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, accident and health, multiple line property and casualty 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 2001 Annual Report to the Shareholders, incorporated herein by reference. The Registrant's primary competition is substantially the same as Mason State Bank's as discussed below.
The Bank was organized in 1886 under the laws of Michigan and is subject to the Michigan Banking Code of 1969. It is insured by the Bank Insurance Fund through the Federal Deposit Insurance Corporation. The Bank is regulated by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation. The Federal Reserve Board regulates the Registrant. The Bank's Principal office is located at 322 South Jefferson Street, Mason, Michigan. It operates branches at 661 North Cedar Street, Mason, Michigan and at 810 W. Bellevue, Leslie, Michigan.
Banking services are provided to individuals, businesses, local, state and federal governmental units and institutional customers located in Mason, Leslie and the surrounding areas. Services include demand deposits, savings and time deposits, collections, cash management, night depositories and personal, installment, commercial and real estate loans. The Bank offers a credit card program affiliated with the Visa and MasterCharge Inter-Bank charge card system.
The Bank maintains a correspondent relationship with several of the major banks in the Detroit area and elsewhere, in order to provide for the clearance of checks, the transfer of funds, the periodic purchase and sale of Federal funds, and participation in large loans which would be beyond the Bank's legal lending limit if made by the Bank alone.
The Bank has full and part-time employees (38 full-time equivalents) and owns its main office and Cedar Street office. The facility in Leslie is operated under a lease agreement. The Bank operates primarily within Ingham County. Competing with the Bank in Ingham County are several other commercial banks and financial institutions, some of which have significantly greater total resources than the Bank.
Item 1. Business-Statistical Disclosures
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
(A), (B) The following table sets forth average balances for major categories of interest earning assets and interest bearing liabilities, the interest earned (on a fully taxable equivalent basis) or paid on such amounts, and average interest rates earned or paid thereon.
(1) Average balances for loans include non-accrual loans. The inclusion of non-accrual loans and fees does not have a material effect on either the average balance or the average interest rate.
(2) Interest on non-taxable investment securities and non-taxable loans is reflected on a fully tax equivalent basis using an effective tax rate of 34%.
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Differential (continued)
(C) The following table summarizes the changes in interest income (on a fully taxable equivalent basis) and interest expense resulting from changes in volume and changes in rates:
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(1) The change in interest due to both volume and rate has been allocated to volume and rate in proportion to the relationship of the absolute dollar amounts of the change in each.
(2) Interest on tax-exempt investment securities and loans is based on a fully taxable equivalent basis using an effective tax rate of 34%.
II. Investment Portfolio
(A) A table of carrying values of the investment portfolio as of December 31, 2001 and 2000 is set forth in Note 3 on pages 18 and 19 of the 2001 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, 2001: (dollars in thousands)
(1) Mortgage Backed securities and Corporate securities, as reflected in the above schedules consider anticipated prepayments and calls. (2) Weighted average yield is adjusted to a taxable equivalent basis using a federal income tax rate of 34 percent.
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, 2001.
III. Loan Portfolio
(A) A table of loans outstanding as of December 31, 2001 and 2000 is set forth in Note 4 on page 19 of the 2001 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, 2001, according to scheduled payments of principal (in thousands) and considering the banks "rollover policy."(1)
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, 2001.
(1) The "rollover policy" is to generally write terms of these loans for a shorter time than the expected payments. The purpose of this is to re-evaluate the term and credit of the respective borrower. We estimate that this happens on approximately 80% of these borrowings and is reflected as such in this schedule.
(C). Risk Elements
(1). Nonaccrual, Past Due, Impaired and Restructured Loans. A table and discussion of nonaccrual, past due, impaired and restructured loans for the years ended December 31, 2001 and 2000 is in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 9 under Provision and allowance for loan losses, Note 1 under "Loans" and "Allowance for Loan Losses" on pages 17 and 18 and in Note 5 "Allowance For Loan Losses" on page 19 in the 2001 Annual Report to Shareholders. Such information is incorporated herein by reference.
III. Loan Portfolio (continued)
Gross interest income that would have been recorded in 2001 on nonaccrual loans if the loans had been current in accordance with their original terms and outstanding throughout the period or since origination was $1,581. No interest income was recognized on these loans during 2001.
(2). Potential Problem Loans There are no material loans that are current as to which management has serious doubts as to the ability of the borrower to comply with the loan repayment terms, or which are expected to need adjustments in their repayment terms, or which are believed to require additional reserves in the allowance for loan losses.
(3). Foreign Outstandings There were no foreign outstandings as of December 31, 2001.
(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, 2001.
(D). Other Interest Bearing Assets
As of December 31, 2001, 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 other than $117,000 held as other real estate.
IV. Summary of Loan Loss Experience
(A). The following table sets forth loan allowance balances and summarizes changes in the allowance for loan losses for each of the three years ended December 31.
Further discussion of the provision and allowance for loan losses as well as non-performing and impaired loans is presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 9, Note 1 on pages 17 and 18 and Note 5 on page 19 in the 2001 Annual Report to the Shareholders, incorporated herein by reference.
IV. Summary of Loan Loss Experience (continued)
(B) The following table presents an allocation for loan losses to the various loan categories at December 31:
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 management tool for quantifying the amount of risk in the loan portfolio. This LLAM computes a suggested allowance balance to be compared to the actual allowance for loan losses. The difference between the suggested and actual allowance is monitored and maintained at an amount considered reasonable to provide for potential losses inherent in the portfolio.
To determine the suggested allowance balance, two tests are applied to the various loan categories. The test with the most conservative (greatest) allowance allocation is selected for each category. The two tests are then combined with a separate qualitative factor spread against all loan categories.
The first test includes establishment of a minimum allocation percentage for each loan (primarily commercial) based upon its loan grade. The second test involves computing the actual loss experience over the last five years for each of the loan categories (primarily consumer and residential real estate loans). The factor applied to the current outstanding loan balances of these loan categories is equal to at least the five-year average of net charge-offs to average loans for the appropriate loan portfolio.
Economic conditions or other factors may warrant a qualitative factor be applied to all loan categories. Management declared that such a factor be instituted for 2001 and 2000. A review of the regional trends show insured financial institutions experienced increasing levels of past due and non-accrual loans relative to the prior five year average. The factor applied to current loan outstandings reflects the net percentage change in the past due and non-accruing financial institution experience applied to the Mason State Bank factor.
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, 2001 and 2000.
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:
The following table summarizes time deposits in amounts of $100,000 or more by time remaining until maturity as of December 31, 2001:
As of December 31, 2001 the registrant had no foreign deposits.
VI. Return on Equity and Assets
The following table presents the ratios for the year ended December 31:
VII. Short Term Borrowings -- Not applicable
Item 2.
Item 2. Properties
The Bank owns the land on which the Main Office is located. The parcel measures 85' by 170' and bears the municipal address of 322 South Jefferson Street, Mason, Michigan. The permanent building, also owned by Mason State Bank, has approximately 6,800 square feet and includes banking facilities, storage and personnel lounge areas. This brick structure was built in the mid 1800's and has undergone several remodelings, the most recent of which was completed in 2001. The building is in generally good condition. A parking area with spaces to accommodate 20 vehicles occupies part of the property; also on site are three drive-in banking stations which operate via remote monitors located within the banking facility.
The Bank also owns the land used as a Branch office. The land measures 368' by 297' and bears the municipal address of 661 North Cedar Street, Mason, Michigan. The permanent building, built in the 1960's, also owned by Mason State Bank, measures approximately 2,400 square feet, including banking facilities, storage and personnel lounge areas. This building is also in good
Item 2. Properties (continued)
condition. A parking area with spaces to accommodate 24 vehicles occupies part of the property; part is occupied by 4 drive-in banking stations.
In October 1998, the Bank established an in-store branch located within the Felpausch Food Center, 810 W. Bellevue Street, Leslie, Michigan. The Bank entered into a lease arrangement and occupies 709 square feet of the southeast corner of the store. Prior to occupancy, this space was renovated to provide full service banking accommodations. Customer parking is readily available and maintained by Felpausch Food Center.
The Registrant operates its business at the same address as Mason State Bank's main office. As of February 6, 2002, the Registrant owned no properties.
Item 3.
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.
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, 2001.
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 Vice President, Controller and Cashier of Mason State Bank.
PART II I. The information required by this item appears in the Capital Directions, Inc. Annual Report to Shareholders for the year ended December 31, 2001, and is incorporated herein by reference, as follows:
PART III
Item 10. Directors and Executive Officers of the Registrant as of December 31,
(1) Includes service as a director of the Company's wholly-owned subsidiary, Mason State Bank (the "Bank"). The Company was organized in 1988 to act, inter alia, as a holding company for Mason State Bank, and the Bank's directors became directors of the Company. (2) Includes shares owned by or jointly with spouse, or minor child, or other relative residing in same household, or as trustee. (3) Less than one percent.
Reference is made to Additional Item -- Executive Officers under Part I, Item 4, of this Form 10-K report on page 11.
Part III (continued)
Item 11. Executive Compensation
Each director of the Company is entitled to receive an annual retainer of $7,899. In lieu of payment of director fees, certain directors have elected to participate in a deferred compensation plan adopted in 1986. The plan was closed to new participants May 18, 1996. Douglas W. Dancer, Marvin B. Oesterle, and George A. Sullivan elected to participate in the plan which provides for retirement and death benefits to be paid to the participating directors or their beneficiaries over fifteen years. Deferred director fees are used to purchase life insurance policies of which the Bank is the owner and beneficiary. These life insurance policies are structured to fully fund the Bank's obligation under the terms of the plan.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation paid by the Company and its subsidiaries during the fiscal year ended December 31, 2001 to the Company's Chief Executive Officer. There were no executive officers, other than the CEO, whose combined salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
(1) Includes director's fees of $7,595 for 2001; $7,303 for 2000; and $7,022 for 1999.
(2) The amounts shown represent the number of shares covered by stock options granted under the Capital Directions, Inc. Incentive Stock Option Plan as more fully described in the Option Grants in Last Fiscal Year table set forth on the following page.
(3) "All Other Compensation" is comprised of the following items: The Bank is accustomed to awarding a longevity bonus to all employees based on their salary and length of service at five year increments. Mr. Gaylord received an award of $1,196 for ten years of service in 2001. The Bank entered into a lease agreement on a vehicle for Mr. Gaylord's use. The income benefit to Mr. Gaylord was $4,388 for 2001 and $2,628 for 2000. A contribution by the Bank for Mr. Gaylord's benefit to the Bank's 401(k) Plan for $9,771 for 2001; $8,975 for 2000; and $8,300 for 1999.
Part III (continued)
The following table presents information about stock options granted to the named executive officer during 2001 under the Capital Directions, Inc. Incentive Stock Option Plan (the "Stock Option Plan").
(1) The amounts shown are shares of the Company's Common Stock covered by options granted under the Stock Option Plan. The vesting of Stock Options does not start until two years from the date of grant, February 15, 2001. The options vest over 3 years, with one-third of the covered shares becoming part of the exercisable portion each of the three years.
(2) The potential realizable value is reported net of the option exercise price, but before income taxes associated with exercise. These amounts represent assumed annual compounded rates of appreciation of five percent and ten percent from the date of grant to the end of the option. Actual gains, if any, on stock option exercises are dependent on the future performance of the Company's Common Stock, overall stock market conditions, and the optionees' continued employment through the vesting period. The amounts reflected in this table may not necessarily be achieved.
The following table presents the number of shares covered by, and the value of, unexercised options held by the named executive officer at December 31, 2001. Nine hundred (900) options were exercised by the named executive officer during 2001.
(1) On March 18, 1999, the Company's Board of Directors, with the consent of each grantee, voted to rescind all outstanding SARs, which had been previously granted under the Company's Incentive Stock Option Plan.
(2) The value shown is based upon the market bid price at December 31, 2001 of $39.42 net of the option exercise price.
Part III (continued)
EMPLOYMENT AGREEMENT
The Company has entered into an agreement with Mr. Gaylord relating to his employment by the Company and the Bank. This agreement is summarized below. This summary is not intended to be complete and is qualified in its entirety by reference to the agreement.
The agreement among Mr. Gaylord, the Company, and the Bank (the "Agreement") provides that Mr. Gaylord will be employed by the Company and the Bank as their President and Chief Executive Officer. The Agreement was automatically renewed in 2001 for a one-year period ending September 30, 2002 and is subject to automatic renewals of one-year periods unless terminated in accordance with the Agreement. The Agreement provided an annual salary rate in 1995 of $85,000, subject to adjustment by the Board of Directors in subsequent years during the term of the Agreement. During 2001 Mr. Gaylord's salary was $119,919. Mr. Gaylord is also entitled to customary employee benefits and perquisites. The Agreement provides that in the event of a change in control of the Company or the Bank, if Mr. Gaylord's employment is involuntarily terminated, or if Mr. Gaylord's status and compensation are reduced without cause within one year of the change in control, Mr. Gaylord shall be entitled to payment of an amount equal to his annual salary. The Agreement provides that the Company and the Bank may terminate Mr. Gaylord's employment at any time for cause without further obligation to compensate Mr. Gaylord. The Agreement broadly defines cause to generally include, among other things, misfeasance, malfeasance, and nonfeasance of Mr. Gaylord's duties and breach of the Agreement. The Agreement further provides that Mr. Gaylord shall not, for a period of one year after Mr. Gaylord's last day of employment, provide financial services or otherwise compete with the business of the Company and the Bank in the City of Mason, Michigan and a three mile radius surrounding it. Further, Mr. Gaylord shall not during that one year period solicit customers of the Bank and its affiliates or solicit for hire any then current Bank or Company employees or contact them for the purpose of inducing them to leave the Bank or Company. The Agreement also requires Mr. Gaylord to maintain the confidentiality of certain information and trade secrets of the Company and the Bank following the termination of his employment.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of March 1, 2002, as to the Common Stock beneficially owned by each person known by the Company to be the beneficial owner of more than five percent (5%) of the Common Stock:
(1) Total of shares owned by both the June M. Oesterle Trust of which June M. Oesterle is the sole Trustee and the Lyle M. Oesterle Trust of which Lyle M. Oesterle, spouse of June M. Oesterle, is sole Trustee.
Part III (continued)
In addition, reference is made to Directors -- under Part III, Item 10, of this Form 10-K report on page 13.
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were customers of, and had transactions with, subsidiaries of the Company in the ordinary course of business during 2001. All loans and commitments included in such transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.
The information appearing in Note 4 on page 19 of the Notes to Consolidated Financial Statements of the 2001 Annual Report to Shareholders is incorporated by reference in response to this item.
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 2001 Annual Report to Shareholders for the year ended December 31, 2001, are incorporated herein by reference in Item 8: