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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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 (IRS Employer Identification No.)
Incorporation or Organization)
1820 West End Avenue, Nashville, TN 37203
-----------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
(615) 327-9000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock outstanding: 1,565,271 shares at August 13, 2002
1
CAPITAL BANCORP, INC.
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited consolidated financial statements of the Company and its
subsidiaries are as follows:
Consolidated Balance Sheets - June 30, 2002 and December 31,
2001.
Consolidated Statements of Earnings - For the three months and
six months ended June 30, 2002 and 2001.
Consolidated Statements of Comprehensive Earnings - For the
three months and six months ended June 30, 2002 and 2001.
Consolidated Statements of Cash Flows - For the six months
ended June 30, 2002 and 2001.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk*
*Certain of the disclosures required by Item 3 are
incorporated by reference to Management's Discussion and
Analysis of Financial Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
CAPITAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(In Thousands)
------------------------------
June 30, December 31,
2002 2001
-------- ------------
ASSETS
Loans, net of allowance for possible loan losses of $2,199,000
and $2,122,000, respectively $158,851 138,952
Securities available-for-sale, at market (amortized
cost $28,865,000 and $22,222,000, respectively) 29,232 22,251
Loans held for sale 1,869 3,514
Interest-bearing deposits in financial institutions 447 251
Federal funds sold 5,600 2,450
Other earning assets 1,116 1,096
-------- -------
Total earning assets 197,115 168,514
-------- -------
Cash and due from banks 4,074 4,040
Premises and equipment, net of accumulated depreciation 5,246 5,428
Accrued interest receivable 1,025 868
Deferred income taxes 632 724
Other real estate 60 244
Other assets 1,497 1,594
-------- -------
Total assets $209,649 181,412
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $172,557 150,093
Securities sold under repurchase agreements 2,915 2,854
Accrued interest and other liabilities 849 944
Advances from Federal Home Loan Bank 15,934 11,000
-------- -------
Total liabilities 192,255 164,891
-------- -------
Stockholders' equity:
Preferred stock, no par value, authorized 20,000,000 shares,
no shares issued -- --
Common stock, par value $4 per share, authorized 20,000,000
shares, 1,565,271 shares issued and outstanding 6,261 6,261
Additional paid-in capital 5,909 5,909
Retained earnings 4,997 4,333
Net unrealized gains on available-for-sale securities,
net of income tax expense of $140,000 and $11,000, respectively 227 18
-------- -------
Total stockholders' equity 17,394 16,521
-------- -------
COMMITMENTS AND CONTINGENCIES
Total liabilities and stockholders' equity $209,649 181,412
======== =======
See accompanying notes to consolidated financial statements (unaudited).
3
CAPITAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
---------- --------- ---------- ---------
(Dollars In Thousands (Dollars in Thousands
Except Per Share Amounts) Except Per Share Amounts)
Interest income:
Interest and fees on loans $ 2,982 2,929 $ 5,758 5,769
Interest and dividends on securities:
Taxable securities 266 243 538 593
Exempt from Federal income taxes 15 13 28 26
Interest on loans held for sale 14 41 37 69
Interest on Federal funds sold 36 135 49 281
Interest on interest-bearing deposits in financial
institutions 5 -- 10 1
---------- --------- ---------- ---------
Total interest income 3,318 3,361 6,420 6,739
---------- --------- ---------- ---------
Interest expense:
Interest on savings accounts 2 4 5 7
Interest on negotiable order of withdrawal accounts 13 33 26 104
Interest on money market accounts 277 665 566 1,425
Interest on certificates of deposits over $100,000 473 435 821 853
Interest on certificates of deposits - other 271 446 629 909
Interest on securities sold under repurchase agreements 13 23 25 43
Interest on advances from Federal Home Loan Bank 199 97 352 165
---------- --------- ---------- ---------
Total interest expense 1,248 1,703 2,424 3,506
---------- --------- ---------- ---------
Net interest income before provision for possible loan
losses 2,070 1,658 3,996 3,233
Provision for possible loan losses 230 136 447 316
---------- --------- ---------- ---------
Net interest income after provision for possible loan
losses 1,840 1,522 3,549 2,917
---------- --------- ---------- ---------
Non-interest income:
Service charges on deposit accounts 248 138 462 267
Other fees and commissions 45 14 79 44
Gain on sale of loans 108 169 192 256
Gain on sale of securities 1 -- 1
---------- --------- ---------- ---------
Total non-interest income 402 321 734 567
---------- --------- ---------- ---------
Non-interest expenses:
Employee salaries and benefits 897 855 1,784 1,671
Occupancy expenses 186 169 372 355
Furniture and equipment expenses 89 80 178 160
Data processing expense 58 51 101 97
FDIC insurance and state banking fees 18 15 35 30
Other operating expenses 386 267 724 539
Loss on sale of other real estate -- 44 19 44
---------- --------- ---------- ---------
Total non-interest expense 1,634 1,481 3,213 2,896
---------- --------- ---------- ---------
Earnings before income taxes 608 362 1,070 588
Income taxes 231 134 406 217
---------- --------- ---------- ---------
Net earnings $ 377 228 $ 664 371
========== ========= ========== =========
Weighted average number of shares outstanding 1,565,271 1,560,271 1,565,271 1,560,271
========== ========= ========== =========
Basic earnings per common share $ .24 .15 $ .42 .24
========== ========= ========== =========
Diluted earnings per common share $ .24 .14 $ .42 .23
========== ========= ========== =========
See accompanying notes to consolidated financial statements (unaudited).
