1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
Of The Securities Exchange Act of 1934
For the quarter ended March 31, 2000 Commission file number 33-20417
-------------------- -----------------
Capital Directions, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2781737
- ------------------------------- --------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number)
incorporation or organization)
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
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None
---------------------------------------------
Former name, former address and former fiscal
year, if changed since last report
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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
----- -----
As of April 27, 2000 the registrant had outstanding 598,056 shares of common
stock having a par value of $5 per share.
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CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q
Page
PART I - FINANCIAL INFORMATION Number
------
Item 1. Consolidated Balance Sheets
March 31, 2000 and December 31, 1999......................................... 1
Consolidated Statements of Income for the Three Month
Periods ended March 31, 2000 and 1999........................................ 2
Consolidated Statements of Cash Flows for the Three Month
Periods ended March 31, 2000 and 1999........................................ 3
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months ended March 31, 2000.................................... 4
Notes to Interim Consolidated Financial Statements........................... 5-6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 6-10
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................................ 11
Item 2 Changes in Securities........................................................ 11
Item 3 Defaults Upon Senior Securities.............................................. 11
Item 4 Submission of Matters to a Vote of Security Holders.......................... 11
Item 5 Other Information............................................................ 11
Item 6 Exhibits and Reports on Form 8-K............................................. 11
Item 7 Signatures................................................................... 12
Index to Exhibits............................................................ 13
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PART I - FINANCIAL INFORMATION
CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
March 31, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
Cash and non interest bearing deposits $ 2,310 $ 3,097
Interest bearing deposits 14 54
Federal funds sold 250 -
--------- --------
Total cash and cash equivalents 2,574 3,151
Securities available for sale 10,057 9,751
Federal Home Loan Bank (FHLB) stock 1,014 975
--------- --------
Total investment securities 11,071 10,726
Loans:
Commercial and agricultural 4,796 5,268
Installment 4,529 4,574
Real estate mortgages 78,702 79,270
--------- --------
Total loans 88,027 89,112
Allowance for loan losses (1,062) (1,055)
--------- ---------
Net loans 86,965 88,057
Premises and equipment, net 748 768
Accrued income and other assets 2,997 3,011
--------- ---------
Total assets $ 104,355 $ 105,713
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non interest bearing $ 9,680 $ 8,884
Interest bearing 60,934 63,146
--------- ---------
Total deposits 70,614 72,030
Federal funds purchased - 1,700
Long-term FHLB borrowings 20,271 18,861
Other liabilities 1,436 1,294
--------- ---------
Total liabilities 92,321 93,885
SHAREHOLDERS' EQUITY
Common stock: $5 par value, 1,300,000 shares authorized;
598,056 outstanding March 31, 2000 and 596,622 outstanding
December 31, 1999 2,990 2,983
Additional paid in capital 2,590 2,576
Retained earnings 6,448 6,236
Accumulated other comprehensive income,
net of tax of $3 as of March 31, 2000 and $17 as of
December 31, 1999 6 33
--------- ---------
Total shareholders' equity 12,034 11,828
--------- ---------
Total liabilities and shareholders' equity $ 104,355 $ 105,713
========= =========
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) Three Months Ended
March 31,
2000 1999
---- ----
Interest and Dividend Income
Interest and fees on loans $ 1,766 $ 1,643
Federal funds sold 5 6
Interest and dividends on investment securities:
Taxable 125 129
Tax exempt 43 56
Other interest income 1 1
--------- ---------
Total interest income 1,940 1,835
Interest Expense
Deposits 596 598
Short term borrowings 9 4
Long-term borrowings 285 234
--------- ---------
Total interest expense 890 836
--------- ---------
Net Interest Income 1,050 999
Provision for loan losses 6 9
--------- ---------
Net interest income after provision for loan losses 1,044 990
Non Interest Income
Service charges on deposit accounts 70 62
Other operating income 91 74
--------- ---------
Total non interest income 161 136
Non Interest Expense
Salaries and employee benefits 374 351
Premises and equipment 78 80
Other operating expense 189 195
--------- ---------
Total non interest expense 641 626
Income before income tax expense 564 500
Income tax expense 173 148
--------- ---------
Net Income $ 391 $ 352
========= =========
Average common shares outstanding 597,112 595,412
Basic earnings per common share 0.66 0.59
Diluted earnings per common share 0.65 0.59
Dividends per share of common stock, declared 0.30 0.27
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------------------------
(In thousands) Three Months Ended
March 31,
2000 1999
---- ----
Cash flows from operating activities
Net income $ 391 $ 352
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 28 30
Provision for loan losses 6 9
Net amortization (accretion) on securities 1 9
Changes in assets and liabilities:
Accrued interest receivable (16) (129)
Accrued interest payable 2 25
Other assets 44 (170)
Other liabilities 140 183
--------- ---------
Net cash from operating activities 596 309
Cash flows from investing activities
Securities available for sale:
Purchases (536) (88)
Maturities, calls and principal payments 149 87
Securities held to maturity:
Maturities, calls and principal payments - 265
Proceeds from sale of non-residential loans - -
Net change in loans 1,086 (2,966)
Premises and equipment expenditures (8) (10)
--------- ---------
Net cash from investing activities 691 (2,712)
Cash flows from financing activities
Net change in deposits (1,416) (1,409)
Federal funds purchased (1,700) 1,200
Proceeds from long-term FHLB borrowings 2,500 2,000
Repayment of long-term FHLB borrowings (1,090) (88)
Proceeds from shares issued upon exercise of stock options 21 16
Dividends paid (179) (161)
--------- ---------
Net cash from financing activities (1,864) 1,558
---------- ---------
Net change in cash and cash equivalents (577) (845)
Cash and cash equivalents at beginning of year 3,151 3,321
--------- ---------
Cash and cash equivalents at March 31 $ 2,574 $ 2,476
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 888 $ 810
Income taxes - federal $ 176 168
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited) For the three months ended March 31, 2000 and 1999
- ---------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
Accumulated
Other Total
Additional Comprehensive Share-
Common Paid-In Retained Income, Holders'
Stock Capital Earnings Net of Tax Equity
----- ------- -------- ---------- ------
Balance, January 1, 1999 $ 2,976 $ 2,561 $ 5,418 $ 42 $ 10,997
Net income - - 352 - 352
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $(4) - - - (8) (8)
---------
Comprehensive income 344
Issuance of 999 shares of common stock
upon exercise of stock options 5 11 - - 16
Cash dividends ($.27 per share) (161) (161)
--------- --------- -------- -------- ---------
Balance, March 31, 1999 $ 2,981 $ 2,572 $ 5,609 $ 34 $ 11,196
========= ========= ======== ======== =========
Balance, January 1, 2000 $ 2,983 $ 2,576 $ 6,236 $ 33 $ 11,828
Net income - - 391 - 391
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $(14) - - - (27) (27)
---------
Comprehensive income 364
Issuance of 1,434 shares of common stock
upon exercise of stock options 7 14 - - 21
Cash dividends ($.30 per share) (179) (179)
--------- --------- -------- -------- ---------
Balance, March 31, 2000 $ 2,990 $ 2,590 $ 6,448 $ 6 $ 12,034
========= ========= ======== ======== =========
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management of the Registrant, the accompanying
Consolidated Financial Statements contain all adjustments (consisting only
of normal recurring items) necessary to present fairly the consolidated
financial position of the Registrant as of March 31, 2000 and December 31,
1999, the results of operations and cash flows for the three month periods
ended March 31, 2000 and 1999, and the changes in shareholders' equity for
the three month periods ended March 31, 2000 and 1999.
2. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the full
year.
3. The accompanying unaudited Consolidated Financial Statements and the notes
thereto should be read in conjunction with the Notes to Consolidated
Financial Statements and the notes included therein, for the fiscal year
end 1999, included in the Registrant's 1999 Annual Report on Form 10-K.
4. Management determines the adequacy of the allowance for loan losses based
on an evaluation of the loan portfolio, recent loss experience, historical
performance, current economic conditions, current analyses of asset
quality and other pertinent factors. 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 March 31, 2000, non-performing loans totaled $194,000 or .22%
of total loans. This represents a decrease of $144,000 from the $338,000
balance at December 31, 1999.
