<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 June 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 July 15, 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
Page
PART I - FINANCIAL INFORMATION Number
Item 1. Consolidated Balance Sheets
June 30, 1999 and December 31, 1998................................ 1
Consolidated Statement of Income for the three and six month
periods ended June 30, 1999 and 1998............................... 2
Consolidated Statement of Cash Flows for the six month
periods ended June 30, 1999 and 1998............................... 3
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 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
<PAGE> 3
PART I - FINANCIAL INFORMATION
CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
June 30, December 31,
1999 1998
----- ----
<S> <C> <C>
(Unaudited)
ASSETS
Cash and non interest bearing deposits $ 2,332 $ 2,695
Interest bearing deposits 40 26
Federal funds sold - 600
--------- ---------
Total cash and cash equivalents 2,372 3,321
Securities available for sale 9,640 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 10,615 12,383
Loans:
Commercial and agricultural 5,448 5,547
Installment 3,399 3,368
Real estate mortgages 78,502 73,000
--------- ---------
Total loans 87,349 81,915
Allowance for loan losses (1,026) (1,011)
--------- ---------
Net loans 86,323 80,904
Premises and equipment, net 755 784
Accrued income and other assets 3,178 2,837
--------- ---------
Total assets $ 103,243 $ 100,229
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non interest bearing $ 10,305 $ 10,288
Interest bearing 59,862 62,101
--------- ---------
Total deposits 70,167 72,389
Federal funds purchased 1,050 -
Long-term FHLB borrowings 19,005 15,593
Other liabilities 1,575 1,250
--------- ---------
Total liabilities 91,797 89,232
SHAREHOLDERS' EQUITY
Common stock: $5 par value, 1,300,000 shares authorized;
596,622 outstanding June 30, 1999 and 595,123 outstanding
December 31, 1998 2,983 2,976
Additional paid in capital 2,576 2,561
Retained earnings 5,798 5,418
Net unrealized gains/(losses) on securities available for sale,
net of tax of $46 as of June 30, 1999 and $22 as of
December 31, 1998 89 42
--------- ---------
Total shareholders' equity 11,446 10,997
--------- ---------
Total liabilities and shareholders' equity $ 103,243 $ 100,229
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and fees on loans $ 1,695 $ 1,407 $ 3,338 $ 2,768
Federal funds sold 6 33 12 57
Interest and dividends on investment securities:
Taxable 120 168 249 351
Tax exempt 53 50 109 102
Other interest income 2 6 3 6
--------- --------- --------- ---------
Total interest income 1,876 1,664 3,711 3,284
Interest Expense
Deposits 576 622 1,174 1,235
Short-term borrowings 11 - 15 1
Long-term borrowings 276 146 510 239
--------- --------- --------- ---------
Total interest expense 863 768 1,699 1,475
--------- --------- --------- ---------
Net Interest Income 1,013 896 2,012 1,809
Provision for loan losses 9 (9) 18 (17)
--------- --------- --------- ---------
Net interest income after provision for loan losses 1,004 905 1,994 1,826
Non Interest Income
Service charges on deposit accounts 70 72 132 140
Net gain (loss) on sale of loans - (2) - (1)
Net gain (loss) on sale and call of securities - (5) - (18)
Other income 83 98 157 163
--------- --------- --------- ---------
Total non interest income 153 163 289 284
Non Interest Expense
Salaries and employee benefits 342 355 693 724
Premises and equipment 76 77 156 155
Other operating expense 228 184 423 354
--------- --------- --------- ---------
Total non interest expense 646 616 1,272 1,233
Income before income tax expense 511 452 1,011 877
Income tax expense 154 132 302 254
--------- --------- --------- ---------
Net Income $ 357 $ 320 $ 709 $ 623
========= ========= ========= =========
Average common shares outstanding 596,127 595,056 595,772 595,056
Basic earnings per common share 0.60 0.54 1.19 1.05
Diluted earnings per common share 0.59 0.53 1.18 1.04
Dividends per share of common stock, declared 0.28 0.23 0.55 0.42
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 709 $ 623
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 61 61
Provision for loan losses 18 (17)
Net amortization (accretion) on securities 19 18
Net gain (loss) on sales of non-residential loans - 1
