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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, 1998 Commission file number 33-20417
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Capital Directions, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2781737
- ------------------------------- ---------------------------------------
(State of 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
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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 20, 1997 the registrant had outstanding 595,056 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
Number
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 ......................... 1
Consolidated Statements of Income for the Three Month
Periods ended March 31, 1998 and 1997......................... 2
Consolidated Statements of Cash Flows for the Three Month
Periods ended March 31, 1998 and 1997......................... 3
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months Ended March 31, 1998..................... 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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CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) March 31, December 31,
1998 1997
--------- -----------
(Unaudited)
ASSETS
Cash and non interest bearing deposits $ 2,959 $ 2,188
Federal funds sold 1,250 0
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Total cash and cash equivalents 4,209 2,188
Securities available for sale 6,872 6,271
Securities held to maturity (fair value of $7,016 as of
March 31, 1998 and $7,705 as of December 31, 1997)
U.S. Government and agencies 2,658 2,944
State and municipal 4,149 4,539
Federal Home Loan Bank (FHLB) stock 364 364
------- -------
Total securities 14,043 14,118
Loans:
Commercial and agricultural 3,487 4,241
Installment 3,382 3,601
Real estate mortgages 56,836 53,492
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Total loans 63,705 61,334
Allowance for loan losses (1,034) (1,035)
------- -------
Net loans 62,671 60,299
Premises and equipment, net 617 618
Accrued income and other assets 2,870 2,734
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Total assets $84,410 $79,957
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest bearing $ 8,471 $ 8,322
Interest bearing 57,521 56,099
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Total deposits 65,992 64,421
Federal funds purchased 0 450
Long-term FHLB borrowings 6,684 3,670
Other liabilities 1,324 1,200
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Total liabilities 74,000 69,741
Shareholders' equity
Common stock: $5 par value, 1,300,000 shares
authorized; 595,056 shares outstanding 2,975 2,975
Additional paid in capital 2,561 2,561
Retained earnings 4,843 4,652
Net unrealized gains/(losses) on securities available
for sale, net of tax of $16 as of March 31, 1998 and
$14 as of December 31, 1997 31 28
------- -------
Total shareholders' equity 10,410 10,216
Total liabilities and shareholders equity $84,410 $79,957
======= =======
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31,
(In thousands, except per share data) 1998 1997
---- ----
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 1,361 $ 1,158
Federal funds sold 24 9
Securities: Taxable - available for sale 121 153
Taxable - held to maturity 55 73
Tax exempt - held to maturity 52 64
Dividends on FHLB stock 7 7
Other interest income 0 2
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Total interest and dividend income 1,620 1,466
INTEREST EXPENSE
Deposits 613 566
Federal funds purchased 1 9
Long-term FHLB borrowings 93 29
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Total interest expense 707 604
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Net interest income 913 862
-------- --------
Provision for loan losses (8) 0
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 921 862
NON INTEREST INCOME
Service charges on deposits 68 63
Net gain (loss) on sale and call of securities (13) 7
Net gain on sales of loans 1 7
Other income 65 58
-------- --------
Total non interest income 121 135
NON INTEREST EXPENSE
Salaries and employee benefits 369 343
Premises and equipment 78 83
Other operating expense 170 161
-------- --------
Total non interest expense 617 587
INCOME BEFORE INCOME TAX EXPENSE 425 410
INCOME TAX EXPENSE 122 115
-------- --------
NET INCOME $ 303 $ 295
======== ========
AVERAGE COMMON SHARES OUTSTANDING 595,056 594,856
BASIC EARNINGS PER COMMON SHARE 0.51 0.50
DILUTED EARNINGS PER COMMON SHARE 0.51 0.49
DIVIDENDS PER SHARE OF COMMON STOCK, DECLARED 0.21 0.16
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31,
(In thousands) 1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 303 $ 295
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 28 23
Provision for loan losses (8) -
Net amortization (accretion) on securities 10 18
Net gain (loss) on sales of loans (1) (7)
Net gain (loss) on sales of securities 13 (7)
Changes in assets and liabilities:
Accrued interest receivable (42) (67)
Accrued interest payable 7 (1)
Other assets (94) (86)
Other liabilities 117 155
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Net cash from operating activities 333 323
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (2,444) -
Maturities, call and principal payments 1,834 225
Securities held to maturity:
Purchases - -
Maturities, call and principal payments 675 623
Proceeds from sale of non-residential loans 53 180
Net change in loans (2,425) 113
Premises and equipment expenditures (27) (1)
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Net cash from investing activities (2,334) 1,140
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,571 (4,051)
Federal funds purchased (450) -
Proceeds from long-term FHLB borrowings 3,100 1,000
Repayment of long-term FHLB borrowings (86) (86)
Dividends paid (113) (98)
------- -------
Net cash from financing activities 4,022 (3,235)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,021 (1,772)
Cash and cash equivalents at beginning of year 2,188 5,477
------- -------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 4,209 $ 3,705
======= =======
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 606 $ 605
Income taxes - federal $ 130 $ 124
See accompanying notes to consolidated financial statements.
