##### Table of Contents



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
September 30, 2003 Commission file number 33-20417

Capital Directions,
Inc.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Michigan                                                       |  | 38-2781737                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)

|                                         |  |           
|---------------------------------------- |  | ----------
|322 South Jefferson St., Mason, Michigan |  | 48854-0130
|                                         |  |           
|(Address of principal executive offices) |  | (Zip Code)

|                                                    |  |               
|--------------------------------------------------- |  | --------------
|Registrants telephone number, including area code: |  | (517) 676-0500
|                                                    |  |               

None




Former name, former address and former fiscal
year, if changed since last report


Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of September 30, 2003 the registrant had outstanding 591,410 shares of
common stock having a par value of $5 per share.





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TABLE OF CONTENTS



|                                             |                                                                                               |                                                    |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION              
|                                             |                                                                                               | CONSOLIDATED BALANCE SHEETS                       
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME                 
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS             
|                                             |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME   
|                                             |                                                                                               | NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
|                                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                                             | 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                                  
|Index to Exhibits                           
|302 Certification of Timothy P. Gaylord     
|302 Certification of Lois A. Toth           
|906 Certification of Chief Executive Officer
|906 Certification of Chief Financial Officer



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##### Table of Contents



CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

|                               |  |  |  |         |  |                                                                                                                 |  |  |      |        |  | 
|------------------------------ |  |  |  | ------- |  | --------------------------------------------------------------------------------------------------------------- |  |  | ---- | ------ |  | 
|                               |  |  |  |         |  |                                                                                                                 |  |  |      | Page  
|                               |  |  |  |         |  |                                                                                                                 |  |  |      | Number
|                               |  |  |  |         |  |                                                                                                                 |  |  |      |       
|PART I  FINANCIAL INFORMATION |  |  |  |        
|                               |  |  |  | Item 1. |  | Financial Statements                                                                                            |  |  |      |       
|                               |  |  |  |         |  | Consolidated Balance Sheets September 30, 2003 and December 31, 2002                                            |  |  | 1    |       
|                               |  |  |  |         |  | Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002               |  |  | 2    |       
|                               |  |  |  |         |  | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002                     |  |  | 3    |       
|                               |  |  |  |         |  | Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 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                           |  |  | 8-14 |       
|                               |  |  |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  |  | 14   |       
|                               |  |  |  | Item 4. |  | Controls and Procedures                                                                                         |  |  | 14   |       
|PART II  OTHER INFORMATION    |  |  |  |        
|                               |  |  |  | Item 1. |  | Legal Proceedings                                                                                               |  |  | 15   |       
|                               |  |  |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                       |  |  | 15   |       
|                               |  |  |  | Item 3. |  | Defaults Upon Senior Securities                                                                                 |  |  | 15   |       
|                               |  |  |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                             |  |  | 15   |       
|                               |  |  |  | Item 5. |  | Other Information                                                                                               |  |  | 15   |       
|                               |  |  |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                |  |  | 15   |       
|                               |  |  |  |         |  | Signatures                                                                                                      |  |  | 16   |       
|                               |  |  |  |         |  | Index to Exhibits                                                                                               |  |  | 17   |       





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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)

|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |        |        |         |  
|------------------------------------ | --------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------ | ------- | ----------- | ------- | ------ | ------ | ------ | ------- | -
|                                     |                                                           | September 30,2003                                                                                                                                        |                      | December
31,2002                          
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         | (Unaudited) |         |        |        |       
|ASSETS                               |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |       
|                                     | Cash and non interest bearing deposits                    |                                                                                                                                                          | $                    | 2,150                                      |         |             | $       | 3,287  |       
|                                     | Interest bearing deposits in other financial institutions |                                                                                                                                                          |                      | 513                                        |         |             |         | 1,917  |       
|                                     | Federal funds sold                                        |                                                                                                                                                          |                      |                                           |         |             |         | 3,230  |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total cash and cash equivalents            |         |             | 2,663   |        |        |        | 8,434   |  
|                                     | Time deposits with other financial institutions           |                                                                                                                                                          |                      | 2,171                                      |         |             |         | 981    |       
|                                     | Securities available for sale                             |                                                                                                                                                          |                      | 9,775                                      |         |             |         | 12,644 |       
|                                     | Securities held to maturity                               |                                                                                                                                                          |                      | 900                                        |         |             |         | 400    |       
|                                     | Federal Home Loan Bank (FHLB) stock                       |                                                                                                                                                          |                      | 2,442                                      |         |             |         | 2,381  |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     | Total securities                                          |                                                                                                                                                          |                      | 13,117                                     |         |             |         | 15,425 |       
|                                     | Loan held for sale                                        |                                                                                                                                                          |                      | 190                                        |         |             |         | 635    |       
|                                     | Loans:                                                    |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           | Commercial and agricultural                                                                                                                              |                      |                                            | 4,676   |             |         |        | 5,990  |       
|                                     |                                                           | Installment                                                                                                                                              |                      |                                            | 1,283   |             |         |        | 1,726  |       
|                                     |                                                           | Real estate mortgage                                                                                                                                     |                      |                                            | 101,862 |             |         |        | 89,383 |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total loans                                |         |             | 107,821 |        |        |        | 97,099  |  
|                                     |                                                           |                                                                                                                                                          |                      | Allowance for loan losses                  |         |             | (1,015  | )      |        |        | (1,044  | )
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Net loans                                  |         |             | 106,806 |        |        |        | 96,055  |  
|                                     |                                                           | Premises and equipment, net                                                                                                                              |                      |                                            | 1,080   |             |         |        | 1,029  |       
|                                     |                                                           | Accrued interest receivable                                                                                                                              |                      |                                            | 466     |             |         |        | 463    |       
|                                     |                                                           | Bank owned life insurance                                                                                                                                |                      |                                            | 1,841   |             |         |        | 1,794  |       
|                                     |                                                           | Other assets                                                                                                                                             |                      |                                            | 1,511   |             |         |        | 1,398  |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total assets                               |         | $           | 129,845 |        |        | $      | 126,214 |  
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |       
|LIABILITIES                          |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |       
|                                     |                                                           | Deposits:                                                                                                                                                |                      |                                            |         |             |         |        |        |       
|                                     |                                                           |                                                                                                                                                          | Non interest bearing |                                            | $       | 13,732      |         |        | $      | 10,767 |        
|                                     |                                                           |                                                                                                                                                          | Interest bearing     |                                            |         | 61,825      |         |        |        | 63,940 |        
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total deposits                             |         |             | 75,557  |        |        |        | 74,707  |  
|                                     |                                                           | Accrued interest payable                                                                                                                                 |                      |                                            | 152     |             |         |        | 277    |       
|                                     |                                                           | Federal funds purchased                                                                                                                                  |                      |                                            | 3,215   |             |         |        |       |       
|                                     |                                                           | FHLB borrowings                                                                                                                                          |                      |                                            | 34,171  |             |         |        | 35,401 |       
|                                     |                                                           | Other liabilities                                                                                                                                        |                      |                                            | 1,733   |             |         |        | 1,479  |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total liabilities                          |         |             | 114,828 |        |        |        | 111,864 |  
|SHAREHOLDERS EQUITY                 |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |       
|                                     |                                                           | Common stock: $5 par value, 1,300,000 shares authorized;
591,410 and 589,043 shares outstanding at September 30, 2003
and December 31, 2002 respectively |                      |                                            | 2,957   |             |         |        | 2,945  |       
|                                     |                                                           | Additional paid in capital                                                                                                                               |                      |                                            | 2,267   |             |         |        | 2,231  |       
|                                     |                                                           | Retained earnings                                                                                                                                        |                      |                                            | 9,706   |             |         |        | 9,002  |       
|                                     |                                                           | Accumulated other comprehensive income, net of tax of $45
as of September 30, 2003 and $89 as of December 31, 2002                                       |                      |                                            | 87      |             |         |        | 172    |       
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total shareholders equity                 |         |             | 15,017  |        |        |        | 14,350  |  
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       
|                                     |                                                           |                                                                                                                                                          |                      | Total liabilities and shareholders equity |         | $           | 129,845 |        |        | $      | 126,214 |  
|                                     |                                                           |                                                                                                                                                          |                      |                                            |         |             |         |        |       

