Capital Directions (CTDN) 10-Q 2002 Q1 Quarterly report

UNITED STATES
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   March 31, 2002      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 April 26, 2002 the registrant had outstanding 595,956 shares of common stock having a par value of $5 per share.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets March 31, 2002 and December 31, 2001
		Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2002 and 2001
		Notes to Interim Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
Part II — Other Information
	Item 1. Legal proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
		Signatures
		Index to Exhibits

CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

			Page
PART I – FINANCIAL INFORMATION			Number
	Item 1. Financial Statements
		Consolidated Balance Sheets March 31, 2002 and December 31, 2001		1
		Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001		2
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001		3
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2002 and 2001		4
		Notes to Interim Consolidated Financial Statements		5-8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			8-13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			13
PART II – OTHER INFORMATION
	Item 1. Legal Proceedings			13
	Item 2. Changes in Securities and Use of Proceeds			13
	Item 3. Defaults Upon Senior Securities			13
	Item 4. Submission of Matters to a Vote of Security Holders			14
	Item 5. Other Information			14
	Item 6. Exhibits and Reports on Form 8-K			14
		Signatures		15
		Index to Exhibits		16

PART I – FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)
					March 31,			December 31,
					2002			2001
					(Unaudited)
ASSETS
	Cash and non interest bearing deposits				$	2,022		$	2,642
	Interest bearing deposits					43			38
	Federal funds sold					440			4,293
				Total cash and cash equivalents		2,505			6,973
	Securities available for sale					11,549			12,200
	Federal Home Loan Bank (FHLB) stock					1,967			1,967
	Total investment securities					13,516			14,167
	Loans:
		Commercial and agricultural				4,420			5,188
		Installment				2,016			2,266
		Real estate mortgage				94,548			85,378
				Total loans		100,984			92,832
				Allowance for loan losses		(1,047	)		(1,048	)
				Net loans		99,937			91,784
	Premises and equipment, net					1,077			1,107
	Accrued income and other assets					3,347			3,246
				Total assets	$	120,382		$	117,277
LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES
	Deposits:
		Non interest bearing			$	11,005		$	10,470
		Interest bearing				60,561			60,463
			Total deposits			71,566			70,933
	Long-term FHLB borrowings					33,108			31,125
	Other liabilities					1,745			1,456
			Total liabilities			106,419			103,514
SHAREHOLDERS’ EQUITY
	Common stock: $5 par value, 1,300,000 shares authorized; 595,956 shares outstanding at March 31, 2002 and December 31, 2001					2,980			2,980
	Additional paid in capital					2,597			2,597
	Retained earnings					8,130			7,912
	Accumulated other comprehensive income, net of tax of $132 as of March 31, 2002 and $141 as of December 31, 2001					256			274
				Total shareholders’ equity		13,963			13,763
				Total liabilities and shareholders’ equity	$	120,382		$	117,277

See accompanying notes to consolidated financial statements.

1

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

(In thousands, except share and per share data)				Three Months Ended
				March 31,
				2002		2001
Interest and Dividend Income
	Interest and fees on loans			$	1,792	$	1,734
	Federal funds sold				7		49
	Interest and dividends on investment securities:
		Taxable			168		232
		Tax exempt			40		39
			Total interest income		2,007		2,054
Interest Expense
	Deposits				383		584
	Short-term borrowings				1		1
	Long-term borrowings				450		409
			Total interest expense		834		994
Net interest income					1,173		1,060
Non Interest Income
	Service charges on deposit accounts				80		79
	Investment commission fees				17		13
	Net gains on sale of loans				31		6
	Other operating income				75		86
			Total non interest income		203		184
Non Interest Expense
	Salaries and employee benefits				403		376
	Premises and equipment				89		83
	Other operating expense				223		198
			Total non interest expense		715		657
Income before income tax expense					661		587
Income tax expense					210		181
Net Income				$	451	$	406
Average common shares outstanding					595,956		598,056
Basic earnings per common share				$	0.76	$	0.68
Diluted earnings per common share				$	0.75	$	0.67
Dividends per share of common stock, declared				$	0.39	$	0.34

See accompanying notes to consolidated financial statements.

