Annual Report on Form 10-K for the Year Ended December 31, ~~2010~~2011

INDEX

PART I		Page No.

Item 1.	Business	4
Item 1A.	Risk Factors	1526
Item 1B.	Unresolved Staff Comments	2847
Item 2.	Properties	2848
Item 3.	Legal Proceedings	2848
Item 4.	~~(Removed and Reserved)~~Mine Safety Disclosures	2848

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2848
Item 6.	Selected Financial Data	3050
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3152
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	5877
Item 8.	Financial Statements and Supplementary Data	6078
	Consolidated Balance Sheets as of December 31, 2011 (Successor) and December 31, 2010 (Predecessor)	78
	Consolidated Statements of Operations for the Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 (Predecessor)	6079
	~~Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008~~	61
	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 ~~and 2008~~(Predecessor)	6280
	Consolidated Statements of Cash Flows for the Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 ~~and 2008~~(Predecessor)	6382
	Notes to Consolidated Financial Statements	6584
	Reports of Independent Registered Public Accounting Firm	99126
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~101~~130
Item 9A.	Controls and Procedures	~~101~~130
Item 9A(T).	Controls and Procedures	~~103~~131
Item 9B.	Other Information	~~103~~ 131

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	~~103~~ 131
Item 11.	Executive Compensation	~~104~~ 131
Item 12.	Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters	~~104~~ 131
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~104~~131
Item 14.	Principal Accounting Fees and Services	~~104~~ 131

PART IV

Item 15.	Exhibits and Financial Statement Schedules	~~104~~ 132
Signatures

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PART I

As used in this document, the terms “we,” “us,” “our,” and “Company” mean Capital Bank Corporation and its subsidiaries and/or management (unless the context indicates another meaning); the terms “Bank,” “Capital Bank, NA” and “Capital Bank” means Capital Bank, National Association (unless the context indicates another meaning). Throughout this document, the banking operations are generally discussed from the perspective of the management of the Company including management of affiliated banks that ultimately merged with and into Capital Bank, NA.

Forward Looking Statements

Information set forth in this Annual Report on Form 10-K contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements represent the Company’s judgment concerning the future and are subject to business, economic and other risks and uncertainties, both known and unknown, that could cause the Company’s actual operating results and financial position to differ materially from the forward looking statements. Such forward looking statements can be identified by the use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” or “continue,” or the negative thereof or other variations thereof or comparable terminology.

~~Capital Bank Corporation (the “Company”)~~The Company cautions that any such forward looking statements are further qualified by important factors that could cause the Company’s actual operating results to differ materially from those in the forward looking statements, including without limitation, the management of the Company’s growth, the risks associated with possible or completed acquisitions, the risks associated with the Bank’s loan portfolio, competition within the industry, dependence on key personnel, government regulation and the other risk factors described in Part I- Item 1A. Risk Factors.

Any forward looking statements contained in this Annual Report on Form 10-K are as of the date hereof, and the Company undertakes no duty to update them if views change later. These forward looking statements should not be relied upon as representing the Company’s views as of any date subsequent to the date hereof.

ITEM 1. BUSINESS

~~General~~The Company

Capital Bank Corporation (the “Company”) is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. ~~The~~Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary iswas Capital Bank (“Old Capital Bank”), a state-chartered banking corporation that was incorporated under the laws ~~of the State~~ of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. The Company also serves as the holding company for CB Trustee, LLC and has interests in three trusts, Capital Bank Statutory Trust I, II and III (hereinafter collectively referred to as the “Trusts”). These Trusts are not consolidated with the financial statements of the Company. CB Trustee, LLC was established to facilitate the administration of deeds of trust relating to real property used as collateral to secure loans made by ~~the~~Old Capital Bank and has no assets, liabilities, operational income or expenses. Capital Bank Investment Services, Inc. currently has no operations and is inactive, but remains a subsidiary of the Company.

Capital Bank is a community bank engaged in the general commercial banking business, primarily in markets in central and western North Carolina. As of December 31, 2010, the Company had assets of approximately $1.6 billion, $1.3 billion in loans, $1.3 billion in deposits, and $76.7 million in shareholders’ equity. The Company’s corporate office is located at 333 Fayetteville Street, Suite 700, Raleigh, North Carolina 27601, and its telephone number is (919) 645-6400. The Bank operates 32 branch offices in North Carolina: five branch offices in Raleigh, four in Asheville, four in Fayetteville, three in Burlington, three in Sanford, two in Cary, and one each in Clayton, Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Siler City, Pittsboro, Wake Forest and Zebulon.

The Bank offers a full range of banking services, including the following: checking accounts; savings accounts; NOW accounts; money market accounts; certificates of deposit; individual retirement accounts; loans for real estate, construction, businesses, agriculture, personal use, home improvement and automobiles; equity lines of credit; mortgage loans; credit loans; consumer loans; credit cards; safe deposit boxes; bank money orders; internet banking; electronic funds transfer services including wire transfers and remote deposit capture; traveler’s checks; and free notary services to all Bank customers. In addition, the Bank provides automated teller machine access to its customers for cash withdrawals through nationwide ATM networks. Through a partnership between the Bank’s financial services division and Capital Investment Companies, an unaffiliated Raleigh, North Carolina-based broker-dealer, the Bank also makes available a complete line of uninsured investment products and services. The securities involved in these services are not deposits or other obligations of the Bank and are not insured by the FDIC.

The Trusts were formed for the sole purpose of issuing trust preferred securities. The proceeds from such issuances were loaned to the Company in exchange for subordinated debentures, which are the sole assets of the Trusts. The Company’s obligation under the subordinated debentures constitutes a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities. The Trusts have no operations other than those that are incidental to the issuance of the trust preferred securities.

On June 30, 2011, Old Capital Bank merged (the “Bank Merger”) with and into NAFH National Bank (“NAFH Bank”), a national banking association and wholly-owned subsidiary of Capital Bank Financial Corp. (“CBF,” formerly known as “North American Financial Holdings, Inc.”), with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, NA,” “Capital Bank” or the “Bank”). CBF currently owns approximately 83% of the Company’s common stock. Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).

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~~Transaction with~~

Prior to the Bank Merger, the Company operated 32 branch offices in North ~~American Financial Holdings, Inc.~~Carolina: five in Raleigh, four in Asheville, four in Fayetteville; three in Burlington, three in Sanford, two in Cary, and one each in Clayton, Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Pittsboro, Siler City, Wake Forest and Zebulon. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.

CBF Investment

On January 28, 2011 (the “Transaction Date”), the Company completed the issuance and sale ~~to North American Financial Holdings, Inc. (“NAFH”)~~ of 71,000,000 shares of its common stock to CBF for $181,050,000 million in cash (the ~~“Investment”~~“CBF Investment”). As a result of the Investment and following the completion of the Company’s rights offering on March 11, 2011, NAFH currently owns approximately 83% of the Company’s common stock. The Company’s shareholders approved the issuance of such shares to NAFH, and an amendment to the Company’s articles of incorporation to increase the authorized shares of common stock to 300,000,000 shares from 50,000,000 shares, at a special meeting of shareholders held on December 16, 2010. In connection with the ~~investment,~~CBF Investment, each ~~existing~~ Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of ~~the~~Old Capital Bank’s then existing loan portfolio.

Also in connection with the ~~investment, pursuant to an agreement among NAFH, the U.S. Treasury Department (“Treasury”), and the Company,~~CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the Troubled Asset Relief Program (“TARP”) were repurchased (the “TARP Repurchase”). Following the TARP Repurchase, the Series A Preferred Stock and warrant are no longer outstanding, and accordingly the Company no longer expects to be subject to the restrictions imposed by the terms of the Series A Preferred Stock, or certain regulatory provisions of the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”) that are imposed on TARP recipients.repurchased.

Pursuant to the CBF Investment, ~~Agreement,~~ shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations (the “Rights Offering”). The Company issued 1,613,165 shares of ~~the Company’s~~ common stock ~~were issued~~ in exchange for $4,113,570.75 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

~~Upon~~Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.

The most significant fair value adjustments resulting from the application of the acquisition method of accounting were made to loans. Accounting guidance requires that all loans held by the Company on the Transaction Date be recorded at their fair value. The fair value of these acquired loans takes into account both the differences in loan interest rates and market rates and any deterioration in their credit quality. Because concerns about the probability of receiving the full amount of the contractual payments from the borrowers was considered in estimating the fair value of the loans, stating the loans at their fair value results in no allowance for loan loss being provided for these loans as of the Transaction Date. As of January 28, 2011, certain loans had evidence of credit deterioration since origination, and it was probable that not all contractually required principal and interest payments would be collected. Such loans identified at the time of the acquisition were accounted for using the measurement provision for purchased credit-impaired (“PCI”) loans, according to the FASB Accounting Standards Codification (“ASC”) 310-30. The special accounting for PCI loans not only requires that they are recorded at fair value at the date of acquisition and that any related allowance for loan and lease losses is not permitted to be carried forward past the Transaction Date, but it also governs how interest income will be recognized on these loans and how any further deterioration in credit quality after the Transaction Date will be recognized and reported.

As a result of the adjustments required by the acquisition method of accounting, the Company’s balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Bank Mergers

On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, NA. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, Inc. (“Green Bankshares”) and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial Corp. (“TIB Financial”), and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

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Capital Bank, NA was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks – Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina), (collectively, the “Failed Banks”) – from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.

The Bank Merger, the preceding merger of TIB Bank and Capital Bank, NA, and the succeeding merger of GreenBank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. At the time of the Bank Merger, due to the deconsolidation of Old Capital Bank, the balance of accumulated other comprehensive income was reclassified to common stock within shareholders’ equity. Immediately following the Bank Merger, on June 30, 2011, CBF, the Company and TIB Financial made cash contributions of additional capital to Capital Bank, NA of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, NA. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, NA in exchange for additional shares of Capital Bank, NA. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.

The Company reports its investment in Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment in that entity. As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, NA totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of December 31, 2011 (Successor). In the successor period from June 30, 2011 to December 31, 2011, the Company increased the equity investment balance by $4.0 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $771 thousand based on its equity in Capital Bank, NA’s other comprehensive income.

Potential Merger of the Company and CBF

On September 1, 2011, the Boards of Directors of CBF and the Company approved and adopted a merger agreement. The merger agreement provides for the merger, following the receipt of shareholder approval by the Company’s shareholders (including CBF), of the Company with and into CBF, with CBF continuing as the surviving entity (the “merger”). In the merger, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or the Company, will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of the Company’s common stock will be entitled to receive cash in lieu thereof.

Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.

Capital Bank, NA’s Business Strategy

Our business strategy is to build a mid-sized regional bank by operating, integrating and growing our existing operations as well as to acquire other banks, including failed, underperforming and undercapitalized banks and other complementary assets. We believe recent and continuing dislocations in the southeastern U.S. banking industry have created an opportunity for us to create a mid-sized regional bank that will be able to realize greater economies of scale compared to smaller community banks while still providing more personalized, local service than larger-sized banks.

Operating Strategy

Our operating strategy emphasizes relationship banking focused on commercial and consumer lending and deposit gathering. We have organized operations under a line of business operating model, under which we have appointed experienced bankers to oversee loan and deposit production in each of our markets, while centralizing credit, finance, technology and operations functions. Our management team possesses significant executive-level leadership experience at Fortune 500 financial services companies, and we believe this experience is an important advantage in executing this regional, more focused, bank business model.

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Organic Loan and Deposit Growth

The primary components of our operating strategy are to originate high-quality loans and low-cost customer deposits. Our executive management team has developed a hands-on operating culture focused on performance and accountability, with frequent and detailed oversight by executive management of key performance indicators. We have implemented a sales management system for our branches that is focused on growing loans and core deposits in each of our markets. We believe that this system holds loan officers and branch managers accountable for achieving loan production goals, which are subject to the conservative credit standards and disciplined underwriting practices that we have implemented as well as compliance, profitability and other standards that we monitor. We also believe that accountability is crucial to our results. Our executive management monitors production, credit quality and profitability measures on a quarterly, monthly, weekly and, in some cases, daily basis and provides ongoing feedback to our business unit leaders. During 2011, we originated $728.4 million of new commercial and consumer loans. During this period, the Bank also grew its core deposits by $265.4 million (or 29.3% annualized growth) excluding the initial increase in deposits resulting from CBF’s acquisitions of Capital Bank Corporation and Green Bankshares.

The current market conditions have forced many banks to focus internally, which we believe creates an opportunity for organic growth by strongly capitalized banks such as ourselves. We seek to grow our loan portfolio by offering personalized customer service, local market knowledge and a long-term perspective. We have selectively hired experienced loan officers with local market knowledge and existing client relationships. Additionally, our executive management team takes an active role in soliciting, developing and maintaining client relationships.

Efficiency and Cost Savings

Another key element of our strategy is to operate efficiently by carefully managing our cost structure and taking advantage of economies of scale afforded by our acquisitions to control operating costs. We have been able to reduce headcount by consolidating duplicative operations of the acquired banks and streamlining management. In addition, we expect to recognize additional cost savings now that we have fully integrated Green Bankshares with the rest of CBF’s business. We plan to further improve efficiency by boosting the productivity of our sales force through our focus on accountability and employee incentives and through selective hiring of experienced loan officers with existing books of business.

To evaluate and control operating costs, we monitor certain performance metrics including our efficiency ratio, which equals total noninterest expense divided by net revenue (net interest income plus noninterest income). Our efficiency ratio has been and is expected to continue to be significantly impacted by certain costs that follow acquisitions of financial institutions. Capital Bank, NA’s efficiency ratio for 2011 was 69.9%, which was impacted by $7.6 million of conversion expenses due to integration of the acquired banks. Excluding the impact of these items, Capital Bank, NA’s adjusted efficiency ratio for 2011 was 66.6%. The adjusted efficiency ratio is a non-GAAP measure which we believe provides investors with information useful in understanding our business and our operating efficiency. Comparison of our adjusted efficiency ratio with those of other companies may not be possible because other companies may calculate the adjusted efficiency ratio differently. The adjusted efficiency ratio, which equals adjusted noninterest expense (noninterest expense less conversion expense) divided by net revenue (net interest income plus noninterest income), for the year ended December 31, 2011 is as follows:

Capital Bank, NA		Efficiency Ratio
December 31, 2011		Non-adjusted			Adjusted
(Dollars in thousands)

Noninterest expense	$	163,710		$	163,710
Less: conversion expense		–			(7,620	)
Noninterest expense, adjusted		163,710			156,090

Net interest income		193,598			193,598
Noninterest income		40,660			40,660
Net revenue	$	234,258		$	234,258

Efficiency ratio		69.9	%		66.6	%

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Capital Bank, NA’s Acquisition and Integration Strategy

Acquisition and Integration Strategy

We seek acquisition opportunities consistent with our business strategy that we believe will produce attractive returns for our stockholders. We plan to pursue acquisitions that position us in southeastern U.S. markets with attractive demographics and business growth trends, expand our branch network in existing markets, increase our earnings power or enhance our suite of products. Our future acquisitions may include distressed assets sold by the FDIC or another seller where our operations, underwriting and servicing capabilities or management experience give us an advantage in evaluating and resolving the assets.

Our acquisition process begins with detailed research of target institutions and the markets they serve. We then draw on our management team’s extensive experience and network of industry contacts in the southeastern region of the United States. Our research and analytics team, led by our Chief of Investment Analytics and Research, maintains lists of priority targets for each of our markets. The team analyzes financial, accounting, tax, regulatory, demographic, transaction structures and competitive considerations for each target and prepares acquisition projections for review by our executive management team and Board of Directors.

As part of our diligence process in connection with potential acquisitions, we undertake a detailed portfolio- and loan-level analysis conducted by a team of experienced credit analysts led by our Chief Risk Officer. In addition, our executive management team engages the target management teams in active dialogue and personally conducts extensive on-site diligence at target branches.

Our executive management team has demonstrated success not only in acquiring financial institutions and combining them onto a common platform, but also in managing the integration of those financial institutions. Our management team develops integration plans prior to the closing of a given transaction that allows us to (1) reorganize the ~~investment, R. Eugene Taylor, NAFH’s Chief Executive Officer, Christopher G. Marshall, NAFH’s Chief Financial Officer,~~acquired institution’s management team under our line of business model immediately after closing; (2) implement our credit, risk and ~~R. Bruce Singletary, NAFH’s~~interest rate risk management, liquidity and compliance and governance policies and procedures; and (3) integrate our target’s technology and processing systems rapidly. Using our procedures, we have already integrated credit and operational policies across each of our acquisitions. We reorganized the management of the Failed Banks within three months of closing, and we merged their core processing systems with TIB Financial’s platform within six months. We also fully integrated Capital Bank Corporation in July 2011 and Green Bankshares in February 2012.

Sound Risk Management

Sound risk management is an important element of our commercial/retail bank business model and is overseen by our Chief Risk Officer, ~~were named~~Bruce Singletary, who has over 19 years of experience managing credit risk. Our credit risk policy, which has been implemented across our organization, establishes prudent underwriting guidelines, limits portfolio concentrations by geography and loan type and incorporates an independent loan review function. Mr. Singletary has created a special assets division with 35 employees to work out or dispose of legacy problem assets using a detailed process taking into account a borrower’s repayment capacity, available guarantees, collateral value, interest accrual and other factors. We believe our risk management policies establish conservative regulatory capital ratios, robust liquidity (including contingency planning), limitations on wholesale funding (including brokered CDs, holding company debt and advances from the FHLB), and restrictions on interest rate risk.

Our Competitive Strengths

Experienced and Respected Management Team with a Successful Track Record. Members of our executive management team and Board of Directors have served in executive leadership roles at Fortune 500 financial services companies, including Bank of America, Fifth Third Bancorp and Morgan Stanley. The executive management team has extensive experience overseeing commercial and consumer banking, mergers and acquisitions, systems integrations, technology, operations, credit and regulatory compliance. Many members of our executive management team are from the southeastern region of the United States and have an extensive network of contacts with banking executives, existing and potential customers, and business and civic leaders throughout the region. We believe our executive management team’s reputation and track record give us an advantage in negotiating acquisitions and hiring and retaining experienced bankers.

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	•	Growth-Oriented Business Model. Our executive management team seeks to foster a strong sales culture with a focus on developing key client relationships, including direct participation in sales calls, and through regular reporting and accountability while emphasizing risk management. Our executive management and line of business executives monitor performance on a quarterly, monthly, weekly, and in some cases, daily basis, and our compensation plans reward core deposit and responsible commercial loan growth, subject to credit quality, compliance and profitability standards. We have an integrated, scalable core processing platform and centralized credit, finance and technology operations that we believe will support future growth. Our business model contributed to the Bank’s $728.4 million of commercial and consumer loan originations and $265.4 million in total deposit growth for 2011, excluding the initial increase in deposits resulting from CBF’s acquisitions of Capital Bank Corporation and Green Bankshares.

	•	Highly Skilled and Disciplined Acquirer. CBF has executed six acquisitions in just 14 months. CBF integrated its first four investments into a common core processing platform within six months, the fifth in July 2011 and the sixth in February 2012. We believe our track record of completing and integrating transactions quickly has helped us negotiate transactions on more economically favorable terms. CBF has conducted due diligence on more than 82 financial institutions, many of which its diligence process indicated would not meet its strategic objectives.

	•	Reduced-Risk Legacy Portfolio. Our acquired loan portfolios have been marked-to-market with the application of the acquisition method of accounting, meaning that the carrying value of these assets at the time of their acquisitions reflected our estimate of lifetime credit losses. In addition, as of December 31, 2011, approximately 13% of our loan portfolio was covered by the loss sharing agreements we entered into with the FDIC, resulting in limited credit risk exposure for these assets.

	•	Excess Capital and Liquidity. As a result of its private placements and the disciplined deployment of capital, we have ample capital with which to make acquisitions. As of December 31, 2011, CBF had a 13.2% tangible common equity ratio1 (which is a non-GAAP measure used by certain regulators, financial analysts and others to measure core capital strength) and a 12.5% Tier 1 leverage ratio, which provides CBF with $161.7 million in excess capital relative to the 10% Tier 1 leverage standard required under Capital Bank, NA’s operating agreement with the OCC. As of December 31, 2011, Capital Bank, NA had a 10.4% Tier 1 leverage ratio, a 15.7% Tier 1 risk-based ratio and a 16.7% total risk-based capital ratio. As of December 31, 2011, the Capital Bank had cash and securities equal to 21.6% of total assets, representing $426.9 million of liquidity in excess of our target of 15%, which provides ample liquidity to support our existing banking franchises. Further, our investment portfolio consists primarily of U.S. agency-guaranteed mortgage-backed securities, which have limited credit or liquidity risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity Management” for a discussion of the use of the tangible common equity ratio in our business and the reconciliation of tangible common equity ratio.

	•	Scalable Back-Office Systems. All of CBF’s acquired institutions operate on a single information processing system. Green Bankshares separately uses the same operating platform, which we have begun to integrate onto our common information processing system. Our systems are designed to accommodate all of our projected future growth and allow us to offer our customers virtually all of the services currently offered by the nation’s largest financial institutions, including state-of-the-art online banking. Enhancements made to our systems are included to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support.

Our Market Area

We view our market area as the ~~Company’s CEO, CFO and CRO, respectively, and members~~southeastern region of the ~~Company’s Board~~United States. Our six acquisitions have established a footprint defined by the Miami-Raleigh-Nashville triangle, which includes the Carolinas, Southwest Florida (Naples) and Southeast Florida (Miami-Dade and the Keys). These markets include a combination of ~~Directors.~~large and fast-growing metropolitan areas that we believe will offer us opportunities for organic loan and deposit growth. Approximately 47% of our current branches are located in our target MSAs.


1	The tangible common equity ratio is a non-GAAP measure calculated as tangible common equity divided by tangible assets. Tangible common equity is calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net and tangible assets are calculated as total assets less goodwill and other intangible assets, net.

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Products and Services

Banking Services by Business Line

Capital Bank, NA has integrated each of CBF’s six acquisitions under a single line of business operating model. Under this model, we have appointed experienced bankers to oversee loan and deposit growth in each of our markets, while we have centralized other functions, including credit, finance, operations, marketing, human resources and information technology.

The Commercial Bank

Our commercial bank business consists of teams of commercial loan officers operating under the leadership of commercial banking executives in Florida, the Carolinas and Tennessee. The commercial banking executives are responsible for production goals for loans, deposits and fees. They work with senior credit officers to ensure that loan production is consistent with our loan policies and with financial officers to ensure that loan pricing is consistent with our profitability goals. We focus our commercial bank business on loan originations for established small and middle-market businesses with whom we develop personal relationships that we believe give us a competitive advantage and differentiates us from larger banking institutions. In addition, our commercial lending teams coordinate with personnel in our consumer bank business to provide personal loans and other services to the owners and managers and employees of the bank’s commercial clients. At December 31, 2011, commercial loans totaled $2.9 billion (or 67.0% of our total loan portfolio). Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. Our commercial lending teams offer a wide range of commercial loan products, including:

	•	owner occupied commercial real estate construction and term loans;

	•	working capital loans and lines of credit;

	•	demand, term and time loans; and

	•	equipment, inventory and accounts receivable financing.

