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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
----------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 333-56682.
CAPITAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-1848668
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1820 West End Avenue
Nashville, Tennessee 37203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (615) 327-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered: each class is to be registered:
None None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:
$4.00 par value common stock
(Title of Class)
Indicate by check mark 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 shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value based upon the last transaction in the shares
reported to management (in that there exists no established public trading
market for Registrant's shares and no bid or asked prices of such stock are
available) of the Registrant's common equity held by non-affiliates as of March
1, 2002, is approximately $17,375,774. The market value calculation assumes that
all shares beneficially owned by members of the Board of Directors and executive
officers of the Registrant are owned by "affiliates," a status that each of such
Directors and executive officers individually disclaims. This is based on an
estimated 1,336,598 shares held by non-affiliates at March 1, 2002. Such
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 1, 2002, 1,565,271 shares of the Registrant's common voting stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Specified portions of the Registrant's
Proxy Statement for the 2002 Annual Meeting of Shareholders, and portions of its
2001 Annual Report to Shareholders, as set forth in the Exhibit Index.
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CAPITAL BANCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I ................................................................... 1
Item 1. Business........................................................ 1
Item 2. Description of Property......................................... 41
Item 3. Legal Proceedings............................................... 42
Item 4. Submission of Matters to a Vote of Security Holders............. 42
PART II ................................................................... 42
Item 5. Market Price for Common Equity and Related Stockholder Matters.. 42
Item 6. Selected Financial Data......................................... 53
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation........................................ 54
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 54
Item 8. Financial Statements and Supplementary Data..................... 54
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 55
PART III................................................................... 55
Item 10. Directors And Executive Officers of the Registrant.............. 55
Item 11. Executive Compensation.......................................... 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................... 55
Item 13. Certain Relationships and Related Transactions.................. 55
PART IV ................................................................... 56
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56
-ii-
PART I
Discussions of certain matters contained in this Annual Report on Form 10-K may
constitute "forward-looking statements" within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act") and, as such,
may involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which your
Company, Capital Bancorp, Inc., operates, including projections of future
performance, perceived opportunities in the market and any statements regarding
the Company's goals, business plans, and/or areas of concern. The Company's
actual results, performance and achievements may differ materially from the
results, performance and achievements expressed or implied in such
forward-looking statements. For a discussion of some of the factors that might
cause such a difference, see "Item 1. Business - Factors That May Affect Future
Results of Operation."
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
THE COMPANY
Capital Bancorp, Inc. (the "Company") is a one bank holding company registered
under the Bank Holding Company Act of 1956, as amended. The Company was
chartered in the State of Tennessee in March of 2001, for the purpose of
becoming the parent holding company of Capital Bank & Trust Company. The Bank's
Shareholders approved a share exchange between the Company and the Bank on April
24, 2001. The share exchange became effective on July 1, 2001. The primary
function of the Company is the ownership of the shares of the Bank. Accordingly,
the Company's results of operation and financial performance are virtually
identical to those of the Bank in 2001.
The Company's principal executive offices are located at 1820 West End Avenue,
Nashville, Davidson County, Tennessee 37203, telephone (615) 327-9000.
THE BANK
Capital Bank & Trust Company (the "Bank") is a commercial bank with deposits
insured by the Bank Insurance Fund that is administered by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is chartered under the Tennessee
Banking Act. It is subject to examination, supervision and regulation by the
FDIC and by the Tennessee Department of Financial Institutions. The Bank
initially opened for business in May of 1994.
The Bank concentrates on developing its financial service business in Davidson
County and Sumner County, Tennessee and in other trade areas (generally, in
those counties contiguous to Davidson County). It currently operates six
full-service banking offices located in Davidson County and in Sumner County in
Tennessee. Its main office is located in Nashville, Tennessee and it has
additional full-service branches in Nashville, Goodlettsville, Hendersonville,
and Hermitage, Tennessee. The Bank's deposits are insured by the FDIC as
provided by law. It has not elected to seek membership in the Federal Reserve
System.
Expenditures for research and development activities were not material for the
years 1999, 2000, or 2001.
Neither the Company nor any of its significant subsidiaries is dependent upon a
single customer or very few customers.
At December 31, 2001, the Company and its subsidiaries had fifty-nine full-time
and five part-time employees, not including contract labor for certain services.
1
The principal executive offices of the Bank are located at 1820 West End Avenue,
Nashville, Davidson County, Tennessee 37203, telephone (615) 327-9000.
(a) Business Development in 2001.
During 2001 the Bank has continued to focus on developing its financial services
business in Davidson County, Tennessee and in other areas (generally, in those
counties contiguous to Davidson County, particularly Sumner County, Tennessee).
The Bank provides a wide range of commercial banking services to small and
medium-sized businesses, including those engaged in the real estate development
business, the music industry, business executives, professionals and other
individuals. The Bank operates throughout Davidson County, Tennessee, with three
offices located in Nashville. The Bank opened a new, full service branch office
in Hermitage, Tennessee, in September of 2001, in addition to the two full
service branch offices that it opened in 2000 in Hendersonville and
Goodlettsville, Tennessee, respectively. Additional information concerning the
general development of the Company's business since the beginning of the
Company's last fiscal year is set forth as part of Item 7, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" ("Management's Discussion"), and in the financial statements made
part of Item 8 (the "Consolidated Financial Statements"), in this Annual Report
on Form 10-K as well as in "Business of the Bank" below in this Item.
(b) Business of the Bank.
The Bank focuses its business in Middle Tennessee. The Middle Tennessee area is
generally comprised of the Nashville, Tennessee metropolitan statistical area.
At December 31, 2001, the Bank had total earning assets of approximately
$168,514,000 and total Shareholders' equity of $16,521,000. The Bank reported
net earnings of approximately $1,008,000 (and the Company, $989,000) for fiscal
2001. At December 31, 2001, the Bank's total loans (net of allowance for
possible loan losses of $2,122,000) were $138,952,000 and its total deposits
were $150,093,000. As of that date, the Bank's Tier I capital ratio was 11.5%
(as compared to the minimum required level of 4%), its total risk-based capital
ratio was 12.8% (as compared to the minimum required level of 8%), and its
leverage ratio was 9.2% (as compared to the minimum required level of 4%).
Generally, the Bank is pleased with these ratios and believes that they can
support the Bank's anticipated growth for the foreseeable future.
The Bank's primary source of income in 2001 was its earnings principally derived
from interest income from loans and returns from its investment portfolio. The
Bank derived approximately 91% of its gross earnings from interest income and
approximately 9% from fees and other non-interest sources. The availability of
funds to the Bank is primarily dependent upon the economic policies of the
government, the economy in general and the general credit market for loans. The
Bank may in the future engage in various business activities permitted to
commercial banks and their subsidiaries, either directly, through one or more
subsidiaries, or through acquisitions. The Bank intends to provide banking and
financial services in Middle Tennessee, primarily in the Davidson County and
Sumner County trade areas, through its commercial banking operations.
The Bank engages in a full service commercial and consumer banking business,
including the following services:
- - Accepting time and demand deposits,
- - Providing personal and business checking accounts at competitive rates,
and
- - Making secured and unsecured commercial and consumer loans.
The Bank is a locally managed community bank that seeks to provide personal
attention and professional assistance to its customer base which consists
principally of individuals and small and medium-sized businesses. The Bank's
philosophy includes offering direct access to its officers and personnel,
providing friendly, informed and courteous service, local and timely decision
making, flexible and reasonable operating procedures, and consistently-applied
credit policies.
2
The Bank's acceptance of time, demand, and savings deposits includes NOW
accounts, money market accounts, regular savings accounts, and certificates of
deposit.
The Bank makes secured and unsecured commercial, consumer, installment and
construction loans. Residential mortgages and small business loans are core
products. Consumer loans include revolving credit lines and installment loans.
The Bank offers the following support services to make financial management more
efficient and convenient for its customers:
- - personalized service - automatic bill payment service
- - telephone banking - safe deposit boxes
- - night deposit services - drive-up banking
- - on-line banking - U.S. Savings Bonds
- - direct deposit - travelers' checks
For retail customers, the Bank offers a full range of depository products
including regular and money market checking accounts; regular, special, and
money market savings accounts; various types of certificates of deposit and
Individual Retirement Accounts, as well as safe deposit facilities. The Bank
also offers its retail customers consumer and other installment loans and credit
services. The Bank makes available to local businesses and institutions
traditional lending services, such as lines of credit, real estate loans and
real estate construction loans, as well as standard depository services and
certain other special services. Its principal source of income is from interest
earned on personal, commercial, agricultural, and real estate loans of various
types. The Bank has a number of correspondent bank relationships, through which
the Bank is effectively able to offer customers services generally available
only from larger financial institutions. The Bank does not operate a trust
department.
The Bank's primary service area is located in Davidson County and the
surrounding portions of the Nashville Metropolitan Statistical Area. Within the
defined service area of the Bank's main office, the banking business is highly
competitive. The Bank competes primarily with banks and with other types of
financial institutions, including credit unions, finance companies, brokerage
firms, insurance companies, retailers, and other types of businesses that offer
credit, loans, check cashing, and comparable services. The Bank is a relatively
small commercial bank in its market area. Deposit deregulation has intensified
the competition for deposits among banks and other types of companies in recent
years. Deposit gathering and the effective and profitable use of those deposits
are two of the most daunting challenges faced by the Bank in particular and the
financial services sector in general.
The Bank is subject to extensive supervision and regulation by federal banking
agencies. Its operations are subject to a wide array of federal and state laws
applicable to financial services, to banks, and to lending. Certain of the laws
and regulations that affect these operations are outlined briefly below in this
Item and in other portions of this Annual Report on Form 10-K.
There also has been a number of recent legislative and regulatory proposals
designed to overhaul or otherwise "strengthen" the federal deposit insurance
system and to improve the overall financial stability of the banking system in
the United States. Some of these proposals provide for changes in the bank
regulatory structure, including proposals to reduce regulatory burdens on
banking organizations and to expand (or to limit) the nature of products and
services banks and bank holding companies may offer. It is not possible to
predict whether or in what form these proposals may be adopted in the future,
and, if adopted, their impact upon either the Bank or the financial services
industries in which the Bank competes. However, the enactment of the
"Gramm-Leach-Bliley Act of 1999" in late 1999 was an important development. See
"Financial Services Modernization Act," below.
3
Please refer also to the Consolidated Financial Statements for additional,
important information concerning the Bank.
FINANCIAL SUMMARY OF THE COMPANY
A financial summary of the Company is set forth below (amounts are
rounded). For years prior to 2001, the amounts stated are Bank only. Please
refer to the Consolidated Financial Statements for a more detailed presentation.
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
2001 2000 1999 1998 1997
TOTAL ASSETS $181,412 $166,942 $136,313 $113,687 $81,616
TOTAL EARNING ASSETS 168,514 153,369 128,932 108,164 75,211
DEPOSITS 150,093 144,093 100,978 90,705 66,392
STOCKHOLDERS' EQUITY 16,521 15,282 19,062 14,216 13,294
GROSS REVENUES 14,562 14,150 10,846 8,604 6,346
NET EARNINGS* 989* 1,087* 1,038 938 836
BASIC EARNINGS PER SHARE 0.63 0.68 0.64 0.69 0.70
DILUTED EARNINGS PER SHARE 0.62 0.65 0.59 0.56 0.59
*Gross revenues increased in 2001 over 2000. However, in 2001 the Company did
not have the tax benefit that resulted from the redemption of a major
shareholder's stock. Thus, in 2001, gross revenues were $1,581,000 (compared to
$1,266,000 in 2000), but income taxes were $592,000 (compared to $179,000 in
2000), resulting in after-tax earnings of $989,000 in 2001 (compared to
$1,087,000 in 2000).
SUBSIDIARIES
The Company has one direct subsidiary, which is the Bank. The Bank has one
active subsidiary, Capital Housing Improvement Projects, Inc., which assists the
Bank in providing affordable housing to lower income customers. The Bank's other
subsidiary, CBTC Corporation, is inactive. All of the Company's subsidiaries are
listed in Exhibit 21.
SERVICES TO AND TRANSACTIONS WITH ITS SUBSIDIARIES
Intercompany transactions between the Company and its subsidiaries are subject
to restrictions of existing banking laws (such as Sections 23A and 23B of the
Federal Reserve Act) and accepted principles of fair dealing. The Company can
provide its subsidiaries with advice and specialized services in the areas of
accounting and taxation, budgeting and strategic planning, employee benefits and
human resources, auditing, trust, and banking and corporate law. The Company may
elect to charge a fee for these services from time to time. The responsibility
for the management of the subsidiaries, however, remains with each company's
Board of Directors and with the officers elected by each subsidiary's Board.
EXPANSION STRATEGY AND SUBSIDIARIES
The Company, through the Bank, will continue to focus on expansion through
internal organic growth. However, the Company becomes aware from time to time of
opportunities for growth through acquisition.
4
The Company's philosophy in considering such a transaction is to evaluate the
acquisition for its potential to bolster the Company's presence in its chosen
markets as well as for long-term profitability. Ultimately, the purpose of any
such acquisition should be to enhance long-term shareholder value. Presently,
there are no ongoing discussions that should be disclosed pursuant to federal or
state securities laws.
FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K and in documents incorporated herein by
reference, the Company may communicate statements relating to the future results
of the Company that may be considered "forward- looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act). The
Company's actual results may differ materially from those included in the
forward-looking statements. Forward-looking statements are typically identified
by the words "believe, expect, anticipate, intend, estimate" and similar
expressions. These statements may relate to, among other things, loan loss
reserve adequacy, simulation of changes in interest rates and litigation
results. Actual results may differ materially from those expressed or implied as
a result of certain risks and uncertainties, including, but not limited to,
social, political and economic conditions, interest rate fluctuations,
competition for loans, mortgages, and other financial services and products,
changes in interest rates, and unforeseen changes in liquidity, results of
operations, and financial conditions affecting the Company and/or its customers,
as well as other risks that cannot be accurately quantified or definitively
identified. Many factors affecting the Company's financial condition and
profitability, including changes in economic conditions, the volatility of
interest rates, political events, equity and fixed income market fluctuations,
personal and corporate customers' bankruptcies, inflation, technological change,
changes in law, changes in fiscal, monetary, regulatory and tax policies,
monetary fluctuations, success in gaining regulatory approvals when required as
well as other risks and uncertainties and competition from other providers of
financial services simply cannot be predicted. Because these factors are
unpredictable and beyond the Company's control, earnings may fluctuate from
period to period. The purpose of this type of information, such as that provided
in Item 7, as well as other portions of this Annual Report on Form 10-K, is to
provide readers of this Annual Report on Form 10-K with information relevant to
understanding and assessing the financial condition and results of operations of
the Company and not to predict the future or to guarantee results. The Company
undertakes no obligation to publish revised forward-looking statements to
reflect the occurrence of changes or of unanticipated events, circumstances, or
results.
SUPERVISION AND REGULATION
The commercial banking business is highly regulated. The following discussion
contains a summary of the material aspects of the regulatory framework
applicable to bank holding companies and their subsidiaries, and provides
certain specific information about the Company. The bank regulatory framework is
intended primarily for the protection of depositors, the deposit insurance
system, and the banking system, and not for the protection of shareholders or
any other group. In addition, certain present or potential activities of the
Company and the Bank are subject to various securities and insurance laws and
are regulated by the Securities and Exchange Commission and the Tennessee
Department of Commerce and Insurance (Insurance Division). To the extent that
the following information describes statutory and regulatory provisions, it is
qualified in its entirety by express reference to each of the particular
statutory and regulatory provisions. A change in applicable statutes,
regulations or regulatory policy may have a material effect on the business of
the Company.
GENERAL
Capital Bancorp, Inc. The Company is registered as a bank holding company with
the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
The Company is subject to examination, regulation and supervision by the Federal
Reserve Board under the Bank Holding Company Act of 1956, as amended. The
Company is required to file annual reports and such additional information as
the Federal Reserve Board may require pursuant to the Bank Holding Company Act
with the Federal Reserve Board. The Company is also subject to Tennessee
regulations.
5
The Bank Holding Company Act permits the Federal Reserve Board to approve an
application by a bank holding company to acquire a bank located outside the
acquirer's principal state of operations without regard to whether the
transaction is prohibited under state law. See "Interstate Banking and
Branching."
Effective September 29, 1995, the Tennessee Bank Structure Act of 1974 was
amended to, among other things, prohibit (subject to certain exceptions) a bank
holding company from acquiring a bank for which the home state is Tennessee (a
Tennessee bank) if, upon consummation, the company would directly or indirectly
control 30% or more of the total deposits in insured depository institutions in
Tennessee. As of June 30, 2001, the Company estimates that it held less than one
percent of such deposits. Subject to certain exceptions, the Tennessee Bank
Structure Act prohibits a bank holding company from acquiring a bank in
Tennessee which has been in operation for less than five years. Tennessee law
permits a Tennessee bank to establish branches in any county in Tennessee. See
"Interstate Banking and Branching."
Capital Bank & Trust Company. The Company's subsidiary Bank is subject to
supervision and examination by applicable federal and state banking agencies.
The Bank is chartered under the laws of the State of Tennessee but it has chosen
not to be a member of the Federal Reserve System. All Tennessee banks, and all
subsidiary banks of a bank holding company, must become and remain insured banks
under the Federal Deposit Insurance Act. (See 12 U.S.C. Section 1811, et seq.)