See accompanying notes to consolidated financial statements.

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

(In thousands, except share and per
share data)

|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       |  |       |       | 
|--------------------------------------------------- | ------------------------------------- | ---------------------------- | -------------------------- | --------------------- |  | ------------------ | ------- | ----------------- |  | --- | ------- | ----- |  | ----- | ------- | ----- |  | ----- | ----- | 
|                                                    |                                       |                              |                            |                       |  | Three Months Ended |         | Nine Months Ended
|                                                    |                                       |                              |                            |                       |  | September 30,      |         | September 30,    
|                                                    |                                       | 2003                         |                            | 2002                  |  | 2003               |         | 2002             
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |      
|                                                    |                                       | Interest and Dividend Income |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       |  |      
|                                                    | Interest and fees on loans            |                              | $                          | 1,727                 |  |                    | $       | 1,767             |  |     | $       | 5,039 |  |       | $       | 5,310 | 
|                                                    | Federal funds sold                    |                              |                            | 5                     |  |                    |         | 9                 |  |     |         | 22    |  |       |         | 20    | 
|                                                    | Interest and dividends on securities: |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|                                                    |                                       |                              | Taxable                    |                       |  | 86                 |         |                   |  | 157 |         |       |  | 316   |         |       |  | 490   |      
|                                                    |                                       |                              | Tax exempt                 |                       |  | 45                 |         |                   |  | 42  |         |       |  | 140   |         |       |  | 121   |      
|                                                    |                                       |                              | Other interest income      |                       |  | 13                 |         |                   |  | 1   |         |       |  | 53    |         |       |  | 1     |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|                                                    |                                       |                              |                            | Total interest income |  |                    | 1,876   |                   |  |     | 1,976   |       |  |       | 5,570   |       |  |       | 5,942 | 
|Interest Expense                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |      
|                                                    | Deposits                              |                              |                            | 253                   |  |                    |         | 362               |  |     |         | 846   |  |       |         | 1,112 | 
|                                                    | Short-term borrowings                 |                              |                            | 1                     |  |                    |         | 3                 |  |     |         | 1     |  |       |         | 6     | 
|                                                    | Long-term borrowings                  |                              |                            | 437                   |  |                    |         | 489               |  |     |         | 1,336 |  |       |         | 1,417 | 
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|                                                    |                                       |                              | Total interest expense     |                       |  | 691                |         |                   |  | 854 |         |       |  | 2,183 |         |       |  | 2,535 |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|Net Interest Income                                 |                                       |                              | 1,185                      |                       |  |                    | 1,122   |                   |  |     | 3,387   |       |  |       | 3,407   |      
|Provision for loan losses                           |                                       |                              |                           |                       |  |                    |        |                   |  |     |        |       |  |       |        |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|Net interest income after provision for loan losses |                                       |                              | 1,185                      |                       |  |                    | 1,122   |                   |  |     | 3,387   |       |  |       | 3,407   |      
|Non Interest Income                                 |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |      
|                                                    | Service charges on deposit accounts   |                              |                            | 102                   |  |                    |         | 77                |  |     |         | 276   |  |       |         | 236   | 
|                                                    | Investment commission fees            |                              |                            | 13                    |  |                    |         | 6                 |  |     |         | 34    |  |       |         | 37    | 
|                                                    | Net gains on sale of loans            |                              |                            | 119                   |  |                    |         | 117               |  |     |         | 326   |  |       |         | 168   | 
|                                                    | Other income                          |                              |                            | 3                     |  |                    |         | 59                |  |     |         | 113   |  |       |         | 222   | 
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|                                                    |                                       |                              | Total non interest income  |                       |  | 237                |         |                   |  | 259 |         |       |  | 749   |         |       |  | 663   |      
|Non Interest Expense                                |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |      
|                                                    | Salaries and employee benefits        |                              |                            | 462                   |  |                    |         | 392               |  |     |         | 1,336 |  |       |         | 1,173 | 
|                                                    | Premises and equipment                |                              |                            | 85                    |  |                    |         | 80                |  |     |         | 252   |  |       |         | 251   | 
|                                                    | Other operating expense               |                              |                            | 220                   |  |                    |         | 184               |  |     |         | 612   |  |       |         | 629   | 
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|                                                    |                                       |                              | Total non interest expense |                       |  | 767                |         |                   |  | 656 |         |       |  | 2,200 |         |       |  | 2,053 |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|Income before income tax expense                    |                                       |                              | 655                        |                       |  |                    | 725     |                   |  |     | 1,936   |       |  |       | 2,017   |      
|Income tax expense                                  |                                       |                              | 163                        |                       |  |                    | 228     |                   |  |     | 542     |       |  |       | 626     |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|Net Income                                          |                                       | $                            | 492                        |                       |  | $                  | 497     |                   |  | $   | 1,394   |       |  | $     | 1,391   |      
|                                                    |                                       |                              |                            |                       |  |                    |         |                   |  |     |         |       |  |       |         |       | 
|Average common shares outstanding                   |                                       |                              | 590,375                    |                       |  |                    | 589,515 |                   |  |     | 590,125 |       |  |       | 592,469 |      
|Basic earnings per common share                     |                                       | $                            | 0.83                       |                       |  | $                  | 0.84    |                   |  | $   | 2.36    |       |  | $     | 2.35    |      
|Diluted earnings per common share                   |                                       |                              | 0.82                       |                       |  |                    | 0.84    |                   |  |     | 2.33    |       |  |       | 2.33    |      
|Dividends per share of common stock, declared       |                                       |                              | 0.39                       |                       |  |                    | 0.39    |                   |  |     | 1.17    |       |  |       | 1.17    |      

See accompanying notes to consolidated financial statements.

