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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 SEPTEMBER 30, 2003
     
[    ]   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
Incorporation or Organization)
  (IRS Employer Identification No.)
 
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [  ]  NO [X]

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: 1,566,471 shares at November 7, 2003.

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TABLE OF CONTENTS

Consolidated Balance Sheets
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Earnings
Consolidated Statements of Cash Flows
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
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
EX-10.4 RETIREMENT PLAN AGREEMENT
EX-10.5 RETIREMENT PLAN AGREEMENT
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32 SECTION 906 CEO AND CFO CERTIFICATION


Table of Contents

CAPITAL BANCORP, INC.

             
Part I:       Financial Information
    Item 1.   Financial Statements
    The unaudited consolidated financial statements of the Company and its subsidiaries are as follows:
        Consolidated Balance Sheets – September 30, 2003 and December 31, 2002.
        Consolidated Statements of Earnings - For the three months and nine months ended September 30, 2003 and 2002.
        Consolidated Statements of Comprehensive Earnings - For the three months and nine months ended September 30, 2003 and 2002.
        Consolidated Statements of Cash Flows - For the nine months ended September 30, 2003 and 2002.
    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
 
    Item 4.   Controls and Procedures
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    

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CAPITAL BANCORP, INC.

Consolidated Balance Sheets

September 30, 2003 and December 31, 2002

(Unaudited)

                         
            (In Thousands)
           
            September 30,   December 31,
            2003   2002
           
 
       
ASSETS
               
Loans, net of allowance for possible loan losses of $2,911,000 and $2,535,000, respectively
  $ 192,761       173,385  
Securities available-for-sale, at market (amortized cost $45,116,000 and $44,330,000, respectively)
    45,440       45,144  
Loans held for sale
    1,797       5,769  
Interest-bearing deposits in financial institutions
    251       251  
Federal funds sold
    3,240        
 
   
     
 
   
Total earning assets
    243,489       224,549  
 
   
     
 
Cash and due from banks
    5,636       5,160  
Premises and equipment, net of accumulated depreciation
    4,988       5,060  
Accrued interest receivable
    1,097       1,107  
Deferred income taxes
    734       546  
Other real estate
          505  
Other assets
    4,995       2,478  
 
   
     
 
   
Total assets
  $ 260,939       239,405  
 
   
     
 
     
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits
  $ 213,222       189,895  
Securities sold under repurchase agreements
    1,802       3,222  
Accrued interest and other liabilities
    1,340       1,249  
Advances from Federal Home Loan Bank
    24,592       25,787  
Federal funds purchased
          620  
 
   
     
 
   
Total liabilities
    240,956       220,773  
 
   
     
 
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, 1,566,471 and 1,565,271 shares issued and outstanding, respectively
    6,266       6,261  
 
Additional paid-in capital
    5,920       5,909  
 
Retained earnings
    7,597       5,960  
 
Net unrealized gains on available-for-sale securities, net of income tax expense of $124,000 and $311,000, respectively
    200       502  
 
   
     
 
   
Total stockholders’ equity
    19,983       18,632  
 
   
     
 
COMMITMENTS AND CONTINGENCIES
               
   
Total liabilities and stockholders’ equity
  $ 260,939       239,405  
 
   
     
 

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, 2003 and 2002

(Unaudited)

                                       
          Three Months Ended   Nine Months Ended
          September 30,   September 30,
         
 
          2003   2002   2003   2002
         
 
 
 
          (Dollars In Thousands   (Dollars In Thousands
          Except Per Share Amounts)   Except Per Share Amounts)
         
 
Interest income:
                               
 
Interest and fees on loans
  $ 3,321       3,106     $ 9,668       8,864  
 
Interest and dividends on securities:
                               
   
Taxable securities
    294       418       1,068       956  
   
Exempt from Federal income taxes
    37       21       105       49  
 
Interest on loans held for sale
    80       41       174       78  
 
Interest on Federal funds sold
    11       9       17       58  
 
Interest on interest-bearing deposits in financial institutions
    4       4       13       14  
 
   
     
     
     
 
     
Total interest income
    3,747       3,599       11,045       10,019  
 
   
     
     
     
 
Interest expense:
                               