Therefor, the Bank is subject to supervision, regulation, and examination by the
Federal Deposit Insurance Company (the "FDIC") and the Tennessee Department of
Financial Institutions. The Bank is also subject to various requirements and
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon and limitations on
the types of investments that may be made, activities that may be engaged in,
and types of services that may be offered. The operations of the Bank are also
affected by various consumer laws and regulations, including those relating to
equal credit opportunity, truth in savings disclosures, debt collection laws,
privacy regulations, and regulation of consumer lending practices. In addition
to the impact of direct regulation, commercial banks are affected significantly
by the actions of the Federal Reserve Board as it attempts to control the money
supply and credit availability in order to influence the economy.
Strict compliance at all times with state and federal banking laws, as well as
other laws, is and will continue to be required. The Bank believes that the
experience of its executive management will assist it in its continuing efforts
to achieve the requisite level of compliance. Certain provisions of Tennessee
law may be preempted by existing and future federal laws, rules and regulations
and no prediction can be made as to the impact of preemption on Tennessee law or
the regulation of the Bank thereunder.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking and other
subsidiaries. The principal source of cash flow of the Company, including cash
flow to pay dividends on its stock, is dividends from the Bank. There are
statutory and regulatory limitations on the payment of dividends by the Bank to
the Company, as well as by the Company to its shareholders.
Tennessee law restricts the timing and amount of dividends that may be paid by
the Bank. In no event is a Tennessee chartered bank permitted to pay dividends
in any calendar year that exceed the total of its net income of that year
combined with its retained net income of the preceding two years without the
prior approval of the Commissioner of the Tennessee Department of Financial
Institutions. Prior regulatory approval must be obtained before declaring any
dividends if the amount of the Bank's capital, and surplus is below certain
statutory limits.
If, in the opinion of the applicable federal bank regulatory authority, a
depository institution or a holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require that such institution or holding company
cease and desist from such practice. The federal bank regulatory agencies have
indicated that paying dividends that deplete a depository institution's or
holding company's capital base to an inadequate level would be such an unsafe
and unsound banking practice. Moreover, the Federal Reserve Board, the
Comptroller and the FDIC have issued policy statements
6
which provide that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating earnings.
In addition, under the Federal Deposit Insurance Act, an FDIC-insured depository
institution may not make any capital distributions (including the payment of
dividends) or pay any management fees to its holding company or pay any dividend
if it is undercapitalized or if such payment would cause it to become
undercapitalized.
Under Tennessee law, the Company is not permitted to pay dividends if, after
giving effect to such payment, it would not be able to pay its debts as they
become due in the usual course of business or if the Company's total assets
would be less than the sum of its total liabilities plus any amounts needed to
satisfy any preferential rights if the Company were dissolving. However, it is
not intended that the Company will pay a cash dividend in 2002. The funds
available for dividends are expected to be retained by the Company to support
the Company's planned growth in deposits and loans. The payment of dividends by
the Company and the Bank may also be affected or limited by other factors, such
as the requirement to maintain adequate capital above regulatory guidelines and
debt covenants. See "Capital Adequacy" and "Prompt Corrective Action."
BANK HOLDING COMPANY ACT
The Company is a bank holding company and thus subject to examination,
regulation and supervision by the Federal Reserve Board. The Bank Holding
Company Act requires prior Federal Reserve Board approval for bank acquisitions
and generally requires that a bank holding company engage in banking or
bank-related activities. Specifically, the Bank Holding Company Act requires
that a bank holding company obtain prior approval of the Federal Reserve Board
before (1) acquiring, directly or indirectly (except in certain limited
circumstances), ownership or control of more than 5% of the voting stock of a
bank, (2) acquiring all or substantially all of the assets of a bank, or (3)
merging or consolidating with another bank holding company. The Bank Holding
Company Act also generally limits the business in which a bank holding company
may engage to banking, managing or controlling banks, and furnishing or
performing services for the banks that it controls. Interstate banking and
interstate branching are now permitted. See "Interstate Banking and Branching."
Failure to meet capital requirements can result in certain mandatory, and
possibly additional discretionary, actions by regulators that could, in that
event, have a direct material effect on the institution's financial statements.
The relevant regulations require the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets and
liabilities as calculated under regulatory accounting principles. The
regulations also require the regulators to make qualitative judgments about the
Bank. Those qualitative judgments could also affect the Bank's capital status
and the amounts of dividends that the Bank may distribute. See "Prompt
Corrective Action" and "Capital Adequacy." At December 31, 2001, management
believes that the Company and the Bank met all such capital requirements to
which they are subject.
The Company is subject to various legal restrictions on the extent to which it
and any nonbank subsidiary that it might own or form in the future can borrow or
otherwise obtain credit from the Bank. For example, the Company and the Bank are
subject to limitations imposed by Section 23A of the Federal Reserve Act with
respect to extensions of credit to, investments in, and certain other
transactions with any affiliate, including any transactions between the Bank and
the Company. In general, these restrictions require that any such extensions of
credit must be on non-preferential terms and secured by designated amounts of
specified collateral and be limited, as to the holding company or any one of
such nonbank subsidiaries, to 10% of the lending institution's capital stock and
surplus, and as to the holding company and all such nonbank subsidiaries in the
aggregate, to 20% of such capital stock and surplus. Further, Section 23B of the
Federal Reserve Act imposes restrictions on "non-credit" transactions between
the Bank on the one hand and the Company (and "nonbank" bank holding company)
affiliates on the other hand.
The Federal Reserve Board has issued a proposed new regulation, styled
Regulation W, that is intended to deal comprehensively with the issues covered
by Sections 23A and 23B of the Federal Reserve Act. Public comment on the
proposed new regulation ended on August 15, 2001.
7
Under the Bank Holding Company Act, prior to March 13, 2000, bank holding
companies could not in general directly or indirectly acquire the ownership or
control of more than 5% of the voting shares or substantially all of the assets
of any company, including a bank, without the prior approval of the Federal
Reserve Board, and the Bank Holding Company Act also generally limited the types
of activities in which a bank holding company and its subsidiaries could engage
to banking and activities found by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto. Since March 13, 2000,
eligible bank holding companies that elect to become financial holding companies
may affiliate with securities firms and insurance companies and engage in
activities that are financial in nature generally without the prior approval of
the Federal Reserve Board. See "Financial Services Modernization Act." The
Company has not elected to become a financial holding company but believes that
it is eligible to do so.
The Federal Reserve Board may require that a bank holding company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, a bank holding
company must file written notice and obtain approval from the Federal Reserve
Board prior to purchasing or redeeming its equity securities.
The Bank Holding Company Act prohibits, except in certain statutorily prescribed
instances, a bank holding company from acquiring direct or indirect ownership or
control of more than 5% of the outstanding voting shares of any company that is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
furnishing services to its subsidiaries. However, a bank holding company,
subject to the prior approval of the Federal Reserve Board, may engage in any,
or acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. See
"Cross-Guarantee Liability." In addition, it is the Federal Reserve Board's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the Federal Reserve Board to be an unsafe and unsound banking
practice or a violation of the Federal Reserve Board's regulations or both.
Under the Bank Holding Company Act and regulations adopted by the Federal
Reserve Board, a bank holding company and its non-banking subsidiaries are
prohibited from requiring certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or furnishing of services.
Further, a bank holding company is required by the Federal Reserve Board to
maintain specified minimum capital. See "Capital Adequacy."
Bank holding companies within the meaning of T.C.A. Section 45-2-1401 of the
Tennessee Banking Act are also subject to regulation under that Tennessee Act.
As such, a bank holding company and its subsidiaries could be subject to
examination by, and could be required to file reports with, the Tennessee
Department of Financial Institutions under specified circumstances.
TENNESSEE BANKING REGULATION
The Bank is incorporated under the banking laws of the State of Tennessee. As
such, the Bank is subject to a myriad of state banking and corporate laws, and
to supervision, regulation and examination by the Tennessee Department of
Financial Institutions, although such regulation and examination is for the
protection of the banking system and not for the protection of shareholders or
any other investors. The Bank
8
files periodic reports with the Tennessee Department of Financial Institutions
concerning, among other things, its activities and financial condition.
Tennessee statutes regulate a variety of the banking activities of the Bank
including required reserves, investments, loans, mergers and share exchanges,
issuance of securities, payment of dividends, and establishment of branches.
Under Tennessee law, a state bank is prohibited from lending to any one person,
firm or corporation amounts more than 15% of its equity capital accounts, except
(i) in the case of certain loans secured by negotiable title documents covering
readily marketable nonperishable staples or (ii) with the prior approval of the
Bank's board of directors or finance committee (however titled), the Bank may
make a loan to one person, firm or corporation of up to 25% of its equity
capital accounts. The Bank must obtain the prior approval of the Commissioner of
the Tennessee Department of Financial Institutions (the "Commissioner") for a
variety of matters. These include branching, mergers, acquisitions, issuances of
preferred stock, charter amendments, and other matters. State and federal
statutes and regulations also relate to many aspects of the Banks' operations,
including reserves against deposits, ownership of deposit accounts, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices, and capital requirements.
Further, the Bank is required to maintain certain levels of capital. See "See
"Capital Adequacy."
Under the Tennessee Banking Act, each Bank director must, during each director's
whole term of service, be a citizen of the United States. A majority of the
directors must reside in a state in which the Bank has a branch location or
within one hundred (100) miles of the location of any branch, both for at least
one (1) year immediately preceding their election and during their term of
service as a director.
As noted above, Tennessee law restricts the timing and amount of dividends that
may be paid by the Bank. In no event is a Tennessee chartered bank permitted to
pay dividends in any calendar year that exceed the total of its net income of
that year combined with its retained net income of the preceding two years
without the prior approval of the Commissioner. Prior regulatory approval must
be obtained before declaring any dividends if the amount of the Bank's capital,
and surplus is below certain statutory limits.
Subject to certain exceptions and the ultimate impact of the Interstate Banking
Act, both a bank holding company and an out-of-state bank are prohibited under
Tennessee law from acquiring control of, merging, or consolidating with a
Tennessee bank, unless the Tennessee bank has been in operation for at least
five (5) years. Notwithstanding the above-described prohibition(s), a bank which
does not have its home state in Tennessee may establish or acquire a branch in
Tennessee through the acquisition of all or substantially all of the assets and
the assumption of all or substantially all of the liabilities of or related to a
branch located in Tennessee which has been in operation for at least five (5)
years, provided that the laws of the home state of the out-of-state bank permit
Tennessee banks to establish and maintain branches in that state through the
acquisition of a branch under substantially the same terms and conditions. A
bank or bank holding company is prohibited from acquiring any bank in Tennessee
if the bank or bank holding company (including all insured depository
institutions which are affiliates of the bank or bank holding company), upon
consummation of the acquisition, would control thirty percent (30%) or more of
the total amount of the deposits of the insured depository institutions in
Tennessee. Under Tennessee law, any Tennessee bank that has been in operation
for at least five years may be acquired, under certain circumstances, by banks
and bank holding companies from outside Tennessee. Acquisitions are subject to
the approval of the Commissioner, the FDIC, and the Federal Reserve Board based
upon a variety of statutory and regulatory criteria. Branching is regulated
generally by the Tennessee Department of Financial Institutions and the FDIC
pursuant to certain state and federal law requirements. See "Interstate Banking
and Branching."
The Tennessee Banking Act, as amended, is codified at Tennessee Code Annotated
Section 45-2-101, et seq.
REGULATION BY THE FDIC
The FDIC is the Bank's primary federal regulator. The Bank is subject to
supervision, examination and regulation by the FDIC. However, such supervision,
examination and regulation is intended to protect the deposit insurance funds
managed by the FDIC and not to protect shareholders of or other investors in the
Bank. It is intended that the Bank's deposit accounts will always be insured up
to applicable limits by the FDIC through the Bank Insurance Fund. The Bank files
and will continue to be required to file reports with
9
the FDIC concerning its activities and financial condition, in addition to
obtaining regulatory approvals prior to consummating certain transactions,
including branching, mergers or acquisitions. The Federal Deposit Insurance Act
serves to limit the amount of dividends payable by the Bank. See "Payment of
Dividends."
The deposits of the Bank are insured to a maximum of $100,000 per depositor,
subject to certain aggregation rules that can have the effect of limiting the
amount of deposit insurance coverage. The FDIC establishes rates for the payment
of premiums by federally insured banks and thrifts for deposit insurance.
Separate insurance funds (the Bank Insurance Fund, and the Savings Association
Insurance Fund), are maintained for commercial banks and thrifts, with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. The Bank's deposits are insured under the Bank Insurance
Fund. The FDIC has adopted a risk-based deposit insurance premium system for all
insured depository institutions, including the Bank, which requires that a
depository institution pay a premium for deposit insurance on insured deposits
depending on its capital levels and risk profile, as determined by its primary
federal regulator on a semi-annual basis.
CAPITAL ADEQUACY
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. The minimum guideline for the ratio of total capital (Total
Capital) to risk-weighted assets (including certain off-balance-sheet items,
such as standby letters of credit) is 8%, and the minimum ratio of Tier 1
Capital (defined below) to risk-weighted assets is 4%. At least half of the
Total Capital must be composed of common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets (Tier 1 Capital). The remainder may consist of
qualifying subordinated debt, certain types of mandatory convertible securities
and perpetual debt, other preferred stock and a limited amount of loan loss
reserves.
In addition, the Federal Reserve Board has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to quarterly average assets, less goodwill and certain
other intangible assets (the Leverage Ratio), of 3% for bank holding companies
that meet certain specific criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3%, plus an additional cushion of 100 to 200 basis
points. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve
Board has indicated that it will consider a tangible Tier 1 Capital leverage
ratio (deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities.
At December 31, 2001, the Company's consolidated Tier 1 Capital, Total Capital,
and Leverage Ratios, together with the well-capitalized and minimum permissible
levels, were as follows:
Capital Bancorp, Inc. Well-Capitalized Minimum Required
Institutions* by Regulation
Tier 1 Capital 11.50% 6.00% 4.00%
Total Risk-Based Capital 12.80% 10.00% 8.00%
Leverage Ratio 9.20% 5.00% 4.00%
*See "Prompt Corrective Action" below.
The Federal Reserve Board, the FDIC and the Office of the Comptroller of the
Currency adopted rules to incorporate market and interest-rate risk components
into their risk-based capital standards and that explicitly identify
concentration of credit risk and certain risks arising from non-traditional
activities, and the
10
management of such risks, as important factors to consider in assessing an
institution's overall capital adequacy. Under the market risk requirements,
capital is allocated to support the amount of market risk related to a financial
institution's ongoing trading activities for banks with relatively large trading
activities. Institutions will be able to satisfy this additional requirement, in
part, by issuing short-term subordinated debt that qualifies as Tier 3 capital.
The Company is not required to make any allocation of capital under these rules.
The Bank is also subject to risk-based and leverage capital requirements similar
to those described above adopted by the FDIC, as the case may be. The Company
believes that the Bank was in compliance with applicable minimum capital
requirements as of December 31, 2001.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business and in certain circumstances
to the appointment of a conservator or receiver. See "Prompt Corrective Action."
The federal regulators continue to study and to propose changes to the capital
requirements applicable to the Company and the Bank. For example, in 2001 the
federal banking regulators issued regulations to establish special minimum
capital requirements for equity investments in nonfinancial companies (defined
as companies not previously determined to be financial in nature by the federal
banking regulators) and the impact of such investments on a financial
institution's Tier 1 capital. These regulations are to become effective on April
1, 2002. On December 5, 2001, the Federal Reserve Board requested public comment
on a proposed regulation to amend its risk-based capital guidelines to clarify
that deferred tax assets in excess of the allowable amount (disallowed deferred
tax assets) are included in the items deducted from Tier 1 capital for the
purpose of determining the maximum allowable amount of Tier 2 capital that a
banking organization may include in qualifying total capital; and the maximum
allowable amount of term subordinated debt and intermediate-term preferred stock
that may be treated as supplementary capital. (The Federal Reserve Board
indicates that this change is to make its regulations consistent with those of
the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation.) The Company does not anticipate that these changes will adversely
affect the Company or the Bank.
Further, some of the developments related to capital are international in scope.
For instance, on January 16, 2001, the Basel Committee proposed its second draft
of a new capital adequacy framework. The new capital framework would consist of
minimum capital requirements, a supervisory review process and the effective use
of market discipline. In its proposal for minimum capital requirements, the
Committee set out options from which banks could choose depending on the
complexity of their business and the quality of their risk management. A
standardized approach would refine the current measurement framework and
introduce the use of external credit assessments to determine a bank's capital
charge. Banks with more advanced risk management capabilities could make use of
an internal risk-rating based approach. Under this approach, some of the key
elements of credit risk, such as the probability of default of the borrower,
would be estimated internally by a bank. The Committee is also proposing an
explicit capital charge for operational risk to provide for problems like
internal systems failure.
The supervisory review aspect of the new framework would seek to ensure that a
bank's capital position is consistent with its overall risk profile and
strategy. The supervisory review process would also encourage early supervisory
intervention when a bank's capital position deteriorates. The third aspect of
the new framework, market discipline, would call for detailed disclosure of a
bank's capital adequacy in order to encourage high disclosure standards and to
enhance the role of market participants in encouraging banks to hold adequate
capital. Banks must also disclose how they evaluate their own capital adequacy.
