UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

MARK ONE

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

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 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: 1,657,404 shares at August 9, 2004

1

CAPITAL BANCORP, INC.

2

CAPITAL BANCORP, INC.

Consolidated Balance Sheets

June 30, 2004 and December 31, 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

3

CAPITAL BANCORP, INC.

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2004 and 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

4

CAPITAL BANCORP, INC.

Consolidated Statements of Comprehensive Earnings

Three Months and Six Months Ended June 30, 2004 and 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

5

CAPITAL BANCORP, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2004 and 2003

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

6

CAPITAL BANCORP, INC.

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2004 and 2003

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

7

CAPITAL BANCORP, INC.

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Capital Bancorp, Inc. (Company), Capital Bank & Trust Company (Bank), its wholly-owned subsidiary, and CBTC Corporation and Capital Housing Improvement Projects, Inc., wholly-owned subsidiaries of Capital Bank & Trust Company.

The accompanying consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the consolidated financial statements contain all adjustments and disclosures necessary to summarize fairly the financial position of the Company as of June 30, 2004 and December 31, 2003, the results of operations for the three months and six months ended June 30, 2004 and 2003, comprehensive earnings for the three months and six months ended June 30, 2004 and 2003 and changes in cash flows for the six months ended June 30, 2004 and 2003. 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, 2003 Annual Report to Stockholders. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year.

Stock Split and Elimination of Par Value

In May, 2004, the Company’s Board of Directors declared a two-for-one stock split effective July 30, 2004. As a result, shareholders of record at the close of business on July 30, 2004 will receive one additional share of common stock for each share of common stock held by them on that date. In addition, the Board authorized a charter amendment to eliminate “par value” effective July 2, 2004.

8

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

     The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its subsidiaries. This discussion should be read in conjunction with the consolidated financial statements. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for a more complete discussion of factors that affect liquidity, capital and the results of operations.

Forward-Looking Statements

     Management’s discussion of the Company, and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as expect, anticipate, forecast, and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, as well as other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information is to provide Form 10-Q readers with information relevant to understanding and assessing the financial conditions and results of operations of the Company, and not to predict the future or to guarantee results. The Company is unable to predict in any reliable manner all of the types of circumstances, conditions, and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or of unanticipated events, circumstances, or results.

Liquidity and Interest Rate Sensitivity Management

     The concept of liquidity involves the ability of the Company to meet future cash flow requirements, particularly those of customers who are either withdrawing funds from their accounts or borrowing to meet their credit needs.

     Proper asset/liability management is designed to maintain stability in the balance of interest-sensitive assets to interest-sensitive liabilities in order to provide a stable growth in net interest margins. Earnings on interest-sensitive assets such as loans tied to the prime rate of interest and federal funds sold, may vary considerably from fixed rate assets such as long-term investment securities and fixed rate loans. Interest-sensitive liabilities such as large certificates of deposit and money market certificates, generally require higher costs than fixed rate instruments such as savings accounts.

9

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Liquidity and Interest Rate Sensitivity Management, Continued

     The Company maintains a formal asset and liability management process designed to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines. (Please refer to Item 3 for additional information.)

     Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income cannot be precisely estimated nor can the impact of higher or lower interest rates on net interest income be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management’s strategies, among other factors.

     Banks, in general, must maintain large cash balances to meet day-to-day cash flow requirements as well as maintaining required reserves for regulatory agencies. The cash balances maintained are the primary source of liquidity. Federal funds sold, which are basically overnight or short-term loans to other banks that increase the other bank’s required reserves, are also a major source of liquidity.

     The Company’s investment portfolio consists of earning assets that provide interest income. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. Securities totaling approximately $3.2 million (5.3% of the portfolio) are presently scheduled to mature or reprice within the next twelve months.

     A secondary source of liquidity is the Company’s loan portfolio. At June 30, 2004 loans of approximately $126.9 million (56.0% 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 $51.5 million (40.2% of the time deposit portfolio) will mature during the next twelve months. The Company’s deposit base increased approximately $29.4 million during the six months ended June 30, 2004. The increase in deposits consists of a $16.0 million increase in transactional accounts and a $13.4 million increase in time deposits. Advances from the Federal Home Loan Bank decreased to $23.7 million at June 30, 2004 from $24.5 million at December 31, 2003. Federal funds purchased decreased to $2.2 million at June 30, 2004 from $9.2 million at December 31, 2003.

10

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Liquidity and Interest Rate Sensitivity Management, Continued

     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 or higher interest rates paid by compatible or similar accounts could have an impact on the level of these accounts.

