##### 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 | March 31, 2002 |  |  | Commission file number | 33-20417 | 

|                                                      
|------------------------------------------------------
|Capital Directions, Inc.                              
|                                                      
|(Exact name of registrant as specified in its charter)

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

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

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

|                                                                                
|--------------------------------------------------------------------------------
|None                                                                            
|                                                                                
|Former name, former address and former fiscal
year, if changed since last report

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

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





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TABLE OF CONTENTS



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



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##### Table of Contents



CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

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





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PART I  FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

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

See accompanying notes to consolidated financial statements.

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

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

See accompanying notes to consolidated financial statements.

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

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

See accompanying notes to consolidated financial statements.

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

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

See accompanying notes to consolidated financial statements.

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



|1. |  | In the opinion of management of the Registrant, the accompanying
Consolidated Financial Statements contain all adjustments (consisting only
of normal recurring items) necessary to present fairly the consolidated
financial position of the Registrant as of March 31, 2002 and December 31,
2001 and results of operations and cash flows for the three month periods
ended March 31, 2002 and 2001.                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | The results of operations for the three months ended March 31, 2002 are
not necessarily indicative of the results to be expected for the full
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|3. |  | The accompanying unaudited Consolidated Financial Statements and the
notes thereto should be read in conjunction with the Notes to Consolidated
Financial Statements and the notes included therein, for the fiscal year
end 2001, included in the Registrants 2001 Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                              
|  
|4. |  | Management determines the adequacy of the allowance for loan losses based
on an evaluation of the loan portfolio, recent loss experience, historical
performance, current economic conditions, current analyses of asset
quality and other pertinent factors. Non-performing loans are defined as
all loans which are accounted for as non-accrual; loans 90 days or more
past due and still accruing interest; or loans which have been
renegotiated due to the borrowers inability to comply with the original
terms. As of March 31, 2002, non-performing loans totaled $283 or .28% of
total loans. This represents a decrease of $20,000 from the $303,000
balance at December 31, 2001.

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

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

6



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##### Table of Contents



Note 5. Earnings Per Share

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

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

Note 6. Stock Option Plan

Options to buy common stock are granted to officers and other key employees
under a Stock Option Plan which provides for the issuance of up to 40,000
shares of common stock. The plan provides for stock options to be granted at
prices that approximate the fair value of the stock at the respective dates of
grant. The vesting of stock options does not start until two years from the
date of the grant. After two years, the options will vest evenly over a three
year period. The plan terminates on May 20, 2003. All shares and per share
amounts have been restated for stock splits.



| |                                                 
| | ------------------------------------------------
| | A summary of activity in the plan is as follows:

|        |                   |  |           |        |  |             |       |        |          |         |          |         |          |              |          |  | 
|------- | ----------------- |  | --------- | ------ |  | ----------- | ----- | ------ | -------- | ------- | -------- | ------- | -------- | ------------ | -------- |  | 
|        |                   |  |           |        |  |             |       |        |          |         |          |         |          |              | Weighted | 
|        |                   |  |           |        |  |             |       |        |          |         | Weighted |         |          | Average Fair |         
|        |                   |  | Available |        |  |             |       |        |          | Average |          |         | Value of |             
|        |                   |  | For       |        |  | Options     |       |        | Exercise |         |          | Options |         
|        |                   |  | Grant     |        |  | Outstanding |       |        | Price    |         |          | Granted |         
|        |                   |  |           |        |  |             |       |        |          |         |          |         |         
|Balance |                   |  |           |        |  |             |       |        |          |         |          |         |          |              |          | 
|        | December 31, 2001 |  |           | 13,893 |  |             |       | 22,007 |          |         | $        | 32.12   |          |              |          |  | 
|Granted |                   |  | (4,000    | )      |  |             | 4,000 |        |          |         | 38.00    |         |          |              | 1.10     | 
|        |                   |  |           |        |  |             |       |        |          |         |          |         |          |             
|Balance |                   |  |           |        |  |             |       |        |          |         |          |         |          |              |          | 
|        | March 31, 2002    |  |           | 9,893  |  |             |       | 26,007 |          |         | $        | 33.03   |          |              |          |  | 
|        |                   |  |           |        |  |             |       |        |          |         |          |         |         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the options outstanding at March 31, 2002, the range of exercise prices
was $12.75 to $41.50 per share with a weighted average remaining
contractual term of 5.46 years. At March 31, 2002, 14,028 stock options
were exercisable at a weighted average price of $27.85 per share. Had
compensation cost for stock options been measured using SFAS No. 123, net
income and earnings per share would have been the pro forma amounts
indicated in the following table.