Further clarifications and changes were made in these proposals in 2001 and, on
December 13, 2001, the Committee issued a press release intended to inform the
public of the Committee's continued work, and apparent progress, toward new
guidelines. The Committee has announced that it expects to finalize its new,
proposed capital accord in 2002 and to implement it by 2005. The Company cannot
reliably predict whether the Committee will achieve its goals or what impact, if
any, a new international capital accord might have on its consolidated
operations. However, the Company believes that is capital position remains
strong and that it meets all federal capital standards applicable to it and to
the Bank.
11
Please refer to Items 7 and 8 of this Annual Report on Form 10-K for additional
information about the Company's and the Bank's respective capital positions.
HOLDING COMPANY STRUCTURE AND SUPPORT OF THE BANK
Because the Company is a holding company, its right to participate in the assets
of any subsidiary upon the latter's liquidation or reorganization will be
subject to the prior claims of the subsidiary's creditors (including depositors
in the case of the Bank) except to the extent that the Company may itself be a
creditor with recognized claims against the subsidiary. In addition, depositors
of a bank, and the FDIC as their subrogee, would likely be entitled to priority
over creditors of the Bank, including the Company, in the event of liquidation
of a bank subsidiary.
Under Federal Reserve Board policy, the Company is expected to act as a source
of financial strength to, and to commit resources to support, the Bank. This
support may be required at times when, absent such Federal Reserve Board policy,
the Company may not be inclined to provide it. In addition, any capital loans by
a bank holding company to the Bank are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In the event
of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
CROSS-GUARANTEE LIABILITY
Under the Federal Deposit Insurance Act, a depository institution insured by the
FDIC can be held liable for any loss incurred by, or reasonably expected to be
incurred by, the FDIC after August 9, 1989 in connection with (i) the default of
a commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to any commonly controlled FDIC-insured depository
institution in danger of default. Default is defined generally as the
appointment of a conservator or receiver and in danger of default is defined
generally as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institution. The Company and the Bank
are subject to these cross-guarantee provisions. As a result, any loss suffered
by the FDIC in respect of any of the Bank would likely result in assertion of
the cross-guarantee provisions and the assessment of such estimated losses
against the Company.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Act requires, among other things, that the federal
banking regulators take prompt corrective action with respect to FDIC-insured
depository institutions that do not meet minimum capital requirements. Under the
Federal Deposit Insurance Act, insured depository institutions are divided into
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Under
applicable regulations, an institution is defined to be well capitalized if it
maintains a Leverage Ratio of at least 5%, a Tier 1 Capital ratio of at least 6%
and a Total Capital ratio of at least 10% and is not subject to a directive,
order or written agreement to meet and maintain specific capital levels. An
institution is defined to be adequately capitalized if it meets all of its
minimum capital requirements as described above. An institution will be
considered undercapitalized if it fails to meet any minimum required measure,
significantly undercapitalized if it has a Total Risk-Based Capital ratio of
less than 6%, a Tier 1 Risk-Based Capital ratio of less than 3% or a Leverage
Ratio of less than 3% and critically undercapitalized if it fails to maintain a
level of tangible equity equal to at least 2% of total assets. An institution
may be deemed to be in a capitalization category that is lower than is indicated
by its actual capital position if it receives an unsatisfactory examination
rating.
The Federal Deposit Insurance Act generally prohibits an FDIC-insured depository
institution from making any capital distribution (including payment of
dividends) or paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized. Undercapitalized depository
institutions are subject to restrictions on borrowing from the Federal Reserve
System. In addition, undercapitalized depository institutions are subject to
growth limitations and are required to submit capital
12
restoration plans. An insured depository institution's holding company must
guarantee the capital plan, up to an amount equal to the lesser of 5% of the
depository institution's assets at the time it becomes undercapitalized or the
amount of the capital deficiency when the institution fails to comply with the
plan, for the plan to be accepted by the applicable federal regulatory
authority. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator, generally within ninety days of the date on which they
become critically undercapitalized.
The Company believes that the Bank, as of December 31, 2001, had sufficient
capital to qualify as well capitalized under applicable regulatory capital
requirements.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") authorizes interstate acquisitions of banks and bank
holding companies without geographic limitation beginning one year after
enactment. In addition, since June 1, 1997, a bank may merge with a bank in
another state as long as neither of the states has opted out of interstate
branching between the date of enactment of the Interstate Banking Act and May
31, 1997. Tennessee did not opt out of interstate branching. The Interstate
Banking Act further provides that states may enact laws permitting interstate
merger transactions prior to June 1, 1997. Tennessee did not enact such a law. A
bank may establish and operate a de novo branch in a state in which the bank
does not maintain a branch if that state explicitly permits de novo branching.
As of 2001, Tennessee has adopted legislation permitting de novo branching in
specified circumstances. Once a bank has established branches in a state through
an interstate merger transaction, the bank may establish and acquire additional
branches at any location in the state where any bank involved in the interstate
merger transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through de
novo branching may establish and acquire additional branches in such state in
the same manner and to the same extent as a bank having a branch in such state
as a result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out of state, whether through an acquisition or de novo.
TRANSACTIONS WITH AFFILIATES
There are various legal restrictions on the extent to which the Company and any
present or future nonbank subsidiaries (including for purposes of this
paragraph, in certain situations, subsidiaries of the Bank) can borrow or
otherwise obtain credit from the Bank. There are also legal restrictions on the
Bank's purchases of or investments in the securities of and purchases of assets
from the Company and its nonbank subsidiaries, the Bank's loans or extensions of
credit to third parties collateralized by the securities or obligations of the
Company and its nonbank subsidiaries, the issuance of guaranties, acceptances
and letters of credit on behalf of the Company and its nonbank subsidiaries, and
certain bank transactions with the Company and its nonbank subsidiaries, or with
respect to which the Company and its nonbank subsidiaries act as agent,
participate or have a financial interest. Subject to certain limited exceptions,
the Bank (including for purposes of this paragraph all subsidiaries of the Bank)
may not extend credit to the Company or to any other affiliate (other than, if
one existed, another bank subsidiary and certain exempted affiliates) in an
amount which exceeds 10% of a subsidiary bank's capital stock and surplus and
may not extend credit in the aggregate to all such affiliates in an amount which
exceeds 20% of its capital stock and surplus. Further, there are legal
requirements as to the type, amount and quality of collateral which must secure
such extensions of credit by the Bank to the Company or to such other
affiliates. Also, extensions of credit and other transactions between the Bank
and the Company or such other affiliates must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the Bank as those prevailing at the time for comparable
transactions with non-affiliated companies. Also, the Company and its
subsidiaries are
13
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
OFF-BALANCE SHEET FINANCING
The Company engages in no material off-balance sheet financings.
Information concerning the Bank's off-balance sheet financing (such as unfunded
lines of credit and outstanding stand-by letters of credit) are discussed in
Note 11 of the Consolidated Financial Statements.
TRANSACTIONS WITH THE COMPANY'S ACCOUNTANTS
As a matter of policy, the Company avoids being involved in transactions
with its firm of independent certified public accountants that would, in the
Company's view, jeopardize that firm's independence. The Company values the work
and the independent perspective offered by that firm but engages in no material
consulting service agreements with that firm. For example, in 2001, the fees for
non-audit services for the Company and the Bank were $12,815 as opposed to
$54,950 for audit fees. In addition, the Company and the Bank, collectively,
paid this firm $20,130 in connection with the formation of the Company as a bank
holding company in 2001, a non-recurring, special project.
GENERAL REGULATORY CONSIDERATIONS
Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), all
insured institutions must undergo regular on-site examination by their
appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and the
appropriate agency (and state supervisor when applicable). FDICIA also directs
the FDIC to develop with other appropriate agencies a method for insured
depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of condition or any other
report of any insured depository institution. FDICIA also requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions and depository institution holding companies
relating, among other things, to: (i) internal controls, information systems and
audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest
rate risk exposure; and (v) asset quality.
In response to perceived needs in financial institution regulation, Congress
enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
That statute, called FIRREA, provides that a depository institution insured by
the FDIC can be held liable for any loss incurred by, or reasonably expected to
be incurred by, the FDIC after August 9, 1989 in connection with (i) the default
of a commonly controlled FDIC insured depository institution or (ii) any
assistance provided by the FDIC to a commonly controlled FDIC insured depository
institution in danger of default. FIRREA provides that certain types of persons
affiliated with financial institutions can be fined by the federal regulatory
agency having jurisdiction over a depository institution with federal deposit
insurance (such as the Bank) could be fined up to $1 million per day for each
violation of certain regulations related (primarily) to lending to and
transactions with executive officers, directors, and principal shareholders,
including the interests of these individuals. Other violations may result in
civil money penalties of $5,000 to $25,000 per day or in criminal fines and
penalties. In addition, the FDIC has been granted enhanced authority to withdraw
or to suspend deposit insurance in certain cases. The banking regulators have
not been reluctant to use the new enforcement authorities provided under FIRREA.
Further, regulators have broad power to issue cease and desist orders that may,
among other things, require affirmative action to correct any harm resulting
from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts or take other actions as determined by the ordering agency to be
appropriate.
The Bank is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal stockholders and their related interests.
Such extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable
14
transactions with third parties and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
In 1991 Congress enacted FDICIA. That statute continued the trend toward placing
increasingly stringent capital requirements on banks and thrifts having deposits
insured through the Bank Insurance Fund and the savings association insurance
fund. In addition, FDICIA increased the powers of regulatory authorities to
intervene in the management of insured institutions such as the Bank, including
matters relating to lending, sources of funding, asset growth, management
compensation and internal controls, internal audit systems and information
systems. Among other matters, the regulatory agencies were charged to establish
operating ratios. These ratios include minimum earnings levels (sufficient to
absorb losses to the institution without impairing the institution's capital), a
minimum ratio of market value to book value for publicly traded companies (to
the extent deemed practicable), and a maximum ratio for classified assets to
capital. FDICIA imposes stricter limitations on insider loans and clarifies and
strengthens the limitations inherent in the credit aggregation rules. FDICIA
makes it clear that insured depository institutions must develop and maintain
strong capital and that those which do not maintain strong capital will be
subject to extensive scrutiny and likely regulatory intervention. Financial
institutions deemed to be undercapitalized, significantly undercapitalized, or
critically undercapitalized are subject to rigorous regulatory response
(including, particularly with respect to the last category, receivership). See
"Capital Adequacy" and "Prompt Corrective Action."
THE COMMUNITY REINVESTMENT ACT AND CERTAIN OTHER REGULATIONS
The federal law known as the Community Reinvestment Act requires that each
insured depository institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit needs of its local
community, including low and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions and applications to open a branch
or facility.
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a performance- based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval to
acquire a bank or other bank holding company, the Federal Reserve Board will
review the assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application. In
connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." As of its most recent CRA examination,
conducted in 1999, the Bank was rated at least "satisfactory."
Interest and certain other charges collected or contracted for by the Bank are
subject to state usury laws and certain federal laws concerning interest rates.
See "Usury Provisions." The Bank's loan operations are also subject to certain
federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of
15
financial records, and the Electronic Funds Transfer Act and Regulation E issued
by the Federal Reserve Board to implement that act, which governs automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services. This is not an exhaustive discussion of laws, rules
and regulations that affect and that will continue to have an impact on the
Bank.
USURY PROVISIONS
The Constitution of the State of Tennessee requires the state legislature to fix
interest rates in the state, and the legislature has adopted statutes to
accomplish this purpose. The general interest rate statutes currently in effect
establish a maximum "formula rate" of interest at 4% above the average prime
loan rate (or the average short-term business average rate, however denominated)
for the most recent week for which such average rate has been published by the
Federal Reserve Board, or 24% per annum, whichever is lower. In the event that
the Federal Reserve Board fails to publish the average rate for four consecutive
weeks or the maximum effective rate should be adjudicated or become inapplicable
for any reason whatsoever, the maximum effective rate is deemed to be 24% per
annum until the Tennessee General Assembly otherwise provides. At March 4, 2002,
the maximum "formula rate" of interest was 8.75%. Specific usury laws may apply
also to particular classes of lenders (e.g., credit unions and savings and loan
associations) and transactions (e.g., bank installment loans and home
mortgages). The maximum possible nominal rate of interest under these laws
generally cannot exceed (and may be less than) 24% per annum.
The relative importance of the usury laws to the financial operations of the
Bank varies from time to time, depending on a number of factors, including
conditions in the money markets, the cost and the availability of funds, and
prevailing interest rates. The management of the Bank is unable to state whether
existing usury laws have had or will have a material effect on its businesses or
earnings.
EFFECTS OF GOVERNMENTAL POLICIES
The Bank is affected by the policies of various regulatory authorities,
including the Tennessee Department of Financial Institutions, the Federal
Reserve Board, and the federal Office of the Comptroller of the Currency. An
important function of the Federal Reserve System is to regulate the national
money supply. As described in Management's Discussions and Analysis, the
multiple changes in interest rates established by the Federal Reserve Board in
the period 2000-2001 have had a material, negative impact of the Company on a
consolidated basis. In summary, the impact has been to narrow the Bank's net
interest margin (the difference between what the Bank pays for deposits and what
the Bank charges for loans), thus negatively affecting earnings.
Among the instruments of monetary policy used by the Federal Reserve Board are:
purchases and sales of U.S. Government securities in the marketplace; changes in
the discount rate, which is the rate any depository institution must pay to
borrow from the Federal Reserve Board; and changes in the reserve requirements
of depository institutions. These instruments are effective in influencing
economic and monetary growth, interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of changing conditions in the national economy and in the money market, as well
as the result of actions by monetary and fiscal authorities, it is not possible
to predict with certainty future changes in interest rates, deposit levels, loan
demand or the business and earnings of the Company and the Bank or whether the
changing economic conditions will have a positive or negative effect on
operations and earnings.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety
16
and soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a system
to identify problem assets and prevent those assets from deteriorating. Under
these standards, an insured depository institution should: (i) conduct periodic
asset quality reviews to identify problem assets, (ii) estimate the inherent
losses in problem assets and establish reserves that are sufficient to absorb
estimated losses, (iii) compare problem asset totals to capital, (iv) take
appropriate corrective action to resolve problem assets, (v) consider the size
and potential risks of material asset concentrations, and (vi) provide periodic
asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk. These guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves.
FINANCIAL SERVICES MODERNIZATION ACT
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999 (the "Financial Services Modernization Act"). The Financial Services
Modernization Act repeals the two affiliation provisions of the Glass-Steagall
Act: Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities; and
Section 32, which restricts officer, director, or employee interlocks between a
member bank and any company or person "primarily engaged" in specified
securities activities. In addition, the Financial Services Modernization Act
also contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general intent of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the Bank Holding
Company Act framework to permit a holding company system to engage in a full
range of financial activities through a new entity known as a Financial Holding
Company. The term "financial activities" is broadly defined to include not only
banking, insurance, and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
Generally, the Financial Services Modernization Act, which is also known as the
"Gramm-Leach-Bliley Act of 1999":
- - Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
- - Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
- - Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- - Provides an enhanced framework for protecting the privacy of consumer
information;
- Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed to
modernize the Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act; and
- - Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
Presently, the Company does not plan to create a corporate structure as a
"Financial Holding Company" within the meaning of the Financial Services
Modernization Act. If the Company were to decide to utilize the ability to
affiliate with other financial services providers, it would first have to become
a "Financial Holding Company" as permitted under an amendment to the Bank
Holding Company Act. To become a
17
Financial Holding Company, the Company would file a declaration with the Federal
Reserve Board, electing to engage in activities permissible for Financial
Holding Companies and certifying that it is eligible to do so because the Bank
(as its sole financial institution subsidiary) is well-capitalized and
well-managed. In addition, the Federal Reserve Board must also determine that
the Bank, as the new bank holding company's only insured depository institution
subsidiary, has at least a "satisfactory" Community Reinvestment Act rating
(which it does). See "The Bank - Community Reinvestment Act and Fair Lending
Developments," below. Management has, however, determined at this time that the
Bank will not seek an election to become a Financial Holding Company. The Bank
expects to continue to re-examine its decision under the Financial Services
Modernization Act from time to time. Presently, however, given its current
strategic business plan, market and financial conditions, regulatory capital
requirements, general economic conditions, and other factors, the Bank does not
intend to utilize any of its expanded powers provided in the Financial Services
Modernization Act.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because, under the so-called
"wild-card" or "parity" statute (T.C.A. Section 45-2-601), Tennessee chartered
commercial banks are generally permitted by the State of Tennessee to engage in
any activity permissible for national banks, competitor state banks will also be
permitted to form subsidiaries to engage in the activities authorized by the
Financial Services Modernization Act, to the same extent as a national bank. In
order to form a financial subsidiary, the Bank must be well-capitalized, and the
Bank would be subject to the same capital deduction, risk management and
affiliate transaction rules as applicable to national banks. These are described
below.
The Financial Services Modernization Act permits national banks to engage in
expanded activities through the formation of financial subsidiaries. A national
bank may have a subsidiary engaged in any activity authorized for national banks
directly or any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking, which
may only be conducted through a subsidiary of a Financial Holding Company.