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

(In thousands)

|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |        |        |       | 
|------------------------------------------------ | ------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------ | ---------------------------------- | ------- | ----------------- | ------ | ------ | ------ | ------ | ----- | 
|                                                 |                                                                           |                                                 |                                            |                                    |         | Nine Months Ended
|                                                 |                                                                           |                                                 |                                            |                                    |         | September 30,    
|                                                 |                                                                           | 2003                                            |                                            | 2002                              
|                                                 |                                                                           |                                                 |                                            |                                   
|Cash flows from operating activities             |                                                                           |                                                 |                                            |                                    |         |                   |        |       
|                                                 | Net income                                                                |                                                 | $                                          | 1,394                              |         |                   | $      | 1,391  |       
|                                                 | Adjustments to reconcile net income to net cash from
operating activities |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           | Depreciation                                    |                                            |                                    | 82      |                   |        |        | 93     |       
|                                                 |                                                                           | Net amortization on securities                  |                                            |                                    | 71      |                   |        |        | 3      |       
|                                                 |                                                                           | FHLB stock dividend                             |                                            |                                    | (61     | )                 |        |        |       |       
|                                                 |                                                                           | Loans originated for sale                       |                                            |                                    | (15,429 | )                 |        |        | (5,440 | )     
|                                                 |                                                                           | Proceeds from sale of loans originated for sale |                                            |                                    | 16,200  |                   |        |        | 4,942  |       
|                                                 |                                                                           | Net gain on sales of loans originated for sale  |                                            |                                    | (326    | )                 |        |        | (168   | )     
|                                                 |                                                                           | Stock-based compensation expense                |                                            |                                    | 1       |                   |        |        |       |       
|                                                 |                                                                           | Changes in assets and liabilities:              |                                            |                                    |         |                   |        |        |        |       
|                                                 |                                                                           |                                                 | Accrued interest receivable                |                                    |         | (3                | )      |        |        | (8     | )    
|                                                 |                                                                           |                                                 | Accrued interest payable                   |                                    |         | (125              | )      |        |        | 9      |      
|                                                 |                                                                           |                                                 | Other assets and bank owned life insurance |                                    |         | (116              | )      |        |        | (10    | )    
|                                                 |                                                                           |                                                 | Other liabilities                          |                                    |         | 253               |        |        |        | 189    |      
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           |                                                 |                                            | Net cash from operating activities |         |                   | 1,941  |        |        |        | 1,001 | 
|Cash flows from investing activities             |                                                                           |                                                 |                                            |                                    |         |                   |        |       
|                                                 | Securities available for sale:                                            |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           | Purchases                                       |                                            |                                    | (1,846  | )                 |        |        | (1,536 | )     
|                                                 |                                                                           | Maturities, calls and principal payments        |                                            |                                    | 4,515   |                   |        |        | 2,138  |       
|                                                 | Securities held to maturity:                                              |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           | Purchases                                       |                                            |                                    | (500    | )                 |        |        | (400   | )     
|                                                 | Net change in time deposits with other financial institutions             |                                                 |                                            | (1,190                             | )       |                   |        |       |       
|                                                 | Net change in loans                                                       |                                                 |                                            | (10,751                            | )       |                   |        | (7,067 | )     
|                                                 | Premises and equipment expenditures                                       |                                                 |                                            | (133                               | )       |                   |        | (33    | )     
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           |                                                 | Net cash from investing activities         |                                    |         | (9,905            | )      |        |        | (6,898 | )    
|Cash flows from financing activities             |                                                                           |                                                 |                                            |                                    |         |                   |        |       
|                                                 | Net change in deposits                                                    |                                                 |                                            | 850                                |         |                   |        | 6,130  |       
|                                                 | Federal funds purchased                                                   |                                                 |                                            | 3,215                              |         |                   |        |       |       
|                                                 | Proceeds from long-term FHLB borrowings                                   |                                                 |                                            | 8,000                              |         |                   |        | 4,000  |       
|                                                 | Repayment of long-term FHLB borrowings                                    |                                                 |                                            | (9,230                             | )       |                   |        | (17    | )     
|                                                 | Proceeds from shares issued upon exercise of stock options                |                                                 |                                            | 47                                 |         |                   |        | 18     |       
|                                                 | Repurchase of common stock                                                |                                                 |                                            |                                   |         |                   |        | (263   | )     
|                                                 | Cash dividends paid                                                       |                                                 |                                            | (689                               | )       |                   |        | (683   | )     
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           |                                                 | Net cash from financing activities         |                                    |         | 2,193             |        |        |        | 9,185  |      
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|Net change in cash and cash equivalents          |                                                                           |                                                 | (5,771                                     | )                                  |         |                   | 3,288  |       
|Cash and cash equivalents at beginning of year   |                                                                           |                                                 | 8,434                                      |                                    |         |                   | 6,973  |       
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|Cash and cash equivalents at September 30        |                                                                           | $                                               | 2,663                                      |                                    |         | $                 | 10,261 |       
|                                                 |                                                                           |                                                 |                                            |                                    |         |                   |        |        |       
|Supplemental disclosure of cash flow information |                                                                           |                                                 |                                            |                                    |         |                   |        |       
|                                                 | Cash paid during the period for:                                          |                                                 |                                            |                                    |         |                   |        |        |       
|                                                 |                                                                           | Interest                                        |                                            | $                                  | 2,308   |                   |        | $      | 2,526  |       
|                                                 |                                                                           | Income taxes  federal                          |                                            | $                                  | 544     |                   |        | $      | 560    |       

See accompanying notes to consolidated financial statements.