Net gain (loss) on securities - 18
Changes in assets and liabilities:
Accrued interest receivable (53) 32
Accrued interest payable 10 (27)
Other assets (316) (251)
Other liabilities 308 231
-------- --------
Net cash from operating activities 756 689
Cash flows from investing activities
Securities available for sale:
Purchases (1,277) (4,693)
Maturities, calls and principal payments 2,836 3,713
Securities held to maturity:
Maturities, calls and principal payments 265 1,223
Proceeds from sale of non-residential loans - 68
Net change in loans (5,437) (7,594)
Premises and equipment expenditures (32) (41)
-------- --------
Net cash from investing activities (3,645) (7,324)
Cash flows from financing activities
Net change in deposits (2,222) 7,761
Federal funds purchased 1,050 (450)
Proceeds from long-term FHLB borrowings 4,000 8,350
Repayment of long-term FHLB borrowings (588) (86)
Proceeds from shares issued upon exercise of stock options 22 -
Dividends paid (322) (247)
-------- --------
Net cash from financing activities 1,940 15,328
-------- --------
Net change in cash and cash equivalents (949) 8,693
Cash and cash equivalents at beginning of year 3,321 2,188
-------- --------
Cash and cash equivalents at end of period $ 2,372 $ 10,881
======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 1,688 $ 1,503
Income taxes - federal $ 301 269
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For the six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
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 - - 623 - 623
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $(1) - - - (2) (2)
--------
Comprehensive income 621
Cash dividends ($.415 per share) (246) (246)
-------- -------- -------- -------- --------
Balance, June 30, 1998 $ 2,975 $ 2,561 $ 5,029 $ 26 $ 10,591
======== ======== ======== ======== ========
Balance, January 1, 1999 $ 2,976 $ 2,561 $ 5,418 $ 42 $ 10,997
Net income - - 709 - 709
Other comprehensive income, net:
Net change in unrealized gain on
securities available for sale, net of
tax of $24 - - - 47 47
--------
Comprehensive income 756
Issuance of 999 shares of common stock
upon exercise of stock options 7 15 - - 22
Cash dividends ($.55 per share) (329) (329)
-------- -------- -------- -------- --------
Balance, June 30, 1999 $ 2,983 $ 2,576 $ 5,798 $ 89 $ 11,446
======== ======== ======== ======== ========
</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 June 30, 1999 and December 31, 1998, the
results of operations and cash flows for the six month periods ended June 30,
1999 and 1998, and the changes in shareholders' equity for the six month
periods ended June 30, 1999 and 1998.
2. The results of operations for the six months ended June 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 June 30, 1999,
non-performing loans totaled $36,000 or .04% of total loans. This represents
a decrease of $337,000 from the $373,000 balance at December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
Non-performing loans 1999 1998
-------------------- ---- ----
<S> <C> <C>
Non-accrual $ 34,000 $243,000
90 days or more past due 2,000 130,000
Renegotiated - -
-------- --------
Total $ 36,000 $373,000
======== ========
Non-performing loans as a percent of:
Total loans .04% .46%
Allowance for loan losses 3.51% 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) Six Twelve
Months Months
Ended Ended
June 30, December 31
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,011 $ 1,035
Charge-offs (24) (30)
Recoveries 21 29
-------- --------
Net charge-offs (3) (1)
Additions (reductions) to allowance
for loan losses 18 (23)
-------- --------
Balance at end of period $ 1,026 $ 1,011
======== ========
Average loans outstanding during the period $ 84,988 $ 69,172
======== ========
Loans outstanding at end of period $ 87,349 $ 81,915
======== ========
Allowance as a percent of:
Total loans at end of period 1.17% 1.23%
======== ========
Non-performing loans at end of period 2,850.00% 271.05%
======== ========
Net charge-offs as a percent of:
Average loans outstanding .00% .00%
======== ========
Allowance for loan losses .29% .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 $103,243 at June 30, 1999. The 3.0% increase of $3,014 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 Federal Home Loan Bank borrowings.
