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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

MARK ONE

Commission File Number 333-56682

CAPITAL BANCORP, INC.

1820 West End Avenue, Nashville, TN 37203

(615) 327-9000

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 November 4, 2002.

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CAPITAL BANCORP, INC.

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CAPITAL BANCORP, INC.

Consolidated Balance Sheets

September 30, 2002 and December 31, 2001

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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CAPITAL BANCORP, INC.

Consolidated Statements of Earnings

Three Months and Nine Months Ended September 30, 2002 and 2001

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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CAPITAL BANCORP, INC.

Consolidated Statements of Comprehensive Earnings

Three Months and Nine Months Ended September 30, 2002 and 2001

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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CAPITAL BANCORP, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2002 and 2001

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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CAPITAL BANCORP, INC.

Consolidated Statements of Cash Flows, Continued

Nine Months Ended September 30, 2002 and 2001

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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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 September 30, 2002 and December 31, 2001, the results of operations for the three months and nine months ended September 30, 2002 and 2001, comprehensive earnings for the three months and nine months ended September 30, 2002 and 2001 and changes in cash flows for the nine months ended September 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.

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CAPITAL BANCORP, INC.

FORM 10-Q

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 impact 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.

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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 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 can not 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 rates, prepayment risk, the need or desire to increase capital and similar economic factors. Securities totaling approximately $1.7 million (4.0% of the portfolio) mature or reprice within the next twelve months.

     A secondary source of liquidity is the Company’s loan portfolio. At September 30, 2002 loans of approximately $95.2 million (55.9% 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 structuring adjustable rate loans.

     As for liabilities, certificates of deposit of $100,000 or greater totaling approximately $27.6 million (28.5% of the time deposit portfolio) will become due during the next twelve months. The Company’s deposit base increased approximately $34.0 million during the nine months ended September 30, 2002. The increase in deposits consists of a $3.1 million decrease in transactional accounts and a $37.1 million increase in time deposits. Advances from the Federal Home Loan Bank increased to $25.8 million at September 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.

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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 the new 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 7.8% at September 30, 2002 and 9.1% at December 31, 2001. Total assets increased 27.8% during the nine months ended September 30, 2002. The annualized rate of return on stockholders’ equity for the nine months ended September 30, 2002 was 8.3% compared to 5.2% for the comparable period in 2001. The Bank’s capital at September 30, 2002 of $18,043,000 results from beginning capital of $16,521,000 plus net earnings of $1,122,000, plus an increase in unrealized gains on available-for-sale securities of $400,000. 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 September 30, 2002 the Bank has a Tier 1 risk-based ratio of 10.2%, a total capital to risk-based ratio of 11.4% and a Tier 1 leverage ratio of 8.0%. These ratios fell within the category of “well capitalized” under the regulations.

     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 September 30, 2002.

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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

     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 nine months ended September 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:

     In addition, 9,500 options were issued to employees at an exercise price of $12.75 during the first six months of 2002, 500 options were issued to an employee at an exercise price of $15.30 and 4,000 options at an exercise price of $19.00 have expired due to termination of employment of one employee. The Company at September 30, 2002, has granted the right to purchase 129,000 shares of stock to its officers and employees at an exercise price ranging from $12.75 to $15.30 and 130,000 shares of stock to the Bank’s Directors and Organizers at an exercise price of $10.00 per share. At September 30, 2002, 232,400 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.

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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 $1,122,000 for the nine months ended September 30, 2002 as compared to $636,000 for the same period in 2001. Net earnings were $458,000 for the quarter ended September 30, 2002 as compared to $265,000 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 periods of volatility in interest.

     The Company’s interest income, excluding tax equivalent adjustments, decreased by $102,000 or 1.0% during the nine months ended September 30, 2002 as compared to the same period in 2001. Interest income for the quarter ended September 30, 2002 increased $217,000 or 6.4% over the quarter ended September 30, 2001 and increased $281,000 from the second quarter of 2002. The decrease over 2001 was primarily attributable to a decline in prevailing interest rates. The ratio of average earning assets to total average assets was 95.5% for the nine months ended September 30, 2002 and 94.1% for the nine months ended September 30, 2001.

     Interest expense decreased by $1,347,000 for the nine months ended September 30, 2002 or 26.2% to $3,798,000 compared to $5,145,000 for the same period in 2001. Interest expense for the quarter ended September 30, 2002 decreased $265,000 or 16.2% as compared to the quarter ended September 30, 2001. Interest expense for the quarter ended September 30, 2002 increased $126,000 or 10.1% compared to the quarter ended June 30, 2002. The decrease in interest expense for the nine months ended September 30, 2002 can be attributable primarily to a decline in prevailing interest rates.

     The foregoing resulted in net interest income of $6,221,000 for the nine months ended September 30, 2002, an increase of $1,245,000 or 25.0% compared to the same period in 2001. Net interest income for the quarter ended September 30, 2002 increased $482,000 or 27.7% over the third quarter of 2001 while there was an increase of $155,000 or 7.5% over the quarter ended June 30, 2002.

     The following schedule details the loans of the Company at September 30, 2002 and December 31, 2001:

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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 $57,746,000, $5,652,000 and $156,000, respectively at September 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 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 September 30, 2002, the Company had nonaccrual loans totaling $1,352,000 as compared to $1,268,000 at December 31, 2001.

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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 September 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 September 30, 2002 and December 31, 2001 were as follows:

     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 nine months ended September 30, 2002 and 2001 was $425,000 and $380,000, respectively. The related amount of interest income recognized on the accrual method for the period that such loans were impaired was approximately $27,000 and $26,000 for 2002 and 2001, respectively.

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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: