<PAGE> 1
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 September 30, 1998 Commission file number 33-20417
--------------------- ------------
Capital Directions, Inc.
------------------------------------------------------
(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
--------------
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 October 27, 1998 the registrant had outstanding 595,056 shares of common
stock having a par value of $5 per share.
<PAGE> 2
CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Balance Sheets
September 30, 1998 and December 31, 1997......................................1
Consolidated Statements of Income for the three and nine month
periods ended September 30, 1998 and 1997.....................................2
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997.....................................3
Consolidated Statements of Changes in
Shareholders' Equity for nine months
ended September 30, 1998......................................................4
Notes to Interim Consolidated Financial Statements..........................5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................7-12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................13
Item 2 Changes in Securities........................................................13
Item 3. Defaults Upon Senior Securities..............................................13
Item 4. Submission of Matters to a Vote of Security Holders .........................13
Item 5. Other Information ...........................................................13
Item 6. Exhibits and Reports on Form 8-K ............................................13
Item 7. Signatures ..................................................................14
Index to Exhibits ...........................................................15
</TABLE>
<PAGE> 3
CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In thousands) September 30, December 31,
1998 1997
---- ----
(Unaudited)
-----------
ASSETS
<S> <C> <C>
Cash and non interest bearing deposits $3,423 $ 2,188
Interest bearing deposits 29 0
Federal funds sold 2,400 0
------- -------
Total cash and cash equivalents 5,852 2,188
Securities available for sale 6,404 6,271
Securities held to maturity (fair value of $7,015 as of
Sept. 30, 1998 and $7,705 as of December 31, 1997)
U.S. Government and agencies 1,996 2,944
State and municipal 4,829 4,539
Federal Home Loan Bank (FHLB) stock 747 364
------- -------
Total securities 13,976 14,118
Loans:
Commercial and agricultural 5,030 4,241
Installment 3,292 3,601
Real estate mortgages 65,754 53,492
Loans held for sale 0 0
------- -------
Total loans 74,076 61,334
Allowance for loan losses (1,006) (1,035)
------- -------
Net loans 73,070 60,299
Premises and equipment, net 662 618
Accrued income and other assets 3,049 2,734
------- -------
Total assets $96,609 $79,957
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest bearing $9,467 $8,322
Interest bearing 59,918 56,099
------- -------
Total deposits 69,385 64,421
Federal funds purchased 0 450
Long-term FHLB borrowings 14,934 3,670
Other liabilities 1,483 1,200
------- -------
Total liabilities 85,802 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 5,207 4,652
Net unrealized gains/(losses) on securities available
for sale, net of tax of $33 as of Sept. 30, 1998 and
$14 as of December 31, 1997 64 28
------- -------
Total shareholders' equity 10,807 10,216
------- -------
Total liabilities and shareholders' equity $96,609 $79,957
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(In thousands, except per share data) Sept. 30, Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
INTEREST AND DIVIDEND INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 1,497 $ 1,300 $ 4,265 $ 3,620
Federal funds sold 52 24 109 59
Securities: Taxable - available for sale 113 144 339 442
Taxable - held to maturity 35 77 143 221
Tax exempt - held to maturity 53 58 155 179
Dividends on FHLB stock 12 7 29 21
Other interest income 1 - 7 2
-------- -------- -------- ---------
Total interest and dividend income 1,763 1,610 5,047 4,544
INTEREST EXPENSE
Deposits 635 617 1,870 1,759
Federal funds purchased - 1 1 10
Long-term FHLB borrowings 186 62 425 144
-------- -------- -------- ---------
Total interest expense 821 680 2,296 1,913
-------- -------- -------- ---------
NET INTEREST INCOME 942 930 2,751 2,631
-------- -------- -------- ---------
Provision for loan losses (5) - (22) -