During 2011, Capital Bank originated $561.8 million of new commercial loans. Our commercial lending teams also seek to gather low-cost deposits from commercial customers in connection with extending credit. In addition to business demand, savings and money market accounts, we also provide specialized cash management services and deposit products.

The Consumer Bank

Our consumer bank business consists of Capital Bank, NA’s retail banking branches and associated businesses. Similar to our commercial bank business, we have organized the ~~aforementioned members~~consumer bank by geographical market, with divisions consisting of ~~NAFH management,~~our Florida, Carolinas and Tennessee branches. Each division reports to a consumer banking executive responsible for achieving core deposit and consumer loan growth goals. Pricing of our deposit products is reviewed and approved by our asset-liability committee and the ~~Company’s Board~~standards for consumer loan credit quality are documented in our loan policy and reviewed by our credit executives.

We seek to differentiate our consumer bank business from competitors through the personalized service offered by our branch managers, customer service representatives, tellers and other staff. We offer various services to meet the needs of ~~Directors was reconstituted~~our customers, including checking, savings and money market accounts, certificates of deposit and debit and credit cards. Our products are designed to foster relationships by rewarding our best customers for desirable activities such as debit card transactions, e-statements and direct deposit. In addition to traditional products and services, we offer competitive technology in Internet banking services, which we plan to further upgrade in order to keep pace with technological improvements. Consumer loan products we offer include:

	•	home equity lines of credit;

	•	residential first lien mortgages;

	•	second lien mortgages;

	•	new and used auto loans;

	•	new and used boat loans;

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Index

	•	overdraft protection; and

	•	unsecured personal credit lines.

Branch managers and their staff are charged with growing core deposits with a ~~combination~~special focus on new demand deposit accounts and expected to conduct outbound telephone campaigns, generate qualified referrals, collaborate with business partners in the commercial lending teams and evaluate, and make informed decisions with respect to, existing and prospective customers. In 2011, the Bank generated organic core deposit growth of ~~two existing members (Oscar A. Keller III~~$265.4 million (or 29.3% annualized growth) excluding the initial increase in deposits resulting from the acquisitions of Capital Bank Corporation and ~~Charles F. Atkins) and two additional NAFH-designated members (Peter N. Foss and William A. Hodges).~~Green Bankshares. As of December 31, 2011, consumer loans totaled $1.4 billion. During 2011, the Bank originated $166.6 million of new consumer loans.

Ancillary Fee-Based Businesses

Mortgage Banking

Through our newly established mortgage banking business, we aim to originate high-quality loans for customers who are willing to establish a deposit relationship with us. The mortgage loans in our portfolio that do not meet this criterion are sold in to the secondary market to buyers, such as Fannie Mae and Freddie Mac, and provide an additional source of fee income. Our mortgage banking capabilities include conventional and nonconforming mortgage underwriting and construction and permanent financing.

Private Banking, Trust and Investment Management

We offer private banking and wealth management services to affluent clients, business owners and retirees, building new relationships and expanding existing relationships to grow deposits, loans and fiduciary and investment management fee income. Through private banking, we offer deposit products, commercial and consumer loans, including mortgage financing, and investment accounts providing access to a wide range of mutual funds, annuities and other financial products, as well as access to our affiliate, Naples Capital Advisors, which is a registered investment advisor with approximately $102 million in assets under management as of December 31, 2011.

Lending Activities

~~The Bank originates~~We originate a variety of loans, including loans secured by real estate, loans for construction, loans for commercial purposes, loans to individuals for personal and household purposes, loans to municipalities and loans ~~to municipalities.~~for new and used cars. A significant portion of ~~the~~our loan portfolio is related to real estate. As of December 31, 2011, loans related to real estate totaled $3.7 billion (or 86% of our total loan portfolio). The economic trends in the ~~areas served by the Bank~~regions we serve are influenced by the ~~significant~~ industries within ~~the~~those regions. Consistent with ~~the Company’s~~our emphasis on being a community-oriented financial institution, most of ~~its~~our lending activity is with customers located in and around counties in which ~~it has~~we have banking offices. ~~The ultimate collectability~~As of ~~the Bank’s~~December 31, 2011, our owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, residential mortgage loans and commercial and industrial loans represented 21%, 21%, 19% and 11%, respectively, of our $4.3 billion loan ~~portfolio is susceptible to changes in the market conditions of these geographic regions.~~portfolio.

~~The Company uses~~We use a centralized risk management process to ensure uniform credit underwriting that adheres to ~~its~~our loan policies as approved annually by the CBF Board of Directors. Lending policies are reviewed on a regular basis to confirm that ~~the Company is~~we are prudent in setting underwriting criteria. Credit risk is managed through a number of methods, including a loan approval process that establishes consistent procedures for the processing and approval of loan requests, risk grading of all commercial loans and certain consumer loans and coding of all loans by purpose, class and collateral type. ~~The Company also seeks~~We seek to focus on underwriting loans that enhance a balanced, diversified portfolio. Management analyzes ~~the Bank’s~~our commercial real estate concentrations by market and region on a regular basis in an attempt to prevent ~~over-exposure~~overexposure to any one type of commercial real estate loan and incorporates ~~third party~~third-party real estate and market analysis to monitor market conditions. As of December 31, 2011, the carrying value of our commercial real estate loans in North Carolina, South Carolina, Florida, Tennessee and Virginia totaled $699.2 million, $303.6 million, $794.4 million, $596.0 million and $15.8 million, respectively. At December 31, 2011, commercial real estate loans in all regions totaled $2.4 billion (21% of which was owner occupied commercial real estate). We have recently tightened underwriting and pricing standards for indirect auto and residential mortgage lending and deemphasized originations of commercial real estate mortgages.

~~The Company believes~~We believe that early detection of potential credit problems through regular contact with ~~the Bank’s~~our clients, coupled with consistent reviews of the borrowers’ financial condition, are important factors in overall credit risk management. Management has designed an active system for the purpose of identifying problem loans and managing the quality of the portfolio. This system includes a problem loan detection program, which is designed to prioritize potential problem loans at an early stage to enable timely solutions by senior management. Under this program, loans that are projected to be 30 or more days past due at month-end are reviewed on a weekly basis. Additionally, the Bank employs a loan review department that audits a minimum of 25% of commercial loan commitments annually, concentrating on potentially high risk portions of the portfolio, a sample of each consumer loan officer’s loan portfolio and all unsecured commercial loans greater than $500,000. All findings are reported to senior management and the Audit Committee of the Board of Directors. The Bank has recently enhanced its loan ~~review function to include an annual review of all loans in excess of $500,000. Another part of the Company’s~~Our approach to proactively ~~managing~~manage credit quality is to aggressively work with customers for ~~which~~whom a problem loan has been identified ~~to potentially resolve~~and assist in resolving issues before ~~defaults result.~~a default occurs.

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~~The amounts~~A key component of our growth strategy is to grow our loan portfolio by originating high-quality commercial and ~~types of~~consumer loans, ~~outstanding for the past five years ended~~other than non-owner occupied real estate loans, that comply with our conservative credit policies and that produce revenues consistent with our financial objectives. From December 31, 2010 to December 31, 2011, the Bank’s loan portfolio grew organically by $107.9 million (or 6.2% annualized growth), excluding the initial increase in loans resulting from the acquisitions of Capital Bank Corporation and Green Bankshares, with $728.4 million in new originations partially offset by pay-downs, dispositions and charge-offs. Additionally, we are ~~shown on~~working to reduce excessive concentrations in commercial real estate, which characterized our acquisitions’ legacy portfolios, in order to achieve a more diversified portfolio. It is our long-term goal to reduce the ~~following table:~~commercial real estate concentration to approximately 20% of our total loan portfolio.

2010 2009 2008 2007 2006
(Dollars in thousands) Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total

Commercial real estate $ 806,184 64 % $ 892,523 64 % $ 803,634 64 % $ 708,768 65 % $ 638,492 64 %
Consumer real estate 262,955 21 262,503 19 235,688 19 196,706 18 195,853 19
Commercial and industrial 145,435 12 183,733 13 186,474 15 169,389 15 155,673 15
Consumer 6,163 1 9,692 1 11,215 1 13,540 1 12,246 1
Other loans 33,742 2 41,851 3 17,357 1 6,704 1 5,788 1
$ 1,254,479 100 % $ 1,390,302 100 % $ 1,254,368 100 % $ 1,095,107 100 % $ 1,008,052 100 %
In addition, we operate an indirect auto lending business which originates loans for new and used cars through relationships with dealers in Southwest Florida, Southeast Florida, the Florida Keys and Tennessee. Loans are approved subject to review of FICO credit scores, vehicle age, and loan-to-value. We are in the process of implementing an expert scoring model which will include additional proprietary underwriting factors. We set pricing for loans based on credit score, vehicle age, and loan term. As of December 31, 2011, we had $87.2 million of indirect auto loans.

Deposits

Deposits are the primary source of funds for lending and investing activities and their cost is the largest category of interest expense. Deposits are attracted principally from clients within our branch network through the offering of a wide selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, certificates of deposit and individual retirement accounts. We are focused on reducing our reliance on high-cost certificates of deposit as a source of funds with low-cost deposit accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (1) the interest rates offered by competitors, (2) the anticipated amount and timing of funding needs, (3) the availability and cost of alternative sources of funding and (4) the anticipated future economic conditions and interest rates. Client deposits are attractive sources of funding because of their stability and relatively low cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other services. In addition, we gather a portion of our deposit base through brokered deposits. At December 31, 2011, total deposits were $5.1 billion of which $5.0 billion (or 97%) were non-brokered deposits and $143.1 million (or 3%) were brokered deposits. At December 31, 2011, our core deposits (total deposits less time deposits) consisted of $683.3 million of noninterest checking accounts, $1.1 billion of negotiable order of withdrawal accounts, $296.4 million of savings accounts and $868.4 million of money market deposits. For the foreseeable future, we remain focused on retaining and growing a strong deposit base and transitioning certain of our customers to low-cost banking services as high-cost funding sources, such as high-interest certificates of deposit, mature.

Investing Activities

Investment securities represent a significant portion of ~~the Company’s~~Capital Bank, NA’s assets. The Bank invests in securities as allowable under bank regulations. These securities include obligations of the U.S. Treasury, U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, bank eligible obligations of any state or political subdivision, privately-issued mortgage-backed securities, bank eligible corporate obligations, mutual funds and limited types of equity securities.

~~The Bank’s~~ Our investment activities are governed internally by a written, Board-approved policy. The investment policy is carried out by the ~~Company’s Risk~~Bank’s Asset-Liability Committee (“ALCO”), which meets regularly to review the economic environment and establish investment strategies. The Risk Committee also has much broader responsibilities, which are discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” contained elsewhere in this report.

Investment strategies are reviewed by ~~the Risk Committee~~ALCO based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the ~~Company.~~Bank. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).

~~Funding Activities~~Marketing

~~Deposits are the primary source~~Our marketing activities support all of ~~funds for lending~~our products and ~~investing activities,~~services described above. Historically, most of our marketing efforts have supported our real estate mortgage, commercial and their cost is the largest category of interest expense. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. The Company’s funding activities are monitored and governed through the Company’s overall asset/liability management process, which is further discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk” contained elsewhere in this report. The Company conducts its funding activities in compliance with all applicable laws and regulations.retail banking businesses. Our marketing strategy aims to:

Deposits are attracted principally from clients within the Bank’s branch network through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) the anticipated future economic conditions and interest rates. Client deposits are attractive sources of funding because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other services. In addition, the Bank gathers a portion of its deposit base through brokered deposits. At December 31, 2010, brokered deposits represented approximately 8% of the Company’s total deposits compared to 5% at December 31, 2009.

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Index

~~The types and mix of deposit accounts for the past five years ended December 31 are shown on the following table:~~

	•	capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors in both the commercial and residential mortgage lending businesses;

	•	meet our growth objectives based on current economic and market conditions;

	•	attract core deposits held in checking, savings, money market and certificate of deposit accounts;

	•	provide customers with access to our local executives;

	•	appeal to customers in our region who value quality banking products and personal service;

	•	pursue commercial and industrial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors;

	•	cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability;

	•	utilize existing industry relationships cultivated by our senior management team; and

	•	adhere to safe and sound credit standards.

2010 2009 2008 2007 2006
(Dollars in thousands) Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total

Demand, noninterest checking $ 116,113 9 % $ 141,069 10 % $ 125,281 10 % $ 114,780 10 % $ 120,945 11 %
NOW accounts 185,782 14 175,084 13 144,985 11 119,299 11 109,692 11
Money market accounts 137,422 10 184,146 13 212,780 16 229,560 21 221,502 21
Savings accounts 30,639 2 28,958 2 28,726 2 32,399 3 35,049 3
Time deposits 873,330 65 848,708 62 803,542 61 602,660 55 568,021 54
$ 1,343,286 100 % $ 1,377,965 100 % $ 1,315,314 100 % $ 1,098,698 100 % $ 1,055,209 100 %
We use a variety of targeted marketing media including the Internet, print, direct mail and financial newsletters. Our online marketing activities include paid advertising, as well as cross-sale marketing through our website and Internet banking services. We believe our marketing strategy will enable us to take advantage of lower average customer acquisition costs, build valuable brand awareness and lower our funding costs.

Information Technology Systems

We have made and continue to make investments in our information technology systems for our banking and lending operations and cash management activities. We seek to integrate our acquisitions quickly and successfully and believe this is a necessary investment in order to enhance our capabilities to offer new products and overall customer experience and to provide scale for future growth and acquisitions. Our enhancements are tailored to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support. We work closely with certain third-party service providers to which we outsource certain of our systems and infrastructure. We use the Jack Henry SilverLake System as our banking platform and believe that the scalability of our infrastructure will support our growth strategy and that this platform will support our growth needs.

Competition

The ~~Company’s ability~~financial services industry in general and our primary markets of South Florida, Tennessee and the Carolinas are highly competitive. We compete actively with national, regional and local financial services providers, including banks, thrifts, credit unions, mortgage bankers and finance companies, money market mutual funds and other financial institutions, some of which are not subject to ~~borrow funds from nondeposit sources provides additional flexibility in meeting its liquidity needs. Short-term borrowings~~the same degree of regulation and restrictions imposed upon us. Our largest competitors include ~~federal funds purchased, securities sold under repurchase agreements, short-term Federal Home Loan~~ Bank ~~(“FHLB”) borrowings, Federal Reserve~~of America, Wells Fargo, BB&T, First Citizens, Royal Bank ~~(“FRB”) discount window borrowings~~of Canada, SunTrust, Regions, FNB United Corp., Toronto-Dominion, Synovus, First Financial, SCBT, JPMorgan Chase, Citigroup, EverBank, Fifth Third Bancorp, First Horizon, Pinnacle Financial, First South and brokered deposits. The Company also utilizes longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost-effective options for funding asset growth and satisfying capital needs. The Company’s long-term borrowings include long-term FHLB advances, structured repurchase agreements and subordinated debt.U.S. Bancorp.

~~Market Area~~Competition among providers of financial products and ~~Competition~~services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The primary factors driving commercial and consumer competition for loans and deposits are interest rates, the fees charged, customer service levels and the range of products and services offered. In addition, other competitive factors include the location and hours of our branches and customer service.

Capital Bank’s primary markets are in central and western North Carolina. The Bank’s Triangle market includes operations in Wake, Johnston and Granville counties. The Triangle, which includes Raleigh, North Carolina’s capital, as well as Chapel Hill, Durham and Research Triangle Park, has a well-diversified economic base with a mixture of businesses, universities, and large medical institutions. The Bank’s Sandhills market includes operations in Cumberland, Lee and Chatham counties. The Sandhills market, which includes the city of Fayetteville, has a large military community and is home to Fort Bragg, the largest global Army installation with 10% of the Army’s active forces. Fayetteville and the surrounding Sandhills market have in recent years experienced significant growth due to the 2005 Base Realignment and Closure process (“BRAC”). Lee and Chatham counties are also significant centers for various industries, including agriculture, manufacturing, lumber and tobacco. The Bank’s Triad market includes operations in Alamance County, which has a diversified economic base, comprised primarily of manufacturing, agriculture, retail and wholesale trade, government, services and utilities. The Bank’s Western market includes operations in Buncombe and Catawba counties. Catawba County, which includes the town of Hickory, is a regional center for manufacturing and wholesale trade. The economic base of the city of Asheville, in Buncombe County, is comprised primarily of services, health care, tourism and manufacturing.Employees

~~Local economic conditions in the markets that the~~At December 31, 2011, Capital Bank, ~~serves affect the Bank’s results~~NA had over 1,375 full-time employees and 165 part-time employees. None of ~~operations and, as~~our employees are parties to a ~~result, the Company’s results of operations. The following tables present certain important economic indicators at the latest date available for regions in which the Bank has branches:~~

~~Unemployment Rate:~~

Region 12/08 12/09 12/10
% Change
2008–2010
% Change
2009–2010

United States 7.1% 9.7% 9.1% 28.2% -6.2%
North Carolina 8.2% 11.1% 9.7% 18.3% -12.6%
Triangle:
Raleigh/Cary MSA 6.2% 9.0% 7.8% 25.8% -13.3%
Sandhills:
Fayetteville MSA 7.2% 9.3% 9.0% 25.0% -3.2%
Triad:
Burlington MSA 8.8% 12.5% 10.1% 14.8% -19.2%
Western:
Asheville MSA 6.4% 9.0% 7.9% 23.4% -12.2%
Hickory/Lenoir/Morganton MSA 10.2% 14.9% 12.4% 21.6% -16.8%

Source: North Carolina Employment Security Commission (NC ESC)
collective bargaining agreement. We consider our relationship with our employees to be adequate.

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Index

~~Median Household Income:~~

	~~Region~~	~~2009~~
	~~United States~~ ~~(1)~~	~~$49,777~~
	~~North Carolina~~ ~~(2)~~	~~$60,434~~
	~~Triangle:~~
	~~Granville County~~ ~~(2)~~	~~$50,698~~
	~~Johnston County~~ ~~(2)~~	~~$54,089~~
	~~Wake County~~ ~~(2)~~	~~$75,682~~
	~~Sandhills:~~
	~~Chatham County~~ ~~(2)~~	~~$54,654~~
	~~Cumberland County~~ ~~(2)~~	~~$50,583~~
	~~Lee County~~ ~~(2)~~	~~$49,375~~
	~~Triad:~~
	~~Alamance County~~ ~~(2)~~	~~$50,579~~
	~~Western:~~
	~~Buncombe County~~ ~~(2)~~	~~$47,450~~
	~~Catawba County~~ ~~(2)~~	~~$51,200~~

~~Bankruptcy Filings(3)(4)~~ ~~(Business~~Facilities and ~~Individual):~~Real Estate

Region 2009 2010 % Change
United States 1,402,816 1,593,081 8.1%
North Carolina 27,740 26,674 -3.8%
North Carolina – Eastern District 11,702 10,760 -8.0%
North Carolina – Middle District 7,520 7,160 -4.8%
North Carolina – Western District 8,518 8,754 2.8%

	~~(1)~~	Source: Report, “Income, Poverty, and Health Insurance Coverage in the United States: 2009”. Released by the US Census Bureau/US Dept. of Commerce-Economics and Statistics Administration, September 2010.
	~~(2)~~	~~Source: NC Dept. of Commerce, Economic Development Intelligence System (EDIS)~~
	~~(3)~~	~~Source: United States Courts~~
	~~(4)~~	~~Bankruptcy data is for the 12-month period ended December 31, 2010 and 2009.~~

~~Commercial banking~~Capital Bank, NA currently leases approximately 263,000 square feet of office and operations space in North Carolina, ~~is extremely competitive. The Company competes~~Florida and South Carolina. We operate 35 branches in ~~its market areas with some~~Florida, 32 in North Carolina, 12 in South Carolina, 63 in Tennessee and one in Virginia. Of these branches, 42 were leased and the rest were owned. In addition, the Bank owns approximately 110,000 square feet and leases approximately 100,000 square feet of non-branch office space. Management believes the terms of the ~~largest banking organizations in the state~~various leases are consistent with market standards and the country, other community financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Manywere arrived at through arm’s-length bargaining.

Related Person Transactions

Certain of the ~~Company’s competitors have broader geographic markets, easier access to capital~~directors and ~~lower cost funding,~~executive officers of Capital Bank, NA, members of their immediate families and ~~higher lending limits than~~entities with which they are involved are customers of and borrowers from the ~~Company; and are also able to provide more services and make greater use of media advertising.~~

Despite the competition in its market areas, the Company believes that it has certain competitive advantages that distinguish it from its competition. The Company believes that its primary competitive advantages are its strong local identity and affiliation with the communities it serves, and its emphasis on providing specialized services to small- and medium-sized business enterprises, professionals and upper-income individuals. The Bank offers customers modern, high-tech banking without compromising community values such as prompt, personal service and friendliness. The Bank offers many personalized services and attracts customers by being responsive and sensitive to their individualized needs. The Company relies on goodwill and referrals from shareholders and satisfied customers, as well as traditional media to attract new customers. To enhance a positive image in the communities in which it has branches, the Bank supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations.

~~Employees~~

Bank. As of December 31, ~~2010,~~2011, total loans outstanding to directors and executive officers of the Bank, and their associates as a group, equaled approximately $13.1 million. All outstanding loans and commitments included in such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features.

Due to the Bank Merger, the Company ~~employed 406 persons,~~reported no loans or deposits on its Consolidated Balance Sheet as of which 389 were full-time and 17 were part-time. None of the Company’s employees are represented by a collective bargaining unit or agreement. The Company considers relations with its employees to be good.

December 31, 2011 (Successor).

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~~Index~~

Supervision and Regulation

~~Holding companies, banks and many of their non-bank affiliates are extensively~~The U.S. banking industry is highly regulated under ~~both~~ federal and state law. ~~The following is a brief summary~~These regulations affect the operations of ~~certain statutes, rules and regulations affecting~~ the Company and its subsidiaries. Investors should understand that the ~~Bank.~~primary objectives of the U.S. bank regulatory regime are the protection of depositors and consumers and maintaining the stability of the U.S. financial system, and not the protection of stockholders.

As a bank holding company, we are subject to supervision and regulation by the Federal Reserve. Our national bank subsidiary (which will be our sole bank subsidiary following the reorganization) is subject to supervision and regulation by the OCC, the Consumer Financial Protection Bureau (which we refer to as the “CFPB”) and the FDIC. In addition, we expect that the additional businesses that we may invest in or acquire will be regulated by various state and/or federal regulators, including the OCC, the Federal Reserve, the CFPB and the FDIC.

The description below summarizes certain elements of the applicable bank regulatory framework. This ~~summary~~description is not intended to describe all laws and regulations applicable to us and our subsidiaries. Banking statutes, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies and changes in them, including changes in how they are interpreted or implemented, could have material effects on our business. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us and our subsidiaries. These issuances also may affect the conduct of our business or impose additional regulatory obligations. The description is qualified in its entirety by reference to the ~~particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description~~full text of the statutes, or regulations, ~~applicable to the Company’s or the Bank’s business. Supervision, regulation~~policies, interpretive letters and ~~examination of the Company and the Bank by bank regulatory agencies is intended primarily for the protection of the Bank’s depositors rather than holders of the Company’s common stock.~~other written guidance that are described.