 
Interest on savings accounts
    2       4       7       9  
 
Interest on negotiable order of withdrawal accounts
    6       14       21       40  
 
Interest on money market accounts
    167       271       571       837  
 
Interest on certificates of deposit over $100,000
    482       497       1,454       1,318  
 
Interest on certificates of deposit – other
    351       307       1,033       936  
 
Interest on securities sold under repurchase agreements
    4       12       20       37  
 
Interest on Federal funds purchased
    8       9       28       9  
 
Interest on advances from Federal Home Loan Bank
    269       260       818       612  
 
   
     
     
     
 
     
Total interest expense
    1,289       1,374       3,952       3,798  
 
   
     
     
     
 
Net interest income before provision for possible loan losses
    2,458       2,225       7,093       6,221  
Provision for possible loan losses
    274       298       817       745  
 
   
     
     
     
 
Net interest income after provision for possible loan losses
    2,184       1,927       6,276       5,476  
 
   
     
     
     
 
Non-interest income:
                               
 
Service charges on deposit accounts
    287       272       792       734  
 
Other fees and commissions
    90       44       245       123  
 
Gain on sale of loans
    477       206       1,100       398  
 
Gain on sale of securities
    5             6       1  
 
   
     
     
     
 
     
Total non-interest income
    859       522       2,143       1,256  
 
   
     
     
     
 
Non-interest expenses:
                               
 
Employee salaries and benefits
    1,104       951       3,284       2,735  
 
Occupancy expenses
    188       190       573       562  
 
Furniture and equipment expenses
    117       97       334       275  
 
Data processing expense
    61       52       173       153  
 
Professional fees
    80       45       181       100  
 
FDIC insurance and state banking fees
    21       17       61       52  
 
Legal fees and expenses
    34       60       134       131  
 
Other operating expenses
    399       322       1,103       918  
 
Loss on sale of other real estate
                16       19  
 
Loss on disposal of fixed assets
                      2  
 
   
     
     
     
 
     
Total non-interest expense
    2,004       1,734       5,859       4,947  
 
   
     
     
     
 
     
Earnings before income taxes
    1,039       715       2,560       1,785  
Income taxes
    371       257       923       663  
 
   
     
     
     
 
     
Net earnings
  $ 668       458     $ 1,637       1,122  
 
 
   
     
     
     
 
Basic earnings per common share
  $ .43       .29     $ 1.05       .72  
 
 
   
     
     
     
 
Diluted earnings per common share
  $ .40       .28     $ .99       .70  
 
 
   
     
     
     
 

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, 2003 and 2002

(Unaudited)

                                     
        Three Months Ended   Nine Months Ended
        September 30,   September 30,
       
 
        2003   2002   2003   2002
       
 
 
 
        (In Thousands)   (In Thousands)
Net earnings
  $ 668       458     $ 1,637       1,122  
 
   
     
     
     
 
Other comprehensive earnings (losses) net of tax:
                               
 
Unrealized gains on available-for-sale securities arising during period, net of taxes of $143,000, $117,000, $185,000 and $245,000, respectively
    (231 )     191       (298 )     401  
 
Less: reclassification adjustment for gains included in net earnings, net of taxes
    (3 )           (4 )     (1 )
 
   
     
     
     
 
   
Other comprehensive earnings (losses)
    (234 )     191       (302 )     400  
 
   
     
     
     
 
   
Comprehensive earnings
  $ 434       649     $ 1,335       1,522  
 
   
     
     
     
 

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, 2003 and 2002

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

                     
        (In Thousands)
       
        2003   2002
       
 
Cash flows from operating activities:
               
 
Interest received
  $ 11,436       9,785  
 
Fees received
    1,037       857  
 
Interest paid
    (3,973 )     (3,793 )
 
Cash paid to suppliers and employees
    (5,773 )     (4,726 )
 
Proceeds from loan sales
    64,727       28,961  
 
Originations of loans held for sale
    (59,655 )     (31,119 )
 
Income taxes paid
    (1,063 )     (961 )
 
 
   
     
 
   
Net cash provided by (used in) operating activities
    6,736       (996 )
 
 
   
     
 
Cash flows from investing activities:
               