2

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

(In thousands)				Three Months Ended
				March 31,
				2002			2001
Cash flows from operating activities
	Net income			$	451		$	406
	Adjustments to reconcile net income to net cash from operating activities
		Depreciation			32			31
		Net amortization (accretion) on securities			1			(3	)
		Loans originated for sale			(1,001	)		(1,223	)
		Proceeds from sale of loans originated for sale			1,006			326
		Net gain on sales of loans originated for sale			(5	)		(1	)
		Changes in assets and liabilities:
			Accrued interest receivable		(57	)		(25	)
			Accrued interest payable		14			(11	)
			Other assets		(35	)		3
			Other liabilities		262			221
			Net cash from operating activities		668			(276	)
Cash flows from investing activities
	Securities available for sale:
		Maturities, calls and principal payments			623			1,347
	Net change in loans				(8,153	)		541
	Premises and equipment expenditures				(2	)		(130	)
			Net cash from investing activities		(7,532	)		1,758
Cash flows from financing activities
	Net change in deposits				633			(3,552	)
	Proceeds from long-term FHLB borrowings				2,000			3,000
	Repayment of long-term FHLB borrowings				(17	)		(2,593	)
	Dividends paid				(220	)		(203	)
			Net cash from financing activities		2,396			(3,348	)
Net change in cash and cash equivalents					(4,468	)		(1,866	)
Cash and cash equivalents at beginning of year					6,973			8,566
Cash and cash equivalents at March 31				$	2,505		$	6,700
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest		$	820		$	1,005
		Income taxes – federal		$	150		$	195

See accompanying notes to consolidated financial statements.

3

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the three months ended March 31, 2002 and 2001

(In thousands)
			Three Months Ended
			March 31,
			2002			2001
Net income			$	451		$	406
Other comprehensive income (loss),
	net
		Unrealized holding gains (losses) on securities available for sale arising during period		(27	)		153
		Tax effects		9			(52	)
Other comprehensive income (loss), net				(18	)		101
Comprehensive income			$	433		$	507

See accompanying notes to consolidated financial statements.

4

CAPITAL DIRECTIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.	In the opinion of management of the Registrant, the accompanying Consolidated Financial Statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Registrant as of March 31, 2002 and December 31, 2001 and results of operations and cash flows for the three month periods ended March 31, 2002 and 2001.
2.	The results of operations for the three months ended March 31, 2002 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 2001, included in the Registrant’s 2001 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 March 31, 2002, non-performing loans totaled $283 or .28% of total loans. This represents a decrease of $20,000 from the $303,000 balance at December 31, 2001.

		March 31,			December 31,
Non-performing Loans		2002			2001
Non-accrual		$	16,000		$	20,000
90 days or more past due			240,000			255,000
Renegotiated			27,000			28,000
	Total	$	283,000		$	303,000
Non-performing loans as a percent of:
	Total loans		.28	%		.33	%
	Allowance for loan losses		27.03	%		28.91	%

5

Note 4. Analysis of the Allowance For Loan Losses (continued)

The following table summarizes changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged-off, and additions or reductions to the allowance which have been charged or credited to expense.

(Dollars in thousands)				Three			Twelve
				Months			Months
				Ended			Ended
				March 31,			December 31,
				2002			2001
		Balance at beginning of period		$	1,048		$	1,053
		Charge-offs			(3	)		(36	)
		Recoveries			2			31
			Net charge-offs		(1	)		(5	)
		Balance at end of period		$	1,047		$	1,048
Average loans outstanding during the period				$	97,241		$	86,794
Loans outstanding at end of period				$	100,984		$	92,832
Allowance as a percent of:
	Total loans at end of period				1.04	%		1.13	%
	Non-performing loans at end of period				369.96	%		345.87	%
Net charge-offs as a percent of:
	Average loans outstanding				.00	%		.00	%
	Allowance for loan losses				.10	%		.48	%

6

Note 5. Earnings Per Share

A reconciliation of basic and diluted earnings per share for the three month period ending March 31 follows:

(Dollars in thousands)		Three months ended
		2002		2001
Basic earnings per share:
	Net income	$	451	$	406
Weighted average shares outstanding for basic earnings per share			595,956		598,056
Per share amount		$	.76	$	.68
Diluted earnings per share:
	Net income	$	451	$	406
Weighted average shares outstanding for basic earnings per share			595,956		598,056
Effect of dilutive securities-stock options			4,056		4,651
Weighted average shares outstanding for diluted earnings per share			600,012		602,707
Per share amount		$	.75	$	.67

Note 6. Stock Option Plan

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.

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
	December 31, 2001		13,893			22,007	$	32.12
Granted			(4,000	)		4,000		38.00		1.10
Balance
	March 31, 2002		9,893			26,007	$	33.03

For the options outstanding at March 31, 2002, the range of exercise prices was $12.75 to $41.50 per share with a weighted average remaining contractual term of 5.46 years. At March 31, 2002, 14,028 stock options were exercisable at a weighted average price of $27.85 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 in the following table.