4
CAPITAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
2002 2001 2002 2001
----- ---- ----- ----
(In Thousands) (In Thousands)
Net earnings $ 377 228 $ 664 371
----- --- ----- ---
Other comprehensive earnings net of tax:
Unrealized gains on available-for-sale securities
arising during period, net of tax expense of $192,000,
$6,000, $128,000 and $146,000, respectively 314 10 210 238
Less: reclassification adjustment for gains included
in net earnings (1) -- (1) --
----- --- ----- ---
Other comprehensive earnings 313 10 209 238
----- --- ----- ---
Comprehensive earnings $ 690 238 $ 873 609
===== === ===== ===
See accompanying notes to consolidated financial statements (unaudited).
5
CAPITAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(In Thousands)
-----------------------------
2002 2001
-------- -------
Cash flows from operating activities:
Interest received $ 6,285 6,842
Fees received 541 311
Interest paid (2,418) (3,572)
Cash paid to suppliers and employees (2,812) (2,614)
Proceeds from loan sales 14,827 17,625
Originations of loans held for sale (12,990) (19,068)
Income taxes paid (613) (211)
-------- -------
Net cash provided by (used in) operating activities 2,820 (687)
-------- -------
Cash flows from investing activities:
Purchase of available-for-sale securities (10,204) (9,804)
Proceeds from sale of other real estate 717 453
Proceeds from maturities of available-for-sale securities 3,520 16,610
Loans made to customers, net of repayments (20,898) (17,486)
Purchase of premises and equipment (34) (736)
Increase in interest-bearing deposits in financial institutions (196) (421)
Expenditures on other real estate -- (4)
-------- -------
Net cash used in investing activities (27,095) (11,388)
-------- -------
Cash flows from financing activities:
Net decrease in non-interest bearing, savings and NOW deposit
accounts (1,162) (612)
Net increase in time deposits 23,626 4,096
Proceeds from securities sold under agreements to repurchase 61 1,251
Net increase in advances from Federal Home Loan Bank 4,934 6,000
-------- -------
Net cash provided by financing activities 27,459 10,735
-------- -------
Net increase (decrease) in cash and cash equivalents 3,184 (1,340)
Cash and cash equivalents at beginning of period 6,490 16,715
-------- -------
Cash and cash equivalents at end of period $ 9,674 15,375
======== =======
See accompanying notes to consolidated financial statements (unaudited).
6
CAPITAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(In Thousands)
--------------------------
2002 2001
------- ------
Reconciliation of net earnings to net cash provided by
(used in) operating activities:
Net earnings $ 664 371
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Depreciation, amortization and accretion 257 148
Provision for possible loan losses 447 316
FHLB dividend reinvestment (20) (30)
Gain on sale of securities (1) --
Decrease in refundable income taxes -- 13
Loss on sale of other real estate 19 44
Decrease (increase) in accrued interest receivable (157) 182
Decrease (increase) in loans held for sale 1,645 (1,699)
Increase in deferred tax asset (36) (7)
Increase (decrease) in interest payable 6 (66)
Decrease in other assets 68 132
Increase (decrease) in other liabilities 69 (91)
Decrease in accrued income taxes (171) --
------- ------
Total adjustments 2,126 (1,058)
------- ------
Net cash provided by (used in) operating activities $ 2,790 (687)
======= ======
Supplemental Schedule of Non-Cash Activities:
Unrealized gain on available-for-sale securities, net of tax
expense of $128,000 and $146,000, respectively $ 209 238
======= ======
Non-cash transfers from loans to other real estate $ 552 --
======= ======
7
CAPITAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of Capital
Bancorp, Inc. (Company), Capital Bank & Trust Company (Bank), its wholly-owned
subsidiary, and CBTC Corporation and Capital Housing Improvement Projects, Inc.,
wholly-owned subsidiaries of Capital Bank & Trust Company. On April 24, 2001,
the stockholders of Capital Bank & Trust Company voted to exchange their stock
for stock in Capital Bancorp, Inc. Effective July 1, 2001, Capital Bancorp, Inc.