     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 branches in Sumner County and Eastern Davidson County and expects these locations to have a favorable impact on the deposit base. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonable likely to result in the Company’s liquidity changing in any material way.

Capital Resources

     A primary source of capital is internal growth through retained earnings. The ratio of stockholders’ equity to total assets was 7.0% at June 30, 2004 and 7.4% at December 31, 2003. Total assets increased 8.1% during the six months ended June 30, 2004. The annualized rate of return on stockholders’ equity for the six months ended June 30, 2004 was 12.0% compared to 9.9% for the comparable period in 2003. The Company’s capital at June 30, 2004 of $21,302,000 results from beginning capital of $20,843,000, plus net earnings of $1,280,000, less a net decrease in unrealized gains on available-for-sale securities of $861,000 plus proceeds of $40,000 related to the exercise of stock options.

     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 June 30, 2004 the Bank has a Tier 1 risk-based ratio of 9.2%, a total capital to risk-based ratio of 10.4% and a Tier 1 leverage ratio of 7.3%. These ratios fell within the category of “well capitalized” under the regulations.

11

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Capital Resources, Continued

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

     The Federal Reserve Board imposes consolidated capital guidelines on bank holding companies which have more than $150 million in consolidated assets. These guidelines require bank holding companies to maintain consolidated capital ratios which are essentially the same as the minimum capital levels required for state banks. The Company’s consolidated capital ratios were substantially the same as those set forth above for the Bank, and exceeded the minimums required under these Federal Reserve Board guidelines at June 30, 2004.

Stock Option Plan

     In March of 2001, the Company’s stockholders approved the Capital Bancorp, Inc. 2001 Stock Option Plan which provides for the grant of options to purchase 500,000 shares of the Company’s stock. The Company agreed with the Bank that it would exchange its options to the holders of stock options under the Bank’s stock option plan on an option-for-option basis. Thus options that were outstanding under the Bank’s stock option plan have been exchanged for options under the Company’s stock option plan. It is intended that the holders of the Bank’s options will be able to exercise their options on exactly the terms and conditions that they could have exercised Bank stock options. Thus substantially identical vesting, exercise price, and all other material terms of exercise have been grafted on the stock options exchanged by Bank stock option holders. (Thus, for example, Bank stock options that were fully vested at the time that the Company acquired the Bank became fully vested at the time of their exchange for Company stock options.)

     During the six months ended June 30, 2004, two employees exercised 2,800 shares of their options and the remaining 1,200 shares of their options were forfeited upon termination of employment. Forfeited options may be reissued by the Company in accordance with the Company’s stock option plan. At June 30, 2004, the Company has granted the right to purchase 123,000 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, 2,500 shares of stock to its officers and employees at an exercise price of $19.90, 2,500 shares of stock to its officers and employees at an exercise price of $20.25, 500 shares of stock to its officers and employees at an exercise price of $21.00, 30,000 shares of stock to its officers and employees at an exercise price of $22.65, 500 shares of stock to its officers and employees at an exercise price of $21.25, 5,750 shares of stock to its officers and employees at an exercise price of $24.75, 3,500 shares of stock to its officers and employees at an exercise price of $25.75, 1,750 shares of stock to its officers and employees at an exercise price of $29.00 and 122,500 shares of stock to the Bank’s Directors at an exercise price of $10.00 per share. At June 30, 2004, 247,050 shares were exercisable.

     Subsequent to June 30, 2004, officers and employees have exercised 80,633 shares of their options with proceeds totaling approximately $1,048,000.

12

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Stock Option Plan, Continued

     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.

     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 share and diluted earnings per common share would have been reduced to the proforma amounts indicated below.

     The Financial Accounting Standards Board (FASB) has proposed a pronouncement that requires all companies to recognize compensation expense related to the issuance of stock options. However, implementation of this pronouncement has been delayed through Congressional action. The future of FASB’s pronouncement remains unknown, and it may not be finally determined until Congress determines whether to intervene legislatively in the method of accounting for stock options. If the Company is required to expense stock options, it will have a negative impact on earnings, the effect of which has not yet been determined.

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 the Bank to provide cost-effective benefits for employees. The Bank treats BOLI life insurance products as bank investments.

     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. In May, 2004, the Bank bought one single-premium BOLI policy for $315,000 to fund non-ERISA retirement (and other) benefits to Sally Kimble. 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 and with Ms. Kimble in May of 2004. 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 from the increases in anticipated cash value of the policies can help offset other Bank expenses. There are certain inherent risks in such investments that were considered by the Board, but the Board perceived that the advantages outweighed the risks.

