
PART I – FINANCIAL INFORMATION
CAPITAL DIRECTIONS, INC. CONSOLIDATED BALANCE SHEETS
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CAPITAL DIRECTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CAPITAL DIRECTIONS, INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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
Certification of Chief Executive Officer
Certification of Treasurer

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


	Quarterly Report Pursuant to Section 13 or 15(d) Of The Securities Exchange Act of 1934

For the quarter ended June 30, 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		(I.R.S. Employer Identification Number)
incorporation or organization)


322 South Jefferson St., Mason, Michigan		48854-0130

(Address of principal executive offices)		(Zip Code)


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

None

Former name, former address and former fiscal

year, if changed since last report

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

As of July 24, 2002 the registrant had outstanding 589,308 shares of common stock having a par value of $5 per share.

CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q


		Page
PART I – FINANCIAL INFORMATION		Number


Item 1.	Consolidated Balance Sheets June 30, 2002 and December 31, 2001		1

	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001		2

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001		3

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 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		8-14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		14

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		14

Item 2.	Changes in Securities and Use of Proceeds		14

Item 3.	Defaults Upon Senior Securities		14

Item 4.	Submission of Matters to a Vote of Security Holders		15

Item 5.	Other Information		15

Item 6.	Exhibits and Reports on Form 8-K		15

	Signatures		16

	Index to Exhibits		17

	Exhibits 99.1 and 99.2		18-19

PART I – FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


					June 30,			December 31,
					2002			2001

					(Unaudited)
ASSETS
	Cash and non interest bearing deposits				$	2,052		$	2,642
	Interest bearing deposits					39			38
	Federal funds sold					—			4,293

			Total cash and cash equivalents			2,091			6,973
	Securities held to maturity					400			—
	Securities available for sale					10,881			12,200
	Federal Home Loan Bank (FHLB) stock					1,967			1,967

	Total investment securities					13,248			14,167
		Loans:
				Commercial and agricultural		4,911			5,188
				Installment		1,878			2,266
				Real estate mortgages		94,006			85,378

				Total loans		100,795			92,832
				Allowance for loan losses		(1,049	)		(1,048	)

				Net loans		99,746			91,784
				Premises and equipment, net		1,083			1,107
				Accrued income and other assets		3,389			3,246

				Total assets	$	119,557		$	117,277

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
		Deposits:
				Non interest bearing	$	10,898		$	10,470
				Interest bearing		56,943			60,463

				Total deposits		67,841			70,933
				Federal funds purchased		2,100			—
				Long-term FHLB borrowings		34,108			31,125
				Other liabilities		1,637			1,456

				Total liabilities		105,686			103,514
SHAREHOLDERS’ EQUITY
			Common stock: $5 par value, 1,300,000 shares authorized; 589,308 outstanding at June 30, 2002 and 595,956 outstanding at December 31, 2001			2,947			2,980
			Additional paid in capital			2,597			2,597
			Retained earnings			8,115			7,912
			Accumulated other comprehensive income, net of tax of $109 as of June 30, 2002 and $141 as of December 31, 2001			212			274

				Total shareholders’ equity		13,871			13,763

				Total liabilities and shareholders’ equity	$	119,557		$	117,277

See accompanying notes to consolidated financial statements.

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

(In thousands, except share and per share data)


				Three Months Ended				Six Months Ended
				June 30,				June 30,
				2002		2001		2002		2001

Interest and Dividend Income
	Interest and fees on loans			$	1,751	$	1,704	$	3,543	$	3,438
	Federal funds sold				4		54		11		103
	Interest and dividends on investment securities:
		Taxable			165		223		333		455
		Tax exempt			39		37		79		76
		Other interest income			—		1		—		1

			Total interest income		1,959		2,019		3,966		4,073
Interest Expense Deposits					367		532		750		1,116
	Short-term borrowings				2		—		3		1
	Long-term borrowings				478		409		928		818

