Capital Directions (CTDN) 10-Q 2003 Q1 Quarterly report

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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, 2003   Commission file number      33-20417      

Capital Directions, Inc.

(Exact name of registrant as specified in its charter)

Michigan
(State or other jurisdiction of
incorporation or organization) 38-2781737
(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. Yesx Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox

As of March 31, 2003 the registrant had outstanding 590,043 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, 2003 and December 31, 2002
		Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002
		Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002
		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
	Item 4. Controls and Procedures
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
		Certifications
		Index to Exhibits
906 Certification of Chief Executive Officer
906 Certfication of Chief Financial Officer

CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

	Page
	Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets March 31, 2003 and December 31, 2002	1
Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002	2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002	3
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002	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
Item 4. Controls and Procedures	13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	14
Item 2. Changes in Securities and Use of Proceeds	14
Item 3. Defaults Upon Senior Securities	14
Item 4. Submission of Matters to a Vote of Security Holders	14
Item 5. Other Information	14
Item 6. Exhibits and Reports on Form 8-K	14
Signatures	15
Certifications	16-17
Index to Exhibits	18

PART I — FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)
					March 31,			December 31,
					2003			2002
					(Unaudited)
ASSETS
	Cash and non interest bearing deposits				$	3,063		$	3,287
	Interest bearing deposits in other financial institutions					609			1,917
	Federal funds sold					4,910			3,230
				Total cash and cash equivalents		8,582			8,434
	Time deposits with other financial institutions					3,458			981
	Securities available for sale					11,762			12,644
	Securities held to maturity					400			400
	Federal Home Loan Bank (FHLB) stock					2,381			2,381
	Total securities					14,543			15,425
	Loan held for sale					—			635
	Loans:
		Commercial and agricultural				5,488			5,990
		Installment				1,625			1,726
		Real estate mortgage				88,102			89,383
				Total loans		95,215			97,099
			Allowance for loan losses			(1,039	)		(1,044	)
				Net loans		94,176			96,055
	Premises and equipment, net					1,035			1,029
	Accrued interest receivable					461			463
	Bank owned life insurance					1,813			1,794
	Other assets					1,541			1,398
				Total assets	$	125,609		$	126,214
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
	Deposits:
		Non interest bearing			$	12,964		$	10,767
		Interest bearing				61,836			63,940
			Total deposits			74,800			74,707
	Accrued interest payable					187			277
	FHLB borrowings					34,171			35,401
	Other liabilities					1,852			1,479
			Total liabilities			111,010			111,864
SHAREHOLDERS’ EQUITY
	Common stock: $5 par value, 1,300,000 shares authorized; 590,043 and 589,043 shares outstanding at March 31, 2003 and December 31, 2002 respectively					2,950			2,945
	Additional paid in capital					2,243			2,231
	Retained earnings					9,261			9,002
	Accumulated other comprehensive income, net of tax of $75 as of March 31, 2003 and $89 as of December 31, 2002					145			172
			Total shareholders’ equity			14,599			14,350
				Total liabilities and shareholders’ equity	$	125,609		$	126,214

See accompanying notes to consolidated financial statements.

1

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

				Three Months Ended
				March 31,
				2003		2002
(In thousands, except share and per share data)
Interest and Dividend Income
	Interest and fees on loans			$	1,662	$	1,792
	Federal funds sold and other				28		7
	Interest and dividends on securities:
		Taxable			123		168
		Tax exempt			49		40
			Total interest income		1,862		2,007
Interest Expense
	Deposits				307		383
	FHLB borrowings and other debt				464		451
			Total interest expense		771		834
Net interest income					1,091		1,173
Non Interest Income
	Service charges on deposit accounts				81		80
	Investment commission fees				10		17
	Net gains on sale of loans				187		31
	Other operating income				44		75
			Total non interest income		322		203
Non Interest Expense
	Salaries and employee benefits				438		403
	Premises and equipment				87		89
	Other operating expense				194		223
			Total non interest expense		719		715
Income before income tax expense					694		661
Income tax expense					205		210
Net Income				$	489	$	451
Average common shares outstanding					589,954		595,956
Basic earnings per common share				$	0.83	$	0.76
Diluted earnings per common share				$	0.82	$	0.75
Dividends per share of common stock, declared				$	0.39	$	0.39

See accompanying notes to consolidated financial statements.