Cash and cash equivalents have decreased $949 or 28.58% in the six month
period from December 31, 1998 to June 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 $5,434 during the first six months
of 1999. This is an increase of 6.63% 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 $15 or 1.48% during the six month
period ending June 30, 1999. At June 30, 1999 the allowance as a percent of
outstanding loans was 1.17% 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 June 30, 1999 compared to year-end 1998 decreased
$2,222 or 3.07%. The largest portion of this decline was concentrated in
interest bearing accounts. Average total deposits have increased $3,985 or
5.88% since year-end 1998.
Total shareholders' equity increased $449 or 4.01% in the first six months
of 1999. Net income of $709, stock transactions from the exercise of
options of $22 and net unrealized gains on available for sale securities of
$47 have increased shareholders' equity, while dividends of $329 reduced
shareholders' equity. Book value per share was $19.21 at June 30, 1999
compared to $18.48 at December 31, 1998.
Results of Operations (In thousands)
For the second quarter of 1999 and 1998 net income totaled $357 and $320,
respectively. During the six month periods of 1999 and 1998, net income
totaled $709 and $623, 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 $1.19, and diluted
earnings per share were $1.18, compared to $1.05, and $1.04 for the same
period in 1998. For the second quarter of 1999 basic earnings per share
were $0.60, and diluted earnings per share were $0.59, compared to $0.54
and $0.53 for the same period of 1998. Average earning assets increased to
$97,387 or 20.40% from June 30, 1998 to June 30, 1999. The average yield on
earning assets decreased to 7.86% for the period ended June 30, 1999 from
8.31% for the comparable period in 1998. Average costs for rate related
liabilities decreased 22 basis points to 3.81% at June 30, 1999 from 4.03%
at June 30, 1998. Net interest margin decreased to 4.30% for the first six
months of 1999 compared to 4.63% in the same period of 1998. This is a
result of a lower rate environment.
The provision for loan losses was $9 during the second quarter of 1999
compared to $(9) for the same period of 1998. For the six months ended June
30, the provision was $18 in 1999 compared to $(17) in 1998. This increase
is consistent with the growth of the loan portfolio.
Non interest income decreased $10 or 6.13% during the second quarter of
1999 when compared to the second quarter of 1998. Decreases in loan
servicing income, investment center income, service charge income and
change in cash value on life insurance contributed to this decline.
Increases in ATM fee income partially offset this decline. Non interest
income for the six month period ended June 30, 1999
7
<PAGE> 10
increased $5 or 1.76% when compared to 1998. The 1998 totals included a
loss of $18 incurred on investment securities. Decreases in loan servicing
income, investment center income, cash value on life insurance and deposit
service charges impacted year-to-date earnings. ATM income partially offset
these decreases.
Non interest expense increased $30 or 4.87% when comparing the second
quarter of 1999 to 1998. Most of this increase is a result of increased
data processing costs, consulting fees and correspondent service charges.
Decreased expenses were realized for salaries and employee benefits. For
the six months ended June 30, 1999 non interest expense increased $39 or
3.16% compared to the same period in 1998. Salaries and benefits declined
$31 or 4.47% as well as marketing expenses, which declined $9 or 36%.
Increases were realized in data processing, consulting fees, supplies and
correspondent fees.
The federal income tax provision for the second quarter of 1999 was $154,
up from $22 for the same period in 1998. Year-to-date the income tax
provision has increased by $48 or 18.9%. 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 $497,000 in
federal funds sold was maintained during the second 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 six 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 June 30, 1999 the securities available for sale were valued at
$9,640,000. 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 second quarter of 1999,
the results of the GAP analysis were within the Bank's policy guidelines.
