<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, 2000 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 27, 2000 the registrant had outstanding 598,056 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
PART I - FINANCIAL INFORMATION Number
------------------------------ ------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999................................... 1
Consolidated Statements of Income for the Three and Nine Month
Periods ended September 30, 2000 and 1999.................................. 2
Consolidated Statements of Cash Flows for the Nine Month
Periods ended September 30, 2000 and 1999.................................. 3
Consolidated Statements of Comprehensive Income
for the Three and Nine Month Periods ended September 30, 2000 and 1999..... 4
Notes to Interim Consolidated Financial Statements......................... 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 9-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 14
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings......................................................... 14
Item 2. Changes in Securities and Use of Proceeds................................. 14
Item 3. Defaults Upon Senior Securities .......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
Item 5. Other Information......................................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................................... 15
Signatures................................................................. 16
Index to Exhibits.......................................................... 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Cash and non interest bearing deposits $ 4,732 $ 3,097
Interest bearing deposits 31 54
Federal funds sold 3,350 -
--------- --------
Total cash and cash equivalents 8,113 3,151
Securities available for sale 11,141 9,751
Federal Home Loan Bank (FHLB) stock 1,174 975
--------- --------
Total investment securities 12,315 10,726
Loans:
Commercial and agricultural 5,638 5,268
Installment 4,018 4,574
Real estate mortgages 77,832 79,270
---------- --------
Total loans 87,488 89,112
Allowance for loan losses (1,068) (1,055)
--------- ---------
Net loans 86,420 88,057
Premises and equipment, net 782 768
Accrued income and other assets 3,075 3,011
--------- ---------
Total assets $ 110,705 $ 105,713
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non interest bearing $ 10,384 $ 8,884
Interest bearing 62,896 63,146
--------- ---------
Total deposits 73,280 72,030
Federal funds purchased - 1,700
Long-term FHLB borrowings 23,471 18,861
Other liabilities 1,412 1,294
--------- ---------
Total liabilities 98,163 93,885
SHAREHOLDERS' EQUITY
Common stock: $5 par value, 1,300,000 shares authorized;
598,056 outstanding at September 30, 2000 and 596,622
outstanding at December 31, 1999 2,990 2,983
Additional paid in capital 2,590 2,576
Retained earnings 6,917 6,236
Accumulated other comprehensive income,
net of tax of $23 as of September 30, 2000 and $17 as of
December 31, 1999 45 33
--------- ---------
Total shareholders' equity 12,542 11,828
--------- ---------
Total liabilities and shareholders' equity $ 110,705 $ 105,713
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
-------------------------------------------------------------------------
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and Dividend Income
Interest and fees on loans $ 1,779 $ 1,714 $ 5,306 $ 5,052
Federal funds sold 28 18 55 30
Interest and dividends on investment securities:
Taxable 154 123 415 372
Tax exempt 41 45 127 154
Other interest income - - 1 3
-------- -------- --------- --------
Total interest income 2,002 1,900 5,904 5,611
Interest Expense
Deposits 644 589 1,847 1,763
Short-term borrowings - 2 13 17
Long-term borrowings 322 280 908 790
-------- -------- --------- --------
Total interest expense 966 871 2,768 2,570
-------- --------- --------- --------
Net Interest Income 1,036 1,029 3,136 3,041
Provision for loan losses - 15 6 33
-------- -------- --------- --------
Net interest income after provision for loan losses 1,036 1,014 3,130 3,008
Non Interest Income
Service charges on deposit accounts 85 74 244 206
Other income 112 59 340 216
-------- -------- --------- --------
Total non interest income 197 133 584 422
Non Interest Expense
Salaries and employee benefits 351 327 1,106 1,020
Premises and equipment 79 75 229 231
Other operating expense 182 183 602 606
-------- -------- --------- --------
Total non interest expense 612 585 1,937 1,857
Income before income tax expense 621 562 1,777 1,573
Income tax expense 193 172 540 474
-------- -------- --------- --------
Net Income $ 428 $ 390 $ 1,237 $ 1,099
======== ======== ========= ========
Average common shares outstanding 598,056 596,622 597,742 596,058
Basic earnings per common share $ 0.72 $ 0.65 $ 2.07 $ 1.84
Diluted earnings per common share $ 0.71 $ 0.65 $ 2.05 $ 1.83
Dividends per share of common stock, declared $ 0.32 $ 0.29 $ 0.93 $ 0.84
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
.....................................................................................................
(In thousands) Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 1,237 $ 1,099
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 85 90
Provision for loan losses 6 33
Net amortization (accretion) on securities 1 9
Changes in assets and liabilities:
Accrued interest receivable (133) (115)
Accrued interest payable 37 11
Other assets 63 (346)
Other liabilities 64 291
--------- ---------
Net cash from operating activities 1,360 1,072
Cash flows from investing activities
Securities available for sale:
Purchases (3,083) (2,439)
Maturities, calls and principal payments 1,710 3,155
Securities held to maturity:
Maturities, calls and principal payments - 265
Purchase of FHLB stock (199) (188)
Net change in loans 1,631 (5,350)
Premises and equipment expenditures (99) (83)
--------- ---------
Net cash from investing activities (40) (4,640)
Cash flows from financing activities
Net change in deposits 1,250 561
Federal funds purchased (1,700) -
Proceeds from long-term FHLB borrowings 5,700 4,000
Repayment of long-term FHLB borrowings (1,090) (588)
Proceeds from shares issued upon exercise of stock options 21 22
Dividends paid (539) (489)
--------- ---------
Net cash from financing activities 3,642 3,506
--------- ---------
Net change in cash and cash equivalents 4,962 (62)
Cash and cash equivalents at beginning of year 3,151 3,321
--------- ---------
Cash and cash equivalents at September 30 $ 8,113 $ 3,259
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 2,731 $ 2,559
Income taxes - federal $ 542 $ 474
Transfer from securities held to maturity to securities
available for sale $ - $ 6,011
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 428 $ 390 $1,237 $1,099
Other comprehensive income (loss),
net of tax
Unrealized holding gains (losses)
on securities available for sale
arising during period 46 (59) 18 (177)
Unrealized gain on securities
transferred from held to maturity
to available for sale - - - 190
Tax effects (16) 20 (6) (4)
------- ------- ------ ------
Other comprehensive income (loss) 30 (39) 12 9
------- ------- ------ ------
Comprehensive income $ 458 $ 351 $1,249 $1,108
======= ======= ====== ======
</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, 2000 and December
31, 1999, the results of operations for the three and nine month periods
ended September 30, 2000 and 1999, and the cash flows for the nine month
periods ended September 30, 2000 and 1999.
2. The results of operations for the nine months ended September 30, 2000 are
not necessarily indicative of the results to be expected for the full
year.
3. The accompanying unaudited Consolidated Financial Statements and the notes
thereto should be read in conjunction with the Notes to Consolidated
Financial Statements and the notes included therein, for the fiscal
year-end 1999, included in the Registrant's 1999 Annual Report on Form
10-K.
4. New Accounting Standards
Under Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Investments and Hedging Activities, all
derivative instruments are recorded at their fair market values. If
derivative instruments are designated as hedges of fair values, both the
change in the fair value of the hedge and the hedged item are included in
current earnings. Fair value adjustments related to cash flow hedges are
recorded in other comprehensive income or loss and reclassified to
earnings when the hedged transactions are reflected in earnings.
Ineffective portions of hedges are reflected in income currently. As of
April 1, 1999, the Company adopted SFAS No. 133, later amended by SFAS No.
137 and SFAS No. 138, and, in accordance with its provisions, chose to
reclassify certain securities from held-to-maturity to available-for-sale.
The amortized cost of the securities transferred to available-for-sale was
$6,011,000 and the net unrealized gain was $190,000. Shareholder's equity
increased by $125,000, net of income tax of $65,000, as a result of the
transfer. The Company does not have derivative instruments in its
portfolio to account for under provisions of this statement.
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, 2000, non-performing loans totaled $122,000 or
.14% of total loans. This represents a decrease of $216,000 from the
$338,000 balance at December 31, 1999.
<TABLE>
<CAPTION>
September 30, December 31,
Non-performing loans 2000 1999
-------------------- ---- ----
<S> <C> <C>
Non-accrual $ 15,000 $ 32,000
90 days or more past due 107,000 306,000
Renegotiated - -
-------- --------
Total $122,000 $338,000
======== ========
Non-performing loans as a percent of:
Total loans .14% .38%
Allowance for loan losses 11.42% 32.04%
</TABLE>
5
<PAGE> 8
Note 5. Analysis of the allowance for loan losses (continued)
The following table summarizes changes in the allowance for loan losses arising
from loans charged-off, recoveries on loans previously charged-off, and
additions to the allowance which have been charged to expense.