7

Note 6. Stock Option Plan (continued)

The proforma effect may increase in the future if more options are granted (in thousands, except per share data).

		Three Months		Three Months
		Ended		Ended
		March 31, 2002		March 31, 2001
Net income		$	451	$	406
Pro forma			442		393
Basic and diluted income per share:
	As reported basic	$	.76	$	.68
	Pro forma basic		.74		.66
	As reported diluted		.75		.67
	Pro forma diluted		.74		.65

The pro forma effects are computed using option pricing models. For the options granted during the three months ended March 31, 2002 the following weighted average assumptions as of the grant date were utilized.

Risk-free interest rate		4.27	%
Expected option life	5 years
Expected stock price volatility		3.65	%
Expected dividend yield		4.15	%

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 revenues and services are derived from banking products and services. The Bank’s primary services include accepting retail deposits and making residential, consumer and commercial loans.

The Company 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)

During the first quarter of 2002, the assets of the Company increased $3,105 or 2.65% from December 31, 2001. This increase resulted primarily from increased residential mortgage loan demand due to favorable borrowing rates.

Cash and cash equivalents have decreased $4,468 or 64.08% in the three-month period from December 31, 2001 to March 31, 2002. This is a result of a reduction of Federal funds sold as those excess funds were deployed in the funding of new residential mortgages.

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Total outstanding loans have increased $8,152 during the first quarter of 2002. This is an increase of 8.78% from December 31, 2001. This greatest portion of this increase has been due to favorable residential mortgage loan rates, while commercial and installment loans have decreased slightly. During the first quarter of 2002, the Company has continued to sell certain loans into the secondary market as part of its asset and liability management strategy to minimize the risk associated with the recent reductions in interest rates.

The allowance for loan losses decreased $1 or .10% during the three month period ending March 31, 2002. At March 31, 2002 the allowance as a percent of outstanding loans was 1.04% compared to 1.13% at December 31, 2001. Management continues to maintain the allowance for loan losses at a level considered appropriate to absorb losses inherent in the portfolio.

Total deposits have increased $633 or .89% during the first quarter of 2002. This increase was concentrated in non-interest bearing and savings accounts while interest bearing demand and time deposits showed a slight decline.

Total shareholders’ equity increased $200 or 1.45% in the first quarter of 2002. This increase was comprised of net income of $451 and offset by decrease in net unrealized gains on available for sale securities of $18 and by dividends declared of $233. Book value per share was $23.43 at March 31, 2002 compared to $23.09 at December 31, 2001.

Results of Operations(In thousands)

For the first quarter of 2002, net income was $451, basic earnings per share was $.76, and diluted earnings per share was $.75, compared to $406, $.68, and $.67 for the same period in 2001. Average earning assets increased to $112,725 or 5.93% from March 31, 2001 to March 31, 2002. The average yield on earning assets decreased to 7.30% for the quarter ended March 31, 2002 from 7.93% for the comparable time period in 2001. Average costs for rate related liabilities decreased ninety-four basis points to 3.65% at March 31, 2002 from 4.59% at March 31, 2001. Net interest margin increased to 4.30% for the first three months of 2002 compared to 4.14% in the same period of 2001. The Company is experiencing an increasing margin related primarily to the change in the structure of earning assets. As loan demand declined during 2001, those funds were used to increase the securities portfolio, which tends to be at lower yields as compared to loans. As residential mortgage loan demand increased significantly during the past several months, funds from maturing securities as well as excess federal funds were deployed into higher yielding loans. The following table illustrates the change in net interest margin for the three months ended March 31, 2002 and March 31, 2001.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

		2002							2001
		Average				Yield/			Average					Yield/
		Balance		Interest(1)		Rate(1)			Balance		Interest(1)			Rate(1)
Loans (taxable)		$	97,143	$	1,791		7.48	%	$	85,053		$	1,722		8.21	%
Loans (non-taxable)			98		2		8.16			808			18		9.16
Taxable investment securities			10,594		168		6.43			13,926			232		6.76
Non-taxable investment securities			3,186		61		7.75			2,966			59		8.09
Federal funds sold and other			1,704		7		1.64			3,662			49		5.38
	Total interest earning assets	$	112,725	$	2,029		7.30	%	$	106,415		$	2,080		7.93	%
Interest bearing demand deposits		$	10,094	$	14		0.56	%	$	9,191		$	14		.63	%
Savings deposits			23,310		84		1.46			22,695			179		3.20
Time deposits <$100,000			18,837		212		4.57			17,743			249		5.69
Time deposits $100,000 and more			8,094		73		3.66			9,846			142		5.85
Federal funds purchased			277		1		1.44			28			1		6.07
Other borrowings			32,188		450		5.67			28,390			409		5.86
	Total interest bearing liabilities	$	92,800	$	834		3.65	%	$	87,893		$	994		4.59	%
Net Interest Income/Spread				$	1,195		3.65	%				$	1,086		3.34	%
Net Interest Margin							4.30	%							4.14	%

(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 Company had an increase in net interest income due primarily to securities and fed funds growth as well as increased loan rates.

Change in Net Interest Income
(Dollars in thousands)			2002 compared to 2001
			Volume			Rate			Total
Earning Assets
	Loans (taxable)		$	231		$	(162	)	$	69
	Loans (non-taxable)			(15	)		(1	)		(16	)
	Taxable investment securities			(53	)		(11	)		(64	)
	Non-taxable investment securities			4			(2	)		2
	Federal funds sold and other			(18	)		(24	)		(42	)
		Total interest income	$	149		$	(200	)	$	(51	)
Interest Bearing Liabilities
	Interest bearing demand deposits		$	1		$	(1	)	$	—
	Savings deposits			5			(100	)		(95	)
	Time deposits <$100,000			15			(52	)		(37	)
	Time deposits $100,000 or more			(22	)		(47	)		(69	)
	Fed funds purchased			2			(2	)		—
	Other borrowings			53			(12	)		41
		Total interest expense	$	54		$	(214	)	$	(160	)
	Net interest Income		$	95		$	14		$	109

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

There was no provision for loan losses during the first three months of 2002 as well as for the same period of 2001. This is representative of the stable loss experience and continuing performance experienced in the loan portfolio.

Non interest income increased $19 or 10.33% during the first quarter of 2002 when compared to the first quarter of 2001. Of this increase, a majority is attributable to gains realized on recognition of servicing rights related to loans sold during the period as well as by increased customer investment commissions. This was partially offset by a decrease in fees from ATM activity as well as a decrease in earnings realized on the Rabi Trust.

Non interest expense increased $58 or 8.83% when comparing the first quarter of 2002 to the first quarter of 2001. Most of this increase is a result of increased expenses for salaries and employee benefits as well as marketing, consulting and premises and equipment costs. This is partially offset by costs for data processing and supplies, which have decreased since the prior year.

The Federal income tax provision for the first three months of 2002 was $210, up from $181 for the same period in 2001. This increase reflects a higher taxable income for 2001.

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 demands of borrowers.

Sources of liquidity include federal funds sold, investment security maturities and principal payments. A net average balance of $1,681 in federal funds sold was maintained during the first quarter of 2002. 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. Other sources of liquidity include internally generated cash flow, repayments and maturities of loans, borrowings 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 March 31, 2002 the securities available for sale were valued at $11,549. It is not anticipated that management will use these funds due to the optional sources that may be available.

Interest rate sensitivity management seeks to maximize net interest margin through periods of changing interest rates. The Bank develops strategies to assure desired levels of interest sensitive assets and interest bearing liabilities mature or reprice within selected time frames.

Strategies include the use of variable rate loan products in addition to managing deposit accounts and maturities in the investment portfolio. The following table, using recommended regulatory standards, reflects the “rate sensitive position” or the difference between loans and investments, and liabilities that mature or reprice within the next year and beyond. The financial industry has generally referred to this difference as “GAP” and its handling as “GAP Management”. Throughout the first quarter of 2001, the results of the GAP analysis were within the Bank’s policy guidelines. At March 31, 2002, the percentage of rate sensitive assets to rate sensitive liabilities within the one-year time horizon was 50%.

11

Liquidity and Interest Rate Risk (continued)

The following table shows the Company’s GAP position as of March 31, 2002. The Company has a liability sensitive position of approximately $28,337 within the one-year time frame, which indicates higher net interest income may be earned if rates decrease during the period and lower net interest income may be earned if rates increase during the period. Due to the limitations of GAP analysis, modeling is also used to enhance measurement and control.

