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 March 31, 2007

¨	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 Number)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)


Large Accelerated Filer ¨		Accelerated filer ¨		Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (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: 3,668,596 shares at April 30, 2007

CAPITAL BANCORP, INC.


*Part 1:*	*Financial Information*

Item 1.	Financial Statements

	The unaudited consolidated financial statements of the Company and its subsidiaries are as follows:

	Consolidated Balance Sheets – March 31, 2007 and December 31, 2006.	3

	Consolidated Statements of Earnings – For the three months ended March 31, 2007 and 2006.	4

	Consolidated Statements of Comprehensive Earnings – For the three months ended March 31, 2007 and 2006.	5

	Consolidated Statements of Cash Flows – For the three months ended March 31, 2007 and 2006.	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk*	33

	*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	34

*Part II:*	*Other Information*

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

Signatures		37

CAPITAL BANCORP, INC.

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CONSOLIDATED BALANCE SHEETS

March 31, 2007 and December 31, 2006

(Unaudited)


(In Thousands, except share amounts)	March 31, 2007			December 31, 2006


Assets:
Cash and due from banks, including reserve requirements of $63, and $529, respectively	$	7,670		$	8,353
Federal funds sold		26			2,881

Cash and cash equivalents		7,696			11,234
Securities available-for-sale		66,807			67,784
Loans, net		481,471			458,593
Premises and equipment, net		5,823			5,780
Accrued interest receivable		2,761			2,744
Bank owned life insurance		9,637			9,535
Loans held for sale		1,648			1,589
Interest-bearing deposits in financial institutions		2,349			19
Other real estate		1,808			808
Other assets		7,249			6,356

Total Assets	$	587,249		$	564,442


Liabilities and Stockholders’ Equity:
Deposits:
Demand	$	39,341		$	44,425
Interest bearing demand		18,335			19,061
Savings (includes Money Market Deposit Accounts)		100,290			96,418
Time		113,382			111,398
Time, over $100,000		204,368			193,650

Total deposits		475,716			464,952
Federal Home Loan Bank advances		52,235			44,612
Junior subordinated debentures		12,372			12,372
Securities sold under repurchase agreements		6,744			2,997
Other liabilities		4,034			4,540

Total liabilities		551,101			529,473

Stockholders’ equity
Preferred stock, no par value, 20,000,000 shares authorized, no shares issued		—			—
Common stock, no par value, 20,000,000 shares authorized; 3,633,980 and 3,621,575 shares issued and outstanding		16,410			16,172
Retained earnings		20,002			19,135
Accumulated other comprehensive income		(264	)		(338	)

Total stockholders’ equity		36,148			34,969

Total Liabilities and Stockholders’ Equity	$	587,249		$	564,442

See accompanying notes to consolidated financial statements (unaudited).

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

CONSOLIDATED STATEMENTS OF EARNINGS

Three months ended March 31, 2007 and 2006

(Unaudited)


	Three Months Ended March 31,
(In Thousands, except per share amounts)	2007		2006


Interest income:
Interest and fees on loans	$	9,566	$	7,677
Interest on investment securities:
U.S. Government agencies		284		186
State, county and municipal		132		101
Mortgage backed securities		359		286
Other interest		73		66

Total interest income		10,414		8,316
Interest expense:
Interest on deposits:
Demand		28		25
Savings and money market demand accounts		846		860
Time		3,925		2,225
Interest on FHLB and other borrowings		877		768

Total interest expense		5,676		3,878

Net interest income		4,738		4,438
Provision for loan losses		263		428

Net interest income after provision for loan losses		4,475		4,010
Other income:
Service charges on deposit accounts		291		322
Gain on sale of loans		148		189
Miscellaneous		228		117

Total other income		667		628
Other expenses
Salaries and employee benefits		2,215		1,900
Occupancy		335		270
Merger related		157		—
Other operating		1,126		954

Total other expenses		3,833		3,124

Earnings before income taxes		1,309		1,514
Income taxes		442		532

Net earnings	$	867	$	982

Basic earnings per share	$	0.24	$	0.28

Diluted earnings per share	$	0.23	$	0.27

See accompanying notes to consolidated financial statements (unaudited).

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

Three months ended March 31, 2007 and 2006

(Unaudited)


	Three Months Ended March 31,
(In Thousands)	2007		2006


Net earnings	$	867	$	982


Other comprehensive earnings (losses) net of tax:
Unrealized gains (losses) on investment securities available-for-sale during period, net of (taxes)/ income tax benefit of $(46) and $66, respectively		74		(106	)

Other comprehensive earnings (losses)		74		(106	)

Comprehensive earnings	$	941	$	876

See accompanying notes to consolidated financial statements (unaudited).

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three months ended March 31, 2007 and 2006

(Unaudited)


(In Thousands)	2007			2006

Cash flows from operating activities:
Net earnings	$	867		$	982
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation, amortization and accretion		188			181
Provision for loan losses		263			428
Originations of loans held for sale		(12,959	)		(10,355	)
Proceeds from sale of loans		13,048			11,631
Net gain on sale of loans		(148	)		(189	)
Increase in CSV of life insurance		(102	)		(40	)
Decrease (increase) in accrued interest receivable		(17	)		46
Stock-based compensation expense		57			14
Change in:
Other assets		(824	)		828
Other liabilities		(552	)		(185	)

Net cash provided (used) by operating activities		(179	)		3,341

Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available-for-sale		1,589			1,053
Purchases of securities available-for-sale		(500	)		(725	)
Net increase in loans		(24,141	)		(18,917	)
Purchase of premises and equipment		(223	)		(113	)
Decrease (increase) in interest-bearing deposits in financial institutions		(2,330	)		1,192

Net cash used by investing activities		(25,605	)		(17,510	)

Cash flows from financing activities:
Net increase (decrease) in non-interest bearing, savings and NOW deposit accounts		(1,938	)		(9,276	)
Net increase in time deposits		12,702			18,788
Increase (decrease) in securities sold under repurchase agreements		3,747			(1,104	)
Proceeds from Federal Home Loan Bank advances and short-term borrowings		43,930			46,805
Repayment of Federal Home Loan Bank advances and short-term borrowings		(36,307	)		(44,723	)
Employee stock purchases		72			62
Exercise of stock options		40			230

Net cash provided by financing activities		22,246			10,782

Change in cash and cash equivalents		(3,538	)		(3,387	)
Cash and cash equivalents at beginning of year		11,234			9,659

Cash and cash equivalents at end of period		7,696			6,272

See accompanying notes to consolidated financial statements (unaudited).

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2007 and 2006

(Unaudited)


(In Thousands)	2007		2006


Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	5,912	$	4,002
Income taxes	$	561	$	903
Non-cash investing and financing activities:
Loans to facilitate sales of other real estate	$	348	$	—
Transfer from loans to other real estate	$	1,348	$	—
Change in unrealized gains on securities available-for-sale, net of tax	$	74	$	(106	)

See accompanying notes to consolidated financial statements (unaudited).