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CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the three and nine months ended September 30, 2003 and 2002

(In thousands)

|                                       |                                                                                          |   |     |                    |   |                   |     |      |   |      |       |      |   |   |       |      |   | 
|-------------------------------------- | ---------------------------------------------------------------------------------------- | - | --- | ------------------ | - | ----------------- | --- | ---- | - | ---- | ----- | ---- | - | - | ----- | ---- | - | 
|                                       |                                                                                          |   |     | Three Months Ended |   | Nine Months Ended
|                                       |                                                                                          |   |     | September 30,      |   | September 30,    
|                                       |                                                                                          |   |     | 2003               |   | 2002              |     | 2003 |   | 2002
|                                       |                                                                                          |   |     |                    |   |                   |     |     
|Net income                             |                                                                                          | $ | 492 |                    |   | $                 | 497 |      |   | $    | 1,394 |      |   | $ | 1,391 |     
|Other comprehensive income (loss),
net |                                                                                          |   |     |                    |   |                   |     |      |   |      |       |      |   |   |       |     
|                                       | Unrealized holding gains (losses)
on securities available for sale
arising during period |   |     | (39                | ) |                   |     | (47  | ) |      |       | (129 | ) |   |       | (141 | )
|                                       | Tax effects                                                                              |   |     | 13                 |   |                   |     | 16   |   |      |       | 44   |   |   |       | 48   |  
|                                       |                                                                                          |   |     |                    |   |                   |     |      |   |      |       |      |   |   |       |     
|Other comprehensive income (loss), net |                                                                                          |   | (26 | )                  |   |                   | (31 | )    |   |      | (85   | )    |   |   | (93   | )   
|                                       |                                                                                          |   |     |                    |   |                   |     |      |   |      |       |      |   |   |       |     
|Comprehensive income                   |                                                                                          | $ | 466 |                    |   | $                 | 466 |      |   | $    | 1,309 |      |   | $ | 1,298 |     
|                                       |                                                                                          |   |     |                    |   |                   |     |      |   |      |       |      |   |   |       |     

See accompanying notes to consolidated financial statements.

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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 September 30, 2003 and December
31, 2002 and results of operations for the three and nine month periods
ended September 30, 2003 and 2002, and the cash flows for the nine month
periods ended September 30, 2003 and 2002.

Note 2.

The results of operations for the nine months ended September 30, 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 September
30, 2003, non-performing loans totaled $103,000 or .10% of total loans.
This represents an increase of $15,000 from the $88,000 balance at December
31, 2002.

|                                      |                           |      |               |         |              |   |        |        |  
|------------------------------------- | ------------------------- | ---- | ------------- | ------- | ------------ | - | ------ | ------ | -
|                                      |                           |      | September 30, |         | December 31,
|Non-performing Loans                  |                           | 2003 |               | 2002   
|                                      |                           |      |               |        
|Non-accrual                           |                           | $    |              |         |              | $ | 5,000  |       
|90 days or more past due              |                           |      | 83,000        |         |              |   | 59,000 |       
|Renegotiated                          |                           |      | 20,000        |         |              |   | 24,000 |       
|                                      |                           |      |               |         |              |   |        |       
|                                      | Total                     |      | $             | 103,000 |              |   | $      | 88,000 |  
|                                      |                           |      |               |         |              |   |        |       
|Non-performing loans as a percent of: |                           |      |               |         |              |   |        |       
|                                      | Total loans               |      |               | .10     | %            |   |        | .09    | %
|                                      | Allowance for loan losses |      |               | 10.15   | %            |   |        | 8.43   | %

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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)

|                                            |                                       |                                |                 |        |           |     |              |         |       |    |  
|------------------------------------------- | ------------------------------------- | ------------------------------ | --------------- | ------ | --------- | --- | ------------ | ------- | ----- | -- | -
|                                            |                                       |                                |                 |        | Nine      |     | Twelve      
|                                            |                                       |                                |                 |        | Months    |     | Months      
|                                            |                                       |                                |                 |        | Ended     |     | Ended       
|                                            |                                       |                                |                 |        | Sept. 30, |     | December 31,
|                                            |                                       |                                |                 |        | 2003      |     | 2002        
|                                            |                                       |                                |                 |       
|                                            |                                       | Balance at beginning of period |                 | $      | 1,044     |     |              | $       | 1,048 |   
|                                            |                                       | Charge-offs                    |                 |        | (34       | )   |              |         | (14   | ) 
|                                            |                                       | Recoveries                     |                 |        | 5         |     |              |         | 10    |   
|                                            |                                       |                                |                 |        |           |     |              |        
|                                            |                                       |                                | Net charge-offs |        |           | (29 | )            |         |       | (4 | )
|                                            |                                       |                                |                 |        |           |     |              |        
|                                            |                                       | Balance at end of period       |                 | $      | 1,015     |     |              | $       | 1,044 |   
|                                            |                                       |                                |                 |        |           |     |              |        
|Average loans outstanding during the period |                                       | $                              | 98,853          |        |           | $   | 86,794       |        
|                                            |                                       |                                |                 |        |           |     |              |        
|Loans outstanding at end of period          |                                       | $                              | 107,821         |        |           | $   | 97,099       |        
|                                            |                                       |                                |                 |        |           |     |              |        
|Allowance as a percent of:                  |                                       |                                |                 |        |           |     |              |        
|                                            | Total loans at end of period          |                                |                 | .94    | %         |     |              | 1.08    | %    
|                                            |                                       |                                |                 |        |           |     |              |        
|                                            | Non-performing loans at end of period |                                |                 | 985.44 | %         |     |              | 1186.36 | %    
|                                            |                                       |                                |                 |        |           |     |              |        
|Net charge-offs as a percent of:            |                                       |                                |                 |        |           |     |              |        
|                                            | Average loans outstanding             |                                |                 | .03    | %         |     |              | .00     | %    
|                                            |                                       |                                |                 |        |           |     |              |        
|                                            | Allowance for loan losses             |                                |                 | 2.86   | %         |     |              | .38     | %    
|                                            |                                       |                                |                 |        |           |     |              |        

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Note 5. Earnings Per Share

A reconciliation of basic and diluted earnings per share for the three-month
and nine-month periods ending September 30 follows:

(Dollars in thousands, except
per share amounts)

|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|------------------------------------------------------------------ | ------------------------------------------- | - | ------------------ | ----- | ----------------- | - | ------- | ----- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                   |                                             |   | Three months ended |       | Nine months ended
|                                                                   |                                             |   | September 30,      |       | September 30,    
|                                                                   |                                             |   | 2003               |       | 2002              |   | 2003    |       | 2002
|                                                                   |                                             |   |                    |       |                   |   |         |      
|Basic earnings per share                                           |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|                                                                   | Net income                                  |   | $                  | 492   |                   |   | $       | 497   |      |   | $       | 1,394 |  |   | $       | 1,391 | 
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|Weighted average shares
outstanding for basic
earnings per share   |                                             |   | 590,375            |       |                   |   | 589,515 |       |      |   | 590,125 |       |  |   | 592,469 |      
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|                                                                   | Per share amount                            |   | $                  | .83   |                   |   | $       | .84   |      |   | $       | 2.36  |  |   | $       | 2.35  | 
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|Diluted earnings per share                                         |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |      
|                                                                   | Net income                                  |   | $                  | 492   |                   |   | $       | 497   |      |   | $       | 1,394 |  |   | $       | 1,391 | 
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|Weighted average shares
outstanding for basic
earnings per share   |                                             |   | 590,375            |       |                   |   | 589,515 |       |      |   | 590,125 |       |  |   | 592,469 |      
|                                                                   | Effect of dilutive securities-Stock options |   |                    | 8,206 |                   |   |         | 4,678 |      |   |         | 6,956 |  |   |         | 4,136 | 
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|Weighted average shares
outstanding for diluted
earnings per share |                                             |   | 598,581            |       |                   |   | 594,193 |       |      |   | 597,081 |       |  |   | 596,605 |      
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 
|Per share amount                                                   |                                             | $ | .82                |       |                   | $ | .84     |       |      | $ | 2.33    |       |  | $ | 2.33    |      
|                                                                   |                                             |   |                    |       |                   |   |         |       |      |   |         |       |  |   |         |       | 