		Total interest expense			847		941		1,681		1,935

Net Interest Income					1,112		1,078		2,285		2,138
Provision for loan losses					—		—		—		—

Net interest income after provision for loan losses					1,112		1,078		2,285		2,138
Non Interest Income
	Service charges on deposit accounts				79		85		159		164
	Investment commission fees				14		9		31		22
	Net gains on sale of loans				20		47		51		53
	Other income				88		92		163		178

		Total non interest income			201		233		404		417
Non Interest Expense
	Salaries and employee benefits				378		366		781		742
	Premises and equipment				82		87		171		170
	Other operating expense				222		220		445		418

		Total non interest expense			682		673		1,397		1,330

Income before income tax expense					631		638		1,292		1,225
Income tax expense					188		195		398		376

Net Income				$	443	$	443	$	894	$	849

Average common shares outstanding					592,006		598,056		593,970		598,056
Basic earnings per common share					0.75		0.74		1.51		1.42
Diluted earnings per common share					0.74		0.74		1.49		1.41
Dividends per share of common stock, declared					0.39		0.35		0.78		0.69

See accompanying notes to consolidated financial statements.

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

(In thousands)


					Six Months Ended
					June 30,
					2002			2001

Cash flows from operating activities
	Net income				$	894		$	849
	Adjustments to reconcile net income to net cash from operating activities Depreciation					65			63
		Net amortization (accretion) on securities				1			(5	)
		Loans originated for sale				(1,537	)		(2,525	)
		Proceeds from sale of loans originated for sale				1,546			1,847
		Net gain on sales of loans originated for sale				(9	)		(2	)
	Changes in assets and liabilities:
		Accrued interest receivable				(14	)		87
		Accrued interest payable				(3	)		(45	)
		Other assets				(97	)		(58	)
		Other liabilities				175			155

				Net cash from operating activities		1,021			366
	Cash flows from investing activities
		Securities available for sale:
			Purchases			(846	)		(1,028	)
			Maturities, calls and principal payments			2,070			2,482
		Securities held to maturity:
			Purchases			(400	)		—
		Net change in loans				(7,962	)		817
		Premises and equipment expenditures				(41	)		(233	)

				Net cash from investing activities		(7,179	)		2,038
	Cash flows from financing activities
		Net change in deposits				(3,092	)		(5,016	)
		Federal funds purchased				2,100			—
		Proceeds from long-term FHLB borrowings				3,000			4,000
		Repayment of long-term FHLB borrowings				(17	)		(4,093	)
		Repurchase of common stock				(263	)		—
		Dividends paid				(452	)		(406	)

				Net cash from financing activities		1,276			(5,515	)

	Net change in cash and cash equivalents					(4,882	)		(3,111	)
	Cash and cash equivalents at beginning of year					6,973			8,566

	Cash and cash equivalents at June 30				$	2,091		$	5,455

	Supplemental disclosure of cash flow information
		Cash paid during the period for:
			Interest		$	753		$	1,980
			Income taxes – federal		$	359		$	397

See accompanying notes to consolidated financial statements.

CAPITAL DIRECTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the three and six months ended June 30, 2002 and 2001

(In thousands)


				Three Months Ended						Six Months Ended
				June 30,						June 30,
				2002			2001			2002			2001

Net income				$	443		$	443		$	894		$	849
Other comprehensive income (loss),
	net
		Unrealized holding gains (losses) on securities available for sale arising during period			(67	)		9			(94	)		162
			Tax effects		23			(3	)		32			(55	)

Other comprehensive income (loss), net					(44	)		6			(62	)		107

Comprehensive income				$	399		$	449		$	832		$	956

See accompanying notes to consolidated financial statements.

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

1.		In the opinion of management of the Registrant, the accompanying Consolidated Financial Statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Registrant as of June 30, 2002 and December 31, 2001, and results of operations for the three and six month periods ended June 30, 2002 and 2001, and the cash flows for the six month periods ended June 30, 2002 and 2001.