~~On October 28, 2010, the~~ Bank ~~entered into an informal Memorandum~~Holding Company Regulations

Any entity that acquires direct or indirect control of ~~Understanding with the FDIC and the NC Commissioner. In accordance with the terms of the MOU, the Bank has agreed to, among other things, (i) increase regulatory capital to achieve and maintain~~ a minimum Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 12%, (ii) monitor and reduce its commercial real estate concentration, (iii) timely identify and reduce its overall level of problem loans, (iv) establish and maintain an adequate allowance for loan losses, and (v) ensure adherence to loan policy guidelines. In addition, the Bankbank must obtain ~~regulatory~~prior approval prior to paying any dividends to the Company. The MOU will remain in effect until modified, terminated, lifted, suspended or set aside by the regulatory authorities. In addition, the Company consults withof the Federal Reserve ~~Bank of Richmond prior~~ to ~~payment of~~become a bank holding company pursuant to the BHCA. As a bank holding company, we are subject to regulation under the BHCA and to examination, supervision and enforcement by the Federal Reserve. While subjecting us to supervision and regulation, we believe that being a bank holding company (as opposed to a non-controlling investor) broadens the investment opportunities available to us among public and private financial institutions, failing and distressed financial institutions, seized assets and deposits and FDIC auctions. Federal Reserve jurisdiction also extends to any ~~dividends~~company that is directly or ~~interest on debt.~~indirectly controlled by a bank holding company, such as subsidiaries and other companies in which the bank holding company makes a controlling investment.

~~The Company is~~Statutes, regulations and policies could restrict our ability to diversify into other areas of financial services, acquire depository institutions and make distributions or pay dividends on our equity securities. They may also ~~regulated~~require us to provide financial support to any bank that we control, maintain capital balances in excess of those desired by ~~the SEC~~management and pay higher deposit insurance premiums as a result of a general deterioration in the financial condition of Capital Bank or other depository institutions we control. They may also limit the fees and prices Capital Bank charges for its ~~publicly traded common stock. The regulatory compliance burden of being~~consumer services.

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Index

Capital Bank, NA as a ~~publicly traded company has increased significantly over the last decade.~~National Bank

~~Holding Company Regulation~~Capital Bank is a national bank and is subject to supervision (including regular examination) by its primary banking regulator, the OCC. Retail operations of the bank are also subject to supervision and regulation by the CFPB. Capital Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund (the “DIF”) up to applicable limits in the manner and extent provided by law. Capital Bank is subject to the Federal Deposit Insurance Act, as amended (which we refer to as the “FDI Act”), and FDIC regulations relating to deposit insurance and may also be subject to supervision by the FDIC under certain circumstances.

~~General~~OCC Operating Agreement and FDIC Order

Capital Bank is subject to specific requirements pursuant to the OCC Operating Agreement, which it entered into with the OCC in connection with our acquisition of the Failed Banks. The ~~Company~~OCC Operating Agreement requires, among other things, that Capital Bank maintain various financial and capital ratios and provide notice to, and obtain consent from, the OCC with respect to any additional failed bank acquisitions from the FDIC or the appointment of any new director or senior executive officer of Capital Bank.

Capital Bank (and, with respect to certain provisions, CBF) is also subject to the FDIC Order issued in connection with the FDIC’s approval of our applications for deposit insurance for the Failed Banks. The FDIC Order requires, among other things, that during the first three years following our acquisition of the Failed Banks, Capital Bank must obtain the FDIC’s approval before implementing certain compensation plans and submit updated business plans and reports of material deviations from those plans to the FDIC. Additionally, the FDIC Order requires that Capital Bank maintain Tier 1 common equity (a non-GAAP measure) to total assets of at least 10% during such three-year period and after such three-year period to remain “well capitalized.”

A failure by CBF or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could subject CBF to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent CBF from executing its business strategy and negatively impact its business, financial condition, liquidity and results of operations. As of December 31, 2011, Capital Bank was in compliance with all of the material terms of the OCC Operating Agreement and FDIC Order.

Regulatory Notice and Approval Requirements for Acquisitions of Control

We must generally receive federal regulatory approval before we can acquire an institution or business. Specifically, a bank holding company ~~registered with~~must obtain prior approval of the Federal Reserve in connection with any acquisition that results in the bank holding company owning or controlling more than 5% of any class of voting securities of a bank or another bank holding company. In acting on such applications of approval, the Federal Reserve considers, among other factors: the effect of the acquisition on competition; the financial condition and future prospects of the applicant and the banks involved; the managerial resources of the applicant and the banks involved; the convenience and needs of the community, including the record of performance under the ~~Bank Holding Company Act~~CRA; the effect of ~~1956 (the “BHCA”). As such,~~ the ~~Company~~acquisition on the stability of the United States banking or financial system; and the ~~Bank are subject~~effectiveness of the applicant in combating money laundering activities. Our ability to ~~the supervision, examination and reporting requirements contained~~make investments in ~~the BHCA and the regulation~~depository institutions will depend on our ability to obtain approval of the Federal Reserve. The Federal Reserve could deny our application based on the above criteria or other considerations. We may also be required to sell branches as a condition to receiving regulatory approval, which may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.

Federal and state laws impose additional notice, approval and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank holding company. These laws include the BHCA and the Change in Bank Control Act. Among other things, these laws require regulatory filings by an investor that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution.

Broad Supervision and Enforcement Powers

The Federal Reserve, the OCC and the FDIC have broad supervisory and enforcement authority with regard to bank holding companies and banks, including the power to conduct examinations and investigations, issue cease and desist orders, impose fines and other civil and criminal penalties, terminate deposit insurance and appoint a conservator or receiver. The CFPB similarly has broad regulatory supervision and enforcement authority with regard to consumer protection matters affecting us or our subsidiaries. Bank regulators regularly examine the operations of banks and bank holding companies. In addition, banks and bank holding companies are subject to periodic reporting and filing requirements.

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Bank regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization’s operations are unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things: enjoin “unsafe or unsound” practices, require affirmative actions to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors and terminate deposit insurance.

Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject the Company, its subsidiaries and their respective officers, directors and institution-affiliated parties to the remedies described above and other sanctions. In addition, the FDIC may terminate a bank’s depository insurance upon a finding that the bank’s financial condition is unsafe or unsound or that the bank has engaged in unsafe or unsound practices or has violated an applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency.

Interstate Banking

Interstate Banking for State and National Banks

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (which we refer to as the “Riegle-Neal Act”), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. The Dodd-Frank Act permits a national or state bank, with the approval of its regulator, to open a branch in any state if the law of the state in which the branch is located would permit the establishment of the branch if the bank were a bank chartered in that state. National banks may provide trust services in any state to the same extent as a trust company chartered by that state.

Limits on Transactions with Affiliates

Federal law restricts the amount and the terms of both credit and non-credit transactions between a bank and its nonbank affiliates. Transactions with any single affiliate may not exceed 10% of the capital stock and surplus of the bank.

Bank Holding Companies as a Source of Strength

Federal Reserve law requires that a bank holding company ~~obtain~~serve as a source of financial and managerial strength to each bank that it controls and, under appropriate circumstances, to commit resources to support each such controlled bank.

Under the ~~prior approval of~~prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve ~~before: (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank; (ii) taking any action~~believes that ~~causes a bank to become a subsidiary of~~ a bank holding ~~company; (iii) acquiring all~~company’s activities, assets or ~~substantially all of the assets of any bank; or (iv) merging or consolidating with any other bank holding company.~~

~~The BHCA generally prohibits~~affiliates represent a bank holding company and its subsidiaries, with certain exceptions, from engaging in or acquiring or retaining direct or indirect control of any company engaged in (i) activities other than banking or managing or controlling banks or other permissible subsidiaries, or (ii) those activities not determined by the Federal Reserve to be closely related to banking, or managing or controlling banks. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. For example, extending credit and servicing loans, leasing real or personal property, providing securities brokerage services, providing certain data processing services, acting as agent or broker in selling credit life insurance and certain other types of insurance underwriting activities have all been determined by regulations of the Federal Reserve to be permissible non-bank activities.

The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it believes that continuation of such activity or such ownership or control constitutes a serioussignificant risk to the financial safety, soundness or stability of ~~any~~a controlled bank, ~~subsidiary of that bank holding company.~~

~~Additional Restrictions and Oversight~~

~~Subsidiary banks of a~~then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are ~~subject to certain restrictions imposed by~~not in the ~~Federal Reserve on any extensions~~best interests of ~~credit to~~ the bank holding company or ~~any of~~ its ~~subsidiaries, investments in the stock or securities of the~~stockholders. Because we are a bank holding company, we (and our consolidated assets) are viewed as a source of financial and ~~the acceptance of~~managerial strength for any controlled depository institutions, such ~~stock or securities~~ as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie-in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding company or any of its other subsidiaries.Capital Bank.

The ~~Federal Reserve~~Dodd-Frank Act also directs federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as sources of financial strength for the institution. The term “source of financial strength” is defined under the Dodd-Frank Act as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress. The appropriate federal banking agency for such a depository institution may ~~issue cease~~require reports from companies that control the insured depository institution to assess their abilities to serve as sources of strength and ~~desist orders against bank~~to enforce compliance with the source-of-strength requirements. The appropriate federal banking agency may also require a holding ~~companies and non-bank subsidiaries~~company to ~~stop actions believed to present a serious threat~~provide financial assistance to a bank with impaired capital. The Dodd-Frank Act requires that federal banking regulators propose implementing regulations no later than July 21, 2011. Under this requirement, in the future we could be required to provide financial assistance to Capital Bank should it experience financial distress. Based on our ownership of a national bank subsidiary, ~~bank. The Federal Reserve regulates certain debt obligations, changes~~the OCC could assess us if the capital of Capital Bank were to become impaired. If we failed to pay the assessment within three months, the OCC could order the sale of our stock in ~~control of bank holding companies and capital requirements.~~Capital Bank to cover the deficiency.

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~~Under~~In addition, capital loans by us to Capital Bank will be subordinate in right of payment to deposits and certain other indebtedness of Capital Bank. In the ~~provisions~~event of ~~North Carolina law,~~our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of Capital Bank ~~is registered with and subject to supervision~~will be assumed by the ~~North Carolina Office~~bankruptcy trustee and entitled to a priority of payment.

Depositor Preference

The FDI Act provides that, in the event of the ~~Commissioner~~“liquidation or other resolution” of ~~Banks.~~an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If our insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.

Regulatory Capital Requirements

In General

Bank regulators view capital levels as important indicators of an institution’s financial soundness. FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The ~~Federal Reserve has established risk-based~~final supervisory judgment on an institution’s capital ~~guidelines for~~adequacy is based on the regulator’s individualized assessment of numerous factors.

As a bank holding ~~companies.~~company, we are subject to various regulatory capital adequacy requirements administered by the Federal Reserve. In addition, the OCC imposes capital adequacy requirements on our subsidiary bank. The FDIC also may impose these requirements on Capital Bank and other depository institution subsidiaries that we may acquire or control in the future. The FDI Act requires that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum ~~standard for~~capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition.

Quantitative measures, established by the ~~ratio~~regulators to ensure capital adequacy, require that a bank holding company maintain minimum ratios of capital to risk-weighted assets. There are three categories of capital under the guidelines. With the implementation of the Dodd-Frank Act, certain changes have been made as to the type of capital that falls under each of these categories. For us, as a bank holding company, Tier 1 capital includes common shareholders’ equity, qualifying preferred stock and trust preferred securities issued before May 19, 2010, less goodwill and certain other deductions (including a portion of servicing assets and the unrealized net gains and losses, after taxes, on securities available for sale). Tier 2 capital includes preferred stock and trust preferred securities not qualifying as Tier 1 capital, subordinated debt, the allowance for credit losses and net unrealized gains on marketable equity securities, subject to limitations by the guidelines. Tier 2 capital is limited to the amount of Tier 1 capital (i.e., at least half of the total capital must be in the form of Tier 1 capital). Tier 3 capital includes certain qualifying unsecured subordinated debt. See “—Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”

Under the guidelines, capital is compared with the relative risk related to the balance sheet. To derive the risk included in the balance sheet, a risk weighting is applied to each balance sheet asset and off-balance sheet item, primarily based on the relative credit risk of the asset or counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0% and certain real estate-related loans risk-weighted at 50%. Off-balance sheet items, such as loan commitments and derivatives, are also applied a risk weight after calculating balance sheet equivalent amounts. A credit conversion factor is assigned to loan commitments based on the likelihood of the off-balance sheet item becoming an asset. For example, certain loan commitments are converted at 50% and then risk-weighted at 100%. Derivatives are converted to balance sheet equivalents based on notional values, replacement costs and remaining contractual terms. For certain recourse obligations, direct credit substitutes, residual interests in asset securitization and other securitized transactions that expose institutions primarily to credit risk, the capital amounts and classification under the guidelines are subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Banks and bank holding companies currently are required to maintain Tier 1 capital and the sum of Tier 1 and Tier 2 capital equal to at least 6% and 10%, respectively, of their total risk-weighted assets (including certain ~~off-balance-sheet obligations,~~off-balance sheet items, such as standby letters of credit) ~~is eight percent, of which at least four percent must consist of common equity, retained earnings,~~to be deemed “well capitalized.” The federal bank regulatory agencies may, however, set higher capital requirements for an individual bank or when a bank’s particular circumstances warrant. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements in order to meet well-capitalized standards, and future regulatory change could impose higher capital standards as a limited amount of perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less certain goodwill items and other adjustments (“Tier 1 capital”). The remainder (“Tier 2 capital”) may consist of mandatorily redeemable convertible debt securities, a limited amount of other preferred stock, subordinated debt and loan loss reserves.routine matter.

~~In addition, the~~

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The Federal Reserve ~~has established minimum leverage ratio guidelines~~may also set higher capital requirements for bank holding companies. These guidelines provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets less certain amounts (“Leverage Ratio”) equal to three percent for bank holding companies ~~that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a Leverage Ratio of at least four percent.~~

~~The guidelines provide that bank~~whose circumstances warrant it. For example, holding companies experiencing ~~significant~~internal growth ~~whether through internal expansion~~ or making acquisitions ~~will be~~are expected to maintain strong capital ~~ratios well~~positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The same heightened requirements apply to bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as to other banking institutions if warranted by particular circumstances or the institution’s risk profile. Furthermore, the guidelines indicate thatAlso, the Federal Reserve ~~will continue to consider~~considers a “tangible Tier 1 ~~Leverage Ratio”~~leverage ratio” (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or engaging in new ~~activity. The Federal Reserve has not advised~~activities. In addition, the ~~Company~~federal bank regulatory agencies have established minimum leverage (Tier 1 capital to adjusted average total assets) guidelines for banks within their regulatory jurisdictions. These guidelines provide for a minimum leverage ratio of ~~any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable~~5% for banks to ~~it.~~be deemed “well capitalized.” Our regulatory capital ratios and those of Capital Bank are in excess of the levels established for “well-capitalized” institutions.

As an additional means to identify problems in the financial management of ~~December 31, 2010,~~depository institutions, the ~~Company had Tier 1 risk-adjusted, total~~FDI Act requires federal bank regulatory ~~capital~~agencies to establish certain non-capital safety and ~~leverage capital of approximately 8.07%, 9.59%~~soundness standards for institutions for which they are the primary federal regulator. The standards relate generally to operations and ~~6.45%, respectively. Those same ratios as of December 31, 2009 were 10.16%, 11.41%~~management, asset quality, interest rate exposure and ~~8.94%, respectively.~~executive compensation. The agencies are authorized to take action against institutions that fail to meet such standards.

~~Anti-Money Laundering~~In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an institution pose to the institution and the ~~USA PATRIOT~~public and private stakeholders, including risks arising from certain enumerated activities. The federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future pursuant to the Dodd-Frank Act, the implementation of Basel III (described below) or other regulatory or supervisory changes. We cannot be certain what the impact of changes to existing capital guidelines will have on us or Capital Bank.

Basel I, Basel II and Basel III Accords

The ~~United~~current risk-based capital guidelines that apply to us and ~~Strengthening~~our subsidiary bank are based on the 1988 capital accord, referred to as Basel I, of ~~America~~the International Basel Committee on Banking Supervision (which we refer to as the “Basel Committee”), a committee of central banks and bank supervisors, as implemented by ~~Providing Appropriate Tools Required~~federal bank regulators. In 2008, the bank regulatory agencies began to ~~Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) contains anti-money laundering provisions that impose affirmative obligations~~phase in capital standards based on a ~~broad range~~second capital accord issued by the Basel Committee, referred to as Basel II, for large or “core” international banks and bank holding companies (generally defined for U.S. purposes as having total assets of financial institutions, including banks, brokers and dealers. Among other requirements, the USA PATRIOT Act requires all financial institutions to establish anti-money laundering programs that include, at a minimum, internal policies, procedures and controls; specific designation of an anti-money laundering compliance officer; ongoing employee training programs; and an independent audit function to test the anti-money laundering program. The USA Patriot Act requires financial institutions that establish, maintain, administer or manage private banking accounts for non-United States persons or their representatives to establish appropriate, specific, and where necessary, enhanced due diligence policies, procedures and controls designed to detect and report money laundering. The Company has established policies and procedures that the Company believes will comply with the requirements of the USA PATRIOT Act.

~~Emergency Economic Stabilization Act of 2008~~

In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act of 2008 was enacted on October 3, 2008. EESA authorized the Treasury to purchase or guarantee up to $700 billion in troubled assets from financial institutions under the Troubled Asset Relief Program. Pursuant to authority granted under EESA, the Treasury created the TARP Capital Purchase Program under which the Treasury was authorized to invest up to $250 billion ~~in senior preferred stock~~or more or consolidated foreign exposures of ~~U.S. banks and savings associations~~$10 billion or ~~their holding companies.~~

Institutions participating in the TARP or CPP were required to issue warrants for common or preferred stock or senior debt to the Treasury. If an institution participates in the CPP or if the Treasury acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Following the TARP Repurchase,more). Because we do not ~~expect these additional standards~~anticipate controlling any large or “core” international bank in the foreseeable future, Basel II will not apply to us.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase in arrangements for a strengthened set of capital requirements, known as Basel III. While the timing and scope of any U.S. implementation of Basel III remains uncertain, the following items provide a brief description of the relevant provisions of Basel III and their potential impact on our capital levels if applied to us and Capital Bank.

New Minimum Capital Requirements. Subject to implementation by the U.S. federal banking agencies, Basel III would be ~~applicable~~expected, among other things, to ~~the Company.~~increase required capital ratios of banking institutions to which it applies, as follows:

	•	Minimum Common Equity. The minimum requirement for common equity, the highest form of loss absorbing capital, would be raised from the current 2.0% level, before the application of regulatory adjustments, to 3.5% as of January 11, 2013 and 4.5% by January 1, 2015 after the application of stricter adjustments. The “capital conversion buffer,” discussed below, would cause required total common equity to rise to 7.0% by January 1, 2019 (4.5% attributable to the minimum required common equity plus 2.5% attributable to the “capital conservation buffer”).

	•	Minimum Tier 1 Capital. The minimum Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, would increase from 4.0% to 4.5% by January 1, 2013, and 6.0% by January 1, 2015. Total Tier 1 capital would rise to 8.5% by January 1, 2019 (6.0% attributable to the minimum required Tier 1 capital ratio plus 2.5% attributable to the capital conservation buffer, as discussed below).

	•	Minimum Total Capital. The minimum Total Capital (Tier 1 and Tier 2 capital) requirement would increase to 8.0% (10.5% by January 1, 2019, including the capital conservation buffer).

	•	Capital Conservation Buffer. The capital conservation buffer would add 2.5% to the regulatory minimum common equity requirement (adding 0.625% during each of the three years beginning in January 1, 2016 through January 1, 2019). The buffer would be added to common equity, after the application of deductions. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. It is expected that, while banks would be allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints that would be applied to earnings distributions.

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~~American Recovery and Reinvestment Act of 2009~~

	•	Countercyclical Buffer. Basel III expects regulators to require, as appropriate to national circumstances, a “countercyclical buffer” within a range of 0% to 2.5% of common equity or other fully loss-absorbing capital. The purpose of the countercyclical buffer is to achieve the broader goal of protecting the banking sector from periods of excess aggregate credit growth. For any given country, it is expected that this buffer would only be applied when there is excess credit growth that is resulting in a perceived system-wide buildup of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the capital conservation buffer range.

	•	Regulatory Deductions from Common Equity. The regulatory adjustments (i.e., deductions and prudential filters), including minority interests in financial institutions, mortgage-servicing rights, and deferred tax assets from timing differences, would be deducted in increasing percentages beginning January 1, 2014, and would be fully deducted from common equity by January 1, 2018. Certain instruments that no longer qualify as Tier 1 capital, such as trust preferred securities, also would be subject to phaseout over a 10-year period beginning January 1, 2013.

	•	Non-Risk-Based Leverage Ratios. These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures described above. In July 2010, the Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3.0% during the parallel run period. Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to adopting the 3.0% leverage ratio on January 1, 2018, based on appropriate review and calibration.

~~ARRA was enacted~~Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3%, based on ~~February 17, 2009~~a measure of total exposure that includes balance sheet assets, net of provisions and includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, ARRA imposes certain executive compensation and corporate governance obligations on all current and future TARP recipients, including the Company, until the institution has redeemed the preferred stock, which TARP recipients are now permitted to do under ARRA without regard to the three year holding period and without the need to raise new capital, subject to approval of its primary federal regulator.

Additionally, ARRA amends Section 111 of EESA to require the Treasury to adopt additional standards with respect to executive compensation and corporate governance for TARP recipients, which are set forth in the TARP Standards for Compensation and Corporate Governance: Interim Final Rule (“Interim Final Rule”), adopted by the Treasury on June 15, 2009. Following the TARP Repurchase, we do not expect these additional standards to be applicable to the Company.

~~Dodd-Frank Wall Street Reform and Consumer Protection Act~~

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and will impact all financial institutions including the Company and the Bank. The Dodd-Frank Act contains provisions that will, among other things, establish a Bureau of Consumer Financial Protection, establish a systemic risk regulator, consolidate certain federal bank regulators and impose increased corporate governance and executive compensation requirements. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and reports for the U.S. Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act are not yet known.

~~Bank Regulation~~

~~General~~

The Bank is subject to numerous state and federal statues and regulations that affect its business, activities and operations, and is supervised and examined by the NC Commissioner and the FDIC. The FDIC and the NC Commissioner regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations and other similar corporate actions. They also have authority to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The FDIC and the NC Commissioner regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, the issuance of securities, capital adequacy, loss reserves and compliance with the Community Reinvestment Act of 1977 (“CRA”)valuation adjustments, as well as ~~other laws~~potential future exposure to off-balance sheet items, such as derivatives. Basel III also includes both short- and ~~regulations. Interest~~long-term liquidity standards. The phase-in of the new rules is to commence on January 1, 2013, with the phase-in of the capital conservation buffer commencing on January 1, 2016 and ~~certain other charges collected~~the rules to be fully phased in by January 1, 2019.