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CAPITAL DIRECTIONS, INC
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
For the three months ended March 31, 1998 and 1997
Accumulated
Other
Common Paid In Retained Comprehensive
Stock Capital Earning Income Total
----- ------- ------- ------ -----
Balance, January 1, 1997 $ 1,487 $ 2,559 $ 5,319 $ 32 $ 9,397
Net income 295 295
Unrealized gain (loss) on securities, (2) (2)
net of tax --------
Comprehensive income 293
Cash dividends ($ .16 per share) (98) (98)
------- ------- ------- ------ --------
Balance, March 31, 1997 $ 1,487 $ 2,559 $ 5,516 $ 30 $ 9,592
======= ======= ======= ====== ========
Balance, January 1, 1998 $ 2,975 $ 2,561 $ 4,652 $ 28 $ 10,216
Net income 303 303
Unrealized gain (loss) on securities, 3 3
net of tax --------
Comprehensive income 306
Cash dividends ($ .19 per share) (112) (112)
------- ------- ------- ------ --------
Balance, March 31, 1998 $ 2,975 $ 2,561 $ 4,843 $ 31 $ 10,410
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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, 1998 and December 31,
1997, the results of operations and cash flows for the three month periods
ended March 31, 1998 and 1997, and the change in shareholders' equity for
the three month periods ended March 31, 1998 and 1997.
2. The results of operations for the three months ended March 31, 1998 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 1997, included in the Registrant's 1997 Annual Report.
4. Management determines the adequacy of the allowance for loan losses based
on an evaluation of the loan portfolio, recent loss experience, current
economic conditions 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, 1998, non-performing loans totaled $102,000 or .19%
of total loans. This represents a decrease of $89,000 from the $209,000
balance at December 31, 1997.
March 31, December 31,
Non-performing loans 1998 1997
----------------------------- --------- ------------
Non-accrual $ 10,000 $ 48,000
90 days or more past due 99,000 161,000
Renegotiated 11,000 ---
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$ 120,000 $ 209,000
========= =========
The renegotiated loans are in compliance with the modified terms.
A loan is considered impaired when full collection of principal and interest
is not expected. There were no impaired loans in the portfolio at March 31,
1998 or December 31, 1997.
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5. A summary of the activity in the allowance for loan losses for the three
months ended March 31, follows:
(In thousands) 1998 1997
---- ----
Balance - beginning of period $1,035 $1,020
Provision charged to operating period (8) 0
Loans charged-off (1) (1)
Recoveries 8 13
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Balance, end of period $1,034 $1,032
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6. The provision for income taxes represents federal income tax expense
calculated using annualized rates on taxable income generated during the
respective periods.
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.
The discussion should be read in conjunction with those statements.
The company is not aware of any market or institutional trends, events or
circumstances that will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of operations except as
discussed herein.
FINANCIAL CONDITION
Total assets at March 31, 1998 increased from December 31, 1997 by 5.57% or
$4,453. This increase resulted primarily from strong growth in mortgage
lending. This growth was funded largely by an increase in Federal Home Loan
Bank borrowings.
The allowance for loan losses remains strong . At March 31, 1998 the
allowance was equal to 1.65% of average total loans outstanding, down
slightly from 1.69% at December 31, 1997.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1998 totaled $303,000
compared to $295,000 in 1997. Basic earnings per share for 1998 were $.51
compared to $.50 for the same period in 1997. Diluted earnings per share
were $.51 for 1998 compared to $.49 in 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net interest income increased 5.9% or $51,000 compared to 1997. The increase
is primarily a result of growth in the mortgage loan portfolio. Loans grew
by $2,371,000 during the first quarter of 1998 compared to a decline in loan
balances of $274,000 for the same period in 1997.
Net interest margin for the first three months of 1998 was 4.70% compared to
4.94% for the same period in 1997. Lower rates, particularly in the mortgage
lending area contributed to the decline in margin.
A decrease of $14,000 in non interest income for the first three months of
1998, compared to the same period in 1997, is due primarily to a loss of
$13,000 incurred on the sale of a security.
Non interest expense for the first three months of 1998 increased $30,000
compared to the same period in 1997. This is due primarily to increased
salary and benefit expenses as well as increased marketing and data
processing costs.
The provision for loan losses was reduced $8,000 for the first three months
of 1998. This reduction corresponded directly to the recoveries booked thus
far in 1998 and is in response to the previous five consecutive years of net
recoveries. The 1997 provision for the same period was $0.
The federal income tax provision for the first three months of 1998 was
$122,000, up from $115,000 for the same period in 1997. This increase
reflects a higher taxable income for 1998.
LIQUIDITY AND INTEREST RATE SENSITIVITY
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
insures sufficient funds are maintained to meet the cash withdrawal
requirements of depositors and the credit demand of borrowers.