2.		The results of operations for the six months ended June 30, 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 June 30, 2002, non-performing loans totaled $130,000 or .13% of total loans. This represents a decrease of $173,000 from the $303,000 balance at December 31, 2001.


		June 30,			December 31,
Non-performing loans		2002			2001

Non-accrual		$	76,000		$	20,000
90 days or more past due			28,000			255,000
Renegotiated			26,000			28,000

	Total	$	130,000		$	303,000

Non-performing loans as a percent of:
	Total loans		.13	%		.33	%
	Allowance for loan losses		12.39	%		28.91	%

Note 4. Analysis of the allowance for loan losses (continued)

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


*(Dollars in thousands)*
				Six Months			Twelve Months
				Ended			Ended
				June 30,			December 31,
				2002			2001

		Balance at beginning of period		$	1,048		$	1,053
		Charge-offs			(4	)		(36	)
		Recoveries			5			31

			Net (charge-offs) recoveries		1			(5	)
		Additions (reductions) to allowance for loan losses			—			—

		Balance at end of period		$	1,049		$	1,048

Average loans outstanding during the period				$	99,032		$	86,794

Loans outstanding at end of period				$	100,795		$	92,832

Allowance as a percent of:
	Total loans at end of period				1.04	%		1.13	%

	Non-performing loans at end of period				806.92	%		345.87	%

Net charge-offs as a percent of:
	Average loans outstanding				.00	%		(00	)%

	Allowance for loan losses				(.10	)%		.48	%

Note 5. Earnings per share

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

(Dollars in thousands, except per share amounts)


		Three months ended				Six months ended
		June 30,				June 30,
		2002		2001		2002		2001

Basic earnings per share
	Net income	$	443	$	443	$	894	$	849

Weighted average shares
	outstanding for basic earnings per share		592,006		598,056		593,970		598,056

	Per share amount	$	.75	$	.74	$	1.51	$	1.42

Diluted earnings per share
	Net income	$	443	$	443	$	894	$	849

Weighted average shares outstanding for basic earnings per share			592,006		598,056		593,970		598,056
	Effect of dilutive securities- Stock options		4,944		2,423		4,445		4,750

Weighted average shares outstanding for diluted earnings per share			596,950		600,479		598,415		602,806

Per share amount		$	.74	$	.74	$	1.49	$	1.41

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.

Note 6. Stock Option Plan (continued)

A summary of activity in the plan is as follows:


									Weighted
							Weighted		Average Fair
		Available					Average		Value of
		For			Options		Exercise		Options
		Grant			Outstanding		Price		Granted

Balance at
	December 31, 2001		13,893			22,007	$	32.12
Granted			(4,000	)		4,000		38.00	$	1.10

Balance
	June 30, 2002		9,893			26,007	$	33.03

For the options outstanding June 30, 2002, the range of exercise prices was $12.75 to $41.50 per share with a weighted average remaining contractual term of 5.25 years. At June 30, 2002, 14,028 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.

(Dollars in thousands, except per share amounts)


			Three Months		Three Months		Six Months		Six Months
			Ended		Ended		Ended		Ended
			June 30, 2002		June 30, 2001		June 30, 2002		June 30, 2001

Net income
		As reported	$	443	$	443	$	894	$	849
		Pro forma		444		432		886		838
Basic and diluted income
	per share
		As reported basic	$	.75	$	.74	$	1.51	$	1.42
		Pro forma basic		.75		.74		1.49		1.40
		As reported diluted		.74		.72		1.49		1.41
		Pro forma diluted		.74		.72		1.48		1.39

The pro forma effects are computed with option pricing models. For the options granted during the six months ended June 30, 2002 the following weighted average assumptions as of the grant date were used.


