Certain directors, executive officers and principal shareholders of the Company,
including associates of such persons, were loan customers of the Company. A
summary of activity related to these loans follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Balance, January 1,.................... $ 630 $ 609
New loans.............................. 546 419
Repayments............................. (217) (398)
Other changes, net..................... 92 --
-------- --------
BALANCE, DECEMBER 31,.................. $ 1,051 $ 630
======== ========
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Balance, beginning of period........... $ 1,011 $ 1,035 $ 1,020
Loans charged-off...................... (37) (30) (26)
Recoveries............................. 33 29 41
Provision for loan losses.............. 48 (23) --
-------- -------- --------
BALANCE, END OF PERIOD................. $ 1,055 $ 1,011 $ 1,035
======== ======== ========
</TABLE>
During 1999, 1998 and 1997, the Company had no loans, which were considered
impaired. Nonperforming loans were not considered significant at December 31,
1999 and 1998.
NOTE 6 - PREMISES AND EQUIPMENT, NET
Year-end premises and equipment were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Land................................... $ 86 $ 86
Buildings and improvements............. 1,133 1,062
Furniture and equipment................ 2,400 2,369
-------- --------
Total cost........................... 3,619 3,517
Less accumulated depreciation.......... (2,851) (2,733)
-------- --------
PREMISES AND EQUIPMENT, NET............ $ 768 $ 784
======== ========
</TABLE>
NOTE 7 - INTEREST BEARING DEPOSITS
Year-end interest bearing deposits were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Interest bearing demand....................... $ 12,038 $ 11,934
Savings....................................... 18,984 18,201
Time: In denominations less than $100,000..... 19,723 20,689
In denominations of $100,000 or more.... 12,401 11,277
-------- --------
TOTAL INTEREST BEARING DEPOSITS............... $ 63,146 $ 62,101
======== ========
</TABLE>
19
<PAGE> 20
At year-end 1999, stated maturities of time deposits were as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000.............................................. $23,172
2001.............................................. 4,205
2002.............................................. 2,738
2003.............................................. 505
2004.............................................. 1,349
Thereafter........................................ 155
-------
TOTAL............................................. $32,124
=======
</TABLE>
Related party deposits totaled approximately $555,000 and $1,283,000 at year-end
1999 and 1998.
NOTE 8 - LONG-TERM FHLB BORROWINGS
At year-end, advances from the Federal Home Loan Bank were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Maturities May 1999 through January 2003,
primarily fixed rate at rates from 5.67% to
6.72%, averaging 6.44% at year-end 1999
and 6.41% at year-end 1998....................... $ 2,728 $ 3,443
Maturities January 2003 through November 2008,
primarily fixed rate at rates from 4.86% to
6.02%, averaging 5.66% at year-end 1999
and 5.66% at year-end 1998....................... 12,133 12,150
Maturities February 2004 through April 2005,
primarily fixed rate at rates from 5.19% to
5.82%, averaging 5.62% at year-end 1999.......... 4,000 --
------- -------
TOTAL............................................ $18,861 $15,593
======= =======
</TABLE>
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 $58,214,000 and $58,082,000 of first mortgage
loans and securities under a blanket lien arrangement at year-end 1999 and 1998.
At year-end 1999, scheduled principal reductions on these advances were:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000.............................................. $ 1,222
2001.............................................. 714
2002.............................................. 723
2003.............................................. 11,254
2004.............................................. 2,026
Thereafter........................................ 2,922
-------
TOTAL............................................. $18,861
=======
</TABLE>
NOTE 9 - BENEFIT PLANS
A retirement and savings plan has been established for all full-time employees.
Annual matching contributions are made based on a percentage of participants'
compensation plus a discretionary amount determined by the Board of Directors.
The expense for the plan was approximately $40,000 in 1999, and $43,000 in 1998
and 1997.
An incentive compensation plan is also maintained for certain employees and is
based upon key performance factors. The expense for the plan was approximately
$59,000 in 1999, $47,000 in 1998 and $42,000 in 1997.