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Nature of Operations

Capital Bancorp, Inc. is a registered bank holding company headquartered in Nashville, Tennessee. It offers extensive and service-intensive financial products and services through its subsidiary, Capital Bank & Trust Company (Bank), which is a state chartered bank. The Bank provides full banking services. As a state chartered bank, the Bank is subject to regulations of the Tennessee Department of Financial Institutions and the Federal Deposit Insurance Corporation. The area served by the Bank is Davidson and surrounding counties of Middle Tennessee. Services are provided at the main office in Nashville, Tennessee and seven branches.

Agreement and Plan of Merger with Renasant Corporation

On February 5, 2007, Renasant Corporation, a Mississippi corporation (“Renasant”), Renasant Bank, a Mississippi banking association, Capital Bancorp, Inc., a Tennessee corporation (“Capital”), and Capital Bank & Trust Company, a Tennessee banking association (“Capital Bank”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Capital will merge with and into Renasant (the “Merger”), with Renasant being the surviving corporation in the Merger. Immediately following the Merger, Capital Bank will be merged with and into Renasant Bank, with Renasant Bank being the surviving banking association in such merger.

Under the terms of the Merger Agreement each outstanding share of Capital’s common stock (other than treasury shares and shares held by Capital stockholders who have exercised and maintained their dissenter’s rights) will be converted into the right to receive either (i) $38.00 in cash (ii) 1.2306 shares (the “Exchange Ratio”) of Renasant common stock or (iii) a combination of 40% cash, in the amount listed above, and 60% Renasant common stock, at the Exchange Ratio listed above. Each stockholder of Capital will be entitled to elect the type of merger consideration he or she wishes to receive for his or her shares of Capital common stock, subject to an overall limitation that the aggregate stock consideration shall be no more than 65% and no less than 60% of the total merger consideration received by Capital stockholders. The Merger is intended to qualify as a tax-free reorganization with respect to the portion of the merger consideration received as shares of Renasant common stock. Outstanding options to purchase Capital common stock granted under Capital’s equity plans will be automatically converted into options to purchase Renasant common stock, except that (i) the per share exercise price of such options will be adjusted by dividing such exercise price by the Exchange Ratio and (ii) the number of shares subject to such options will be adjusted by multiplying such number of shares by the Exchange Ratio.

Consummation of this merger is subject to the receipt of required regulatory approval as well as the approval of Capital’s shareholders and the satisfaction of other customary closing conditions. Subject to approval, the transaction is expected to be completed during the third quarter of 2007.

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 the

CAPITAL BANCORP, INC.

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Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company also has an investment in an unconsolidated subsidiary, Capital Bancorp Capital Trust I (Trust).

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 March 31, 2007, and December 31, 2006, and the results of operations for the three months ended March 31, 2007, and 2006, comprehensive earnings for the three months ended March 31, 2007, and 2006, and changes in cash flows for the three months ended March 31, 2007, and 2006. 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, 2006, Annual Report on Form 10-K, as amended. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year. Certain reclassifications have been made to prior period numbers to conform to current period presentation.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for loan losses and the valuation of debt and equity securities and the related deferred taxes.

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 1,000,000 shares of the Company’s stock. At March 31, 2007, the Company had outstanding options to purchase 232,618 shares of its common stock, of which options for 159,255 shares of the Company’s common stock were currently exercisable.

In January 2005, the Board of Directors adopted the 2005 Employee Stock Purchase Plan (“ESPP”). The ESPP authorizes the issuance of 500,000 shares of common stock pursuant to purchase right granted employees or to employees of affiliates designated as being eligible to participate. The ESPP is intended to qualify as an “Employee Stock Purchase Plan” within the meaning of Section 423 of the IRS Code.

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

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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. In December, 2004, the Financial Accounting Standards Board (“FASB”) reissued Statement of Financial Accounting Standards No. 123 (revised 2004) (“FAS 123R”) related to share based payments. For Capital Bancorp, Inc. the SFAS applies to the accounting for stock options and the ESPP. The substance of the revised statement is to require companies to record as an expense the fair market value of stock options determined as of the grant date over the vesting period and the purchase price discount within the ESPP. The offsetting credit is to common stock unless there is an obligation to buy back the stock or exchange other assets for the stock. If such an obligation exists the offsetting credit would be to a liability account. The statement is effective for the first interim reporting period after December 15, 2005. Capital Bancorp, Inc. has applied FAS 123R for the three months ended March 31, 2007, and the pre-tax impact to earnings was $57,000 for the period then ended compared to a pre-tax impact to earnings of $14,000 for the period ended March 31, 2006.

Earnings per Common Share

Statement of Financial Accounting Standards (SFAS) No. 128 “Earnings Per Share” sets forth uniform standards for computing and presenting earnings per share. The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. For the Company the computation of diluted earnings per share begins with the basic earnings per share plus the effect of common shares contingently issuable from stock options.

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Earnings per Common Share, continued

The following is a summary of components comprising basic and diluted earnings per share (EPS) for the three months ended March 31, 2007, and 2006:


	Three Months Ended March 31,
(In Thousands, except share amounts)	2007		2006

Basic EPS Computation:
Numerator – income available to common shareholders	$	867	$	982

Denominator – weighted average number of common shares outstanding		3,629,169		3,509,638

Basic earnings per common share	$	0.24	$	0.28

Diluted EPS Computation:
Numerator – income available to common shareholders	$	867	$	982

Denominator – weighted average number of common shares outstanding		3,629,169		3,509,638
Dilutive effect of stock options		125,475		144,970

		3,754,644		3,654,608

Diluted earnings per common share	$	0.23	$	0.27

While there were no anti-dilutive options as of March 31, 2007, there were 22,760 anti-dilutive options as of March 31, 2006.

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Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

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, as amended, for the year ended December 31, 2006, 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, or prove to 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,” “intend,” “plan,” “consider,” “believe,” “should,” “estimate,” “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. Any system (such as the system for identifying loan losses) is subject to inherent risks and to unanticipated events. 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, changes in the legislative and regulatory environment, including compliance with the Sarbanes Oxley Act of 2002, 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 the types of circumstances, conditions, and factors that can cause anticipated results to change. The Company undertakes no obligation, and specifically disclaims any intention, to publish revised forward-looking statements or reports to reflect the occurrence of changes or of unanticipated events, circumstances, or results.

General

The Company owns 100% of Capital Bank & Trust Company (the “Bank”), a community bank headquartered in Nashville, Tennessee serving Davidson and the surrounding counties in Middle Tennessee. The Company serves as a financial intermediary whereby its profitability is determined to a large degree by the interest spread it achieves and the successful measurement of risks. The Company’s management believes that its market area offers an environment for

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continued growth, and the Company’s target market is local consumers, professionals and small businesses. The Company offers a wide range of banking services, including checking, savings, and money market deposit accounts, certificates of deposit, and loans for consumer, commercial and real estate purposes. The Company also provides its customers with investment services through CBT Investment Services. Clients can purchase mutual funds, stocks, bond, annuities, and other investment products and services through this department. Deposit instruments in the form of demand deposits, money market savings and certificates of deposit are offered to customers to establish the Company’s core deposit base.