Note 6. Stock Option Plan

Options to buy common stock were granted to officers and other key employees
under a Stock Option Plan which provided for the issuance of up to 40,000
shares of common stock. The plan provided 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 terminated on May 20, 2003. A new plan which provides
for the issuance of up to 20,000 shares of common stock was approved by
shareholders on April 24, 2003. The new plan contains the same features as the
original plan, however, at this time, no options have been awarded. All shares
and per share amounts for the original plan have been restated for stock
splits.

A summary of activity in the original 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                  |  |           |       |             |  |          | (2,367 | )       |  |          | 20.38 |              |  |          |     | 
|Forfeited                  |  |           | 600    |             |  |          | (600   | )       |  |          | 39.83 |              |  |          |     | 
|Expired on May 20, 2003    |  |           | (6,493 | )           |  |          |       |         |  |          |      |              |  |          |     | 
|                           |  |           |        |             |  |          |        |         |  |          |       |              |  |          |     | 
|Balance
September 30, 2003 |  |           |       |             |  |          | 26,040 |         |  | $        | 35.37 |              |  |          |     | 
|                           |  |           |        |             |  |          |        |         |  |          |       |              |  |          |     | 

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| |                                      
| | -------------------------------------
| | Note 6. Stock Option Plan (continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the options outstanding at September 30, 2003, the range of exercise
prices was $12.75 to $48.00 per share with a weighted average remaining
contractual term of 6.46 years. At September 30, 2003, 14,136 stock
options were exercisable at a weighted average price of $32.53 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.

(Dollars in thousands, except per share amounts)

|                                                                                  |  |                     |     |                |     |                |     |                |     |                |       |   |      |   |       |   |      | 
|--------------------------------------------------------------------------------- |  | ------------------- | --- | -------------- | --- | -------------- | --- | -------------- | --- | -------------- | ----- | - | ---- | - | ----- | - | ---- | 
|                                                                                  |  |                     |     | Three Months   |     | Three Months   |     | Nine Months    |     | Nine Months   
|                                                                                  |  |                     |     | Ended          |     | Ended          |     | Ended          |     | Ended         
|                                                                                  |  |                     |     | Sept. 30, 2003 |     | Sept. 30, 2002 |     | Sept. 30, 2003 |     | Sept. 30, 2002
|                                                                                  |  |                     |     |                |     |                |     |               
|Net income as reported                                                            |  | $                   | 492 |                |     | $              | 497 |                |     | $              | 1,394 |   |      | $ | 1,391 |  
|Add: stock-based compensation
expense included in reported
net income             |  |                     |    |                |     |                |    |                |     |                | 1     |   |      |   |      |  
|Deduct: stock-based compensation
expense determined under fair
value based method |  |                     | (2  | )              |     |                | (3  | )              |     |                | (3    | ) |      |   | (3    | )
|                                                                                  |  |                     |     |                |     |                |     |                |     |                |       |   |      |   |       |   |     
|Pro forma net income                                                              |  | $                   | 490 |                |     | $              | 494 |                |     | $              | 1,392 |   |      | $ | 1,388 |  
|                                                                                  |  |                     |     |                |     |                |     |                |     |                |       |   |      |   |       |   |     
|Basic and diluted income per share:                                               |  |                     |     |                |     |                |     |                |     |                |       |   |      |   |       |  
|                                                                                  |  | As reported basic   |     | $              | .83 |                |     | $              | .84 |                |       | $ | 2.36 |   |       | $ | 2.35 | 
|                                                                                  |  | Pro forma basic     |     |                | .83 |                |     |                | .84 |                |       |   | 2.36 |   |       |   | 2.34 | 
|                                                                                  |  | As reported diluted |     |                | .82 |                |     |                | .84 |                |       |   | 2.33 |   |       |   | 2.33 | 
|                                                                                  |  | Pro forma diluted   |     |                | .82 |                |     |                | .83 |                |       |   | 2.33 |   |       |   | 2.33 | 

Stock-based compensation expense was computed using option pricing models. For
the options granted during the nine months ended September 30, 2003 and
September 30, 2002 the following weighted average assumptions as of the grant
date were utilized.

|                                |  |         |      |         |  |  |      |  
|------------------------------- |  | ------- | ---- | ------- |  |  | ---- | -
|Risk-free interest rate         |  |         | 2.82 | %       |  |  | 4.95 | %
|Expected option life            |  | 5 years |      | 5 years
|Expected stock price volatility |  |         | 4.26 | %       |  |  | 4.02 | %
|Expected dividend yield         |  |         | 3.56 | %       |  |  | 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

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



| |  | subsidiaries provide banking and financial services in the banking industry.
Substantially all revenue
and services are derived from banking products and services. The Banks
primary services include accepting retail deposits and making residential,
consumer and commercial loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Assets totaled $129,845 at September 30, 2003. The 2.88% increase of $3,631
from $126,214 at December 31, 2002 resulted primarily from a decrease of
$5,771 in cash and cash equivalents and a decrease of $2,308 in securities,
which were used to partially fund an increase of $10,751 in net loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Cash and cash equivalents have decreased $5,771 or 68.43% in the nine-month
period from December 31, 2002 to September 30, 2003. This is a result of a
decrease in cash and non-interest bearing deposits, Federal funds sold and a
decrease in short-term interest bearing deposits in other financial
institutions. Time deposits with other financial institutions have
increased by 121.3% to $2,171 at September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Total outstanding net loans have increased $10,751 during the first nine
months of 2003. This is an increase of 11.07% from December 31, 2002. The
greatest portion of this increase has been realized in residential mortgage
loans, while commercial and installment loans have decreased. During the
first nine months 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 $29 or 2.78% during the nine-month
period ending September 30, 2003. At September 30, 2003 the allowance as a
percent of outstanding loans was .94% 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 $850 or 1.14% during the first nine months of
2003. This increase was concentrated in non-interest bearing deposits while
time deposits declined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Total shareholders equity increased $677 or 4.65% in the first nine months
of 2003. This increase was comprised of net income of $1,394, proceeds of
$47 from shares issued upon the exercise of options, and offset by a
decrease in net unrealized gains on available for sale securities of $85 and
by cash dividends declared of $691. Book value per share was $25.39 at
September 30, 2003 compared to $24.36 at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Results of Operations (In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | For the third quarter of 2003, net income was $492, basic earnings per share
was $.83, and diluted earnings per share was $.82, compared to $497, $.84,
and $.84 for the same period in 2002. Average earning assets increased
3.60% from $114,902 at September 30, 2002 to $119,033 at September 30, 2003.
The average yield on earning assets decreased to 6.35% for the quarter
ended September 30, 2003 from 6.99% for the comparable time period in 2002.
Average costs for rate related liabilities decreased fifty-five basis points
to 3.03% at September 30, 2003 from 3.58% at September 30, 2002. Net
interest margin decreased to 3.89% for the first nine months of 2003
compared to 4.04% 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