March 31, December 31,
Non-performing loans 2000 1999
-------------------- ---- ----
Non-accrual $ 26,000 $ 32,000
90 days or more past due 168,000 306,000
Renegotiated - -
--------- --------
Total $ 194,000 $338,000
========= ========
Non-performing loans as a percent of:
Total loans .22% .38%
Allowance for loan losses 18.27% 32.04%
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Note 4. Analysis of the allowance for loan losses (continued)
The following table summarizes changes in the allowance for loan losses
arising from loans charged off, recoveries on loans previously
charged-off, and additions or reductions to the allowance which have been
charged or credited to expense.
(Dollars in thousands) Three Twelve
Months Months
Ended Ended
March 31, December 31,
2000 1999
---- ----
Balance at beginning of period $ 1,055 $ 1,011
Charge-offs (3) (37)
Recoveries 4 33
--------- --------
Net (charge-offs) recoveries 1 (4)
Additions (reductions) to allowance
for loan losses 6 48
--------- --------
Balance at end of period $ 1,062 $ 1,055
========= ========
Average loans outstanding during the period $ 88,651 $ 86,397
========= ========
Loans outstanding at end of period $ 88,027 $ 89,112
========= ========
Allowance as a percent of:
Total loans at end of period 1.21% 1.18%
======== ========
Non-performing loans at end of period 547.42% 312.13%
======== ========
Net charge-offs as a percent of:
Average loans outstanding .00% .00%
======== ========
Allowance for loan losses (.09)% .38%
========= =========
Item 2. Management's discussion and analysis of financial condition and results
of operations
The following discussion and analysis of financial condition and results of
operations provides additional information to assess the Consolidated
Financial Statements of the Registrant and its wholly-owned subsidiaries.
Capital Directions, Inc. is a one-bank holding company which 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 Company and its subsidiaries provide banking and financial
services in the banking industry. Substantially all revenue and services
are derived from banking products and services. The Bank's primary services
include accepting retail deposits and making residential, consumer and
commercial loans.
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 results of operations except as
discussed herein.
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9
Financial Condition (In thousands)
During the first quarter of 2000, the assets of the corporation decreased
$1,358 or 1.3% from December 31, 1999. This decrease resulted primarily
from reduced loan demand and lower cash supplies.
Cash and cash equivalents have decreased $577 or 18.31% in the three-month
period from December 31, 1999 to March 31, 2000. This is a result of
reducing excess cash, which was held in the event of Y2K customer needs.
Total outstanding loans have decreased $1,085 during the first quarter of
2000. This is a decrease of 1.22% from December 31, 1999. This decline has
been divided between the residential real estate portfolio as well as the
commercial loan portfolio. All new loans booked in 2000 have been held
within the loan portfolio.
The allowance for loan losses increased $7 or .66% during the three month
period ending March 31, 2000. At March 31, 2000 the allowance as a percent
of outstanding loans was 1.21% compared to 1.18% at December 31, 1999.
Management continues to maintain the allowance for loan losses at a level
considered appropriate to absorb losses inherent in the portfolio.
Total deposits have decreased $1,416 or 1.97% during the first quarter of
2000. This decline was concentrated in interest bearing accounts and was
largely the result of a withdrawal of public funds for a building project.
Total shareholders' equity increased $206 or 1.74% in the first quarter of
2000. Net income of $391 and stock issued from the exercise of options of
$21 have increased shareholders' equity, while dividends of $179 and net
unrealized losses on available for sale securities of $27 reduced
shareholders' equity. Book value per share was $20.12 at March 31, 2000
compared to $19.82 at December 31, 1999.
Results of Operations (In thousands)
For the first quarter of 2000, net income was $391, basic earnings per
share was $.66, and diluted earnings per share was $.65, compared to $352,
$.59, and $.59 for the same period in 1999. Average earning assets
increased to $99,966 or 4.19% from March 31, 1999 to March 31, 2000. The
average yield on earning assets increased to 7.90% for the quarter ended
March 31, 2000 from 7.87% for the comparable time period in 1999. Average
costs for rate related liabilities increased four basis points to 4.32% at
March 31, 2000 from 4.28% at March 31, 1999. Net interest margin decreased
to 4.32% for the first three months of 2000 compared to 4.35% in the same
period of 1999. This is a result of the rising rate environment. The
Corporation is experiencing a declining margin as liabilities have repriced
at a faster pace than assets.