Risk-free interest rate	4.95	%
Expected option life	5 years
Expected stock price volatility	4.02	%
Expected dividend yield	3.44	%

Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of financial condition and results of operations provides additional information to assess the Consolidated Financial Statements of the Registrant and its wholly owned subsidiaries. Capital Directions, Inc. is a one-bank holding company, which commenced operations on July 22, 1988. This was facilitated by the acquisition of 100% of the outstanding shares of Mason State Bank in an exchange of common stock. Mason State Mortgage Company, LLC will be formed July 16, 2002. This will be facilitated by a 99% ownership provided by Mason State Bank and 1% ownership provided by Capital Directions, Inc. The Company and its subsidiaries provide banking and financial services in the banking industry. Substantially all revenue and services are derived from banking products and services. The Bank’s primary services include accepting retail deposits and making residential, consumer and commercial loans.

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

The corporation is not aware of any market or institutional trends, events or circumstances that will have or are reasonably likely to have a material effect on liquidity, capital resources, or results of operations except as discussed herein.

Financial Condition (In thousands)

Assets totaled $119,557 at June 30, 2002. The 1.94% increase of $2,280 from $117,277 at December 31, 2001 resulted primarily from a decrease of $4,293 in Federal funds sold and a $919 decrease in investment securities which were used to fund an increase of $7,963 in total loans.

Cash and cash equivalents have decreased $4,882 or 70.01% in the six month period from December 31, 2001 to June 30, 2002. This is a result of the reduction of excess Federal funds sold that were used to fund loan growth.

Total outstanding loans have increased $7,963 during the first six months of 2002. This is an increase of 8.58% from December 31, 2001. This increase has been concentrated in the residential real estate mortgage portfolio, while commercial and installment loans have decreased slightly. Currently, no 1-4 family residential loans reside in the held-for-sale category and as of June 30, 2002, as all loans were sold that had been committed for sale. During the first and second quarter of 2002, the Company decided to sell certain loans into the secondary market as part of the asset and liability strategy to minimize risk associated with the recent reduction in interest rates. Management will closely monitor this strategy in the near term.

The allowance for loan losses increased $1 or .10% during the six-month period ending June 30, 2002. At June 30, 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 as of June 30, 2002 compared to year-end 2001 decreased by $3,092 or 4.36%. The decline was concentrated in time deposits greater than $100,000, while savings deposits increased in the same period. This decline is primarily the result of customers seeking alternative deposit opportunities due to the declining rate environment.

Total shareholders’ equity increased $108 or .78% in the first six months of 2002. Net income of $894 increased shareholders’ equity, while dividends declared, repurchase of common stock of $263 and $62 net unrealized gain on available for sale securities reduced shareholders’ equity. Book value per share was $23.54 at June 30, 2002 compared to $23.09 at December 31, 2001.

For the second quarter of 2002, net income was $443, basic earnings per share was $.75, and diluted earnings per share was $.74, compared to $443, $.74, and $.74 for the same period in 2001. During the six-month period ending June 30, 2002, net income totaled $894, basic earnings per share was $1.51, and diluted earnings per share was $1.49, compared to $849, $1.42 and $1.41 for the same period in 2001. Average earning assets increased by 7.10% or $7,555 from June 30, 2001 to June 30, 2002. The average yield on earning assets decreased to 7.09% for the six-month period ended June 30, 2002 from 7.81% for the comparable time period in 2001. Average costs for rate related liabilities decreased to 3.61% at June 30, 2002 from 4.46% at June 30, 2001. Net interest margin decreased to 4.12% for the first six-months of 2002 compared to 4.14% in the same period of 2001. This is a result of the continued falling rate environment. The Company is experiencing a declining margin related primarily to the change in the structure of earning assets. As commercial loan demand declined during 2001 and 2002, those funds were used to increase the securities portfolio and residential mortgage portfolios, which tend to be at lower yields as compared to commercial loans. Security maturities in 2002 were also used to fund residential loan growth. The following table illustrates the change in net interest margin for the six months ended June 30, 2002 and June 30, 2001.