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Twelve
Months Months
Ended Ended
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Balance at beginning of period $ 1,055 $ 1,011
Charge-offs (10) (37)
Recoveries 17 33
--------- --------
Net (charge-offs) recoveries 7 (4)
Additions to allowance for
loan losses 6 48
--------- --------
Balance at end of period $ 1,068 $ 1,055
========= ========
Average loans outstanding during the period $ 87,679 $ 86,397
========= ========
Loans outstanding at end of period $ 87,488 $ 89,112
========= ========
Allowance as a percent of:
Total loans at end of period 1.22% 1.18%
========= ========
Non-performing loans at end of period 875.41% 312.13%
========= ========
Net charge-offs (recoveries) as a percent of:
Average loans outstanding (.01)% .00%
========= ========
Allowance for loan losses (.66)% .38%
========= ========
</TABLE>
6
<PAGE> 9
Note 6. Earnings per share
6. A reconciliation of basic and diluted earnings per share for the three
month and nine month periods ending September 30 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Three months ended Nine months ended
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share
Net income $ 428 $ 390 $ 1,237 $ 1,099
========= =========== ========== ==========
Shares outstanding 598,056 596,622 597,742 596,058
======= ======= ======= =======
Per share amount .72 .65 2.07 1.84
=== === ==== ====
Diluted earnings per share
Net income $ 428 $ 390 $ 1,237 $ 1,099
========= =========== ========== ==========
Shares outstanding 598,056 596,622 597,742 596,058
======= ======= ======= =======
Effect of dilutive securities-
Stock options 5,088 5,646 5,397 5,236
---------- ----------- -------- ---------
603,144 602,268 603,139 601,294
======= ======= ======= =======
Per share amount .71 .65 2.05 1.83
=== === ==== ====
</TABLE>
Note 7. Stock Option Plan
7. Options to buy common stock are granted to officers and other key
employees under a Stock Option Plan which provides for the issuance of up
to 40,000 shares of common stock. The plan provides for stock options to
be granted at prices that approximate the fair value of the stock at the
respective dates of grant. The vesting of stock options does not start
until two years from the date of the grant. After two years, the options
will vest evenly over a three year period. The plan terminates on May 20,
2003. All shares and per share amounts have been restated for stock
splits.
7
<PAGE> 10
A summary of activity in the plan is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Fair
Available Average Value of
For Options Exercise Options
Grant Outstanding Price Granted
------------ ------------ --------- ----------
<S> <C> <C> <C> <C>
Balance at
January 1, 1999 24,933 14,800 $ 21.64
Granted (5,133) 5,133 35.88 $ 3.17
Exercised - (1,499) 15.10
Forfeited 662 (662) 33.94
------------ ------------ ---------
Balance
December 31, 1999 20,462 17,772 25.85
Granted (4,000) 4,000 41.50 6.26
Exercised - (1,434) 14.34
Forfeited 1,131 (1,131) 29.44
------------ ------------ ---------
Balance
September 30, 2000 17,593 19,207 $ 29.75
============ ============ =========
</TABLE>
For the options outstanding at September 30, 2000, the range of exercise
prices was $12.75 to $41.50 per share with a weighted average remaining
contractual term of 7.37 years. At September 30, 2000, 7,401 stock options
were exercisable at a weighted average price of $20.28 per share. Had
compensation cost for stock options been measured using SFAS No. 123, net
income and earnings per share would have been the pro forma amounts
indicated below for the nine months ended September 30, 2000 and 1999. The
pro forma effect may increase in the future if more options are granted
(in thousands, except per share data).
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net income
As reported $ 1,237 $ 1,099
Pro forma 1,230 1,090
Basic and diluted income
per share
As reported basic $ 2.07 $ 1.84
Pro forma basic 2.06 1.83
As reported diluted 2.05 1.83
Pro forma diluted 2.04 1.81
</TABLE>
The pro forma effects are computed with option pricing models using the
following weighted average assumptions as of the grant date.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Risk-free interest rate 6.76% 5.07%
Expected option life 5 years 5 years
Expected stock price volatility 6.40% 6.28%
Expected dividend yield 3.04% 3.37%
</TABLE>
8
<PAGE> 11
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.