Management believes there is an opportunity to continue to increase the loan portfolio. The Company has targeted commercial business lending, commercial and residential real estate lending, and consumer lending as areas of focus. It is the Company’s intention to manage the size of its loan portfolio to approximately 80% of total assets; however, the quality of lending opportunities as well as the desired loan to asset ratio will determine the size of the loan portfolio. At March 31, 2007, and 2006, the ratio of net loans to assets was 81.98% and 81.25%, respectively. As a practice, the Company generates substantially all of its own loans but occasionally buys participations from other institutions. The Company attempts, to the extent practical, to maintain a loan portfolio which adjusts to swings in interest rates. The Company’s policy is to have a diverse loan portfolio not dependent on any particular market or industrial segment.

Critical Accounting Policies

The accounting principles we follow and our methods of applying those principles conform with accounting principles generally accepted in the United States and to general practices within the banking industry. In connection with the application of those principles to the determination of our allowance for loan losses (“ALL”), we have made judgments and estimates which have significantly impacted our financial position and results of operations.

Management uses various means to monitor the performance and risk profile of the loan portfolio. A monthly analysis is performed which monitors growth, payment volumes, delinquencies and many other factors. Trends are monitored for each measured component. Additionally, management monitors documentation exceptions, migration of risk ratings, credit concentrations and other factors on an ongoing basis.

Management reviews loans on an ongoing basis to monitor credit quality. Annual reviews are conducted on those loan relationships which management considers material. Problem loans are reviewed more frequently. A Loan Review Committee meets twice monthly to review selected loan relationships. The activities of the Loan Review Committee are subsequently reported to the Audit Committee.

Management assesses the adequacy of and calculates the ALL on a quarterly basis. A monthly adjustment to the loan loss provision is determined quarterly and adjusted to reflect inherent loan losses in order to maintain an adequate ALL. The ALL consists of the following categories: (1) an allocated amount based upon reviews of individual loans which determine specific estimated losses of such loans, (2) an allocated amount based upon classified loans which have specifically identified credit exposure and anticipated loss exposure based upon historical experience or comparative experience of peer group banks, (3) an allocated amount based upon loans identified by type but not classified and with allocations of ALL for such loans

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calculated based upon historical experience, comparative experience, and other selected criteria as determined by management, and (4) a general reserve amount representative of potential losses anticipated from risks inherent to our loan portfolio and risks resulting from management decisions and initiatives to enhance growth and profitability of the loan portfolio and the bank.

We establish the allocated amount separately for three different risk groups: (1) loans, both classified and unclassified, which are specifically reviewed and a specific estimated loss determined for each loan so reviewed, (2) classified loans and watch list loans which are not reviewed but which are assigned loan loss reserves based upon the risk rating of such loans, and (3) unclassified loans which are allocated a loan loss reserve by loan type. Each loan is assigned a risk rating grade based upon specific definitions of each risk rating. The risk rating for each loan is determined by management at the loan’s inception and changed as the risks associated with each loan change during the term of the loan. Ongoing assessments of the appropriate risk rating for each loan are made by the loan officer assigned to the loan, independent loan reviews, discussions with banking regulators, and management. By policy, on any future re-negotiated loans which are impaired, we will estimate losses based upon forecasted cash flows discounted at the loan’s original effective interest rate or the underlying collateral value.

The general reserve amount is an additional amount added to the ALL in order to provide an adequate amount to accommodate anticipated losses. Its calculation is not as specific as with the allocated amounts but it is determined based upon certain risks which are either inherent to our loan portfolio or risks which are elevated as a result of management decisions and initiatives to enhance the growth and profitability of the loan portfolio and the bank. Inherent risks include changes in the national or local economy, the location of the bank in a single trade area which limits the bank’s ability to spread its geographical risks, the time gap between the occurrence of adverse financial circumstances with our borrowers and the delivery of financial statements to the bank (annual delivery to bank in most cases), changes in banking laws and regulations, and the depth and experience of the lending staff. Risks associated with management decisions and initiatives include (a) a relatively high concentration of commercial real estate loans to total capital as defined by U. S. Treasury in guidelines dated January 13, 2006, (b) initiative to increase residential construction and commercial real estate lending, (c) CRA lending initiatives, (d) higher average loan amounts over the past two years, (e) increased numbers and dollar amounts of borrowing relationships who are indebted to the bank for amounts greater than 10% of the bank’s total capital, and (f) new electronic based products which add to the risk of loss to the bank, including remote deposit capture, business and consumer debit cards, and electronic funds transfer services. We determine the general reserves based upon an assessment of the above risk factors and management’s judgment.

We test the resulting ALL calculation by comparing it to the current balance in the loan loss allowance account, historical trends, and peer information. Management then evaluates the results of the procedures performed, including the results of our testing, and decides on the sufficiency of the ALL in its entirety. In the first month of each quarter, the Board of Directors reviews the prior quarter’s ALL and approves the current quarter’s ALL including the monthly loan loss provision.

As a result of Management’s review of loan losses year-to-date which have been favorably low, as well as a comparative review of peer information on ALL levels, Management has determined that a reduction in the monthly provision for possible loan losses is appropriate within a context of maintaining an ALL adequate to accommodate anticipated losses.

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Management will continue to review the provision monthly to determine if further adjustments are warranted during the remainder of the year.

Capital Resources, Capital and Dividends

A primary source of capital is internal growth through retained earnings. The ratio of stockholders’ equity to total assets was 6.15% at March 31, 2007, and 6.20% at December 31, 2006, respectively. The annualized rate of return on stockholders’ equity for the three months ended March 31, 2007, was 10.04% compared to 13.70% for the comparable period in 2006. The Company’s capital at March 31, 2007, of $36.1 million results from beginning capital of $35.0 million plus net earnings of $867,000 plus an increase in common stock of $125,000 related to the stock option compensation, plus the decrease in unrealized losses on available-for-sale securities of $74,000 plus proceeds of $72,000 related to the exercise of stock options and $40,000 related to the Company’s Employee Stock Purchase Plan’s stock purchase.