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)		$	98,836	$	3,538		7.22	%	$	84,266	$	3,399		8.13	%
Loans (non-taxable)			146		6		7.53	%		677		29		8.64	%
Loans held for sale			50		2		8.00	%		669		20		6.03	%
Taxable investment securities			10,574		333		6.36	%		13,548		455		6.77	%
Non-taxable investment securities			3,164		120		7.65	%		2,891		115		8.02	%
Federal funds sold and other			1,225		10		1.71	%		4,389		104		4.78	%

	Total interest earning assets	$	113,995	$	4,009		7.09	%	$	106,440	$	4,122		7.81	%
Interest bearing demand deposits		$	10,189	$	28		.55	%	$	9,047	$	28		.62	%
Savings deposits			23,731		177		1.50	%		22,292		329		2.98	%
Time deposits <$100,000			18,678		407		4.36	%		17,569		489		5.61	%
Time deposits $100,000 or more			7,675		138		3.64	%		10,023		269		5.41	%
Federal funds purchased			286		3		2.10	%		16		1		6.30	%
Other borrowings			33,109		928		5.65	%		28,460		819		5.80	%

	Total interest bearing liabilities	$	93,668	$	1,681		3.61	%	$	87,407	$	1,935		4.46	%
Net Interest				$	2,328		3.48	%			$	2,187		3.35	%
Net Interest Margin							4.12	%						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 Corporation had an increase in net interest income due primarily to changes due to interest rates, while volume changes between assets and liabilities were offsetting.


Change in Net Interest Income
(Dollars in thousands)			2002 compared to 2001
			Volume			Rate			Total

Earning Assets

	Loans (taxable)		$	548		$	(409	)	$	139
	Loans (non-taxable)			(22	)		(1	)		(23	)
	Loans held for sale			(23	)		5			(18	)
	Taxable investment securities			(95	)		(27	)		(122	)
	Non-taxable investment securities			11			(6	)		5
	Federal funds sold			(49	)		(45	)		(94	)

		Total interest income	$	370		$	(483	)	$	(113	)

Interest Bearing Liabilities

	Interest bearing demand deposits		$	3		$	(3	)	$	—
	Savings deposits			20			(172	)		(152	)
	Time deposits <$100,000			29			(111	)		(82	)
	Time deposits $100,000 or more			(54	)		(77	)		(131	)
	Federal funds purchased			3			(1	)		2
	Other borrowings			131			(22	)		109

		Total interest expense	$	132		$	(386	)	$	(254	)

	Net Interest Income		$	238		$	(97	)	$	141

	Earning assets are presented on a fully taxable equivalent basis.

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

The provision for loan losses was $0 during the second quarter of 2002, unchanged from the same period of 2001. For the six months ended June 30, the provision was $0 in 2002 compared to $0 in 2001. This is consistent with the decline in non-performing loans.

Non-interest income decreased $32 or 13.73% during the second quarter of 2002 when compared to the second quarter of 2001. This is primarily attributable to a decrease in the recognition of mortgage servicing rights on loans sold into the secondary market, a decrease in service charge income on deposit accounts and lower ATM fee income. For the six months ended June 30, non-interest income has decreased $13 or 3.12% when compared to the similar period in 2001. This is a result of the same factors affecting the second quarter decrease.

Non-interest expense increased $9 or 1.34% when comparing the second quarter of 2002 to 2001. Most of this increase is a result of increased personnel costs for salaries and employee benefits as some vacant positions have been replaced. This is partially offset by an decrease in premises and equipment costs and increased postage and legal expenses. For the six months ended June 30, 2002 non-interest expense slightly increased $67 or 5.04% compared to the same period in 2001. Salaries and benefits increased $39 or 5.26% as some vacant positions have been filled. Increases were also realized in legal expense, other real estate expense and consulting services.