Results of Operations

     Net earnings were $1,280,000 for the six months ended June 30, 2004 as compared to $969,000 for the same period in 2003. Net earnings were $677,000 for the quarter ended June 30, 2004 as compared to $487,000 during the same quarter in 2003.

     As in most financial institutions, a major element in analyzing the statement of earnings is net interest income which is the excess of interest earned over interest paid. The net interest margin could be materially affected during period of volatility in interest.

13

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

     The Company’s interest income, excluding tax equivalent adjustments, increased by $777,000 or 10.6% during the six months ended June 30, 2004 as compared to the same period in 2003. Interest income for the quarter ended June 30, 2004 increased $395,000 or 10.7% over the quarter ended June 30, 2003 and increased $4,102,000 from the first quarter of 2004. The ratio of average earning assets to total average assets was 94.9% for the six months ended June 30, 2004 and 95.7% for the six months ended June 30, 2003.

     Interest expense increased by $104,000 for the six months ended June 30, 2004 or 3.9% to $2,767,000 compared to $2,663,000 for the same period in 2003. Interest expense for the quarter ended June 30, 2004 increased $39,000 or 2.9% as compared to the quarter ended June 30, 2003. Interest expense for the quarter ended June 30, 2004 increased $5,000 or 0.4% compared to the first quarter of 2004.

     The foregoing resulted in net interest income of $5,308,000 for the six months ended June 30, 2004, an increase of $673,000 or 14.5% compared to the same period in 2003. Net interest income for the quarter ended June 30, 2004 increased $356,000 or 15.1% over the second quarter of 2003 while there was an increase of $124,000 or 4.8% over the first quarter in 2004.

     Non-interest income decreased $144,000 or 11.2% to $1,140,000 during the six months ended June 30, 2004 compared to $1,284,000 for the same period in 2003. Non-interest income increased $12,000 or 2.0% for the quarter ended June 30, 2004 as compared to the comparable quarter in 2003. The decrease in 2004 has been due primarily to a decrease in gain on sales of mortgage loans during the first six months of 2004 compared to 2003.

     Non-interest expense increased $74,000 or 1.9% to $3,929,000 during the first six months of 2004 compared to $3,855,000 during the same period in 2003. There was an increase of $94,000 or 4.9% for the three months ended June 30, 2004 as compared to the same period in 2003 and a $127,000 increase or 6.7% from $1,901,000 for the quarter ended March 31, 2004. The increase in 2004 was due primarily to increases in other operating expenses. These increases relate principally to costs associated with supplies and various general operating costs.

     Income taxes were $669,000 for the first six months of 2004 as compared to $552,000 for the first six months of 2003. Taxes were $356,000 for the quarter ended June 30, 2004 as compared to $272,000 for the same period in 2003.

     The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.

14

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

     The following is a summary of components comprising basic and diluted earnings per share (EPS) for the three and six months ended June 30, 2004 and 2003:

     The Company’s total assets increased 8.1% to $304,902,000 at June 30, 2004 from $281,969,000 at December 31, 2003. Loans, net of allowance for possible loan losses, totaled $223,474,000 at June 30, 2004, a 4.3% increase compared to $214,334,000 at December 31, 2003. Investment securities increased $13,036,000 or 27.7% from December 31, 2003 to $60,180,000 at June 30, 2004.

     Total liabilities increased by 8.6% to $283,600,000 for the six months ended June 30, 2004 compared to $261,126,000 at December 31, 2003. This increase was composed primarily of a $29,382,000 increase in total deposits during the six months ended June 30, 2004 and a $6,990,000 decrease in Federal funds purchased.

15

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

     The following schedule details the loans of the Company at June 30, 2004 and December 31, 2003:

     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 $71,031,000, $5,547,000 and $286,000, respectively, at June 30, 2004, are dividend 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

16

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral, liquidation value, and other factors that, in the subjective judgment of management, affect the borrower’s ability to pay.

     Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, such interest received is applied as a reduction of principal. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt. At June 30, 2004, the Company had nonaccrual loans totaling $977,000 as compared to $2,229,000 at December 31, 2003.

     Loans not on nonaccrual status are classified as impaired in certain cases where there is inadequate protection by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.

     Generally the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring after January 1, 1995. Interest is accrued on such loans that continue to meet the modified terms of their loan agreements. At June 30, 2004, the Company had no loans that have had the terms modified in a troubled debt restructuring.

     The Company’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when they are considered uncollectible.

     Impaired loans and related allowance for loan loss amounts at June 30, 2004 and December 31, 2003 were as follows:

     The allowance for loan loss related to impaired loans was measured based upon the estimated fair value of related collateral.