The Company’s principal regulators have established 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 government 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 stockholders’ equity, non-cumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred—or total risk-based 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 risk-based capital. Net unrealized gains and losses on available-for-sale securities are excluded for the regulatory capital ratios. The Company and its subsidiaries must maintain a Tier 1 capital to risk-based assets ratio of at least 4.00%, a total risk-based capital to risk-based assets ratio of at least 8.00% and a leverage capital ratio, defined as Tier 1 capital to adjusted total average assets for the most recent quarter, of at least 4.00%. The same ratios are also required in order for a bank to be considered “adequately capitalized” under the Federal Deposit Insurance Corporation and the Tennessee Department of Financial Institutions “prompt corrective action” regulations, which impose certain operating restrictions on institutions that are not adequately capitalized. The Company and its consolidated subsidiaries are within the “well capitalized” category under the regulations as indicated in the following ratios:


	March 31, 2007		March 31, 2006

Tier 1 risk-based capital ratio	9.32	%	9.54	%
Total risk-based capital ratio	11.16	%	11.95	%
Leverage capital ratio	7.99	%	8.02	%

The decrease in the capital ratios from 2006 to 2007 is primarily attributable to the asset growth of the Company which has continued through the three months of 2007.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

The Federal Reserve Board imposes consolidated capital guidelines on bank holding companies which have more than $500 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 March 31, 2007.

Challenges Facing the Company

Growth of Low Cost Deposit Accounts

The Company’s biggest challenge is growing low-cost core deposits to protect the net interest margin and to meet the loan demands of the community. While the Company utilizes alternative sources of funding such as brokered certificates of deposit as well as Federal Home Loan Bank advances and other overnight borrowings in addition to core deposits, the Company is committed to increasing the core deposit base.

Competitive Market

The Company is located in a very competitive market area and faces competition from large and small financial institutions as well as non-financial institutions such as insurance companies and brokerage firms. Bank competition consists of super-regional as well as regional banks moving into the area, de novo institutions entering the market and existing community banks vying for market share. In addition, the Company now competes globally in a non-traditional market where customers can either deposit or borrow funds through the use of the Internet on not only a local, but worldwide market.

Competition combined with the increases in the federal discount rates over the past year have forced the industry to raise the interest rates paid on deposits. Competitive pressures are also putting downward pressure on loan rates and associated loan fees. This is resulting in a squeeze on the net interest margin, a bank’s primary source of net earnings. While local community banks face similar funding challenges, the larger regional banks are able to pull resources from outside markets enabling them to offer higher interest rates on local deposits in their quest to increase market share.

The Company considers its major competition to be the super-regional banks such as Bank of America, AmSouth and SunTrust. These companies have heavy market share and offer a wide range of services; however, Management believes the Company has advantages in building better customer relationships and in being able to react more quickly than the larger institutions to customers’ changing needs.

With increases in the prime interest rate as recent as the second quarter of 2006, customers have become more driven by interest rates than in the past several years. Prior to the rate increases, the marketplace had become accustomed to lower interest rates on both loans and deposits. With the interest rate increases, customers have become more rate conscious regarding both deposits and loans. Due to the competitiveness of the marketplace, the demand for higher rates has pushed deposit rates up in order to maintain growth in deposit accounts; however, the demand for lower loan rates has prevented the Company from raising the interest rates on loans at the same pace. This has resulted in a squeeze on the net interest margin.

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FORM 10-Q CONTINUED

Focus on Retail Side

To provide more focus on growing core deposits, the Company added an experienced senior level retail administrator during April 2006. Organizational responsibilities were shifted to promote a structure for core deposit growth in conjunction with enhanced consumer loan development. Additionally, the branch system has been augmented with personal bankers and branch sales managers at most locations whose primary focus is consumer retail account development. The opening of the Company’s Williamson County branch in October 2006 is also expected to increase the Company’s retail exposure.

Real Estate Driven

By design, the Company has a high concentration of residential and commercial real estate loans. Since 2003, the Company has experienced significant growth in commercial real estate loans and has increased variable rate loans associated with this type of lending.

The liquidity of the Company’s loan portfolio is such that the current monthly principal payments on loans would repay the entire loan portfolio in less than 24 months. This primarily reflects the cyclical nature of real estate and construction lending. Charged-off loans in particular years have been loan and customer specific as opposed to economic or business cycle downturns.

Real Estate Cycle

On a national scale, economists are concerned that the real estate market has peaked and is entering a cooling off period. Market prices in areas such as California, Florida and Nevada are beginning to reflect the normalization of prices rather than double-digit market value appreciation they have experienced over the last several years. In these areas, homeowners and speculative builders are no longer experiencing quick property turnover with lucrative gains. Homes are staying on the market for longer periods of time as well.

Despite the national changes in the housing industry, the local housing market continues to thrive. The Company has observed the number of days on the market to sell is edging up slightly. Overall housing inventories have also begun to increase. Current home sales year to date are even with the 2006 sales.

Minimizing Risks Related to Loans

The Company’s loan officers have individual lending authority based upon their experience, expertise and loss ratios. This helps reduce the risks associated with loan losses. Large loans are approved by the Senior Loan Committee, the Credit and Finance Committee, or the Board of Directors. The Senior Loan Committee consists of senior credit underwriters within the Company who average 20 years of lending experience. The Credit and Finance Committee consists entirely of Directors of the Company. The Company is diligent in ensuring that risks related to loan losses are minimized.

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FORM 10-Q CONTINUED

Diversifying the Loan Portfolio

As stated earlier, the Company has concentrated on residential and commercial real estate lending. The Company plans to expand and further diversify the loan portfolio through commercial and industrial lending. A focus on hiring experienced commercial lenders should enable the Company to increase the commercial loan portfolio with term loans and lines of credit. Relationships with commercial loan customers are expected to open opportunities for increasing commercial demand deposits with these customers as well. Our expanding treasury management services are particularly important to attracting commercial and industrial business and to our plans for expanding non-interest revenue.

Proposed Regulatory Requirements for Commercial Real Estate

The banking regulators have released proposed guidance that would require banks with concentrations in commercial real estate lending (CRE) to tighten risk management practices and potentially increase capital.

Historically, the Company has used various methods for improving risk management and as these loans have increased has taken additional steps to improve its practices. These measures include the following:

Loan Loss Reserve has a component which recognizes the increased risks of our bank’s initiative to emphasize commercial real estate lending;

Hired experienced and highly capable management for CRE lending;

Strengthened appraisal review process in relation to commercial real estate and residential real estate;

Improved structuring and underwriting requirements, using stress testing techniques and structuring consistent with secondary market parameters for loans that are acceptable to the secondary market;

Increased monitoring of CRE and other loan type concentrations within the loan portfolio;

Increased monitoring of past dues and trends by loan type;

Monitoring construction loans for amounts drawn versus the percentage of completion and retaining outside professional inspectors for both residential and commercial construction loans;

Increased close monitoring of loan to values in excess of interagency guidelines;

Continued development of a group of community banks to whom we sell participations in order to manage concentrations of risk and aggregation limits for specific borrowers;

Increased communication with market experts who understand the dynamics of the real estate market for both the residential and commercial segments;

Stress testing of CRE loans for both interest rate and occupancy rate changes;

Applying limits to speculative construction for borrowers whose risk profiles are higher due to leverage and capital limitations;

Documentation of all exceptions to policy for each loan with appropriate approvals;

Loan reviews of all loan relationships of $500,000 or greater not less frequently than annually;

Loan reviews of all classified and criticized loan relationships with monthly updates;

Identification of specific impairment to all loans which are reviewed or are in classified or criticized categories;

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FORM 10-Q CONTINUED

Ongoing review of risk ratings for all new and renewed loans, all loans rated “watch” or worse, all past due loans, and all loan relationships subject to formal loan review which occur twice a month;

Tracking of risk rating migrations by loan and borrower;

Initiation of tracking of risk rating migrations for loan portfolio as a whole and

Ongoing monitoring of capital position with short- and long-range planning to ensure capital adequacy.