2

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

(In thousands)
					Three Months Ended
					March 31,
					2003			2002
Cash flows from operating activities
	Net income				$	489		$	451
	Adjustments to reconcile net income to net cash from operating activities
		Depreciation				26			32
		Net amortization (accretion) on securities				24			1
		Loans originated for sale				(8,434	)		(1,001	)
		Proceeds from sale of loans originated for sale				9,256			1,006
		Net gain on sales of loans originated for sale				(187	)		(5	)
		Changes in assets and liabilities:
			Accrued interest receivable			2			(57	)
			Accrued interest payable			(90	)		14
			Other assets and bank owned life insurance			(148	)		(35	)
			Other liabilities			373			262
				Net cash from operating activities		1,311			668
Cash flows from investing activities
	Securities available for sale:
		Purchases				(248	)		—
		Maturities, calls and principal payments				1,065			623
	Net change in time deposits with other financial institutions					(2,477	)		—
	Net change in loans					1,879			(8,153	)
	Premises and equipment expenditures					(32	)		(2	)
			Net cash from investing activities			187			(7,532	)
Cash flows from financing activities
	Net change in deposits					93			633
	Proceeds from long-term FHLB borrowings					—			2,000
	Repayment of long-term FHLB borrowings					(1,230	)		(17	)
	Proceeds from shares issued upon exercise of stock options					17			—
	Cash dividends paid					(230	)		(220	)
			Net cash from financing activities			(1,350	)		2,396
Net change in cash and cash equivalents						148			(4,468	)
Cash and cash equivalents at beginning of year						8,434			6,973
Cash and cash equivalents at March 31					$	8,582		$	2,505
Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest			$	861		$	820
		Income taxes— federal			$	213		$	150

See accompanying notes to consolidated financial statements.

3

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the three months ended March 31, 2003 and 2002

(In thousands)

		Three Months Ended
		March 31,
		2003			2002
Net income		$	489		$	451
Other comprehensive income (loss), net Unrealized holding gains (losses) on securities available for sale arising during period			(41	)		(27	)
	Tax effects		14			9
Other comprehensive income (loss), net			(27	)		(18	)
Comprehensive income		$	462		$	433

See accompanying notes to consolidated financial statements.

4

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

Note 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, 2003 and December 31, 2002 and results of operations and cash flows for the three month periods ended March 31, 2003 and 2002.

Note 2.

The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year.

Note 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 2002, included in the Registrant’s 2002 Annual Report on Form 10-K.

Note 4. Analysis of the Allowance for Loan Losses

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, 2003, non-performing loans totaled $57,000 or .06% of total loans. This represents a decrease of $31,000 from the $88,000 balance at December 31, 2002.

			March 31,			December 31,
Non-performing Loans			2003			2002
Non-accrual			$	21,000		$	5,000
90 days or more past due				13,000			59,000
Renegotiated				23,000			24,000
		Total	$	57,000		$	88,000
	Non-performing loans as a percent of:
		Total loans		.06	%		.09	%
		Allowance for loan losses		5.49	%		8.43	%

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,
				2003			2002
		Balance at beginning of period		$	1,044		$	1,048
		Charge-offs			(7	)		(14	)
		Recoveries			2			10
			Net charge-offs		(5	)		(4	)
		Balance at end of period		$	1,039		$	1,044
Average loans outstanding during the period				$	97,047		$	86,794
Loans outstanding at end of period				$	95,215		$	97,099
Allowance as a percent of:
	Total loans at end of period				1.09	%		1.08	%
	Non-performing loans at end of period				1822.81	%		1186.36	%
Net charge-offs as a percent of:
	Average loans outstanding				.01	%		.00	%
	Allowance for loan losses				.48	%		.38	%

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
		2003		2002
Basic earnings per share:
	Net income	$	489	$	451
Weighted average shares outstanding for basic earnings per share			589,954		595,956
Per share amount		$	.83	$	.76
Diluted earnings per share:
	Net income	$	489	$	451
Weighted average shares outstanding for basic earnings per share			589,954		595,956
Effect of dilutive securities- stock options			6,563		4,056
Weighted average shares outstanding for diluted earnings per share			596,517		600,012
Per share amount		$	.82	$	.75

Stock options for 4,000 and 8,300 shares of common stock were not considered in computing diluted earnings per common share in 2003 and 2002 because they were not dilutive.