became a bank holding company within the meaning of the Bank Holding Company Act
of 1956, as amended. The transaction has been treated as a reorganization for
accounting purposes.
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the consolidated financial statements contain all
adjustments and disclosures necessary to summarize fairly the financial position
of the Company as of June 30, 2002 and December 31, 2001, the results of
operations for the three months and six months ended June 30, 2002 and 2001,
comprehensive earnings for the three months and six months ended June 30, 2002
and 2001 and changes in cash flows for the six months ended June 30, 2002 and
2001. All significant intercompany transactions have been eliminated. The
interim consolidated financial statements should be read in conjunction with the
notes to the consolidated financial statements presented in the Company's
December 31, 2001 Annual Report to Stockholders. The results for interim periods
are not necessarily indicative of results to be expected for the complete fiscal
year.
8
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on Form
10-K for the year ended December 31, 2001 for a more complete discussion of
factors that affect liquidity, capital and the results of operations.
FORWARD-LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis of
the Company's operations and prospects, and other matters, may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and other provisions of federal and state
securities laws. Although the Company believes that the assumptions underlying
such forward-looking statements contained in this Report are reasonable, any of
the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
The use of such words as expect, anticipate, forecast, and comparable terms
should be understood by the reader to indicate that the statement is
"forward-looking" and thus subject to change in a manner that can be
unpredictable. Factors that could cause actual results to differ from the
results anticipated, but not guaranteed, in this Report, include (without
limitation) economic and social conditions, competition for loans, mortgages,
and other financial services and products, changes in interest rates, unforeseen
changes in liquidity, results of operations, and financial conditions affecting
the Company's customers, as well as other risks that cannot be accurately
quantified or completely identified. Many factors affecting the Company's
financial condition and profitability, including changes in economic conditions,
the volatility of interest rates, political events 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 is to
provide Form 10-Q readers with information relevant to understanding and
assessing the financial conditions and results of operations of the Company, and
not to predict the future or to guarantee results. The Company is unable to
predict in any reliable manner all of the types of circumstances, conditions,
and factors that can cause anticipated results to change. The Company undertakes
no obligation to publish revised forward-looking statements to reflect the
occurrence of changes or of unanticipated events, circumstances, or results.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Company to meet
future cash flow requirements, particularly those of customers who are either
withdrawing funds from their accounts or borrowing to meet their credit needs.
Proper asset/liability management is designed to maintain stability in
the balance of interest-sensitive assets to interest-sensitive liabilities in
order to provide a stable growth in net interest margins. Earnings on
interest-sensitive assets such as loans tied to the prime rate of interest and
federal funds sold, may vary considerably from fixed rate assets such as
long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as savings
accounts.
9
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT, CONTINUED
The Company maintains a formal asset and liability management process
designed to quantify, monitor and control interest rate risk and to assist
management in maintaining stability in the net interest margin under varying
interest rate environments. The Company accomplishes this process through the
development and implementation of lending, funding and pricing strategies
designed to maximize net interest income under varying interest rate
environments subject to specific liquidity and interest rate risk guidelines.
(Please refer to Item 3 for additional information.)
Analysis of rate sensitivity and rate gap analysis are the primary
tools used to assess the direction and magnitude of changes in net interest
income resulting from changes in interest rates. Included in the analysis are
cash flows and maturities of financial instruments held for purposes other than
trading, changes in market conditions, loan volumes and pricing and deposit
volume and mix. These assumptions are inherently uncertain, and, as a result,
net interest income cannot be precisely estimated nor can the impact of higher
or lower interest rates on net interest income be precisely predicted. Actual
results will differ due to timing, magnitude and frequency of interest rate
changes and changes in market conditions and management's strategies, among
other factors.
Banks, in general, must maintain large cash balances to meet day-to-day
cash flow requirements as well as maintaining required reserves for regulatory
agencies. The cash balances maintained are the primary source of liquidity.