Sarbanes-Oxley Compliance

The Company has postured itself to be in compliance with Section 404 of the Sarbanes Oxley Act. A Sarbanes-Oxley Compliance / Disclosure Committee was created during 2004 and is chaired by the Assistant Controller and consists of representatives from every area within the Company. The documentation phase has been completed. By documenting each of the major processes, the Company has been able to strengthen controls within the organization and improve its business processes. The Company continually assesses and modifies internal processes to strengthen its internal control structure and is committed to maintaining high standards for internal controls going forward.

Bank Secrecy Act Compliance

The Company is subject to numerous federal and state laws, rules and regulations, and compliance with these legal requirements is mandatory. One significant and developing area of law involves Homeland Security and the Bank Secrecy Act. The Company currently believes that its systems are adequate to meet its compliance needs with respect to these and other regulations; however, compliance with the Bank Secrecy Act may prove expensive to the Company in the near-term and in the long-term. Management cannot at this time quantify the costs of compliance or the expense of inadvertent non-compliance.

Company Strengths

Thriving Local Economy

The Company is located in a diverse local economy where the commercial real estate market continues to thrive. Nashville’s appeal to both businesses and individuals is indicated in several recent polls such as Forbes.com where Nashville was ranked as No. 7 for the “Best Places for Business” in an article dated May 4, 2006. This ranking was based on the cost of doing business, job growth and educational attainment. Kiplinger’s Personal Finance magazine named Nashville as the number one “smart place to live”. This ranking considered housing costs, economic diversity and the cultural scene according to an article in The City Paper On-line dated May 9, 2006. The 2007 Report from Worldwide ERC and Primacy Relocation lists Nashville as the 5^th “Best City for Relocating Families” based on the ease of relocation and settling into a new life, tax rates, home cost and home appreciation. Entrepreneur.com ranked Nashville as the 8^th “Hot City for Entrepreneurs”. Finally, CNNMoney.com ranks Nashville in the top twenty-five “Smartest Cities” based on education, as 31.7% of the residents have completed a bachelor’s degree or higher.

Since the development of Partnership 2010, a regional economic development initiative, more than 350 companies have relocated their corporate headquarters to Nashville. During

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FORM 10-Q CONTINUED

January 2006, Partnership 2010 announced its five-year economic development strategy. The strategy focuses on annual job growth of 1.5% annually, increasing the percentage of adults with bachelor’s degrees along with the high school graduation rate, increased support for entrepreneurs and continued development of the infrastructure.

The local economy presents many opportunities to the Company which Management believes will lead to continued growth; however, Management recognizes there will be challenges from competition in the form of a number of financial institutions that have either existing branch locations or plans to move into the Middle Tennessee area.

Technological Advances within the Organization

The Company introduced electronic branch capture during the fourth quarter of 2006. This process enabled each of the Company’s retail locations to electronically transmit customer deposit transactions rather than relying upon the physical delivery of items to our processing center. Management anticipates that this system will significantly reduce potential errors, shorten processing times and reduce courier expenses. In addition, the system has permitted us to offer extended deposit cut-off times, thereby providing us with additional earnings related to increased same-day deposits. Finally, the new system has bolstered the Company’s business continuity plan by providing the ability to electronically transmit deposit items from any retail location in the event of branch disruptions due to weather, power outages or other man-made natural disasters.

During January 2007, the Company implemented a new ATM/Debit card system to reduce the inherent risks associated with the service. The new real-time system provides several benefits, including better customer service, reduced processing times and new anti-fraud detection measures.

In addition, the Company introduced a new multi-factor authentication system for its Internet Banking product during December 2006 and January 2007. This system provides additional online identification capabilities for bank customers as well as reducing the risk of fraud and identity theft.

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FORM 10-Q CONTINUED

Results of Operations

Net earnings were $867,000 for the three months ended March 31, 2007, as compared to $982,000 for the same period in 2006. The decrease in net earnings is primarily attributed to one-time merger related expenses of $157,000 ($97,000 after tax), decreasing net interest margin and increased overhead associated with growth of the Bank


	Three months ended March 31,
*(In Thousands, except percentages)*	2007		2006		Percent Increase/(Decrease)

Interest income	$	10,414	$	8,316	25.23
Interest expense		5,676		3,878	46.36

Net Interest Income		4,738		4,438	6.76
Provision for loan losses		263		428	(38.55	)

Net interest income after provision for loan losses		4,475		4,010	11.60
Non-interest income		667		628	6.21
Non-interest expense		3,833		3,124	22.70

Earnings before income taxes		1,309		1,514	(13.54	)
Income taxes		442		532	(16.92	)

Net earnings	$	867	$	982	(11.71	)

Net Interest Income. 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 a period of volatility in interest.

The Company’s interest income, excluding tax equivalent adjustments, increased by $2.1 million, or 25.23%, for the three months ended March 31, 2007, for a balance of $10.4 million, as compared to $8.3 million for the three months ended March 31, 2006. The ratio of average earning assets to total average assets was 95.9% as of March 31, 2007, and 96.6% as of March 31, 2006. The increase in interest income resulted primarily from an increase in the interest income recorded on loans due to increased loan volume and increases in interest rates.

Interest expense increased by $1.8 million, or 46.4%, for the three months ended March 31, 2007, for a balance of $5.7 million, as compared to $3.9 million for the three months ended March 31, 2006. Such increases in interest expense can be attributable primarily to an increase in average interest-bearing liabilities combined with increasing rates in the Company’s very competitive market.

The foregoing resulted in net interest income of $4.7 million for the three months ended March 31, 2006, for an increase of $300,000, or 6.8%, compared to net interest income of $4.4 million for the three months ended March 31, 2006. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings.

The increase in net interest income is attributed to the Company’s sensitivity to assets combined with the large investment in loans rather than other interest earning assets. As of March 31, 2007, the Company has 87.38% of its interest earning assets invested in loans. During the first three months of 2007, the loan portfolio of the Company has continued to grow while investments have actually declined.

