##### Table of Contents



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, 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     No

As of July 26, 2001 the registrant had outstanding 598,056 shares of common
stock having a par value of $5 per share.





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TABLE OF CONTENTS



|                               |                                                                                                |                                                                                                           |  |  |  |  |  | 
|------------------------------ | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1.  CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000                      
|                               |                                                                                                | CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000              
|                               |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000                    
|                               |                                                                                                | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
|                               |                                                                                                | 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                                                                                        



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##### Table of Contents



CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

|                              |  |                                                                |  |      |      | 
|----------------------------- |  | -------------------------------------------------------------- |  | ---- | ---- | 
|                              |  |                                                                |  | Page |     
|PART I FINANCIAL INFORMATION |  | Number                                                         | 
|                              |  |                                                                | 
|                             
|Item 1.                       |  | Consolidated Balance Sheets                                   
|                              |  | June 30, 2001 and December 31, 2000                            |  |      | 1    | 
|                             
|                              |  | Consolidated Statements of Income for the Three and Six Months
|                              |  | Ended June 30, 2001 and 2000                                   |  |      | 2    | 
|                             
|                              |  | Consolidated Statements of Cash Flows for the Six Months      
|                              |  | Ended June 30, 2001 and 2000                                   |  |      | 3    | 
|                             
|                              |  | Consolidated Statements of Comprehensive Income               
|                              |  | for the Three and Six Months Ended June 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                            |  |      | 8-14 | 
|                             
|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                                |  |      | 14   | 
|                             
|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   | 





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##### Table of Contents






PART I  FINANCIAL INFORMATION




CAPITAL DIRECTIONS, INC.CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

|                                     |                                        |                                                                                                                                            |                                            |        |             |         |   |              |        |         |  
|------------------------------------ | -------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ----------- | ------- | - | ------------ | ------ | ------- | -
|                                     |                                        |                                                                                                                                            |                                            |        | June 30,    |         |   | December 31, |       
|                                     |                                        |                                                                                                                                            |                                            |        | 2001        |         |   | 2000         |       
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |   |              |       
|                                     |                                        |                                                                                                                                            |                                            |        | (Unaudited)
|                                    
|                                    
|                                    
|                                    
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and non interest bearing deposits |                                                                                                                                            | $                                          | 3,520  |             |         | $ | 2,603        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Interest bearing deposits              |                                                                                                                                            |                                            | 40     |             |         |   | 58           |       
|                                    
|                                    
|                                    
|                                    
|                                     | Federal funds sold                     |                                                                                                                                            |                                            | 1,895  |             |         |   | 5,905        |       
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total cash and cash equivalents            |        |             | 5,455   |   |              |        | 8,566   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Securities available for sale          |                                                                                                                                            |                                            | 14,383 |             |         |   | 15,670       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Federal Home Loan Bank (FHLB) stock    |                                                                                                                                            |                                            | 1,967  |             |         |   | 1,967        |       
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     | Total investment securities            |                                                                                                                                            |                                            | 16,350 |             |         |   | 17,637       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Loans held for sale                    |                                                                                                                                            |                                            | 680    |             |         |   |             |       
|                                    
|                                    
|                                    
|                                    
|                                     | Loans:                                
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Commercial and agricultural                                                                                                                |                                            |        | 4,830       |         |   |              | 6,038  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Installment                                                                                                                                |                                            |        | 3,678       |         |   |              | 3,688  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Real estate mortgages                                                                                                                      |                                            |        | 76,314      |         |   |              | 75,923 |        
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total loans                                |        |             | 84,822  |   |              |        | 85,649  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                        |                                                                                                                                            | Allowance for loan losses                  |        |             | (1,043  | ) |              |        | (1,053  | )
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Net loans                                  |        |             | 83,779  |   |              |        | 84,596  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Premises and equipment, net                                                                                                                |                                            |        | 1,117       |         |   |              | 947    |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Accrued income and other assets                                                                                                            |                                            |        | 3,193       |         |   |              | 3,277  |        
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                        |                                                                                                                                            | Total assets                               |        | $           | 110,574 |   |              | $      | 115,023 |  
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|LIABILITIES                         
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Deposits:                                                                                                                                 
|                                    
|                                    
|                                    
|                                    
|                                     |                                        |                                                                                                                                            | Non interest bearing                       |        | $           | 10,080  |   |              | $      | 9,885   |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                        |                                                                                                                                            | Interest bearing                           |        |             | 57,327  |   |              |        | 62,538  |  
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total deposits                             |        |             | 67,407  |   |              |        | 72,423  |  
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Long-term FHLB borrowings                                                                                                                  |                                            |        | 28,246      |         |   |              | 28,339 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Other liabilities                                                                                                                          |                                            |        | 1,543       |         |   |              | 1,427  |        
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total liabilities                          |        |             | 97,196  |   |              |        | 102,189 |  
|                                    
|                                    
|                                    
|                                    
|SHAREHOLDERS EQUITY                
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Common stock: $5 par value, 1,300,000 shares authorized;
598,056 outstanding at June 30, 2001 and 598,056 outstanding
at December 31, 2000 |                                            |        | 2,990       |         |   |              | 2,990  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Additional paid in capital                                                                                                                 |                                            |        | 2,590       |         |   |              | 2,590  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Retained earnings                                                                                                                          |                                            |        | 7,563       |         |   |              | 7,126  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                        | Accumulated other comprehensive income,
net of tax of $121 as of June 30, 2001 and $66 as of
December 31, 2000                             |                                            |        | 235         |         |   |              | 128    |        
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total
shareholders equity                 |        |             | 13,378  |   |              |        | 12,834  |  
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  
|                                     |                                        |                                                                                                                                            | Total liabilities and shareholders equity |        | $           | 110,574 |   |              | $      | 115,023 |  
|                                     |                                        |                                                                                                                                            |                                            |        |             |         |  

See accompanying notes to consolidated financial statements.

1



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##### Table of Contents






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

(In thousands, except share and per share data)

|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |       |       |       |         |       |       |       | 
|--------------------------------------------------- | ------------------------------------------------ | -------------------------- | --------------------- | ----- | ------------------ | ----- | ------- | ---------------- | --- | ----- | ------- | ----- | ----- | ----- | ------- | ----- | ----- | ----- | 
|                                                    |                                                  |                            |                       |       | Three Months Ended |       |         | Six Months Ended |    
|                                                    |                                                  |                            |                       |       | June 30,           |       |         | June 30,         |    
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |    
|                                                    |                                                  |                            |                       |       | 2001               |       |         | 2000             |     |       | 2001    |       |       | 2000  |        
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |       |       |       |        
|Interest and Dividend Income                       
|                                                    | Interest and fees on loans                       |                            | $                     | 1,704 |                    |       | $       | 1,761            |     |       | $       | 3,438 |       |       | $       | 3,527 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Federal funds sold                               |                            |                       | 54    |                    |       |         | 22               |     |       |         | 103   |       |       |         | 27    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest and dividends on investment securities:
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                  | Taxable                    |                       |       | 223                |       |         |                  | 136 |       |         |       | 455   |       |         |       | 261   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                  | Tax exempt                 |                       |       | 37                 |       |         |                  | 43  |       |         |       | 76    |       |         |       | 86    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                  | Other interest income      |                       |       | 1                  |       |         |                  |    |       |         |       | 1     |       |         |       | 1     |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|                                                    |                                                  |                            | Total interest income |       |                    | 2,019 |         |                  |     | 1,962 |         |       |       | 4,073 |         |       |       | 3,902 | 
|                                                   
|                                                   
|                                                   
|                                                   
|Interest Expense                                   
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Deposits                                         |                            |                       | 532   |                    |       |         | 607              |     |       |         | 1,116 |       |       |         | 1,203 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Short-term borrowings                            |                            |                       |      |                    |       |         | 3                |     |       |         | 1     |       |       |         | 12    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Long-term borrowings                             |                            |                       | 409   |                    |       |         | 302              |     |       |         | 818   |       |       |         | 587   |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|                                                    |                                                  | Total interest expense     |                       |       | 941                |       |         |                  | 912 |       |         |       | 1,935 |       |         |       | 1,802 |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|Net Interest Income                                 |                                                  |                            | 1,078                 |       |                    |       | 1,050   |                  |     |       | 2,138   |       |       |       | 2,100   |      
|                                                   
|                                                   
|                                                   
|                                                   
|Provision for loan losses                           |                                                  |                            |                      |       |                    |       |        |                  |     |       |        |       |       |       | 6       |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|Net interest income after provision for loan losses |                                                  |                            | 1,078                 |       |                    |       | 1,050   |                  |     |       | 2,138   |       |       |       | 2,094   |      
|                                                   
|                                                   
|                                                   
|                                                   
|Non Interest Income                                
|                                                    | Service charges on deposit accounts              |                            |                       | 85    |                    |       |         | 89               |     |       |         | 164   |       |       |         | 159   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other income                                     |                            |                       | 148   |                    |       |         | 137              |     |       |         | 253   |       |       |         | 228   |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|                                                    |                                                  | Total non interest income  |                       |       | 233                |       |         |                  | 226 |       |         |       | 417   |       |         |       | 387   |      
|                                                   
|                                                   
|                                                   
|                                                   
|Non Interest Expense                               
|                                                    | Salaries and employee benefits                   |                            |                       | 366   |                    |       |         | 381              |     |       |         | 742   |       |       |         | 755   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Premises and equipment                           |                            |                       | 87    |                    |       |         | 72               |     |       |         | 170   |       |       |         | 150   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other operating expense                          |                            |                       | 220   |                    |       |         | 231              |     |       |         | 418   |       |       |         | 420   |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|                                                    |                                                  | Total non interest expense |                       |       | 673                |       |         |                  | 684 |       |         |       | 1,330 |       |         |       | 1,325 |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|Income before income tax expense                    |                                                  |                            | 638                   |       |                    |       | 592     |                  |     |       | 1,225   |       |       |       | 1,156   |      
|                                                   
|                                                   
|                                                   
|                                                   
|Income tax expense                                  |                                                  |                            | 195                   |       |                    |       | 174     |                  |     |       | 376     |       |       |       | 347     |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|Net Income                                          |                                                  | $                          | 443                   |       |                    | $     | 418     |                  |     | $     | 849     |       |       | $     | 809     |      
|                                                    |                                                  |                            |                       |       |                    |       |         |                  |     |       |         |      
|Average common shares outstanding                   |                                                  |                            | 598,056               |       |                    |       | 598,056 |                  |     |       | 598,056 |       |       |       | 597,584 |      
|                                                   
|                                                   
|                                                   
|                                                   
|Basic earnings per common share                     |                                                  |                            | 0.74                  |       |                    |       | 0.70    |                  |     |       | 1.42    |       |       |       | 1.35    |      
|                                                   
|                                                   
|                                                   
|                                                   
|Diluted earnings per common share                   |                                                  |                            | 0.74                  |       |                    |       | 0.69    |                  |     |       | 1.41    |       |       |       | 1.34    |      
|                                                   
|                                                   
|                                                   
|                                                   
|Dividends per share of common stock, declared       |                                                  |                            | 0.35                  |       |                    |       | 0.31    |                  |     |       | 0.69    |       |       |       | 0.61    |      

See accompanying notes to consolidated financial statements.