Federal funds sold, which are basically overnight or short-term loans to other
banks that increase the other bank's required reserves, are also a major source
of liquidity.
The Company's investment portfolio consists of earning assets that
provide interest income. Securities classified as available-for-sale include
securities intended to be used as part of the Company's asset/liability strategy
and/or securities that may be sold in response to changes in interest rate,
prepayment risk, the need or desire to increase capital and similar economic
factors. Securities totaling approximately $3.0 million (10.3% of the portfolio)
are presently scheduled to mature or reprice within the next twelve months.
A secondary source of liquidity is the Company's loan portfolio. At
June 30, 2002 loans of approximately $84.5 million (52.5% of the portfolio)
either will become due or will be subject to rate adjustments within twelve
months from the respective date. Emphasis is placed on using adjustable interest
rates on commercial loans.
As for liabilities, certificates of deposit of $100,000 or greater
totaling approximately $28.1 million (53.4% of this category of time deposits)
will mature during the next twelve months. The Company's deposit base increased
approximately $22.4 million during the six months ended June 30, 2002. The
increase in deposits consists of a $1.2 million decrease in transactional
accounts and a $23.6 million increase in time deposits. Advances from the
Federal Home Loan Bank increased to $15.9 million at June 30, 2002 from $11.0
million at December 31, 2001.
Historically, there has been no significant reduction in immediately
withdrawable accounts such as negotiable order of withdrawal accounts, money
market demand accounts, demand deposit and regular savings. Management does not
expect that there will be significant withdrawals from these accounts in the
future that are inconsistent with past experience. A reduction in the interest
rate paid on these accounts could have an impact on the level of these accounts.
10
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT, CONTINUED
It is anticipated that with present maturities, the expected growth in
deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. The
Company has branched into Sumner County and Eastern Davidson County and expects
these locations to have a favorable impact on the deposit base. At the present
time there are no known trends or any known commitments, demands, events or
uncertainties that will result in or that are reasonable likely to result in the
Company's liquidity changing in any material way.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 8.3% at June 30,
2002 and 9.1% at December 31, 2001. Total assets increased 15.6% during the six
months ended June 30, 2002. The annualized rate of return on stockholders'
equity for the six months ended June 30, 2002 was 7.6% compared to 4.7% for the
comparable period in 2001. The Company's capital at June 30, 2002 of $17,394,000
results from beginning capital of $16,521,000, plus net earnings of $664,000,
plus an increase in unrealized gains on available-for-sale securities of
$209,000. No material changes in the mix or cost of capital is anticipated in
the foreseeable future.
Regulations of the Federal Deposit Insurance Corporation and the
Tennessee Department of Financial Institutions establish required minimum
capital levels for the Bank. Under these regulations, banks must maintain
certain capital levels as a percentage of average total assets (leverage capital
ratio) and as a percentage of total risk-based assets (risk-based capital
ratio). Under the risk-based requirements, various categories of assets and
commitments are assigned a percentage related to credit risk ranging from 0% for
assets backed by the full faith and credit of the United States to 100% for
loans other than residential real estate loans and certain off-balance sheet
commitments. Total capital is characterized as either Tier 1 capital - common
shareholders' equity, noncumulative perpetual preferred stock and a limited
amount of cumulative perpetual preferred - or total capital which includes the
allowance for loan losses up to 1.25% of risk weighted assets, perpetual
preferred stock, subordinated debt and various other hybrid capital instruments,
subject to various limits. Goodwill is not includable in Tier 1 or total
capital. The Bank must maintain a Tier 1 capital to risk-based assets of at
least 4.0%, a total capital to risk-based assets ratio of at least 8.0% and a
leverage capital ratio (defined as Tier 1 capital to average total assets for
the most recent quarter) of at least 4.0%. The same ratios are also required in
order for a bank to be considered "adequately capitalized" under the "prompt
corrective action" regulations, which impose certain operating restrictions on
institutions which are not adequately capitalized. At June 30, 2002 the Bank has
a Tier 1 risk-based ratio of 10.5%, a total capital to risk-based ratio of 11.8%
and a Tier 1 leverage ratio of 8.6%. These ratios fell within the category of
"well capitalized" under the regulations.
11
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
CAPITAL RESOURCES, CONTINUED
The Federal Reserve Board imposes consolidated capital guidelines on
bank holding companies which have more than $150 million in consolidated assets.
These guidelines require bank holding companies to maintain consolidated capital
ratios which are essentially the same as the minimum capital levels required for
state banks. The Company's consolidated capital ratios were substantially the
same as those set forth above for the Bank, and exceeded the minimums required
under these Federal Reserve Board guidelines at June 30, 2002.
In March of 2001, the Company's stockholders approved the Capital
Bancorp, Inc. 2001 Stock Option Plan which provides for the grant of options to
purchase 500,000 shares of the Company's stock. The Company agreed with the Bank
that it would exchange its options to the holders of stock options under the
Bank's stock option plan on an option-for-option basis. Thus options that were
outstanding under the Bank's stock option plan have been exchanged for options
under the Company's stock option plan. It is intended that the holders of the
Bank's options will be able to exercise their options on exactly the terms and
conditions that they could have exercised Bank stock options. Thus substantially
identical vesting, exercise price, and all other material terms of exercise have
been grafted on the stock options exchanged by Bank stock option holders. (Thus,
for example, Bank stock options that were fully vested at the time that the
Company acquired the Bank became fully vested at the time of their exchange for
Company stock options.) During the six months ended June 30, 2002, the Board of
Directors of the Company and the optionees agreed to a restructuring of the
Company's outstanding options. The changes made are summarized as follows:
Prior to Restructuring After Restructuring
---------------------------------------- -----------------------------------------
Number Number
of Options Exercise Expiration of Options Exercise Expiration
Outstanding Price Date Outstanding Price Date
----------- ----- ---- ----------- ----- ----
Organizers and Directors 50,000 $ 10.00 2005 97,500 $ 10.00 2012
32,500 10.00 2004
Senior Management 95,000 10.00 2005 95,000 12.75 2012
4,000 18.00 2010 4,000 12.75 2012
1,500 14.00 2011 1,500 12.75 2012
Employees 13,000 19.00 2009 13,000 12.75 2012
5,500 14.00 2009 5,500 12.75 2012
4,000 19.00 2009 4,000 19.00 2009
----------- ------------
173,000 253,000
=========== ============
In addition, 9,000 options were issued to employees at an exercise
price of $12.75 during the first six months of 2002 and 4,000 options at an
exercise price of $19.00 have expired due to termination of employment of one
employee. The Company at June 30, 2002, has granted the right to purchase
128,000 shares of stock to its officers and employees at an exercise price of
$12.75 and 130,000 shares of stock to the Bank's Directors and Organizers at an
exercise price of $10.00 per share. At June 30, 2002, 228,600 shares were
exercisable. The shares granted to directors, organizers, officers and employees
are exercisable over a period of 10 years. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). The impact of the adoption of SFAS No.
123 has been reflected as a proforma disclosure in the notes to the Company's
annual consolidated financial statements.
12
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
Net earnings were $664,000 for the six months ended June 30, 2002 as
compared to $371,000 for the same period in 2001. Net earnings were $377,000 for
the quarter ended June 30, 2002 as compared to $228,000 during the same quarter
in 2001.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income which is the excess of interest
earned over interest paid. The net interest margin could be materially affected
during period of volatility in interest.
The Company's interest income, excluding tax equivalent adjustments,
decreased by $319,000 or 4.7% during the six months ended June 30, 2002 as
compared to the same period in 2001. Interest income for the quarter ended June
30, 2002 decreased $43,000 or 1.3% over the quarter ended June 30, 2001 and
increased $216,000 from the first quarter of 2002. The decreases from 2001 were
primarily attributable to a decline in prevailing interest rates. The ratio of
average earning assets to total average assets was 95.2% for the six months
ended June 30, 2002 and 94.4% for the six months ended June 30, 2001.
Interest expense decreased by $1,082,000 for the six months ended June
30, 2002 or 30.9% to $2,424,000 compared to $3,506,000 for the same period in
2001. Interest expense for the quarter ended June 30, 2002 decreased $455,000 or
26.7% as compared to the quarter ended June 30, 2001. Interest expense for the
quarter ended June 30, 2002 increased $72,000 or 6.1% compared to the first
quarter of 2002. The decreases in interest expense over the past year can be
attributable primarily to a decline in prevailing interest rates.
The foregoing resulted in net interest income of $3,996,000 for the six
months ended June 30, 2002, an increase of $763,000 or 23.6% compared to the
same period in 2001. Net interest income for the quarter ended June 30, 2002
increased $412,000 or 24.8% over the second quarter of 2001 while there was an
increase of $144,000 or 7.5% over the first quarter in 2002.