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FORM 10-Q CONTINUED

The net interest margin (the ratio of net interest income to average earning assets for the period) was 3.50% for the three months ended March 31, 2007, compared to 3.91% for the three months ended March 31, 2006. Interest earning assets have grown at a faster rate than the interest bearing liabilities. The average year to date balances of interest earning assets exceed the average year to date balances of interest bearing liabilities by approximately $50 million. Additionally, the average rate charged on loans has increased from 7.39% as of March 31, 2006, to 7.62% as of March 31, 2007. The Company has increased the average year to date balance in Federal funds borrowed by approximately $2.2 million compared to the average year to date balance for the first quarter of 2006. The year to date average balance of Federal funds sold has increased by approximately $35,000. All of these factors have led to an increase in the net interest income. According to certain economists, interest rates are expected to remain relatively stable for the remainder of 2007. Management believes that a satisfactory level of loans and deposits can be booked or repriced during the remainder of 2007 to maintain a satisfactory net interest margin.

Provision for Loan Losses. The provision for loan loss was $263,000 and $428,000 for the three months ended March 31, 2007 and 2006, respectively. The decrease in the provision in 2007 was based upon improved credit quality measurements, including loan charge-off ratios. The provision for loan losses is based on past loan experience and other factors, which, in management’s judgment, deserve current recognition in estimating possible loan losses. See “Critical Accounting Estimates” below for a further discussion of the allowance for loan losses.

Non-Interest Income. Non-interest income increased $39,000, or 6.21%, to $667,000 during the three months ended March 31, 2007, compared to $628,000 for the same period in 2006. The overall increase in non-interest income for the first quarter of 2007 compared to the first quarter of 2006 relates to an increase in non-interest income from the bank owned life insurance policies of $62,000, an increase of $40,000 related to CBT Investment Services, and an increase of $8,000 in other fee income. Combined with these increases, the Company experienced a decrease of $31,000 related to service charges on deposit accounts and a decrease of $41,000 related to the gain on loans sold.

Non-Interest Expense. Non-interest expense increased $709,000, or 22.7%, to $3.8 million for the three months ended March 31, 2007 compared to $3.1 million for the three months ended March 31, 2006. The increase in non-interest expense as of March 31, 2007 resulted from additional expenses in several categories compared to total of non-interest expense as of March 31, 2006. The additional expenses include increases in salaries and employee benefits of $315,000, merger related expenses of $157,000, occupancy expenses of $65,000, data and item processing of $27,000, promotional items of $17,000, stock option expenses of $57,000, meals and entertainment of $41,000, and other variable operating expenses related to the growth of the Company. Included in salaries and benefits is FAS 123R Share-Based Payment expense of $57,000 and $14,000 for the first quarter ended March 31, 2007 and 2006, respectively. Since March 31, 2006, the Company has increased its number of full-time equivalent employees from 106 to 117. During the past year the Company has hired several management level employees to support the continued growth and specialization of various departments within the Company. The Company opened a new branch location in Williamson County, Tennessee, during October of 2006. Opening new branches typically results in an

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FORM 10-Q CONTINUED

increase of non-interest expenses associated with employee and occupancy costs. The Company’s efficiency ratio (non-interest expense as a percentage of the sum of net interest income and non-interest income) was 70.92% for the three months ended March 31, 2007, as compared to 61.18% for the three months ended March 31, 2006. The Company’s efficiency ratio net of merger related expenses was 68.02% for the three months ended March 31, 2007. Many analysts view the efficiency ratio as a measure of the amount of expense that is incurred to generate a dollar of revenue.

Income Taxes. Income taxes were $442,000 for the three months ended March 31, 2007, as compared to income taxes of $532,000 for the three months ended March 31, 2006. The decrease is due to the decrease in net income for the first three months of 2007. The effective tax rate remained stable at 38.0%.

The Company adopted the provision of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN48”), on January 1, 2007, and determined there was no need to make an adjustment to retained earnings due to adoption of this Interpretation. The Company has no unrecognized tax benefits and does not anticipate any increase in unrecognized benefits during 2007 relative to any tax positions taken prior to January 1, 2007. should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts; no such accruals exist as of January 1, 2007. The Company and its subsidiaries file a consolidated U.S. federal income tax return and a consolidated unitary return in the state of Tennessee. These returns are subject to examination by taxing authorities for all years after 2002.

Financial Condition

The Company’s total assets increased $22.8 million, or 4.04%, to $587.2 million at March 31, 2007, from $564.4 million at December 31, 2006.

Loans. Loans, net of allowance for loan losses, totaled $481.5 million at March 31, 2007, an increase of 22.9 million, or 4.99%, compared to $458.6 million at December 31, 2006. The net increase in loans was primarily composed of an increase in real estate construction loans of $17.5 million or 15.12%.

The following schedule details the loans of the Company at March 31, 2007, and December 31, 2006:


(In Thousands)	March 31, 2007		December 31, 2006

Commercial, financial & agricultural	$	214,545	$	205,487
Real estate – construction		132,873		115,417
Real estate – mortgage		133,667		137,963
Consumer		6,765		5,987

		487,850		464,854
Unearned income		613		656
Allowance for loan loss		5,766		5,605

	$	481,471	$	458,593

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FORM 10-Q CONTINUED

Investment Securities. Securities decreased $977,000, or 1.44%, from $67.8 million at December 31, 2006, to $66.8 million at March 31, 2007. At March 31, 2007, the market value of the Company’s securities portfolio was less than its amortized cost by $427,000, or (0.6%). At December 31, 2006, the market value of the Company’s securities portfolio was less than its amortized cost by $547,000, or (0.8%). The weighted average yield (stated on a tax-equivalent basis) of the securities at March 31, 2007, was 4.95%. The Company has an extremely conservative approach to investments. All investments contained in the portfolio are government grade with no corporate bonds. Approximately 42.7% of the portfolio consists of mortgage-backed securities. Although the investment portfolio’s cash flow is expected to decrease in a rising interest rate environment due to the amount of mortgage-backed securities in the portfolio, the average maturity of the portfolio increases by less than one year should interest rates instantaneously increase by 100 basis points.

All the Company’s securities are classified as available-for-sale.


	March 31, 2007				December 31, 2006
(In Thousands)	Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value

U.S. Treasury and other U.S. government agencies and corporations	$	23,857	$	23,765	$	23,855	$	23,721
Obligations of states and political subdivisions		14,496		14,488		14,500		14,499
Mortgage-backed securities		28,881		28,554		29,976		29,564

	$	67,234	$	66,807	$	68,331	$	67,784

There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at March 31, 2007, which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.

In addition, the Company has invested in bank owned life insurance (“BOLI”) policies to finance certain 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 Company and to enable the Company to fund cost-effective benefits for employees. The Company treats BOLI life insurance products as Company investments. Presently, the Company has invested $6.8 million in these policies. The investments earned $88,000 for the Company during the three months ended March 31, 2007 (a 4.87% annualized rate of return, on a pre-tax benefit basis).

Total liabilities increased by $21.6 million, or 4.08%, to $551.1 million for the three months ended March 31, 2007, compared to $529.5 million at December 31, 2006. The primary components of this increase were an increase of $10.7 million in deposit accounts, an increase of $7.6 million in Federal Home Loan Bank advances and an increase of $3.7 million in securities sold under repurchase agreements.