9



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##### Table of Contents



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

2002 and 2003, 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 nine months ended September 30, 2003 and September
30, 2002.

|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |      |  
|-------------------------------- | ---------------------------------- | - | ------- | ------- | ----------- | - | ------- | ----- | ------- |  | ----------- | ---- | ------- | - | ------ | ------- | ------ | - | ----- | ----- |  |  | ---- | ---- | -
|                                 |                                    |   | 2003    |         | 2002       
|                                 |                                    |   |         |         |            
|                                 |                                    |   | Average |         |             |   |         |       | Yield/  |  | Average     |      |         |   |        |         | Yield/
|                                 |                                    |   | Balance |         | Interest(1) |   | Rate(1) |       | Balance |  | Interest(1) |      | Rate(1)
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |        
|Loans (taxable)                  |                                    | $ | 98,320  |         |             | $ | 5,016   |       |         |  | 6.82        | %    |         | $ | 99,378 |         |        | $ | 5,298 |       |  |  | 7.13 | %   
|Loans (non-taxable)              |                                    |   | 534     |         |             |   | 19      |       |         |  | 4.76        |      |         |   | 167    |         |        |   | 9     |       |  |  | 7.21 |     
|Taxable securities               |                                    |   | 9,220   |         |             |   | 316     |       |         |  | 4.58        |      |         |   | 10,350 |         |        |   | 490   |       |  |  | 6.33 |     
|Non-taxable securities           |                                    |   | 4,695   |         |             |   | 213     |       |         |  | 6.07        |      |         |   | 3,254  |         |        |   | 183   |       |  |  | 7.52 |     
|Loans held for sale              |                                    |   | 241     |         |             |   | 10      |       |         |  | 5.55        |      |         |   | 114    |         |        |   | 6     |       |  |  | 7.04 |     
|Federal funds sold and other     |                                    |   | 6,023   |         |             |   | 75      |       |         |  | 1.66        |      |         |   | 1,639  |         |        |   | 21    |       |  |  | 1.71 |     
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |     
|                                 | Total interest earning assets      |   | $       | 119,033 |             |   | $       | 5,649 |         |  |             | 6.35 | %       |   | $      | 114,902 |        |   | $     | 6,007 |  |  |      | 6.99 | %
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |     
|Interest bearing demand deposits |                                    | $ | 10,976  |         |             | $ | 36      |       |         |  | 0.44        | %    |         | $ | 10,202 |         |        | $ | 42    |       |  |  | 0.55 | %   
|Savings deposits                 |                                    |   | 24,879  |         |             |   | 144     |       |         |  | 0.77        |      |         |   | 26,587 |         |        |   | 369   |       |  |  | 1.86 |     
|Time deposits <$100,000          |                                    |   | 20,723  |         |             |   | 528     |       |         |  | 3.41        |      |         |   | 16,167 |         |        |   | 503   |       |  |  | 4.16 |     
|Time deposits $100,000 and more  |                                    |   | 5,990   |         |             |   | 138     |       |         |  | 3.08        |      |         |   | 7,444  |         |        |   | 198   |       |  |  | 3.56 |     
|Federal funds purchased          |                                    |   | 128     |         |             |   | 1       |       |         |  | 1.04        |      |         |   | 415    |         |        |   | 6     |       |  |  | 1.93 |     
|Other borrowings                 |                                    |   | 33,328  |         |             |   | 1,336   |       |         |  | 5.36        |      |         |   | 33,622 |         |        |   | 1,417 |       |  |  | 5.63 |     
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |     
|                                 | Total interest bearing liabilities |   | $       | 96,024  |             |   | $       | 2,183 |         |  |             | 3.03 | %       |   | $      | 94,437  |        |   | $     | 2,535 |  |  |      | 3.58 | %
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |     
|Net Interest Income/Spread       |                                    |   |         |         |             | $ | 3,466   |       |         |  | 3.32        | %    |         |   |        |         |        | $ | 3,472 |       |  |  | 3.41 | %   
|                                 |                                    |   |         |         |             |   |         |       |         |  |             |      |         |   |        |         |        |   |       |       |  |  |      |     
|Net Interest Margin              |                                    |   |         |         |             |   |         |       |         |  | 3.89        | %    |         |   |        |         |        |   |       |       |  |  | 4.04 | %   

(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.

10



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##### Table of Contents



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

Change in Net Interest Income(Dollars in thousands)

|                             |                                  |                        |   |      |    |       |   |      |      |   |   |      |      |  
|---------------------------- | -------------------------------- | ---------------------- | - | ---- | -- | ----- | - | ---- | ---- | - | - | ---- | ---- | -
|                             |                                  | 2003 compared to 2002 
|                             |                                  | Volume                 |   | Rate |    | Total
|                             |                                  |                        |   |      |    |      
|Earning Assets               |                                  |                        |   |      |    |       |   |      |      |   |   |     
|                             | Loans (taxable)                  |                        | $ | (56  | )  |       | $ | (226 | )    |   | $ | (282 | )   
|                             | Loans (non-taxable)              |                        |   | 14   |    |       |   | (4   | )    |   |   | 10   |     
|                             | Taxable securities               |                        |   | (49  | )  |       |   | (125 | )    |   |   | (174 | )   
|                             | Non-taxable securities           |                        |   | 70   |    |       |   | (40  | )    |   |   | 30   |     
|                             | Loans held for sale              |                        |   | 5    |    |       |   | (1   | )    |   |   | 4    |     
|                             | Federal funds sold and other     |                        |   | 55   |    |       |   | (1   | )    |   |   | 54   |     
|                             |                                  |                        |   |      |    |       |   |      |      |   |   |     
|                             |                                  | Total interest income  |   | $    | 39 |       |   | $    | (397 | ) |   | $    | (358 | )
|Interest Bearing Liabilities |                                  |                        |   |      |    |       |   |      |      |   |   |     
|                             | Interest bearing demand deposits |                        | $ | 3    |    |       | $ | (9   | )    |   | $ | (6   | )   
|                             | Savings deposits                 |                        |   | (22  | )  |       |   | (203 | )    |   |   | (225 | )   
|                             | Time deposits <$100,000          |                        |   | 126  |    |       |   | (101 | )    |   |   | 25   |     
|                             | Time deposits $100,000 or more   |                        |   | (36  | )  |       |   | (24  | )    |   |   | (60  | )   
|                             | Fed funds purchased              |                        |   | (3   | )  |       |   | (2   | )    |   |   | (5   | )   
|                             | Other borrowings                 |                        |   | (12  | )  |       |   | (69  | )    |   |   | (81  | )   
|                             |                                  |                        |   |      |    |       |   |      |      |   |   |     
|                             |                                  | Total interest expense |   | $    | 56 |       |   | $    | (408 | ) |   | $    | (352 | )
|                             |                                  |                        |   |      |    |       |   |      |      |   |   |     
|                             | Net interest Income              |                        | $ | (17  | )  |       | $ | 11   |      |   | $ | (6   | )   
|                             |                                  |                        |   |      |    |       |   |      |      |   |   |     