7



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##### Table of Contents



Note 6. Stock Option Plan (continued)

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

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

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

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




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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following discussion and analysis of financial condition and results of
operations provides additional information to assess the Consolidated
Financial Statements of the Registrant and its wholly-owned subsidiaries.
Capital Directions, Inc. is a one-bank holding company which commenced
operations on July 22, 1988. This was facilitated by the acquisition of
100% of the outstanding shares of Mason State Bank in an exchange of common
stock. The Company and its subsidiaries provide banking and financial
services in the banking industry. Substantially all revenues and services
are derived from banking products and services. The Banks primary services
include accepting retail deposits and making residential, consumer and
commercial loans.
|
| | The Company is not aware of any market or institutional trends, events or
circumstances that will have or are reasonably likely to have a material
effect on liquidity, capital resources, or results of operations except as
discussed herein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Financial Condition (In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | During the first quarter of 2002, the assets of the Company increased $3,105
or 2.65% from December 31, 2001. This increase resulted primarily from
increased residential mortgage loan demand due to favorable borrowing rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Cash and cash equivalents have decreased $4,468 or 64.08% in the three-month
period from December 31, 2001 to March 31, 2002. This is a result of a
reduction of Federal funds sold as those excess funds were deployed in the
funding of new residential mortgages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

8



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##### Table of Contents



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Total outstanding loans have increased $8,152 during the first quarter of
2002. This is an increase of 8.78% from December 31, 2001. This greatest
portion of this increase has been due to favorable residential mortgage loan
rates, while commercial and installment loans have decreased slightly.
During the first quarter of 2002, the Company has continued to sell certain
loans into the secondary market as part of its asset and liability
management strategy to minimize the risk associated with the recent
reductions in interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The allowance for loan losses decreased $1 or .10% during the three month
period ending March 31, 2002. At March 31, 2002 the allowance as a percent
of outstanding loans was 1.04% compared to 1.13% at December 31, 2001.
Management continues to maintain the allowance for loan losses at a level
considered appropriate to absorb losses inherent in the portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Total deposits have increased $633 or .89% during the first quarter of 2002.
This increase was concentrated in non-interest bearing and savings accounts
while interest bearing demand and time deposits showed a slight decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Total shareholders equity increased $200 or 1.45% in the first quarter of
2002. This increase was comprised of net income of $451 and offset by
decrease in net unrealized gains on available for sale securities of $18 and
by dividends declared of $233. Book value per share was $23.43 at March 31,
2002 compared to $23.09 at December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Results of Operations (In thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | For the first quarter of 2002, net income was $451, basic earnings per share
was $.76, and diluted earnings per share was $.75, compared to $406, $.68,
and $.67 for the same period in 2001. Average earning assets increased to
$112,725 or 5.93% from March 31, 2001 to March 31, 2002. The average yield
on earning assets decreased to 7.30% for the quarter ended March 31, 2002
from 7.93% for the comparable time period in 2001. Average costs for rate
related liabilities decreased ninety-four basis points to 3.65% at March 31,
2002 from 4.59% at March 31, 2001. Net interest margin increased to 4.30%
for the first three months of 2002 compared to 4.14% in the same period of
2001. The Company is experiencing an increasing margin related primarily to
the change in the structure of earning assets. As loan demand declined
during 2001, those funds were used to increase the securities portfolio,
which tends to be at lower yields as compared to loans. As residential
mortgage loan demand increased significantly during the past several months,
funds from maturing securities as well as excess federal funds were deployed
into higher yielding loans. The following table illustrates the change in
net interest margin for the three months ended March 31, 2002 and March 31,
2001.