The increase in assets in the first quarter of 2007 as mentioned earlier was funded primarily by increases in deposits. Total deposits increased from $465.0 million at

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FORM 10-Q CONTINUED

December 31, 2006, to $475.7 million at March 31, 2007, representing an increase of $10.7 million, or 2.32%. The Company experienced the largest amount of growth in deposits related to time deposits which increased $12.7 million, or 4.16%, from $305.0 million at December 31, 2006, to $317.8 million at March 31, 2007. Included in the time deposit growth, brokered time deposits decreased $5.5 million, or (8.02%), from $68.6 million as of December 31, 2006, to $63.1 million as of March 31, 2007. The growth of time deposits is attributed to special deposit campaigns offering competitive rates on these accounts during the period. Over the three months ended March 31, 2007, the Company has experienced an increase in savings accounts, which include Money Market Deposit Accounts, of $3.9 million, or 4.02%. Additionally, the Company has experienced a decrease in demand deposit accounts of $5.1 million, or (11.44%), from a balance of $44.4 million as of December 31, 2006 compared to $39.3 million as of March 31, 2007. The decrease in demand deposit accounts is attributed to the number of commercial customers and the volatility and size of transactions associated with those accounts. Securities sold under repurchase agreements increased to $6.7 million during the three months ended March 31, 2007, for a total increase of $3.7 million, or 125.03%, from a balance of $3.0 million as of December 31, 2006. Advances from Federal Home Loan Bank increased to $52.2 million as of March 31, 2007, for a total increase of $7.6 million, or 17.09%, since the December 31, 2006, balance of $44.6 million.

Critical Accounting Estimates

The Company has designed and implemented a system calculated and intended to identify weaknesses or losses in its loan portfolio. 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 $81.4 million, $5.3 million, and $1.5 million, respectively at March 31, 2007, are divided into various groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and thus are not subject to the provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairment under the provisions of SFAS Nos. 114 and 118.

The Company considers all loans on non-accrual status to be impaired. Loans are placed on non-accrual status when doubt as to timely collection of principal or interest exists, or when

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FORM 10-Q CONTINUED

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 non-accrual 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 anticipated ability to pay and/or the Bank’s anticipated ability to collect from the borrower, from collateral liquidation and/or from other obligors (such as guarantors).

Generally, at the time a loan is placed on non-accrual 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 non-accrual 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 non-accrual 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 no longer in doubt. At March 31, 2007, the Company had non-accrual loans totaling $1.9 million as compared to $2.5 million at December 31, 2006, representing 0.39% and 0.54% of total loans, respectively.

Generally the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring. Interest is accrued on such loans that continue to meet the modified terms of their loan agreements. At March 31, 2007, the Company had $782,000 in 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 March 31, 2007, and December 31, 2006, were as follows:


(In Thousands)	March 31, 2007				December 31, 2006

	Recorded Investment		Allowance for Loan Loss		Recorded Investment		Allowance for Loan Loss
Impaired loans with allowance for loan loss	$	2,614	$	586	$	2,978	$	565
Impaired loans with no allowance for loan loss	$	721	$	—	$	1,153	$	—

	$	3,335	$	586	$	4,131	$	565

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 three months ended March 31, 2007, and 2006, was $2.9 million and $1.2 million, respectively. Interest income recognized on these loans was $32,000 as of March 31, 2007 with no interest income recognized on these loans for the period ended March 31, 2006.

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FORM 10-Q CONTINUED

The following schedule details selected information as to non-performing loans of the Company at March 31, 2007 and December 31, 2006:


	March 31, 2007				December 31, 2006
(In Thousands)	Past Due 90 Days		Non- Accrual		Past Due 90 Days		Non- Accrual
Real estate – mortgage	$	324	$	1,105	$	244	$	331
Real estate – construction		—		538		—		1,500
Consumer loans		12		125		—		15
Commercial		346		102		386		661

	$	682	$	1,870	$	630	$	2,507
Renegotiated loans	$	325	$	—	$	62	$	32

Total	$	1,007	$	1,870	$	692	$	2,539

The Company’s allowance for loan losses at March 31, 2007, was $5.8 million as compared to $5.6 million at December 31, 2006. Non-performing loans amounted to $2.9 million at March 31, 2007, as compared to $3.2 million at December 31, 2006. Non-performing loans are loans which have been placed on non-accrual status, loans that are 90 days past due plus past due renegotiated loans. Charge-offs totaled $115,000 for the first three months of 2007 and $77,000 for the same period in 2006. Recoveries amounted to $13,000 for the first three months of 2007 and $11,000 for the same period in 2006. The provision for loan losses was $263,000 for the first three months of 2007 and $428,000 for the first three months of 2006. The provisions for these periods are considered by management to be reasonable.

The allowance for loan losses at March 31, 2007, represents 1.21% of total loans outstanding. At December 31, 2006, the allowance for loan losses represented 1.2% of total loans outstanding. Management has a system in place to identify and monitor problem loans. A Reserve for Loan Loss Calculation is prepared each quarter end to determine the adequacy of the allowance for loan losses (“ALL”). On an ongoing basis during each quarter, formal reviews and analyses are performed including analyses of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain loans (including material loan relationships and problem loans), loan activity since the previous assessment, Loan Administration reports prepared by the Loan Review Officer and other employees, consideration of current or changing economic conditions, and analysis of other information pertinent to the condition and performance of the bank’s loan portfolio. The level of the ALL to net loans outstanding will vary depending on the results of ongoing analyses and the quarterly Reserve for Loan Loss Calculation. The calculation and other pertinent information is presented to and approved by the Board of Directors quarterly. Management believes the ALL at March 31, 2007, to be adequate and appropriate.

Transactions in the allowance for loan losses were as follows:


	March 31,
(In Thousands)	2007			2006

Balance, January 1, 2007, and 2006, respectively	$	5,605		$	4,604
Add (deduct):
Losses charged to allowance		(115	)		(77	)
Recoveries credited to allowance		13			11
Provision for loan losses		263			428

Balance, March 31, 2007, and 2006, respectively	$	5,766		$	4,966

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

The provision for loan losses is based on past loan experience and other factors which, in management’s 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 a system in place designed to identify and monitor potential problem loans on a timely basis. Of course, no system is either perfect or infallible.

The following table presents total internally graded loans as of March 31, 2007, and December 31, 2006:


	March 31, 2007

(In Thousands)	Total		Special Mention	Substandard	Doubtful	Loss

Commercial, financial and agricultural	$	1,040	15	921	104	—
Real estate mortgage		2,694	741	1,948	—	5
Real estate construction		747	—	747	—	—
Consumer		98	—	17	81	—

	$	4,579	756	3,633	185	5


	December 31, 2006

(In Thousands)	Total		Special Mention	Substandard	Doubtful	Loss

Commercial, financial and agricultural	$	1,152	15	1,134	3	—
Real estate mortgage		1,063	—	1,063	—	—
Real estate construction		2,439	—	2,439	—	—
Consumer		100	—	19	81	—

	$	4,754	15	4,655	84	—

Of the $4.6 million internally graded loans noted above as of March 31, 2007, management believes that approximately $905,000 million in principal losses are possible, for which a specific loan loss allowance has been made. Potential principal losses are up approximately $123,000 from December 31, 2006 when management believed that approximately $783,000 in principal losses was possible, for which a specific loan loss allowance had been made. The increase is attributed to the single borrower which has been internally graded as substandard in the real estate construction loan category as mentioned previously.