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, 2002		9,893			25,007		$	33.63
Granted		(4,000	)		4,000			48.00		.91
Exercised		—			(1,000	)		18.00
Forfeited		600			(600	)		39.83
Balance March 31, 2003		6,493			27,407		$	34.70

For the options outstanding at March 31, 2003, the range of exercise prices was $12.75 to $48.00 per share with a weighted average remaining contractual term of 6.80 years. At March 31, 2003, 15,836

7

Note 6. Stock Option Plan (continued)

stock options were exercisable at a weighted average price of $31.74 per share. Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2002. Awards under the Company’s plan vest over a five-year period. Therefore, the cost related to stock based compensation included in the determination of net income for 2003 and 2002 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

		Three Months			Three Months
		Ended			Ended
		March 31, 2003			March 31, 2002
Net income as reported		$	489		$	451
Add: stock-based compensation expense included in reported net income			—			—
Deduct: stock-based compensation expense determined under fair value based method			(3	)		(3	)
Pro forma net income		$	486		$	448
Basic and diluted income per share:
	As reported basic	$	.83		$	.76
	Pro forma basic		.82			.75
	As reported diluted		.82			.75
	Pro forma diluted		.81			.75

Stock-based compensation expense was computed using option pricing models. For the options granted during the three months ended March 31, 2003 and March 31, 2002 the following weighted average assumptions as of the grant date were utilized.

Risk-free interest rate		2.82	%		4.27	%
Expected option life	5 years			5 years
Expected stock price volatility		4.26	%		3.65	%
Expected dividend yield		3.56	%		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.

8

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

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 2003, the assets of the Company decreased $605 or 0.48% from December 31, 2002. This decrease resulted primarily from decreased residential mortgage loan balances due to normal repayment streams. New loan activity did not fully replace the repayment streams, as a portion of the new loans generated was sold directly into the secondary market.

Cash and cash equivalents have increased $148 or 1.75% in the three-month period from December 31, 2002 to March 31, 2003. This is a result of an increase in Federal funds sold and a decrease in short-term interest bearing deposits in other financial institutions.

Total outstanding loans have decreased $1,884 during the first quarter of 2003. This is a decrease of 1.94% from December 31, 2002. The greatest portion of this decrease has been realized in residential mortgage loans, while commercial and installment loans have decreased slightly. During the first quarter of 2003, the Company has continued to sell certain newly originated 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 $5 or .48% during the three month period ending March 31, 2003. At March 31, 2003 the allowance as a percent of outstanding loans was 1.09% compared to 1.08% at December 31, 2002. Management continues to maintain the allowance for loan losses at a level considered appropriate to absorb probable incurred losses in the portfolio.

Total deposits have increased $93 or .12% during the first quarter of 2003. This increase was concentrated in non-interest bearing deposits while time deposits showed a slight decline.

Total shareholders’ equity increased $249 or 1.74% in the first quarter of 2003. This increase was comprised of net income of $489 and offset by decrease in net unrealized gains on available for sale securities of $27 and by dividends declared of $230 and proceeds from shares issued upon the exercise of stock options. Book value per share was $24.74 at March 31, 2003 compared to $24.36 at December 31, 2002.

Results of Operations(In thousands)

For the first quarter of 2003, net income was $489, basic earnings per share was $.83, and diluted earnings per share was $.82, compared to $451, $.76, and $.75 for the same period in 2002. Average earning assets increased to $118,842 or 5.43% from March 31, 2002 to March 31, 2003. The average yield on earning assets decreased to 6.45% for the quarter ended March 31, 2003 from 7.30% for the comparable time period in 2002. Average costs for rate related liabilities decreased forty-five basis points to 3.20% at March 31, 2003 from 3.65% at March 31, 2002. Net interest margin decreased to 3.82% for the first three months of 2003 compared to 4.30% in the same period of 2002. The Company is experiencing a decreasing margin related primarily to the change in the structure of earning assets. As mortgage loan payoffs from refinancing increased during 2002, some of the funds were invested in interest bearing deposits with other financial institutions, which tend to be at lower yields as compared to loans. In addition, residential mortgage loan demand increased significantly during the past several months and many of the new, lower rate loans were sold into the secondary market to protect the Company from interest-rate risk. The following table illustrates the change in net interest margin for the three months ended March 31, 2003 and March 31, 2002.