An incentive stock option plan was approved in 1994 to provide officers and
other key employees an opportunity to acquire a proprietary interest in the
Company with an incentive to their continued employment and efforts to promote
the Company's success. Under the plan, up to 40,000 unauthorized and newly
issued shares of common stock may be issued upon exercise of stock options
granted under the plan. The plan provides for stock options to be granted at
prices that approximate the fair value of the stock at the respective dates of
grant. Accordingly, no compensation cost for stock options was recognized in
1999, 1998 and 1997. The vesting of stock options does not start until two years
from the date of grant. After two years, the options will vest evenly over a
three year period. The plan terminates on May 20, 2003. All shares and per share
amounts have been restated for stock splits.
A summary of activity in the plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AVAILABLE OPTIONS EXERCISE GRANT DATE
FOR GRANT OUTSTANDING PRICE FAIR VALUE
<S> <C> <C> <C> <C>
Balance at
January 1, 1997. 32,000 8,000 $ 15.38
Granted.......... (4,000) 4,000 21.88 $ 2.17
Exercised........ -- (200) 12.75
Forfeited........ 400 (400) 12.75
------ ------ -----
Balance
December 31, 1997 28,400 11,400 17.80
Granted.......... (4,400) 4,400 32.00 3.21
Exercised........ -- (67) 18.00
Cancelled........ 66 (66) 18.00
Forfeited........ 867 (867) 24.19
------ ------ -----
Balance
December 31, 1998 24,933 14,800 21.64
Granted.......... (5,133) 5,133 35.88 3.17
Exercised........ -- (1,499) 15.10
Forfeited........ 662 (662) 33.94
------ ------ -----
BALANCE
DECEMBER 31, 1999 20,462 17,772 $ 25.85
====== ====== =====
</TABLE>
For the options outstanding at December 31, 1999, the range of exercise prices
was $12.75 to $38.50 per share with a weighted average remaining contractual
life of 7.5 years. At December 31, 1999, 1998 and 1997, 5,532, 3,466 and
20
<PAGE> 21
1,133 options were exercisable at a weighted average exercise price of $16.42,
$14.57 and $12.75 per share, respectively.
Had compensation cost for stock options been measured using SFAS No. 123, net
income and earnings per share would have been the pro forma amounts indicated
below. The pro forma effect may increase in the future if more options are
granted (in thousands, except per share data).
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income as reported......$1,499 $ 1,334 $ 1,235
Pro forma net income........ 1,490 1,327 1,231
Basic earnings per share
as reported................ 2.51 2.24 2.08
Pro forma basic earnings
per share.................. 2.50 2.23 2.07
Diluted earnings per share
as reported................ 2.49 2.22 2.07
Pro forma diluted earnings
per share.................. 2.48 2.21 2.06
</TABLE>
The pro forma effects are computed using option pricing models, using the
following weighted average assumptions as of the grant date.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate.......... 5.07% 5.47% 6.17%
Expected option life............. 5 years 5 years 5 years
Expected stock price volatility.. 6.28% 7.57% 7.57%
Expected dividend yield.......... 3.37% 3.56% 4.19%
</TABLE>
A deferred compensation plan has been adopted to provide retirement benefits to
the directors, at their option, in lieu of annual directors' fees. The present
value of future benefits are accrued annually over the period of active service
of each participant. The expense for the plan was $85,000 in 1999, $104,000 in
1998 and $85,000 in 1997. Insurance on the lives of the participants has also
been purchased with the Bank as owner and beneficiary of the policies.