9



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##### Table of Contents





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

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



---

|(1) |  | Earning assets are presented on a fully taxable equivalent basis using
a 34% tax rate, and average yields/rates are annualized.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The two variables that have the most significant effect on the change in the
net interest income are volume and rate. The change in interest due to both
volume and rate has been allocated to volume and rate changes in proportion
to the relationship of the absolute dollar amounts of the change in each.
As illustrated in the following table, the Company had an increase in net
interest income due primarily to securities and fed funds growth as well as
increased loan rates.

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

10



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##### Table of Contents





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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There was no provision for loan losses during the first three months of 2002
as well as for the same period of 2001. This is representative of the
stable loss experience and continuing performance experienced in the loan
portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | Non interest income increased $19 or 10.33% during the first quarter of 2002
when compared to the first quarter of 2001. Of this increase, a majority is
attributable to gains realized on recognition of servicing rights related to
loans sold during the period as well as by increased customer investment
commissions. This was partially offset by a decrease in fees from ATM
activity as well as a decrease in earnings realized on the Rabi Trust.                                                                                                                                                                                                                                                                                                                            
|
| | Non interest expense increased $58 or 8.83% when comparing the first quarter
of 2002 to the first quarter of 2001. Most of this increase is a result of
increased expenses for salaries and employee benefits as well as marketing,
consulting and premises and equipment costs. This is partially offset by
costs for data processing and supplies, which have decreased since the prior
year.                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Federal income tax provision for the first three months of 2002 was
$210, up from $181 for the same period in 2001. This increase reflects a
higher taxable income for 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Liquidity and Interest Rate Risk (in thousands)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The primary objective of asset/liability management is to assure the
maintenance of adequate liquidity and maximize net interest income by
maintaining appropriate maturities and balances between interest sensitive
earning assets and interest bearing liabilities. Liquidity management
ensures sufficient funds are maintained to meet the cash withdrawal
requirements of depositors and the credit demands of borrowers.                                                                                                                                                                                                                                                                                                                                                        
|
| | Sources of liquidity include federal funds sold, investment security
maturities and principal payments. A net average balance of $1,681 in
federal funds sold was maintained during the first quarter of 2002. As a
member of the Federal Home Loan Bank system, the Bank has access to an
alternate funding source, lower cost for credit services, and an additional
tool to manage interest rate risk. Other sources of liquidity include
internally generated cash flow, repayments and maturities of loans,
borrowings and normal deposit growth. The primary source of funds for the
parent company is the upstream of dividends from the Bank. Management
believes these sources of liquidity are sufficient for the Bank and parent
company to continue current business plans.
|
| | At March 31, 2002 the securities available for sale were valued at $11,549.
It is not anticipated that management will use these funds due to the
optional sources that may be available.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Interest rate sensitivity management seeks to maximize net interest margin
through periods of changing interest rates. The Bank develops strategies to
assure desired levels of interest sensitive assets and interest bearing
liabilities mature or reprice within selected time frames.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Strategies include the use of variable rate loan products in addition to
managing deposit accounts and maturities in the investment portfolio. The
following table, using recommended regulatory standards, reflects the rate
sensitive position or the difference between loans and investments, and
liabilities that mature or reprice within the next year and beyond. The
financial industry has generally referred to this difference as GAP and
its handling as GAP Management. Throughout the first quarter of 2001, the
results of the GAP analysis were within the Banks policy guidelines. At
March 31, 2002, the percentage of rate sensitive assets to rate sensitive
liabilities within the one-year time horizon was 50%.                                         

11



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##### Table of Contents



Liquidity and Interest Rate Risk (continued)



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



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

[Additional columns below]

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

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

12



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Regulators established risk-based capital guidelines that became effective
December 31, 1990. Under the guidelines, minimum capital levels are
established for risk-based and total assets based on perceived risk in asset
categories and certain off-balance sheet items, such as loan commitments and
standby letters of credit. On March 31, 2002, the Bank has a risk-based
total capital to asset ratio of 19.46%. The ratio exceeds the requirements
established by regulatory agencies as shown below.