9

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

		2003							2002
		Average				Yield/			Average				Yield/
		Balance		Interest(1)		Rate(1)			Balance		Interest(1)		Rate(1)
Loans (taxable)		$	96,508	$	1,654		6.95	%	$	97,143	$	1,791		7.48	%
Loans (non-taxable)			539		6		4.51			98		2		8.16
Taxable securities			9,836		123		5.07			10,594		168		6.43
Non-taxable securities			4,942		75		6.15			3,186		61		7.75
Loans held for sale			317		4		5.12			—		—		.00
Federal funds sold and other			6,700		28		1.63			1,704		7		1.64
	Total interest earning assets	$	118,842	$	1,890		6.45	%	$	112,725	$	2,029		7.30	%
Interest bearing demand deposits		$	10,825	$	16		0.60	%	$	10,094	$	14		.56	%
Savings deposits			25,079		63		1.02			23,310		84		1.46
Time deposits <$100,000			20,483		177		3.50			18,837		212		4.57
Time deposits $100,000 and more			6,713		51		3.08			8,094		73		3.66
Federal funds purchased			—		—		.00			277		1		1.44
Other borrowings			34,336		464		5.48			32,188		450		5.67
	Total interest bearing liabilities	$	97,436	$	771		3.20	%	$	92,800	$	834		3.65	%
Net Interest Income/Spread				$	1,119		3.24	%			$	1,195		3.65	%
Net Interest Margin							3.82	%						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 Company had a decrease in net interest income due primarily to funds deployed into lower yielding deposits with other financial institutions and fed funds growth as well as decreased loan and investment rates.

Change in Net Interest Income
(Dollars in thousands)			2003 compared to 2002
			Volume			Rate			Total
Earning Assets
	Loans (taxable)		$	(12	)	$	(125	)	$	(137	)
	Loans (non-taxable)			5			(1	)		4
	Taxable securities			(11	)		(34	)		(45	)
	Non-taxable securities			29			(15	)		14
	Loans held for sale			4			—			4
	Federal funds sold and other			21			—			21
		Total interest income	$	36		$	(175	)	$	(139	)
Interest Bearing Liabilities
	Interest bearing demand deposits		$	1		$	1		$	2
	Savings deposits			6			(27	)		(21	)
	Time deposits <$100,000			17			(52	)		(35	)
	Time deposits $100,000 or more			(11	)		(11	)		(22	)
	Fed funds purchased			(1	)		—			(1	)
	Other borrowings			29			(15	)		14
		Total interest expense	$	41		$	(104	)	$	(63	)
	Net interest Income		$	(5	)	$	(71	)	$	(76	)

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 2003 as well as for the same period of 2002. This is representative of the stable loss experience and continuing performance experienced in the loan portfolio.

Non interest income increased $119 or 58.62% during the first quarter of 2003 when compared to the first quarter of 2002. Of this increase, a majority is attributable to gains realized on loans sold, which includes the recognition of servicing rights related to loans sold, during the period however, this was partially offset by less customer investment commissions and decreased fees from ATM activity.

Non interest expense increased $4 or .56% when comparing the first quarter of 2003 to the first quarter of 2002. Most of this increase is a result of increased expenses for salaries and employee benefits as well as data processing expenses, postage and supply costs. This is partially offset by costs for marketing, telephone and Michigan Single Business Tax which have decreased since the prior year.

The Federal income tax provision for the first three months of 2003 was $205, down slightly from $210 for the same period in 2002.

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 $2,855 in federal funds sold was maintained during the first quarter of 2003. 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, 2003 the securities available for sale were valued at $11,762. 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 2003, the results of the GAP analysis were within the Bank’s policy guidelines. At March 31, 2003, the percentage of rate sensitive assets to rate sensitive liabilities within the one-year time horizon was 52%.The following table shows the Company’s GAP position as of March 31, 2003. The Company has a liability sensitive position of approximately $33,089 within the one-year time frame, which indicates higher net interest income may be earned if rates decrease during the period and lower net

11

Liquidity and Interest Rate Risk (continued)

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. The GAP model used by the Bank differs from the following chart in that actual loan prepayment and deposit longevity experience are also factored into the calculation. Using this method, the Bank’s GAP position at March 31, 2003 was an asset sensitive position of $15,805 or 12.61% at one year.