-------- -------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 947 930 2,773 2,631
NON INTEREST INCOME
Service charges on deposits 56 65 196 193
Net gain (loss) on sale of securities - (18) (18) (13)
Net gain on sales of loans 4 - 3 7
Other income 80 41 243 190
-------- -------- -------- ---------
Total non interest income 140 88 424 377
NON INTEREST EXPENSE
Salaries and employee benefits 345 337 1,069 1,021
Premises and equipment 78 82 233 248
Other operating expense 183 152 537 468
-------- -------- -------- ---------
Total non interest expense 606 571 1,839 1,737
INCOME BEFORE INCOME TAX EXPENSE 481 447 1,358 1,271
INCOME TAX EXPENSE 142 129 396 361
-------- -------- -------- ---------
NET INCOME $ 339 $ 318 $ 962 $ 910
======== ======== ======== =========
AVERAGE COMMON SHARES OUTSTANDING 595,056 594,856 595,056 594,886
BASIC EARNINGS PER COMMON SHARE 0.57 0.53 1.62 1.53
DILUTED EARNINGS PER COMMON SHARE 0.57 0.53 1.61 1.53
DIVIDENDS PER SHARE OF COMMON STOCK, DECLARED 0.27 0.18 0.69 0.51
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Nine Months Ended
(In thousands) September 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 962 $ 910
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 83 77
Provision for loan losses (22) -
Net amortization (accretion) on securities 57 44
Loans originated for sale (1,051) -
Proceeds from loans originated for sale 1,053 -
Net gain on sale of loans originated for sale (2) -
Net gain (loss) on sales of loans (1) (7)
Net gain (loss) on sales of securities 18 13
Changes in assets and liabilities:
Accrued interest receivable (71) (127)
Accrued interest payable 46 19
Other assets (244) (157)
Other liabilities 237 194
------------ ------------
1,065 966
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,820) (1,467)
Maturities and principal payments 4,070 1,960
Call payments 2,250 500
Securities held to maturity:
Purchases (1,246) (180)
Maturities and principal payments 1,888 1,043
Proceeds from sale of non-residential loans 68 182
Net change in loans (12,816) (5,901)
Premises and equipment expenditures (127) (163)
------------ ------------
Net cash from investing activities (12,733) (4,026)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 4,964 (1,215)
Federal funds purchased (450) -
Proceeds from long-term FHLB borrowings 11,264 2,000
Repayment of long-term FHLB borrowings (86) (85)
Proceeds from shares issued upon exercise of stock options 3
Dividends paid (360) (300)
------------ ------------
Net cash from financing activities 15,332 403
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,664 (2,657)
Cash and cash equivalents at beginning of year 2,188 5,477
------------ ------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 5,852 $ 2,820
============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 2,243 $ 1,894
Income taxes - federal $ 412 $ 380
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Accumulated
Other
(In thousands) Common Paid in Retained Comprehensive
Stock Capital Earnings Income Total
-------- ------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,487 $ 2,559 $ 5,319 $ 32 $ 9,397
Net income 910 910
Unrealized gain (loss) on securities 7 7
-----------
Comprehensive income 917
Exercise of stock options 1 2 3
Cash dividends ($ .505 per share) (301) (301)
-------- ------- -------- ------------- -----------
Balance, September 30, 1997 $ 1,488 $ 2,561 $ 5,928 $ 39 $ 10,016
======== ======= ======== ============= ===========
Balance, January 1, 1998 $ 2,975 $ 2,561 $ 4,652 $ 28 $ 10,216
Net income 962 962
Unrealized gain (loss) on securities 36 36
-----------
Comprehensive income 998
Cash dividends ($ .685 per share) (407) (407)
-------- ------- -------- ------------- -----------
Balance, September 30, 1998 $ 2,975 $ 2,561 $ 5,207 $ 64 $ 10,807
======== ======= ======== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
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 September 30, 1998 and December
31, 1997, the results of operations and cash flows for the nine month
periods ended September 30, 1998 and 1997, and the change in shareholders'
equity for the nine month periods ended September 30, 1998 and 1997.
2. The results of operations for the nine months ended September 30, 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 September 30, 1998, non-performing loans totaled $388,000 or
.52% of total loans. This represents an increase of $11,000 from the
$209,000 balance at December 31, 1997.