Financial activities include all activities permitted under new sections of the
Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The Bank does not believe that the Financial Services Modernization Act will
have a material adverse effect on its operations in the near-term. However, to
the extent that it permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
As a result, the may find that it is compelled to compete with even larger and
more diversified financial institutions than is currently the case. The
Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated on
an ad hoc basis. Nevertheless, this new law may have the result of increasing
the amount of competition that the Bank faces from larger institutions and other
types of companies offering financial products, many of which may have
substantially more financial resources than the Bank. The impact of this or any
other development under the Financial Services Modernization Act cannot be
predicted.
The Act generally became effective March 11, 2000, although certain provisions
took effect later, such as functional regulation (May 12, 2001), and compliance
with privacy regulations (July 1, 2001). The Company has not elected, and
presently does not plan to elect, to become a financial holding company.
However, the Company could seek to make such an election in the future. The
Company cannot predict at this time the potential effect that the Act will have
on its business and operations, although the Company expects that the general
effect of the Act will be to increase competition in the financial services
industry generally.
18
FDIC INSURANCE ASSESSMENTS; FDIC FUNDS ACT
The FDIC reduced the insurance premiums it charges on bank deposits insured by
the Bank Insurance Fund to the statutory minimum of $2,000 for well capitalized
banks, effective January 1, 1996. Premiums related to deposits assessed by the
Savings Association Insurance Fund , including savings association deposits
acquired by banks, continued to be assessed at a rate of between 23 cents and 31
cents per $100 of deposits. On September 30, 1996, the Deposit Insurance Funds
Act of 1996 ("FDIC Funds Act") was enacted and signed into law. The FDIC Funds
Act provided for a special assessment to recapitalize the Savings Association
Insurance Fund to bring the Savings Association Insurance Fund up to statutorily
prescribed levels. The assessment imposed a one-time fee to banks that own
previously acquired thrift deposits of $ .526 per $100 of thrift deposits they
held at March 31, 1995. Neither the Company nor the Bank owned any such deposits
and, accordingly, no such fee was paid. The FDIC Funds Act further provides for
assessments to be imposed on insured depository institutions with respect to
deposits insured by the Bank Insurance Fund (in addition to assessments
currently imposed on depository institutions with respect to Savings Association
Insurance Fund-insured deposits) to pay for the cost of Financing Company bonds
("FICO bonds"). All banks are being assessed to pay the interest due on FICO
bonds since January 1, 1997. The cost to the Company on an annual basis has been
determined to be immaterial.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
DEPOSITOR PREFERENCE
Federal law provides that deposits and certain claims for administrative
expenses and employee compensation against an insured depository institution
would be afforded a priority over other general unsecured claims against such an
institution, including federal funds and letters of credit, in the liquidation
or other resolution of such an institution by any receiver.
INSURANCE ACTIVITIES
Through the Bank, the Company engages, or may engage, in limited sales of
insurance policies and products as agent. Insurance activities are conducted (or
expected to be conducted) in the State of Tennessee. Accordingly, such
activities are subject to regulation by the Tennessee Department of Commerce and
Insurance (Insurance Division). Although most of such regulation focuses on
insurance companies and their insurance products, insurance agents and their
activities are also subject to regulation by the states, including, among other
things, licensing, and marketing and sales practices, and overall market
conduct. Sales of insurance by federally insured deposit institutions like the
Bank are also subject to federal regulations, guidelines, and oversight.
COMPETITION
The commercial banking business is highly competitive and the Company competes
actively with national and state banks and bank holding company organizations
for deposits, loans and trust accounts, and with savings and loan associations
and credit unions for deposits and loans. In addition, the Company competes with
other financial institutions, including securities brokers and dealers, personal
loan companies, insurance companies, finance companies, leasing companies and
certain governmental agencies, all of which actively engage in marketing various
types of loans, deposit accounts and other services. For example, may of the
Company's competitors are affiliated with large bank holding company systems
that have greater financial and other resources than the Company. The
deregulation of depository institutions, as well as the increased ability of
nonbanking financial institutions to provide services previously reserved for
commercial banks, has intensified competition. Because nonbanking financial
institutions are not subject to the same regulatory restrictions as banks and
bank holding companies, in many instances they may operate with greater
flexibility because they may not be subject to the same types of regulatory
applications and processes as are the Company or the Bank.
19
The principal geographic area of the Company's operations encompasses Nashville,
Davidson County, Sumner County, and surrounding areas of Tennessee. In this
area, there are many commercial banks and other financial institutions operating
dozens of offices and branches (exclusive of free-standing ATM's) and holding an
aggregate (reportedly) of billions of dollars in deposits as of approximately
June 30, 2001 (based on data published by the FDIC). The Company competes with
some of the largest bank holding companies in Tennessee, which have or control
businesses, banks or branches in the area, including regional financial
institutions such as Union Planters Bank, N.A., SunTrust Bank, National
Association, Regions Bank, National Bank of Commerce, SouthTrust Bank, National
Association, Bank of America, Firstar Bank, N.A., and AmSouth Bank, as well as
with a variety of other local banks, financial institutions, and financial
services companies.
To compete with major financial institutions in its service area, the Company
relies, in part, on specialized services, on a high level of personalized
service and intensive customer-oriented services, local promotional activity,
and personal contacts with customers by its officers, directors, and employees.
For customers whose loan demands exceed the Bank's lending limit, the Bank seeks
to arrange for loans on a participation basis with correspondent banks. The Bank
also assists customers requiring services not offered by the Bank in obtaining
those services from its correspondent banks or other sources. Due to the intense
competition in the financial industry, the Company makes no representation that
its competitive position has remained constant, nor can it predict whether its
position will change in the future.
SOURCES AND AVAILABILITY OF FUNDS
Specific reference is made to the Management's Discussion and Analysis of
Financial Condition and Results of Operation section contained in the 2001
Annual Report to Stockholders, which section is incorporated herein by
reference.
EMPLOYEES
At year-end 2001, the Bank employed fifty-nine persons on a full-time, and five
persons on a part-time, basis. None of these employees is covered by a
collective-bargaining agreement. Group life, health, dental, and disability
insurance are maintained for or made available to employees by the Bank, as is a
401(k) profit- sharing plan adopted by the Bank as are certain benefit plans
(described elsewhere herein) adopted by the Bank. The Company considers employee
relations to be satisfactory.
ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY; LAWS AND REGULATIONS
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials and non-interest income. In general,
the difference between the interest rates paid by the Bank on interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates
received by the Bank on its interest-earning assets, such as loans extended to
its borrowers, together with securities held in its investment portfolio,
comprise the major portion of the Bank's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank, such as
inflation, recession and unemployment, and the impact which future changes in
domestic and even in foreign economic conditions might have on the Bank cannot
be predicted by the Bank or the Company.
The Company's business is also influenced by the monetary and fiscal policies of
the federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open- market operations in U.S. Government securities by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted which
have the effect of increasing the cost of doing business, limiting or expanding
permissible activities, or affecting the competitive balance
20
between banks and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of banks, bank
holding companies, and other financial institutions and financial services
providers are frequently made in the federal Congress, in the state
legislatures, and before various regulatory agencies. Please refer to "Item 1.
Business - Supervision and Regulation."
The Company's earnings are affected not only by the extensive regulation
described above, but also by general economic conditions. These economic
conditions influence, and are themselves influenced, by the monetary and fiscal
policies of the United States government and its various agencies, particularly
the Federal Reserve Board. The Company cannot predict changes in monetary
policies or their impact on its operations and earnings.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company does not believe that it will be required to expend any material amounts
in order to comply with these laws and regulations by virtue of its and the
Company's activities. However, such laws may from time to time affect the
Company in the context of lending activities to borrowers who may themselves
engage in activities or encounter circumstances in which the environmental laws,
rules, and regulations are implicated.
RESEARCH
The Company makes no material expenditures for research and development.
DEPENDENCE UPON A SINGLE CUSTOMER
The Company's principal customers are generally located in the Middle Tennessee
area with a concentration in Davidson County, Tennessee. The Company is not
dependent upon a single customer or a very few customers. However, a substantial
percentage of the Company's total loans is secured by commercial real estate,
most of which property is located in Davidson County, Tennessee. Accordingly,
the Company has a significant concentration of credit that is dependent, under
certain circumstances, on the continuing strength of the local real estate
market.
LINE OF BUSINESS
The Company's principal business is the ownership of the Banks' stock. The Bank
operates under the Tennessee Banking Act and the Federal Deposit Insurance Act
in the area of finance. The Company and the Bank derived 100% of its
consolidated total operating income from the commercial banking business in
2001.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATION
In addition to the other information contained in this Annual Report on Form
10-K, the following risks may affect the Company. If any of these risks occurs,
the Company's business, financial condition or operating results could be
adversely affected.
The Company's financial performance and profitability will depend on its ability
to execute its corporate growth strategy and to manage recent and anticipated
future growth. The Company's success and profitability depend on the Company's
ability to maintain profitable operations through continued implementation of
the Company's community banking philosophy which emphasizes personal service and
customer attention.
Changes in market interest rates may adversely affect the Company's performance.
For instance, the Company's earnings are affected by changing interest rates.
Changes in interest rates affect the demand for new loans, the credit profile of
existing loans, the rates received on loans and securities and rates paid on
deposits and borrowings. The relationship between the rates received on loans
and securities and the rates paid on deposits and borrowings is known as
interest rate spread. Given the Company's current volume and mix of
interest-bearing liabilities and interest-earning assets, its interest rate
spread could be expected to decrease during times of rising interest rates and,
conversely, to increase during times of falling interest rates.
21
Although management believes that the current level of interest rate sensitivity
is reasonable, significant fluctuations and/or further increases in interest
rates may have an adverse effect on the Company's business, financial condition
and results of operations. The recent downward plunge of interest rates has had
a decidedly negative effect on the Bank's (and thus the Company's) profitability
in the past year. See Item 7, "Management's Discussion and Analysis."
The Company's Davidson County and Middle Tennessee business focus and economic
conditions in these areas could adversely affect our operations. This is true
because our operations are centralized and focused on this narrowly defined
geographic area. As a result of this geographic concentration, the Company's
operating results depend largely upon economic conditions in these areas. A
deterioration in economic conditions in these market areas, particularly in the
nursery and real estate industries on which these areas depend, could have a
material adverse impact on the quality of the Bank's loan portfolio and on the
demand for the Bank's products and services, which in turn can be expected to
have a negative, and perhaps material adverse, effect on results of operations
of both the Bank and the Company.
As discussed above, the Company is subject to government regulation that could
limit or restrict its activities. In turn, this could adversely impact
operations. The financial services industry is regulated extensively. Federal
and state regulation is designed primarily to protect the deposit insurance
funds and consumers, and not to benefit our shareholders. These regulations can
sometimes impose significant limitations on Company operations. In addition,
these regulations are constantly evolving and may change significantly over
time. Significant new laws or changes in existing laws or repeal of existing
laws may cause the Company's consolidated results to differ materially. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for us. The ultimate impact of
financial institution affiliations under the Financial Services Modernization
Act, and other aspects of that law, cannot yet be predicted but could adversely
affect the Company.
Competition may adversely affect the Company's performance. The financial
services business in the Company's market areas is highly competitive. It is
becoming increasingly competitive due to changes in regulation, technological
advances, and the accelerating pace of consolidation among financial services
providers. (For instance, AmSouth's recent acquisition of First American
National Bank is another example of consolidation in the financial services
business in the Company's market areas.) The Company faces competition both in
attracting deposits and in making loans. The Company competes for loans
principally through the interest rates and loan fees charged and the efficiency
and quality of services provided. Increasing levels of competition in the
banking and financial services businesses may reduce the Company's market share
or cause the prices charged by the Company and/or the Bank for services to fall.
Thus results may differ in future periods depending upon the nature or level of
competition.
If a significant number of the Bank's borrowers, guarantors and related parties
fail to perform as required by the terms of their loans, the Company will
sustain losses. A significant source of risk arises from the possibility that
losses will be sustained if a significant number of the Bank's borrowers,
guarantors and related parties fail to perform in accordance with the terms of
their loans. The Bank has adopted underwriting and credit monitoring procedures
and credit policies, including the establishment and review of the allowance for
credit losses, that management believes are appropriate to minimize this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Bank's credit portfolio. These policies and procedures,
however, may not prevent unexpected losses that could materially adversely
affect consolidated results of operations.
RECENT DEVELOPMENTS AND FUTURE LEGISLATION
The following discussion contains a summary of recent legislative developments
that can be expected to affect the Bank's operations.
As noted previously, new laws and regulations are commonly prescribed by
governmental agencies that affect the Bank. The best known new development was
the enactment of the Financial Services Modernization Act, which is expected to
have an extensive impact on financial services in the United States. Additional
developments include, for example, a recent change in Tennessee law removed the
prohibition against the acquisition of certain branches that have been in
existence for at least five years by out-of-state banks and
22
bank holding companies. It has also become possible to have "S corporation" tax
status as a bank under federal income tax laws, with the effect that the tax
attributes of S corporations are available, under federal law, to certain
qualifying financial institutions.
The rules for accounting for mergers and acquisitions and the accounting for
goodwill have been changed. These changes could impact the Company's evaluation
of future acquisitions or mergers. However, the impact of these changes cannot
be properly evaluated at this time.
Recently, there have been public calls for greater supervision of accounting
functions and the need to assure auditor independence. This has been a
particular result from the controversial collapse of the Enron Corporation.
Presently, both the Bush Administration and Congress have issued various
proposals related to auditing, consulting, and public disclosures by reporting
companies. None of these proposals has been enacted into law.
The foregoing list is not intended to be exclusive or exhaustive. Other
legislative and regulatory proposals that affect commercial banks and their
competitors, and regarding changes in banking and the regulation of banks,
thrifts and other financial institutions and bank and bank holding company
powers, are being considered by the executive branch of the Federal government,
Congress and various state governments, including Tennessee. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. It cannot be reliably predicted whether any of
these proposals will be adopted, and, if adopted, how these proposals will
affect the Bank and the Company.
SELECTED FINANCIAL DATA AND STATISTICAL INFORMATION
Certain selected financial data and certain statistical data concerning the
Company that should be read in conjunction with Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operation" is set forth in
the following pages.
23
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
I. Distribution of Assets, Liabilities and Stockholders' Equity:
Interest Rate and Interest Differential
The Schedule which follows indicates the average balances for each
major balance sheet item, an analysis of net interest income and the
change in interest income and interest expense attributable to changes
in volume and changes in rates.
The difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities is net interest
income, which is the Company's gross margin. Analysis of net interest
income is more meaningful when income from tax-exempt earning assets is
adjusted to a tax equivalent basis. Accordingly, the following schedule
includes a tax equivalent adjustment of tax-exempt earning assets,
assuming a weighted average Federal income tax rate of 34%.
In this Schedule "change due to volume" is the change in volume
multiplied by the interest rate for the prior year. "Change due to
rate" is the change in interest rate multiplied by the volume for the
current year. Changes in interest income and expense not due solely to
volume or rate changes are included in the "change due to rate"
category.
Non-accrual loans have been included in the loan category. Loan fees of
$612,000, $504,000 and $510,000 for 2001, 2000 and 1999, respectively,
are included in loan income and represent an adjustment of the yield on
these loans.