2



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##### Table of Contents






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



|                                                 |                                                            |                                                 |                                    |                                    |        |        |       |        |        |      |     | 
|------------------------------------------------ | ---------------------------------------------------------- | ----------------------------------------------- | ---------------------------------- | ---------------------------------- | ------ | ------ | ----- | ------ | ------ | ---- | --- | 
|(In thousands)                                   |                                                            |                                                 | Six Months Ended                   |                                   
|                                                 |                                                            |                                                 | June 30,                           |                                   
|                                                 |                                                            |                                                 |                                    |                                    |        |        |      
|                                                 |                                                            |                                                 |                                    |                                    |        | 2001   |       |        | 2000   |     
|                                                 |                                                            |                                                 |                                    |                                    |        |        |       |        |        |     
|Cash flows from operating activities            
|                                                 | Net income                                                 |                                                 | $                                  | 849                                |        |        | $     | 809    |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net income to net cash from      
|                                                
|                                                
|                                                
|                                                
|                                                 | operating activities                                      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Depreciation                                    |                                    |                                    | 63     |        |       |        | 57     |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Provision for loan losses                       |                                    |                                    |       |        |       |        | 6      |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Net amortization (accretion) on securities      |                                    |                                    | (5     | )      |       |        | 1      |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Loans originated for sale                       |                                    |                                    | (2,525 | )      |       |        |       |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Proceeds from sale of loans originated for sale |                                    |                                    | 1,847  |        |       |        |       |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Net gain on sales of loans originated for sale  |                                    |                                    | (2     | )      |       |        |       |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Changes in assets and liabilities:             
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            |                                                 | Accrued interest receivable        |                                    |        | 87     |       |        |        | (15  | )  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            |                                                 | Accrued interest payable           |                                    |        | (45    | )     |        |        | (4   | )  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            |                                                 | Other assets                       |                                    |        | (58    | )     |        |        | (59  | )  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            |                                                 | Other liabilities                  |                                    |        | 155    |       |        |        | 57   |    
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|                                                 |                                                            |                                                 |                                    | Net cash from operating activities |        |        | 366   |        |        |      | 852 | 
|                                                
|                                                
|                                                
|                                                
|Cash flows from investing activities            
|                                                 | Securities available for sale:                            
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Purchases                                       |                                    |                                    | (1,028 | )      |       |        | (2,080 | )   
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Maturities, calls and principal payments        |                                    |                                    | 2,482  |        |       |        | 1,184  |     
|                                                
|                                                
|                                                
|                                                
|                                                 | Net change in loans                                        |                                                 |                                    | 817                                |        |        |       | 1,230  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Premises and equipment expenditures                        |                                                 |                                    | (233                               | )      |        |       | (36    | )     
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|                                                 |                                                            |                                                 | Net cash from investing activities |                                    |        | 2,038  |       |        |        | 298  |    
|                                                
|                                                
|                                                
|                                                
|Cash flows from financing activities            
|                                                 | Net change in deposits                                     |                                                 |                                    | (5,016                             | )      |        |       | (128   | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Federal funds purchased                                    |                                                 |                                    |                                   |        |        |       | (1,700 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Proceeds from long-term FHLB borrowings                    |                                                 |                                    | 4,000                              |        |        |       | 2,700  |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Repayment of long-term FHLB borrowings                     |                                                 |                                    | (4,093                             | )      |        |       | (1,090 | )     
|                                                
|                                                
|                                                
|                                                
|                                                 | Proceeds from shares issued upon exercise of stock options |                                                 |                                    |                                   |        |        |       | 21     |       
|                                                
|                                                
|                                                
|                                                
|                                                 | Dividends paid                                             |                                                 |                                    | (406                               | )      |        |       | (359   | )     
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|                                                 |                                                            |                                                 | Net cash from financing activities |                                    |        | (5,515 | )     |        |        | (556 | )  
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|Net change in cash and cash equivalents          |                                                            |                                                 | (3,111                             | )                                  |        |        | 594   |       
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of year   |                                                            |                                                 | 8,566                              |                                    |        |        | 3,151 |       
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|Cash and cash equivalents at June 30             |                                                            | $                                               | 5,455                              |                                    |        | $      | 3,745 |       
|                                                 |                                                            |                                                 |                                    |                                    |        |       
|Supplemental disclosure of cash flow information
|                                                 | Cash paid during the period for:                          
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Interest                                        |                                    | $                                  | 1,980  |        |       | $      | 1,806  |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                            | Income taxes  federal                          |                                    | $                                  | 397    |        |       | $      | 348    |     

See accompanying notes to consolidated financial statements.

3



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##### Table of Contents






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

(In thousands)

|                                       |     |                                   |     |                                  |    |                    |     |  |                  |   |     |      |     |   |      |   |    |  |     |  
|-------------------------------------- | --- | --------------------------------- | --- | -------------------------------- | -- | ------------------ | --- |  | ---------------- | - | --- | ---- | --- | - | ---- | - | -- |  | --- | -
|                                       |     |                                   |     |                                  |    | Three Months Ended |     |  | Six Months Ended |  
|                                       |     |                                   |     |                                  |    | June 30,           |     |  | June 30,         |  
|                                       |     |                                   |     |                                  |    |                    |     |  |                  |  
|                                       |     |                                   |     |                                  |    | 2001               |     |  | 2000             |   |     | 2001 |     |   | 2000 |  
|                                       |     |                                   |     |                                  |    |                    |     |  |                  |   |     |      |     |   |      |  
|Net income                             |     | $                                 | 443 |                                  |    | $                  | 418 |  |                  | $ | 849 |      |     | $ | 809  |  
|                                      
|                                      
|                                      
|                                      
|Other comprehensive income (loss),    
|                                      
|                                      
|                                      
|                                      
|                                       | net
|                                      
|                                      
|                                      
|                                      
|                                       |     | Unrealized holding gains (losses)
|                                      
|                                      
|                                      
|                                      
|                                       |     |                                   |     | on securities available for sale
|                                      
|                                      
|                                      
|                                      
|                                       |     |                                   |     | arising during period            |    |                    | 9   |  |                  |   | 13  |      |     |   | 162  |   |    |  | (28 | )
|                                      
|                                      
|                                      
|                                      
|                                       |     | Tax effects                       |     |                                  | (3 | )                  |     |  | (4               | ) |     |      | (55 | ) |      |   | 10 | 
|                                       |     |                                   |     |                                  |    |                    |     |  |                  |   |     |     
|Other comprehensive income (loss), net |     |                                   | 6   |                                  |    |                    | 9   |  |                  |   | 107 |      |     |   | (18  | )
|                                       |     |                                   |     |                                  |    |                    |     |  |                  |   |     |     
|Comprehensive income                   |     | $                                 | 449 |                                  |    | $                  | 427 |  |                  | $ | 956 |      |     | $ | 791  |  
|                                       |     |                                   |     |                                  |    |                    |     |  |                  |   |     |     

See accompanying notes to consolidated financial statements.

4



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##### Table of Contents






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, 2001 and December 31,
2000, and results of operations for the three and six month periods ended
June 30, 2001 and 2000, and the cash flows for the six month periods ended
June 30, 2001 and 2000.                                                                                                                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The results of operations for the six months ended June 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 June 30, 2001, non-performing loans totaled $150,000 or .18%
of total loans. This represents an increase of $13,000 from the $137,000
balance at December 31, 2000.

|                                      |                           |   |          |         |   |              |         |         |  
|------------------------------------- | ------------------------- | - | -------- | ------- | - | ------------ | ------- | ------- | -
|                                      |                           |   | June 30, |         |   | December 31, |        
|Non-performing loans                  |                           |   | 2001     |         |   | 2000         |        
|                                      |                           |   |          |         |   |              |        
|Non-accrual                           |                           | $ |         |         |   | $            |        |        
|                                     
|                                     
|                                     
|                                     
|90 days or more past due              |                           |   | 150,000  |         |   |              | 137,000 |        
|                                     
|                                     
|                                     
|                                     
|Renegotiated                          |                           |   |         |         |   |              |        |        
|                                      |                           |   |          |         |   |             
|                                      | Total                     |   | $        | 150,000 |   |              | $       | 137,000 |  
|                                      |                           |   |          |         |   |             
|Non-performing loans as a percent of:
|                                     
|                                     
|                                     
|                                     
|                                      | Total loans               |   |          | .18     | % |              |         | .16     | %
|                                     
|                                     
|                                     
|                                     
|                                      | Allowance for loan losses |   |          | 14.38   | % |              |         | 13.01   | %

5



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##### Table of Contents





| |  | 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)                      |                                       |                                                     | Six                          |        |          | Twelve |       
|                                            |                                       |                                                     |                              |        | Months   |        |        | Months       |      
|                                            |                                       |                                                     |                              |        | Ended    |        |        | Ended        |      
|                                            |                                       |                                                     |                              |        | June 30, |        |        | December 31, |      
|                                            |                                       |                                                     |                              |        | 2001     |        |        | 2000         |      
|                                            |                                       |                                                     |                              |        |          |        |        |              |      
|                                            |                                       | Balance at beginning of period                      |                              | $      | 1,053    |        |        | $            | 1,055 |   
|                                           
|                                           
|                                            |                                       | Charge-offs                                         |                              |        | (32      | )      |        |              | (27   | ) 
|                                           
|                                           
|                                           
|                                           
|                                            |                                       | Recoveries                                          |                              |        | 22       |        |        |              | 19    |   
|                                            |                                       |                                                     |                              |        |          |       
|                                            |                                       |                                                     | Net (charge-offs) recoveries |        |          | (10    | )      |              |       | (8 | )
|                                           
|                                           
|                                           
|                                           
|                                            |                                       | Additions (reductions) to allowance
for loan losses |                              |        |         |        |        |              | 6     |   
|                                            |                                       |                                                     |                              |        |          |       
|                                            |                                       | Balance at end of period                            |                              | $      | 1,043    |        |        | $            | 1,053 |   
|                                            |                                       |                                                     |                              |        |          |       
|Average loans outstanding during the period |                                       | $                                                   | 84,943                       |        |          | $      | 87,651 |             
|                                            |                                       |                                                     |                              |        |          |       
|Loans outstanding at end of period          |                                       | $                                                   | 84,822                       |        |          | $      | 85,649 |             
|                                            |                                       |                                                     |                              |        |          |       
|Allowance as a percent of:                 
|                                           
|                                           
|                                           
|                                           
|                                            | Total loans at end of period          |                                                     |                              | 1.23   | %        |        |        | 1.23         | %    
|                                            |                                       |                                                     |                              |        |          |       
|                                            | Non-performing loans at end of period |                                                     |                              | 695.33 | %        |        |        | 768.61       | %    
|                                            |                                       |                                                     |                              |        |          |       
|Net charge-offs as a percent of:           
|                                           
|                                           
|                                           
|                                           
|                                            | Average loans outstanding             |                                                     |                              | .01    | %        |        |        | .00          | %    
|                                            |                                       |                                                     |                              |        |          |       
|                                            | Allowance for loan losses             |                                                     |                              | .96    | %        |        |        | .76          | %    
|                                            |                                       |                                                     |                              |        |          |       

6



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##### Table of Contents





Note 5.   Earnings per share



|5. |  | A reconciliation of basic and diluted earnings per share for the
three-month and six-month periods; ending June 30 follows:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------

|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |       |   |      |         |       | 
|------------------------------------------------ | ------------------------------ | ------------- | --- | ------------------ | ----- | - | ---------------- | ------- | ----- | ---- | ---- | ------- | ----- | - | ---- | ------- | ----- | 
|(Dollars in thousands, except per share amounts) |                               
|                                                 |                                |               |     | Three months ended |       |   | Six months ended |        
|                                                 |                                |               |     | June 30,           |       |   | June 30,         |        
|                                                 |                                |               |     |                    |       |   |                  |        
|                                                 |                                |               |     | 2001               |       |   | 2000             |         |       | 2001 |      |         | 2000  |  
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |       |  
|Basic earnings per share                        
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income                     |               | $   | 443                |       |   | $                | 418     |       |      | $    | 849     |       |   | $    | 809     |      
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|Weighted average shares                         
|                                                
|                                                
|                                                
|                                                
|                                                 | outstanding for basic         
|                                                
|                                                
|                                                
|                                                
|                                                 | earnings per share             |               |     | 598,056            |       |   |                  | 598,056 |       |      |      | 598,056 |       |   |      | 597,584 |      
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|                                                 | Per share amount               |               | $   | .74                |       |   | $                | .70     |       |      | $    | 1.42    |       |   | $    | 1.35    |      
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|Diluted earnings per share                      
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income                     |               | $   | 443                |       |   | $                | 418     |       |      | $    | 849     |       |   | $    | 809     |      
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|Weighted average shares                         
|                                                
|                                                
|                                                
|                                                
|                                                 | outstanding for basic         
|                                                
|                                                
|                                                
|                                                
|                                                 | earnings per share             |               |     | 598,056            |       |   |                  | 598,056 |       |      |      | 598,056 |       |   |      | 597,584 |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Effect of dilutive securities-
|                                                
|                                                
|                                                
|                                                
|                                                 |                                | Stock options |     |                    | 2,423 |   |                  |         | 5,461 |      |      |         | 4,750 |   |      |         | 5,591 | 
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|Weighted average shares                         
|                                                
|                                                
|                                                
|                                                
|                                                 | outstanding for diluted       
|                                                
|                                                
|                                                
|                                                
|                                                 | earnings per share             |               |     | 600,479            |       |   |                  | 603,517 |       |      |      | 602,806 |       |   |      | 597,584 |      
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      
|Per share amount                                 |                                | $             | .74 |                    |       | $ | .69              |         |       | $    | 1.41 |         |       | $ | 1.34 |        
|                                                 |                                |               |     |                    |       |   |                  |         |       |      |      |         |      



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



---



##### Table of Contents





| |  | 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                    |  |           | 950    |   |             |  | (950   | )        |         |          | 39.29   |         
|                             |  |           |        |   |             | 
|Balance
June 30, 2001        |  |           | 13,543 |   |             |  | 23,257 |          |         | $        | 31.50   |         
|                             |  |           |        |   |             |  |        |          |        



| |  | For the options outstanding June 30, 2001, the range of exercise prices was
$12.75 to $41.50 per share with a weighted average remaining contractual
term of 7.48 years. At June 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  |  |     | Six Months    |  |  | Six Months    | 
|                                   |                     |  | Ended         |   |  | Ended         |  |     | Ended         |  |  | Ended         | 
|                                   |                     |  | June 30, 2001 |   |  | June 30, 2000 |  |     | June 30, 2001 |  |  | June 30, 2000 | 
|                                   |                     |  |               |   |  |               |  |     |               |  |  |               | 
|Net income                        
|                                   | As reported         |  |               | $ |  |               |  | 443 |               |  |  | $             |  |  |  | 418 |  |  | $ | 849  |  |  | $ | 809  | 
|                                  
|                                  
|                                  
|                                  
|                                   | Pro forma           |  |               |   |  |               |  | 432 |               |  |  |               |  |  |  | 413 |  |  |   | 838  |  |  |   | 801  | 
|                                  
|                                  
|                                  
|                                  
|Basic and diluted income
per share
|                                  
|                                  
|                                  
|                                  
|                                   | As reported basic   |  |               | $ |  |               |  | .74 |               |  |  | $             |  |  |  | .70 |  |  | $ | 1.42 |  |  | $ | 1.35 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Pro forma basic     |  |               |   |  |               |  | .74 |               |  |  |               |  |  |  | .69 |  |  |   | 1.40 |  |  |   | 1.34 | 
|                                  
|                                  
|                                  
|                                  
|                                   | As reported diluted |  |               |   |  |               |  | .74 |               |  |  |               |  |  |  | .69 |  |  |   | 1.41 |  |  |   | 1.34 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Pro forma diluted   |  |               |   |  |               |  | .72 |               |  |  |               |  |  |  | .69 |  |  |   | 1.39 |  |  |   | 1.33 | 

The pro forma effects are computed with option pricing models. For the options
granted during the six months ended June 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



---



##### Table of Contents



| |  | 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 $110,574 at June 30, 2001. The 3.87% decrease of $4,449 from
$115,023 at December 31, 2000 resulted primarily from a decrease of $4,010
in Federal funds sold and a $1,287 decrease in investment securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Cash and cash equivalents have decreased $3,111 or 36.32% in the six month
period from December 31, 2000 to June 30, 2001. This is a result of the
reduction of excess Federal funds sold and declining deposits as discussed
more fully below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Total outstanding loans have decreased $827 during the first six months of
2001. This is a decrease of .97% from December 31, 2000. This decline has
been concentrated in the commercial loan portfolio, while real estate
mortgages have increased slightly. Currently, $680 in 1-4 family
residential loans reside in the held-for-sale category and as of June 30,
2001, had been committed for sale. 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 $10 or .95% during the six-month
period ending June 30, 2001. At June 30, 2001 the allowance as a percent of
outstanding loans was 1.23% 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Total deposits as of June 30, 2001 compared to year-end 2000 decreased by
$5,016 or 6.93%. The decline was concentrated in interest bearing demand
deposits and time deposits, while savings 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 $544 or 4.24% in the first six months
of 2001. Net income of $849 and $107 net unrealized gain on available for
sale securities increased shareholders equity, while dividends of $412
reduced shareholders equity. Book value per share was $22.37 at June 30,
2001 compared to $21.46 at December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | For the second quarter of 2001, net income was $443, basic earnings per
share was $.74, and diluted earnings per share was $.74, compared to $418,
$.70 and $.69 for the same period in 2000. During the six-month period
ending June 30, 2001, net income totaled $849, basic earnings per share was
$1.42, and diluted earnings per share was $1.41, compared to $809, $1.35 and
$1.34 for the same period in 2000. Average earning assets increased by
6.09% to $106,440 from June 30, 2000 to June 30, 2001. The average yield on
earning assets decreased to 7.81% for the six-month period ended June 30,
2001 from 7.91% for the comparable time period in 2000. Average costs for
rate related liabilities increased six basis points to 4.46% at June 30,
2001 from 4.40% at June 30, 2000. Net interest margin decreased to 4.14%
for the first six-months of 2001 compared to 4.30% 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 six months ended June 30, 2001 and
June 30, 2000.

9



---



##### Table of Contents



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

|                                  |                                    |   |         |         |  |           |       |       |       |        |      |         |         |   |           |         |  |       |       |        |  |  |       |      |  
|--------------------------------- | ---------------------------------- | - | ------- | ------- |  | --------- | ----- | ----- | ----- | ------ | ---- | ------- | ------- | - | --------- | ------- |  | ----- | ----- | ------ |  |  | ----- | ---- | -
|                                  |                                    |   |         |         |  |           | 2001  |       |       |        |      |         |         |   |           |         |  | 2000  |      
|                                  |                                    |   |         |         |  |           |       |       |       |        |      |         |         |   |           |         |  |       |      
|                                  |                                    |   | Average |         |  |           |       |       |       | Yield/ |      |         | Average |   |           |         |  |       |       | Yield/ | 
|                                  |                                    |   | Balance |         |  | Interest1 |       |       | Rate1 |        |      | Balance |         |   | Interest1 |         |  | Rate1 |      
|                                  |                                    |   |         |         |  |           |       |       |       |        |      |         |         |   |           |         |  |       |      
|Loans (taxable)                   |                                    | $ | 84,266  |         |  | $         | 3,399 |       |       |        | 8.13 | %       |         | $ | 88,117    |         |  | $     | 3,521 |        |  |  | 8.04  | %   
|                                 
|                                 
|                                 
|                                 
|Loans (non-taxable)               |                                    |   | 677     |         |  |           | 29    |       |       |        | 8.64 | %       |         |   | 177       |         |  |       | 9     |        |  |  | 10.23 | %   
|                                 
|                                 
|                                 
|                                 
|Loans held for sale               |                                    |   | 669     |         |  |           | 20    |       |       |        | 6.03 | %       |         |   |          |         |  |       |      |        |  |  |      |     
|                                 
|                                 
|                                 
|                                 
|Taxable investment securities     |                                    |   | 13,548  |         |  |           | 455   |       |       |        | 6.77 | %       |         |   | 7,865     |         |  |       | 261   |        |  |  | 6.67  | %   
|                                 
|                                 
|                                 
|                                 
|Non-taxable investment securities |                                    |   | 2,891   |         |  |           | 115   |       |       |        | 8.02 | %       |         |   | 3,211     |         |  |       | 129   |        |  |  | 8.08  | %   
|                                 
|                                 
|                                 
|                                 
|Federal funds sold and other      |                                    |   | 4,389   |         |  |           | 104   |       |       |        | 4.78 | %       |         |   | 962       |         |  |       | 28    |        |  |  | 5.85  | %   
|                                  |                                    |   |         |         |  |           |       |       |       |        |      |         |         |   |           |        
|                                  | Total interest earning assets      |   | $       | 106,440 |  |           | $     | 4,122 |       |        |      | 7.81    | %       |   | $         | 100,332 |  |       | $     | 3,948  |  |  |       | 7.91 | %
|                                 
|                                 
|                                 
|                                 
|                                 
|Interest bearing demand deposits  |                                    | $ | 9,047   |         |  | $         | 28    |       |       |        | .62  | %       |         | $ | 11,159    |         |  | $     | 50    |        |  |  | .90   | %   
|                                 
|                                 
|                                 
|                                 
|Savings deposits                  |                                    |   | 22,292  |         |  |           | 329   |       |       |        | 2.98 | %       |         |   | 18,590    |         |  |       | 262   |        |  |  | 2.83  | %   
|                                 
|                                 
|                                 
|                                 
|Time deposits <$100,000           |                                    |   | 17,569  |         |  |           | 489   |       |       |        | 5.61 | %       |         |   | 20,968    |         |  |       | 555   |        |  |  | 5.32  | %   
|                                 
|                                 
|                                 
|                                 
|Time deposits $100,000 or more    |                                    |   | 10,023  |         |  |           | 269   |       |       |        | 5.41 | %       |         |   | 11,340    |         |  |       | 336   |        |  |  | 5.96  | %   
|                                 
|                                 
|                                 
|                                 
|Federal funds purchased           |                                    |   | 16      |         |  |           | 1     |       |       |        | 6.30 | %       |         |   | 402       |         |  |       | 12    |        |  |  | 6.00  | %   
|                                 
|                                 
|                                 
|                                 
|Other borrowings                  |                                    |   | 28,460  |         |  |           | 819   |       |       |        | 5.80 | %       |         |   | 19,984    |         |  |       | 587   |        |  |  | 5.91  | %   
|                                  |                                    |   |         |         |  |           |       |       |       |        |      |         |         |   |           |        
|                                  | Total interest bearing liabilities |   | $       | 87,407  |  |           | $     | 1,935 |       |        |      | 4.46    | %       |   | $         | 82,443  |  |       | $     | 1,802  |  |  |       | 4.40 | %
|                                 
|                                 
|                                 
|                                 
|                                 
|Net Interest                      |                                    |   |         |         |  | $         | 2,187 |       |       |        | 3.35 | %       |         |   |           |         |  | $     | 2,146 |        |  |  | 3.51  | %   
|                                 
|                                 
|                                 
|                                 
|                                 
|Net Interest Margin               |                                    |   |         |         |  |           |       |       |       |        | 4.14 | %       |         |   |           |         |  |       |       |        |  |  | 4.30  | %   

|    |                                                                                                                                  | 
|--- | -------------------------------------------------------------------------------------------------------------------------------- | 
|(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)                                                   |                        | $                     | (312   | )   |  | $    | 86  |     |       | $ | (226 | )  
|                             
|                             
|                             
|                             
|                              | Loans (non-taxable)                                               |                        |                       | 44     |     |  |      | (4  | )   |       |   | 40   |    
|                             
|                             
|                             
|                             
|                              | Loans held for sale                                               |                        |                       | 40     |     |  |      |    |     |       |   | 40   |    
|                             
|                             
|                             
|                             
|                              | Taxable investment securities                                     |                        |                       | 385    |     |  |      | 8   |     |       |   | 393  |    
|                             
|                             
|                             
|                             
|                              | Non-taxable investment securities                                 |                        |                       | (26    | )   |  |      | (2  | )   |       |   | (28  | )  
|                             
|                             
|                             
|                             
|                              | Federal funds sold                                                |                        |                       | 166    |     |  |      | (13 | )   |       |   | 153  |    
|                              |                                                                   |                        |                       |        |     |  |      |     |    
|                              |                                                                   | Total interest income  |                       | $      | 297 |  |      | $   | 75  |       |   | $    | 372 | 
|                              |                                                                   |                        |                       |        |     |  |      |     |    
|Interest Bearing Liabilities 
|                             
|                             
|                             
|                             
|                              | Interest bearing demand deposits                                  |                        | $                     | (17    | )   |  | $    | (27 | )   |       | $ | (44  | )  
|                             
|                             
|                             
|                             
|                              | Savings deposits                                                  |                        |                       | 109    |     |  |      | 28  |     |       |   | 137  |    
|                             
|                             
|                             
|                             
|                              | Time deposits <$100,000                                           |                        |                       | (188   | )   |  |      | 58  |     |       |   | (130 | )  
|                             
|                             
|                             
|                             
|                              | Time deposits $100,000 or more                                    |                        |                       | (74    | )   |  |      | (59 | )   |       |   | (133 | )  
|                             
|                             
|                             
|                             
|                              | Federal funds purchased                                           |                        |                       | (24    | )   |  |      | 1   |     |       |   | (23  | )  
|                             
|                             
|                             
|                             
|                              | Other borrowings                                                  |                        |                       | 492    |     |  |      | (21 | )   |       |   | 471  |    
|                              |                                                                   |                        |                       |        |     |  |      |     |    
|                              |                                                                   | Total interest expense |                       | $      | 298 |  |      | $   | (20 | )     |   | $    | 278 | 
|                              |                                                                   |                        |                       |        |     |  |      |     |    
|                              | Net Interest Income                                               |                        | $                     | (1     | )   |  | $    | 95  |     |       | $ | 94   |    
|                              |                                                                   |                        |                       |        |     |  |      |     |    
|                              | Earning
assets are presented on a fully taxable equivalent basis.

10



---



##### Table of Contents





| |  | Item 2. Managements discussion and analysis of financial condition and
results of operations
(continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The provision for loan losses was $0 during the second quarter of 2001,
unchanged from the same period of 2000. For the six months ended June 30,
the provision was $0 in 2001 compared to $6 in 2000. This decrease is
consistent with the decline in outstanding loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Non interest income increased $7 or 3.10% during the second quarter of 2001
when compared to the second quarter of 2000. This is primarily attributable
to the recognition of mortgage servicing rights on loans sold into the
secondary market, which offset declines in customer investment commissions.
For the six months ended June 30, non interest income has increased $30 or
7.75% when compared to the similar period in 2000. This is a result of the
same factors affecting the second quarter increase, as well as new and
increased fees on products, which were not in effect for the entire time
period in 2000.                                                                                                                                                                                                                                                                                                            
|
| |  | Non interest expense decreased $11 or 1.61% when comparing the second
quarter of 2001 to 2000. Most of this decrease is a result of reduced
personnel costs for salaries and employee benefits as some vacant positions
have not yet been replaced. This is partially offset by an increase in
premises and equipment costs due to the renovation of the main office
facility and increased postage and supply expenses. For the six months
ended June 30, 2001 non interest expense slightly increased $5 or .38%
compared to the same period in 2000. Salaries and benefits decreased $13 or
1.72% as some vacant positions have not yet been filled. Decreases were
realized in marketing and data processing expenses due to continued efforts
to control expenses.                                                                                                                                                                     
|
| |  | The federal income tax provision for the second quarter of 2001 was $195, up
$21 for the same period in 2000. Year-to-date the income tax provision has
increased by $29 or 8.36%. This increase reflects a higher taxable income
for 2001. The effective tax rate was 31% and 29% for the three months ended
June 30, 2001 and 2000 and 31% and 30% for the six months ended June 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 $5,088 in
federal funds sold was maintained during the second 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 six 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 June 30, 2001 the securities available for sale were valued at $14,383.
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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

11



---



##### Table of Contents





| |  | 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 second quarter
of 2001, the results of the GAP analysis were within the Banks policy
guidelines. At June 30, 2001, the percentage of rate sensitive assets to
rate sensitive liabilities within the one-year time horizon was 46%.
|
| |  | The following table shows the Corporations GAP position as of June 30,
2001. The Corporation has a liability sensitive position of approximately
$36,502 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



---



##### Table of Contents



GAP Measurement (Dollars in thousands)

|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |         |         |       |   |         |   |       | 
|-------------- | -------- | ----- | ------- | ---- | ------ | - | ------- | --- | ----- | ------- | ------- | - | ------- | - | ------- | ------- | ----- | - | ------- | - | ----- | 
|               |          |       |         | 0-30 |        |   | 31-90   |     |       | 2nd     |         |   | 3rd     |   |         | 4th     |      
|               |          |       |         | Days |        |   | Days    |     |       | Quarter |         |   | Quarter |   |         | Quarter |      
|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |         |         |      
|Assets        
|              
|              
|              
|              
|Loans          |          | $     | 4,620   |      |        | $ | 7,497   |     |       | $       | 3,922   |   |         | $ | 3,177   |         |       | $ | 3,016   |  
|              
|              
|              
|              
|Loans Held-   
|              
|              
|              
|              
|               | For-Sale |       |         |     |        |   |         | 680 |       |         |         |  |         |   |         |        |       |   |         |  |      
|              
|              
|              
|              
|Allowance for 
|              
|              
|              
|              
|loan losses    |          |       |        |      |        |   |        |     |       |         |        |   |         |   |        |         |       |   |        |  
|              
|              
|              
|              
|Investments    |          |       | 1,967   |      |        |   |        |     |       |         | 2,059   |   |         |   | 907     |         |       |   | 1,393   |  
|              
|              
|              
|              
|Short-term    
|              
|              
|              
|              
|Investments    |          |       | 1,935   |      |        |   |        |     |       |         |        |   |         |   |        |         |       |   |        |  
|              
|              
|              
|              
|Other non-    
|              
|              
|              
|              
|earning assets |          |       |        |      |        |   |        |     |       |         |        |   |         |   |        |         |       |   |        |  
|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |        
|               |          | Total |         | $    | 8,522  |   |         | $   | 8,177 |         |         | $ | 5,981   |   |         | $       | 4,084 |   |         | $ | 4,409 | 
|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |        
|Liabilities   
|              
|              
|              
|              
|Non interest  
|              
|              
|              
|              
|bearing       
|              
|              
|              
|              
|deposits       |          | $     | 10,080  |      |        | $ |        |     |       | $       |        |   |         | $ |        |         |       | $ |        |  
|              
|              
|              
|              
|Interest      
|              
|              
|              
|              
|bearing       
|              
|              
|              
|              
|deposits       |          |       | 36,840  |      |        |   | 3,475   |     |       |         | 3,885   |   |         |   | 4,146   |         |       |   | 3,111   |  
|              
|              
|              
|              
|Long-term     
|              
|              
|              
|              
|FHLB          
|              
|              
|              
|              
|borrowings     |          |       |        |      |        |   | 1,000   |     |       |         | 5,122   |   |         |   | 16      |         |       |   |        |  
|              
|              
|              
|              
|Other         
|              
|              
|              
|              
|liabilities    |          |       |        |      |        |   |        |     |       |         |        |   |         |   |        |         |       |   |        |  
|              
|              
|              
|              
|Capital        |          |       |        |      |        |   |        |     |       |         |        |   |         |   |        |         |       |   |        |  
|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |        
|               |          | Total |         | $    | 46,920 |   |         | $   | 4,475 |         |         | $ | 9,007   |   |         |         | 4,162 |   |         | $ | 3,111 | 
|               |          |       |         |      |        |   |         |     |       |         |         |   |         |   |        
|GAP            |          | $     | (38,398 | )    |        | $ | 3,702   |     |       | $       | (3,026  | ) |         | $ | (78     | )       |       | $ | 1,298   |  
|              
|              
|              
|              
|Cumulative    
|              
|              
|              
|              
|GAP            |          | $     | (38,398 | )    |        | $ | (34,696 | )   |       | $       | (37,722 | ) |         | $ | (37,800 | )       |       | $ | (36,502 | )
|              
|              
|              
|              
|GAP ratio      |          |       | 18      | %    |        |   | 183     | %   |       |         | 66      | % |         |   | 98      | %       |       |   | 142     | %

[Additional columns below]

[Continued from above table, first column(s) repeated]

|               |          |       |         |        |        |   |         |   |        |       |         |   |        |   |        |       |        |   |        |     |         | 
|-------------- | -------- | ----- | ------- | ------ | ------ | - | ------- | - | ------ | ----- | ------- | - | ------ | - | ------ | ----- | ------ | - | ------ | --- | ------- | 
|               |          |       |         | Annual |        |   | 1-3     |   |        | 3-5   |         |   | Over 5 |  
|               |          |       |         | Total  |        |   | Years   |   |        | Years |         |   | Years  |   |        | Total |       
|               |          |       |         |        |        |   |         |   |        |       |         |   |        |   |        |       |       
|Assets        
|              
|              
|              
|              
|Loans          |          | $     | 22,232  |        |        | $ | 7,207   |   |        | $     | 7,852   |   |        | $ | 47,531 |       |        | $ | 84,822 |    
|              
|              
|              
|              
|Loans Held-   
|              
|              
|              
|              
|               | For-Sale |       |         | 680    |        |   |         |  |        |       |         |  |        |   |        |      |        |   |        | 680 |        
|              
|              
|              
|              
|Allowance for 
|              
|              
|              
|              
|loan losses    |          |       |        |        |        |   |        |   |        |       |        |   |        |   |       |       |        |   | (1,043 | )  
|              
|              
|              
|              
|Investments    |          |       | 6,326   |        |        |   | 8,708   |   |        |       | 657     |   |        |   | 659    |       |        |   | 16,350 |    
|              
|              
|              
|              
|Short-term    
|              
|              
|              
|              
|Investments    |          |       | 1,935   |        |        |   |        |   |        |       |        |   |        |   |       |       |        |   | 1,935  |    
|              
|              
|              
|              
|Other non-    
|              
|              
|              
|              
|earning assets |          |       |        |        |        |   |        |   |        |       |        |   |        |   |       |       |        |   | 7,830  |    
|               |          |       |         |        |        |   |         |   |        |       |         |   |        |   |       
|               |          | Total |         | $      | 31,173 |   |         | $ | 15,915 |       |         | $ | 8,509  |   |        | $     | 48,190 |   |        | $   | 110,574 | 
|               |          |       |         |        |        |   |         |   |        |       |         |   |        |   |       
|Liabilities   
|              
|              
|              
|              
|Non interest  
|              
|              
|              
|              
|bearing       
|              
|              
|              
|              
|deposits       |          | $     | 10,080  |        |        | $ |        |   |        | $     |        |   |        | $ |       |       |        | $ | 10,080 |    
|              
|              
|              
|              
|Interest      
|              
|              
|              
|              
|bearing       
|              
|              
|              
|              
|deposits       |          |       | 51,457  |        |        |   | 5,028   |   |        |       | 792     |   |        |   | 50     |       |        |   | 57,327 |    
|              
|              
|              
|              
|Long-term     
|              
|              
|              
|              
|FHLB          
|              
|              
|              
|              
|borrowings     |          |       | 6,138   |        |        |   | 14,961  |   |        |       | 6,253   |   |        |   | 894    |       |        |   | 28,246 |    
|              
|              
|              
|              
|Other         
|              
|              
|              
|              
|liabilities    |          |       |        |        |        |   |        |   |        |       |        |   |        |   |       |       |        |   | 1,543  |    
|              
|              
|              
|              
|Capital        |          |       |        |        |        |   |        |   |        |       |        |   |        |   |       |       |        |   | 13,378 |    
|               |          |       |         |        |        |   |         |   |        |       |         |   |        |   |       
|               |          | Total |         | $      | 67,675 |   |         | $ | 19,989 |       |         | $ | 7,045  |   |        | $     | 944    |   |        | $   | 110,574 | 
|              
|              
|              
|              
|GAP            |          | $     | (36,502 | )      |        | $ | (4,074  | ) |        | $     | 1,464   |   |        | $ | 47,246 |      
|              
|              
|              
|              
|Cumulative    
|              
|              
|              
|              
|GAP            |          | $     | (36,502 | )      |        | $ | (40,576 | ) |        | $     | (39,112 | ) |        | $ | 8,134  |      
|              
|              
|              
|              
|GAP ratio      |          |       | 46      | %      |        |   | 80      | % |        |       | 121     | % |        |   | 5,105  | %    



| |  | 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 $437,000 or
3.44% to

13



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##### Table of Contents





| |  | Item 2. Managements discussion and analysis of financial condition and
results of operations (continued)                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | $13,143,000 for the first six months of 2001. This represents 11.89%
of total assets. At June 30, 2000, the similar ratio of shareholders
equity to total assets was 11.57%. Dividends declared per common share
increased by 13.11% to $.69 per share in 2001 compared to $.61 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 June 30, 2001, the Bank has a risk-based
total capital to asset ratio of 19.94%. The ratio exceeds the requirements
established by regulatory agencies as shown below.

|                                         |  |        |        |  |       |                   |       |        |                         |   |       |  |  |        |      |   |       |   |       |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ |  | ----- | ----------------- | ----- | ------ | ----------------------- | - | ----- |  |  | ------ | ---- | - | ----- | - | ----- |  |  |  | ----- | -
|(Dollars in thousands)                   |  |        |        |  |       | Minimum Required  |      
|June 30, 2001                            |  |        |        |  |       | For Capital       |       |        | Under Prompt Corrective |  
|                                         |  |        |        |  |       | Adequacy Purposes |       |        | Action Regulations      |  
|                                         |  | Actual |        |  |       |                   |       |        |                        
|                                         |  | Amount |        |  | Ratio |                   |       | Amount |                         |   | Ratio |  |  | Amount |      |   | Ratio |  
|                                         |  |        |        |  |       |                   |       |        |                         |   |       |  |  |        |      |   |       |  
|Total Capital (to risk
weighted assets)  |  | $      | 13,962 |  |       |                   | 19.94 | %      |                         | $ | 5,602 |  |  |        | 8.00 | % |       | $ | 7,003 |  |  |  | 10.00 | %
|                                        
|                                        
|                                        
|                                        
|Tier 1 capital (to risk
weighted assets) |  |        | 13,085 |  |       |                   | 18.69 |        |                         |   | 2,801 |  |  |        | 4.00 |   |       |   | 4,202 |  |  |  | 6.00  |  
|                                        
|                                        
|                                        
|                                        
|Tier 1 capital (to
average assets)       |  |        | 13,085 |  |       |                   | 11.71 |        |                         |   | 4,471 |  |  |        | 4.00 |   |       |   | 5,588 |  |  |  | 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.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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 June 30,
2001.






| |  | Item 2.  Changes in securities and use of proceeds                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the six months ended June 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.

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##### Table of Contents






| |  | 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 six months ended June 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 13.              
| | -- |  | -----------------------------------------------------------------------------------------------
|
| | 2. |  | Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended June 30,
2001.

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##### Table of Contents






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 2, 2001 |  | By:     /s/     Timothy Gaylord
|      |  |                |  | Timothy Gaylord                
|      |  |                |  | President                      
|     
|Date: |  | August 2, 2001 |  | By:     /s/     Lois A. Toth   
|      |  |                |  | Lois A. Toth                   
|      |  |                |  | Treasurer                      

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##### Table of Contents






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                                                                                                                                           

17