<TABLE>
<CAPTION>
Sept. 30, December 31,
Non-performing loans 1998 1997
----------------------------- --------- ------------
<S> <C> <C>
Non-accrual $ 45,000 $ 48,000
90 days or more past due 343,000 161,000
Renegotiated --- ---
--------- --------
$ 388,000 $209,000
========= ========
</TABLE>
A loan is considered impaired when full collection of principal and
interest is not expected. There were no impaired loans in the portfolio at
September 30, 1998 or December 31, 1997.
5
<PAGE> 8
5. A summary of the activity in the allowance for loan losses for the nine
months ended September 30, follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---- ----
<S> <C> <C>
Balance - beginning of period $1,035 $1,020
Provision charged to operating period (22) 0
Loans charged-off (29) (1)
Recoveries 22 13
------ ------
Balance, end of period $1,006 $1,032
====== ======
</TABLE>
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 September 30, 1998 increased from December 31, 1997 by
20.83% or $16,652. 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 September 30, 1998 the
allowance was equal to 1.39% of average total loans outstanding, down from
1.69% at December 31, 1997.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1998 totaled $339,000
compared to $318,000 in 1997. Basic earnings per share for the third
quarter of 1998 were $.57 compared to $.53 for the same period in 1997.
Diluted earnings per share were $.57 for 1998 compared to $.53 in 1997. Net
income for the nine months ended September 30, 1998 totaled $962,000
compared to $910,0000 for 1997. Basic earnings per share were $1.62
compared to $1.53 for the same period in 1997. Diluted earnings per share
were $1.61 for 1998 compared to $1.53 in 1997.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net interest income for the first nine months of 1998 increased 4.6% or
$120,000 compared to the same period in 1997. The increase is primarily a
result of strong growth in the real estate mortgage loan portfolio as well
as a decline in the interest rate paid on deposits. Loans grew by
$12,742,000 or 20.8% during the first three-quarters of 1998 compared to an
increase of $5,750,000 or 11.1% for the same period in 1997. Total deposits
increased 7.7% or $4,964,000. This growth was divided between interest
bearing and non interest bearing deposits. Non interest bearing deposits
increased $1,145,000 while interest bearing deposits increased $3,819,000.
Net interest margin for the first nine months of 1998 was 4.53% compared to
4.97% for the same period in 1997. Lower rates, particularly in the
mortgage lending area contributed to the decline in margin.
An increase of $47,000 in non interest income for the first nine months of
1998, compared to the same period in 1997, is due primarily to investment
center earnings of $29,000 over prior year levels as well as increased fee
income from ATM surcharges which was $25,000 over 1997. These items were
partially offset by $5,000 in losses on securities.
Non interest expense for the first nine months of 1998 increased $102,000
compared to the same period in 1997. This is due primarily to increased
salary and benefit expenses as well as increased data processing costs.
The provision for loan losses was reduced $22,000 for the first nine 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 six months of 1998 was
$396,000, up from $361,000 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 $2,663,000 in federal funds
sold was maintained during the first nine months 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. Throughout the first nine months 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 September 30, 1998 the securities available for sale were valued at
$7,151,000. 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.
7
<PAGE> 10
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 September 30, 1998, the percentage of
rate sensitive assets to rate sensitive liabilities within the one-year
time horizon was 96.58%.
The table shows the Bank's GAP position as of September 30, 1998. The Bank
has a liability sensitive position of $1,343 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. Management is continually reviewing its interest
rate risk position and modifying its strategies based on projections to
minimize the impact of future interest rate declines.