24
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IN THOUSANDS, EXCEPT INTEREST RATES
------------------------------------------------------------------------------------------------
2001 2000 2000/2001 CHANGE
----------------------------- ----------------------------- --------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
---------- ------- ------- ------- ------- ------- ------ ------ -----
Loans, net of unearned interest $ 130,055 8.83% 11,488 113,461 9.99% 11,335 1,658 (1,505) 153
Investment securities - taxable 18,615 6.02 1,120 23,714 6.70 1,589 (342) (127) (469)
Investment securities -
tax exempt 1,103 4.62 51 1,102 4.63 51 -- -- --
Taxable equivalent adjustment -- 2.36 26 -- 2.36 26 -- -- --
----------------------------- ----------------------------- -----
Total tax-exempt
investment securities 1,103 6.98 77 1,102 6.99 77 -- -- --
----------------------------- ----------------------------- -----
Total investment securities 19,718 6.07 1,197 24,816 6.71 1,666 (342) (127) (469)
----------------------------- ----------------------------- -----
Loans held for sale 1,960 7.35 144 1,121 7.40 83 62 (1) 61
Federal funds sold 9,926 4.11 408 3,966 6.58 261 392 (245) 147
Interest-bearing deposits in
financial institutions 862 4.99 43 344 5.52 19 29 (5) 24
----------------------------- ----------------------------- -----
Total earning assets 162,521 8.17 13,280 143,708 9.30 13,364 1,750 (1,834) (84)
----------------------------- ----------------------------- -----
Cash and due from banks 3,365 3,086
Allowance for possible loan
losses (2,078) (1,624)
Premises and equipment 5,110 3,356
Other assets 3,132 2,997
--------- -------
Total assets $ 172,050 151,523
========= =======
25
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IN THOUSANDS, EXCEPT INTEREST RATES
------------------------------------------------------------------------------------------------
2001 2000 2001/2000 CHANGE
------------------------------ ----------------------------- ----------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
------- -------- ------- ------- -------- ------- ------ ------ -----
Deposits:
Negotiable order of
withdrawal accounts $ 10,646 1.36% 145 6,015 2.31% 139 107 (101) 6
Money market demand
accounts 62,748 3.79 2,379 55,813 5.54 3,094 384 (1,099) (715)
Individual retirement
accounts 1,866 6.38 119 1,565 6.07 95 18 6 24
Other savings deposits 1,092 1.01 11 808 1.36 11 4 (4) --
Certificates of deposit
$100,000 and over 29,519 5.69 1,681 20,740 6.05 1,254 531 (104) 427
Certificates of deposit
under $100,000 26,459 6.04 1,597 28,835 5.84 1,685 (139) 51 (88)
---------------------------- ----------------------------- ----
Total interest-bearing
deposits 132,330 4.48 5,932 113,776 5.52 6,278 1,024 (1,370) (346)
Demand 11,869 -- -- 9,679 -- -- -- -- --
---------------------------- ----------------------------- ----
Total deposits 144,199 4.11 5,932 123,455 5.09 6,278 1,055 (1,401) (346)
---------------------------- ----------------------------- ----
Advances from Federal Home
Loan Bank 8,633 5.25 453 9,496 5.92 562 (51) (58) (109)
Securities sold under
repurchase agreements 2,477 3.27 81 1,884 4.35 82 26 (27) (1)
Federal funds purchased -- -- -- 1,139 6.58 75 (75) -- (75)
---------------------------- ----------------------------- ----
Total deposits and
borrowed funds 155,309 4.16 6,466 135,974 5.15 6,997 995 (1,526) (531)
---------------------------- ----------------------------- ----
Other liabilities 768 583
Stockholders' equity 15,973 14,966
-------- -------
Total liabilities and
stockholders' equity $172,050 151,523
======== =======
Net interest income 6,814 6,367
===== =====
Net yield on earning assets 4.19% 4.43%
==== ====
Net interest spread 4.01% 4.15%
==== ====
26
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IN THOUSANDS, EXCEPT INTEREST RATES
-----------------------------------------------------------------------------------------------
2000 1999 2000/1999 CHANGE
---------------------------- ----------------------------- ---------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
--------- -------- ------- ------- -------- ------- ------ ------ -----
Loans, net of unearned interest $ 113,461 9.99% 11,335 86,198 9.61% 8,287 2,620 428 3,048
Investment securities - taxable 23,714 6.70 1,589 20,972 6.51 1,366 179 44 223
Investment securities -
tax exempt 1,102 4.63 51 871 4.59 40 11 -- 11
Taxable equivalent adjustment -- 2.36 26 -- 2.41 21 5 -- 5
----------------------------- ---------------------------- -----
Total tax-exempt
investment securities 1,102 6.99 77 871 7.00 61 16 -- 16
----------------------------- ---------------------------- -----
Total investment securities 24,816 6.71 1,666 21,843 6.53 1,427 194 45 239
----------------------------- ---------------------------- -----
Loans held for sale 1,121 7.40 83 1,783 7.85 140 (52) (5) (57)
Federal funds sold 3,966 6.58 261 3,668 4.85 178 14 69 83
Interest-bearing deposits in
financial institutions 344 5.52 19 1,579 4.62 73 (57) 3 (54)
----------------------------- ---------------------------- -----
Total earning assets 143,708 9.30 13,364 115,071 8.78 10,105 2,514 745 3,259
----------------------------- ---------------------------- -----
Cash and due from banks 3,086 3,114
Allowance for possible loan
losses (1,624) (1,193)
Premises and equipment 3,356 1,406
Other assets 2,997 1,668
--------- -------
Total assets $ 151,523 120,066
========= =======
27
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IN THOUSANDS, EXCEPT INTEREST RATES
----------------------------------------------------------------------------------------------
2000 1999 2000/1999 CHANGE
------------------------------ ----------------------------- ---------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
-------- -------- ------- ------- -------- ------- ------ ------ -----
Deposits:
Negotiable order of
withdrawal accounts $ 6,015 2.31% 139 4,624 1.30% 60 18 61 79
Money market demand
accounts 55,813 5.54 3,094 34,471 4.59 1,581 980 533 1,513
Individual retirement
accounts 1,565 6.07 95 944 5.51 52 34 9 43
Other savings deposits 808 1.36 11 770 1.95 15 1 (5) (4)
Certificates of deposit
$100,000 and over 20,740 6.05 1,254 13,262 5.23 693 391 170 561
Certificates of deposit
under $100,000 28,835 5.84 1,685 29,472 5.36 1,580 (34) 139 105
----------------------------- ---------------------------- -----
Total interest-bearing
deposits 113,776 5.52 6,278 83,543 4.77 3,981 1,442 855 2,297
Demand 9,679 -- -- 8,533 -- -- -- -- --
----------------------------- ---------------------------- -----
Total deposits 123,455 5.09 6,278 92,076 4.32 3,981 1,356 941 2,297
----------------------------- ---------------------------- -----
Advances from Federal Home
Loan Bank 9,496 5.92 562 9,010 5.37 484 26 52 78
Securities sold under
repurchase agreements 1,884 4.35 82 795 4.28 34 47 1 48
Federal funds purchased 1,139 6.58 75 363 5.79 21 45 9 54
----------------------------- ---------------------------- -----
Total deposits and
borrowed funds 135,974 5.15 6,997 102,244 4.42 4,520 1,491 986 2,477
----------------------------- ---------------------------- -----
Other liabilities 583 695
Stockholders' equity 14,966 17,127
-------- -------
Total liabilities and
stockholders' equity $151,523 120,066
======== =======
Net interest income 6,367 5,585
===== =====
Net yield on earning assets 4.43% 4.85%
==== ====
Net interest spread 4.15% 4.36%
==== ====
28
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
II. Investment Portfolio:
A. Securities at December 31, 2001 consist of the following:
SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury and other
U.S. Government agencies
and corporations $10,078 70 96 10,052
Obligations of states and
political subdivisions 1,104 17 -- 1,121
Mortgage-backed securities 11,040 59 21 11,078
Corporate and other securities 1,096 -- -- 1,096
------- --- ------ ------
$23,318 146 117 23,347
======= === ====== ======
Securities at December 31, 2000 consist of the following:
SECURITIES AVAILABLE-FOR-SALE
------------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury and other
U.S. Government agencies
and corporations $21,031 16 267 20,780
Obligations of states and
political subdivisions 1,103 14 4 1,113
Mortgage-backed securities 3,112 5 58 3,059
Corporate and other securities 1,038 -- -- 1,038
------- --- ------ ------
$26,284 35 329 25,990
======= === ====== ======
Securities at December 31, 1999 consist of the following:
SECURITIES AVAILABLE-FOR-SALE
----------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury and other
U.S. Government agencies
and corporations $20,081 -- 830 19,251
Obligations of states and
political subdivisions 1,102 -- 34 1,068
Mortgage-backed securities 3,889 1 128 3,762
Corporate and other securities 845 -- -- 845
------- --- ------ ------
$25,917 1 992 24,926
======= === ====== ======
29
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
II. Investment Portfolio, Continued:
B. The following schedule details the estimated maturities and
weighted average yields of investment securities (including
mortgage-backed securities) of the Company at December 31, 2001:
Estimated Weighted
Amortized Market Average
Available-For-Sale Securities Cost Value Yields
----------------------------- --------- --------- --------
(In Thousands, Except Yields)
U.S. Treasury and other U.S. Government
agencies and corporations, including
mortgage-backed securities:
One to five years $ 8,887 8,863 4.32%
Five to ten years 2,034 2,039 4.06
More than ten years 10,197 10,228 6.20
------- ------ ----
Total securities of U.S. Treasury
and other U.S. Government
agencies and corporations 21,118 21,130 5.20
------- ------ ----
Obligations of states and political
subdivisions*:
Less than one year 115 116 4.43
One to five years 325 332 4.64
Five to ten years 300 302 4.30
More than ten years 364 371 4.99
------- ------ ----
Total obligations of states and
political subdivisions 1,104 1,121 4.64
------- ------ ----
Other:
Federal Home Loan Bank stock 902 902 6.71
Bankers Bank stock 194 194 2.86
------- ------ ----
Total investment securities $23,318 23,347 5.22%
======= ====== ====
* Weighted average yield is stated on a tax-equivalent basis, assuming a
weighted average Federal income tax rate of 34%.
30
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
III. Loan Portfolio:
A. Loan Types
The following schedule details the loans of the Company at
December 31, 2001, 2000, 1999, 1998 and 1997:
In Thousands
-------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- ------- -------
Commercial, financial and
agricultural $ 80,224 69,402 53,832 42,117 29,931
Real estate - construction 9,343 8,289 12,625 10,738 7,091
Real estate - mortgage 46,198 34,269 33,572 19,155 15,517
Installment 5,309 4,629 4,213 2,707 2,352
--------- -------- -------- ------- -------
Total loans 141,074 116,589 104,242 74,717 54,891
Less unearned interest -- -- -- -- --
--------- -------- -------- ------- -------
Total loans, net of
unearned interest 141,074 116,589 104,242 74,717 54,891
Less allowance for possible
loan losses (2,122) (1,886) (1,330) (1,026) (795)
--------- -------- -------- ------- -------
Net loans $ 138,952 114,703 102,912 73,691 54,096
========= ======== ======== ======= =======
31
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
III. Loan Portfolio, Continued:
B. Maturities and Sensitivities of Loans to Changes in Interest
Rates
The following schedule details maturities and sensitivity to
interest rates changes for commercial loans of the Company at
December 31, 2001:
1 Year to
Less Than Less Than After 5
1 Year 5 Years Years Total
---------- --------- ------- ------
Maturity Distribution:
Commercial, financial
and agricultural $24,298 51,726 4,200 80,224
Real estate - construction 8,586 757 -- 9,343
------- ------ ------ ------
$32,884 52,483 4,200 89,567
======= ====== ====== ======
Interest-Rate Sensitivity:
Fixed interest rates $11,729 35,930 2,329 49,988
Floating or adjustable
interest rates 21,155 16,553 1,871 39,579
------- ------ ------ ------
Total commercial,
financial and
agricultural loans
plus real estate -
construction loans $32,884 52,483 4,200 89,567
======= ====== ====== ======
*Includes demand loans, bankers acceptances, commercial paper and deposit notes.
32
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
III. Loan Portfolio, Continued:
C. Risk Elements
The following schedule details selected information as to
non-performing loans of the Company at December 31, 2001, 2000,
1999, 1998 and 1997:
In Thousands, Except Percentages
-------------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------ ------
Non-accrual loans:
Commercial, financial and
agricultural $ 993 873 438 167 --
Real estate - construction -- -- -- -- --
Real estate - mortgage 227 574 -- -- --
Installment 48 -- -- -- 3
Lease financing receivable -- -- -- -- --
-------- ------- ------- ------ ------
Total non-accrual $ 1,268 1,447 438 167 3
======== ======= ======= ====== ======
Loans 90 days past due:
Commercial, financial and
agricultural $ 317 45 51 -- --
Real estate - construction -- -- -- -- --
Real estate - mortgage 171 81 415 -- --
Installment 14 6 6 -- --
Lease financing receivable -- -- -- -- --
-------- ------- ------- ------ ------
Total loans 90 days
past due $ 502 132 472 -- --
======== ======= ======= ====== ======
Renegotiated loans:
Commercial, financial and
agricultural $ -- -- -- -- --
Real estate - construction -- -- -- -- --
Real estate - mortgage -- -- -- -- --
Installment -- -- -- -- --
Lease financing receivable -- -- -- -- --
-------- ------- ------- ------ ------
Total renegotiated
loans past due $ -- -- -- -- --
======== ======= ======= ====== ======
Loans current - considered
uncollectible $ -- -- -- -- --
======== ======= ======= ====== ======
Total non-performing
loans $ 1,770 1,579 910 167 3
======== ======= ======= ====== ======
Total loans, net of
unearned interest $141,074 116,589 104,242 74,717 54,891
======== ======= ======= ====== ======
Percent of total
loans outstanding,
net of unearned
interest 1.25% 1.35 0.87 0.22 0.01
======== ======= ======= ====== ======
Other real estate $ 244 493 402 -- --
======== ======= ======= ====== ======
33
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
III. Loan Portfolio, Continued:
C. Risk Elements, Continued
The accrual of interest income is discontinued when it is
determined that collection of interest is less than probable or
the collection of any amount of principal is doubtful. The
decision to place a loan on a non-accrual status is based on an
evaluation of the borrower's financial condition, collateral
liquidation value, economic and business conditions and other
factors that affect the borrower's ability to pay. At the time a
loan is placed on a non-accrual status, the accrued but unpaid
interest is also evaluated as to collectibility. If
collectibility is doubtful, the unpaid interest is charged off.
Thereafter, interest on non-accrual loans is recognized only as
received. Non-accrual loans totaled $1,268,000 at December 31,
2001, $1,447,000 at December 31, 2000, $438,000 at December 31,
1999, $167,000 at December 31, 1998 and $3,000 at December 31,
1997. Gross interest income on non-accrual loans, that would
have been recorded for the year ended December 31, 2001 if the
loans had been current totaled $56,000 as compared to $34,000 in
2000, $20,000 in 1999 and $6,000 in 1998. The amount of interest
income recognized on total loans during 2001 totaled $11,488,000
as compared to $11,335,000 in 2000, $8,287,000 in 1999,
$6,258,000 in 1998 and $4,441,000 in 1997.
At December 31, 2001, loans, which include the above, totaling
$3,615,000 were included in the Company's internal classified
loan list. Of these loans $1,567,000 are real estate and
$2,048,000 are various other types of loans. The collateral
values securing these loans total approximately $2,603,000,
($2,437,000 related to real property and $166,000 related to the
various other types of loans). Such loans are listed as
classified when information obtained about possible credit
problems of the borrowers has prompted management to question
the ability of the borrower to comply with the repayment terms
of the loan agreement. The loan classifications do not represent
or result from trends or uncertainties which management expects
will materially impact future operating results, liquidity or
capital resources.
At December 31, 2001 there were no loan concentrations that
exceeded ten percent of total loans other than as included in
the preceding table of types of loans. Loan concentrations are
amounts loaned to a multiple number of borrowers engaged in
similar activities which would cause them to be similarly
impacted by economic or other conditions.
At December 31, 2001 and 2000 other real estate totaled $244,000
and $493,000, respectively.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds,
etc.) at December 31, 2001 which would be required to be
disclosed as past due, non-accrual, restructured or potential
problem loans, if such interest-bearing assets were loans.
34
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IV. Summary of Loan Loss Experience:
The following schedule details selected information related to the
allowance for possible loan loss account of the Company at December 31,
2001, 2000, 1999, 1998 and 1997 and the years then ended:
In Thousands, Except Percentages
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- ------- -------
Allowance for loan losses
at beginning of period $ 1,886 1,330 1,026 795 628
--------- -------- -------- ------- -------
Less: net of loan
charge-offs:
Charge-offs:
Commercial, financial and
agricultural (211) (231) (143) (33) --
Real estate construction -- -- -- -- --
Real estate - mortgage (98) -- -- -- --
Installment (50) (16) (8) (18) (14)
Lease financing -- -- -- -- --
--------- -------- -------- ------- -------
(359) (247) (151) (51) (14)
--------- -------- -------- ------- -------
Recoveries:
Commercial, financial and
agricultural 10 7 -- 1 --
Real estate construction -- -- -- -- --
Real estate - mortgage -- 4 -- -- --
Installment 15 -- 5 1 1
Lease financing -- -- -- -- --
--------- -------- -------- ------- -------
25 11 5 2 1
--------- -------- -------- ------- -------
Net loan charge-offs (334) (236) (146) (49) (13)
--------- -------- -------- ------- -------
Provision for loan losses
charged to expense 570 792 450 280 180
--------- -------- -------- ------- -------
Allowance for loan losses at
end of period $ 2,122 1,886 1,330 1,026 795
========= ======== ======== ======= =======
Total loans, net of unearned
interest, at end of year $ 141,074 116,589 104,242 74,717 54,891
========= ======== ======== ======= =======
Average total loans out-
standing, net of unearned
interest, during year $ 130,055 113,461 86,198 62,831 44,526
========= ======== ======== ======= =======
Net charge-offs as a
percentage of average total
loans outstanding, net of
unearned interest, during
year 0.26% 0.21 0.17 0.08 0.03
========= ======== ======== ======= =======
Ending allowance for loan
losses as a percentage of
total loans outstanding net
of unearned interest, at
end of year 1.50% 1.62 1.28 1.37 1.45
========= ======== ======== ======= =======
35
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
IV. Summary of Loan Loss Experience, Continued:
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans
that may become uncollectible. The provision for possible loan losses
charged to operating expense is based on past loan loss experience and
other factors which, in management's judgment, deserve current
recognition in estimating possible loan losses. Such other factors
considered by management include growth and composition of the loan
portfolio, review of specific loan problems, the relationship of the
allowance for possible loan losses to outstanding loans, adverse
situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral and current economic
conditions that may affect the borrower's ability to pay.
Management conducts a continuous review of all loans that are
delinquent, previously charged down or loans which are determined to be
potentially uncollectible. Loan classifications are reviewed
periodically by a person independent of the lending function. The Board
of Directors periodically reviews the adequacy of the allowance for
possible loan losses.
The breakdown of the allowance by loan category is based in part on
evaluations of specific loans, past history and economic conditions
within specific industries or geographic areas. Accordingly, since all
of these conditions are subject to change, the allocation is not
necessarily indicative of the breakdown of the future losses.