The following schedule details the loans of the Company at June 30,
2002 and December 31, 2001:
(In Thousands)
------------------------------
June 30, December 31,
2002 2001
-------- ------------
Commercial, financial & agricultural $ 80,832 80,224
Real estate - construction 20,347 9,343
Real estate - mortgage 54,272 46,198
Consumer 5,599 5,309
-------- -------
$161,050 141,074
======== =======
13
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The Company accounts for impaired loans under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures". These
pronouncements apply to impaired loans except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
including credit card, residential mortgage, and consumer installment loans.
A loan is deemed to be impaired when it is probable that the Company
will be unable to collect the scheduled payments of principal and interest due
under the contractual terms of the loan agreement. Impaired loans are measured
at the present value of expected future cash flows discounted at the loan's
effective interest rate, at the loan's observable market price, or the fair
value of the collateral if the loan is collateral dependent. If the measure of
the impaired loan is less than the recorded investment in the loan, the Company
shall recognize an impairment by creating a valuation allowance with a
corresponding charge to the provision for loan losses or by adjusting an
existing valuation allowance for the impaired loan with a corresponding charge
or credit to the provision for loan losses.
The Company's first mortgage single family residential, consumer, and
credit card loans or other revolving credit plans which total approximately
$48,847,000, $5,470,000 and $129,000, respectively at June 30, 2002, are divided
into various groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and thus are not subject to the provisions of SFAS Nos.
114 and 118. Substantially all other loans of the Company are evaluated for
impairment under the provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status to be impaired.
Loans are placed on nonaccrual status when doubt as to timely collection of
principal or interest exists, or when principal or interest is past due 90 days
or more unless such loans are well-secured and in the process of collection.
Delays or shortfalls in loan payments are evaluated with various other factors
to determine if a loan is impaired. Generally, delinquencies under 90 days are
considered insignificant unless certain other factors are present which indicate
impairment is probable. The decision to place a loan on nonaccrual status is
also based on an evaluation of the borrower's financial condition, collateral,
liquidation value, and other factors that, in the subjective judgment of
management, affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on nonaccrual loans
is recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At June
30, 2002, the Company had nonaccrual loans totaling $893,000 as compared to
$1,268,000 at December 31, 2001.
14
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Loans not on nonaccrual status are classified as impaired in certain
cases where there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will sustain some loss. In
such cases, interest income continues to accrue as long as the loan does not
meet the Company's criteria for nonaccrual status.
Generally the Company also classifies as impaired any loans the terms
of which have been modified in a troubled debt restructuring after January 1,
1995. Interest is accrued on such loans that continue to meet the modified terms
of their loan agreements. At June 30, 2002, the Company had no loans that have
had the terms modified in a troubled debt restructuring.
The Company's charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged-off in the month when
they are considered uncollectible.
Impaired loans and related allowance for loan loss amounts at June 30,
2002 and December 31, 2001 were as follows:
June 30, 2002 December 31, 2001
-------------------------- --------------------------
Allowance Allowance
Recorded for Recorded for
(In Thousands) Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
Impaired loans with allowance for
loan loss $837 267 1,222 425
Impaired loans with no allowance for
loan loss -- -- -- --
---- ----- ----- ---
$837 267 1,222 425
==== ===== ===== ===
The allowance for loan loss related to impaired loans was measured
based upon the estimated fair value of related collateral.
The average recorded investment in impaired loans for the six months
ended June 30, 2002 and 2001 was $526,000 and $871,000, respectively. The
related amount of interest income recognized on the accrual method for the
period that such loans were impaired was approximately $23,000 and $42,000 for
2002 and 2001, respectively.
15
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The following schedule details selected information as to
non-performing loans of the Company at June 30, 2002:
June 30, 2002 December 31, 2001
----------------------------------- ----------------------------------
Past Due Past Due
90 Days Non-Accrual 90 Days Non-Accrual
------- ----------- ------- -----------
(In Thousands) (In Thousands)
Real estate - construction $ 386 - $ - -
Real estate - mortgage 169 344 171 227
Consumer loans 24 58 14 48
Commercial 57 491 317 993
--------------- ---------------- --------------- ----------------
$ 636 893 $ 502 1,268
=============== ================ =============== ================
Renegotiated loans $ - - $ - -
=============== ================ =============== ================
Transactions in the allowance for loan losses were as follows:
Six Months Ended
June 30,
-------------------------------------
2002 2001
---- ----
(In Thousands)
Balance, January 1, 2002 and 2001, respectively $ 2,122 1,886
Add (deduct):
Losses charged to allowance (391) (146)
Recoveries credited to allowance 21 18
Provision for loan losses 447 316
--------------- ---------------
Balance, June 30, 2002 and 2001, respectively $ 2,199 2,074
=============== ===============
The provision for loan losses was $447,000 and $316,000 for the first
six months of 2002 and 2001, respectively. The provision for loan losses is
based on past loan experience and other factors which, in management's
subjective judgment, deserve current recognition in estimating possible loan
losses. Such factors include growth and composition of the loan portfolio,
review of specific loan problems, the relationship of the allowance for loan
losses to outstanding loans, and current economic conditions that may affect the
borrower's ability to repay. This is not an exact science. Management has in
place a system designed to identify and monitor potential problem loans on a
timely basis. Of course, no system is either perfect or infallible.