Sources of liquidity include federal funds sold, investment security
maturities and principal payments. A net average balance of $1,805,000 in
federal funds sold was maintained during the first quarter of 1998. 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. In January of 1998, the Bank used this
source of funding to offset new mortgage loan demand. Other sources of
liquidity include internally generated cash flow, repayments and maturities
of loans, borrowing 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, 1998 the securities available for sale were valued at
$6,872,000. It is not anticipated that management will use these funds due
to the optional sources available.
Interest rate sensitivity management seeks to maximize net interest margins
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 handing as "GAP Management". At March 31, 1998, the percentage of rate
sensitive assets to rate sensitive liabilities within the one-year time
horizon was 100.19%.
The table shows the Bank's GAP position as of March 31, 1998. The Bank has
an asset sensitive position of $69,000, which indicates higher 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.
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GAP Measurement
(Dollars in thousands)
Over
0-30 31-90 Second Third Fourth Annual 1 - 3 3 - 5 Five
ASSETS Days Days Quarter Quarter Quarter Total Years Years Years Total
- --------------------------- ---- ----- ------- ------- ------- -------- -------- -------- -------- --------
Loans $10,263 $ 4,241 $ 5,117 $ 5,267 $ 4,522 $ 29,410 $ 10,140 $ 13,599 $ 16,693 $ 69,842
Loan repayment offset - - - - - - - - - (6,148)
Allowance for loan
losses - - - - - - - - - (1,034)
Federal funds sold 1,250 - - - - 1,250 - - - 1,250
Investments(1) 1,082 2,349 1,103 565 225 5,324 4,597 809 4,113 14,843
Mortgage-backed repayments (800)
Other non-earning assets 6,373
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Total $12,595 $ 6,590 $ 6,220 $ 5,832 $ 4,747 $ 35,984 $ 14,737 $ 14,408 $ 20,806 $ 84,326
LIABILITIES
- ---------------------------
Non interest bearing
deposits 314 619 1,017 932 932 3,814 2,119 2,119 424 8,476
Interest bearing
deposits 8,915 6,634 6,289 4,361 5,761 31,960 13,639 6,415 5,506 57,520
Federal funds purchased - - - - - - - - - -
Long-term FHLB
borrowings - - - - 141 141 2,915 3,625 - 6,681
Other liabilities - - - - - - - - - 1,326
Capital - 10,323 10,323
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Total $ 9,229 $ 7,253 $ 7,306 $ 5,293 $ 6,834 $ 35,915 $ 18,673 $ 12,159 $ 16,253 $ 84,326
GAP $ 3,366 $ (663) $(1,086) $ 539 $(2,087) $ 69 $ (3,936) $ 2,249 $ 4,553 $ -
Cumulative GAP 3,366 2,703 1,617 2,156 69 69 (3,867) ( 1,618) 2,935 -
GAP Ratio 136.47% 90.86% 85.14% 110.18% 69.46% 100.19% 78.92% 118.50% 128.01% -
(1) Maturities reflect probable prepayments and calls.
CAPITAL RESOURCES
The Corporation's capital adequacy is reviewed continuously. This ensures both
compliance with regulatory requirements and availability of sufficient capital
to meet current and future funding needs.
Shareholders' equity increased $194,000 or 1.90% to $10,410,000 at March 31,
1998. This represents 12.33% of total assets. At March 31, 1997, the similar
ratio of shareholders' equity to total assets was 12.56%. The Corporation has a
strong capital position that will continue to meet our needs throughout 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED).
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, 1998, the Bank had
a "risk-based" total capital to asset ratio of 19.85%. The ratio exceeds
the requirements established by regulatory agencies as shown below.
CAPITAL March 31, 1998
(dollars in thousands) Risk-based Leverage
---------- --------
Actual amount $ 10,988 $ 10,292
Actual percent 19.85% 12.33%
Required amount $ 4,428 $ 3,339
Required percent 8.00% 4.00%
Excess amount $ 6,560 $ 6,953
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 1998.
FEDERAL INCOME TAXES
The provision for federal income taxes for the three-month periods ending
March 31, 1998 and 1997 totaled $122,000 and $115,000 respectively. The
increase in taxes is reflective of the increase in taxable income for the
above mentioned time periods.
OTHER MATTERS
SFAS No. 128, "Earnings per Share," was issued by the Financial Accounting
Standards Board in 1997. It requires computation of basic earnings per share
based on net income divided by the weighted average of shares outstanding
during the period as well as the computation of diluted earnings per share
which shows the dilutive effect of additional common shares issuable under
stock options. All prior period amounts have been restated to be comparable.
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PART II.
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,
1998.
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 1998, 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, 1998.
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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 5, 1998 By: /s/ Timothy Gaylord
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Timothy Gaylord
President
Date: May 5, 1998 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 Registration Statement No. 33-20417
4 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
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