 
Proceeds from maturities of available-for-sale securities
    27,749       7,316  
 
Purchase of available-for-sale securities
    (39,965 )     (26,651 )
 
Proceeds from sales of available-for-sale securities
    11,055        
 
Loans made to customers, net of repayments
    (20,193 )     (30,516 )
 
Purchase of premises and equipment
    (263 )     (62 )
 
Increase in interest-bearing deposits in financial institutions
          (410 )
 
Expenditures on other real estate
    (4 )      
 
Proceeds from sale of other real estate
    493       716  
 
Purchase of life insurance
    (2,000 )      
 
Increase in other earning assets
          (647 )
 
 
   
     
 
   
Net cash used in investing activities
    (23,128 )     (50,254 )
 
 
   
     
 
Cash flows from financing activities:
               
 
Net increase (decrease) in non-interest bearing, savings and NOW deposit accounts
    8,875       (3,122 )
 
Net increase in time deposits
    14,452       37,155  
 
Net increase (decrease) in securities sold under repurchase agreements
    (1,420 )     233  
 
Net increase (decrease) in advances from Federal Home Loan Bank
    (1,195 )     14,834  
 
Net decrease in Federal funds purchased
    (620 )      
 
Proceeds from exercise of stock options
    16        
 
 
   
     
 
   
Net cash provided by financing activities
    20,108       49,100  
 
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    3,716       (2,150 )
Cash and cash equivalents at beginning of period
    5,160       6,490  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 8,876       4,340  
 
 
   
     
 

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, 2003 and 2002

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

                         
            (In Thousands)
           
            2003   2002
           
 
Reconciliation of net earnings to net cash provided by (used in) operating activities:
               
   
Net earnings
  $ 1,637       1,122  
   
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
               
     
Depreciation, amortization and accretion
    764       423  
     
Provision for possible loan losses
    817       745  
     
FHLB dividend reinvestment
    (48 )     (36 )
     
Gain on sale of securities
    (6 )     (1 )
     
Loss on sale of other real estate
    16       19  
     
Decrease (increase) in loans held for sale
    3,972       (2,556 )
     
Increase in refundable income taxes
    (65 )      
     
Increase in other assets, net
    (452 )     (161 )
     
Decrease (increase) in accrued interest receivable
    10       (297 )
     
Increase in deferred tax asset
          (36 )
     
Loss on disposal of fixed assets
          2  
     
Decrease in accrued income taxes
    (75 )     (262 )
     
Increase in other liabilities
    187       37  
     
Increase (decrease) in interest payable
    (21 )     5  
   
 
   
     
 
       
Total adjustments
    5,099       (2,118 )
   
 
   
     
 
       
Net cash provided by (used in) operating activities
  $ 6,736       (996 )
   
 
   
     
 
Supplemental Schedule of Non-Cash Activities:
               
 
Unrealized gain (loss) on available-for-sale securities, net of income taxes of $187,000 and $245,000, respectively
  $ (302 )     400  
   
 
   
     
 
 
Non-cash transfers from loans to other real estate
  $       785  
   
 
   
     
 

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.

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, 2003 and December 31, 2002, the results of operations for the three months and nine months ended September 30, 2003 and 2002, comprehensive earnings for the three months and nine months ended September 30, 2003 and 2002 and changes in cash flows for the nine months ended September 30, 2003 and 2002. 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, 2002 Annual Report to Stockholders. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year. Interim results are subject to customary year-end adjustments.

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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

     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, 2002 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, project, assume, assumption, 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 the 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. Except as may be expressly required by applicable law, the Company does not undertake - and specifically disclaims any plan or obligation - - to publicly release the result of any revisions that may be made to any forward-looking statements to reflect actual events, changes, 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 $279,000 (0.6% 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, 2003 loans of approximately $106.1 million (55.0% 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 $51.9 million (45.7% of the time deposit portfolio) will become due during the next twelve months. The Company’s deposit base increased approximately $23.3 million during the nine months ended September 30, 2003. The increase in deposits consists of a $8.9 million increase in transactional accounts and a $14.4 million increase in time deposits. Advances from the Federal Home Loan Bank decreased to $24.6 million at September 30, 2003 from $25.8 million at December 31, 2002.