Financial Condition (In thousands)
Assets totaled $110,705 at September 30, 2000. The 4.72% increase of $4,992
from $105,713 at December 31, 1999 resulted from an increase in Federal
funds sold, which were $0 at year-end, and investment securities, which
were funded by an increase in Federal Home Loan Bank borrowings.
Cash and cash equivalents have increased $4,962 or 157.47% in the nine
month period from December 31, 1999 to September 30, 2000. This is a result
of the sale of excess fed funds and a larger than usual cash letter
clearings position.
Total outstanding loans have decreased $1,624 during the first nine months
of 2000. This is a decrease of 1.82% from December 31, 1999. This decline
has been divided between the residential real estate portfolio and the
installment loan portfolio, while the commercial and agricultural loan
portfolio has grown slightly. Rising interest rates have resulted in a
slowing of loan demand particularly in the residential real estate
portfolio. All new loans booked in 2000 have been held within the loan
portfolio.
The allowance for loan losses increased $13 or 1.23% during the nine month
period ending September 30, 2000. At September 30, 2000 the allowance as a
percent of outstanding loans was 1.22% compared to 1.18% at December 31,
1999. Management continues to maintain the allowance for loan losses at a
level considered appropriate to absorb losses inherent in the portfolio.
Total deposits as of September 30, 2000 compared to year-end 1999 increased
by $1,250 or 1.74%. This growth was realized in non interest bearing
deposits, which increased $1,500 or 16.88% over year-end 1999, while
interest bearing deposits decreased slightly. The increase in non interest
bearing deposits resulted from end of quarter deposits by public fund
entities.
Federal Home Loan Bank borrowings increased by $4,610 or 24.44% in the
first nine months of 2000. Attractive interest rates on these borrowings
made it possible for the Bank to purchase securities, which provided
approximately 100 basis points in additional net interest margin. In
addition, a portion of the new borrowings was used after the end of the
quarter to repay outstanding borrowings with higher interest rates.
Total shareholders' equity increased $714 or 6.04% in the first nine months
of 2000. Net income of $1,237, stock transactions from the exercise of
options of $21and a change of $12 in net unrealized gains on available for
sale securities, net of tax have increased shareholders' equity, while
dividends declared of $556 reduced shareholders' equity. Book value per
share was $20.97 at September 30, 2000 compared to $19.82 at December 31,
1999.
9
<PAGE> 12
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)
Results of Operations (In thousands)
For the third quarter of 2000, net income was $428, basic earnings per share was
$.72, and diluted earnings per share was $.71, compared to $390, $.65 and $.65
for the same period in 1999. During the nine month period ending September 30,
2000, net income totaled $1,237, basic earnings per share was $2.07, and diluted
earnings per share was $2.05, compared to $1,099, $1.84 and $1.83 for the same
period in 1999. The following table illustrates the change in net interest
margin for the nine months ended September 30, 2000 and September 30, 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Loans (taxable) $87,770 $ 5,292 8.05% $ 85,040 $ 5,022 7.90%
Loans (non-taxable) 315 22 9.33% 846 45 7.11%
Taxable investment securities 8,208 415 6.75% 7,519 372 6.61%
Non-taxable investment securities 3,179 192 8.07% 4,042 233 7.71%
Federal funds sold and other 1,243 56 6.02% 821 33 5.37%
------- -------- -------- --------
Total interest earning assets $100,715 $ 5,977 7.93% $ 98,268 $ 5,705 7.76%
======== ========
Interest bearing demand deposits $ 10,692 $ 66 .82% $ 11,581 $ 90 1.04%
Savings deposits 19,028 413 2.90% 19,553 389 2.66%
Time deposits less than $100,000 20,549 848 5.51% 20,263 843 5.56%
Time deposits $100,000 and more 11,814 520 5.88% 11,385 441 5.18%
Federal funds purchased 276 13 6.29% 496 17 4.58%
Other borrowings 20,406 908 5.94% 18,006 790 5.87%
--------- --------- -------- ---------
Total interest bearing liabilities $ 82,765 $ 2,768 4.47% $ 81,284 $ 2,570 4.23%
========= ========
Net Interest Income/Spread $ 3,209 3.46% $ 3,135 3.53%
======== ========
Net Interest Margin 4.26% 4.27%
</TABLE>
Earning assets are presented on a fully taxable equivalent basis using a
34% tax rate, and average yields/rates are annualized.