NOTE 10 - OTHER OPERATING EXPENSE
Other operating expense consists of:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Supplies.................... $ 53 $ 54 $ 53
State taxes................. 75 65 66
Deferred compensation....... 85 104 85
Other expense............... 586 506 441
------- ------- --------
TOTAL....................... $ 799 $ 729 $ 645
======= ======= ========
</TABLE>
NOTE 11 - INCOME TAX
Income tax expense consists of:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Taxes currently payable..... $ 667 $ 602 $ 517
Deferred benefit............ (8) (54) (26)
------- ------- --------
TOTAL....................... $ 659 $ 548 $ 491
======= ======= ========
</TABLE>
Year-end deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses........ $ 237 $ 222 $ 230
Deferred compensation............ 309 301 299
Deferred loan fees............... 1 2 5
Other............................ 4 2 3
-------- ------ -------
551 527 537
Deferred tax liabilities
Fixed assets..................... (50) (37) (37)
Net unrealized gain on
securities available for sale... (17) (22) (14)
Deferred gain on
installment sale................ -- -- (43)
Other............................ (9) (6) (27)
-------- ------- --------
(76) (65) (121)
-------- ------- --------
TOTAL.............................. $ 475 $ 462 $ 416
======== ======= ========
</TABLE>
An allowance against deferred tax assets has not been recorded for 1999, 1998 or
1997.
The difference between the financial statement income tax expense and the
amounts computed by applying the federal income tax rate to pretax income is
reconciled as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Statutory rate...................... 34% 34% 34%
Income tax computed at
statutory rate..................... $ 734 $ 640 587
Tax effect of: Nontaxable income.... (68) (70) (72)
Other........................... (7) (22) (24)
------ ------ -------
TOTAL............................... $ 659 $ 548 $ 491
====== ====== =======
</TABLE>
21
<PAGE> 22
NOTE 12 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic earnings per
common share and diluted earnings per common share computations for the years
ended is presented below:
<TABLE>
<CAPTION>
(In thousands, except per
share data) 1999 1998 1997
<S> <C> <C> <C>
Basic earnings per common share:
Net income available to common
shareholders ................... $1,499 $1,334 $1,235
------ ------ ------
Weighted average common
shares outstanding ............. 596 595 595
------ ------ ------
BASIC EARNINGS PER
COMMON SHARE ................... $ 2.51 $ 2.24 $ 2.08
====== ====== ======
Diluted earnings per common share:
Net income available to common
shareholders ................... $1,499 $1,334 $1,235
------ ------ ------
Weighted average common
shares outstanding for basic
earnings per common share ...... 596 595 595
Add: dilutive effect of assumed
exercise of stock options ...... 6 5 3
------ ------ ------
Weighted average common
shares outstanding for diluted
earnings per common share ...... 602 600 598
------ ------ ------
DILUTED EARNINGS PER
COMMON SHARE ................... $ 2.49 $ 2.22 $ 2.07
====== ====== ======
</TABLE>
Stock options for 600 shares of common stock were not considered in computing
diluted earnings per common share in 1999 because they were antidilutive. Stock
options for 4,100 shares of common stock were not considered in computing
diluted earnings per common share for 1998 because they were antidilutive.
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
Net change in net unrealized
gain (loss) on securities
available for sale:
Unrealized net gain (loss) on
securities available for sale .... $(204) $ 4 $ (12)
Reclassification adjustments for
net unrealized gains on securities
transferred from held-to-maturity
to available-for-sale upon
adoption of SFAS No. 133 ......... 190 -- --
Reclassification adjustments
for net losses included in
net income ....................... -- 18 5
----- ------ ------
NET CHANGE IN NET UNREALIZED
GAIN (LOSS) ON SECURITIES
AVAILABLE FOR SALE ............... (14) 22 (7)
Tax expense (benefit) .............. (5) 8 (3)
----- ------ ------
TOTAL OTHER COMPREHENSIVE
INCOME (LOSS), NET ................. $ (9) $ 14 $ (4)
===== ====== ======
</TABLE>
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Periodically, in the normal course of business, there are various outstanding
commitments and contingent liabilities, such as commitments to extend credit and
guarantees, which are not reflected in the accompanying consolidated financial
statements. The exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for unused lines of credit, commitments
to make loans and standby letters of credit is represented by the contractual
amount of those instruments. The same credit policy to make commitments is
followed for those loans recorded in the consolidated financial statements.
The contract amounts of these financial instruments are as follows at year-end:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
<S> <C> <C>
Unused lines of credit................. $ 7,439 $ 7,261
Commitments to make loans.............. 19 752
Standby letters of credit.............. 187 479
</TABLE>
Commitments are generally made at variable rates, primarily tied to Bank One's
prime rate, with maximum commitment periods generally around 365 days. Since
many of the commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon the
exercise of the commitments is determined using management's credit evaluation
of the borrower and may include real estate, vehicles, business assets, deposits
and other items. In management's opinion, these commitments represent normal
banking transactions and no material losses are expected to result.