16
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The Company maintains an allowance for loan losses which management
believes is adequate to absorb losses inherent in the loan portfolio. A formal
review is prepared monthly by the Loan Review Officer to assess the risk in the
portfolio and to determine the adequacy of the allowance for loan losses. The
review includes analysis of historical performance, the level of non-performing
and adversely rated loans, specific analysis of certain problem loans, loan
activity since the previous assessment, reports prepared by the Loan Review
Officer, consideration of current economic conditions, and other pertinent
information. The level of the allowance to net loans outstanding will vary
depending on the overall results of this monthly assessment. The review is
presented to and subject to approval by the Board of Directors.
The following tables present internally graded loans as of June 30,
2002 and December 31, 2001:
June 30, 2002
(In Thousands) Special
Total Mention Substandard Doubtful
----- ------- ----------- --------
Commercial, financial and
agricultural $ 864 161 472 231
Real estate construction - - - -
Real estate mortgage 1,617 52 1,565 -
Consumer 259 - 259 -
------------------ ---------------- -------------- --------------
$ 2,740 213 2,296 231
================== ============== ============== ================
December 31, 2001
(In Thousands) Special
Total Mention Substandard Doubtful
----- ------- ----------- --------
Commercial, financial and
agricultural $ 1,513 - 1,253 260
Real estate construction - - - -
Real estate mortgage 1,567 - 1,567 -
Consumer 535 - 534 1
------------------ ---------------- -------------- ----------------
$ 3,615 - 3,354 261
================== ================ ============== ================
The collateral values, based on estimates received by management,
securing these loans total approximately $3,012,000 ($2,851,000 related to real
estate and $161,000 related to commercial and other loans) at June 30, 2002.
Such loans are listed as classified when information obtained about possible
credit problems of the borrower 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 and adversely affect impact future
operating results, liquidity or capital resources.
17
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Included in the internally graded commercial loans is a loan to one
customer in the amount of $27,000 and $395,000 at June 30, 2002 and December 31,
2001, respectively. The loan was to a customer made for the purpose of financing
vehicles. During the first six months of 2002, $368,000 of the loan was charged
off. The customer has declared bankruptcy and the Company has classified the
remaining outstanding balance of $27,000 as doubtful.
Residential real estate loans that are graded substandard totaling
$1,565,000 and $1,567,000 at June 30, 2002 and December 31, 2001 consist of
seventeen and twelve individual loans, respectively, that have been graded
accordingly due to bankruptcies, inadequate cash flows and delinquencies.
Residential real estate loans that are graded special mention totaling $52,000
at June 30, 2002, consist of two individual loans, respectively, that have been
graded accordingly due to inadequate cash flows and delinquencies. No material
losses on these loans is anticipated by management.
The following detail provides a breakdown of the allocation of the
allowance for possible loan losses:
June 30, 2002 December 31, 2001
--------------------------------- --------------------------------
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 $ 1,429 50.2% $ 1,380 56.9%
Real estate construction 297 12.6 286 6.6
Real estate mortgage 297 33.7 286 32.7
Consumer 176 3.5 170 3.8
------------ ------------ ------------ ------------
$ 2,199 100.0% $ 2,122 100.0%
============ ============ ============ ============
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at June 30,
2002 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income increased $167,000 or 29.4% to $734,000 during the
six months ended June 30, 2002 compared to $567,000 for the same period in 2001.
Non-interest income increased $81,000 or 25.2% for the quarter ended June 30,
2002 as compared to the comparable quarter in 2001. The increase in 2002 was due
primarily to an increase in service charges on deposit accounts during the first
six months of 2002 compared to 2001.