     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 these locations to continue 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 7.7% at September 30, 2003 and 7.8% at December 31, 2002. Total assets increased 9.0% during the nine months ended September 30, 2003. The annualized rate of return on stockholders’ equity for the nine months ended September 30, 2003 was 10.9% compared to 8.3% for the comparable period in 2002. The Company’s capital at September 30, 2003 of $19,983,000 results from beginning capital of $18,632,000 plus net earnings of $1,637,000, plus a decrease in unrealized gains on available-for-sale securities of $302,000, plus proceeds of $16,000 related to the exercise of stock options. 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 Company and its subsidiary. 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 Company and its subsidiary 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, 2003 the Bank has a Tier 1 risk-based ratio of 9.8%, a total capital to risk-based ratio of 11.1% and a Tier 1 leverage ratio of 7.6%. These ratios fell within the category of “well capitalized” under the regulations.

     In view of the continued growth of the Company, the Company is considering various measures for raising additional capital to support anticipated future growth.

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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

     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, 2003.

     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 become fully vested at the time of their exchange for Company stock options.)

     During the quarter ended March 31, 2002, the Board of Directors of the Company and the optionees agreed to a restructuring of the Company’s outstanding options. A summary of options activity for directors, former directors, the four senior officers and others is more fully described in the Company’s December 31, 2002 Annual Report to Stockholders. During the nine months ended September 30, 2003, employees were issued options totaling 1,000 shares, employees exercised 1,200 shares of options, and the remaining 800 shares of one employee’s options were forfeited upon his termination of employment. Forfeited options may be reissued by the Company in accordance with the Company’s stock option plan. At September 30, 2003, the Company has granted the right to purchase 126,500 shares of stock to its officers and employees at an exercise price of $12.75, 500 shares to its officers and employees at an exercise price of $15.30, 1,500 shares to its officers and employees at an exercise price of $16.00, 1,000 shares to its officers and employees at an exercise price of $21.00 and 130,000 shares of stock to the Bank’s Directors at an exercise price of $10.00 per share. At September 30, 2003, 239,800 shares were exercisable.

     Under the Stock Option Plan, stock option awards may be granted in the form of incentive stock options or nonstatutory stock options, and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.

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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

     Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock Based Compensation”, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure”, sets forth the methods for recognition of cost of plans similar to those of the Company. As is permitted, management has elected to continue accounting for the plan under APB Opinion 25 and related Interpretations in accounting for its plan. However, under SFAS No. 123, the Company is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company’s net earnings, basic earnings per common shares and diluted earnings per common share would have been reduced to the proforma amounts indicated below.

                                           
              In Thousands,
              Except Per Share Amounts
             
              Three Months Ended   Nine Months Ended
              September 30,   September 30,
             
 
              2003   2002   2003   2002
             
 
 
 
Net earnings
  As Reported   $ 668       458     $ 1,637       1,122  
 
  Proforma   $ 667       438     $ 1,634       1,102  
Basic earnings per common share
  As Reported   $ .43       .29     $ 1.05       .72  
 
 
  Proforma   $ .43       .28     $ 1.04       .71  
Diluted earnings per common share
  As Reported   $ .40       .28     $ .99       .70  
 
 
  Proforma   $ .40       .27     $ .99       .69  

     The Company uses the fair value method to calculate the compensation reported in the proforma earnings. The compensation cost for 2002 related to the grant of stock options includes all grants made in 2002 plus the impact of changes to option terms as setforth above. The fair value of options for 2002 ranged from $0.20 to $1.48 for each option. The fair value for 2002 was estimated using the Black-Scholes option-pricing model using the following assumptions: risk free interest rate ranging from 3.56% to 5.11%; expected life of ten years; and dividend yield ranging from 2.95% to 4.70%. The dividend yield was computed assuming a 15% return on equity with a 30% dividend to earnings payout ratio.

Bank Owned Life Insurance

     In 2002, the Board of Directors of Capital Bank voted to purchase bank owned life insurance (“BOLI”) policies to finance certain proposed employee benefits. Neither the Company nor the Bank provides a pension plan for its key employees. Based on the Bank’s research, BOLI is a widely used tool intended to benefit the Bank and to enable to Bank to provide cost-effective benefits for employees. The Bank treats BOLI life insurance products as bank investments.