22
<PAGE> 23
NOTE 15 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
CAPITAL TO TIER 1
RISK-WEIGHTED ASSETS CAPITAL TO
AVERAGE
TOTAL TIER 1 ASSETS
<S> <C> <C> <C>
Well capitalized............ 10% 6% 5%
Adequately capitalized...... 8 4 4
Undercapitalized 6 3 3
</TABLE>
At year-end, the Bank's actual capital levels and minimum required levels were:
<TABLE>
<CAPTION>
(Dollars in thousands) MINIMUM REQUIRED MAXIMUM REQUIRED TO
FOR CAPITAL BE WELL CAPITALIZED
ACTUAL ADEQUACY PURPOSES UNDER PROMPT CORRECTIVE
ACTION REGULATIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
1999
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets)... $ 12,612 17.9% $ 5,639 8.0% $ 7,049 10.0%
Tier 1 capital
(to risk weighted assets)... 11,729 16.6 2,819 4.0 4,229 6.0
Tier 1 capital
(to average assets)......... 11,729 11.1 4,225 4.0 5,281 5.0
1998
Total capital
(to risk weighted assets)... $ 11,718 17.7% $ 5,303 8.0% $ 6,628 10.0%
Tier 1 capital
(to risk weighted assets)... 10,887 16.4 2,651 4.0 3,977 6.0
Tier 1 capital
(to average assets)......... 10,887 11.2 3,898 4.0 4,873 5.0
</TABLE>
The Bank was considered well capitalized at year-end 1999 and 1998.
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 1999, the Bank could pay
approximately $5,325,000 in dividends to the parent company without prior
regulatory approval.
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values for
financial instruments. The carrying amount is considered to estimate fair values
for cash and cash equivalents, demand and savings deposits, short-term
borrowings, accrued interest, FHLB stock and variable rate loans or deposits
that reprice frequently and fully. Securities fair values are based on quoted
market prices or, if no quotes are available, on the rate and term of the
security and on information about the issuer. For fixed rate loans or time
deposits and for variable rate loans or time deposits with infrequent repricing
or repricing limits, the fair value is estimated by discounted cash flow
analysis using current market rates for the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values, where applicable. Fair value of loans held for
sale is based on market estimates. The allowance for loan losses is considered
to be a reasonable estimate of discount for credit quality concerns. The fair
value of debt is based on currently available rates for similar financing. The
fair value of off-balance-sheet items is based on the fees or costs that would
currently be charged to enter into or terminate such arrangements and are not
material to this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at year-end 1999 or 1998, 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 1999 and
1998 should not necessarily be considered to apply at subsequent dates.
In addition, other assets and other liabilities of the Company that are not
defined as financial instruments are not included in the following disclosures,
such as premises and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are not
included in the following disclosures. These include, among other items,
23
<PAGE> 24
the estimated earnings power of core deposit accounts, the trained workforce,
customer goodwill and similar items.
