<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, 1999 Commission file number 33-20417
---------------------- -----------
Capital Directions, Inc.
-----------------------------------------------------
(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
--------------
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 30, 1999 the registrant had outstanding 596,622 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
PART I - FINANCIAL INFORMATION Number
<S> <C>
Item 1. Consolidated Balance Sheets
September 30, 1999 and December 31, 1998..................................... 1
Consolidated Statement of Income for the three and nine month
periods ended September 30, 1999 and 1998.................................... 2
Consolidated Statement of Cash Flows for the nine month
periods ended September 30, 1999 and 1998.................................... 3
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 1999................................. 4
Notes to Interim Consolidated Financial Statements........................... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 6-11
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
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and non interest bearing deposits $ 3,144 $ 2,695
Interest bearing deposits 15 26
Federal funds sold 100 600
--------- --------
Total cash and cash equivalents 3,259 3,321
Securities available for sale 10,619 5,320
Securities held to maturity (fair value of $6,484
as of December 31, 1998) - 6,276
Federal Home Loan Bank (FHLB) stock 975 787
--------- --------
Total investment securities 11,594 12,383
Loans:
Commercial and agricultural 4,956 5,547
Installment 3,393 3,368
Real estate mortgages 78,912 73,000
--------- --------
Total loans 87,261 81,915
Allowance for loan losses (1,040) (1,011)
--------- ---------
Net loans 86,221 80,904
Premises and equipment, net 777 784
Accrued income and other assets 3,294 2,837
--------- ---------
Total assets $ 105,145 $ 100,229
========= =========
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Non interest bearing $ 10,392 $ 10,288
Interest bearing 62,558 62,101
--------- ---------
Total deposits 72,950 72,389
Federal funds purchased - -
Long-term FHLB borrowing 19,005 15,593
Other liabilities 1,566 1,250
--------- ---------
Total liabilities 93,521 89,232
Shareholders' Equity
Common stock: $5 par value, 1,300,000 shares authorized;
596,622 outstanding September 30, 1999 and 595,123
outstanding December 31, 1998 2,983 2,976
Additional paid in capital 2,576 2,561
Retained earnings 6,014 5,418
Net unrealized gains/(losses) on securities available for sale,
net of tax of $26 as of September 30, 1999 and $22 as of
December 31, 1998 51 42
--------- ---------
Total shareholders' equity 11,624 10,997
--------- ---------
Total liabilities and shareholders' equity $ 105,145 $ 100,229
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and fees on loans $ 1,714 $ 1,497 $ 5,052 $ 4,265
Federal funds sold 18 52 30 109
Interest and dividends on investment securities:
Taxable 123 160 372 511
Tax exempt 45 53 154 155
Other interest income 0 1 3 7
-------- --------- --------- ---------
Total interest income 1,900 1,763 5,611 5,047
Interest Expense
Deposits 589 635 1,763 1,870
Short-term borrowings 2 - 17 1
Long-term borrowings 280 186 790 425
-------- --------- --------- ---------
Total interest expense 871 821 2,570 2,296
-------- --------- --------- ---------
Net Interest Income 1,029 942 3,041 2,751
Provision for loan losses 15 (5) 33 (22)
-------- --------- --------- ---------
Net interest income after provision for loan losses 1,014 947 3,008 2,773
Non Interest Income
Service charges on deposit accounts 74 56 206 196
Net gain (loss) on sale of loans - 4 - 3
Net gain (loss) on sale and call of securities - - - (18)
Other income 59 80 216 243
-------- --------- --------- ---------
Total non interest income 133 140 422 424
Non Interest Expense
Salaries and employee benefits 327 345 1,020 1,069
Premises and equipment 75 78 231 233
Other operating expense 183 183 606 537
-------- --------- --------- ---------
Total non interest expense 585 606 1,857 1,839
Income before income tax expense 562 481 1,573 1,358
Income tax expense 172 142 474 396
-------- --------- --------- ---------
Net Income $ 390 $ 339 $ 1,099 $ 962
