Capital Directions (CTDN) 10-Q 2001 Q3 Quarterly report

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, 2001 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 incorporation or organization)	(I.R.S. Employer Identification Number)
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 26, 2001 the registrant had outstanding 598,056 shares of common stock having a par value of $5 per share.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s discussion and analysis of financial condition and results of operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II – Other Information
	Item 1. Legal proceedings
	Item 2. Changes in securities and use of proceeds
	Item 3. Defaults upon senior securities
	Item 4. Submission of matters to a vote of security holders
	Item 5. Other information
	Item 6. Exhibits and reports on Form 8-K
SIGNATURES
Index to Exhibits

CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

			Page
			Number
PART I – FINANCIAL INFORMATION
	Item 1.	Consolidated Balance Sheets
		September 30, 2001 and December 31, 2000		1
		Consolidated Statements of Income for the Three and Nine Months
		Ended September 30, 2001 and 2000		2
		Consolidated Statements of Cash Flows for the Nine Months
		Ended September 30, 2001 and 2000		3
		Consolidated Statements of Comprehensive Income
		for the Three and Nine Months Ended September 30, 2001 and 2000		4
		Notes to Interim Consolidated Financial Statements		5-8
	Item 2.	Management's Discussion and Analysis of Financial
		Condition and Results of Operations		8-13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		13
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		14
	Item 4.	Submission of Matters to a Vote of Security Holders		14
	Item 5.	Other Information		14
	Item 6.	Exhibits and Reports on Form 8-K		14
		Signatures		15
		Index to Exhibits		16

PART I – FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

					September 30,			December 31,
					2001			2000
					(Unaudited)
ASSETS
		Cash and non interest bearing deposits			$	5,046		$	2,603
		Interest bearing deposits				37			58
		Federal funds sold				5,606			5,905
			Total cash and cash equivalents			10,689			8,566
		Securities available for sale				14,316			15,670
		Federal Home Loan Bank (FHLB) stock				1,967			1,967
		Total investment securities				16,283			17,637
		Loans:
			Commercial and agricultural			4,561			6,038
			Installment			3,206			3,688
			Real estate mortgages			79,006			75,923
				Total loans		86,773			85,649
				Allowance for loan losses		(1,047	)		(1,053	)
				Net loans		85,726			84,596
			Premises and equipment, net			1,113			947
			Accrued income and other assets			3,280			3,277
				Total assets	$	117,091		$	115,023
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
		Deposits:
			Non interest bearing		$	10,515		$	9,885
			Interest bearing			61,117			62,538
				Total deposits		71,632			72,423
		Long-term FHLB borrowings				30,246			28,339
		Other liabilities				1,570			1,427
				Total liabilities		103,448			102,189
SHAREHOLDERS’ EQUITY
	Common stock: $5 par value, 1,300,000 shares authorized; 598,056 outstanding at September 30, 2001 and 598,056 outstanding at December 31, 2000					2,990			2,990
	Additional paid in capital					2,590			2,590
	Retained earnings					7,784			7,126
	Accumulated other comprehensive income, net of tax of $144 as of September 30, 2001 and $66 as of December 31, 2000					279			128
				Total shareholders’ equity		13,643			12,834
				Total liabilities and shareholders’ equity	$	117,091		$	115,023

See accompanying notes to consolidated financial statements.

1

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except share and per share data)