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Table of Contents

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Bank Owned Life Insurance, Continued

     In response to the opportunities that the Bank’s Board believed to be available by the use of BOLI policies, and in order to assure to the extent possible the continued service of Messrs. R. Rick Hart and John W. Gregory, Jr., the Bank bought two single-premium BOLI policies for an aggregate purchase price of $2,000,000 in August, 2003 to fund non-ERISA retirement (and other) benefits to these two executive officers and directors. These benefits will be provided in the form of supplemental executive retirement plan (SERP) agreements that the Bank signed with Messrs. Hart and Gregory in August of 2003. The Bank now owns the BOLI policies (including both the cash value and all increases in the cash value).

     The BOLI policies are being carried on the Bank’s balance sheet as investments. Anticipated increases in cash value, as well as death benefits received in the unfortunate event of the death of either of these employees, will be treated as “other income” on the Bank’s income statement. The income booked form the increases in anticipated cash value of the policies can help offset other Bank expenses. There are certain inherent risks in such investments that we considered by the Board, but the Board perceived that the advantages outweighed the risks.

     Please refer to the BOLI discussion in the Company’s most recent proxy statement furnished to Shareholders and as filed with the Securities and Exchange Commission.

Results of Operations

     Net earnings were $1,637,000 for the nine months ended September 30, 2003 as compared to $1,122,000 for the same period in 2002. Net earnings were $668,000 for the quarter ended September 30, 2003 as compared to $458,000 during the same quarter in 2002.

     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, increased by $1,026,000 or 10.2% during the nine months ended September 30, 2003 as compared to the same period in 2002. Interest income for the quarter ended September 30, 2003 increased $148,000 or 4.1% over the quarter ended September 30, 2002 and increased $40,000 from the second quarter of 2003. The ratio of average earning assets to total average assets was 94.3% for the nine months ended September 30, 2003 and 95.5% for the nine months ended September 30, 2002.

     Interest expense increased by $154,000 for the nine months ended September 30, 2003 or 4.1% to $3,952,000 compared to $3,798,000 for the same period in 2002. Interest expense for the quarter ended September 30, 2003 decreased $85,000 or 6.2% as compared to the quarter ended September 30, 2002. Interest expense for the quarter ended September 30, 2003 decreased $58,000 or 4.3% compared to the quarter ended June 30, 2003.

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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 foregoing resulted in net interest income of $7,093,000 for the nine months ended September 30, 2003, an increase of $872,000 or 14.0% compared to the same period in 2002. Net interest income for the quarter ended September 30, 2003 increased $233,000 or 10.5% over the third quarter of 2002 while there was an increase of $98,000 or 4.2% over the quarter ended June 30, 2003.

     The following schedule details the loans of the Company at September 30, 2003 and December 31, 2002.

                 
    (In Thousands)
   
    September 30,   December 31,
    2003   2002
   
 
Commercial, financial & agricultural
  $ 103,793       88,406  
Real estate – construction
    16,709       21,488  
Real estate – mortgage
    69,002       60,260  
Consumer
    6,168       5,766  
 
   
     
 
 
  $ 195,672       175,920  
 
   
     
 

     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 other revolving credit plans which total approximately $63,324,000, $6,033,000 and $135,000, respectively at September 30, 2003, 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.

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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 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, 2003, the Company had nonaccrual loans totaling $1,591,000 as compared to $1,306,000 at December 31, 2002.

     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, 2003, 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, 2003 and December 31, 2002 were as follows:

                                 
    September 30, 2003   December 31, 2002
   
 
            Allowance           Allowance
    Recorded   for   Recorded   for
(In Thousands)   Investment   Loan Loss   Investment   Loan Loss
   
 
 
 
Impaired loans with allowance for loan loss
  $ 1,494       378     $ 1,150       290  
Impaired loans with no allowance for loan loss
                       
 
   
     
     
     
 
 
  $ 1,494       378     $ 1,150       290  
 
   
     
     
     
 

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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 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, 2003 and 2002 was $861,000 and $425,000, respectively. The related amount of interest income recognized on the accrual method for the period that such loans were impaired was approximately $47,000 and $27,000 for 2003 and 2002, respectively.