The provision for loan losses was $6 during the first three months of 2000
compared to $9 for the same period of 1999. This decrease is consistent
with the balance decline experienced in the loan portfolio.
Non interest income increased $25 or 18.38% during the first quarter of
2000 when compared to the first quarter of 1999. Of this increase, 32% is
attributable to new fees for products and service charges which has
resulted in greater service charge income. The majority of the remaining
increase coming in increased customer investment commissions.
Non interest expense increased $15 or 2.40% when comparing the first
quarter of 2000 to the first quarter of 1999. Most of this increase is a
result of increased personnel costs as we continue to see increasing costs
associated with health services, as well as marketing expenses to produce
updated product brochures, which are partially offset by declining costs
for premises/equipment and supplies.
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10
Results of Operations (in thousands)
The Federal income tax provision for the first three months of 2000 was
$173, up from $148 for the same period in 1999. This increase reflects a
higher taxable income for 2000.
Liquidity and interest rate risk (in thousands)
The primary objective of asset/liability management is to assure the
maintenance of adequate liquidity and maximize net interest income by
maintaining appropriate maturities and balances between interest sensitive
earning assets and interest bearing liabilities. Liquidity management
ensures 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 principal payments. A net average balance of $399 in federal
funds sold was maintained during the first quarter of 2000. As a member of
the Federal Home Loan Bank system, the Bank has access to an alternate
funding source, lower cost for credit services, and an additional tool to
manage interest rate risk. During the first quarter of 2000, the Bank used
this source of funding to offset security purchases to be used as
collateral for public deposits. Other sources of liquidity include
internally generated cash flow, repayments and maturities of loans,
borrowings and normal deposit growth. The primary source of funds for the
parent company is the upstream of dividends from the Bank. Management
believes these sources of liquidity are sufficient for the Bank and parent
company to continue current business plans.
At March 31, 2000 the securities available for sale were valued at $10,057.
It is not anticipated that management will use these funds due to the
optional sources that may be available.
Interest rate sensitivity management seeks to maximize net interest margin
through periods of changing interest rates. The Bank develops strategies to
assure 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 in addition to
managing deposit accounts and maturities in the investment portfolio. The
following table, 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 "GAP" and
its handling as "GAP Management". Throughout the first quarter of 2000, the
results of the GAP analysis were within the Bank's policy guidelines. At
March 31, 2000, the percentage of rate sensitive assets to rate sensitive
liabilities within the one-year time horizon was 33%.
The following table shows the Corporation's GAP position as of March 31,
2000. The Corporation has a liability sensitive position of approximately
$42,798 within the one-year time frame, which indicates higher net interest
income may be earned if rates decrease during the period. Due to the
limitations of GAP analysis, modeling is also used to enhance measurement
and control.
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GAP Measurement (Dollars in thousands)
0-30 31-90 2nd 3rd 4th Annual 1-3 3-5 Over 5
Days Days Quarter Quarter Quarter Total Years Years Years Total
---- ---- ------- ------- ------- ----- ----- ----- ----- -----
Assets
- ------
Loans $ 5,931 $ 3,095 $ 2,249 $ 3,315 $ 1,652 $16,242 $ 14,480 $ 14,566 $42,739 $ 88,027
Allowance for
loan losses - - - - - - - - - -1,062
Investments 1,641 634 418 589 1,022 4,304 3,681 1,966 1,120 11,071
Short-term
Investments 264 - - - - 264 - - - 264
Other non-
earning assets - - - - - - - - - 6,055
------- ------- -------- -------- ------- ------- -------- -------- ------- ---------
Total $ 7,836 $ 3,729 $ 2,667 $ 3,904 $ 2,674 $20,810 $ 18,161 $ 16,532 $43,859 $ 104,355
======= ======= ======== ======== ======= ======= ======== ======== ======= =========
Liabilities
Non interest
bearing
deposits $ 9,680 $ - $ - $ - $ - $ 9,680 $ - $ - $ - $ 9,680
Interest
bearing