GAP Measurement (Dollars in thousands)
			0-30			31-90			2nd			3rd			4th
			Days			Days			Quarter			Quarter			Quarter
Assets
Loans			$	4,153		$	7,748		$	2,981		$	3,409		$	3,131
Allowance for loan losses				—			—			—			—			—
Investments				2,032			1,511			—			2,148			1,141
Short-term Investments				440			—			—			—			—
Other non-earning assets				—			—			—			—			—
	Total		$	6,625		$	9,259		$	2,981		$	5,557		$	4,272
Liabilities
Non interest bearing deposits			$	—		$	—		$	—		$	—		$	—
Interest bearing deposits				37,003			5,188			4,055			5,414			1,434
Long-term FHLB borrowings				—			—			—			707			3,230
Other liabilities				—			—			—			—			—
Capital				—			—			—			—			—
		Total	$	37,003		$	5,188		$	4,055		$	6,121		$	4,664
GAP			$	(30,378	)	$	4,071		$	(1,074	)	$	(564	)	$	(392	)
Cumulative GAP			$	(30,378	)	$	(26,307	)	$	(27,381	)	$	(27,945	)	$	(28,337	)
GAP ratio				18	%		178	%		74	%		91	%		92	%

[Additional columns below]

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

GAP Measurement (Dollars in thousands)
			Annual			1-3			3-5			Over 5
			Total			Years			Years			Years			Total
Assets
Loans			$	21,422		$	4,896		$	10,554		$	64,112		$	100,984
Allowance for loan losses				—			—			—			—			-1,047
Investments				6,832			5,701			487			496			13,516
Short-term Investments				440			—			—			—			440
Other non-earning assets				—			—			—			—			6,489
	Total		$	28,694		$	10,597		$	11,041		$	64,608		$	120,382
Liabilities
Non interest bearing deposits			$	—		$	—		$	—		$	—		$	11,005
Interest bearing deposits				53,094			4,767			2,650			50			60,561
Long-term FHLB borrowings				3,937			9,049			10,258			9,864			33,108
Other liabilities				—			—			—			—			1,745
Capital				—			—			—			—			13,963
		Total	$	57,031		$	13,816		$	12,908		$	9,914		$	120,382
GAP			$	(28,337	)	$	(3,219	)	$	(1,867	)	$	54,694
Cumulative GAP			$	(28,337	)	$	(31,556	)	$	(33,423	)	$	21,271
GAP ratio				50	%		77	%		86	%		652	%

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Capital Resources(Dollars in thousands)

The Company’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 $218 or 1.62% to $13,707 for the first quarter of 2002. This represents 11.39% of total assets. At December 31, 2001, the similar ratio of shareholders’ equity to total assets was 11.74%. Dividends declared per common share increased by 14.71% to $.39 per share in 2002 compared to $.34 in 2001.

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 March 31, 2002, the Bank has a “risk-based” total capital to asset ratio of 19.46%. The ratio exceeds the requirements established by regulatory agencies as shown below.

(Dollars in thousands)			Minimum Required
March 31, 2002			For Capital					Under Prompt Corrective
	Actual		Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount			Ratio
Total Capital (to risk weighted assets)	$	14,597		19.46	%	$	6,001		8.00	%		$	7,501		10.00	%
Tier 1 capital (to risk weighted assets)		13,658		18.21			3,001		4.00				4,501		6.00
Tier 1 capital (to average assets)		13,658		11.54			4,735		4.00				5,919		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 2002.

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 Company 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 March 31, 2002.

Item 2. Changes in Securities and Use of Proceeds

During the three months ended March 31, 2002, 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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Item 4. Submission of Matters to a Vote of Security Holders

No matters have been submitted to a vote of the Registrant’s security holders.

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 March 31, 2002.

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SIGNATURES

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

CAPITAL DIRECTIONS, INC
Date: May 1, 2002	By: /s/ Timothy Gaylord
	Timothy Gaylord President
Date: May 1, 2002	By: /s/ Lois A. Toth
	Lois A. Toth Treasurer

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Index to Exhibits

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

2	Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession – Consolidation Agreement included in Amendment No. 1 to Form S-4 Registrant Statement No. 33-20417
3	Instruments Defining the Rights of Security Holders, Including Debentures – Not applicable
11	Statement Regarding Computation of Per Share Earnings – Not applicable
15	Letter Regarding Unaudited Interim Financial Information – Not applicable
18	Letter Regarding Change in Accounting Principals – Not applicable
19	Previous Unfiled Documents – Not applicable
20	Report Furnished to Security Holders – Not applicable
23	Published Report Regarding Matters Submitted to Vote of Security Holders – Not applicable
24	Consents of Experts and Counsel – Not applicable
25	Power of Attorney – Not applicable
27	Additional Exhibits – Not applicable

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