				Three Months Ended				Nine Months Ended
				September 30,				September 30,
				2001		2000		2001		2000
Interest and Dividend Income
	Interest and fees on loans			$	1,683	$	1,779	$	5,121	$	5,306
	Federal funds sold				52		28		155		55
	Interest and dividends on investment securities:
		Taxable			216		154		671		415
		Tax exempt			42		41		118		127
		Other interest income			—		—		1		1
			Total interest income		1,993		2,002		6,066		5,904
Interest Expense
	Deposits				499		644		1,615		1,847
	Short-term borrowings				—		—		1		13
	Long-term borrowings				424		322		1,242		908
		Total interest expense			923		966		2,858		2,768
Net Interest Income					1,070		1,036		3,208		3,136
Provision for loan losses					—		—		—		6
Net interest income after provision for loan losses					1,070		1,036		3,208		3,130
Non Interest Income
	Service charges on deposit accounts				81		85		245		244
	Other income				111		112		364		340
		Total non interest income			192		197		609		584
Non Interest Expense
	Salaries and employee benefits				347		351		1,089		1,106
	Premises and equipment				87		79		257		229
	Other operating expense				195		182		613		602
		Total non interest expense			629		612		1,959		1,937
Income before income tax expense					633		621		1,858		1,777
Income tax expense					196		193		572		540
Net Income				$	437	$	428	$	1,286	$	1,237
Average common shares outstanding					598,056		598,056		598,056		597,742
Basic earnings per common share					0.73		0.72		2.15		2.07
Diluted earnings per common share					0.73		0.71		2.13		2.05
Dividends per share of common stock, declared					0.36		0.32		1.05		0.93

See accompanying notes to consolidated financial statements.

2

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

					Nine Months Ended
					September 30,
					2001			2000
Cash flows from operating activities
	Net income				$	1,286		$	1,237
	Adjustments to reconcile net income to net cash from operating activities
		Depreciation				96			85
		Provision for loan losses				—			6
		Net amortization (accretion) on securities				(3	)		1
		Loans originated for sale				(2,465	)		—
		Proceeds from sale of loans originated for sale				2,473			—
		Net gain on sales of loans originated for sale				(8	)		—
		Changes in assets and liabilities:
			Accrued interest receivable			(16	)		(133	)
			Accrued interest payable			(42	)		37
			Other assets			(65	)		63
			Other liabilities			173			64
				Net cash from operating activities		1,429			1,360
Cash flows from investing activities
	Securities available for sale:
		Purchases				(1,028	)		(3,083	)
		Maturities, calls and principal payments				2,614			1,710
	Purchase of FHLB stock					—			(199	)
	Net change in loans					(1,130	)		1,631
	Premises and equipment expenditures					(262	)		(99	)
			Net cash from investing activities			194			(40	)
Cash flows from financing activities
	Net change in deposits					(791	)		1,250
	Federal funds purchased					—			(1,700	)
	Proceeds from long-term FHLB borrowings					6,000			5,700
	Repayment of long-term FHLB borrowings					(4,093	)		(1,090	)
	Proceeds from shares issued upon exercise of stock options					—			21
	Dividends paid					(616	)		(539	)
			Net cash from financing activities			500			3,642
Net change in cash and cash equivalents						2,123			4,962
Cash and cash equivalents at beginning of year						8,566			3,151
Cash and cash equivalents at June 30					$	10,689		$	8,113
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest			$	2,900		$	2,731
		Income taxes – federal			$	590		$	542

See accompanying notes to consolidated financial statements.

3

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the three and nine months ended September 30, 2001 and 2000

(In thousands)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2001			2000			2001			2000
Net income		$	437		$	428		$	1,286		$	1,237
Other comprehensive income, net
	Unrealized holding gains on securities available for sale arising during period		67			46			229			18
	Tax effects		(23	)		(16	)		(78	)		(6	)
Other comprehensive income, net			44			30			151			12
Comprehensive income		$	481		$	458		$	1,437		$	1,249

See accompanying notes to consolidated financial statements.

4

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, 2001 and December 31, 2000, and results of operations for the three and nine month periods ended September 30, 2001 and 2000, and the cash flows for the nine month periods ended September 30, 2001 and 2000.
2.	The results of operations for the nine months ended September 30, 2001 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 2000, included in the Registrant’s 2000 Annual Report on Form 10-K.
4.	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, 2001, non-performing loans totaled $256,000 or .30% of total loans. This represents an increase of $119,000 from the $137,000 balance at December 31, 2000.

		September 30,			December 31,
Non-performing loans		2001			2000
Non-accrual		$	—		$	—
90 days or more past due			256,000			137,000
Renegotiated			—			—
	Total	$	256,000		$	137,000
Non-performing loans as a percent of:
	Total loans		.30	%		.16	%
	Allowance for loan losses		24.45	%		13.01	%

5

Note 4. 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 addition or reductions to the allowance which have been charged or credited to expense.