8
<PAGE> 11
GAP Measurement
(Dollars in thousands)
<TABLE>
<CAPTION>
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
- ------------------------------ ---- ---- ------- ------- ------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans* $ 11,640 $ 3,737 $ 4,429 $ 5,314 $4,350 $ 29,470 $11,216 $ 13,582 $ 25,947 $ 80,215
Loan repayment offset - - - - - - - - - (6,148)
Allowance for loan losses - - - - - - - - - (1,006)
Federal funds sold 2,400 - - - - 2,400 - - - 2,400
Investments** 2,314 480 225 2,197 883 6,099 3,992 1,331 3,349 14,771
Mortgage-backed repayments - - - - - - - - - (800)
Other non-earning assets - - - - - - - - - 7,003
--------------------------------------------------------------------------------------------------
Total $ 16,354 $ 4,217 $ 4,654 $ 7,511 $5,233 $ 37,969 $15,208 $ 14,913 $ 29,296 $ 96,435
LIABILITIES
- ------------------------------
Non interest bearing deposits 356 703 1,156 1,059 1,059 4,333 2,408 2,408 481 9,630
Interest bearing deposits 10,117 6,193 7,168 5,939 4,833 34,250 13,034 6,734 5,793 59,811
Federal funds purchased - - - - - - - - - -
Long-term FHLB borrowings - 141 88 500 - 729 3,922 10,033 250 14,934
Other liabilities - - - - - - - - - 1,322
Capital - - - - - - - - - 10,738
--------------------------------------------------------------------------------------------------
Total $ 10,473 $ 7,037 $ 8,412 $ 7,498 $5,892 $ 39,312 $19,364 $ 19,175 $ 6,524 $ 96,435
GAP $ 5,881 $(2,820) $(3,758) $ 13 $ (659) $ (1,343) $(4,156) $ (4,262) $ 22,772 $ -
Cumulative GAP 5,881 3,061 (697) (684) (1,343) (1,343) (5,499) (9,761) 13,011 -
GAP Ratio 156.15% 59.93% 55.33% 100.17% 88.82% 96.58% 78.54% 77.77% 449.05% -
</TABLE>
*Incorporates prepayment projections for certain assets which may shorten the
time frame for repricing or maturity compared to contractual runoff.
**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 $591,000 or 5.79% to $10,807,000 at September 30,
1998. This represents 11.19% of total assets. At September 30, 1997, the similar
ratio of shareholders' equity to total assets was 12.78%. The Corporation has a
strong capital position that will continue to meet our needs throughout 1998.
9
<PAGE> 12
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 September 30, 1998, the Bank
had a "risk-based" total capital to asset ratio of 17.96%. The ratio
exceeds the requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
CAPITAL Sept. 30, 1998
(dollars in thousands) Risk-based Leverage
<S> <C> <C>
Actual amount $ 11,475 $ 10,674
Actual percent 17.96% 11.45%
Required amount $ 5,112 $ 3,730
Required percent 8.00% 4.00%
Excess amount $ 6,363 $ 6,944
</TABLE>
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 nine month periods ending
September 30, 1998 and 1997 totaled $396,000 and $361,000 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.
DISCLOSURE OF YEAR 2000 ISSUES AND CONSEQUENCES
The approach of the Year 2000 presents potential problems to businesses
that utilize computer systems in their daily operations. Some computer
systems may not be able to properly interpret dates after December 31,
1999, as they may use only two digits to indicate the year. Thus, a date
using "00" as the year may be recognized as the year 1900 rather than the
year 2000.
Addressing the potential problem related to the year 2000 has been a top
priority at Capital Directions, Inc. since 1997. At that time, a Year 2000
Plan was developed and a committee, consisting of officers and employees
was formed which meets on a regular basis and provides regular reports to
the Board of Directors on the status of the plans implementation.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As outlined in the Plan scope of the Year 2000 project includes ensuring
the compliance of all operating systems and hardware on all platforms in
the areas of both information and non-information technology. The phases of
this project include the assessment phase where we identify all software
and hardware systems we anticipate running as of the Year 2000; the
renovation phase where all systems affected by the Year 2000 issue are
changed either through code enhancement, upgrades or replacements; the
validation phases where all changes made in the renovation phase and
systems certified as Year 2000 compliant are tested to ensure compliance;
and finally, the implementation phase where we continue to monitor the
progress of certified systems through business use.