The two variables that have the most significant effect on the change in
the net interest income are volume and rate. The change in interest due to
both volume and rate has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change
in each. As illustrated in the following table, the Corporation had an
increase in net interest income due primarily to loan growth and to
increased interest rates.
10
<PAGE> 13
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)
<TABLE>
<CAPTION>
Change in Net Interest Income
(Dollars in thousands) 2000 compared to 1999
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Earning Assets
Loans (taxable) $ 163 $ 107 $ 270
Loans (non-taxable) (34) 11 (23)
Taxable investment securities 35 8 43
Non-taxable investment securities (52) 11 (41)
Federal funds sold and other 19 4 23
------ ------- -----
Total interest income 131 141 272
Interest Bearing Liabilities
Interest bearing demand deposits (7) (17) (24)
Savings deposits (11) 35 24
Time deposits <$100,000 12 (7) 5
Time deposits $100,000 and > 17 62 79
Federal funds purchased (9) 5 (4)
Other borrowings 107 11 118
------- ------- -----
Total interest expense $ 109 $ 89 $ 198
------- -------- -----
Net Interest Income $ 22 $ 52 $ 74
======= ======== =====
</TABLE>
Earning assets are presented on a fully taxable equivalent basis using
a 34% tax rate.
The provision for loan losses was $0 during the third quarter of 2000 compared
to $15 for the same period of 1999. For the nine months ended September 30, the
provision was $6 in 2000 compared to $33 in 1999. This decrease is consistent
with the decline in non-performing loans.
Non interest income increased $64 or 48.12% during the third quarter of 2000
when compared to the third quarter of 1999. Increases in investment center
income due to a higher volume of sales as well as increased service charge
income and change in cash value on life insurance contributed to this increase.
New service charges and fees have been implemented throughout the first nine
months of 2000, which have enhanced earnings. For the nine months ended
September 30, non interest income has increased $162 or 38.39% when compared to
the similar period in 1999. This is a result of the same factors affecting the
third quarter increase.
Non interest expense increased $27 or 4.62% when comparing the third quarter of
2000 to 1999. Most of this increase is a result of increased personnel costs for
salaries and payroll taxes. This is partially offset by a decline in merchant
expenses. For the nine months ended September 30, 2000 non interest expense
increased $80 or 4.31% compared to the same period in 1999. Salaries and
benefits increased $86 or 8.43% as some vacant positions have been filled in
addition to normal salary increases. Decreases were realized in correspondent
fees, data processing and depreciation due to continued efforts to control
expenses.
The federal income tax provision for the third quarter of 2000 was $193, up $21
for the same period in 1999. Year-to-date the income tax provision has increased
by $66 or 13.92%. This increase reflects a higher taxable income for 2000.
11
<PAGE> 14
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)
Liquidity and interest rate risk (In thousands)
The primary objective of asset/liability management is to assure the maintenance
of adequate liquidity and maximize net interest income by maintaining
appropriate maturities and balances between interest sensitive earning assets
and interest bearing liabilities. Liquidity management ensures sufficient funds
are maintained to meet the cash withdrawal requirements of depositors and the
credit demand of borrowers.
Sources of liquidity include federal funds sold, investment security maturities
and principal payments. A net average balance of $1,781 in federal funds sold
was maintained during the third quarter of 2000. As a member of the Federal Home
Loan Bank system, the Bank has access to an alternate funding source, lower cost
for credit services, and an additional tool to manage interest rate risk. During
the first nine months of 2000, the Bank used this source of funding to offset
security purchases to be used as collateral for public deposits and as a direct
offset for a specific loan. 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, 2000 the securities available for sale were valued at $11,141.
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 2000, the results
of the GAP analysis were within the Bank's policy guidelines. At September 30,
2000, the percentage of rate sensitive assets to rate sensitive liabilities
within the one-year time horizon was 39%.
The following table shows the Corporation's GAP position as of September 30,
2000. The Corporation has a liability sensitive position of approximately
$38,869 within the one-year time horizon 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.