17

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

     The average recorded investment in impaired loans for the six months ended June 30, 2004 and 2003 was $859,000 and $805,000, respectively. The related amount of interest income recognized on the accrual method for the period that such loans were impaired was approximately $33,000 and $29,000 for 2004 and 2003, respectively.

     The following schedule details selected information as to non-performing loans of the Company at June 30, 2004:

     Transactions in the allowance for loan losses were as follows:

     The provision for loan losses was $570,000 and $543,000 for the first six months of 2004 and 2003, 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.

18

CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

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

Results of Operations, Continued

     The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared monthly by the Loan Review Officer to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Loan Review Officer, consideration of current economic conditions, and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this monthly assessment. The review is presented to and subject to approval by the Board of Directors.

     The following tables present internally graded loans as of June 30, 2004 and December 31, 2003:

     The collateral values at June 30, 2004, based on estimates received by management, securing these loans total approximately $3,330,000 ($2,199,000 related to real property and $1,131,000 related to commercial and other loans). Such loans are listed as classified when information obtained about possible credit problems of the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially and adversely affect impact future operating results, liquidity or capital resources.

     Residential real estate loans that are graded substandard totaling $1,334,000 and $1,670,000 at June 30, 2004 and December 31, 2003 consist of twenty-one individual loans, respectively, that have been graded accordingly due to bankruptcies, inadequate cash flows and delinquencies. No material losses on these loans is anticipated by management.

19

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 detail provides a breakdown of the allocation of the allowance for possible loan losses:

     There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at June 30, 2004 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 $60,180,000 and $47,144,000 at June 30, 2004 and December 31, 2003, 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:

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

     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.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

     The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of the Company’s assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity such as Federal funds sold or purchased and loans, securities and deposits. Based upon the nature of the Company’s current operations, the Company is not presently subject to foreign currency exchange or commodity price risk.

     Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets periodically to analyze the rate sensitivity position. Such meetings are intended to focus on the spread between the cost of funds and interest yields generated primarily through loans and investments.

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CAPITAL BANCORP, INC.

FORM 10-Q, CONTINUED

Item 3: Quantitative and Qualitative Disclosures About Market Risk, Continued

     Managing interest rate risk is a very subjective exercise based on a wide variety of factors. This activity is based significantly on management’s subjective beliefs about future events (such as actions of the Federal Reserve Board and the conduct of competitors) and is never guaranteed.

     There are no known material changes in reported market risks during the six months ended June 30, 2004 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)		Shares of the Company’s common stock were issued to employees pursuant to the Company’s Stock Option Plan as follows:

		The aggregate proceeds of the shares sold were $26,775.
		There were no underwriters and no underwriting discounts or commissions. All sales were for cash.
		The Company believes that an exemption from registration of these shares was available to the Company in that the issuance thereof did not constitute a public offering of securities within the meaning of the Securities Act of 1933, as amended.
		The securities sold are not convertible.
		The proceeds of the sales are being used by the Company for general corporate purposes.
(d)		The only restrictions on working capital and/or dividends are those reported in Part I.
(e)		The Issuer did not repurchase any of its shares during the second quarter of 2004.

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CAPITAL BANCORP, INC.

PART II. OTHER INFORMATION, CONTINUED

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a)		None.
(b)		Not applicable.

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CAPITAL BANCORP, INC.

PART II. OTHER INFORMATION, CONTINUED

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)		The annual meeting of stockholders was held April 8, 2004.
(b)		Election of the following members of the board of directors:

Albert J. Dale, III
H. Newton Lovvorn, Jr.

(c)

(1) Each director was elected by the following tabulation:

(2)

The vote of security holders with respect to the ratification of the Audit Committee’s selection of Maggart & Associates, P.C. as independent auditors for the Company was as follows:

(d)

Not Applicable.

Item 5. OTHER INFORMATION

(a)		None.
(b)		Not Applicable.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

(1) Exhibit 10.4 consists of Supplemental Executive Retirement Plan Agreement.

(2) Exhibits 31.1 and 31.2 consist of Rule 13a-14 and 15d-14 certifications.

(3)

Exhibit 32 consists of Section 1350 certifications.

(b)

The Company filed a Current Report on Form 8-K on April 7, 2004 reporting the Company’s press release to the public regarding earnings. The Company filed a Current Report on Form 8-K on April 27, 2004 reporting the Company’s press release to the public announcing that its directors and officers could make open-market purchases or sales of the Company’s stock from April 30, 2004 through May 31, 2004. The Company also filed a Current Report on Form 8-K on May 24, 2004 reporting the Company’s press release to the public announcing the Company’s two-for-one stock split for shareholders of record as of July 30, 2004.

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CAPITAL BANCORP, INC.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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