The federal income tax provision for the second quarter of 2002 was $188, down $7 for the same period in 2001. Year-to-date the income tax provision has increased by $22 or 5.85%. This increase reflects a higher taxable income for 2002. The effective tax rate was 30% and 30% for the three months ended June 30, 2002 and 2001 and 31% and 31% for the six months ended June 30, 2002 and 2001. The effective tax rates are lower than the 34% statutory rate due to non-taxable income on loans and investments.

Liquidity and interest rate risk (In thousands)

The primary objective of asset/liability management is to assure the maintenance of adequate liquidity and maximize net interest income by maintaining appropriate maturities and balances between interest sensitive earning assets and interest bearing liabilities. Liquidity management ensures sufficient funds are maintained to meet the cash withdrawal requirements of depositors and the credit demand of borrowers.

Sources of liquidity include federal funds sold, investment security maturities and principal payments. A net average balance of $738 in federal funds sold was maintained during the second 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. During the first six months of 2002, the Bank used this source of funding to offset security purchases to be used as collateral for public deposits. Other sources of liquidity include internally generated cash flow, repayments and maturities of loans, borrowing and normal deposit growth. The primary source of funds for the parent company is the upstream of dividends from the Bank. Management believes these sources of liquidity are sufficient for the Bank and parent company to continue current business plans.

At June 30, 2002 the securities available for sale were valued at $10,881. 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.

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

Strategies include the use of variable rate loan products in addition to managing deposit accounts and maturities in the investment portfolio. The following table, using recommended regulatory standards, reflects the “rate sensitive position” or the difference between loans and investments, and liabilities that mature or reprice within the next year and beyond. The financial industry has generally referred to this difference as “GAP” and its handling as “GAP Management”. Throughout the second quarter of 2002, the results of the GAP analysis were within the Bank’s policy guidelines. At June 30, 2002, the percentage of rate sensitive assets to rate sensitive liabilities within the one-year time horizon was 46%.

The following table shows the Corporation’s GAP position as of June 30, 2002. The Corporation has a liability sensitive position of approximately $32,822 within the one-year time horizon, which indicates higher net interest income may be earned if rates decrease during the period. Due to the limitations of GAP analysis, modeling is also used to enhance measurement and control.

GAP Measurement (Dollars in thousands)


			0-30			31-90			2nd			3rd			4th			Annual
			Days			Days			Quarter			Quarter			Quarter			Total

Assets Loans			$	4,180		$	8,286		$	2,984		$	2,985		$	2,587		$	21,022
Allowance for loan losses				—			—			—			—			—			—
Investments				1,967			—			2,525			1,040			1,496			7,028
Short-term Investments				39			—			—			—			—			39
Other non- earning assets				—			—			—			—			—			—

		Total	$	6,186		$	8,286		$	5,509		$	4,025		$	4,083		$	28,089

Liabilities
Non interest bearing deposits			$	—		$	—		$	—		$	—		$	—		$	—
Interest bearing deposits				37,116			3,615			5,970			1,614			1,559			49,874
Federal Funds purchased				2,100			—			—			—			—			2,100
Long-term FHLB borrowings				—			—			1,707			3,230			4,000			8,937
Other liabilities				—			—			—			—			—			—
Capital				—			—			—			—			—			—

	Total		$	39,216		$	3,615		$	7,677		$	4,844		$	5,559		$	60,911

GAP			$	(33,030	)	$	4,671		$	( 2,168	)	$	(819	)	$	(1,476	)	$	(32,822	)
Cumulative
GAP			$	(33,030	)	$	(28,359	)	$	(30,527	)	$	(31,346	)	$	(32,822	)	$	(32,822	)
GAP ratio				16	%		229	%		72	%		83	%		73	%		46	%

[Additional columns below]

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


			1-3			3-5			Over 5
			Years			Years			Years			Total

Assets Loans			$	4,471		$	11,569		$	63,733		$	100,795
Allowance for loan losses				—			—			—			(1,049	)
Investments				5,413			212			595			13,248
Short-term Investments				—			—			—			39
Other non- earning assets				—			—			—			6,524