The following detail provides a breakdown of the allocation of the
allowance for possible loan losses:
December 31, 2001 December 31, 2000
---------------------------- ----------------------------
Percent of Percent of
Loans In Loans In
In Each Category In Each Category
Thousands To Total Loans Thousands To Total Loans
--------- -------------- --------- --------------
Commercial, financial
and agricultural $1,380 56.9% $1,179 59.5%
Real estate construction 286 6.6 283 7.1
Real estate mortgage 286 32.7 283 29.4
Installment 170 3.8 141 4.0
------ ----- ------ -----
$2,122 100.0% $1,886 100.0%
====== ===== ====== =====
December 31, 1999 December 31, 1998
--------------------------- ----------------------------
Percent of Percent of
Loans In Loans In
In Each Category In Each Category
Thousands To Total Loans Thousands To Total Loans
--------- -------------- --------- --------------
Commercial, financial
and agricultural $ 962 51.6% $ 795 56.4%
Real estate construction 95 12.1 81 14.4
Real estate mortgage 168 32.2 96 25.6
Installment 105 4.1 54 3.6
------ ----- ------ -----
$1,330 100.0% $1,026 100.0%
====== ===== ====== =====
December 31, 1997
-----------------------------
Percent of
Loans In
In Each Category
Thousands To Total Loans
--------- ---------------
Commercial, financial
and agricultural $ 617 54.5%
Real estate construction 53 12.9
Real estate mortgage 78 28.3
Installment 47 4.3
------ -----
$ 795 100.0%
====== =====
36
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
V. Deposits:
The average amounts and average interest rates for deposits for 2001,
2000 and 1999 are detailed in the following schedule:
2001 2000 1999
------------------------ ------------------------ ----------------------
Average Average Average
Balance Balance Balance
In Average In Average In Average
Thousands Rate Thousands Rate Thousands Rate
--------- ------- --------- ------- --------- -------
Non-interest bearing
deposits $ 11,869 --% 9,679 --% 8,533 --%
Negotiable order of
withdrawal accounts 10,646 1.36% 6,015 2.31% 4,624 1.30%
Money market demand
accounts 62,748 3.79% 55,813 5.54% 34,471 4.59%
Individual retirement
accounts 1,866 6.38% 1,565 6.07% 944 5.51%
Other savings 1,092 1.01% 808 1.36% 770 1.95%
Certificates of deposit
$100,000 and over 29,519 5.69% 20,740 6.05% 13,262 5.23%
Certificates of deposit
under $100,000 26,459 6.04% 28,835 5.84% 29,472 5.36%
-------- ---- ------- ---- ------ ----
$144,199 4.11% 123,455 5.09% 92,076 4.32%
======== ==== ======= ==== ====== ====
The following schedule details the maturities of certificates of
deposit and individual retirement accounts of $100,000 and over at
December 31, 2001:
In Thousands
------------------------------------------
Certificates Individual
of Retirement
Deposit Accounts Total
------------ ---------- ------
Less than three months $12,780 103 12,883
Three to six months 4,221 132 4,353
Six to twelve months 13,227 -- 13,227
More than twelve months 1,312 135 1,447
------- ------ ------
$31,540 370 31,910
======= ====== ======
37
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
VI. Return on Equity and Assets:
The following schedule details selected key ratios of the Company as of
or for the year ended December 31, 2001, 2000 and 1999:
2001 2000 1999
------ ------ ------
Return on assets 0.57% 0.72% 0.86%
(Net income divided by average total assets)
Return on equity 6.19% 7.26% 6.06%
(Net income divided by average equity)
Dividend payout ratio - % - % - %
(Dividends declared per share divided by
net income per share)
Equity to asset ratio 9.28% 9.88% 14.26%
(Average equity divided by average total
assets)
Leverage capital ratio 9.20% 9.38% 14.86%
(Equity divided by fourth quarter
average total assets, excluding the net
unrealized gain on available-for-sale
securities)
The minimum leverage capital ratio required by the regulatory agencies
is 4%.
Beginning January 1, 1991, new risk-based capital guidelines were
adopted by regulatory agencies. Under these guidelines, a credit risk
is assigned to various categories of assets and commitments ranging
from 0% to 100% based on the risk associated with the asset.
38
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
VI. Return on Equity and Assets, Continued:
The following schedule details the Company's risk-based capital at
December 31, 2001 excluding the net unrealized gain on
available-for-sale securities which is shown as an addition in
stockholders' equity in the consolidated financial statements:
In Thousands
-------------
Tier I capital:
Stockholders' equity, excluding the net unrealized
gain on available-for-sale securities $ 16,503
Total capital:
Allowable allowance for loan losses (limited to 1.25%
of risk-weighted assets) 1,792
-------------
Total risk-based capital $ 18,295
=============
Risk-weighted assets $ 143,363
=============
Risk-based capital ratios:
Tier I capital ratio 11.51%
=============
Total risk-based capital ratio 12.76%
=============
The Company is required to maintain a Total capital to risk-weighted
asset ratio of 8% and a Tier I capital to risk-weighted asset ratio of
4%. At December 31, 2001, the Company was in compliance with these
requirements.
39
CAPITAL BANCORP, INC.
Form 10-K
December 31, 2001
VI. Return on Equity and Assets, Continued:
The following schedule details the Company's interest rate sensitivity
at December 31, 2001:
Repricing Within
----------------------------------------------------------------------------------
(In Thousands) Total 0-30 Days 31-90 Days 91-180 Days 181-365 Days Over 1 Year
--------- --------- ---------- ----------- ------------ -----------
Earning assets:
Loans, net of
unearned interest $ 141,074 52,038 3,138 5,445 6,360 74,093
Securities 23,347 2,558 116 -- -- 20,673
Loans held for sale 3,514 3,514 -- -- -- --
Interest-bearing
deposits in
financial institutions 251 1 -- -- -- 250
Federal funds sold 2,450 2,450 -- -- -- --
--------- ------- ------- ------- ------- ------
Total earning
assets 170,636 60,561 3,254 5,445 6,360 95,016
--------- ------- ------- ------- ------- ------
Interest-bearing
liabilities:
Negotiable order
of withdrawal
accounts 12,137 12,137 -- -- -- --
Money market demand
accounts 62,250 62,250 -- -- -- --
Individual retirement
accounts 1,931 134 322 646 454 375
Other savings 1,217 1,217 -- -- -- --
Certificates of deposit,
$100,000 and over 31,540 4,987 7,793 4,221 13,218 1,321
Certificates of deposit,
under $100,000 26,056 2,321 6,297 8,522 7,859 1,057
Securities sold
under repurchase
agreements 2,854 2,854 -- -- -- --
Advances from Federal
Home Loan Bank 11,000 -- -- -- -- 11,000
--------- ------- ------- ------- ------- ------
148,985 85,900 14,412 13,389 21,531 13,753
--------- ------- ------- ------- ------- ------
Interest-sensitivity gap $ 21,651 (25,339) (11,158) (7,944) (15,171) 81,263
========= ======= ======= ======= ======= ======
Cumulative gap (25,339) (36,497) (44,441) (59,612) 21,651
======= ======= ======= ======= ======
Interest-sensitivity gap
as % of total assets (13.97) (6.15) (4.38) (8.36) 44.79
======= ======= ======= ======= ======
Cumulative gap as %
of total assets (13.97) (20.12) (24.50) (32.86) 11.93
======= ======= ======= ======= ======
The Company presently maintains a liability sensitive position over the
next twelve months. However, management expects that liabilities of a
demand nature will renew and that it will not be necessary to replace
them with significantly higher cost funds.
40
ITEM 2. DESCRIPTION OF PROPERTY.
OFFICES AND PROPERTIES
The Bank currently operates six full-service offices, including its main office,
in Davidson and Sumner Counties in Tennessee. The following table shows the
location and the Bank's ownership rights in its offices:
Use Type of Ownership Property Location
Main Office of the Bank Lease 1820 West End Avenue
Nashville, Tennessee 37203
Downtown Branch Lease 222 4th Avenue North
Nashville, Tennessee 37219
Goodlettsville Branch Own 140 Long Hollow Pike
Goodlettsville, Tennessee 37072
Green Hills Branch Lease 2200 Abbott Martin Road
Nashville, Tennessee 37215
370 East Main Street
Hendersonville Branch Own Hendersonville, Tennessee 37075
Hermitage Branch Own 4422 Lebanon Road
Hermitage, Tennessee 37076
Operations Center Lease(1) 1816 Hayes Street
Nashville, Tennessee 37203
- ----------
(1) This is a lease from Director Michael D. Shmerling. Please refer to Note 10
of the Consolidated Financial Statements for additional information concerning
this lease.
***
The Bank's operations center is located near the Company's and Bank's main
office. The operations center is leased from a related party. Please refer to
Item 13 of this Annual Report on Form 10-K, which is captioned "Certain
Relationships and Related Transactions, and " The Bank has no ATM's.
In the judgment of the Company's management, the facilities of the Company and
the Bank are generally suitable and adequate for their current and reasonably
foreseeable needs. However, new office sites are considered from time to time,
although no such sites are likely to be considered before late 2002 at the
earliest.
41
ITEM 3. LEGAL PROCEEDINGS.
There were no material legal proceedings pending at December 31, 2001, against
the Company other than ordinary routine litigation incidental to their
respective businesses, to which the Company is a party or of which any of their
property is the subject. It is to be expected that various actions and
proceedings may be anticipated to be pending or threatened against, or to
involve, the Company from time to time in the ordinary course of business. Some
of these may from time to time involve large demands for compensatory and/or
punitive damages. At the present time, management knows of no pending or
threatened litigation the ultimate resolution of which would have a material
adverse effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth quarter of
2001.
PART II
ITEM 5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION
There is no established public trading market for the Company's common stock.
Management, however, believes that Middle Tennessee is the principal market area
for the common stock. The following table sets forth the estimated high and low
sales prices per share of the common stock for the first quarter of 2002
(through January 31, 2002) and for each quarter of fiscal 2001 and 2000.
Although management believes that this information is generally reliable, it has
not been verified. Such information may not include all transactions in the
Company's common stock for the respective periods shown, and it is possible that
transactions occurred during the periods reflected or discussed at prices higher
or lower than the prices set forth below. Certain of the transactions involved,
or may have involved, the Company or its principals.
The Company's common stock is sometimes thinly traded in the local
over-the-counter market from time to time. Many transactions are believed to be
privately negotiated. The Company's management is working to interest locally
represented brokerage firms in making a market in the Company's stock. Three
such firms have indicated an interest in facilitating an accommodation market in
the Company's common stock. (This means that the brokers would assist in putting
buyers and sellers together and perhaps occasionally purchasing or selling for
their own accounts.) The last reported sale of Company common stock known to
management occurred in March of 2002 and involved a trade reported at $13.00 per
share. Due to the limited volume of trading currently and the fact that these
trades may involve negotiated, private transactions, we are unable to determine
with absolute accuracy the actual trading prices on any given date. Bid price
information for the Company's common stock is not available. The information
concerning transactions in the Company's common stock are believed to be
reasonably accurate but are not guaranteed.
The following table shows quarterly high and low trade prices for the Company's
common stock as reported to the Company:
42
Trade Prices: Company's Common Stock (Price per share)
CALENDAR QUARTER HIGH LOW
2002
First Quarter $13.00 $12.00
2001
Fourth Quarter $12.50 $12.00
Third Quarter 13.25 13.25
Second Quarter 14.00 12.00
First Quarter 15.00 15.00
2000
Fourth Quarter $15.00 $15.00
Third Quarter 17.00 15.50
Second Quarter 17.75 17.75
First Quarter 18.00 17.75
Because there is no established public trading market for our Company's common
stock, and because the Company and those closely affiliated with the Company may
be involved in particular transactions, the prices shown above may not
necessarily be indicative of the fair market value of the common stock or of the
prices at which the Company's common stock would trade if there were an
established public trading market. Accordingly, there can be no assurance that
the common stock will subsequently be purchased or sold at prices comparable to
the prices set forth above.
THE COMPANY'S COMMON STOCK
The Company's securities consist of its common voting stock, $4.00 par value,
which is the Company's only class of securities outstanding. As of March 1,
2002, the Company estimates that it has approximately 800 holders of its common
stock. In its charter, the Company is authorized to issue 20,000,000 shares of
its common stock, par value of $4.00 per share. No shares are reserved for
issuance except up to 500,000 shares reserved in connection with the 2001
Capital Bancorp Stock Option Plan (the "Company's stock option plan"). As of
March 1, 2002, there were 1,565,271 shares of the Company's common stock
outstanding and entitled to vote. Each such share is entitled to one vote on all
matters. The presence in person or by proxy of at least a majority of the total
number of outstanding shares of the common stock entitled to vote is necessary
to constitute a quorum at annual and other meetings of the shareholders. A
share, once represented for any purpose at a meeting, is deemed present for
purposes of determining a quorum for that meeting (unless the meeting is
adjourned and a new record date is set for the adjourned meeting and as may be
determined by a court in certain specified circumstances), even if the holder of
the share abstains from voting with respect to any matter brought before the
said meeting. There is no cumulative voting. The Company's common stock does not
carry preemptive rights.
43
The Company's common stock is registered under Section 12 of the Securities
Exchange Act pursuant to 12 C.F.R. 240.12g-3(a) as a result of its share
exchange with Capital Bank & Trust Company, the shares of which were registered
under Section 12 of the Securities Exchange Act. The Company files periodic and
other reports with the United States Securities and Exchange Commission. Under
the Securities Exchange Act, the Company files annual, quarterly and other types
of reports under, and its common shares are subject to all of the requirements
of, the Securities Exchange Act.
Classified Board of Directors
The Company's charter provides that the Company's board of directors is divided
into three classes, with each class to be as nearly equal in number as possible.
The directors in each class serve three-year terms of office. The effect of the
Company having a classified board of directors is that only approximately one
third of the members of the Company's board of directors are elected each year,
which effectively requires two annual meetings for the Company stockholders to
change a majority of the members of the Company's board of directors.
The purpose of dividing the Company's board of directors into classes is to
facilitate continuity and stability of leadership of the Company by ensuring
that experienced personnel familiar with the Company will be represented on the
Company's board of directors at all times, and to permit the Company's
management to plan for the future for a reasonable time. However, by potentially
delaying the time within which an acquirer could obtain working control of the
Company's board of directors, this provision may discourage some potential share
exchanges, tender offers, or takeover attempts.
Directors are elected by a plurality of the total votes cast by all
stockholders. With cumulative voting, it may be possible for minority
stockholders to obtain representation on the board of directors. Without
cumulative voting, the holders of more than 50% of the shares of the Company
common stock generally have the ability to elect 100% of the directors. As a
result, the holders of the remaining shares of Company common stock effectively
may not be able to elect any person to the Company's board of directors. The
absence of cumulative voting makes it more difficult for a Company stockholder
who acquires less than a majority of the shares of the Company common stock to
obtain representation on the Company's board of directors.
Director Removal and Vacancies
The Company's charter provides that: (1) a director may be removed by the
Company stockholders only if the holders of seventy-five percent of the voting
power of all shares of the Company capital stock entitled to vote generally in
the election of directors vote for such removal and "cause" for removal exists;
and (2) vacancies on the Company's board of directors may be filled only by the
Company's board of directors. The purpose of these provisions is to prevent a
majority stockholder from circumventing the classified board system by removing
directors and filling the vacancies with new individuals selected by that
stockholder. Accordingly, the provisions may have the effect of impeding efforts
to gain control of the Company's board of directors by anyone who obtains a
controlling interest in the Company's common stock. The term of a director
appointed to fill a vacancy expires at the next meeting of stockholders at which
that Class of directors is elected.
Director and Officer Indemnification and Limitation on Liability
Under the Tennessee Business Corporation Act, a corporation may indemnify any
director against liability if the director:
- - Conducted himself or herself in good faith;
- - Reasonably believed, in the case of conduct in his or her official
capacity with the corporation, that his or her conduct was in the best
interests of the corporation;
- - Reasonably believed, in all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
44
- - In the case of any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
The Company's charter and bylaws provide for indemnification of its directors,
officers, employees and agents against liabilities and expenses incurred in
legal proceedings concerning the Company, to the fullest extent permitted under
Tennessee corporate law. Indemnification will only apply to persons who act in
good faith, in a manner he or she reasonably believed to be in the best interest
of the company, without willful misconduct or recklessness.
The present directors' and officers' liability insurance policy is expected to
covers the typical errors and omissions liability associated with the activities
of the Company and the Bank. The provisions of the insurance policy might not
indemnify any of the Company's or Bank's officers and directors against
liability arising under the Securities Act.
The Company's charter eliminates a director's liability to the Company or its
shareholders for monetary damages to the maximum extent permitted by law.
Section 48-18-301 of the Tennessee Business Corporation Act provides that a
director shall not be liable for any action, or failure to take action if he or
she discharges his or her duties:
- - In good faith;
- - With the care of an ordinarily prudent person in a like position under
similar circumstances; and
- - In a manner the director reasonably believes to be in the best interests
of the corporation.
In discharging her or his duties, a director may rely on the information,
opinions, reports, or statements, including financial statements, if prepared or
presented by officers or employees of the corporation whom the director
reasonably believes to be reliable. The director may also rely on such
information prepared or presented by legal counsel, public accountants or other
persons as to matters that the director reasonably believes are within the
person's competence.