There was no provision for loan losses during the first nine 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 decreased $22 or 8.49% during the third quarter of 2003
when compared to the third quarter of 2002. Of this decrease, a majority is
attributable to the reversal of servicing rights related to sold loans which
have subsequently paid-off during the period as well as by less customer
investment commissions and a smaller increase in cash value of life
insurance. For the nine months ended September 30, non-interest income has
increased $86 or 12.97% when compared to the similar period in 2002. This
is primarily attributable to an increase in the net gain on loans sold into
the secondary market and an increase in deposit service charges offset by
the reversal of servicing rights on paid-off sold loans and a decline in
investment commission fees.

Non interest expense increased $111 or 16.92% when comparing the third
quarter of 2003 to the third quarter of 2002. The majority of this increase
is a result of increased expenses for salaries and employee benefits due to
overtime, incentive pay and temporary help involved in the recent mortgage
refinancing boom. This is partially offset by costs for depreciation,
consulting fees and Michigan Single Business Tax which have decreased since
the prior year. For the nine months ended September 30, 2003 non-interest
expense increased $147 or 7.16% compared to the same period in 2002.
Salaries and benefits increased $163 or 13.90% as the company has
experienced significant overtime and temporary help expense relating to the
new and refinance mortgage activity. This has been partially offset by
decreased expenses for Michigan Single Business Tax as well as consulting
fees, legal and other real estate related expenses.

The Federal income tax provision for the third quarter of 2003 was $163,
down $65 from $228 for the same period in 2002. The company recognized
previous tax credits related to building renovations undertaken in previous
years. Year-to-date the income tax provision has decreased $84 from the
same period the previous year. The effective tax rate was 24.89% and 31.45%
for the three

11



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##### Table of Contents



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

months ended September 30, 2003 and 2002 and 28% and 31.04% for the nine
months ended September 30, 2003 and 2002. The effective tax rates are lower
than the 34% statutory rate due to non-taxable income on loans and
investments as well as the tax credit noted above.

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, security maturities and
principal payments. A net average balance of $2,144 in federal funds sold
was maintained during the third 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 September 30, 2003 the securities available for sale were valued at
$9,775. It is not anticipated that management will use these funds due to
the optional sources that may be available.

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

Strategies include the use of variable rate loan products in addition to
managing deposit accounts and maturities in the investment portfolio. The
following table, using recommended regulatory standards, reflects the rate
sensitive position or the difference between loans and investments, and
liabilities that mature or reprice within the next year and beyond. The
financial industry has generally referred to this difference as GAP and
its handling as GAP Management. Throughout the third quarter of 2003, the
results of the GAP analysis were within the Banks policy guidelines. At
September 30, 2003, the percentage of rate sensitive assets to rate
sensitive liabilities within the one-year time horizon was 39%. The
following table shows the Companys GAP position as of September 30, 2003.
The Company has a liability sensitive position of approximately $42,063
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. 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 September 30, 2003 was in an asset sensitive position of
$14,865 or 11.47% at one year.

12



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##### Table of Contents



GAP Measurement (Dollars in thousands)



|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |        |        | 
|----------------------------------------------- | ----- | ----- | ------- | ----- | ------ | ----- | ------- | ------- | ------ | ------- | ------- | ------- | ----- | ------ | ------- | ----- | ----- | - | ------- | --- | ----- | - | ------- | ------ | ------ | 
|                                                |       |       |         | 0-30  |        | 31-90 |         | 2nd     |        | 3rd     |         | 4th     |       | Annual
|                                                |       |       |         | Days  |        | Days  |         | Quarter |        | Quarter |         | Quarter |       | Total 
|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |       
|Assets                                          |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|Loans                                           |       | $     | 2,821   |       |        | $     | 9,481   |         |        | $       | 1,143   |         |       | $      | 458     |       |       | $ | 387     |     |       | $ | 14,290  |       
|Allowance for
loan losses                       |       |       |        |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   |        |       
|Loans held-for
Sale                             |       |       | 190     |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   | 190     |       
|Securities (1)                                  |       |       | 2,461   |       |        |       | 1,789   |         |        |         | 1,914   |         |       |        | 3,162   |       |       |   | 147     |     |       |   | 9,473   |       
|Short-term
Investments                          |       |       | 18      |       |        |       | 495     |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   | 513     |       
|Time deposits with
other financial
institutions |       |       |        |       |        |       |        |         |        |         | 1,577   |         |       |        | 198     |       |       |   | 396     |     |       |   | 2,171   |       
|Other non-earning assets                        |       |       |        |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   |        |       
|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|                                                | Total |       | $       | 5,490 |        |       | $       | 11,765  |        |         | $       | 4,634   |       |        | $       | 3,818 |       |   | $       | 930 |       |   | $       | 26,637 |       
|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|Liabilities                                     |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|Non interest
bearing
deposits                   |       | $     |        |       |        | $     |        |         |        | $       |        |         |       | $      |        |       |       | $ |        |     |       | $ |        |       
|Interest bearing
deposits                       |       |       | 42,625  |       |        |       | 2,733   |         |        |         | 4,798   |         |       |        | 1,761   |       |       |   | 1,544   |     |       |   | 53,461  |       
|FHLB
borrowings (2)                             |       |       | 2,000   |       |        |       | 8,024   |         |        |         | 1,000   |         |       |        | 1,000   |       |       |   |        |     |       |   | 12,024  |       
|Federal funds
purchased                         |       |       | 3,215   |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   | 3,215   |       
|Other
liabilities                               |       |       |        |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   |        |       
|Capital                                         |       |       |        |       |        |       |        |         |        |         |        |         |       |        |        |       |       |   |        |     |       |   |        |       
|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|                                                |       | Total |         | $     | 47,840 |       |         | $       | 10,757 |         |         | $       | 5,798 |        |         | $     | 2,761 |   |         | $   | 1,544 |   |         | $      | 68,700 | 
|                                                |       |       |         |       |        |       |         |         |        |         |         |         |       |        |         |       |       |   |         |     |       |   |         |       
|GAP                                             |       | $     | (42,350 | )     |        | $     | 1,008   |         |        | $       | (1,164  | )       |       | $      | 1,057   |       |       | $ | (614    | )   |       | $ | (42,063 | )     
|Cumulative
GAP                                  |       | $     | (42,350 | )     |        | $     | (41,342 | )       |        | $       | (42,506 | )       |       | $      | (41,449 | )     |       | $ | (42,063 | )   |       | $ | (42,063 | )     
|GAP ratio                                       |       |       | 11      | %     |        |       | 109     | %       |        |         | 80      | %       |       |        | 138     | %     |       |   | 60      | %   |       |   | 39      | %     