In November 2010, Basel III was endorsed by the Group of Twenty (G-20) Finance Ministers and ~~contracted for by banks are also~~Central Bank Governors and will be subject to ~~state usury laws and certain federal laws concerning interest rates.~~

~~Deposit Insurance~~

~~The deposit accounts~~individual adoption by member nations, including the United States. On December 16, 2010, the Basel Committee issued the text of the ~~Bank are insured~~Basel III rules, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the ~~Deposit Insurance Fund (the “DIF”) of the FDIC. Pursuant to EESA~~Basel Committee and ARRA, the maximum deposit insurance amount per depositor was temporarily increased from $100,000 to $250,000. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009. The Dodd-Frank Act also provides unlimited deposit insurance for non-interest bearing transaction accounts through December 31, 2013.

The FDIC issues regulations and conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

~~The Bank is subject to insurance assessments imposed~~endorsed by the ~~FDIC.~~G-20 leaders. In January 2011, the Basel Committee issued further guidance on the qualification criteria for inclusion in Tier 1 capital. The ~~FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant~~federal banking agencies will likely implement changes to the ~~Federal Deposit Insurance Reform Act~~current capital adequacy standards applicable to us and our bank subsidiary in light of 2005. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings.

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Recently, the FDIC has been actively seeking to replenish the DIF. The FDIC increased risk-based assessment rates uniformly by seven basis points, on an annual basis, beginning in the first quarter of 2009. On May 22, 2009, the FDICBasel III. If adopted a final rule imposing a five basis point special assessment on each insured depository institution’s qualifying assets less Tier 1 capital as of June 30, 2009. The FDIC collected this special assessment on September 30, 2009. On November 12, 2009, the FDIC adopted a final rule that required insured financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for the following three years. Such prepaid assessments were collected on December 30, 2009 at a rate based on the insured institution’s modified third quarter 2009 assessment rate. The Company’s prepaid assessment was $7.3 million. Under the Dodd-Frank Act, the minimum designated reserve ratio of the DIF increased from 1.15 percent to 1.35 percent of estimated insured deposits. Additionally, the Dodd-Frank Act revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under the FDIC’s proposed rules, the assessment base will change from adjusted domestic deposits to average consolidated total assets minus average tangible equity.

~~Dividends and Capital Requirements~~

Under North Carolina corporation laws, the Company may not pay a dividend or distribution, if after giving it effect, the Company would not be able to pay its debts as they become due in the usual course of business or the Company’s total assets would be less than its liabilities. In general, the Company’s ability to pay cash dividends is dependent upon the amount of dividends paid to the Company by the Bank. The ability of the Bank to pay dividends to the Company is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under the North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the Bank has surplus of a specified level. During 2009, the Office of the Commissioner of Banks authorized a one-time transfer of funds from the Bank’s permanent surplus account to undivided profits for the purpose of paying dividends to the Company.

Like the Company, the Bank is required by federal regulations to maintain certain minimum capital levels. The levels required of the Bank are the same as required for the Company. As of December 31, 2010, the Bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 7.97%, 9.50% and 6.37%, respectively. Those same ratios as of December 31, 2009 were 7.42%, 8.68% and 6.52%, respectively. The Bank’s regulatory capital ratios as of December 31, 2009 were revised after its Call Reports were restated and amended in 2010 to reflect an adjustment to the regulatory capital treatment of the injection of proceeds from the sale of Series A Preferred Stock from the Company into the Bank in 2008.

~~Federal Deposit Insurance Corporation Improvement Act of 1991~~

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) provides for, among other things, (i) publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants, (ii) the establishment of uniform accounting standards by federal banking agencies, ~~(iii) the establishment of~~Basel III could lead to higher capital requirements, including a ~~“prompt corrective action” system of regulatory supervision~~restrictive leverage ratio and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital, (iv) additional grounds for the appointment of a conservator or receiver, and (v) restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements. FDICIA also provides for increased fundingnew liquidity ratios. The ultimate impact of the ~~FDIC insurance funds~~new capital and liquidity standards on us and our bank subsidiary is currently being reviewed and will depend on a number of factors, including the rule-making and implementation ~~of risk-based premiums.~~by the U.S. banking regulators.

~~A central feature of FDICIA is the requirement that the~~Prompt Corrective Action

The FDI Act requires federal ~~banking~~bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. ~~Pursuant~~A depository institution’s treatment for purposes of the prompt corrective action provisions will depend upon how its capital levels compare to ~~FDICIA,~~various capital measures and certain other factors, as established by regulation.

Under this system, the federal ~~bank regulatory authorities~~banking regulators have ~~adopted regulations setting forth a five-tiered system~~established five capital categories, well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, in which all institutions are placed. The federal banking regulators have also specified by regulation the relevant capital levels for ~~measuring the capital adequacy~~each of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”other categories. Federal banking regulators are required to take various mandatory supervisory actions and ~~“critically undercapitalized.” An institution may be deemed by the regulators~~are authorized to ~~be in a capitalization category that is lower than is indicated by its actual capital position if, among~~take other ~~things, it receives an unsatisfactory examination rating~~discretionary actions with respect to ~~asset quality, management, earnings or liquidity. FDICIA provides~~institutions in the ~~federal~~three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment ofregulator must appoint a receiver or conservator for ~~the institution.~~an institution that is critically undercapitalized.

Federal Reserve Board regulations require that each bank maintain reserve balances on deposits with the Federal Reserve Bank.

Reserve Requirements

Pursuant to regulations of the Federal Reserve, all banks are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Banks.

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Deposit Insurance Assessments

FDIC-insured banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. The FDIC recently raised assessment rates to increase funding for the DIF, which is currently underfunded.

The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. In addition, federal deposit insurance for the full net amount of deposits in noninterest-bearing transaction accounts was extended to January 1, 2013 for all insured banks.

The Dodd-Frank Act changes the deposit insurance assessment framework, primarily by basing assessments on an institution’s total assets less tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than domestic deposits, which is expected to shift a greater portion of the aggregate assessments to large banks, as described in detail below. The Dodd-Frank Act also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

The Dodd-Frank Act requires the DIF to reach a reserve ratio of 1.35% of insured deposits by September 30, 2020. On December 20, 2010, the FDIC raised the minimum designated reserve ratio of DIF to 2%. The ratio is higher than the minimum reserve ratio of 1.35% as set by the Dodd-Frank Act. Under the Dodd-Frank Act, the FDIC is required to offset the effect of the higher reserve ratio on insured depository institutions with consolidated assets of less than $10 billion.

On February 7, 2011, the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The final rule, mandated by the Dodd-Frank Act, changes the deposit insurance assessment system from one that is based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity. Because the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the final rule’s assessment rates are lower than the current rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. In addition, the final rule adopts a “scorecard” assessment scheme for larger banks and suspends dividend payments if the DIF reserve ratio exceeds 1.5% but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. The final rule also determines how the effect of the higher reserve ratio will be offset for institutions with less than $10 billion of consolidated assets.

Continued action by the FDIC to replenish the DIF as well as changes contained in the Dodd-Frank Act may result in higher assessment rates. Capital Bank may be able to pass part or all of this cost on to its customers, including in the form of lower interest rates on deposits, or fees to some depositors, depending on market conditions.

The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking business we invest in or acquire were to be terminated, that would have a material adverse effect on that banking business and potentially on the Company as a whole.

Permitted Activities and Investments by Bank Holding Companies

The BHCA generally prohibits a bank holding company from engaging in activities other than banking or managing or controlling banks except for activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (which we refer to as the “GLB Act”) expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities activities. We have not yet determined whether it would be appropriate or advisable in the future to become a financial holding company.

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Privacy Provisions of the GLB Act and Restrictions on Cross-Selling

Federal banking regulators, as required under the GLB Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.

Federal financial regulators have issued regulations under the Fair and Accurate Credit Transactions Act, which have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different companies that we own or may come to own for the purpose of cross-selling products and services among companies we own. A number of states have adopted their own statutes concerning financial privacy and requiring notification of security breaches.

Anti-Money Laundering Requirements

Under federal law, including the Bank Secrecy Act, the PATRIOT Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act, certain types of financial institutions, including insured depository institutions, must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Among other things, these laws are intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.

The OFAC is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If we or Capital Bank find a name on any transaction, account or wire transfer that is on an OFAC list, we or Capital Bank must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.

Consumer Laws and Regulations

Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLB Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement Procedures Act.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.

The Dodd-Frank Act creates the CFPB, a new independent bureau that will have broad authority to regulate, supervise and enforce retail financial services activities of banks and various non-bank providers. The CFPB will have authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, banks with assets of $10 billion or less, such as Capital Bank, will be subject to regulation of the CFPB but will continue to be examined for consumer compliance by their bank regulator. However, given our growth and bank acquisition strategy, if our total assets were to exceed $10 billion, then we will become subject to the CFPB’s exclusive examination authority and primary enforcement authority.

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The Community Reinvestment Act

The CRA is intended to encourage banks to help meet the credit needs of their service areas, including low-and moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine banks and assign each bank a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report. The CRA then requires bank regulators to take into account the bank’s record in meeting the needs of its service area when considering an application by a bank to establish a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.

When we apply for regulatory approval to make certain investments, the regulators will consider the CRA record of the target institution and our depository institution subsidiary. An unsatisfactory CRA record could substantially delay approval or result in denial of an application.

Changes in Laws, Regulations or Policies and the Dodd-Frank Act

Various federal, state and local legislators introduce from time to time measures or take actions that would modify the regulatory requirements or the examination or supervision of banks or bank holding companies. Such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and other financial institutions, all of which could affect our investment opportunities and our assessment of how attractive such opportunities may be. We cannot predict whether potential legislation will be enacted and, if enacted, the effect that it or any implementing regulations would have on our business, results of operations or financial condition.

The Dodd-Frank Act, which was signed into law on July 21, 2010, will have a broad impact on the financial services industry, imposing significant regulatory and compliance changes, increased capital, leverage and liquidity requirements and numerous other provisions designed to improve supervision and oversight of the financial services sector. The following items briefly describe some of the key provisions of the Dodd-Frank Act:

	•	Source of Strength. The Dodd-Frank Act requires all companies that directly or indirectly control a depository institution to serve as a source of strength for the institution.

	•	Limitation on Federal Preemption. The Dodd-Frank Act may limit the ability of national banks to rely upon federal preemption of state consumer financial laws. Under the Dodd-Frank Act, the OCC will have the ability to make preemption determinations only if certain conditions are met and on a case-by-case basis. The Dodd-Frank Act also eliminates the extension of preemption to operating subsidiaries of national banks. However, the Dodd-Frank Act preserves certain preemption standards articulated by the U.S. Supreme Court and existing interpretations thereunder, as well as express preemption provisions in other federal laws (such as the Equal Credit Opportunity Act and the Truth in Lending Act) that specifically address the application of state law in relation to that federal law. The Dodd-Frank Act authorizes state enforcement authorities to bring lawsuits under state law against national banks and authorizes suits by state attorney generals against national banks to enforce rules issued by the CFPB. With this broad grant of enforcement authority to states, institutions, including national banks, could be subject to varying and potentially conflicting interpretations of federal law by various state attorney generals, state regulators and the courts.

	•	Mortgage Loan Origination and Risk Retention. The Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks, in an effort to require steps to verify a borrower’s ability to repay. The Dodd-Frank Act also generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells or mortgages and other asset-backed securities that the securitizer issues. The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.

	•	Consumer Financial Protection Bureau. The Dodd-Frank Act creates the CFPB within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank customers. For banking organizations with assets of more than $10 billion, the CFPB has exclusive rule-making and examination and primary enforcement authority under federal consumer financial laws. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.

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~~Community Reinvestment Act of 1977~~

	•	Deposit Insurance. The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. The Dodd-Frank Act also provides unlimited deposit coverage for noninterest-bearing transaction accounts until January 1, 2013. Amendments to the FDI Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. Under these amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

	•	Transactions with Affiliates and Insiders. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Sections 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.

	•	Corporate Governance. The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company’s proxy materials.

	•	Interchange Fees. Under the so-called Durbin Amendment of the Dodd-Frank Act, interchange transaction fees that a card issuer receives or charges for an electronic debit transaction must be “reasonable and proportional” to the cost incurred by the card issuer in processing the transaction. Banks that have less than $10 billion in assets are exempt from the interchange transaction fee limitation. On June 29, 2011, the Federal Reserve issued a final rule establishing standards for determining whether the amount of any interchange transaction fee is reasonable and proportional, taking into consideration fraud prevention costs, and prescribing regulations to ensure that network fees are not used, directly or indirectly, to compensate card issuers with respect to electronic debit transactions or to circumvent or evade the restrictions that interchange transaction fees be reasonable and proportional. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit will be the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction. The Federal Board also approved on June 29, 2011 an interim final rule that allows for an upward adjustment of no more than $0.01 to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards set out in the interim final rule. The Dodd-Frank Act also bans card issuers and payment card networks from entering into exclusivity arrangements for debit card processing and prohibits card issuers and payment networks from inhibiting the ability of merchants to direct the routing of debit card transactions over networks of their choice. Finally, merchants will be able to set minimum dollar amounts for the use of a credit card and provide discounts to consumers who pay with various payment methods, such as cash.

~~Banks are also~~Many of the requirements of the Dodd-Frank Act will be implemented over time, and most will be subject to regulations implemented over the ~~CRA,~~course of several years. Given the uncertainty surrounding the manner in which ~~requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank’s record in meeting the credit needs~~many of the ~~community served~~Dodd-Frank Act’s provisions will be implemented by ~~that bank, including low-~~the various regulatory agencies and ~~moderate-income neighborhoods. Each institution is assigned one~~through regulations, the full extent of the ~~following four ratings~~impact on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of ~~its record in meeting community credit needs: “outstanding,” “satisfactory,” “needs~~our business activities, require changes to ~~improve”~~certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or “substantial noncompliance.” The regulatory agency’s assessment of the bank’s record is made available to the public. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application.otherwise adversely affect our business.

The Gramm-Leach-Bliley Modernization Act of 1999’s “CRA Sunshine Requirements” call for financial institutions to publicly disclose certain written agreements made in fulfillment of the CRA. Banks that are parties to such agreements must report to federal regulators the amount and use of any funds expended under such agreements on an annual basis, along with such other information as regulators may require.

~~Monetary Policy and Economic Controls~~

The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve, whose actions directly affect the money supply which, in turn, affects banks’ lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.

Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks has eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks’ cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins.

Directors and Executive Officers

Set forth below is information concerning our directors and executive officers. The members of our Board of Directors are elected by the shareholders, and ~~NAFH~~CBF holds approximately 83% of the voting power for election of directors. So long as our Board of Directors consists of less than nine members, it will not be divided into separate classes and each member will be elected by our shareholders annually for a one-year term. Each director and executive officer will hold office until his death, resignation, retirement, removal, disqualification, or until his successor is elected (or appointed) and qualified. All ages below are as of March ~~11, 2011.~~20, 2012.

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Index

	Name	Position

	R. Eugene Taylor	President, Chief Executive Officer and Chairman of the Board
	Christopher G. Marshall	Executive Vice President, Chief Financial Officer and Director
	R. Bruce Singletary	Executive Vice President, Chief Risk Officer and Director
	Charles F. Atkins	Director
	Peter N. Foss	Director
	William A. Hodges	Director
	Oscar A. Keller III	Director

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~~Index~~

R. Eugene ~~Taylor.~~Taylor. Mr. Taylor, who is ~~63,~~64, is the Chairman and Chief Executive Officer of ~~NAFH.~~CBF. Mr. Taylor assumed the title of Chief Executive Officer of Capital Bank Corporation and Old Capital Bank [Capital Bank, formerly a wholly-owned subsidiary of the Company (“Old Capital Bank”)], and was appointed Chairman of the Board of Directors of Capital Bank Corporation and Old Capital Bank on January 28, 2011 upon ~~NAFH’s~~CBF’s designation pursuant to the Investment Agreement. Prior to founding ~~NAFH~~CBF in 2009, Mr. Taylor ~~served as an advisor to Fortress Investment Group, a global investment management firm. Prior to his role at Fortress, Mr. Taylor worked~~spent 38 years at Bank of America ~~where he served in leadership positions across~~Corp. and its predecessor companies, most recently as the ~~United States. In 2001, he was named President~~Vice Chairman of ~~Bank of America Consumer & Commercial Banking,~~the firm and ~~in 2005, he became~~ President of Global Corporate & Investment ~~Banking and was named Vice Chairman of the corporation. He~~Banking. Mr. Taylor also served on Bank of America’s Risk & Capital and Management Operating Committees. He originally joined Bank of America in 1969 as a credit analyst. He served in branch offices, marketing and management positions across North Carolina and Florida. In 1990, Mr. Taylor was named President of the Florida Bank and, in 1993, President of NationsBank Corp. in Maryland, Virginia and the District of Columbia. In 1998, Mr. Taylor was appointed to lead Consumer and Commercial Banking operations in the legacy Bank of America Western U.S. footprint. He subsequently returned to Charlotte, North Carolina to create a national banking unit and, in 2001, was named President of Bank of America Consumer & Commercial Banking. In 2004, Mr. Taylor assumed responsibility for the organization’s combined commercial banking businesses known as Global Business & Financial Services, before being named Vice Chairman of Bank of America and President of Global Corporate & Investment Banking in 2005. Most recently, Mr. Taylor served as a Senior Advisor at Fortress Investment Group LLC. Mr. Taylor is the Chairman of the board of directors of Capital Bank, NA, and Chairman of the board of directors of TIB Financial Corp. and Green Bankshares, Inc., atwo other subsidiary bank holding ~~company~~companies in which ~~NAFH~~CBF has a ~~majority~~controlling interest. Mr. Taylor is a Florida native and received his Bachelor of Science in Finance from Florida State University.

Mr. Taylor ~~is expected to bring~~brings to our Board of Directors valuable and extensive experience from managing and overseeing a broad range of operations during his tenure at Bank of America. His experience in leadership roles and activities in the Southeast ~~qualify~~qualifies him to serve as the Chairman of our Board of Directors.

Christopher G. ~~Marshall.~~Marshall. Mr. Marshall, who is ~~51,~~52, is the Chief Financial Officer of ~~NAFH.~~CBF. Mr. Marshall was appointed as a director on our Board of Directors and the board of directors of Old Capital Bank, and as ~~our~~ Chief Financial Officer of both the Company and of Old Capital Bank on January 28, 2011 upon ~~NAFH’s~~CBF’s designation pursuant to the Investment Agreement. From May to October 2009, Mr. Marshall served as a Senior Advisor to the Chief Executive Officer and Chief Restructuring Officer ofat GMAC, ~~(Ally Bank) and~~Inc. From July 2008 through March 2009, he also served as an advisor to ~~the~~The Blackstone Group ~~an investment~~L.P., providing advice and ~~advisory firm.~~analysis for potential investments in the banking sector. From 2006 through 2008 Mr. Marshall served as the ~~CFO~~Chief Financial Officer of Fifth Third Bancorp. Mr. Marshall served as Chief Operations Executive of Bank of America’s Global Consumer and Small Business Bank from 2004 to ~~2006 after holding various positions throughout~~2006. Mr. Marshall also served as Bank of ~~America beginning in 2001.~~America’s Chief Financial Officer of the Consumer Products Group from 2003 to 2004, Chief Operating Officer of Technology and Operations from 2002 to 2003 and Chief Financial Officer of Technology and Operations from 2001 to 2002. Prior to joining Bank of America, Mr. Marshall served as ~~CFO~~Chief Financial Officer and ~~COO~~Chief Operating Officer of Honeywell International Inc. Global Business Services from 1999 to ~~2001.~~2001, where he was a key member of the integration team for the merger with AlliedSignal Inc., overseeing the integration of all finance, information technology and corporate and administrative functions. From 1995 to 1999, he served as ~~CFO~~Chief Financial Officer of AlliedSignal Technical Services Corporation. Prior to that, hefrom 1987 to 1995, Mr. Marshall held several managerial positions at TRW, Inc. ~~from 1987 to 1995.~~ Mr. Marshall isserves as a director of Capital Bank, NA, and as a director of TIB Financial Corp. and Green Bankshares, Inc., atwo other subsidiary bank holding ~~company~~companies in which ~~NAFH~~CBF has a ~~majority~~controlling interest. Mr. Marshall earned a Bachelor of Science degree in Business Administration from the University of Florida and obtained a Master of Business Administration degree from Pepperdine University.

Mr. Marshall ~~is expected to bring~~brings to our Board of Directors extensive experience from service in leadership positions, including his tenure as Chief Financial Officer of Fifth Third Bancorp, and in other operating roles at both financial and non-financial companies.

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Index

R. Bruce ~~Singletary.~~Singletary. Mr. Singletary, who is ~~60,~~61, is the Chief Risk Officer of ~~NAFH.~~CBF. Mr. Singletary was appointed as a director on our Board of Directors and the board of directors of Old Capital Bank, and as Chief Risk Officer of both the Company and of Old Capital Bank on January 28, 2011 upon ~~NAFH’s~~CBF’s designation pursuant to the Investment Agreement. Prior to joining ~~NAFH, he~~CBF, Mr. Singletary spent 3132 years at Bank of America and its predecessor companies with the last 19 years in various credit risk roles. Mr. Singletary originally joined C&S National Bank as a credit analyst in Atlanta, ~~Georgia.~~Georgia in 1974. He served in various middle market line and credit functions. In 1991, Mr. Singletary was named Senior Credit Policy Executive of C&S Sovran, which was renamed NationsBank Corp. in January 1992 after its acquisition by North Carolina National Bank, for the geographic areas of Maryland, Virginia and the District of Columbia. Mr. Singletary led the credit function of NationsBank Corp. from ~~1990~~1992 to 1998 alongside Mr. Taylor, who served as President of this region from 1993 to 1998. In 1998, Mr. Singletary relocated to Florida to establish a centralized underwriting function to serve middle market commercial clients in the ~~Southeast.~~southeastern region of the United States. In 2000, Mr. Singletary assumed credit responsibility for Bank of America’s middle market leveraged finance portfolio for the eastern half of the United States. In 2004, Mr. Singletary served as Senior Risk Manager for commercial banking for Bank of America’s Florida Bank. Mr. Singletary isserves as a director of Capital Bank, NA, and as a director of TIB Financial Corp. and Green Bankshares, Inc., atwo other subsidiary bank holding ~~company~~companies in which ~~NAFH~~CBF has a ~~majority~~controlling interest. Mr. Singletary earned a Bachelor of Science degree in Industrial Management from Clemson University and obtained a ~~Masters~~Master of Business Administration degree from Georgia State University.

Mr. Singletary has substantial experience in the banking sector and brings a perspective reflecting many years of overseeing credit analysis at complex financial institutions, which qualify him to serve as a director.