Unless limited by its charter, a Tennessee corporation must indemnify, against
reasonable expenses incurred by him or her, a director who was wholly
successful, on the merits or otherwise, in defending any proceeding to which he
or she was a party because he or she is or was a director of the corporation.
Expenses incurred by a director in defending a proceeding may be paid by the
corporation in advance of the final disposition of the proceeding if three
conditions are met:
- - The director must furnish the corporation a written affirmation of the
director's good faith belief that he or she has met the standard of
conduct as set forth above;
- - The director must furnish the corporation a written undertaking by or on
behalf of a director to repay such amount if it is ultimately determined
that he or she is not entitled to be indemnified by the corporation
against such expenses; and
- - A determination must be made that the facts then known to those making the
determination would not preclude indemnification.
A director may apply for court-ordered indemnification under certain
circumstances. Unless a corporation's charter provides otherwise,
- - An officer of a corporation is entitled to mandatory indemnification and
is entitled to apply for court- ordered indemnification to the same extent
as a director,
- - The corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent as to a director,
and
45
- - A corporation may also indemnify and advance expenses to an officer,
employee, or agent who is not a director to the extent, consistent with
public policy, that may be provided by its charter, bylaws, general or
specific action of its board of directors, or contract.
The Company's charter and bylaws provide for the indemnification of its
directors and officers to the fullest extent permitted by Tennessee law.
Amendment of this provision requires a vote of seventy-five percent (75%) of the
outstanding Company shares unless a majority vote is expressly permitted by the
board of directors.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, or persons controlling the Company under
the provisions described above, the Company has been informed that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Amendment of Charter and Bylaws
The Company may amend its charter in any manner permitted by Tennessee law. The
Tennessee Business Corporation Act provides that a corporation's charter may be
amended by a majority of votes entitled to be cast on an amendment, subject to
any condition the board of directors may place on its submission of the
amendment to the stockholders. Unless the board of directors otherwise
determines, the Company's charter requires a vote of seventy-five percent or
more of the shares of capital stock entitled to vote in an election of directors
to amend the provisions of the charter governing directors, removal of
directors, anti-takeover provisions, and indemnification provisions.
The Company's board of directors may adopt, amend, or repeal the Company's
bylaws by a majority vote of the entire board of directors. The bylaws may also
be amended or repealed by action of the Company's stockholders, but only by a
"supermajority vote" of not less than seventy-five percent of all outstanding
shares of the Company entitled to vote at the meeting.
The Company's charter requires that the Company's board of directors must
exercise all powers unless otherwise provided by law. The board of directors may
designate an executive committee consisting of three or more directors and may,
subject to certain exceptions, authorize that committee to exercise all of the
authority of the board of directors.
Special Meetings of Stockholders
Special meetings of the Company's stockholders may be called for any purpose or
purposes, at any time, by the Chairman of the board of directors, the Chief
Executive Officer, not less than eighty percent (80%) of the members of the
board of directors, or by the holders of not less than seventy-five percent of
the shares entitled to vote at such meeting.
Stockholder Nominations and Proposals
Holders of Company common stock are entitled to submit proposals to be presented
at an annual meeting of the Company stockholders. The Company's charter and
bylaws provide that any proposal of a stockholder which is to be presented at
any meeting of stockholders must be sent so it is to be received by the Company
in advance of the meeting. All such proposals must meet the strict criteria set
forth in the Company's charter and bylaws.
Only persons who are nominated in accordance with the procedures set forth in
the charter and bylaws are eligible to serve as directors. Nominations to the
board of directors of the Company may be made at a meeting of shareholders (i)
by or at the direction of the board of directors or (ii) by any shareholder of
the Company who was a shareholder of record at the time of the giving of notice
of the applicable meeting who is entitled to vote for the election of directors
at the meeting if such person has fully and completely complied with the notice
procedures set forth in the charter and described below.
46
In order for a shareholder to nominate a person for election to the board of
directors of the Company at a meeting of shareholders, such shareholder shall
have delivered timely notice of such shareholder's intent to make such
nomination in writing to the secretary of the Company. To be timely, unless
otherwise provided by applicable law (including, without limitation, federal
securities laws), a shareholder's notice shall be delivered to or mailed and
received at the principal executive offices of the Company (i) in the case of an
annual meeting, not less than sixty (60) nor more than ninety (90) days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than
thirty (30) days from such anniversary date, notice by the shareholder to be
timely must be so received not later than the close of business on the tenth day
following the earlier of the day on which notice of the date of the meeting was
mailed or public disclosure of the meeting was made, and (ii) in the case of a
special meeting at which directors are to be elected, not later than the close
of business on the tenth day following the earlier of the day on which notice of
the date of the meeting was mailed or public disclosure of the meeting was made.
Such shareholder's notice shall set forth (i) as to each person whom the
shareholder proposes to nominate for election as a director at such meeting all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act
(including such person's written consent to being named in the proxy statement
as a nominee and to serving as a director if elected); (ii) as to the
shareholder giving the notice (A) the name and address, as they appear on the
Company's books, of such shareholder and (B) the class and number of shares of
the Company which are beneficially owned by such shareholder and also which are
owned of record by such shareholder; and (iii) as to the beneficial owner, if
any, on whose behalf the nomination is made, (A) the name and address of such
person and (B) the class and number of shares of the Company which are
beneficially owned by such person. In addition, the nominating shareholder is
responsible for providing to the Company all of the information as to each
nominee as is required by paragraphs (a), (d), (e) and (f) of Item 401 of the
Securities and Exchange Commission's Regulation S-K (or the corresponding
provisions of any regulation subsequently adopted by the Securities and Exchange
Commission applicable to the Company), together with each such person's signed
consent to serve as a director of the Company if elected. At the request of the
board of directors, any person nominated by the board of directors for election
as a director shall furnish to the secretary of the Company that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. It is the express intention that the foregoing information be
provided to the board of directors and the shareholders so that adequate
disclosure can be made to the shareholders. Accordingly, such information shall
be provided notwithstanding that the Company is not at the time of the adoption
of the Company's bylaws, or at any other time, subject either to the Securities
Exchange Act or to the rules and regulations of the Securities and Exchange
Commission.
The chairperson of the meeting is required, if the facts so warrant, to
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the charter. If so, the chairperson
must declare nomination defective and disregard it. A shareholder seeking to
nominate a person to serve as a director must also comply with all applicable
requirements of the Securities Exchange Act, together with the rules and
regulations thereunder, to the extent applicable to the Company or any
transaction brought before the Company's shareholders.
- - The name and address of each proposed nominee.
- - The principal occupation of each proposed nominee.
- - The total number of shares of capital stock of the bank that will be voted
for each proposed nominee.
- - The name and residence address of the notifying shareholder.
- - The number of shares of capital stock of the bank owned by the notifying
shareholder.
If nominations are not made in accordance with the foregoing provisions, the
chairperson of the meeting, in his/her discretion, may disregard the nomination,
and upon his/her instructions, the vote tellers may disregard all votes cast for
each such nominee.
47
Business Combinations
The Company's charter provides that, unless more restrictively required by
applicable law, the affirmative vote of the holders of seventy-five (75%)
percent or more of the outstanding shares entitled to vote for the election of
directors is required to authorize (1) any merger, share exchange or
consolidation of the Company with or into another entity or (2) any sale, lease,
or other disposition of all or substantially all of the Company's assets to
another person or entity, except where any of these transactions will occur
between the Company and any of its majority-owned, direct or indirect,
subsidiaries.
The requirement of a supermajority vote of stockholders to approve certain
business transactions may discourage a change in control of the Company by
allowing a minority of the Company's stockholders to prevent a transaction
favored by the majority of the stockholders. A seventy-five percent (75%) vote
of all issued and outstanding shares of Company common stock is required to
approve a business combination transaction, unless there is an affirmative vote
by seventy-five percent of the members of the board of directors to recommend
the transaction to the shareholders, in which event a majority of the
outstanding shares of the Company would be sufficient to approve the proposed
transaction. This provision of the charter my enable management to retain
substantial control over the affairs of the Company. The primary purpose of the
supermajority vote requirement is to encourage negotiations with the Company's
management and board of directors by groups or companies interested in acquiring
control of the Company and to reduce the danger of a forced share exchange or
sale of assets.
As a Tennessee corporation, the Company is or could be subject to certain
restrictions on business combinations under Tennessee law, including, but not
limited to, combinations with interested stockholders.
Tennessee has multiple anti-takeover acts that are or may become applicable to
the Company. These are the Tennessee Business Combination Act, the Tennessee
Greenmail Act, and the Tennessee Investor Protection Act. The Tennessee Control
Share Acquisition Act applies to the Company because the Company's charter
includes an express provision electing to be covered by that act.
The Tennessee Business Combination Act. The Tennessee Business Combination Act
generally prohibits a "business combination" by the Company or a subsidiary with
an "interested stockholder" within 5 years after the stockholder becomes an
interested stockholder. But the Company or a subsidiary can enter into a
business combination within that period if, before the interested stockholder
became such, the Company board of directors approved:
- - The business combination; or
- - The transaction in which the interested stockholder became an interested
stockholder.
After that 5 year moratorium, the business combination with the interested
stockholder can be consummated only if it satisfies certain fair price criteria
or is approved by two-thirds of the other stockholders.
For purposes of the Tennessee Business Combination Act, a "business combination"
includes mergers share exchanges, sales and leases of assets, issuances of
securities, and similar transactions. An "interested stockholder" is generally
any person or entity that beneficially owns 10% or more of the voting power of
any outstanding class or series of the Company stock.
Tennessee law also severely limits the extent to which the Company or any of its
officers or directors could be held liable for resisting any business
combination. Under the Tennessee Business Corporation Act, neither a Tennessee
corporation having any stock registered or traded on a national securities
exchange, nor any of its officers or directors, may be held liable for:
- - Failing to approve the acquisition of shares by an interested stockholder
on or before the date the stockholder acquired such shares;
- - Seeking to enforce or implement the provisions of Tennessee law;
48
- - Failing to adopt or recommend any charter or by-law amendment or provision
relating to such provisions of Tennessee law; or
- - Opposing any share exchange, exchange, tender offer, or significant asset
sale because of a good faith belief that such transaction would adversely
affect the corporation's employees, customers, suppliers, the communities
in which the corporation or its subsidiaries operate or any other relevant
factor.
But the officers and directors can only consider such factors if the
corporation's charter permits the board to do so in connection with the
transaction. The Company's charter expressly permits the board to consider these
factors.
The Tennessee Greenmail Act. The Tennessee Greenmail Act applies to a Tennessee
corporation that has a class of voting stock registered or traded on a national
securities exchange or registered with the SEC pursuant to Section 12(g) of the
Securities Exchange Act. Under the Tennessee Greenmail Act, the Company may not
purchase any of its shares at a price above the market value of such shares from
any person who holds more than 3% of the class of securities to be purchased if
such person has held such shares for less than two years, unless the purchase
has been approved by the affirmative vote of a majority of the outstanding
shares of each class of voting stock issued by the Company or the Company makes
an offer, of at least equal value per share, to all stockholders of such class.
The Tennessee Investor Protection Act. The Tennessee Investor Protection Act
generally requires the registration, or an exemption from registration, before a
person can make a tender offer for shares of a Tennessee corporation which, if
successful, will result in the offeror beneficially owning more than 10% of any
class of shares. Registration requires the filing with the Tennessee
Commissioner of Commerce and Insurance of a registration statement, a copy of
which must be sent to the target company, and the public disclosure of the
material terms of the proposed offer. Additional requirements are imposed under
that act if the offeror beneficially owns 5% or more of any class of equity
securities of the target company, any of which was purchased within one year
prior to the proposed takeover offer. The Tennessee Investor Protection Act also
prohibits fraudulent and deceptive practices in connection with takeover offers,
and provides remedies for violations. By its terms, this law is inapplicable to
the bank and to bank holding companies. However, the Company's charter provides
that this law shall be applicable to the Company to the extent now or hereafter
permitted by law.
The Tennessee Investor Protection Act does not apply to an offer involving a
vote by holders of equity securities of the offeree company, pursuant to its
charter, on a share exchange, consolidation or sale of corporate assets in
consideration of the issuance of securities of another corporation, or on a sale
of its securities in exchange for cash or securities of another corporation.
Also excepted from the Tennessee Investor Protection Act are tender offers which
are open on substantially equal terms to all stockholders, are recommended by
the board of directors of the target company and include full disclosure of all
terms.
The Tennessee Investor Protection Act applies to tender offers for corporations
with substantial ties in Tennessee, including corporations incorporated in
Tennessee or which have their principal offices in the state. The United States
Court of Appeals for the Sixth Circuit has held that the application of this
Act, and Tennessee's other takeover statutes, to a target company that wasn't
organized under Tennessee law is unconstitutional. This happened in the case of
Tyson Foods, Inc. v. McReynolds, 865 F.2d 99 (6th Cir. 1989).
The laws described above, together with provisions of the Company's charter and
bylaws, regarding business combinations might be deemed to make the Company less
attractive as a candidate for acquisition by another company than would
otherwise be the case in the absence of such provisions. For example, if another
company should seek to acquire a controlling interest of less than seventy-five
percent (75%) of the outstanding shares of the Company's common stock, the
acquirer would not thereby obtain the ability to replace a majority of the
Company board of directors until at least the second annual meeting of
stockholders following the acquisition. Furthermore the acquirer would not
obtain the ability immediately to effect a share exchange, consolidation, or
other similar business combination unless the described conditions were met.
As a result, the Company's stockholders may be deprived of opportunities to sell
some or all of their shares at prices that represent a premium over prevailing
market prices in a takeover context. The provisions
49
described above also may make it more difficult for the Company's stockholders
to replace the Company board of directors or management, even if the holders of
a majority of the Company's common stock should believe that such replacement is
in the interests of the Company. As a result, such provisions may tend to
perpetuate the incumbent Company board of directors and management.
The Company's charter provides that the affirmative vote of the holders of not
less than 75% of the outstanding shares of its common stock is required to
approve certain transactions with the Company or any of its affiliates specified
therein, including any merger, consolidation, sale of all or substantially all
of its assets, share exchange, or dissolution. The supermajority provision is
inapplicable if the transaction has been approved (or in the case of a
dissolution recommended for stockholder approval) by seventy-five (75%) of all
directors of the Company then in office or if the other entity is a corporation
of which a majority of the outstanding shares of all classes of stock entitled
to vote in elections of directors is owned of record or beneficially by the
Company or its affiliates. The share exchange was unanimously approved by
Capital Bancorp's board of directors, making the supermajority provision
inapplicable to it.
Stock Option Plan
Certain shares are reserved for issuance as set forth in the description of the
Company's 2001 stock option plan appearing elsewhere in this Report.
Shareholders Rights Agreement
Effective as of July 18, 2001, the Board of Directors of the Company adopted a
Shareholders Rights Agreement (the "Rights Agreement"). The following discussion
is qualified in its entirety by the terms of the Rights Agreement, a copy of
which is an Exhibit to the 2001 Annual Report on Form 10-K. On that date, as a
result of the adoption of the Rights Agreement, the Board authorized and
declared a dividend of one common share purchase right (a "Right") for each
outstanding share of the Company's Common Stock (the "Common Shares"). The
dividend was payable on July 18, 2001, to the shareholders of record on that
date (the "Record Date"), and with respect to Common Shares issued thereafter
until the Distribution Date (as hereinafter defined) or the expiration or
earlier redemption or exchange of the Rights. Except as set forth below, each
Right entitles the registered holder to purchase from the Company, at any time
after the Distribution Date one Common Share at a price per share of $90,
subject to adjustment (the "Purchase Price"). The description and terms of the
Rights are as set forth in the Rights Agreement. The following description of
the Rights is qualified by reference to the Rights Agreement, which is an
Exhibit to this Report. The Board does not believe that this Rights Agreement
will thwart honest offers to acquire control of the Company but will instead
serve to prevent shareholders from being treated disparately and unfairly.
Initially the Rights will be attached to all certificates representing Common
Shares then outstanding, and no separate Right Certificates will be distributed.
The Rights will separate from the Common Shares upon the earliest to occur of
(i) ten (10) days after the public announcement of a person's or group of
affiliated or associated persons' having acquired beneficial ownership of ten
percent (10%) or more of the outstanding Common Shares (such person or group
being hereinafter referred to as an "Acquiring Person"); or (ii) ten (10) days
(or such later date as the Board may determine) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in a person or group's becoming an Acquiring
Person (the earlier of such dates being called the "Distribution Date").
The Rights Agreement provides that, until the Distribution Date, the Rights will
be transferred with, and only with, the Common Shares. Until the Distribution
Date (or earlier redemption or expiration of the Rights) new Common Share
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Shares
outstanding as of the Record Date, even without such notation or a copy of this
Summary of Rights being attached thereto, will also constitute the transfer of
the Rights associated with the Common Shares represented by such certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Shares as of the close of business on the
50
Distribution Date (and to each initial record holder of certain Common Shares
issued after the Distribution Date), and such separate Right Certificates alone
will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on July 18, 2011 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
In addition, the Board of Directors of the Company may, at its option (provided
that there are then Independent Directors in office and a majority of the
Independent Directors concur), at any time and from time to time on or after
triggering event, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
Agreement, for shares of Common Stock at an exchange ratio of one share of
Common Stock per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date of this Agreement (such
exchange ratio being the "Exchange Ratio"). The Company shall promptly give
public notice of any such exchange; provided, however, that the failure to give,
or any defect in, such notice shall not affect the validity of such exchange.