======== ========= ========= =========
Average common shares outstanding 596,622 595,056 596,053 595,056
Basic earnings per common share 0.65 0.57 1.84 1.62
Diluted earnings per common share 0.66 0.57 1.84 1.61
Dividends per share of common stock, declared 0.28 0.27 0.82 0.69
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
- --------------------------------------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,099 $ 962
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 90 83
Provision for loan losses 33 (22)
Net amortization (accretion) on securities 9 57
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 non-residential loans - (1)
Net gain (loss) on securities - 18
Changes in assets and liabilities:
Accrued interest receivable (115) (71)
Accrued interest payable 11 46
Other assets (346) (244)
Other liabilities 291 237
--------- ---------
Net cash from operating activities 1,072 1,065
Cash Flows From Investing Activities
Securities available for sale:
Purchases (2,627) (6,820)
Maturities, calls and principal payments 3,155 6,320
Securities held to maturity:
Purchases - (1,246)
Maturities, calls and principal payments 265 1,888
Proceeds from sale of non-residential loans - 68
Net change in loans (5,350) (12,816)
Premises and equipment expenditures (83) (127)
--------- ---------
Net cash from investing activities (4,640) (12,733)
Cash Flows From Financing Activities
Net change in deposits 561 4,964
Federal funds purchased - (450)
Proceeds from long-term FHLB borrowings 4,000 11,264
Repayment of long-term FHLB borrowings (588) (86)
Proceeds from shares issued upon exercise of stock options 22 -
Dividends paid (489) (360)
--------- ---------
Net cash from financing activities 3,506 15,332
--------- ---------
Net Change in Cash and Cash Equivalents (62) 3,664
Cash and Cash Equivalents at Beginning of Year 3,321 2,188
--------- ---------
Cash and Cash Equivalents at End of Period $ 3,259 $ 5,852
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest $ 2,559 $ 2,243
Income taxes - federal $ 474 $ 412
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Net
Unrealized
Gain On
Securities Total
Additional Available Share-
Common Paid-In Retained For Sale, Holders'
Stock Capital Earnings Net of Tax Equity
----- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 2,975 $ 2,561 $ 4,652 $ 28 $ 10,216
Net income - - 962 - 962
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $(1) - - - 36 36
---------
Comprehensive income 998
Cash dividends ($.415 per share) (407) (407)
--------- --------- -------- -------- ---------
Balance, September 30, 1998 $ 2,975 $ 2,561 $ 5,207 $ 64 $ 10,807
========= ========= ======== ======== =========
Balance, January 1, 1999 $ 2,976 $ 2,561 $ 5,418 $ 42 $ 10,997
Net income - - 1,099 - 1,099
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $26 - - - 9 9
---------
Comprehensive income 1,108
Issuance of 999 shares of common stock
upon exercise of stock options 7 15 - - 22
Cash dividends ($.84 per share) (503) (503)
--------- --------- -------- -------- ---------
Balance, September 30, 1999 $ 2,983 $ 2,576 $ 6,014 $ 51 $ 11,624
========= ========= ======== ======== =========
</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, 1999 and December
31, 1998, the results of operations and cash flows for the nine month
periods ended September 30, 1999 and 1998, and the changes in
shareholders' equity for the nine month periods ended September 30, 1999
and 1998.
2. The results of operations for the nine months ended September 30, 1999 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 1998, included in the Registrant's 1998 Annual Report.
4. During the second quarter of 1999, the Bank transferred securities from
the held to maturity portfolio to the available for sale portfolio in
accordance with the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. At the date of transfer, these securities had an amortized
cost of $6,010,847 and increased the unrealized gain on securities
available for sale and shareholders' equity by $125,575, net of tax of
$64,689.
5. 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 September 30, 1999, non-performing loans totaled $136,000 or
.15% of total loans. This represents a decrease of $237,000 from the
$373,000 balance at December 31, 1998.