Capital Directions expects to spend $35,000 associated with the Year 2000;
20% of this amount is attributed to software and hardware upgrades, and 80%
attributed to salaries. To date, 80% of the update costs have been
expensed. The corporation's earnings have been adequate to handle Year 2000
expenditures with no delay to other capital expenditures. It is difficult
to predict exact expenses associated with the Year 200 issue and additional
funds may be needed for unknown expenses that may occur.
We have successfully concluded the assessment phase of the project and
fully expect the renovation of all systems to be complete by the first
quarter of 1999. The validation of systems began in June of this year and
is targeted for completion by June 1999. Our overall target for all phases
of this project is no later than the third quarter of 1999; however, we
expect to have 75% of our mission critical systems compliant by the end of
1998.
The core processing system software is key to the continued operations of
Capital Directions, Inc. The third-party provider of this system was
certified as compliant at the time we entered into an agreement with them.
While this system is certified as compliant, we have continued to perform
numerous validation tests utilizing test dates in the Year 2000, including
leap year. All testing will be complete by April 1999. The mainframe
operating system software Year 2000 upgrade is expected to be installed
prior to year-end 1998. Testing will be complete by the first quarter of
1999. We consider our PC-based loan document processing software to be key
to loan processing. We plan to purchase the Year 2000 upgrade for this
software prior to year-end 1998; testing to be completed by the first
quarter 1999.
PC and network inventories were completed in July of this year. Testing of
both hardware and software was completed at that time. Non-compliant PCs
were either upgraded or replaced and have been retested. Word processing
and spreadsheet software found to be non-compliant will be brought into
compliance once that patch is made available. We expect this to be prior to
year-end 1998. The network was upgraded to a certified Year 2000 compliant
version recently and testing will begin prior to year-end. We fully expect
compliance of all PC-based hardware and software by first quarter of 1999.
Included in the assessment phase of all operating systems was the
inventorying of all environmental, non-information technology systems -
those systems with embedded chips. The third-party vendors to those systems
have all been contacted and to date, no Year 2000 concerns have arisen.
In conjunction with the implementation of the Plan noted above, all
information and non-information systems (hardware, software and
environmental) vendors have been assigned risk factors based on the current
validation status of their service or product, their responsiveness to Year
2000 issues, company history and financial strength. All vendors in this
analysis have been found to be "on target" with their plans and at the
present time we have no known material concerns to report.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
All customers that have a borrowing or deposit relationship in excess of
$250,000 have also been interviewed and an evaluation of their Year 2000
preparedness has been completed. Most material customers are progressing
satisfactory with their Year 2000 plans. The corporation does not expect to
experience credit deterioration due to the Year 2000 issue. The corporation may
face a liquidity risk if the public perceives liquidity risk involved with the
Year 2000 and withdraws funds from the banking system. The Corporation has
established lines of credit to handle this uncertainty.
Despite careful planning, we recognize there may be circumstances beyond our
control that may prohibit us from operating "as usual" after December 31, 1999.
As such, for each mission critical system with the corporation we have developed
contingency plans. These contingency plans will provide us with direction should
any of these systems fail after the Year 2000. Contingency plans will continue
to be revised as testing of each system is completed and implementation takes
place.
12
<PAGE> 15
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 September 30,
1998.
ITEM 2. CHANGES IN SECURITIES
During the nine months ended September 30, 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
The annual meeting of security holders of the Company was held April 23, 1998.
Information concerning the matters brought to a vote of security holders is
contained in the Company's Proxy Statement and Notice of Annual Meeting of
Shareholders held April 23, 1997, as previously filed. There have been no
further matters submitted to a vote of the Registrant's security holders during
the nine months ended September 30, 1998.
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
September 30, 1998.
13
<PAGE> 16
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: November 9, 1998 By: /s/ Timothy Gaylord
---------------- ------------------------------
Timothy Gaylord
President
Date: November 9, 1998 By: /s/ Lois A. Toth
---------------- ------------------------------
Lois A. Toth
Treasurer
14
<PAGE> 17
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
15
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