GAP Measurement(Dollars in thousands)

		0-30			31-90			2nd			3rd			4th			Annual			1-3			3-5			Over 5
		Days			Days			Quarter			Quarter			Quarter			Total			Years			Years			Years			Total
Assets
Loans		$	3,514		$	8,219		$	1,644		$	1,059		$	3,104		$	17,540		$	2,506		$	11,812		$	63,357		$	95,215
Allowance for loan losses			—			—			—			—			—			—			—			—			—			-1,039
Securities (1)			3,313			931			2,056			1,248			1,623			9,171			4,481			586			305			14,543
Short-term Investments			4,925			594			—			—			—			5,519			—			—			—			5,519
Time deposits with other financial institutions			—			—			1,575			—			1,487			3,062			396			—			—			3,458
Other non- earning assets			—			—			—			—			—			—			—			—			—			7,913
	Total	$	11,752		$	9,744		$	5,275		$	2,307		$	6,214		$	35,292		$	7,383		$	12,398		$	63,662		$	125,609
Liabilities Non interest bearing deposits		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	12,964
Interest bearing deposits			36,725			3,141			3,379			3,363			3,749			50,357			5,274			6,205			—			61,836
FHLB borrowings (2)			4,000			10,000			2,000			1,024			1,000			18,024			7,253			8,062			832			34,171
Other liabilities			—			—			—			—			—			—			—			—			—			2,039
Capital			—			—			—			—			—			—			—			—			—			14,599
	Total	$	40,725		$	13,141		$	5,379		$	4,387		$	4,749		$	68,381		$	12,527		$	14,267		$	832		$	125,609
GAP		$	(28,973	)	$	(3,397	)	$	(104	)	$	(2,080	)	$	1,465		$	(33,089	)	$	(5,144	)	$	(1,869	)	$	62,720
Cumulative GAP		$	(28,973	)	$	(32,370	)	$	(32,474	)	$	(34,554	)	$	(33,089	)	$	(33,089	)	$	(38,233	)	$	(40,102	)	$	22,618
GAP ratio			29	%		74	%		98	%		53	%		131	%		52	%		59	%		87	%		7,652	%

(1)	Maturities reflect probable prepayments and calls.
(2)	FHLB borrowings include putable advances, which may be converted to adjustable rates or prepaid beginning one, two or three years after the purchase date. The above schedule reflects maturities at prepayment date on putable advances.

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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 $276 or 1.95% to $14,454 for the first quarter of 2003. This represents 11.51% of total assets. At December 31, 2002, the similar ratio of shareholders’ equity to total assets was 11.23%. Dividends declared per common share at $.39 per share in the first quarter of 2003 was unchanged when compared to the same period in 2002.

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, 2003, the Bank has a “risk-based” total capital to asset ratio of 19.81%. The ratio exceeds the requirements established by regulatory agencies as shown below.

(Dollars in thousands)			Minimum Required
March 31, 2003			For Capital					Under Prompt Corrective
	Actual		Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	14,459		19.81	%	$	5,838		8.00	%	$	7,298		10.00	%
Tier 1 capital (to risk weighted assets)		13,545		18.56			2,919		4.00			4,379		6.00
Tier 1 capital (to average assets)		13,545		10.89			4,976		4.00			6,220		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 2003.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of Capital Directions, Inc.’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by Capital Directions, Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in Capital Directions, Inc.’s internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

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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, 2003.

Item 2. Changes in Securities and Use of Proceeds

During the three months ended March 31, 2003, there weren’t any changes in the Registrant’s securities, relevant to the requirements of this section, that would cause any shareholder’s rights to be materially modified, limited or qualified.

Item 3. Defaults Upon Senior Securities

No defaults have occurred involving senior securities on the part of the Registrant.

Item 4. Submission of Matters to a Vote of Security Holders

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, 2003.

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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 8, 2003	By: /s/ Timothy Gaylord
	Timothy Gaylord
	President
Date: May 8, 2003	By: /s/ Lois A. Toth
	Lois A. Toth
	Treasurer

15

Certifications

I, Timothy P. Gaylord, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Capital Directions, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 8, 2003

/s/ Timothy P. Gaylord
     
Timothy P. Gaylord
Chief Executive Officer

16

Certifications

I, Lois A. Toth, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Capital Directions, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of the date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 8, 2003

/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
99.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

18