The estimated year-end fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash
equivalents ...... $ 3,151 $ 3,151 $ 3,321 $ 3,321
Securities available
for sale ......... 9,751 9,751 5,320 5,320
Securities held to
maturity ......... -- -- 6,276 6,484
FHLB stock ......... 975 975 787 787
Loans, net of
allowance for
loan losses ...... 88,057 85,751 80,904 82,211
Accrued interest
receivable ....... 515 515 509 509
FINANCIAL
LIABILITIES
Deposits ........... (72,030) (72,201) (72,389) (72,680)
Federal funds
purchased ........ (1,700) (1,700) -- --
Long-term FHLB
borrowings ....... (18,861) (17,883) (15,593) (15,824)
Accrued interest
payable .......... (229) (229) (232) (232)
</TABLE>
NOTE 17 - CAPITAL DIRECTIONS, INC. (PARENT COMPANY ONLY), CONDENSED FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) December 31, 1999 1998
<S> <C> <C>
Assets
Cash, due from banks, and other
cash equivalents ............................. $ 53 $ 52
Investment in Mason State Bank ............... 11,762 10,928
Investment in Monex Financial Services, Inc... -- 4
Other assets ................................. 192 173
------- -------
TOTAL ASSETS ............................... $12,007 $11,157
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable ............................ $ 179 $ 160
Shareholders' equity ......................... 11,828 10,997
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ....................... $12,007 $11,157
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME (YEARS ENDED DECEMBER 31,)
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
OPERATING INCOME
Dividends from Mason State Bank ...................... $ 680 $ 583 $ 338
Dividends from Monex Financial Services, Inc.......... 2 -- 148
------- ------- -------
682 583 486
OPERATING EXPENSES
Wages and benefits ................................... 5 4 68
Other expenses and income tax benefit ................ 17 19 (3)
------- ------- -------
22 23 65
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES ......................................... 660 560 421
------- ------- -------
Equity in undistributed net income of Mason State Bank 843 774 961
------- ------- -------
Equity in excess distributed net
income of Monex Financial Services, Inc. ............. (4) -- (147)
------- ------- -------
839 774 814
------- ------- -------
NET INCOME ........................................... $ 1,499 $ 1,334 $ 1,235
======= ======= =======
</TABLE>
Other comprehensive income and comprehensive income for the Parent Company are
equal to the amounts reported for the Consolidated Company for 1999, 1998 and
1997 as disclosed in the Consolidated Statements of Changes in Shareholders'
Equity.
CONDENSED STATEMENTS OF CASH FLOWS (YEARS ENDED DECEMBER 31,)
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income .......................... $ 1,499 $ 1,334 $ 1,235
Adjustments to reconcile net income
to net cash from operating activities
Equity in undistributed net
income of subsidiaries ............ (839) (774) (814)
Change in other assets ............ (19) 8 (43)
------- ------- -------
Net cash from operating activities .. 641 568 378
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from shares issued
upon exercise of stock options ...... 22 1 3
Dividends paid ...................... (662) (521) (391)
------- ------- -------
Net cash from financing activities .. (640) (520) (388)
Net change in cash and cash
equivalents ......................... 1 48 (10)
------- ------- -------
Cash and cash equivalents at
beginning of year ................... 52 4 14
------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF YEAR ......................... $ 53 $ 52 $ 4
======= ======= =======
</TABLE>
24
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and use of our report, dated
February 3, 2000 on the consolidated financial statements of Capital Directions,
Inc. which appears on Page 12 of Capital Directions, Inc.'s 1999 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, 1999, 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 27, 2000
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999 ANNUAL
REPORT
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,097
<INT-BEARING-DEPOSITS> 54
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,751
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 89,112
<ALLOWANCE> 1,055
<TOTAL-ASSETS> 105,713
<DEPOSITS> 72,030
<SHORT-TERM> 1,700
<LIABILITIES-OTHER> 1,294
<LONG-TERM> 18,861
0
0
<COMMON> 2,983
<OTHER-SE> 8,845
<TOTAL-LIABILITIES-AND-EQUITY> 105,713
<INTEREST-LOAN> 6,782
<INTEREST-INVEST> 626
<INTEREST-OTHER> 117
<INTEREST-TOTAL> 7,525
<INTEREST-DEPOSIT> 2,352
<INTEREST-EXPENSE> 3,440
<INTEREST-INCOME-NET> 4,085
<LOAN-LOSSES> 48
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,471
<INCOME-PRETAX> 2,158
<INCOME-PRE-EXTRAORDINARY> 1,499
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,499
<EPS-BASIC> 2.51
<EPS-DILUTED> 2.49
<YIELD-ACTUAL> 4.24
<LOANS-NON> 32
<LOANS-PAST> 306
<LOANS-TROUBLED> 0
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<CHARGE-OFFS> 37
<RECOVERIES> 33
<ALLOWANCE-CLOSE> 1,055
<ALLOWANCE-DOMESTIC> 629
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 426
</TABLE>