deposits 36,016 3,551 4,776 3,487 3,374 51,204 8,140 1,443 147 60,934
Long-term
FHLB
borrowings 1,000 - - 132 1,592 2,724 4,575 10,050 2,922 20,271
Other
liabilities - - - - - - - - - 1,436
Capital - - - - - - - - - 12,034
------- -------- -------- -------- -------- -------- -------- -------- ------- ---------
Total $ 46,696 $ 3,551 $ 4,776 $ 3,619 $ 4,966 $ 63,608 $ 12,715 $ 11,493 $ 3,069 $ 104,355
======== ======== ======== ======== ======== ======== ======== ======== ======= =========
GAP $-38,860 $ 178 $ -2,109 $ 285 $ -2,292 $-42,798 $ 5,446 $ 5,039 $40,790
Cumulative
GAP $-38,860 $-38,682 $-40,791 $-40,506 $-42,798 $-42,798 $-37,352 $-32,313 $ 8,477
GAP ratio 17% 105% 56% 108% 54% 33% 143% 144% 1429%
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Capital Resources
The Corporation's capital adequacy is reviewed continuously 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
$233,000 or 1.98% to $12,028,000 for the first quarter of 2000. This
represents 11.53% of total assets. At December 31, 1999, the similar ratio
of shareholders' equity to total assets was 11.16%. Dividends declared per
common share increased by 11.11% to $.30 per share in 2000 compared to $.27
in 1999.
Regulators established "risk-based" capital guidelines that became
effective December 31, 1990. Under the guidelines, minimum capital levels
are established for risk-based and total assets based on perceived risk in
asset categories and certain off-balance sheet items, such as loan
commitments and standby letters of credit. On March 31, 2000, the Bank has
a "risk-based" total capital to asset ratio of 18.29%. The ratio exceeds
the requirements established by regulatory agencies as shown below.
Capital March 31, 2000
(Dollars in thousands) Risk-based Leverage
Actual amount $ 12,825 $ 11,946
Actual percentage 18.29% 11.36%
Required amount $ 5,609 $ 4,207
Required percentage 8.00% 4.00%
Excess amount $ 7,216 $ 7,739
Bank management does not perceive that future rate changes or inflation
will have a material impact on capital adequacy. It is the opinion of
management that capital and shareholders' equity is adequate and will
continue to be so throughout 2000.
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Part II - Other Information
Item 1. Legal proceedings
The Corporation is not involved in any material pending legal proceedings
to which the Registrant or its subsidiaries is a party or 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 as of and for the period ended March 31,
2000.
Item 2. Changes in securities
During the three months ended March 31, 2000, there weren't any changes in
the Registrant's securities, relevant to the requirements of this section,
that would cause any shareholder's rights to be materially modified,
limited or qualified.
Item 3. Defaults upon senior securities
No defaults have occurred involving senior securities on the part of the
Registrant.
Item 4. Submission of matters to a vote of security holders
No matters have been submitted to a vote of the Registrant's security
holders.
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
1. Exhibits required by Item 601 of Regulation S-K See Index to
Exhibits on page 13.
2. Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 2000.
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SIGNATURES
Pursuant to the requirements 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.
CAPITAL DIRECTIONS, INC.
Date: May 8, 2000 By: /s/ Timothy Gaylord
----------- ---------------------------------
Timothy Gaylord
President
Date: May 8, 2000 By: /s/ Lois A. Toth
----------- ------------------------------------
Lois A. Toth
Treasurer
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Index to Exhibits
The following exhibits are filed or incorporated by reference as part of this
report:
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession - Consolidation Agreement included in Amendment No. 1 to Form
S-4 Registrant Statement No. 33-20417
3 Instruments Defining the Rights of Security Holders, Including
Debentures - Not applicable
11 Statement Regarding Computation of Per Share Earnings - Not applicable
15 Letter Regarding Unaudited Interim Financial Information - Not
applicable
18 Letter Regarding Change in Accounting Principals - Not applicable
19 Previous Unfiled Documents - Not applicable
20 Report Furnished to Security Holders - Not applicable
23 Published Report Regarding Matters Submitted to Vote of Security Holders
- Not applicable
24 Consents of Experts and Counsel - Not applicable
25 Power of Attorney - Not applicable
27 Financial Data Schedule (filed herewith)
28 Additional Exhibits - Not applicable
13