At June 30, 1999, the percentage of rate sensitive assets to rate sensitive
liabilities within the one-year time horizon was 75%.
The following table shows the Corporation's GAP position as of June 30,
1999. The Corporation has a liability sensitive position of approximately
$10,064,000 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
<TABLE>
<CAPTION>
GAP Measurement (Dollars in thousands)
0-30 31-90 2nd 3rd 4th Annual 1-3 3-5 Over 5
Days Days Quarter Quarter Quarter Total Years Years Years Total
---- ---- ------- ------- ------- ----- ----- ----- ----- -----
Assets
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 9,179 $3,558 $5,144 $3,725 $4,954 $26,560 $11,139 $14,340 $41,458 $93,497
Loan repayment
offset - - - - - - - - - -6,148
Allowance for
loan losses - - - - - - - - - -1,026
Investments 1,436 220 965 225 1,140 3,986 2,934 1,861 2,634 11,415
Mortgage-
backed
repayments - - - - - - - - - -800
Short-term
Investments 40 - - - - 40 - - - 40
Other non-
earning assets - - - - - - - - - 6,265
------- ------ ------ ------- ------- ------- ------ ------ ------- --------
Total $10,655 $3,778 $6,109 $ 3,950 $ 6,094 $30,586 $14,073 $16,201 $44,092 $ 103,243
======= ====== ====== ======= ======= ======= ======= ======= ======= =========
Liabilities
Non interest
bearing
deposits $ 384 $ 757 $1,244 $ 1,140 $ 1,140 $ 4,665 $2,592 $2,592 $ 456 $ 10,305
Interest
bearing
deposits 7,868 8,868 6,169 5,419 5,378 33,702 13,314 6,848 5,998 59,862
Federal funds
purchased 1,050 - - - - 1,050 - - - 1,050
Long-term
FHLB
borrowings - - 144 1,089 - 1,233 863 13,961 2,948 19,005
Other
liabilities - - - - - - - - - 1,575
Capital - - - - - - - - - 11,446
------- ------ ------ ------- ------- ------- ------ ------ ------- ---------
Total $ 9,302 $9,625 $7,557 $ 7,648 $ 6,518 $40,650 $16,769 $23,401 $ 9,402 $ 103,243
======= ====== ====== ======= ======= ======= ======= ======= ======= =========
GAP $ 1,353 $-5,847 $-1,448 $-3,698 $ -424 $-10,064 $-2,696 $-7,200 $34,690
Cumulative
GAP $ 1,353 $-4,494 $-5,942 $-9,640 $-10,064 $-10,064 $-12,760 $-19,960 $14,730
GAP ratio 115% 39% 81% 52% 93% 75% 84% 69% 469%
</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
$402,000 or 3.67% to $11,357,000 for the first six months of 1999. This
represents 11.00% of total assets. At June 30, 1998, the similar ratio of
shareholders' equity to total assets was 10.93%. Dividends declared per
common share increased by 30.95% to $.55 per share in 1999 compared to $.42
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 June 30, 1999, the Bank has a
"risk-based" total capital to asset ratio of 17.62%. The ratio exceeds the
requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
Capital June 30, 1999
(Dollars in thousands) Risk-based Leverage
<S> <C> <C>
Actual amount $12,309 $11,283
Actual percentage 17.62% 10.86%
Required amount $ 5,514 $ 4,157
Required percentage 8.00% 4.00%
Excess amount $ 6,795 $ 7,126
</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 are making good
progress on 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 June 30,
1999.
Item 2. Changes in securities
During the six months ended June 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 six months ended June 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
June 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: August 9, 1999 By: /s/ Timothy Gaylord
-------------- ---------------------------------
Timothy Gaylord
President
Date: August 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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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1999 SECOND
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<FISCAL-YEAR-END> DEC-31-1999
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