Charles F. ~~Atkins.~~Atkins. Mr. Atkins, who is ~~61,~~63, has served as a director of Old Capital Bank since its inception in 1997 and was elected to serve as a director of the Company in 2003. He is currently, and has been for the past 21 years, President of Cam-L Properties, Inc., a commercial real estate development company located in Sanford, North Carolina.

Mr. Atkins has substantial experience with community banking, as he was an organizer of Old Capital Bank, and in his position with a real estate development company has developed an extensive understanding of certain real estate markets in which the Bank makes loans. During his tenure with the Company, he has obtained knowledge of the Company’s business, history and organization, which has enhanced his ability to serve as director.

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~~Index~~

Peter N. ~~Foss.~~Foss. Mr. Foss, who is ~~67,~~68, serves on the Board of Directors of ~~NAFH. Mr. Foss~~CBF and was appointed as a director on our Board of Directors on January 28, 2011 upon ~~NAFH’s~~CBF’s designation pursuant to the Investment Agreement. ~~Peter~~Mr. Foss has been President of the General Electric Company’s Olympic Sponsorship and Corporate Accounts since 2003. In addition, Mr. Foss ~~has served as~~is General Manager for Enterprise Selling, with additional responsibilities for Sales Force Effectiveness and Corporate Sales Programs. He has been with GE for 2932 years and, prior to ~~this assignment,~~his current position, served for six years as the President of GE Polymerland, a commercial organization representing GE Plastics in the global marketplace. Prior to GE Polymerland, Mr. Foss served in various commercial roles in the company, including introducing LEXAN® film in the 1970s, ~~and~~ was the Market Development Manager on the ULTEM® introduction team in 1982. He has also served as the Regional General Manager for four of the GE Plastics regions, including leading the GE Plastics effort in Mexico in the ~~mid 1990s.~~mid-1990s. Mr. Foss isserves as a director of Capital Bank, NA, and as a director of TIB Financial Corp. and Green Bankshares, Inc., atwo other subsidiary bank holding ~~company~~companies in which ~~NAFH~~CBF has a ~~majority~~controlling interest. Mr. Foss earned a Bachelor of Science degree in Chemistry from Massachusetts College of Pharmacy, Boston.

Mr. ~~Foss has gained~~Foss’ extensive managerial and sales experience qualifies him to serve on our Board of Directors. His experience assists us in ~~managing~~developing plans to expand and ~~executing complex projects~~energize our sales and ~~has overseen large-scale sales efforts in his prior positions, as set forth above. This background gives him valuable perspective on operating concerns relevant to our business.~~marketing activities.

William A. ~~Hodges.~~Hodges. Mr. Hodges, who is ~~62, is a member of~~63, serves on the Board of Directors of ~~NAFH. Mr. Hodges~~CBF and was appointed as a director on our Board of Directors on January 28, 2011 upon ~~NAFH’s~~CBF’s designation pursuant to the Investment Agreement. Mr. Hodges has been President and Owner of LKW ~~Development~~Properties LLC, a Charlotte-based residential land developer and homebuilder, since 2005. Prior to that, Mr. Hodges worked for ~~ten~~over 30 years in various functions at Bank of ~~America.~~America and its predecessors. From 2004 to 2005, he served as Chairman of Bank of America’s Capital Commitment Committee. Mr. Hodges served as Managing Director and Head of Debt Capital Markets from 1998 to 2004 and as Managing Director and Head of the Real Estate Finance Group from 1996 to 1998. Prior to ~~the~~ Bank of ~~America acquisition,~~America’s merger with NationsBank Corp., he served as Washington, D.C. Market President and Head of ~~Mid-Atlantic~~MidAtlantic Commercial Banking for NationsBank Corp. from 1992 to 1996. Mr. Hodges began his career at North Carolina National Bank, ~~(NCNB),~~ where he worked for ~~twenty~~20 years in various roles, including Chief Credit Officer of Florida operations and as a manager inof the Real Estate Banking and Special Assets Groups. Mr. Hodges isserves as a director of Capital Bank, NA, and as a director of TIB Financial Corp. and Green Bankshares, Inc., atwo other subsidiary bank holding ~~company~~companies in which ~~NAFH~~CBF has a ~~majority~~controlling interest. Mr. Hodges earned a ~~bachelor’s~~Bachelor of Arts degree in ~~history~~History from the University of North Carolina at Chapel Hill and a ~~master’s~~Master of Business Administration degree in finance from Georgia State University.

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Mr. Hodges’ substantial experience in the banking and real estate sectors allows him to bring to the board a valuable perspective on matters that are of key importance to the discussions regarding the financial and other risks faced by the Company.

Oscar A. Keller ~~III.~~III. Mr. Keller, who is ~~66,~~67, has served as a director of Old Capital Bank since its inception in 1997 ~~and as a director of the Company since its inception,~~ and as Chairman of the Board of Directors of the Company from the Company’s inception through the closing of the Investment. He also serves as a director of Capital Bank Foundation, Inc. Mr. Keller was also a founding director of Triangle Bank from 1988 to 1998, and served on its executive committee and audit committee. Furthermore, he served as a director of Triangle Leasing Corp. from 1989 to 1992. He is currently, and has been for the past 15 years, Chief Executive Officer of Earthtec of NC, Inc., an environmental treatment facility founded in 1991 in Chicago, Illinois and in Sanford, North Carolina. ~~He also serves as a director of Capital Bank Foundation, Inc.~~ Mr. Keller is also currently the Chairman of the Sanford Lee County Regional Airport Authority (Raleigh Executive Jet Port), Vice Chairman of Lee County Economic Development Corp. and a member of Triangle Regional Partnership Staying on Top 2 committee.

During his term as Chairman of the Board of Directors, Mr. Keller has had the opportunity to develop extensive knowledge of the Company’s business, history and organization which, along with his personal experience in markets that the Bank serves, has supplemented his ability to effectively contribute to the Board. Mr. Keller is a founder of the Old Capital Bank and a well regarded community leader in Sanford, North Carolina.

Website Access to Capital Bank Corporation’s Filings with the Securities and Exchange Commission

All of the Company’s electronic filings with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), have been made available at no cost on the Company’s web site, www.capitalbank-us.com, as soon as reasonably practicable after the Company has filed such material with, or furnished it to, the SEC. The Company’s SEC filings are also available through the SEC’s web site at www.sec.gov. In addition, any reports the Company files with the SEC are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information may be obtained about the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ITEM 1A. RISK FACTORS

Our business is subject to a variety of risks, including the risks described below as well as adverse business conditions and changes in regulations and the local, regional and national economic environment. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to be material may also impair our business operations. You should carefully consider the risks described below, together with all other information in this report, including information contained in the “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Quantitative and Qualitative Disclosures about Market Risk” sections. This report contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements. If any of the following risks actually occur, our business, financial condition and results of operations could be adversely affected, and we may not be able to achieve our goals. Such events may cause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.

Risks Relating to the Potential Merger of Capital Bank Corporation and CBF

The potential merger has been approved without your vote.

CBF is the owner of approximately 83% of the Company’s common stock. Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.

Neither CBF nor the Company has hired anyone to represent you and CBF has a conflict of interest in the merger.

CBF and the Company have not (1) negotiated the merger at arm’s length or (2) hired independent persons to negotiate the terms of the merger for you. Since CBF initiated and structured the merger without negotiating with the Company or any independent person and CBF has an interest in acquiring your shares at the lowest possible price, if independent persons had been hired, the terms of the merger may have been more favorable to you.

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Because there is currently no market for CBF’s Class A common stock and a market for CBF’s Class A common stock may not develop, you cannot be sure of the market value of the merger consideration you will receive.

Upon completion of the merger, each share of the Company’s common stock will be converted into merger consideration consisting of 0.1354 of a share of CBF’s Class A common stock. Prior to the initial public offering of CBF’s Class A common stock, which is expected to be completed substantially concurrently with the merger, there has been no established public market for CBF’s Class A common stock. An active, liquid trading market for CBF’s Class A common stock may not develop or be sustained following the initial public offering. If an active trading market does not develop, holders of CBF’s Class A common stock may have difficulty selling their shares at an attractive price, or at all. CBF has applied to have its Class A common stock listed on Nasdaq, but its application may not be approved. In addition, the liquidity of any market that may develop or the price that CBF’s stockholders may obtain for their shares of Class A common stock cannot be predicted. The initial public offering price for CBF’s Class A common stock will be determined by negotiations between CBF, its stockholders who choose to sell their shares in the initial public offering and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following the offering.

The outcome of CBF’s initial public offering will affect the market value of the consideration the Company’s shareholders will receive upon completion of the merger. Accordingly, you will not know or be able to calculate the market value of the merger consideration you would receive upon completion of the merger. There will be no adjustment to the exchange ratio for changes in the anticipated outcome of CBF’s initial public offering or changes in the market price of the Company’s common stock.

If CBF completes the merger without completing its initial public offering, the size of the outstanding public float of CBF’s Class A common stock will be low and the value and liquidity of CBF’s common stock may be adversely affected.

While the merger is expected to be completed substantially concurrently with CBF’s initial public offering, CBF controls when the merger will take place and there can be no guarantee that CBF’s initial public offering will occur substantially concurrently with the merger or at all. If the merger is completed and CBF’s initial public offering is delayed or does not occur, there will be fewer publicly traded shares of CBF’s Class A common stock outstanding than if the initial public offering is completed as anticipated and, as a result, the value and liquidity of CBF’s shares of Class A common stock that you receive in the merger may be adversely affected.

The shares of CBF’s Class A common stock to be received by the Company’s shareholders as a result of the merger will have different rights than the shares of the Company’s common stock.

The rights associated with the Company’s common stock are different from the rights associated with CBF’s Class A common stock. For example, the Company’s Board of Directors is divided into two classes, with the term of office of one class expiring each year. CBF’s Board of Directors will not be classified at the time of the merger. In addition, as a North Carolina corporation, the Company is subject to provisions of North Carolina law that require a vote of at least two thirds of the Company’s shareholders to approve business combinations with certain large shareholders (these provisions do not apply to the merger because CBF owns approximately 83% of the Company’s common stock). These provisions do not apply to CBF because it is a Delaware corporation. In addition, the Company’s shareholders are permitted to act by written consent without a meeting, whereas CBF shareholders cannot act by written consent. Also, holders of at least 50% of the Company’s common stock may call a special meeting of Capital Bank Corporation’s shareholders, whereas special meetings of CBF shareholders can only be called by CBF’s Chairman, Chief Executive Officer or its Board of Directors.

Risks Relating to the Company’s Banking Operations

Continued or worsening general business and economic conditions could have a material adverse effect on CBF’s business, financial position, results of operations and cash flows.

Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy is unable to steadily emerge from the recent recession that began in 2007 or we experience worsening economic conditions, such as a so-called “double-dip” recession, our growth and profitability could be adversely affected. Weak economic conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors would be detrimental to our business. On August 5, 2011, Standard & Poor’s lowered the long-term sovereign credit rating of U.S. Government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect on financial markets and although we are unable to predict the longer-term impact on such markets and the participants therein, it may be material and adverse.

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In addition, significant concern regarding the creditworthiness of some of the governments in Europe, most notably Greece, has contributed to volatility in financial markets in Europe and globally, and to funding pressures on some globally active European banks, leading to greater investor and economic uncertainty worldwide. A failure to adequately address sovereign debt concerns in Europe could hamper economic recovery or contribute to a return to recessionary economic conditions and severe stress in the financial markets, including in the United States.

Our business is also significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and cash flows.

The geographic concentration of our markets in the southeastern region of the United States makes our business highly susceptible to downturns in the local economies and depressed banking markets, which could be detrimental to our financial condition.

Unlike larger financial institutions that are more geographically diversified, Capital Bank is a regional banking franchise concentrated in the southeastern region of the United States. Capital Bank operates branches located in Florida, North Carolina, South Carolina, Tennessee and Virginia. As of December 31, 2011, 32% of Capital Bank’s loans were in Florida, 26% were in North Carolina, 12% were in South Carolina, 29% were in Tennessee and 1% were in Virginia. A deterioration in local economic conditions in the loan market or in the residential, commercial or industrial real estate market could have a material adverse effect on the quality of Capital Bank’s portfolio, the demand for its products and services, the ability of borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of our expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected Capital Bank’s capital, CBF, the Company and Capital Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital.

We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.

We believe that our continued growth and future success will depend in large part on the skills of our management team and its ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership and experience in the banking industry of its Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America and has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks. The loss of service of Mr. Taylor or one or more of our other executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer and the value of our and CBF’s common stock could be materially adversely affected. Leadership changes will occur from time to time and we cannot predict whether significant resignations will occur or whether we or CBF will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although R. Eugene Taylor has entered into an employment agreement with CBF and it is expected that, prior to the completion of the initial public offering, Christopher G. Marshall, R. Bruce Singletary and Kenneth A. Posner will have entered into employment agreements with CBF, it is possible that they may not complete the term of their employment agreements or renew them upon expiration. Our success also depends on the experience of Capital Bank’s branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.

Capital Bank’s loss sharing agreements impose restrictions on the operation of its business; failure to comply with the terms of the loss sharing agreements with the FDIC or other regulatory agreements or orders may result in significant losses or regulatory sanctions, and Capital Bank is exposed to unrecoverable losses on the Failed Banks’ assets that it acquired.

In July 2010, Capital Bank purchased substantially all of the assets and assumed all of the deposits and certain other liabilities of the Failed Banks in FDIC-assisted transactions, and a material portion of its revenue is derived from such assets. Certain of the purchased assets are covered by the loss sharing agreements with the FDIC, which provide that the FDIC will bear 80% of losses on the covered loan assets acquired in the acquisition of the Failed Banks. Capital Bank is subject to audit by the FDIC at its discretion to ensure it is in compliance with the terms of these agreements. Capital Bank may experience difficulties in complying with the requirements of the loss sharing agreements, the terms of which are extensive and failure to comply with any of the terms could result in a specific asset or group of assets losing their loss sharing coverage.

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~~Risks Related~~The FDIC has the right to ~~Our Business~~

~~U.S. and international credit markets and economic conditions could adversely affect our liquidity, financial condition and profitability.~~

Global market and economic conditions continue to be disruptive and volatile and the disruption has particularly had a negative impact on the financial sector. The capital and credit markets have placed downward pressure on stock prices, and the availability of capital, credit and liquidity has been adversely affected for many issuers, in some cases, without regard to those issuers’ underlying financial conditionrefuse or performance. Although we have not suffered any significant liquidity problems as a result of these recent events, the cost and availability of funds may be adversely affected by illiquid credit markets. Continued turbulence in U.S. and international markets and economies may also adversely affect our liquidity, financial condition and profitability.

~~Legislative and regulatory actions taken now~~delay payment partially or in full for such loan losses if Capital Bank fails to comply with the ~~future to address~~terms of the ~~current liquidity and credit crisis~~loss sharing agreements, which are extensive. Additionally, the loss sharing agreements are limited in duration. Therefore, any losses that Capital Bank experiences after the ~~financial industry may significantly affect our liquidity or financial condition.~~

~~The Federal Reserve, U.S. Congress,~~terms of the ~~Treasury,~~loss sharing agreements have ended will not be recoverable from the FDIC, and ~~others have taken numerous actions~~would negatively impact net income.

Capital Bank’s loss sharing agreements also impose limitations on how it manages loans covered by loss sharing. For example, under the loss sharing agreements, Capital Bank is not permitted to ~~address~~sell a covered loan even if in the ~~current~~ordinary course of business it is determined that taking such action would be advantageous. These restrictions could impair Capital Bank’s ability to manage problem loans and extend the amount of time that such loans remain on its balance sheet and could negatively impact Capital Bank’s business, financial condition, liquidity and ~~credit situation~~results of operations.

In addition to the loss sharing agreements, in August 2010, Capital Bank entered into an Operating Agreement with the OCC (which we refer to as the “OCC Operating Agreement”), in connection with the acquisition of the Failed Banks. Capital Bank (and, with respect to certain provisions, the Company and CBF) is also subject to an Order of the FDIC, dated July 16, 2010 (which we refer to as the “FDIC Order”) issued in connection with the FDIC’s approval of CBF’s deposit insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial ~~markets. These measures include~~and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the business and they restrict Capital Bank’s ability to ~~encourage loan restructuring~~pay dividends to CBF and ~~modification for homeowners;~~ the ~~establishment~~Company and to make changes to its capital structure. A failure by CBF or Capital Bank to comply with the requirements of ~~significant~~the OCC Operating Agreement or the FDIC Order could subject CBF to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions, by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent CBF from executing its business strategy and negatively impact our business, financial condition, liquidity and credit facilities for financial institutions and investment banks; and coordinated efforts to address liquidity and other weaknesses in the banking sector. The EESA, which established TARP, was enacted on October 3, 2008. As partresults of TARP, the Treasury created the Capital Purchase Program (“CPP”), which authorized the Treasury to invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies for the purpose of stabilizing and providing liquidity to the U.S. financial markets.operations.

~~On February 17, 2009,~~Any requested or required changes in how we determine the ARRA was enacted as a sweeping economic recovery package intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. We participated in the CPP and sold $41.3 millionimpact of our Series A Preferred Stock and a warrant to purchase 749,619 shares of our common stock to the Treasury, which securities are no longer outstanding as a result of the TARP Repurchase. There can be no assurance as to the actual impact that EESA orloss share accounting on its ~~programs, including the CPP, and ARRA or its programs, will have on the national economy or~~ financial ~~markets. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions~~information could ~~materially and adversely affect our financial condition, results of operations, liquidity or stock price.~~

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and will impact all financial institutions including our holding company and Capital Bank. The Dodd-Frank Act contains provisions that will, among other things, establish a Bureau of Consumer Financial Protection, establish a systemic risk regulator, consolidate certain federal bank regulators and impose increased corporate governance and executive compensation requirements. While many of the provisions in the Dodd-Frank Act are aimed at financial institutions significantly larger than us, and some will affect only institutions with different charters than us or institutions that engage in activities in which we do not engage, it will likely increase our regulatory compliance burden and may have a material adverse effect on ~~us, including by increasing the costs associated with~~ our ~~regulatory examinations and compliance measures.~~reported results.

~~The Dodd-Frank Act requires various federal~~A material portion of our financial results is based on loss share accounting, which is subject to assumptions and judgments made by us, our accountants and the regulatory agencies to ~~adopt~~whom we report such information. Loss share accounting is a ~~broad range~~complex accounting methodology. If these assumptions are incorrect or the accountants or the regulatory agencies to whom we report require that management change or modify these assumptions, such change or modification could have a material adverse effect on our financial condition, operations or previously reported results. As such, any financial information generated through the use of ~~new implementing rules~~loss share accounting is subject to modification or change. Any significant modification or change in such information could have a material adverse effect on our results of operations and ~~regulations~~our previously reported results.

Our financial information reflects the application of the acquisition method of accounting. Any change in the assumptions used in such methodology could have an adverse effect on our results of operations.

As a result of CBF’s recent acquisition of us, our financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to ~~prepare numerous studies~~determine their fair market value. Capital Bank’s interest income, interest expense and ~~reports~~net interest margin (which were equal to $226.4 million, $32.8 million and 3.41%, respectively, for the ~~U.S. Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of~~year ended December 31, 2011) reflect the impact of ~~the Dodd-Frank Act may not be known for many months or years. We are closely monitoring all relevant sections~~accretion of the ~~Dodd-Frank Act~~fair value adjustments made to ~~ensure continued compliance with laws~~the carrying amounts of interest earning assets and ~~regulations. While~~interest bearing liabilities and Capital Bank’s noninterest income (which totaled $40.7 million as of December 31, 2011) for periods subsequent to the ~~ultimate effect~~acquisitions includes the effects of discount accretion and amortization of the ~~Dodd-Frank Act on us cannot be determined yet,~~FDIC indemnification asset. In addition, the ~~law is likely~~balances of non-performing assets were significantly reduced by the adjustments to ~~result~~fair value recorded in ~~increased compliance costs and fees paid to regulators, along~~conjunction with ~~possible restrictions on~~the relevant acquisition. If our ~~operations.~~

Further, the U.S. Congress and state legislatures and federal and state regulatory authorities continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulationsassumptions are incorrect or regulatory policies, including interpretation and implementation of statutes, regulation or policies, including the Dodd-Frank Act, could affect us in substantial and unpredictable ways, including limiting the types of financial services and products we may offer or increasing the ability of non-banks to offer competing financial services and products. While we cannot predict the regulatory ~~changes~~agencies to whom we report require that ~~may be borne out of the current economic crisis, and~~ we ~~cannot predict whether we will become subject to increased regulatory scrutiny by any of these regulatory agencies, any regulatory changes~~change or ~~scrutiny~~modify its assumptions, such change or modification could increase or decrease the cost of doing business, limit or expand our permissible activities, or affect the competitive balance among banks, credit unions, savings and loan associations and other institutions. We cannot predict whether additional legislation will be enacted and, if enacted, thehave a material adverse effect ~~that it, or any regulations, would have~~ on our ~~business,~~ financial condition or results of ~~operations.~~operations or our previously reported results.

Our business is highly susceptible to credit risk.

As a lender, Capital Bank is exposed to the risk that its customers will be unable to repay their loans according to their terms and that the collateral (if any) securing the payment of their loans may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. The credit standards, procedures and policies that Capital Bank has established for borrowers may not prevent the incurrence of substantial credit losses.

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~~Changes~~Although Capital Bank does not have a long enough operating history to have restructured many of its loans for borrowers in ~~local economic conditions could lead~~financial difficulty, in the future, it may restructure originated or acquired loans if Capital Bank believes the borrowers have a viable business plan to ~~higher~~fully pay off all obligations. However, for its originated loans, if interest rates or other terms are modified upon extension of credit or if terms of an existing loan ~~charge-offs~~are renewed in such a situation and ~~reduce our net income~~a concession is granted, Capital Bank may be required to classify such action as a troubled debt restructuring (which we refer to as a “TDR”). Capital Bank would classify loans as TDRs when certain modifications are made to the loan terms and ~~growth.~~concessions are granted to the borrowers due to their financial difficulty. Generally, these loans would be restructured to provide the borrower additional time to execute its business plan. With respect to restructured loans, Capital Bank may grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured agreement, the loan would be placed on nonaccrual status and written down to the underlying collateral value.

~~Our~~Recent economic and market developments and the potential for continued economic disruption present considerable risks to CBF and it is difficult to determine the depth and duration of the economic and financial market problems and the many ways in which they may impact CBF’s business ~~is subject~~in general. Any failure to ~~periodic fluctuations based on local economic conditions in central~~manage such credit risks may materially adversely affect CBF’s business and ~~western North Carolina. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on our~~its consolidated results of operations and financial condition even if other favorable events occur. Our operations are locally oriented and community-based. Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities we serve.