<TABLE>
<CAPTION>
September 30, December 31,
Non-performing loans 1999 1998
-------------------- ---- ----
<S> <C> <C>
Non-accrual $ 118,000 $243,000
90 days or more past due 18,000 130,000
Renegotiated - -
--------- --------
Total $ 136,000 $373,000
========= ========
Non-performing loans as a percent of:
Total loans .16% .46%
Allowance for loan losses 13.08% 36.89%
</TABLE>
5
<PAGE> 8
Analysis of the allowance for loan losses
The following table summarizes changes in the allowance for loan losses
arising from loans charged- off, recoveries on loans previously
charged-off, and addition or reductions to the allowance which have been
charged or credited to expense.
<TABLE>
<CAPTION>
(In thousands) Nine Twelve
Months Months
Ended Ended
Sept. 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,011 $ 1,035
Charge-offs (29) (30)
Recoveries 25 29
--------- --------
Net charge-offs (4) (1)
Additions (reductions) to allowance
for loan losses 33 (23)
--------- --------
Balance at end of period $ 1,040 $ 1,011
========= ========
Average loans outstanding during the period $ 85,886 $ 69,172
========= ========
Loans outstanding at end of period $ 87,261 $ 81,915
========= ========
Allowance as a percent of:
Total loans at end of period 1.19% 1.23%
========= ========
Non-performing loans at end of period 764.71% 271.05%
========= ========
Net charge-offs as a percent of:
Average loans outstanding .00% .00%
======== ========
Allowance for loan losses .38% .10%
======== ========
</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.
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.
6
<PAGE> 9
Financial condition (In thousands)
Assets totaled $105,145 at September 30, 1999. The 4.9% increase of $4,916
from $100,229 at December 31, 1998 resulted primarily from continued strong
growth in mortgage lending. This growth was supported largely by an
increase in interest bearing deposits.
Cash and cash equivalents have decreased $62 or 1.87% in the nine month
period from December 31, 1998 to September 30, 1999. This is a result of
reducing excess available funds which are normally sold as an overnight
investment of federal funds.
Total outstanding loans have increased $5,346 during the first nine months
of 1999. This is an increase of 6.53% from December 31, 1998. The majority
of this growth has been in the residential real estate portfolio. All new
loans booked in 1999 have been held within the loan portfolio. As
additional demand for real estate lending is realized, management may
consider selling newly issued loans on the secondary market.
The allowance for loan losses increased $29 or 2.87% during the nine month
period ending September 30, 1999. At September 30, 1999 the allowance as a
percent of outstanding loans was 1.19% compared to 1.23% at December 31,
1998. Management continues to maintain the allowance for loan losses at a
level considered appropriate to absorb losses inherent in the portfolio.
Total deposits as of September 30, 1999 compared to year-end 1998 increased
$561 or 0.77%. The largest portion of this increase was concentrated in
interest bearing accounts. Average total deposits have increased $4,753 or
7.01% since year-end 1998.
Total shareholders' equity increased $627 or 5.70% in the first nine months
of 1999. Net income of $1,099, stock transactions from the exercise of
options of $22 and net unrealized gains on available for sale securities of
$9 have increased shareholders' equity, while dividends of $503 reduced
shareholders' equity. Book value per share was $19.50 at September 30, 1999
compared to $18.48 at December 31, 1998.
Results of operations (In thousands)
For the third quarter of 1999 and 1998, net income totaled $390 and $339,
respectively. During the nine month periods of 1999 and 1998, net income
totaled $1,099 and $962, respectively. The increases in earnings during
these periods are principally the result of increases in net interest
income. These increases in revenue were partially offset by increases in
non interest expense, the provision for loan losses and income tax expense.
Basic earnings per share for the year to date were $1.84, and diluted
earnings per share were $1.84, compared to $1.62, and $1.61 for the same
period in 1998. For the third quarter of 1999 basic earnings per share were
$0.65, and diluted earnings per share were $0.66, compared to $0.57 and
$0.57 for the same period of 1998. Average earning assets increased to
$98,268 or 17.73% from September 30, 1998 to September 30, 1999. The
average yield on earning assets decreased to 7.76% for the period ended
September 30, 1999 from 8.22% for the comparable period in 1998. Average
costs for rate related liabilities decreased 24 basis points to 3.78% at
September 30, 1999 from 4.02% at September 30, 1998. Net interest margin
decreased to 4.26% for the first nine months of 1999 compared to 4.54% in
the same period of 1998. This is a result of a lower rate environment.