Residential real estate loans that are graded substandard, doubtful or loss, totaling $1.9 million at March 31, 2007, and December 31, 2006, consist of 27 and 17 individual loans, respectively that have been graded accordingly due to bankruptcies, inadequate cash flows and delinquencies. Potential losses on these loans are anticipated by management for which a loan loss allocation has been made in the amount of $354,000.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

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


	March 31, 2007				December 31, 2006

(In Thousands)			Percent of Loans in Each Category to Total Loans				Percent of Loans in Each Category to Total Loans


Commercial, financial and agricultural	$	2,147	41.0	%	$	2,054	41.5	%
Real estate construction		1,454	27.5	%		1,374	24.8	%
Real estate mortgage		2,009	30.4	%		1,993	32.7	%
Consumer		156	1.1	%		184	1.0	%

	$	5,766	100.0	%	$	5,605	100.0	%

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. A Company has liquidity potential when it has the ability to obtain sufficient funds in a timely manner at a reasonable cost. The availability of funds through deposits, the purchase and sales of securities in the investment portfolio, the use of funds for consumer and commercial loans and the access to debt markets affect the liquidity of the Company.

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 deposit accounts generally require higher costs than savings accounts.

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.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

Funds management decisions must reflect management’s intent to maintain profitability in both the immediate and long-term earnings. 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 of the Company. These meetings focus on the spread between the Company’s cost of funds and interest yields generated primarily through loans and investments.

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 investments with, or short-term loans to, other banks are also a major source of liquidity.

It is anticipated that with present maturities, the anticipated 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. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in any material way.

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 $2.4 million (3.54% of the portfolio) is presently scheduled to mature or reprice within the next 12 months. Additionally, the Company expects to receive approximately $10.5 million of projected principal and interest payments from its security portfolio over the next twelve months.

A secondary source of liquidity is the Company’s loan portfolio. Residential construction and commercial real estate loans which are short term in nature continue to provide a significant source of liquidity to the Company. Over the past 12 months, the loan portfolio has averaged about $25.2 million per month in principal payments alone. At March 31, 2007, loans of approximately $269.4 million (55.2% of the portfolio) either will become due or will be subject to rate adjustments within 12 months from the respective date. Loans subject to maturity equal $193.3 million with $76.1 million of the loans repricing over the next 12 months. The Company’s emphasis has been placed on structuring adjustable rate loans.

As for liabilities, certificates of deposit of $100,000 or greater totaling approximately $190.5 million (92.3% of the total time deposit portfolio) will mature or could reprice during the next 12 months. The Company’s deposit base increased approximately $10.8 million during the three months ended March 31, 2007. The increase in deposits consists of a $5.8 million decrease in transactional accounts, a $3.9 million increase in savings and money market deposits accounts and a $12.7 million increase in time deposits. Advances from the Federal Home Loan Bank increased by $7.6 million to $52.2 million at March 31, 2007, from $44.6 million at December 31, 2006.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

Historically, there has been no significant reduction in immediately-withdrawable accounts such as negotiable order of withdrawal (NOW) accounts, money market demand accounts, demand deposits and regular savings accounts. 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, or a failure to increase, the interest rate paid on these 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 established branches in Sumner and Davidson Counties and opened another full service branch location in Williamson County during October 2006 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.

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.

Off Balance Sheet Arrangements

At March 31, 2007, the Company had unfunded loan commitments outstanding of $125.8 million and outstanding standby letters of credit of $4.4 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company’s bank subsidiary has the ability to liquidate Federal funds sold or securities available-for-sale or on a short-term basis to borrow and purchase Federal funds from other financial institutions or borrow from the Federal Home Loan Bank. Additionally, the Company’s bank subsidiary could offer to sell participations in these or other loans to correspondent banks. As mentioned above, the Company’s bank subsidiary has been able to fund its ongoing liquidity needs through its stable core deposit base, loan payments (payoffs, principal payments and interest payments), investment security maturities along with principal and interest payments received on securities, and cash flows and short-term borrowings.

Management believes that with present maturities, the anticipated growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the near term future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in a materially adverse way in the near term future, other than the branches previously discussed.

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

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

funds rise or fall at a faster rate than the interest income earned on funds, loans or investments, 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.

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

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

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

There are no known material changes in reported market risks during the three months ended March 31, 2007, known to management. Please refer to Item 2 of Part I of this Report for additional information related to market and other risks.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

Item 4:

Controls and Procedures

As of the end of the period covered by this quarterly 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 effectiveness 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.

Because the Company’s common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, the Company is subject to certain requirements of the Sarbanes-Oxley Act of 2002 (SOX). Under SOX, the Public Company Accounting Oversight Board has imposed significant internal procedures, internal controls, and other requirements on public companies such as the Company, and compliance with these requirements may prove expensive to the Company.

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

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

There have been no material developments during the quarter with respect to any material pending legal proceedings outside ordinary routine litigation incidental to the Company’s business.

Item 1A.

Risk Factors

There are no changes in risk factors applicable to the Company from those set forth in Section 1A of the Company’s annual report on Form 10-K for the year ended December 31, 2006, which readers are urged to review.

Item 2.

Unregistered Sales Of Equity Securities And Use Of Proceeds

(a)

Not applicable

(b)

Not applicable.

(c)

The Issuer did not repurchase any of its shares during the first quarter of 2007.

The only restrictions on working capital and/or dividends are those reported in Part I of this Quarterly Report on Form 10-Q, as well as those discussed with respect to dividends and capital in the Company’s Annual Report on Form 10-K, particularly in the section “Supervision and Regulation” and in the discussion of the Company’s common stock.

Item 3.

Defaults Upon Senior Securities

(a)

Not applicable.

(b)

Not applicable.

Item 4.

Submission Of Matters To A Vote Of Security Holders

There were no matters submitted to a vote of security holders during the fiscal quarter ended March 31, 2007.

Item 5.

Other Information

(a)

Not applicable.

(b)

Not applicable.

CAPITAL BANCORP, INC.

FORM 10-Q CONTINUED

Item 6.

Exhibits

(1)

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

(2)

Exhibit 32 consists of Section 1350 certifications.

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:	May 9, 2007	/s/ R. Rick Hart
		R. Rick Hart, Chairman, President and Chief Executive Officer

DATE:	May 9, 2007	/s/ Sally P. Kimble
		Sally P. Kimble, Executive Vice President and Chief Financial Officer

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CAPITAL BANCORP INC 10-Q