Non-interest expense increased $317,000 or 10.9% to $3,213,000 during
the first six months of 2002 compared to $2,896,000 during the same period in
2001. There was an increase of $153,000 or 10.3% for the three months ended June
30, 2002 as compared to the same period in 2001 and a $55,000 increase or 3.5%
from $1,579,000 for the quarter ended March 31, 2002. The increase in 2002 was
due primarily to increases in salaries and employee benefits and occupancy
expenses. These increases relate principally to costs associated with opening
new branches.
18
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Income taxes were $406,000 for the first six months of 2002 as compared
to $217,000 for the first six months of 2001. Taxes were $231,000 for the
quarter ended June 30, 2002 as compared to $134,000 for the same period in 2001.
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share for the Company begins with the basic earnings per
share plus the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted
earnings per share (EPS) for the three and six months ended June 30, 2002 and
2001:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
(In Thousands, except share amounts) 2002 2001 2002 2001
---- ---- ---- ----
Basic EPS Computation:
Numerator - income available to common
shareholders $ 377 228 $ 664 371
------------ ------------ ------------ ------------
Denominator - weighted average number
of common shares outstanding 1,565,271 1,560,271 1,565,271 1,560,271
------------ ------------ ------------ ------------
Basic earnings per common share $ .24 .15 $ .42 .24
============ ============ ============ ============
Diluted EPS Computation:
Numerator - income available to common
shareholders $ 377 228 $ 664 371
------------ ------------ ------------ ------------
Denominator:
Weighted average number of common
shares outstanding 1,565,271 1,560,271 1,565,271 1,560,271
Dilutive effect of stock options 33,532 47,315 27,850 49,773
------------ ------------ ------------ ------------
1,598,803 1,607,586 1,593,121 1,610,044
------------ ------------ ------------ ------------
Diluted earnings per common share $ .24 .14 $ .42 .23
============ ============ ============ ============
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Company's liquidity, capital resources or operations.
19
CAPITAL BANCORP, INC.
FORM 10-Q, CONTINUED
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
IMPACT OF INFLATION
The primary impact which inflation has on the results of the Company's
operations is evidenced by its effects on interest rates. Interest rates tend to
reflect, in part, the financial market's expectations of the level of inflation
and, therefore, will generally rise or fall as the level of expected inflation
fluctuates. To the extent interest rates paid on deposits and other sources of
funds rise or fall at a faster rate than the interest income earned on funds,
loans or invested, net interest income will vary. Inflation also affects
non-interest expenses as goods and services are purchased, although this has not
had a significant effect on net earnings in recent years. If the inflation rate
stays flat or increases slightly, the effect on profits is not expected to be
significant.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately affect both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity such as Federal funds sold or purchased and loans, securities and
deposits. Based upon the nature of the Company's current operations, the Company
is not presently subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings
risk associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the Company
meets periodically to analyze the rate sensitivity position. Such meetings are
intended to focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments.
Managing interest rate risk is a very subjective exercise based on a
wide variety of factors. This activity is based significantly on management's
subjective beliefs about future events (such as actions of the Federal Reserve
Board and the conduct of competitors) and is never guaranteed.
There are no known material changes in reported market risks during the
six months ended June 30, 2002 known to management. Please refer to Item 2 of
Part I of this Report for additional information related to market and other
risks.
20
CAPITAL BANCORP, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) None.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held April 18, 2002.
(b) Election of the following member of the board of directors:
R. Rick Hart
(c) (1) The above director was elected by the following
tabulation:
Number
of Shares Broker
Voting For Against Abstain Non-Votes
------ --- ------- ------- ---------
R. Rick Hart 1,188,596 1,178,146 - 10,450 -
(2) The election of Maggart & Associates, P.C. as
independent auditors for the Company was as follows:
Number
of Shares Broker
Voting For Against Abstain Non-Votes
------ --- ------- ------- ---------
1,188,596 1,180,646 1,000 6,950 -
(d) Not Applicable.
21
CAPITAL BANCORP, INC.
PART II. OTHER INFORMATION, CONTINUED
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99.1 consists of certifications required by Section
906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed a Report on Form 8-K on April 12, 2002
reporting the Company's press release to the public regarding
earnings.
22
CAPITAL BANCORP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CAPITAL BANCORP, INC
-----------------------------------------
(Registrant)
DATE: August 13, 2002 /s/ R. Rick Hart
-------------------------- -----------------------------------------
R. Rick Hart, President and
Chief Executive Officer
DATE: August 13, 2002 /s/ Sally P. Kimble
-------------------------- -----------------------------------------
Sally P. Kimble, Sr. Vice President and
Chief Financial Officer
23