The provision for loan losses was $15 during the third quarter of 1999
compared to $(5) for the same period of 1998. For the nine months ended
September 30, the provision was $33 in 1999 compared to $(22) in 1998. This
increase is consistent with the growth of the loan portfolio.
Non interest income decreased $7 or 0.05% during the third quarter of 1999
when compared to the third quarter of 1998. Decreases in loan servicing
income, investment center income and change in cash value on life insurance
contributed to this decline. Increases in ATM fee income and service
7
<PAGE> 10
charges on deposit accounts partially offset this decline. Non interest
income for the nine month period ended September 30, 1999 decreased $2 or
0.47% when compared to 1998. The 1998 totals included a loss of $18
incurred on investment securities. Decreases in loan servicing income,
investment center income and cash value on life insurance impacted
year-to-date earnings. ATM income and service charges on deposit accounts
partially offset these decreases.
Non interest expense decreased $21 or 3.47% when comparing the third
quarter of 1999 to 1998. Decreased expenses were realized for salaries and
employee benefits. For the nine months ended September 30, 1999 non
interest expense increased $18 or 0.98% compared to the same period in
1998. Salaries and benefits declined $49 or 4.58% as well as marketing
expenses, which declined $4 or 11.76%. Increases were realized in data
processing, consulting fees, telephone and correspondent fees.
The federal income tax provision for the third quarter of 1999 was $172, up
$30 for the same period in 1998. Year-to-date the income tax provision has
increased by $78 or 19.7%. This increase reflects a higher taxable income
for 1999.
Liquidity and interest rate risk
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 demand of borrowers.
Sources of liquidity include federal funds sold, investment security
maturities and principal payments. A net average balance of $1,406,000 in
federal funds sold was maintained during the third quarter of 1999. 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 nine months of 1999,
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, 1999 the securities available for sale were valued at
$10,619,000. 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 third quarter of 1999, the
results of the GAP analysis were within the Bank's policy guidelines. At
September 30, 1999, the percentage of rate sensitive assets to rate
sensitive liabilities within the one-year time horizon was 67%.
The following table shows the Corporation's GAP position as of September
30, 1999. The Corporation has a liability sensitive position of
approximately $14,077,000 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.
8
<PAGE> 11
GAP Measurement (Dollars in thousands)
<TABLE>
<CAPTION>
0-30 31-90 2nd 3rd 4th Annual 1-3 3-5 Over 5
Days Days Quarter Quarter Quarter Total Years Years Years Total
---- ---- ------- ------- ------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
- ------
Loans $ 8,786 $ 2,900 $4,050 $ 4,476 $ 4,010 $ 24,222 $ 11,210 $15,128 $42,849 $ 93,409
Loan repayment
offset - - - - - - - - - -6,148
Allowance for
loan losses - - - - - - - - - -1,040
Investments 1,475 789 226 525 1,131 4,146 3,076 3,879 1,293 12,394
Mortgage-
backed
repayments - - - - - - - - - -800
Short-term
Investments 115 - - - - 115 - - - 115
Other non-
earning assets - - - - - - - - - 7,215
------- ------- ------ -------- -------- -------- -------- -------- ------- --------
Total $10,376 $ 3,689 $4,276 $ 5,001 $ 5,141 $ 28,483 $ 14,286 $ 19,007 $44,142 $105,145
======= ======= ====== ======== ======== ======== ======== ======== ======= ========
Liabilities
Non interest
bearing
deposits $ 387 $ 763 $ 1,254 $ 1,149 $ 1,149 $ 4,702 $ 2,612 $ 2,612 $ 466 $ 10,392
Interest
bearing
deposits 11,116 7,615 5,760 5,975 6,158 36,624 12,951 6,878 6,105 62,558
Federal funds
purchased - - - - - - - - - -
Long-term
FHLB
borrowings - 144 1,090 - - 1,234 863 13,960 2,948 19,005
Other
liabilities - - - - - - - - - 1,566
Capital - - - - - - - - - 11,624
------- ------- ------- -------- -------- -------- -------- -------- ------- ---------
Total $11,503 $ 8,522 $ 8,104 $ 7,124 $ 7,307 $ 42,560 $ 16,426 $ 23,450 $ 9,519 $ 105,145
======= ======= ======= ======== ======== ======== ======== ======== ======= =========
GAP $-1,127 $-4,833 $-3,828 $ -2,123 $ -2,166 $-14,077 $ -2,140 $ -4,443 $34,623
Cumulative
GAP $-1,127 $-5,960 $-9,788 $-11,911 $-14,077 $-14,077 $-16,217 $-20,660 $13,963
GAP ratio 90% 43% 53% 70% 70% 67% 87% 81% 464%
</TABLE>
9
<PAGE> 12
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
$618,000 or 5.64% to $11,573,000 for the first nine months of 1999. This
represents 11.01% of total assets. At September 30, 1998, the similar ratio
of shareholders' equity to total assets was 11.19%. Dividends declared per
common share increased by 21.74% to $.84 per share in 1999 compared to $.69
in 1998.