     The following schedule details selected information as to non-performing loans of the Company:

                                 
    September 30, 2003   December 31, 2002
   
 
    Past Due           Past Due        
    90 Days   Non-Accrual   90 Days   Non-Accrual
   
 
 
 
    (In Thousands)   (In Thousands)
Real estate - construction
  $       295     $       246  
Real estate - mortgage
    266       755       149       764  
Consumer
    13       23       53        
Commercial
    90       518       82       296  
 
   
     
     
     
 
 
  $ 369       1,591     $ 284       1,306  
 
   
     
     
     
 
Renegotiated loans
  $           $        
 
   
     
     
     
 

     Transactions in the allowance for loan losses were as follows:

                   
      Nine Months Ended
      September 30,
     
      2003   2002
     
 
      (In Thousands)
Balance, January 1, 2003 and 2002, respectively
  $ 2,535       2,122  
Add (deduct):
               
 
Losses charged to allowance
    (502 )     (506 )
 
Recoveries credited to allowance
    61       28  
 
Provision for loan losses
    817       745  
 
   
     
 
Balance, September 30, 2003 and 2002, respectively
  $ 2,911       2,389  
 
   
     
 

     The provision for loan losses was $817,000 and $745,000 for the first nine months of 2003 and 2002, 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. From time to time unscheduled developments, including requirements of bank regulatory agencies, may require additional contributions to the reserve.

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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 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 quarterly 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 quarterly assessment. The review is presented to and subsequently approved by the Board of Directors.

     The following tables present internally classified loans as of September 30, 2003 and December 31, 2002:

                                 
    September 30, 2003
   
    (In Thousands)   Special                
    Total   Mention   Substandard   Doubtful
   
 
 
 
Commercial, financial and agricultural
  $ 1,817       198       1,604       15  
Real estate construction
                       
Real estate mortgage
    1,306       314       992        
Consumer
    267       35       232        
 
   
     
     
     
 
 
  $ 3,390       547       2,828       15  
 
   
     
     
     
 
                                 
    December 31, 2002
   
    (In Thousands)   Special                
    Total   Mention   Substandard   Doubtful
   
 
 
 
Commercial, financial and agricultural
  $ 1,128             1,072       56  
Real estate construction
                       
Real estate mortgage
    2,341             2,341        
Consumer
    350       48       302        
 
   
     
     
     
 
 
  $ 3,819       48       3,715       56  
 
   
     
     
     
 

     The collateral values, based on estimates received by management, securing these loans total approximately $3,496,000 ($2,135,000 related to real property and $1,361,000 related to commercial and other loans) at September 30, 2003. 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 impact future operating results, liquidity or capital resources.

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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

     Residential real estate loans that are graded substandard totaling $992,000 and $2,341,000 at September 30, 2003 and December 31, 2002 consist of twelve and thirty-three 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 $314,000 at September 30, 2003, consist of six 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:

                                 
    September 30, 2003   December 31, 2002
   
 
            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
  $ 1,892       53.0 %   $ 1,648       50.3 %
Real estate construction
    393       8.5       342       12.2  
Real estate mortgage
    393       35.3       342       34.2  
Consumer
    233       3.2       203       3.3  
 
   
     
     
     
 
 
  $ 2,911       100.0 %   $ 2,535       100.0 %
 
   
     
     
     
 

     There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at September 30, 2003 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.

     Securities totaled $45,440,000 and $45,144,000 at September 30, 2003 and December 31, 2002, respectively, and was a primary component of the Company’s earning assets. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), “Accounting for Certain Investments in Debt and Equity Securities”. Under the provisions of the Statement, securities are to be classified in three categories and accounted for as follows:

    Debt securities for which the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized costs.
 
    Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
 
    Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity.

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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 Company’s classification of securities is as follows:

                                 
    Available-for-Sale
   
    September 30, 2003   December 31, 2002
   
 
            Estimated           Estimated
    Amortized   Market   Amortized   Market
    Cost   Value   Cost   Value
   
 
 
 
U.S. Treasury and other U.S. Government agencies and corporations
  $ 22,589       22,732     $ 14,218       14,466  
Mortgage-backed securities
    16,264       16,439       26,190       26,701  
Obligations of states and political subdivisions
    4,418       4,424       2,125       2,180  
Other securities
    1,845       1,845       1,797       1,797  
 
   
     
     
     
 
 
  $ 45,116       45,440     $ 44,330       45,144  
 
   
     
     
     
 

     No securities have been classified as trading or held-to-maturity securities.