~~Weakness in our market areas could depress our earnings and consequently our financial condition because:~~

	•	~~customers may not want or need our products or services;~~

	•	~~borrowers may not be able to repay their loans;~~

	•	~~the value of the collateral securing loans to borrowers may decline; and~~

	•	~~the quality of our loan portfolio may decline.~~

~~Any of the latter three scenarios could require us to charge off a higher percentage of loans and/or increase provisions for credit losses, which would reduce our net income.~~

Because the majority of our borrowers are individuals and businesses located and doing business in Wake, Granville, Lee, Cumberland, Johnston, Chatham, Alamance, Buncombe and Catawba Counties, North Carolina, our success will depend significantly upon the economic conditions in those and the surrounding counties. Unfavorable economic conditions or a continued increase in unemployment rates in those and the surrounding counties may result in, among other things, a deterioration in credit quality or a reduced demand for credit and may harm the financial stability of our customers. Due to our limited market areas, these negative conditions may have a more noticeable effect on us than would be experienced by a larger institution that is able to spread these risks of unfavorable local economic conditions across a large number of diversified economies.

~~We are exposed to risks in connection with the loans we make.~~

A significant source of risk for us arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. We have underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our loan portfolio. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations. Loan defaults result in a decrease in interest income and may require the establishment of or an increase in loan loss reserves. Furthermore, the decrease in interest income resulting from a loan default or defaults may be for a prolonged period of time as we seek to recover, primarily through legal proceedings, the outstanding principal balance, accrued interest and default interest due on a defaulted loan plus the legal costs incurred in pursuing our legal remedies. No assurance can be given that recent market conditions will not result in our need to increase loan loss reserves or charge off a higher percentage of loans, thereby reducing net income.condition.

A significant portion of ~~our~~Capital Bank’s loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt ~~our~~its business.

A significant portion of ~~our~~Capital Bank’s loan portfolio is secured by real estate. As of December 31, ~~2010,~~2011, approximately ~~85%~~84% of ~~our~~Capital Bank’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in ~~our~~Capital Bank’s primary market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on ~~our~~Capital Bank’s profitability and asset quality. If ~~we are~~Capital Bank is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, ~~our~~its earnings and shareholders’ equity could be adversely affected. The declines in home prices in the markets we serve, along with the reduced availability of mortgage credit, also may result in increases in delinquencies and losses in our portfolio of loans related to residential real estate construction and development. Further declines in home prices coupled with a deepened economic recession and continued rises in unemployment levels could drive losses beyond that which is provided for in our allowance for loan losses. In that event, our earnings could be adversely affected.

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~~Index~~

Additionally, recent weakness in the secondary market for residential lending could have an adverse impact on ~~our~~Capital Bank’s profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, any future mortgage loan originations and gains on sale of mortgage loans. Continued declines in real estate values and home sales volumes and financial stress on borrowers as a result of job losses or other factors could have further adverse effects on borrowers that result in higher delinquencies and ~~greater~~ charge-offs in future periods, which could adversely affect ~~our~~Capital Bank’s financial ~~condition or~~position and results of operations.

~~Our real estate~~Capital Bank’s construction and land ~~acquisition and~~ development loans are based upon estimates of costs and the ~~value~~values of the complete ~~project.~~projects.

~~We extend~~While Capital Bank intends to focus on originating loans other than non-owner occupied commercial real estate ~~land~~ loans, its portfolio includes construction ~~loans,~~ and ~~acquisition and~~land development loans (which we refer to as “C&D loans”) extended to builders and developers, primarily for the ~~construction/~~construction and/or development of properties. ~~We originate these~~These loans have been extended on a presold and speculative basis and they include loans for both residential and commercial purposes. As of December 31, 2010, these loans totaled $350.6 million, or 28% of our total loan portfolio. Approximately $77.1 million of this amount was for construction of residential properties and $49.3 million was for construction of commercial properties. Additionally, approximately $144.1 million was for acquisition and development loans for both residential and commercial properties. Land loans, which are loans made with raw land as security, totaled $80.1 million, or 6% of our portfolio, as of December 31, 2010.

In general, ~~construction and land~~C&D lending involves additional risks because of the inherent difficulty in estimating a property’s value both before and at completion of the project. Construction costs may exceed original estimates as a result of increased materials, labor or other costs. In addition, because of current uncertainties in the residential and commercial real estate markets, property values have become more difficult to determine than they have been historically. ~~Construction~~The repayment of construction and land acquisition and development loans is often ~~involve the repayment~~ dependent, in part, on the ability of the borrower to sell or lease the property. These loans also require ongoing monitoring. In addition, speculative construction loans to a residential builder are often associated with homes that are not presold and, thus, pose a greater potential risk than construction loans to individuals on their personal residences. ~~As of December 31, 2010, $61.3 million of our residential construction loans were for speculative construction loans.~~ Slowing housing sales have been a contributing factor to an increase in ~~nonperforming~~non-performing loans as well as an increase in delinquencies.

~~Nonperforming real estate land loans, construction loans and acquisition and development loans totaled $50.7 million and $24.6 million as~~As of December 31, ~~2010~~2011, C&D loans totaled $509.3 million (or 12% of Capital Bank’s total loan portfolio), of which $86.0 million was for construction and/or development of residential properties and $423.3 million was for construction/development of commercial properties. As of December 31, ~~2009, respectively.~~2011, non-performing C&D loans covered under FDIC loss share agreements totaled $39.4 million and non-performing C&D loans not covered under FDIC loss share agreements totaled $94.9 million.

~~Our~~

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Capital Bank’s non-owner occupied commercial real estate loans may be dependent on factors outside the control of ~~our~~its borrowers.

~~We originate~~While Capital Bank intends to focus on originating loans other than non-owner occupied commercial real estate loans, in the acquisitions it acquired non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. Non-owner occupied commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. In such cases, Capital Bank may be compelled to modify the terms of the loan or engage in other potentially expensive work-out techniques. If ~~we foreclose~~Capital Bank forecloses on a non-owner occupied commercial real estate loan, ~~our~~the holding period for the collateral typically is longer than a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with ~~our~~Capital Bank’s residential or consumer loan portfolios.

As of December 31, ~~2010, our~~2011, Capital Bank’s non-owner occupied commercial real estate loans totaled ~~$283.9~~$903.9 million ~~or 23%~~(or 21% of ~~our~~its total loan ~~portfolio. Nonperforming~~portfolio). As of December 31, 2011, non-performing non-owner occupied commercial real estate loans covered under FDIC loss share agreements totaled ~~$2.7~~$15.3 million and ~~$1.0 million as of December 31, 2010 and December 31, 2009, respectively.~~non-performing non-owner occupied commercial real estate loans not covered under FDIC loss share agreements totaled $49.5 million.

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~~Index~~

Repayment of ~~our~~Capital Bank’s commercial business loans is dependent on the cash flows of ~~the borrower,~~borrowers, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

~~We offer~~Capital Bank’s business plan focuses on originating different types of commercial ~~loans to a variety of small to medium-sized businesses. The~~business loans. Capital Bank classifies the types of commercial loans offered ~~are~~as owner-occupied term real estate loans, business lines of credit and term equipment financing. Commercial business lending involves risks that are different from those associated with non-owner occupied commercial real estate lending. ~~Our~~Capital Bank’s commercial business loans are primarily underwritten based on the cash flow of the borrower and secondarily on the underlying collateral, including real estate. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Some of ~~our~~Capital Bank’s commercial business loans are collateralized by equipment, inventory, accounts receivable or other business assets, and the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use.

As of December 31, ~~2010, our~~2011, Capital Bank’s commercial business loans totaled ~~$315.9 million, or 25%~~$1.4 billion (or 32% of ~~our~~its total loan ~~portfolio.~~portfolio). Of this amount, ~~$170.5~~$902.8 million was secured by owner-occupied real estate and ~~$145.4~~$465.8 million was secured by business assets. ~~Nonperforming commercial business loans totaled $14.0 million and $10.6 million as of December 31, 2010 and December 31, 2009, respectively.~~

A portion of our commercial real estate loan portfolio utilizes interest reserves which may not accurately portray the financial condition of the project and the borrower’s ability to repay the loan.

Some of our commercial real estate loans utilize interest reserves to fund the interest payments and are funded from loan proceeds. Our decision to establish a loan-funded interest reserve upon origination of a loan is based on the feasibility of the project, the creditworthiness of the borrower and guarantors and the protection provided by the real estate and other collateral. When applied appropriately, an interest reserve can benefit both the lender and the borrower. For the lender, an interest reserve provides an effective means for addressing the cash flow characteristics of a properly underwritten acquisition, development and construction loan. Similarly, for the borrower, interest reserves provide the funds to service the debt until the property is developed, and cash flow is generated from the sale or lease of the developed property.

Although potentially beneficial to the lender and the borrower, our use of interest reserves carries certain risks. Of particular concern is the possibility that an interest reserve may not accurately reflect problems with a borrower’s willingness or ability to repay the debt consistent with the terms and conditions of the loan obligation. For example, a project that is not completed in a timely manner or falters once completed may appear to perform if the interest reserve keeps the loan current. In some cases, we may extend, renew or restructure the term of certain loans, providing additional interest reserves to keep the loan current. As a result, the financial condition of the project may not be apparent and developing problems may not be addressed in a timely manner. Consequently, we may end up with a matured loan where the interest reserve has been fully advanced, and the borrower’s financial condition has deteriorated. In addition, the project may not be complete, its sale or lease-up may not be sufficient to ensure timely repayment of the debt or the value of the collateral may have declined, exposing us to increasing credit losses.

As of December 31, ~~2010 we had a total of 28 active residential~~2011, non-performing commercial business loans covered under FDIC loss share agreements totaled $29.8 million and non-performing commercial ~~acquisition, development and construction~~business loans funded by an interest reserve with a total outstanding balance of $48.0 million, representing approximately 4% of our total outstanding loans. Total commitments on these loans equaled $55.2 million with total remaining interest reserves of $1.3 million, representing a weighted average term of approximately seven months of remaining interest coverage.not covered under FDIC loss share agreements totaled $67.7 million.

~~Our~~Capital Bank’s allowance for loan losses and fair value adjustments may prove to be insufficient to absorb losses ~~in our loan portfolio.~~for loans that it originates.

Lending money is a substantial part of ~~our~~Capital Bank’s business and each loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

	•	cash flow of the borrower and/or the project being financed;

	•	the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

	•	the duration of the loan;

	•	the discount on the loan at the time of acquisition;

	•	the credit history of a particular borrower; and

	•	changes in economic and industry conditions.

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~~We maintain~~Non-performing loans covered under loss share agreements with the FDIC totaled $124.2 million, and non-performing loans not covered under loss share agreements with the FDIC totaled $258.3 million as of December 31, 2011. Capital Bank maintains an allowance for loan losses with respect to loans it originates, which is a reserve established through a provision for loan losses charged to expense, which ~~we believe~~management believes is appropriate to provide for probable losses in ~~our~~Capital Bank’s loan portfolio. The amount of this allowance is determined by ~~our~~Capital Bank’s management team through periodic ~~reviews~~reviews. As of December 31, 2011, the allowance on loans covered by loss share agreements with the FDIC was $11.8 million, and ~~consideration~~the allowance on loans not covered by loss share agreements with the FDIC was $22.9 million. As of ~~several factors, including, but~~December 31, 2011, the ratio of Capital Bank’s allowance for loan losses to non-performing loans covered by loss share agreements with the FDIC was 9.5% and the ratio of its allowance for loan losses to non-performing loans not ~~limited to:~~covered by loss share agreements with the FDIC was 8.9%.

	•	~~our general reserve, based on our historical default and loss experience and certain other qualitative factors; and~~

	•	~~our specific reserve, based on our evaluation of impaired loans and their underlying collateral.~~

The application of the acquisition method of accounting to CBF’s completed acquisitions impacted Capital Bank’s allowance for loan losses. Under the acquisition method of accounting, all loans were recorded in financial statements at their fair value at the time of their acquisition and the related allowance for loan loss was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into consideration estimated credit quality. Capital Bank may in the future determine that the estimates of fair value are too high, in which case Capital Bank would provide for additional loan losses associated with the acquired loans. As of December 31, 2011, the allowance for loan losses on purchased credit-impaired loan pools totaled $26.3 million, of which $11.8 million was related to loan pools covered by loss share agreements with the FDIC and $14.5 million was related to loan pools not covered by loss share agreements with the FDIC.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires usCapital Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes. ~~Continuing deterioration~~Changes in economic conditions affecting borrowers, new information regarding existing loans that Capital Bank originates, identification of additional problem loans originated by Capital Bank and other factors, both within and outside of ~~our~~management’s control, may require an increase in the allowance for loan losses. If current trends in the real estate markets continue, Capital Bank’s management expects that it will continue to experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, bank regulatory agencies periodically review ~~our~~Capital Bank’s allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, weCapital Bank will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on ~~our~~Capital Bank’s financial condition and results of operations.

If our allowance for loan losses is not adequate, we may be required to make further increases in our provisions for loan losses and to charge off additional loans, which could adversely affect our results of operations.

For the year ended December 31, 2010, we recorded a provision for loan losses of $58.5 million compared to $23.1 million for the year ended December 31, 2009, an increase of $35.4 million. We also recorded net loan charge-offs of $48.6 million for year ended December 31, 2010 compared to $11.8 million for the year ended December 31, 2009. As of December 31, 2010 and December 31, 2009, our allowance for loan losses totaled $36.1 million and $26.1 million, respectively, which represented 50% and 66% of nonperforming loans, respectively. Generally, our nonperforming loans and assets reflect operating difficulties of individual borrowers resulting from weakness in the local economy; however, more recently the deterioration in the general economy has become a significant contributing factor to the increased levels of delinquencies and nonperforming loans.

Slower sales and excess inventory in the housing market has been the primary cause of the increase in delinquencies and foreclosures for residential construction loans, which represented 4% of our nonperforming loans as of December 31, 2010. In addition, slowing housing sales have been a contributing factor to the increase in nonperforming loans as well as the increase in delinquencies. We are experiencing increasing loan delinquencies and credit losses. As of December 31, 2010, our total nonperforming loans increased to $71.9 million, or 5.73% of total loans, compared to $39.5 million, or 2.84% of total loans, as of December 31, 2009. As of December 31, 2010, our total past due loans, excluding nonperforming loans, increased to $13.5 million, or 1.08% of total loans, compared to $9.3 million, or 0.67% of total loans, as of December 31, 2009. If current trends in the housing and real estate markets continue, we expect that we will continue to experience higher than normal delinquencies and credit losses. Moreover, until general economic conditions improve, we may continue to experience increased delinquencies and credit losses. As a result, we may be required to make additional provisions for loan losses and to charge off additional loans in the future, which could materially adversely affect our financial condition and results of operations.

~~We have extended the maturity date and terms of a large amount of loans, which could increase the level of our troubled debt restructured loans.~~

A significant portion of our loans are renewed, or extended, upon maturity. As a prudent risk management strategy, in certain situations we prefer to fund loans with a relatively short maturity date, which provides us with the flexibility of reviewing the borrower’s financial condition and the appropriateness of loan terms on a more frequent basis. Upon renewal, loans are underwritten in the same manner and pursuant to the same approval process as a new loan origination. As of December 31, 2010 and December 31, 2009, loans outstanding totaling $681.4 million and $708.6 million, respectively, had been renewed or had terms extended at a previous maturity date.

While this practice provides certain benefits and flexibility to us as the lender, the extension or renewal of loans carries certain risks. If interest rates or other terms are modified upon extension of credit or if loan terms are renewed in situations where the borrower is experiencing financial difficulty and a concession is granted, the modification or renewal may require classification as a troubled debt restructuring (“TDR”).

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~~Index~~

In accordance with accounting standards, we classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Our practice is to only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute its business plan. With respect to restructured loans, we grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured agreement, the loan is placed on nonaccrual status and is written down to the underlying collateral value. As of December 31, 2010 and 2009, performing and nonperforming TDRs totaled $18.5 million and $50.3 million, respectively. As of December 31, 2010 and 2009, performing TDRs totaled $4.5 million and $34.2 million, respectively.

~~We continue~~Capital Bank continues to hold and acquire ~~a significant amount of~~ other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.

~~We foreclose~~Capital Bank forecloses on and take title to the real estate serving as collateral for many of ~~our~~its loans as part of ~~our~~its business. Real estate owned by ~~the~~Capital Bank and not used in the ordinary course of its operations is referred to as “other real ~~estate”~~estate owned” or ~~“ORE”~~“OREO” property. At December 31, ~~2010, we~~2011, Capital Bank had ~~ORE with an aggregate book value~~$168.8 million of ~~$18.3 million, compared to $10.7 million at December 31, 2009.~~OREO. Increased ~~ORE~~OREO balances have led to greater expenses as ~~we incur~~ costs are incurred to manage and dispose of the properties. ~~We expect~~Capital Bank’s management expects that ~~our~~its earnings will continue to be negatively affected by various expenses associated with ~~ORE,~~OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in ~~ORE.~~OREO. Any further decrease in real estate market prices may lead to additional ~~ORE~~OREO write-downs, with a corresponding expense in ~~our~~Capital Bank’s statement of operations. ~~We evaluate ORE~~Capital Bank’s management evaluates OREO properties periodically and ~~write~~writes down the carrying value of the properties if the results of ~~our evaluation~~such evaluations require it. The expenses associated with ~~ORE~~OREO and any further property write-downs could have a material adverse effect on ~~our~~Capital Bank’s financial condition and results of operations.

~~We are~~Capital Bank is subject to environmental liability risk associated with lending activities.

A significant portion of ~~our~~Capital Bank’s loan portfolio is secured by real property. During the ordinary course of business, weCapital Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, weCapital Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require usCapital Bank to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit ~~our~~the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase ~~our~~Capital Bank’s exposure to environmental liability. Although ~~we have~~Capital Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on ~~our~~Capital Bank’s financial condition and results of operations.

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Delinquencies and defaults in residential mortgages have increased, creating a backlog in courts and an increase in industry scrutiny by regulators, as well as resulting in proposed new laws and regulations governing foreclosures. Such laws and regulations might restrict or delay Capital Bank’s ability to foreclose and collect payments for single family residential loans under the loss sharing agreements.

~~Changes~~Recent laws delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans (some for a limited period of time), or otherwise limit the ability of residential loan servicers to take actions that may be essential to preserve the value of the mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increased servicing costs. As a servicer of mortgage loans, any restriction on Capital Bank’s ability to foreclose on a loan, any requirement that the Bank forego a portion of the amount otherwise due on a loan or any requirement that the Bank modify any original loan terms will in some instances require Capital Bank to advance principal, interest, tax and insurance payments, which may negatively impact its business, financial condition, liquidity and results of operations.

In addition, for the single family residential loans covered by the loss sharing agreements, Capital Bank cannot collect loss share payments until it liquidates the properties securing those loans. These loss share payments could be delayed by an extended foreclosure process, including delays resulting from a court backlog, local or national foreclosure moratoriums or other delays, and these delays could have a material adverse effect on Capital Bank’s results of operations.

Like other financial services institutions, Capital Bank’s asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, ~~may have an adverse effect on our profitability.~~which can impact the value of financial instruments held by the Bank.

~~Our~~Like other financial services institutions, Capital Bank has asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.

Capital Bank’s earnings and ~~financial condition are dependent to a large degree~~cash flows largely depend upon the level of its net interest income, which is the difference between the interest ~~earned from~~income it earns on loans, ~~and~~ investments and other interest ~~paid~~earning assets, and the interest it pays on interest bearing liabilities, such as deposits and borrowings. ~~Approximately 56%~~Because different types of ~~our~~assets and liabilities may react differently and at different times to market interest rate changes, changes in interest rates can increase or decrease Capital Bank’s net interest income. When interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because the magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates could reduce net interest income.

Additionally, an increase in interest rates may, among other things, reduce the demand for loans ~~were variable rate~~and Capital Bank’s ability to originate loans ~~as of December 31, 2010, which means that our interest income will generally~~and decrease loan repayment rates, while a decrease in ~~lower~~the general level of interest ~~rate environments~~rates may adversely affect the fair value of the Bank’s financial assets and ~~rise~~liabilities and its ability to realize gains on the sale of assets. A decrease in ~~higher~~the general level of interest ~~rate environments. Our net interest income will be adversely affected if~~rates may affect Capital Bank through, among other things, increased prepayments on its loan and mortgage-backed securities portfolios and increased competition for deposits.

Accordingly, changes in the level of market interest rates ~~change such that~~affect Capital Bank’s net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios and its overall results. Changes in interest rates may also have a significant impact on any future mortgage loan origination revenues. Historically, there has been an inverse correlation between the ~~interest we earn on~~demand for mortgage loans and ~~investments decreases faster than the~~ interest ~~we pay on deposits~~rates. Mortgage origination volume and ~~borrowings. We cannot predict with certainty~~revenues usually decline during periods of rising or ~~control changes~~high interest rates and increase during periods of declining or low interest rates. Changes in interest ~~rates. Regional and local~~rates also have a significant impact on the carrying value of a significant percentage of the assets on Capital Bank’s balance sheet. Interest rates are highly sensitive to many factors beyond the Bank’s management’s control, including general economic conditions and ~~the~~ policies of various governmental and regulatory ~~authorities, including monetary policies~~agencies, particularly the Board of Governors of the Federal Reserve ~~affect~~System (which we refer to as the “Federal Reserve”). Capital Bank’s management cannot predict the nature and timing of the Federal Reserve’s interest ~~income and interest expense. We have ongoing~~rate policies or other changes in monetary policies and ~~procedures designed to manage~~economic conditions, which could negatively impact the ~~risks associated with changes in market interest rates. However, changes in interest rates still may have an adverse effect on our earnings and~~Bank’s financial ~~condition.~~performance.

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Capital Bank has benefited in recent periods from a favorable interest rate environment, but management believes that this environment cannot be sustained indefinitely and interest rates would be expected to rise as the economy recovers. A strengthening U.S. economy would be expected to cause the Board of Governors of the Federal Reserve to increase short-term interest rates, which would increase Capital Bank’s borrowing costs.

The fair value of ~~our investments could decline.~~Capital Bank’s investment securities can fluctuate due to market conditions out of management’s control.

The majority of our investment portfolio as of December 31, 2010 has been designated as available-for-sale. Unrealized gains and losses in the estimated value of the available-for-sale portfolio must be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive income. As of December 31, ~~2010, we maintained $215.0 million, or 96%,~~2011, approximately 94% of ~~our total~~Capital Bank’s investment securities ~~as available-for-sale. Shareholders’ equity will continue to reflect~~portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises mortgage-backed securities and securities of municipalities. As of December 31, 2011, the ~~unrealized gains and losses (net of tax) of these investments. The~~ fair value of ~~our~~Capital Bank’s investment securities portfolio ~~may decline, causing a corresponding decline in shareholders’ equity.~~

~~Management believes that several factors affect~~was approximately $827.4 million. Factors beyond Capital Bank’s control can significantly influence the fair ~~values~~value of ~~our investment portfolio.~~securities in its portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates ~~or expectations of changes, changes to~~and continued instability in the credit ~~ratings~~markets. In addition, Capital Bank has historically taken a conservative investment posture, concentrating on government issuances of short duration. In the future, Capital Bank may seek to increase yields through more aggressive investment strategies, which may include a greater percentage of corporate issuances and structured credit products. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on Capital Bank’s business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, Capital Bank may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on its financial condition and results of security issuers, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. The yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates. These and other factors may impact specific categories of the portfolio differently, and we cannot predict the effect these factors may have on any specific category.operations.