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, 1999, the Bank
has a "risk-based" total capital to asset ratio of 18.01%. The ratio
exceeds the requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
Capital September 30, 1999
(Dollars in thousands) Risk-based Leverage
<S> <C> <C>
Actual amount $ 12,544 $ 11,504
Actual percentage 18.01% 10.85%
Required amount $ 5,491 $ 4,243
Required percentage 8.00% 4.00%
Excess amount $ 7,053 $ 7,261
</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 1999.
Impact of Year 2000 compliance
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.
Capital Directions, Inc. has been working since 1997 to verify that our
systems are ready for year 2000, or Y2K. A team of Bank professionals meet
on a regular basis to work through the phases of the Bank's Y2K plan and
status updates are made quarterly to the Board of Directors. As outlined in
the plan, the scope of the year 2000 project includes the compliance of all
operating systems and hardware on all platforms in the areas of both
information and non-information technology.
All of our critical systems have been renovated, tested and returned to
production. Throughout 1999 we will continue testing our systems. This will
include participation in industry-wide tests, as well as tests with our
business partners, to verify that information can flow back and forth
between our companies' systems. In addition, we have developed detailed
contingency plans to cope with the unexpected. We fully expect the year
2000 to be business as usual.
We have hosted several Y2K community outreach programs and will continue
throughout 1999. Our desire is to inform customers and consumers not only
as to the Bank's Y2K status; but, also to provide information on the
banking industry as a whole, as well as to provide information to consumers
on such services as power, telecommunications, local government, emergency
services and Y2K fraud awareness.
Capital Directions expects to spend approximately $45,000 associated with
the year 2000; 80% of which can be attributed to salaries. The corporation
earnings have been adequate to handle year 2000
10
<PAGE> 13
Impact of Year 2000 compliance (continued)
expenditures with no delay to other capital expenditures. It is difficult
to predict exact expenses associated with the year 2000 issue and
additional funds may be needed for unknown expenses that may occur.
All customers that have a borrowing or deposit relationship in excess of
$250,000 have been interviewed and an evaluation of their year 2000
preparedness has been completed. All material customers have successfully
completed 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.
No one can predict with absolute certainty the outcome of any event.
However, due to our program, early recognition of the issues and
commitment, customers can be confident that our thorough preparation will
enable our computer systems to continue to meet their financial needs.
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 September
30, 1999.
Item 2. Changes in securities
During the nine months ended September 30, 1999, 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 22,
1999. Information concerning the matters brought to a vote of security
holders is contained in the Company's Proxy Statement and Note of Annual
Meeting of Shareholders held April 22, 1999, 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, 1999.
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, 1999.
11
<PAGE> 14
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, 1999 By: /s/ Timothy Gaylord
---------------- ---------------------------------
Timothy Gaylord
President
Date: November 9, 1999 By: /s/ Lois A. Toth
---------------- -----------------------------------
Lois A. Toth
Treasurer
12
<PAGE> 15
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
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<ARTICLE> 9
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999 THIRD
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
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