		Total	$	9,884		$	11,781		$	64,328		$	119,557

Liabilities
Non interest bearing deposits			$	—		$	—		$	—		$	10,898
Interest bearing deposits				4,789			2,230			50			56,943
Federal Funds purchased				—			—			—			2,100
Long-term FHLB borrowings				6,249			8,058			10,864			34,108
Other liabilities				—			—			—			1,637
Capital				—			—			—			13,871

	Total		$	11,038		$	10,288		$	10,914		$	119,557

GAP			$	(1,154	)	$	1,493		$	53,414
Cumulative
GAP			$	(33,976)	)	$	(32,483	)	$	20,931
GAP ratio				90	%		115	%		589	%

Capital Resources

The Corporation’s capital adequacy is reviewed regularly to ensure that sufficient capital is available to meet current and future funding needs and comply with regulatory requirements. Shareholders’ equity, excluding the net unrealized gain on securities available for sale, increased $170 or 1.26% to

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

$13,659 for the first six months of 2002. This represents 11.42% of total assets. At June 30, 2001, the similar ratio of shareholders’ equity to total assets was 11.50%. Dividends declared increased by 12.02% to $462 in 2002 compared to $413 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 June 30, 2002, the Bank has a “risk-based” total capital to asset ratio of 20.12%. The ratio exceeds the requirements established by regulatory agencies as shown below.


(Dollars in thousands)			Minimum Required
June 30, 2002			For Capital					Under Prompt Corrective
	Actual		Adequacy Purposes					Action Regulations
	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total Capital (to risk weighted assets)	$	14,524		20.12	%	$	5,775		8.00	%	$	7,219		10.00	%
Tier 1 capital (to risk weighted assets)		13,620		18.87			2,887		4.00			4,331		6.00
Tier 1 capital (to average assets)		13,620		11.26			4,838		4.00			6,047		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 Corporation is not involved in any material pending legal proceedings to which the Registrant or its subsidiaries is a party or which any of its property is subject, except for proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial statements of the Registrant or its subsidiaries as of and for the period ended June 30, 2002.

Item 2. Changes in securities and use of proceeds

During the six months ended June 30, 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.

Item 4. Submission of matters to a vote of security holders

The annual meeting of security holders of the Company was held April 25, 2002. Information concerning the matters brought to a vote of security holders is contained in the Company’s Proxy Statement and Notice of Annual Meeting of Shareholders held April 25, 2002, as previously filed. There have been no further matters submitted to a vote of the Registrant’s security holders during the six months ended June 30, 2002.

Item 5. Other information

None

Item 6. Exhibits and reports on Form 8-K


	1.	Exhibits required by Item 601 of Regulation S-K See Index to Exhibits on page 13.

	2.	Reports on Form 8-K No reports on Form 8-K were filed for the three months ended June 30, 2002.

SIGNATURES

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

CAPITAL DIRECTIONS, INC.


Date:	August 6, 2002	By: /s/	Timothy Gaylord Timothy Gaylord President

Date:	August 6, 2002	By: /s/	Lois A. Toth Lois A. Toth Treasurer

Index to Exhibits

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


2		Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession – Consolidation Agreement included in Amendment No. 1 to Form S-4 Registrant Statement No. 33-20417

3		Instruments Defining the Rights of Security Holders, Including Debentures – Not applicable

11		Statement Regarding Computation of Per Share Earnings – Not applicable

15		Letter Regarding Unaudited Interim Financial Information – Not applicable

18		Letter Regarding Change in Accounting Principals – Not applicable

19		Previous Unfiled Documents – Not applicable

20		Report Furnished to Security Holders – Not applicable

23		Published Report Regarding Matters Submitted to Vote of Security Holders – Not applicable

24		Consents of Experts and Counsel – Not applicable

25		Power of Attorney – Not applicable

27		Additional Exhibits – Not applicable

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

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

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CAPITAL DIRECTIONS INC 10-Q