[Additional columns below]

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

|                                                |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |         |         | 
|----------------------------------------------- | ----- | ----- | ------- | ----- | ------ | ----- | ------- | ------ | ------ | ----- | ------ | ------ | --- | - | ------- | ------- | ------- | 
|                                                |       |       |         | 1-3   |        | 3-5   |         | Over 5 |        |       |        |       
|                                                |       |       |         | Years |        | Years |         | Years  |        | Total
|                                                |       |       |         |       |        |       |         |        |        |      
|Assets                                          |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|Loans                                           |       | $     | 3,182   |       |        | $     | 13,653  |        |        | $     | 76,696 |        |     | $ | 107,821 |        
|Allowance for
loan losses                       |       |       |        |       |        |       |        |        |        |       |       |        |     |   | -1,015  |        
|Loans held-for
Sale                             |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 190     |        
|Securities (1)                                  |       |       | 2,637   |       |        |       | 720     |        |        |       | 287    |        |     |   | 13,117  |        
|Short-term
Investments                          |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 513     |        
|Time deposits with
other financial
institutions |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 2,171   |        
|Other non-earning assets                        |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 7,048   |        
|                                                |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|                                                | Total |       | $       | 5,819 |        |       | $       | 14,373 |        |       | $      | 76,983 |     |   | $       | 129,845 |        
|                                                |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|Liabilities                                     |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|Non interest
bearing
deposits                   |       | $     |        |       |        | $     |        |        |        | $     |       |        |     | $ | 13,732  |        
|Interest bearing
deposits                       |       |       | 4,900   |       |        |       | 3,464   |        |        |       |       |        |     |   | 61,825  |        
|FHLB
borrowings (2)                             |       |       | 10,253  |       |        |       | 11,312  |        |        |       | 582    |        |     |   | 34,171  |        
|Federal funds
purchased                         |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 3,215   |        
|Other
liabilities                               |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 1,885   |        
|Capital                                         |       |       |        |       |        |       |        |        |        |       |       |        |     |   | 15,017  |        
|                                                |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|                                                |       | Total |         | $     | 15,153 |       |         | $      | 14,776 |       |        | $      | 582 |   |         | $       | 129,845 | 
|                                                |       |       |         |       |        |       |         |        |        |       |        |        |     |   |         |        
|GAP                                             |       | $     | (9,334  | )     |        | $     | (403    | )      |        | $     | 76,401 |        |     |   |         |        
|Cumulative
GAP                                  |       | $     | (51,397 | )     |        | $     | (51,800 | )      |        | $     | 24,601 |        |     |   |         |        
|GAP ratio                                       |       |       | 38      | %     |        |       | 97      | %      |        |       | 13,227 | %      |     |   |         |        



|(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.

13



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##### Table of Contents





| |  | 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 $752 or
5.30% to $14,930 for the first nine months of 2003. This represents 11.50%
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
$1.17 per share in the first nine months 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 September 30, 2003, the Bank has a
risk-based total capital to asset ratio of 19.15%. The ratio exceeds the
requirements established by regulatory agencies as shown below.                                                                                                                   

(Dollars in thousands)September 30, 2003

|                                         |  |        |        |                   |  |                    |       |                         |  |        |       |       |  |  |      |   |  |   |       |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ | ----------------- |  | ------------------ | ----- | ----------------------- |  | ------ | ----- | ----- |  |  | ---- | - |  | - | ----- |  |  |  | ----- | -
|                                         |  |        |        |                   |  | Minimum Required   |       |                         |  |        |       |       |  |  |      |   |  |  
|                                         |  |        |        |                   |  | For Capital        |       | Under Prompt Corrective
|                                         |  |        |        | Adequacy Purposes |  | Action Regulations
|                                         |  | Actual |        |                   |  |                   
|                                         |  | Amount |        | Ratio             |  | Amount             |       | Ratio                   |  | Amount |       | Ratio
|                                         |  |        |        |                   |  |                    |       |                         |  |        |       |      
|Total Capital (to risk
weighted assets)  |  | $      | 14,975 |                   |  |                    | 19.15 | %                       |  | $      | 6,257 |       |  |  | 8.00 | % |  | $ | 7,822 |  |  |  | 10.00 | %
|Tier 1 capital (to risk
weighted assets) |  |        | 13,997 |                   |  |                    | 17.90 |                         |  |        | 3,129 |       |  |  | 4.00 |   |  |   | 4,693 |  |  |  | 6.00  |  
|Tier 1 capital (to
average assets)       |  |        | 13,997 |                   |  |                    | 11.04 |                         |  |        | 5,070 |       |  |  | 4.00 |   |  |   | 6,337 |  |  |  | 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



| |  |  | An evaluation was carried out under the supervision and with the
participation of Capital Directions, Inc.s management, as of September
30, 2003 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 for the quarter ended September 30, 2003.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents






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 September
30, 2003.






| |  | Item 2. Changes in Securities and Use of Proceeds                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the nine months ended September 30, 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                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The annual meeting of security holders of the Company was held April 24,
2003. 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 24, 2003, as previously filed. There
have been no further matters submitted to a vote of the Registrants
security holders during the nine months ended September 30, 2003.






| |  | 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 Form 8-K reports were filed by the company for the quarter ended
September 30, 2003.

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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: November 7, 2003 |  | By: |  | /s/ Timothy Gaylord
|                       |  |     |  |                    
|                       |  |     |  | Timothy Gaylord    
|                       |  |     |  | President          
|                       |  |     |  |                    
|Date: November 7, 2003 |  | 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                                                                                                                                           
|     |  |                                                                                                                                                                                
|31.1 |  | Certification of Timothy P. Gaylord required by rule 13a-14(a)                                                                                                                 
|     |  |                                                                                                                                                                                
|31.2 |  | Certification of Lois A. Toth required by rule 13a-14(a)                                                                                                                       
|     |  |                                                                                                                                                                                
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        
|     |  |                                                                                                                                                                                
|32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                                        

17