12
<PAGE> 15
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued))
<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
-------- ------- ------- -------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
------
Loans $ 5,778 $6,745 $1,157 $ 2,020 $1,928 $ 17,628 $ 6,498 $8,523 $54,839 $ 87,488
Allowance for
loan losses - - - - - - - - - -1,068
Investments 1,757 516 1,023 1,018 - 4,314 5,273 1,905 823 12,315
Short-term
Investments 3,350 - - - - 3,350 - - - 3,350
Other non-
earning assets - - - - - - - - - 8,620
-------- ------- ------ ------- ------ -------- -------- ------- -------- ---------
Total $ 10,885 $ 7,261 $2,180 $ 3,038 $1,928 $ 25,292 $ 11,771 $10,428 $ 55,662 $ 110,705
======== ======= ====== ======= ====== ======== ======== ======= ======== =========
Liabilities
Non interest
bearing
deposits $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 10,384
Interest
bearing
deposits 37,186 7,429 4,446 3,088 4,788 56,937 4,793 1,014 152 62,896
Long-term
FHLB
borrowings 1,000 2,632 1,092 1,500 1,000 7,224 12,075 3,250 922 23,471
Other
liabilities - - - - - - - - - 1,412
Capital - - - - - - - - - 12,542
-------- -------- -------- -------- -------- --------- --------- ------- ------- ---------
Total $ 38,186 $ 10,061 $ 5,538 $ 4,588 $ 5,788 $ 64,161 $ 16,868 $ 4,264 $1,074 $ 110,705
======== ======== ======== ======== ======== ========= ========= ======= ======= =========
GAP $-27,301 $ -2,800 $- 3,358 $- 1,550 $- 3,860 $- 38,869 $- 5,097 $ 6,164 $54,588
Cumulative
GAP $-27,301 $-30,101 $-33,459 $-35,009 $-38,869 $- 38,869 $-43,966 $-37,802 $16,786
GAP ratio 29% 72% 39% 66% 33% 39% 70% 245% 5183%
</TABLE>
13
<PAGE> 16
Item 2. Management's discussion and analysis of financial condition and results
of operations (continued)
Capital Resources (Dollars in thousands, except per share amounts)
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, net of tax,
increased $702 or 5.95% to $12,497 for the first nine months of 2000. This
represents 11.29% of total assets. At September 30, 1999, the similar ratio
of shareholders' equity to total assets was 11.16%. Dividends declared per
common share for the nine months ended September 30 increased by 10.71% to
$.93 per share in 2000 compared to $.84 in 1999.
Regulators established "risk-based" capital guidelines that became
effective December 31, 1990. Under the guidelines, minimum capital levels
are established for risk based and total assets based on perceived risk in
asset categories and certain off-balance-sheet items, such as loan
commitments and standby letters of credit. On September 30, 2000, the Bank
has a "risk-based" total capital to asset ratio of 18.56%. The ratio
exceeds the requirements established by regulatory agencies as shown below.
<TABLE>
<CAPTION>
Minimum Required
(Dollars in thousands) For Capital Under Prompt Corrective
September 30, 2000 Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk weighted assets) $ 13,327 18.56% $ 5,744 8.00% $ 7,180 10.00%
Tier 1 capital
(to risk weighted assets) 12,427 17.31 2,872 4.00 4,308 6.00
Tier 1 capital
(to average assets) 12,427 11.60 4,284 4.00 5,354 5.00
</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 2000.
Item 3. Quantitative and qualitative disclosures about market risk
Not required as Registrant meets requirements to be a small business filer.
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, 2000.
Item 2. Changes in securities and use of proceeds
During the nine months ended September 30, 2000, there weren't any changes
in the Registrant's securities, relevant to the requirements of this
section, that would cause any shareholder's rights to be materially
modified, limited or qualified.
14
<PAGE> 17
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 27,
2000. 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 27, 2000, 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, 2000.
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 17.
2. Reports on Form 8-K No reports on Form 8-K were filed for the three
months ended September 30, 2000.
15
<PAGE> 18
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 7, 2000 By: /s/ Timothy Gaylord
---------------- ---------------------------------
Timothy Gaylord
President
Date: November 7, 2000 By: /s/ Lois A. Toth
---------------- ---------------------------------
Lois A. Toth
. Treasurer
16
<PAGE> 19
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
17
