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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarter ended    March 31, 2003    Commission file number      33-20417      

Capital Directions, Inc.

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

None

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 o

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

As of March 31, 2003 the registrant had outstanding 590,043 shares of common stock having a par value of $5 per share.

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CAPITAL DIRECTIONS, INC.
INDEX TO FORM 10-Q

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PART I — FINANCIAL INFORMATION

CAPITAL DIRECTIONS, INC.
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

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, 2003 and 2002

(In thousands)

See accompanying notes to consolidated financial statements.

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

Note 1.

In the opinion of management of the Registrant, the accompanying Consolidated Financial Statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the consolidated financial position of the Registrant as of March 31, 2003 and December 31, 2002 and results of operations and cash flows for the three month periods ended March 31, 2003 and 2002.

Note 2.

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

Note 3.

The accompanying unaudited Consolidated Financial Statements and the notes thereto should be read in conjunction with the Notes to Consolidated Financial Statements and the notes included therein, for the fiscal year end 2002, included in the Registrant’s 2002 Annual Report on Form 10-K.

Note 4. Analysis of the Allowance for Loan Losses

Management determines the adequacy of the allowance for loan losses based on an evaluation of the loan portfolio, recent loss experience, historical performance, current economic conditions, current analyses of asset quality and other pertinent factors. Non-performing loans are defined as all loans which are accounted for as non-accrual; loans 90 days or more past due and still accruing interest; or loans which have been renegotiated due to the borrowers’ inability to comply with the original terms. As of March 31, 2003, non-performing loans totaled $57,000 or .06% of total loans. This represents a decrease of $31,000 from the $88,000 balance at December 31, 2002.

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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.

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Note 5. Earnings Per Share

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

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

Note 6. Stock Option Plan

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

     A summary of activity in the plan is as follows:

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

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Note 6. Stock Option Plan (continued)

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

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

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

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.

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

	The Company is not aware of any market or institutional trends, events or circumstances that will have or are reasonably likely to have a material effect on liquidity, capital resources, or results of operations except as discussed herein.
	Financial Condition (In thousands)
	During the first quarter of 2003, the assets of the Company decreased $605 or 0.48% from December 31, 2002. This decrease resulted primarily from decreased residential mortgage loan balances due to normal repayment streams. New loan activity did not fully replace the repayment streams, as a portion of the new loans generated was sold directly into the secondary market.
	Cash and cash equivalents have increased $148 or 1.75% in the three-month period from December 31, 2002 to March 31, 2003. This is a result of an increase in Federal funds sold and a decrease in short-term interest bearing deposits in other financial institutions.
	Total outstanding loans have decreased $1,884 during the first quarter of 2003. This is a decrease of 1.94% from December 31, 2002. The greatest portion of this decrease has been realized in residential mortgage loans, while commercial and installment loans have decreased slightly. During the first quarter of 2003, the Company has continued to sell certain newly originated loans into the secondary market as part of its asset and liability management strategy to minimize the risk associated with the recent reductions in interest rates.
	The allowance for loan losses decreased $5 or .48% during the three month period ending March 31, 2003. At March 31, 2003 the allowance as a percent of outstanding loans was 1.09% compared to 1.08% at December 31, 2002. Management continues to maintain the allowance for loan losses at a level considered appropriate to absorb probable incurred losses in the portfolio.
	Total deposits have increased $93 or .12% during the first quarter of 2003. This increase was concentrated in non-interest bearing deposits while time deposits showed a slight decline.
	Total shareholders’ equity increased $249 or 1.74% in the first quarter of 2003. This increase was comprised of net income of $489 and offset by decrease in net unrealized gains on available for sale securities of $27 and by dividends declared of $230 and proceeds from shares issued upon the exercise of stock options. Book value per share was $24.74 at March 31, 2003 compared to $24.36 at December 31, 2002.
	Results of Operations (In thousands)
	For the first quarter of 2003, net income was $489, basic earnings per share was $.83, and diluted earnings per share was $.82, compared to $451, $.76, and $.75 for the same period in 2002. Average earning assets increased to $118,842 or 5.43% from March 31, 2002 to March 31, 2003. The average yield on earning assets decreased to 6.45% for the quarter ended March 31, 2003 from 7.30% for the comparable time period in 2002. Average costs for rate related liabilities decreased forty-five basis points to 3.20% at March 31, 2003 from 3.65% at March 31, 2002. Net interest margin decreased to 3.82% for the first three months of 2003 compared to 4.30% in the same period of 2002. The Company is experiencing a decreasing margin related primarily to the change in the structure of earning assets. As mortgage loan payoffs from refinancing increased during 2002, some of the funds were invested in interest bearing deposits with other financial institutions, which tend to be at lower yields as compared to loans. In addition, residential mortgage loan demand increased significantly during the past several months and many of the new, lower rate loans were sold into the secondary market to protect the Company from interest-rate risk. The following table illustrates the change in net interest margin for the three months ended March 31, 2003 and March 31, 2002.

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

The two variables that have the most significant effect on the change in the net interest income are volume and rate. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. As illustrated in the following table, the Company had a decrease in net interest income due primarily to funds deployed into lower yielding deposits with other financial institutions and fed funds growth as well as decreased loan and investment rates.