Any partial exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void). In any exchange pursuant to
applicable provisions of the Agreement, the Company, at its option, may
substitute for any share of common stock exchangeable for a Right (i) common
stock equivalents, (ii) cash, (iii) debt securities of the Company, (iv) other
assets, or (v) any combination of the foregoing, having an aggregate value that
a majority of the Independent Directors and the Board of Directors of the
Company shall have determined in good faith to be equal to the Current Market
Price of one share of Common Stock (as determined pursuant to the terms of the
Agreement).
In the event that any person becomes an Acquiring Person (except pursuant to a
tender or exchange offer which is for all outstanding Common Shares at a price
and on terms which a majority of certain members of the Board of Directors
determines to be adequate and in the best interests of the Company, its
stockholders and other relevant constituencies, other than such Acquiring
Person, its affiliates and associates (a "Permitted Offer")), each holder of a
Right will thereafter have the right (the "Flip-In Right") to acquire a Common
Share for a purchase price equal to fifteen percent (15%) of the then current
market price, or at such greater price as the Rights Committee shall determine
(not to exceed thirty-three percent (33 1/3%) of such current market price).
Notwithstanding the foregoing, all Rights that are, or were, beneficially owned
by any Acquiring Person or any affiliate or associate thereof will be null and
void and not exercisable.
In the event that, at any time following the Distribution Date, (i) the Company
is acquired in a merger or other business combination transaction in which the
holders of all of the outstanding Common Shares immediately prior to the
consummation of the transaction are not the holders of all of the surviving
corporation's voting power, or (ii) more than fifty percent (50%) of the
Company's assets or earning power is sold or transferred, then each holder of a
Right (except Rights which have previously been voided as set forth above) shall
thereafter have the right (the "Flip-Over Right") to receive, upon exercise and
payment of the Purchase Price, common shares of the acquiring company having a
value equal to two times the Purchase Price. If a transaction would otherwise
result in a holder's having a Flip-In as well as a Flip-Over Right, then only
the Flip-Over Right will be exercisable; if a transaction results in a holders
having a Flip-Over Right subsequent to a transaction resulting in a holders
having a Flip-In Right, a holder will have Flip-Over Rights only to the extent
such holders Flip-In Rights have not been exercised.
The Purchase Price payable, and the number of Common Shares or other securities
or property issuable, upon exercise of Rights are subject to adjustment from
time to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of Common Shares, (ii) upon the
grant to holders of Common Shares of certain rights or warrants to subscribe for
or purchase Common Shares at a price, or securities convertible into Common
Shares with a conversion price, less than the then current market price of
Common Shares, or (iii) upon the distribution to holders of Common Shares of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Common Shares)
or of subscription rights or warrants (other than those referred to above).
However, no adjustment in the Purchase Price will be required until cumulative
adjustments require an adjustment of at least one percent (1%). No fractional
Common Shares will be issued and in lieu thereof, an adjustment in cash will be
made based on the market price of Common Shares on the last trading day prior to
the date of exercise.
51
At any time prior to the time a person becomes an Acquiring Person, the Board of
Directors of the Company may redeem the Rights in whole, but not in part, at a
price of $.001 per Right, subject to adjustment by the Rights Committee at a
price between $.001 and $.01 per Right (the "Redemption Price"). The redemption
of the Rights may be made effective at such time on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
All of the provisions of the Rights Agreement may be amended prior to the
Distribution Date by the Board of Directors of the Company for any reason it
deems appropriate. Prior to the Distribution Date, the Board is also authorized,
as it deems appropriate, to lower the thresholds for distribution and Flip-In
Rights to not less than the greater of (i) any percentage greater than the
largest percentage then held by any shareholder, or (ii) 10%. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, defect or inconsistency, to make changes
which do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or, subject to certain limitations, to
shorten or lengthen any time period under the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a shareholder of the Company, including, without limitation, the right to vote
or to receive dividends. While the distribution of the Rights will not be
taxable to shareholders of the Company, shareholders may, depending upon the
circumstances, recognize taxable income should the Rights become exercisable or
upon the occurrence of certain events thereafter.
THE COMPANY'S PREFERRED STOCK
The charter of the Company authorizes the issuance by the Company of up to
20,000,000 shares of its preferred stock. The preferred stock may be issued by
vote of the board of directors without Shareholder approval, subject in all
respects to approval by the Commissioner under the provisions of T.C.A. Section
45-2-207. The preferred stock may be issued in one or more classes and series,
with such designations, full or limited voting rights (or without voting
rights), redemption, conversion, or sinking fund provisions, dividend rates or
provisions, liquidation rights, and other preferences and limitations as the
board of directors may determine in the exercise of its business judgment. The
preferred stock may be issued by the board of directors for a variety of
reasons. The Company has no present plans to issue any of its preferred stock.
The preferred stock could be issued in public or private transactions in one or
more (isolated or series of) issues. The shares of any issue of preferred stock
could be issued with rights, including voting, dividend, and liquidation
features, superior to those of any issue or class of Company's common stock,
including the share of the Company's common stock. The issuance of shares of the
preferred stock could serve to dilute the voting rights or ownership percentage
of holders of the common shares. The issuance of shares of the preferred stock
might also serve to deter or block any attempt to obtain control of the Company,
or to facilitate any such attempt, thus having, potentially, either an
"anti-takeover" or a contrary effect.
GENERAL TERMS AND PROVISIONS APPLICABLE TO THE COMPANY'S COMMON STOCK
Liquidation. In the event of liquidation, dissolution or winding up of the
Company, shareholders are entitled to share ratably in all assets remaining
after payment of liabilities.
Liability for Further Assessments. The Company's shareholders are not subject to
further assessments by the Company on their shares.
Sinking Fund Provision. The Company's shares do not require a "sinking fund"
which is a separate capital reserve maintained to pay shareholders with
preferential rights for their investment in the event of liquidation or
redemption.
Redemption Provision. The Company's shareholders do not have a right of
redemption, which is the right to sell their shares back to the Company.
52
(b) HOLDERS
The approximate number of record holders, including those shares held in
"nominee" or "street name," of the Company's common stock at March 1, 2002 was
approximately 800.
(c) DIVIDENDS
The Company did not declare cash or stock dividends in 2001, nor did the Bank do
so in the period 1999 - 2001. Future dividends may be paid as determined by the
Company's Board of Directors from time to time in accordance with federal and
state law. To the extent practicable, but in all event subject to a wide variety
of considerations and to the discretion of the Board of Directors, the Company
may pay dividends from time to time in accordance with Tennessee law.
However, no dividend or other distribution can be made if the Company is
insolvent or would be rendered insolvent by such action. Under the Tennessee
Business Corporation Act, the holding company may not pay a dividend if
afterwards:
- - The Company would be unable to pay its debts as they become due, or
- - The Company's total assets would be less than its total liabilities plus
an amount needed to satisfy any preferential rights of shareholders.
Any dividends that may be declared and paid by the Company will depend upon
earnings, financial condition, regulatory and prudential considerations, and or
other factors affecting the Company that cannot be reliably predicted. Cash
available for dividend distribution to Shareholders must initially come from
dividends which the Bank pays the Company. As a result, the legal restrictions
on the Bank's dividend payments also affect the ability of the holding company
to pay dividends. See "Payment of Dividends."
Please refer also to the discussion of dividends and related matters (such as
"Capital Adequacy") set forth in Item 1 of this Annual Report on Form 10-K.
The payment of dividends by any bank Company is, of course, dependent upon its
consolidated earnings and financial condition and, in addition to the
limitations discussed above, is subject to the statutory power of certain
federal regulatory agencies to act to prevent unsafe or unsound banking
practices. Please refer also to the discussion of "Payment of Dividends" set
forth in Item 1 of this Annual Report on Form 10-K, to Item 7 of this Annual
Report on Form 10-K ("Management's Discussion and Analysis of Financial
Condition and Results of Operation"), to Item 5 ("Market for Common Equity and
Related Stockholder Matters"), and to Item 8 (the Consolidated Financial
Statements).
(d) RECENT SALES OF UNREGISTERED SECURITIES
The Company's predecessor sold unregistered securities as set forth in this
paragraph. In July of 2001, retired Bank Director Frances C. Jackson exercised
5,000 options and acquired 5,000 shares of the Company's common stock at an
exercise price of $10.00 per share. In 2001, the Company granted options to
purchase 7,000 shares of its common stock under the Company's stock option plan
at an exercise price of $14.00 per share. Please refer to Note 15 of the
Consolidated Financial Statements for additional information on the Company's
stock option plan and with respect to basic and diluted earnings per share. The
Company believes that one or more exemptions from registration of these shares
was available to the Company in that the issuance thereof did not constitute a
general distribution of securities within the meaning of the Securities Act of
1933, as amended, that would have required a registration of the Company's
securities under such law.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data required by this part of this Annual Report on Form
10-K are incorporated into this Report by reference to page 3 of the Company's
2001 Annual Report to Stockholders. Only the information set forth in the said
2001 Annual Report to Stockholders on page 3 under the caption "Capital
53
Bancorp, Inc. Selected Financial Data (Unaudited)" is incorporated in response
to this Part of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. No portion of the 2001 Annual Report to Stockholders is
incorporated by reference, however, except (as here) by express reference. The
selected financial data and certain statistical data concerning the Company that
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operation" that is set forth as a part of
Item 7 and is also presented in certain of the Notes to the Consolidated
Financial Statements included in Item 8 of this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The "Management's Discussion and Analysis of Financial Condition and Results of
Operation" called for by this part is expressly incorporated herein by reference
to the section of the Company's 2001 Annual Report to Stockholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" commencing on page 4 thereof. Only those portions of the said 2001
Annual Report to Stockholders expressly specified as being incorporated by
reference are so incorporated as part of the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company. This discussion should be
read in conjunction with the Company's Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the Consolidated Financial Statements, the Statistical Data,
Item 6, Item 7, and Item 8 for the information called for by this Item of the
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements of the Company (commencing at
page 12 of the Company's 2001 Annual Report to Stockholders) are included in
this Report:
- Independent Auditors' Report;
- Consolidated Balance Sheets - December 31, 2001 and 2000;
- Consolidated Statements of Earnings - Three years ended December 31,
2001;
- Consolidated Statements of Comprehensive Earnings - Three years
ended December 31, 2001;
- Consolidated Statements of Changes in Stockholders' Equity - Three
years ended December 31, 2001;
- Consolidated Statements of Cash Flows - Three years ended December
31, 2001; and all
- Notes to Consolidated Financial Statements.
The Consolidated Financial Statements called for by this Item are incorporated
by reference to the Consolidated Financial Statements section of the Company's
2001 Annual Report to Stockholders, pages 12 through 47. No portion of the 2001
Annual Report to Stockholders is incorporated by reference, however, except (as
here) by express reference.
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND, EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference to the Registrant's 2002 proxy
materials filed on March 12, 2002, under Regulation 14A ("2002 Proxy
Statement"). However, the information set forth in the 2002 Proxy Statement
under the subheadings "Compensation Committee Report on Executive Compensation"
and "Stock Performance Graph" (i) shall not be deemed to be "soliciting
material" or to be "filed" with the Commission or subject to Regulation 14A or
the liabilities of Section 18 of the Exchange Act, and (ii) notwithstanding
anything to the contrary that may be contained in any filing by the Company
under such Act or the Securities Act of 1933, as amended ("Securities Act"),
shall not be deemed to be incorporated by reference in this or any other filing.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference to the Registrant's 2002 Proxy
Statement. However, the information set forth in the 2002 Proxy Statement under
the subheadings "Compensation Committee Report on Executive Compensation" and
"Stock Performance Graph" (i) shall not be deemed to be "soliciting material" or
to be "filed" with the Commission or subject to Regulation 14A or the
liabilities of Section 18 of the Exchange Act, and (ii) notwithstanding anything
to the contrary that may be contained in any filing by the Company under such
Act or the Securities Act, shall not be deemed to be incorporated by reference
in this or any other filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is incorporated by reference to the Registrant's 2002 Proxy
Statement. However, the information set forth in the 2002 Proxy Statement under
the subheadings "Compensation Committee Report on Executive Compensation" and
"Stock Performance Graph" (i) shall not be deemed to be "soliciting material" or
to be "filed" with the Commission or subject to Regulation 14A or the
liabilities of Section 18 of the Exchange Act, and (ii) notwithstanding anything
to the contrary that may be contained in any filing by the Company under such
Act or the Securities Act, shall not be deemed to be incorporated by reference
in this or any other filing.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference to the Registrant's 2002 Proxy
Statement. However, the information set forth in the 2002 Proxy Statement under
the subheadings "Compensation Committee Report on Executive Compensation" and
"Stock Performance Graph" (i) shall not be deemed to be "soliciting material" or
to be "filed" with the Commission or subject to Regulation 14A or the
liabilities of Section 18 of the Exchange Act, and (ii) notwithstanding anything
to the contrary that may be contained in any filing by the Company under such
Act or the Securities Act, shall not be deemed to be incorporated by reference
in this or any other filing.
Please refer to Item 8 of this Annual Report on Form 10-K, and to Notes 10 and
15 of the Consolidated Financial Statements for additional information on
related party transactions (that is, transactions involving the Company's
directors and officers, and their related interests, on the one hand and the
Company and the Bank on the other).
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following consolidated annual audited financial statements of the
Company are included in this Annual Report on Form 10-K:
- - Independent Auditors' Report;
- - Consolidated Balance Sheets - December 31, 2001 and 2000;
- - Consolidated Statements of Earnings - Three years ended December 31, 2001;
- - Consolidated Statements of Comprehensive Earnings - Three years ended
December 31, 2001;
- - Consolidated Statements of Changes in Stockholders' Equity - Three years
ended December 31, 2001;
- - Consolidated Statements of Cash Flows - Three years ended December 31,
2001; and all
- - Notes to Consolidated Financial Statements.
(b) Listing of Exhibits:
2.1 Agreement and Plan of Share Exchange dated March 5, 2001.
3(i) Charter.
3(ii) Bylaws.
4.1 Charter.
4.2 Bylaws.
4.3 2001 Capital Bancorp, Inc. Stock Option Plan.
4.4 Capital Bancorp, Inc. Shareholders Rights Agreement dated as of
July 18, 2001.
10.1 Employment Agreement between Capital Bancorp, Inc. and R. Rick
Hart dated December 13, 2000.
10.2 Employment Agreement between Capital Bancorp, Inc. and John W.
Gregory, Jr., dated December 13, 2000.
10.3 Employment Agreement between Capital Bancorp, Inc. and H. Edward
Jackson, III, dated December 13, 2000.
11 Statement re: computation of per share earnings (incorporated by
reference to Note 16 of the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations).
12 Statement re Computation of Ratios.
13 Excerpts from the Capital Bancorp, Inc. 2001 Annual Report to
Stockholders.
21 Subsidiaries of the Registrant for the year ended December 31,
2001.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
(REGISTRANT)
By: /s/ R. Rick Hart
-----------------------------------
R. Rick Hart
Chairman, President and
Chief Executive Officer
March 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
By: /s/ Albert J. Dale, III Director March 20, 2002
-----------------------------------
Albert J. Dale, III
By: /s/ R. Rick Hart Chairman, President & March 18, 2002
----------------------------------- Chief Executive Officer
R. Rick Hart
By: /s/ Michael D. Shmerling Director March 21, 2002
-----------------------------------
Michael D. Shmerling
By: /s/ Sally P. Kimble Senior Vice President, March 18, 2002
----------------------------------- Chief Financial and Chief
Sally P. Kimble Accounting Officer
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT LOCATION*
NUMBER
2.1 Agreement and Plan of Share Exchange dated March 5, 2001. 62
3(i) Charter. 79
3(ii) Bylaws. 94
4.1 Charter. (1)
4.2 Bylaws. (2)
4.3 2001 Capital Bancorp, Inc. Stock Option Plan. 123
4.4 Capital Bancorp, Inc. Shareholders Rights Agreement dated as of 141
July 18, 2001.
10.1 Employment Agreement between Capital Bancorp, Inc. and R. 190
Rick Hart dated December 13, 2000.
10.2 Employment Agreement between Capital Bancorp, Inc. and John 207
W. Gregory, Jr., dated December 13, 2000.
10.3 Employment Agreement between Capital Bancorp, Inc. and H. 224
Edward Jackson, III, dated December 13, 2000.
11 Statement re: computation of per share earnings. (3)
12 Statement re computation of ratios. (4)
13 Excerpts from the 2001 Annual Report to Stockholders. 241(5)
21 Subsidiaries of the Registrant for the year ended December 31, 289
2001.
*Sequential
Page Number
(1) Incorporated by reference to Exhibit 3(i).
(2) Incorporated by reference to Exhibit 3(ii).
(3) Incorporated by reference to Note 16 of the Consolidated Financial
Statements for the annual periods and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the
year ended December 31, 2001.
(4) Incorporated by reference to the Note 16 of the Consolidated
Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
(5) Portions of the Annual Report to Security Holders are incorporated
herein by reference pursuant to the instructions to Form 10-K. These
portions are "Selected Financial Data," the Management's Discussion
and Analysis of Financial Condition and Results of Operation," and
the Company's Consolidated Financial Statements for the year ended
December 31, 2001.