(Dollars in thousands)

				Nine			Twelve
				Months			Months
				Ended			Ended
				September 30,			December 31,
				2001			2000
		Balance at beginning of period		$	1,053		$	1,055
		Charge-offs			(32	)		(27	)
		Recoveries			26			19
			Net (charge-offs) recoveries		(6	)		(8	)
		Additions (reductions) to allowance for loan losses			—			6
		Balance at end of period		$	1,047		$	1,053
Average loans outstanding during the period				$	85,808		$	87,651
Loans outstanding at end of period				$	86,773		$	85,649
Allowance as a percent of:
	Total loans at end of period				1.21	%		1.23	%
	Non-performing loans at end of period				408.98	%		768.61	%
Net charge-offs as a percent of:
	Average loans outstanding				.00	%		.00	%
	Allowance for loan losses				.57	%		.76	%

6

Note 5. Earnings per share

5.	A reconciliation of basic and diluted earnings per share for the three-month and nine-month periods; ending September 30 follows:
	(Dollars in thousands, except per share amounts)

			Three months ended				Nine months ended
			September 30,				September 30,
			2001		2000		2001		2000
Basic earnings per share
		Net income	$	437	$	428	$	1,286	$	1,237
Weighted average shares outstanding for basic earnings per share				598,056		598,056		598,056		597,742
	Per share amount		$	.73	$	.72	$	2.15	$	2.07
Diluted earnings per share Net income			$	437	$	428	$	1,286	$	1,237
Weighted average shares outstanding for basic earnings per share				598,056		598,056		598,056		597,742
	Effect of dilutive securities - Stock options			1,606		5,088		4,773		5,397
Weighted average shares outstanding for diluted earnings per share				599,662		603,144		602,829		603,139
Per share amount			$	.73	$	.71	$	2.13	$	2.05

Note 6. Stock Option Plan

6. 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

Note 6. Stock Option Plan (continued)

A summary of activity in the plan is as follows:

									Weighted
							Weighted		Average Fair
	Available						Average		Value of
	For			Options			Exercise		Options
	Grant			Outstanding			Price		Granted
Balance at December 31, 2000		16,593			20,207		$	30.19
Granted		(4,000	)		4,000			40.00	$	2.75
Forfeited		1,300			(1,300	)		39.65
Balance September 30, 2001		13,893			22,907		$	31.36

For the options outstanding September 30, 2001, the range of exercise prices was $12.75 to $41.50 per share with a weighted average remaining contractual term of 7.2 years. At September 30, 2001, 10,951 were exercisable at a weighted average price of $23.43 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.

(Dollars in thousands, except per share amounts)

		Three Months		Three Months		Nine Months		Nine Months
		Ended		Ended		Ended		Ended
		Sept. 30, 2001		Sept. 30, 2000		Sept. 30, 2001		Sept. 30, 2000
Net income
	As reported	$	437	$	428	$	1,286	$	1,237
	Pro forma		437		428		1,275		1,230
Basic and diluted income per share
	As reported basic	$	.73	$	.72	$	2.15	$	2.07
	Pro forma basic		.73		.72		2.13		2.06
	As reported diluted		.73		.71		2.13		2.05
	Pro forma diluted		.72		.71		2.11		2.04

The pro forma effects are computed with option pricing models. For the options granted during the nine months ended September 30, 2001 the following weighted average assumptions as of the grant date were used.

Risk-free interest rate		4.95	%
Expected option life	5 years
Expected stock price volatility		4.02	%
Expected dividend yield		3.44	%

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.

8

Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)

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 $117,091 at September 30, 2001.   The 1.80% increase of $2,068 from $115,023 at December 31, 2000 resulted primarily from an increase of $1,130 in net loans, a $2,443 increase in cash and non interest bearing deposits and a decrease of $1,354 in investment securities.

Cash and cash equivalents have increased $2,123 or 24.78% in the nine month period from December 31, 2000 to September 30, 2001. This is a result of a large cash letter clearing position on the last day of the quarter.

Total outstanding loans have increased $1,124 during the first nine months of 2001. This is an increase of 1.31% from December 31, 2000. This increase has been concentrated in the real estate loan portfolio due to favorable borrowing rates, while commercial loan demand has decreased. During the first quarter of 2001, the Company decided to sell certain loans into the secondary market as part of the asset and liability strategy to minimize risk associated with the recent reduction in interest rates. Management will closely monitor this strategy in the near term.

The allowance for loan losses decreased $6 or .57% during the nine-month period ending September 30, 2001. At September 30, 2001 the allowance as a percent of outstanding loans was 1.21% compared to 1.23% at December 31, 2000. Management continues to maintain the allowance for loan losses at a level considered appropriate to absorb losses inherent in the portfolio and the current trend of increased non-performing loans.

Total deposits as of September 30, 2001 compared to year-end 2000 decreased slightly by $791 or 1.09%. The decline was concentrated in interest bearing demand deposits and time deposits, while non interest bearing deposits increased in the same period. This decline is primarily the result of customers seeking alternative deposit opportunities due to the declining rate environment.

Total shareholders’ equity increased $809 or 6.30% in the first nine months of 2001. Net income of $1,286 and $151 net unrealized gain on available for sale securities increased shareholders’ equity, while dividends of $616 reduced shareholders’ equity. Book value per share was $22.81 at September 30, 2001 compared to $21.46 at December 31, 2000.

For the third quarter of 2001, net income was $437, basic earnings per share was $.73, and diluted earnings per share was $.73, compared to $428, $.72 and $.71 for the same period in 2000. During the nine-month period ending September 30, 2001, net income totaled $1,286, basic earnings per share was $2.15, and diluted earnings per share was $2.13, compared to $1,237, $2.07 and $2.05 for the same period in 2000. Average earning assets increased by 6.31% to $107,067 from September 30, 2000 to September 30, 2001. The average yield on earning assets decreased to 7.67% for the nine-month period ended September 30, 2001 from 7.93% for the comparable time period in 2000. Average costs for rate related liabilities decreased thirteen basis points to 4.34% at September 30, 2001 from 4.47% at September 30, 2000. Net interest margin decreased to 4.10% for the first nine-months of 2001 compared to 4.26% in the same period of 2000. This is a result of the rapidly falling rate environment. The Company is experiencing a declining margin related primarily to the change in the structure of earning assets. As commercial loan demand declined during 2000 and 2001, those funds were used to increase the securities portfolio and residential mortgage portfolios, which tend to be at lower yields as compared to commercial loans. The following table illustrates the change in net interest margin for the nine months ended September 30, 2001 and September 30, 2000.

9

Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)

				2001							2000
		Average				Yield/			Average				Yield/
		Balance		Interest (1)		Rate(1)			Balance		Interest(1)		Rate(1)
Loans (taxable)		$	84,747	$	5,076		8.01	%	$	87,770	$	5,292		8.05	%
Loans (non-taxable)			585		38		8.68	%		316		22		9.30	%
Loans held for sale			476		21		5.90	%		—		—		—
Taxable investment securities			13,374		671		6.71	%		8,208		415		6.75	%
Non-taxable investment securities			3,029		179		7.90	%		3,179		192		8.07	%
Federal funds sold and other			4,856		155		4.30	%		1,243		56		6.02	%
	Total interest earning assets	$	107,067	$	6,140		7.67	%	$	100,716	$	5,977		7.93	%
Interest bearing demand deposits		$	9,180	$	42		.61	%	$	10,692	$	66		.82	%
Savings deposits			22,716		483		2.84	%		19,028		413		2.90	%
Time deposits <$100,000			17,292		707		5.47	%		20,549		848		5.51	%
Time deposits $100,000 or more			10,180		383		5.03	%		11,814		520		5.88	%
Federal funds purchased			11		1		6.08	%		276		13		6.29	%
Other borrowings			28,732		1,242		5.78	%		20,406		908		5.94	%
	Total interest bearing liabilities	$	88,111	$	2,858		4.34	%	$	82,765	$	2,768		4.47	%
Net Interest				$	3,282		3.33	%			$	3,209		3.46	%
Net Interest Margin							4.10	%						4.26	%

(1) 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 changes due to interest rates, while volume changes between assets and liabilities were offsetting.

Change in Net Interest Income
(Dollars in thousands)

			2001 compared to 2000
			Volume			Rate			Total
Earning Assets
	Loans (taxable)		$	(242	)	$	(40	)	$	(282	)
	Loans (non-taxable)			23			(2	)		21
	Loans held for sale			28			—			28
	Taxable investment securities			347			(4	)		343
	Non-taxable investment securities			(12	)		(5	)		(17	)
	Federal funds sold			161			(27	)		134
		Total interest income	$	305		$	(78	)	$	227
Interest Bearing Liabilities
	Interest bearing demand deposits		$	(11	)	$	(21	)	$	(32	)
	Savings deposits			105			(11	)		94
	Time deposits <$100,000			(178	)		(9	)		(187	)
	Time deposits $100,000 or more			(89	)		(94	)		(183	)
	Federal funds purchased			(16	)		(1	)		(17	)
	Other borrowings			482			(34	)		448
		Total interest expense	$	293		$	(170	)	$	123
	Net Interest Income		$	12		$	92		$	104
	Earning assets are presented on a fully taxable equivalent basis.

10

Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)

The provision for loan losses was $0 during the third quarter of 2001, unchanged from the same period of 2000. For the nine months ended September 30, the provision was $0 in 2001 compared to $6 in 2000. This decrease is consistent with the decline in average outstanding loans.

Non interest income decreased $5 or 2.54% during the third quarter of 2001 when compared to the third quarter of 2000. This is primarily attributable to the decline in customer investment commissions and a market value adjustment on a Rabi Trust. For the nine months ended September 30, non interest income has increased $25 or 4.28% when compared to the similar period in 2000. This is a result of the same factors affecting the third quarter decrease, as well as new and increased fees on products, which were not in effect for the entire time period in 2000.

Non interest expense increased $17 or 2.78% when comparing the third quarter of 2001 to 2000. Most of this increase is a result of an increase in premises and equipment costs due to the renovation of the main office facility and increased postage and supply expenses. For the nine months ended September 30, 2001 non interest expense increased $22 or 1.14% compared to the same period in 2000. Salaries and benefits decreased $17 or 1.54% as some vacant positions have not yet been filled. Decreases were also realized in marketing expense.

The federal income tax provision for the third quarter of 2001 was $196, up $3 for the same period in 2000. Year-to-date the income tax provision has increased by $32 or 5.93%. This increase reflects a higher taxable income for 2001. The effective tax rate was 31% and 31% for the three months ended September 30, 2001 and 2000 and 31% and 30% for the nine months ended September 30, 2001 and 2000. The effective tax rates are lower than the 34% statutory rate due to non-taxable income on loans and investments.

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 $5,768 in federal funds sold was maintained during the third quarter of 2001. 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 2001, the Bank used this source of funding to offset security purchases to be used as collateral for public deposits. 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, 2001 the securities available for sale were valued at $14,316. 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.

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Item 2.   Management’s discussion and analysis of financial condition and results of operations (continued)

Strategies include the use of variable rate loan products in addition to managing deposit accounts and maturities in the investment portfolio. The following table, using recommended regulatory standards, reflects the “rate sensitive position” or the difference between loans and investments, and liabilities that mature or reprice within the next year and beyond. The financial industry has generally referred to this difference as “GAP” and its handling as “GAP Management”. Throughout the third quarter of 2001, the results of the GAP analysis were within the Bank’s policy guidelines. At September 30, 2001, the percentage of rate sensitive assets to rate sensitive liabilities within the one-year time horizon was 44%.

The following table shows the Corporation’s GAP position as of September 30, 2001. The Corporation has a liability sensitive position of approximately $41,885 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.

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
Loans		$	4,243		$	6,856		$	3,235		$	2,884		$	3,009		$	20,227		$	6,493		$	9,529		$	50,524		$	86,773
Allowance for loan losses			—			—			—			—			—			—			—			—			—			(1,047	)
Investments			2,047			2,048			692			1,639			—			6,426			8,889			512			456			16,283
Short-term Investments			5,643			—			—			—			—			5,643			—			—			—			5,643
Other non-earning assets			—			—			—			—			—			—			—			—			—			9,439
	Total	$	11,933		$	8,904		$	3,927		$	4,523		$	3,009		$	32,296		$	15,382		$	10,041		$	50,980		$	117,091
Liabilities
Non interest bearing deposits		$	10,515		$	—		$	—		$	—		$	—		$	10,515		$	—		$	—		$	—		$	10,515
Interest bearing deposits			41,873			3,253			3,143			3,305			2,954			54,528			5,817			722			50			61,117
Long-term FHLB borrowings			2,000			5,122			16			—			2,000			9,138			11,961			8,253			894			30,246
Other liabilities			—			—			—			—			—			—			—			—			—			1,570
Capital			—			—			—			—			—			—			—			—			—			13,643
	Total	$	54,388		$	8,375		$	3,159		$	3,305		$	4,954		$	74,181		$	17,778		$	8,975		$	944		$	117,091
GAP		$	(42,455	)	$	529		$	768		$	1,218		$	(1,945	)	$	(41,885	)	$	(2,396	)	$	1,066		$	50,036
Cumulative GAP		$	(42,455	)	$	(41,926	)	$	(41,158	)	$	(39,940	)	$	(41,885	)	$	(41,885	)	$	(44,281	)	$	(43,215	)	$	6,821
GAP ratio			22	%		106	%		124	%		137	%		61	%		44	%		87	%		112	%		5,400	%

Capital Resources

The Corporation’s capital adequacy is reviewed regularly 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 $658,000 or 5.18% to

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Item 2. Management’s discussion and analysis of financial condition and results of operations (continued)

$13,364,000 for the first nine months of 2001. This represents 11.41% of total assets. At September 30, 2000, the similar ratio of shareholders’ equity to total assets was 11.29%. Dividends declared per common share increased by 12.90% to $1.05 per share in 2001 compared to $.93 in 2000.

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, 2001, the Bank has a “risk-based” total capital to asset ratio of 19.70%. The ratio exceeds the requirements established by regulatory agencies as shown below.

(Dollars in thousands)
   September 30, 2001

						Minimum Required					Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	14,211		19.70	%	$	5,770		8.00	%	$	7,213		10.00	%
Tier 1 capital (to risk weighted assets)		13,308		18.45			2,885		4.00			4,328		6.00
Tier 1 capital (to average assets)		13,308		11.59			4,591		4.00			5,739		5.00

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 2001.

Impact of New Accounting Standards

In June 2001, the Financial Accounting Standards Board “FASB” issued Statement of Financial Accounting Standards “SFAS” No. 141, “Business Combinations.” SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The adoption of this statement will only have an impact on our financial statements if we enter into a business combination.

Also in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. We are required to adopt this statement on January 1, 2002, and early adoption is not permitted. The adoption of this statement will not have an impact on our financial statements, as we do not have any intangible assets.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required as Registrant meets requirements to be a small business filer.

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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, 2001.

Item 2. Changes in securities and use of proceeds

During the nine months ended September 30, 2001, 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 26, 2001. 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 26, 2001, 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, 2001.

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 16.
2.	Reports on Form 8-K
	No reports on Form 8-K were filed for the three months ended September 30, 2001.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CAPITAL DIRECTIONS, INC.
Date:	November 6, 2001	By:	/s/ Timothy Gaylord Timothy Gaylord President
Date:	November 6, 2001	By:	/s/ Lois A. Toth Lois A. Toth Treasurer

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Index to Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

2	Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession – Consolidation Agreement included in Amendment No. 1 to Form S-4 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	Additional Exhibits – Not applicable

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