|                                         |  |        |        |  |                   |                  |       |                    |                         |   |       |  |        |  |       |   |  |   |       |  |  |  |       |  
|---------------------------------------- |  | ------ | ------ |  | ----------------- | ---------------- | ----- | ------------------ | ----------------------- | - | ----- |  | ------ |  | ----- | - |  | - | ----- |  |  |  | ----- | -
|(Dollars in thousands)                   |  |        |        |  |                   | Minimum Required |       |                    |                         |   |       |  |        |  |       |   |  |   |      
|March 31, 2002                           |  |        |        |  |                   | For Capital      |       |                    | Under Prompt Corrective |  
|                                         |  | Actual |        |  | Adequacy Purposes |                  |       | Action Regulations |                        
|                                         |  |        |        |  |                   |                  |       |                    |                        
|                                         |  | Amount |        |  | Ratio             |                  |       | Amount             |                         |   | Ratio |  | Amount |  | Ratio |  
|                                         |  |        |        |  |                   |                  |       |                    |                         |   |       |  |        |  |       |  
|Total Capital (to risk
weighted assets)  |  | $      | 14,597 |  |                   |                  | 19.46 | %                  |                         | $ | 6,001 |  |        |  | 8.00  | % |  | $ | 7,501 |  |  |  | 10.00 | %
|Tier 1 capital (to risk
weighted assets) |  |        | 13,658 |  |                   |                  | 18.21 |                    |                         |   | 3,001 |  |        |  | 4.00  |   |  |   | 4,501 |  |  |  | 6.00  |  
|Tier 1 capital (to
average assets)       |  |        | 13,658 |  |                   |                  | 11.54 |                    |                         |   | 4,735 |  |        |  | 4.00  |   |  |   | 5,919 |  |  |  | 5.00  |  



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bank management does not perceive that future rate changes or inflation will
have a material impact on capital adequacy. It is the opinion of management
that capital and shareholders equity is adequate and will continue to be so
throughout 2002.




Item 3. Quantitative and Qualitative Disclosures about Market Risk



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







Part II  Other Information



| |                          
| | -------------------------
| | Item 1. Legal proceedings



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is not involved in any material pending legal proceedings to
which the Registrant or its subsidiaries is a party or which any of its
property is subject, except for proceedings which arise in the ordinary
course of business. In the opinion of management, pending legal proceedings
will not have a material effect on the consolidated financial statements of
the registrant or its subsidiaries as of and for the period ended March 31,
2002.






| |                                                  
| | -------------------------------------------------
| | Item 2. Changes in Securities and Use of Proceeds



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the three months ended March 31, 2002, there werent any changes in
the Registrants securities, relevant to the requirements of this section,
that would cause any shareholders rights to be materially modified, limited
or qualified.






| |                                        
| | ---------------------------------------
| | Item 3. Defaults Upon Senior Securities



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

13



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##### Table of Contents








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



| |                                                                               
| | ------------------------------------------------------------------------------
| | No matters have been submitted to a vote of the Registrants security
holders.






| |                          
| | -------------------------
| | Item 5. Other Information



| |     
| | ----
| | None






| |                                         
| | ----------------------------------------
| | Item 6. Exhibits and Reports on Form 8-K



| | 1. |  | Exhibits required by Item 601 of Regulation S-K                             
| | -- |  | ----------------------------------------------------------------------------
| |    |  | See Index to Exhibits on page 13.                                           
|
| | 2. |  | Reports on Form 8-K                                                         
| |    |  | No reports on Form 8-K were filed for the three months ended March 31,
2002.

14



---



##### 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: May 1, 2002       |  | By: /s/ Timothy Gaylord  
|                        |  |                          
|                        |  | Timothy Gaylord
President
|                       
|Date: May 1, 2002       |  | By: /s/ Lois A. Toth     
|                        |  |                          
|                        |  | Lois A. Toth
Treasurer   

15



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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                                                                                                                                           

16