     Non-interest income increased $887,000 or 70.6% to $2,143,000 during the nine months ended September 30, 2003 compared to $1,256,000 for the same period in 2002. Non-interest income increased $337,000 or 64.6% for the quarter ended September 30, 2003 as compared to the comparable quarter in 2002. The increase in 2003 has been due primarily to an increase in gain on sales of loans during the first nine months of 2003 compared to 2002.

     Non-interest expense increased $912,000 or 18.4% to $5,859,000 during the first nine months of 2003 compared to $4,947,000 during the same period in 2002. There was an increase of $270,000 or 15.6% for the three months ended September 30, 2003 as compared to the same period in 2002 and a $70,000 increase or 3.6% from $1,934,000 for the quarter ended June 30, 2003. The increase in 2003 was due primarily to increases in salaries and employee benefits and other operating expenses. These increases relate principally to costs associated with opening new branches and increased commissions paid to the mortgage department due to increased production of mortgage loans due to the favorable rate environment.

     Income taxes were $923,000 for the first nine months of 2003 as compared to $663,000 for the first nine months of 2002. Taxes were $371,000 for the quarter ended September 30, 2003 as compared to $257,000 for the same period in 2002.

     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 basic earnings per share plus the effect of common shares contingently issuable from stock options.

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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 is a summary of components comprising basic and diluted earnings per share (EPS) for the three and nine months ended September 30, 2003 and 2002:

                                     
        Three Months Ended   Nine Months Ended
        September 30,   September 30,
       
 
(In Thousands, except share amounts)   2003   2002   2003   2002
   
 
 
 
Basic EPS Computation:
                               
 
Numerator - income available to common shareholders
  $ 668       458     $ 1,637       1,122  
 
 
   
     
     
     
 
 
Denominator - weighted average number of common shares outstanding
    1,565,982       1,565,271       1,565,941       1,565,271  
 
 
   
     
     
     
 
 
Basic earnings per common share
  $ .43       .29     $ 1.05       .72  
 
 
   
     
     
     
 
Diluted EPS Computation:
                               
 
Numerator – income available to common shareholders
  $ 668       458     $ 1,637       1,122  
 
 
   
     
     
     
 
 
Denominator:
                               
   
Weighted average number of common shares outstanding
    1,565,982       1,565,271       1,565,941       1,565,271  
   
Dilutive effect of stock options
    103,465       53,798       90,000       42,535  
 
 
   
     
     
     
 
 
    1,669,447       1,619,069       1,655,941       1,607,806  
 
 
   
     
     
     
 
Diluted earnings per common share
  $ .40       .28     $ .99       .70  
 
 
   
     
     
     
 

     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.

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.

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CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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 impact 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 nine months ended September 30, 2003 known to management. Please refer to Item 2 of Part I of this Report for additional information related to market and other risks.

Item 4: Controls and Procedures

     Within 90 days prior to the date of filing of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company required to be included in our periodic SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.

     There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.

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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)   None.
 
  (b)   Not applicable.
 
  (c)   Not applicable.
 
  (d)   Not applicable.

Item 5. OTHER INFORMATION

          None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

  (a)(1)   Exhibits 10.4 and 10.5 consist of Supplemental Executive Retirement Plan Agreements.
 
  (2)   Exhibits 31.1 and 31.2 consist of Rule 13a-14(a)/15d-14(a) certifications.
 
  (3)   Exhibit 32 consists of Section 1350 certifications.
 
  (b)   The Company filed a Current Report on Form 8-K on October 8, 2003 reporting the Company’s press release to the public regarding earnings.

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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: November 7, 2003   /s/   R. Rick Hart
   
    R. Rick Hart, President and
    Chief Executive Officer
         
DATE: November 7, 2003   /s/   Sally P. Kimble
   
    Sally P. Kimble, Sr. Vice President and
    Chief Financial Officer

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