~~Government regulations~~Capital Bank has a significant deferred tax asset that may ~~prevent~~not be fully realized in the future.

Capital Bank’s net deferred tax asset totaled $164.2 million as of December 31, 2011. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If Capital Bank’s estimates and assumptions about future taxable income are not accurate, the value of its deferred tax asset may not be recoverable and may result in a valuation allowance that would impact the Bank’s earnings.

Recent market disruptions have caused increased liquidity risks and, if Capital Bank is unable to maintain sufficient liquidity, it may not be able to meet the cash flow requirements of its depositors and borrowers.

The recent disruption and illiquidity in the credit markets have generally made potential funding sources more difficult to access, less reliable and more expensive. Capital Bank’s liquidity is generally used to make loans and to repay deposit liabilities as they become due or ~~impact our~~are demanded by customers, and further deterioration in the credit markets or a prolonged period without improvement of market liquidity could present significant challenges in the management of Capital Bank’s liquidity and could adversely affect its business, results of operations and prospects. For example, if as a result of a sudden decline in depositor confidence resulting from negative market conditions, a substantial number of bank customers tried to withdraw their bank deposits simultaneously, Capital Bank’s reserves may not be able to cover the withdrawals.

Furthermore, an inability to increase Capital Bank’s deposit base at all or at attractive rates would impede its ability to ~~pay dividends, engage~~fund the Bank’s continued growth, which could have an adverse effect on the Bank’s business, results of operations and financial condition. Collateralized borrowings such as advances from the FHLB are an important potential source of liquidity. Capital Bank’s borrowing capacity is generally dependent on the value of the collateral pledged to the FHLB. An adverse regulatory change could reduce Capital Bank’s borrowing capacity or eliminate certain types of collateral and could otherwise modify or even eliminate the Bank’s access to FHLB advances, Federal Fund line borrowings and discount window advances. Liquidity may also be adversely impacted by bank supervisory and regulatory authorities mandating changes in the composition of Capital Bank’s balance sheet to asset classes that are less liquid. Any such change or termination may have an adverse effect on Capital Bank’s liquidity.

Capital Bank’s access to other funding sources could be impaired by factors that are not specific to the Bank, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets. Capital Bank may need to incur additional debt in the future to achieve its business objectives, in connection with future acquisitions or ~~operate~~for other reasons. Any borrowings, if sought, may not be available to Capital Bank or, if available, may not be on favorable terms. Without sufficient liquidity, Capital Bank may not be able to meet the cash flow requirements of its depositors and borrowers, which could have a material adverse effect on the Bank’s financial condition and results of operations.

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Capital Bank may not be able to retain or develop a strong core deposit base or other low-cost funding sources.

Capital Bank expects to depend on checking, savings and money market deposit account balances and other forms of customer deposits as its primary source of funding for the Bank’s lending activities. Capital Bank’s future growth will largely depend on its ability to retain and grow a strong deposit base. Because 43% of Capital Bank’s deposits as of December 31, 2011 were time deposits, it may prove harder to maintain and grow the Bank’s deposit base than would otherwise be the case. Capital Bank is also working to transition certain of its customers to lower cost traditional banking services as higher cost funding sources, such as high interest certificates of deposit, mature. There may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Customers may not transition to lower yielding savings or investment products or continue their business with Capital Bank, which could adversely affect its operations. In addition, with recent concerns about bank failures, customers have become concerned about the extent to which their deposits are insured by the FDIC, particularly customers that may maintain deposits in excess of insured limits. Customers may withdraw deposits in an effort to ensure that the amount that they have on deposit with Capital Bank is fully insured and may place them in other ~~ways.~~institutions or make investments that are perceived as being more secure. Further, even if Capital Bank is able to grow and maintain its deposit base, the account and deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments (or similar products at other institutions that may provide a higher rate of return), Capital Bank could lose a relatively low cost source of funds, increasing its funding costs and reducing the Bank’s net interest income and net income. Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact Capital Bank’s growth strategy and results of operations.

~~Current~~Capital Bank operates in a highly competitive industry and ~~future legislation~~faces significant competition from other financial institutions and financial services providers, which may decrease its growth or profits.

Consumer and commercial banking is highly competitive. Capital Bank’s market contains not only a large number of community and regional banks, but also a significant presence of the ~~policies~~country’s largest commercial banks. Capital Bank competes with other state and national financial institutions as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, Capital Bank competes with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in Capital Bank’s markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources may possess an advantage by ~~federal~~being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and ~~state~~conducting extensive promotional and advertising campaigns or operating a more developed Internet platform.

The financial services industry could become even more competitive as a result of legislative, regulatory ~~authorities will~~and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect ~~our operations. Banking regulations, designed primarily~~Capital Bank’s ability to market its products and services. Also, technology has lowered barriers to entry and made it possible for ~~the protection~~banks to compete in Capital Bank’s market without a retail footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Many of ~~depositors,~~Capital Bank’s competitors have fewer regulatory constraints and may ~~limit our growth~~have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and ~~the return~~services as well as better pricing for certain products and services than Capital Bank can.

Capital Bank’s ability to ~~our current and/or potential investors by restricting certain~~compete successfully depends on a number of ~~our activities, such as:~~factors, including:

	•	~~payment of dividends~~the ability to ~~our shareholders;~~

	•	~~possible mergers with, or acquisitions of or by, other institutions;~~

	•	~~our desired investments;~~

	•	~~loans~~develop, maintain and ~~interest rates~~build upon long-term customer relationships based on ~~loans;~~

	•	~~interest rates paid on our deposits;~~quality service and high ethical standards;

	•	the ~~possible expansion of our branch offices; and/or~~ability to attract and retain qualified employees to operate the Bank’s business effectively;

	•	~~our~~the ability to ~~provide securities or trust services.~~

We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. Many of these regulations are intended to protect depositors, the public and the FDIC, not shareholders. The cost of compliance with regulatory requirements including those imposed by the SEC may adversely affect our ability to operate profitably.

Specifically, federal and state governments could pass additional legislation responsive to current credit conditions that reduces the amounts borrowers are contractually required to pay under existing loan contracts or that limits our ability to foreclose on property or other collateral. If proposals such as these, or other proposals limiting our rights as a creditor, were to be implemented, we could experience higher credit losses on our loans or increased expense in pursuing our remedies as a creditor.

~~We have entered into an MOU that requires us to maintain elevated capital ratios and take other actions, and failure to comply with the terms of the MOU may result in adverse consequences.~~

On October 28, 2010, the Bank entered into an informal Memorandum of Understanding with the FDIC and the NC Commissioner. Regulatory oversight and actions are on the rise as a result of the current severe economic conditions and the related impact on the banking industry, specifically real estate loans.

In accordance with the terms of the MOU, the Bank has agreed to, among other things, (i) increase regulatory capital to achieve and maintain a minimum Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 12%, (ii) monitor and reduce its commercial real estate concentration, (iii) timely identify and reduce its overall level of problem loans, (iv) establish and maintain an adequate allowance for loan losses, and (v) ensure adherence to loan policy guidelines. The MOU will remain in effect until modified, terminated, lifted, suspended or set aside by the regulatory authorities. In addition, the Bank must obtain regulatory approval prior to paying any dividends to the Company. The MOU may limit our ability to commit capital resources as we are required to preserve capital to meet the MOU’s requirements.

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~~In addition, the Company consults with the Federal Reserve Bank of Richmond prior to payment of any dividends or interest on debt.~~

We are committed to expeditiously addressing and resolving all the issues raised in the MOU, and our Board of Directors and management have initiated actions to comply with its provisions, including the recent completion of the Investment. A material failure to comply with the terms of the MOU could subject us to additional regulatory actions, including a cease and desist order or other action, and further regulation, which may have a material adverse effect on our future business, results of operations and financial condition.

We are subject to examination and scrutiny by a number of regulatory authorities, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory orders.

We are subject to examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on us and our banking subsidiaries if they determine, upon conclusion of their examination or otherwise, violations of laws with which we or our subsidiaries must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, cease and desist orders, civil money penalties and termination of deposit insurance and bank closures. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective actions. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. The imposition of regulatory sanctions, including monetary penalties, may have a material impact on our financial condition and results of operations and/or damage our reputation. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities and limit our ability to raise capital.

We are dependent on our key personnel, including our senior management and directors, and our inability to integrate our new management and directors into our business and hire and retain key personnel may adversely affect our operations and financial performance.

We are, and for the foreseeable future will be, dependent on the services of our senior management and directors. In connection with the Investment, R. Eugene Taylor, Christopher G. Marshall, Peter N. Foss, William A. Hodges and R. Bruce Singletary were appointed to our Board of Directors. Mr. Oscar A. Keller, III and Charles F. Atkins remained as members of our Board of Directors following the closing of the Investment and all other prior directors of the Company resigned effective January 28, 2011. In addition, we appointed several new executive officers in connection with the Investment: R. Eugene Taylor as President, Chief Executive Officer and Chairman of the Board, Christopher G. Marshall as Executive Vice President and Chief Financial Officer and R. Bruce Singletary as Executive Vice President and Chief Risk Officer. B. Grant Yarber remained with the Company as Market President for North Carolina and Michael R. Moore, David C. Morgan and Mark Redmond remained with the Company as Executive Vice Presidents. We may not be able to integrate our new management and directors into our business without encountering potential difficulties, including but not limited to the loss of key employees and customers; possible changes in strategic direction, business plan, operations, control procedures and policies; and transitional issues related to changing responsibilities of management.

In addition, successful execution of our growth strategy will continue to place significant demands on our management and directors. The loss of any such person’s services may disrupt our operations and growth, and there can be no assurance that a suitable successor could be retained upon the terms and conditions that we would offer. Further, as we continue to grow our operations both in our current markets and other markets that we may target, we expect to continue to be dependent on our senior management and their relationships in such markets. Our inability to attract or retain additional personnel could materially adversely affect our business or growth prospects in one or more markets.

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~~We may enter into acquisitions, combinations, or other strategic transactions at any time, which could expose us to potential risks.~~

We intend to continue to explore expanding our branch system through selective acquisitions of existing banks or bank branches, including through FDIC-assisted transactions. We may also explore combinations with other banks or bank branches in which NAFH has a majority interest, or enter into other strategic transactions. We cannot say with any certainty that we will be able to consummate, or if consummated, successfully integrate, future acquisitions or combinations, or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In the ordinary course of business, we evaluate potential acquisitions, combinations, and other transactions that would bolster our ability to cater to the small business, individual and residential lending markets in our target markets. In attempting to make such acquisitions, combinations, and other transactions we may compete with other financial institutions, many of which have greater financial and operational resources. The process of identifying transaction opportunities, negotiating potential transactions, obtaining the required regulatory approvals and integrating new operations and personnel requires a significant amount of time and expense and may divert management’s attention from our existing business. In addition, since the consideration for an acquired bank or branch may involve cash, notes or the issuance of shares of common stock, existing shareholders could experience dilution in the value of their shares of our common stock in connection with such acquisitions. Any given transaction, if and when consummated, may adversely affect our results of operations or overall financial condition. In addition, we may expand our branch network through de novo branches in existing or new markets. These de novo branches will have expenses in excess of revenues for varying periods after opening, which could decrease our reported earnings.

~~Our ability to raise additional capital could be limited, could affect our liquidity and could be dilutive to existing shareholders.~~

We may be required or choose to raise additional capital, including for strategic, regulatory or other reasons. Current conditions in the capital markets are such that traditional sources of capital may not be available to us on reasonable terms if we need to raise additional capital, and the inability to access the capital markets could impair our liquidity, which is important to our business. In such case, there is no guarantee that we will be able to successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders.

~~We compete with larger companies for business.~~

~~The banking and financial services business in our market areas continues to be a competitive field and is becoming more competitive as a result of:~~

	•	~~changes in regulations;~~expand the Bank’s market position;

	•	~~changes in technology~~the scope, relevance and ~~product delivery systems;~~pricing of products and services offered to meet customer needs and demands;

	•	the rate at which the Bank introduces new products and services relative to its competitors;

	•	customer satisfaction with the Bank’s level of service; and

	•	~~the accelerating pace of consolidation among financial services providers.~~industry and general economic trends.

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Failure to perform in any of these areas could significantly weaken Capital Bank’s competitive position, which could adversely affect its growth and profitability, which, in turn, could harm the Bank’s business, financial condition and results of operations.

WeCapital Bank may ~~not be able to compete effectively in our markets, and our results of operations could~~ be adversely affected by the nature or pace of change in competition. We compete for loans, deposits and customers with various bank and nonbank financial services providers, many of which have substantially greater resources, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services.

~~The failure~~soundness of other financial institutions ~~could adversely affect us.~~

~~Our~~Capital Bank’s ability to engage in routine ~~transactions, including, for example,~~ funding and other transactions could be adversely affected by the actions and ~~potential failures~~commercial soundness of other financial institutions. ~~We have exposure to many different industries and counterparties, and we routinely execute transactions with a variety of counterparties in the financial~~Financial services ~~industry. As~~institutions are interrelated as a result ~~defaults~~of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or ~~concerns~~questions about, one or more financial institutions, ~~with which we do business,~~ or the financial services industry generally, ~~have led~~may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by others. In addition, our credit risk may be exacerbated when the collateral we hold cannot be sold at prices that are sufficient for us to recover the full amount of our exposure. Any such losses could materially and adversely affect our financial condition and results of operations.

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~~Index~~

~~Consumers may decide not to use banks to complete their financial transactions, which could limit our revenue.~~other institutions.

~~Technology~~Capital Bank is subject to losses due to the errors or fraudulent behavior of employees or third parties.

Capital Bank is exposed to many types of operational risk, including the risk of fraud by employees and ~~other changes are allowing~~outsiders, clerical recordkeeping errors and transactional errors. Capital Bank’s business is dependent on its employees as well as third-party service providers to process a large number of increasingly complex transactions. Capital Bank could be materially adversely affected if one of its employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates the Bank’s operations or systems. When Capital Bank originates loans, it relies upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly withoutloan funding, Capital Bank generally bears the ~~assistance~~risk of ~~banks through~~loss associated with the ~~use~~misrepresentation. Any of ~~various electronic payment systems. The process of eliminating banks as intermediaries~~these occurrences could result in a diminished ability of Capital Bank to operate its business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on ourBank’s business, financial condition and results of operations.

~~Technological advances impact our business.~~Capital Bank is dependent on its information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on the Bank’s financial condition and results of operations.

~~The banking industry~~Capital Bank’s business is ~~undergoing rapid technological changes with frequent introductions~~highly dependent on the successful and uninterrupted functioning of ~~new technology-driven products~~its information technology and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources than we do to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to our customers.

~~Our information systems, or those of our third party contractors, may experience an interruption or breach in security.~~

~~We rely heavily on our communications and information~~telecommunications systems and ~~those~~third-party servicers. Capital Bank outsources many of ~~third party contractors, to conduct our business. Any~~its major systems, such as data processing, loan servicing and deposit processing systems. The failure ~~interruption or breach in security~~ of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt the Bank’s operations. Because Capital Bank’s information technology and telecommunications systems interface with and depend on third-party systems, the Bank could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in ~~failures or disruptions in our~~a deterioration of Capital Bank’s ability to process new and renewal loans, gather deposits and provide customer ~~relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed~~service, compromise the Bank’s ability to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that we can prevent any such failures, interruptions or security breaches of our information systems, or those of our third party contractors, or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of such information systems couldoperate effectively, damage ~~our~~its reputation, result in a loss of customer business and/or subject usthe Bank to additional regulatory scrutiny ~~or expose us to civil litigation~~ and possible financial liability, any of which could have a material adverse effect on the Bank’s financial condition and results of operations.

In addition, Capital Bank provides its customers the ability to bank remotely, including online over the Internet. The secure transmission of confidential information is a critical element of remote banking. Capital Bank’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. Capital Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that Capital Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in Capital Bank’s systems and could adversely affect its reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject Capital Bank to additional regulatory scrutiny, expose the Bank to civil litigation and possible financial liability and cause reputational damage.

Hurricanes or other adverse weather events would negatively affect Capital Bank’s local economies or disrupt its operations, which would have an adverse effect on the Bank’s business or results of operations.

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Capital Bank’s market areas in the southeastern region of the United States are susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and manmade disasters, such as the 2010 oil spill in the Gulf of Mexico. Capital Bank’s market areas in Tennessee are susceptible to natural disasters, such as tornadoes and floods. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by Capital Bank, damage its banking facilities and offices and negatively impact the Bank’s growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where Capital Bank operates. The Bank’s management cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect Capital Bank’s operations or the economies in its current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing Capital Bank’s loans and an increase in delinquencies, foreclosures or loan losses. Capital Bank’s business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters.

Risks Relating to Capital Bank’s Growth Strategy

Capital Bank may not be able to effectively manage its growth.

Capital Bank’s future operating results depend to a large extent on its ability to successfully manage its rapid growth. Capital Bank’s rapid growth has placed, and it may continue to place, significant demands on its operations and management. Whether through additional acquisitions or organic growth, Capital Bank’s current plan to expand its business is dependent upon:

	•	the ability of its officers and other key employees to continue to implement and improve its operational, credit, financial, management and other internal risk controls and processes and its reporting systems and procedures in order to manage a growing number of client relationships;

	•	to scale its technology platform;

	•	to integrate its acquisitions and develop consistent policies throughout the various businesses; and

	•	to manage a growing number of client relationships.

Capital Bank may not successfully implement improvements to, or integrate, its management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, Capital Bank’s controls and procedures must be able to accommodate an increase in expected loan volume and the infrastructure that comes with new branches and banks. Thus, Capital Bank’s growth strategy may divert management from its existing businesses and may require the Bank to incur additional expenditures to expand its administrative and operational infrastructure and, if Capital Bank is unable to effectively manage and grow its banking franchise, its business and the Bank’s consolidated results of operations and financial condition could be materially and adversely impacted. In addition, if Capital Bank is unable to manage future expansion in its operations, the Bank may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect Capital Bank’s business.

Many of Capital Bank’s new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict its growth.

Capital Bank intends to complement and expand its business by pursuing strategic acquisitions of banks and other financial institutions. Generally, any acquisition of target financial institutions or assets by CBF or Capital Bank will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on such applications of approval, federal banking regulators consider, among other factors:

	•	the effect of the acquisition on competition;

	•	the financial condition and future prospects of the applicant and the banks involved;

	•	the managerial resources of the applicant and the banks involved;

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	•	the convenience and needs of the community, including the record of performance under the Community Reinvestment Act (which we refer to as the “CRA”); and

	•	the effectiveness of the applicant in combating money laundering activities.

Such regulators could deny an application based on the above criteria or other considerations or the regulatory approvals may not be granted on terms that are acceptable to CBF or Capital Bank. For example, Capital Bank could be required to sell branches as a condition to receiving regulatory approvals, and such a condition may not be acceptable to CBF or Capital Bank or may reduce the benefit of any acquisition.

The success of future transactions will depend on CBF’s ability to successfully identify and consummate transactions with target financial institutions that meet its investment criteria. Because of the significant competition for acquisition opportunities and the limited number of potential targets, CBF may not be able to successfully consummate acquisitions necessary to grow its business.

The success of future transactions will depend on CBF’s ability to successfully identify and consummate transactions with target financial institutions that meet its investment criteria. There are significant risks associated with CBF’s ability to identify and successfully consummate transactions with target financial institutions. There are a limited number of acquisition opportunities, and CBF expects to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and effecting acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater technical, human and other resources than CBF and Capital Bank do, and CBF’s financial resources will be relatively limited when contrasted with those of many of these competitors. These organizations may be able to achieve greater cost savings through consolidating operations than CBF could. CBF’s ability to compete in acquiring certain sizable target institutions will be limited by its available financial resources. These inherent competitive limitations give others an advantage in pursuing the acquisition of certain target financial institutions. In addition, increased competition may drive up the prices for the types of acquisitions CBF intends to target, which would make the identification and successful consummation of acquisition opportunities more difficult. Competitors may be willing to pay more for target financial institutions than CBF believes are justified, which could result in CBF having to pay more for target financial institutions than it prefers or to forego target financial institutions. As a result of the foregoing, CBF may be unable to successfully identify and consummate future transactions to grow its business on commercially attractive terms, or at all.

Because the institutions CBF intends to acquire may have distressed assets, CBF may not be able to realize the value it predicts from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future write-downs taken in respect of, these assets.

Delinquencies and losses in the loan portfolios and other assets of financial institutions that CBF acquires may exceed its initial forecasts developed during the due diligence investigation prior to acquiring those institutions. Even if CBF conducts extensive due diligence on an entity it decides to acquire, this diligence may not reveal all material issues that may affect a particular entity. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that is typical for these depository institutions. If, during the diligence process, CBF fails to identify issues specific to an entity or the environment in which the entity operates, CBF may be forced to later write down or write off assets, restructure its operations, or incur impairment or other charges that could result in other reporting losses. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions CBF acquires and of CBF as a whole. If any of the foregoing adverse events occur with respect to one subsidiary, they may adversely affect other of CBF’s subsidiaries or the CBF as a whole. Current economic conditions have created an uncertain environment with respect to asset valuations and there is no certainty that CBF will be able to sell assets of target institutions if it determines it would be in its best interests to do so. The institutions CBF will target may have substantial amounts of asset classes for which there is currently limited or no marketability.

The success of future transactions will depend on CBF’s ability to successfully combine the target financial institution’s business with CBF’s existing banking business and, if CBF experiences difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

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The success of future transactions will depend, in part, on CBF’s ability to successfully combine the target financial institution’s business with its existing banking business. As with any acquisition involving financial institutions, there may be business disruptions that result in the loss of customers or cause customers to remove their accounts and move their business to competing banking institutions. It is possible that the integration process could result in additional expenses in connection with the integration processes and the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect Capital Bank’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts, including integration of the target financial institution’s systems into Capital Bank’s systems may divert the Bank’s management’s attention and resources, and CBF may be unable to develop, or experience prolonged delays in the development of, the systems necessary to operate its acquired banks, such as a financial reporting platform or a human resources reporting platform call center. If CBF experiences difficulties with the integration process, the anticipated benefits of any future transaction may not be realized fully or at all or may take longer to realize than expected. Additionally, CBF and Capital Bank may be unable to recognize synergies, operating efficiencies and/or expected benefits within expected timeframes within expected cost projections, or at all. CBF may also not be able to preserve the goodwill of the acquired financial institution.

Projected operating results for entities to be acquired by CBF may be inaccurate and may vary significantly from actual results.

CBF will generally establish the pricing of transactions and the capital structure of entities to be acquired on the basis of financial projections for such entities. In general, projected operating results will be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from actual results. General economic, political and market conditions, which are not predictable, can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with CBF’s acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect Capital Bank’s business and CBF’s consolidated results of operations and financial condition.

Changes in accounting standards may affect how we report our financial condition and results of operations.

Our ~~controls~~accounting policies and ~~procedures may fail~~methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (which we refer to as the “FASB”) or other regulatory authorities change the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be ~~circumvented.~~hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

~~Management regularly reviews~~Risks Relating to the Regulation of Capital Bank’s Industry

Capital Bank operates in a highly regulated industry and ~~updates our internal controls, disclosure controls~~the laws and ~~procedures and~~regulations that govern its operations, corporate governance, ~~policies~~executive compensation and ~~procedures. Any system of controls, however well designed and operated, is based~~financial accounting, or reporting, including changes in ~~part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure~~them or ~~circumvention of our controls and procedures or~~Capital Bank’s failure to comply with them, may adversely affect us.

Capital Bank is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the Company and Capital Bank’s business activities, limit the dividend or distributions that Capital Bank or the Company can pay, restrict the ability of institutions to guarantee Capital Bank’s debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in the Bank’s capital than GAAP. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. Capital Bank is currently facing increased regulation and supervision of the industry as a result of the financial crisis in the banking and financial markets. Such additional regulation and supervision may increase Capital Bank’s costs and limit its ability to pursue business opportunities. Further, the Company, CBF or Capital Bank’s failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject the Bank to restrictions on its business activities, fines and other penalties, any of which could adversely affect its results of operations, capital base and the price of CBF’s or the Company’s securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect Capital Bank’s business and financial condition.

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Capital Bank is periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, the Bank may be required to make adjustments to its business that could adversely affect it.

Federal and state banking agencies periodically conduct examinations of Capital Bank’s business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of Capital Bank’s operations has become unsatisfactory, or that the Bank or its management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Capital Bank’s capital, to restrict its growth, to change the asset composition of its portfolio or balance sheet, to assess civil monetary penalties against its officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate its deposit insurance. If Capital Bank becomes subject to such regulatory actions, its business, results of operations and reputation may be negatively impacted.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on Capital Bank’s operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on Capital Bank’s business are:

	•	changes to regulatory capital requirements;

	•	exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier 1 capital;

	•	creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

	•	potential limitations on federal preemption;

	•	changes to deposit insurance assessments;

	•	regulation of debit interchange fees the Bank earns;

	•	changes in retail banking regulations, including potential limitations on certain fees the Bank may charge; and

	•	changes in regulation of consumer mortgage loan origination and risk retention.

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act may impact the profitability of Capital Bank’s business activities, require changes to certain of its business practices, impose upon the Bank more stringent capital, liquidity and leverage requirements or otherwise adversely affect Capital Bank’s business. These changes may also require Capital Bank to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact Capital Bank’s results of operations and financial condition. While management cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on Capital Bank or the Company, these changes could be materially adverse to the Company, Capital Bank and CBF.

The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules is uncertain.

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On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital, to be phased in over time until fully phased in by January 1, 2019.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their Tier 1 capital. While the Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict how any new standards will ultimately be applied to the Company, CBF and Capital Bank.

The FDIC’s restoration plan and the related increased assessment rate could adversely affect Capital Bank’s earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as Capital Bank, up to ~~controls~~applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the deposit insurance fund of the FDIC (which we refer to as the “DIF”) and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. Capital Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures, Capital Bank may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations, including by reducing Capital Bank’s profitability or limiting its ability to pursue certain business opportunities.

Capital Bank is subject to federal and state and fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to Capital Bank’s performance under the fair lending laws and regulations could adversely impact the Bank’s rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact Capital Bank’s reputation, business, financial condition and results of operations.

Capital Bank faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (which we refer to as “OFAC”). If Capital Bank’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that CBF has already acquired or may acquire in the future are deficient, Capital Bank would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans, which would negatively impact its business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for Capital Bank.

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Federal, state and local consumer lending laws may restrict Capital Bank’s ability to originate certain mortgage loans or increase the Bank’s risk of liability with respect to such loans and could increase its cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is Capital Bank’s policy not to make predatory loans, but these laws create the potential for liability with respect to the Bank’s lending and loan investment activities. They increase Capital Bank’s cost of doing business and, ultimately, may prevent the Bank from making certain loans and cause it to reduce the average percentage rate or the points and fees on loans that it does make.

The Federal Reserve may require the Company or CBF and its other subsidiaries to commit capital resources to support Capital Bank.

The Federal Reserve, which examines the Company and CBF, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, the Company or CBF could be required to provide financial assistance to Capital Bank if it experiences financial distress.

A capital injection may be required at times when the Company or CBF do not have the resources to provide it, and therefore the Company or CBF may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

Stockholders may be deemed to be acting in concert or otherwise in control of Capital Bank, which could impose prior approval requirements and result in adverse regulatory consequences for such holders.

The Company and CBF are bank holding companies regulated by the Federal Reserve. Accordingly, acquisition of control of CBF or the Company (or a bank subsidiary) requires prior regulatory notice or approval. With certain limited exceptions, federal regulations prohibit potential investors from, directly or indirectly, acquiring ownership or control of, or the power to vote, more than 10% (more than 5% if the acquirer is a bank holding company) of any class of our voting securities, or obtaining the ability to control in any manner the election of a majority of directors or otherwise exercising a controlling influence over CBF or Capital Bank’s management or policies, without prior notice or application to, and approval of, the Federal Reserve under the Change in Bank Control Act or the Bank Holding Company Act of 1956, as amended (which we refer to as the “BHCA”). Any bank holding company or foreign bank with a U.S. presence also is required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain more than 5% of the Company or CBF’s outstanding voting securities.

In addition to regulatory approvals, any stockholder deemed to “control” the Company or CBF for purposes of the BHCA would become subject to investment and activity restrictions and ongoing regulation and supervision. Any entity owning 25% or more of any class of the Company or CBF’s voting securities, or a lesser percentage if such holder or group otherwise exercises a “controlling influence” over the Company or CBF, may be subject to regulation as a “bank holding company” in accordance with the BHCA. In addition, such a holder may be required to divest 5% or more of the voting securities of investments that may be deemed incompatible with bank holding company status, such as an investment in a company engaged in non-financial activities.

Regulatory determination of “control” of a depository institution or holding company is based on all of the relevant facts and circumstances. In certain instances, stockholders may be determined to be “acting in concert” and their shares aggregated for purposes of determining control for purposes of the Change in Bank Control Act. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. How this definition is applied in individual circumstances can vary among the various federal bank regulatory agencies and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert, including whether:

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	•	stockholders are commonly controlled or managed;

	•	stockholders are parties to an oral or written agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding company;

	•	the holders each own stock in a bank and are also management officials, controlling stockholders, partners or trustees of another company; or

	•	both a holder and a controlling stockholder, partner, trustee or management official of the holder own equity in the bank or bank holding company.

The Company’s or CBF’s common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for purposes of determining whether those holders have control of a bank or bank holding company for Change in Bank Control Act purposes. Because the control regulations under the Change in Bank Control Act and the BHCA are complex, potential investors should seek advice from qualified banking counsel before making an investment in the Company’s common stock.

Risks Related to CBF’s Common Stock Proposed to be Issued in the Merger

The market price of CBF’s Class A common stock could decline due to the large number of outstanding shares of its common stock eligible for future sale.

Sales of substantial amounts of CBF’s Class A common stock in the public market following the initial public offering or in future offerings, or the perception that these sales could occur, could cause the market price of CBF’s Class A common stock to decline. These sales could also make it more difficult for CBF to sell equity or equity-related securities in the future, at a time and place that CBF deems appropriate.

In addition, CBF intends to file a registration statement on Form S-8 under the Securities Act to register additional shares of Class A common stock for issuance under CBF’s 2010 Equity Incentive Plan. CBF may issue all of these shares without any action or approval by CBF’s stockholders and these shares once issued (including upon exercise of outstanding options) will be available for sale into the public market subject to the restrictions described above, if applicable to the holder. Any shares issued in connection with acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by investors who acquire CBF’s shares in the merger.

If shares of CBF’s Class B non-voting common stock are converted into shares of Class A common stock, your voting power subsequent to the merger will be diluted.

Generally, holders of CBF’s Class B non-voting common stock have no voting power and have no right to participate in any meeting of stockholders or to have notice thereof. However, holders of Class B non-voting common stock that are converted into Class A common stock will have all the voting rights of the other holders of Class A common stock. Class B non-voting common stock is not convertible in the hands of the initial holder. However, a transferee unaffiliated with the initial holder that receives Class B non-voting common stock subsequent to transfer permitted by CBF’s certificate of incorporation may elect to convert each share of Class B non-voting common stock into one share of Class A common stock. Subsequent to the merger, upon conversion of any Class B non-voting common stock, your voting power will be diluted in proportion to the decrease in your ownership of the total outstanding Class A common stock.

The market price of CBF’s Class A common stock may be volatile, which could cause the value of an investment in CBF’s Class A common stock to decline.

The market price of CBF’s Class A common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

	•	general market conditions;

	•	domestic and international economic factors unrelated to CBF or Capital Bank’s performance;

	•	actual or anticipated fluctuations in CBF or Capital Bank’s quarterly operating results;

	•	changes in or failure to meet publicly disclosed expectations as to CBF or Capital Bank’s future financial performance;

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	•	downgrades in securities analysts’ estimates of CBF or Capital Bank’s financial performance or lack of research and reports by industry analysts;

	•	changes in market valuations or earnings of similar companies;

	•	any future sales of CBF’s common stock or other securities; and

	•	additions or departures of key personnel.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of CBF’s Class A common stock. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against the Company or CBF could result in substantial costs, divert management’s attention and resources and harm our business or results of operations. For example, we are currently operating in, and have benefited from, a protracted period of historically low interest rates that will not be sustained indefinitely, and future fluctuations in interest rates could cause an increase in volatility of the market price of CBF’s Class A common stock.

CBF and the Company do not currently intend to pay dividends on shares of their common stock in the foreseeable future and the ability to pay dividends will be subject to restrictions under applicable banking laws and regulations.

CBF and the Company do not currently intend to pay cash dividends on their common stock in the foreseeable future. The payment of cash dividends in the future will be dependent upon various factors, including earnings, if any, cash balances, capital requirements and general financial condition. The payment of any dividends will be within the discretion of the then-existing Board of Directors. It is the present intention of the Boards of Directors of the Company and CBF to retain all earnings, if any, for use in business operations in the foreseeable future and, accordingly, the Boards of Directors do not currently anticipate declaring any dividends. Because CBF and the Company do not expect to pay cash dividends on their common stock for some time, any gains on an investment in CBF’s Class A common stock will be limited to the appreciation, if any, of the market value of the Class A common stock.

Banks and bank holding companies are subject to certain regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. The payment of dividends by CBF and the Company depending on their financial condition could be deemed an unsafe or unsound practice. The ability to pay dividends will directly depend on the ability of Capital Bank to pay dividends to us, which in turn will be restricted by the requirement that it maintains an adequate level of capital in accordance with requirements of its regulators and, in the future, can be expected to be further influenced by regulatory policies and capital guidelines. In addition, on August 24, 2010, Capital Bank entered into the OCC Operating Agreement, which in certain circumstances will restrict Capital Bank’s ability to pay dividends to us, to make changes to its capital structure and to make certain other business decisions.

Certain provisions of CBF’s certificate of incorporation and the loss sharing agreements may have anti-takeover effects, which could limit the price investors might be willing to pay in the future for CBF’s common stock and could entrench management. In addition, Delaware law may inhibit takeovers of CBF and could limit CBF’s ability to engage in certain strategic transactions its Board of Directors believes would be in the best interests of stockholders.

CBF’s certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of CBF’s Board of Directors to designate the terms of and issue new series of preferred stock, which may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for CBF’s securities, including its Class A common stock.

The loss sharing agreements with the FDIC require that Capital Bank receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to CBF, Capital Bank or the Company’s stockholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the relevant loss sharing arrangement. Among other things, prior FDIC consent is required for (1) a merger or consolidation of CBF or its bank subsidiary with or into another company if CBF’s stockholders will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of any of CBF’s bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of Capital Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of any class of CBF’s voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of 25% or more of any class of CBF’s voting securities).

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If CBF or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share protection, there could be a material adverse effect on ~~our business,~~Capital Bank’s financial condition, results of operations and ~~financial condition.~~cash flows. In addition, statutes, regulations and policies that govern bank holding companies, including the BHCA, may restrict CBF’s ability to enter into certain transactions.

~~We have experienced net losses during~~CBF is also subject to anti-takeover provisions under Delaware law. CBF has not opted out of Section 203 of the ~~last~~Delaware General Corporation Law (which we refer to as the “DGCL”), which, subject to certain exceptions, prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three ~~completed fiscal~~ years ~~and we are uncertain as~~following the time that such stockholder became an interested stockholder, unless (1) prior to ~~whether~~such time the board of directors of such corporation approved either the business combination or ~~when we will again be profitable.~~

~~We have experienced net losses during~~ the ~~years ended December 31, 2010, 2009 and 2008, and losses may continue. Our ability to generate profit~~transaction that resulted in the ~~future requires successful growth~~stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in ~~revenues~~the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and ~~management~~authorized at a meeting of ~~expenses, among other factors. While we expect to be able to generate profit over time, our operating losses may continue for an unknown period~~stockholders by the affirmative vote of ~~time.~~at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

Risks Related to ~~Ownership of~~ Our Common Stock

~~NAFH~~CBF is a controlling shareholder and may have interests that differ from the interests of our other shareholders.

~~NAFH currently owns~~Upon completion of the CBF Investment, CBF owned approximately ~~83.1%~~90% of the Company’s outstanding voting power. As a result, ~~NAFH~~CBF will be able to control the election of our directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our shareholders for approval. Such transactions may include mergers and acquisitions ~~(which may include mergers~~(including the contemplated potential merger of the Company ~~and/or its subsidiaries~~ with orand into ~~NAFH and/or NAFH’s other subsidiaries)~~CBF), sales of all or some of the Company’s assets (including sales of such assets to ~~NAFH~~CBF and/or ~~NAFH’s~~CBF’s other subsidiaries) or purchases of assets from ~~NAFH~~CBF and/or ~~NAFH’s~~CBF’s other subsidiaries, and other significant corporate transactions.

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~~Index~~

Five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliated with ~~NAFH. NAFH~~CBF. CBF also has sufficient voting power to amend our organizational documents. The interests of ~~NAFH~~CBF may differ from those of our other shareholders, and it may take actions that advance its interests to the detriment of our other shareholders. Additionally, ~~NAFH~~CBF is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. ~~NAFH~~CBF may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

This concentration of ownership could also have the effect of delaying, deferring or preventing a change in our control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of our common stock, and the trading ~~price~~prices of our common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price.

As a controlled company, we are exempt from certain ~~NASDAQ~~Nasdaq corporate governance requirements.

~~Our~~The Company’s common stock is currently listed on the ~~NASDAQ~~Nasdaq Global Select Market. ~~NASDAQ~~The Nasdaq generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under ~~NASDAQ’s~~the rules applicable to the Nasdaq, if another company owns more than 50% of the voting power ~~for the election of directors~~ of a listed company, that company is considered a “controlled company” and exempt from rules relating to independence of the board of directors and the compensation and nominating committees. ~~We are~~The Company is a controlled company because ~~NAFH~~CBF beneficially owns more than 50% of ~~our~~the Company’s outstanding voting ~~power for~~stock. Accordingly, the ~~election of directors. Accordingly, we are~~Company is exempt from certain corporate governance requirements and ~~holders of our common stock~~its shareholders may not have all the protections that these rules are intended to provide.

The trading volume in our common stock has been low, and market conditions and other factors may affect the value of our common stock, which may make it difficult for you to sell your shares at times, volumes or prices you find attractive.

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While our common stock is traded on the NASDAQ Global Select Market, our common stock is thinly traded and has substantially less liquidity than the average trading market for many other publicly traded companies. Trading volume may remain low as a result of the Investment and NAFH’s acquisition of a majority stake in the Company. Thinly traded stocks can be more volatile than stock trading in an active public market. Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to changes in analysts’ recommendations or projections, our announcement of developments related to our business, operations and stock performance of other companies deemed to be peers, news reports of trends, concerns, irrational exuberance on the part of investors and other issues related to the financial services industry. Recently, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies, including those in the financial services sector, have experienced wide price fluctuations that have not necessarily been related to operating performance. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices. Therefore, our shareholders may not be able to sell their shares at the volume, prices or times that they desire.

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We may choose to voluntarily delist our common stock from ~~NASDAQ~~Nasdaq or cease to be a reporting issuer under SEC rules.

We may choose to, or our majority shareholder ~~NAFH~~CBF may cause us to, voluntarily delist from the ~~NASDAQ~~Nasdaq Global Select Market. If we were to delist from ~~NASDAQ,~~Nasdaq, we may or may not list ourselves on another exchange, and may or may not be required to continue to file periodic and current reports and other information as a reporting issuer under SEC rules. A delisting of our common stock could negatively impact ~~you~~shareholders by reducing the liquidity and market price of our common stock, reducing information available ~~to you~~ about the Company on an ongoing basis and potentially reducing the number of investors willing to hold or acquire our common stock. In addition, if we were to delist from ~~NASDAQ,~~Nasdaq, we would no longer be subject to any of the corporate governance rules applicable to ~~NASDAQ~~Nasdaq listed companies. See also ~~“—As~~“As a controlled company, we are exempt from certain ~~NASDAQ~~Nasdaq corporate governance requirements.”

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~~We may issue additional shares of common stock~~Future issuance or ~~convertible securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share~~sales of our common stock or other securities will dilute the ownership interests of our existing shareholders and ~~adversely affect~~could depress the ~~terms on which we may obtain additional capital.~~market price of our common stock.

Our authorized capital includes 300,000,000 shares of common stock. As of March ~~11, 2011,~~23, 2012, we had ~~85,491,011~~85,802,164 shares of common stock outstanding and had reserved for issuance ~~297,880~~193,600 shares underlying options that are exercisable at an average price of ~~$12.11~~$13.11 per share. In addition, as of March 11, 2011, we had the ability to issue 605,359 shares of common stock pursuant to options and restricted stock that may be granted in the future under our existing equity compensation plans. Although we presently do not have any intention of issuing additional common stock, ~~(other than pursuant to our equity compensation plans),~~ we may do so in the future in order to meet our capital needs and regulatory requirements, and we will be able to do so without shareholder ~~approval. Subject~~approval, up to ~~applicable NASDAQ Listing Rules, our Board~~the number of ~~Directors generally has~~authorized shares. Our board of directors may determine from time to time a need to obtain additional capital through the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of common stock for any corporate purpose, including issuance of equity-based incentives under or outside of our equity compensation plans. We may seek additional equity capital in the future as we develop our business and expand our operations. Any issuance of additional shares of common stock or other preferred securities including securities convertible into or exchangeable for shares of our common stock, subject to limitations imposed by the Nasdaq and the Federal Reserve Board. There can be no assurance that such shares can be issued at prices or on terms better than or equal to the terms obtained by our current shareholders. The issuance of any additional shares of common stock or convertible or exchangeable preferred securities by us in the future may result in a reduction of the per share book value or market price, if any, of the then-outstanding common stock. Issuance of additional shares of common stock or convertible or exchangeable preferred securities will ~~dilute~~reduce the ~~percentage~~proportionate ownership ~~interest~~and voting power of our existing shareholders. In addition, new investors in the future may also have rights, preferences and privileges senior to our current shareholders, which may adversely impact our current shareholders.

Resales of our common stock or other securities in the public market may cause the market price of our common stock to fall.

Sales of a substantial number of shares of our common stock in the public market by our shareholders (including CBF), or the perception that such sales are likely to occur, could cause the market price of our common stock to decline. Pursuant to the CBF Investment, we have agreed to provide customary registration rights for the shares of common stock issued to CBF and CBF can exercise those rights in order to sell additional shares of our common stock at its discretion. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.

Market conditions and other factors may ~~dilute~~affect the ~~book~~ value ~~per share~~ of our common stock.

The trading price of the shares of our common stock will depend on many factors, which may change from time to time, including the factors substantially similar to those identified above under “—the market price of CBF’s Class A common stock may be volatile, which could cause the value of an investment in CBF’s Class A common stock to decline.”

The trading volume in our common stock has been low and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.

Our common stock is thinly traded. The average daily trading volume of our shares on The Nasdaq Global Select Market during 2011 was approximately 39,627 shares. Thinly traded stock can be more volatile than stock trading in an active public market. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.

We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.

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Index

The holders of our subordinated debentures have rights that are senior to those of our common shareholders.

We have issued $33.4 million of subordinated debentures, which are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures (and the trust preferred securities related to a portion of the subordinated debentures) before any dividends can be paid on our common stock and, in the event of bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of common stock.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, our shareholders may lose some or all of their investment in our common stock.

Our ability to pay dividends and other obligations is subject to regulatory limitations and the Bank’s ability to pay dividends to us, which is also subject to regulatory limitations.

Our ability to pay our obligations and declare and pay dividends depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. The Company consults with the Federal Reserve ~~Bank of Richmond~~ prior to payment of any dividends or interest on debt. If we are not permitted to make these payments, we may experience adverse consequences under our agreements with the holders of our debt. Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors voted in the first quarter of 2010 to suspend the payment of our quarterly cash dividend. This may continue to adversely affect the market price of our common stock.

We are a separate legal entity from the Bank and our other subsidiaries, and we do not have significant operations of our own. We have historically depended on the Bank’s cash and liquidity as well as dividends to pay our operating expenses. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks can pay to their holding companies without regulatory approval. The Bank is also subject to limitations under state law regarding the payment of dividends, including the requirement that dividends may be paid only out of undivided profits and only if the Bank has surplus of a specified level. ~~In addition, the Bank’s MOU requires the Bank to obtain regulatory approval prior to paying any cash dividends to us.~~

It is possible, depending upon the financial condition of the Bank and other factors, that the federal and state regulatory agencies could take the position that payment of dividends by the Bank would constitute an unsafe or unsound banking practice. In the event the Bank is unable to pay dividends sufficient to satisfy our obligations or is otherwise unable to pay dividends to us, we may not be able to service our obligations as they become due or to pay dividends on our common stock. Consequently, the inability to receive dividends from the Bank could adversely affect our financial condition, results of operations, cash flows and prospects.

~~The holders of our subordinated debentures have rights that are senior to those of our shareholders.~~

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have issued $34.3 million of subordinated debentures, which are senior to our shares of common stock. As a result, we must make payments on the subordinated debentures (and the trust preferred securities related to a portion of the subordinated debentures) before any dividends can be paid on our common stock and, in the event of bankruptcy, dissolution or liquidation, the holders of the debentures must be satisfied before any distributions can be made to the holders of common stock.None.

~~An investment in our common stock is not an insured deposit.~~

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, our shareholders may lose some or all of their investment in our common stock.

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Index

~~ITEM 1B. UNRESOLVED STAFF COMMENTS~~

~~None~~

ITEM 2. PROPERTIES

The ~~Company currently leases property~~Company’s executive offices are located at 333 Fayetteville Street, Raleigh, North ~~Carolina~~Carolina. As discussed in Item 1, effective as of June 30, 2011 the Company’s primary operating subsidiary, Old Capital Bank, was merged with and into Capital Bank, NA. Subsequent to the Bank Merger, the Company began to account for its ~~principal offices~~ownership in Capital Bank, NA under the equity method of accounting, and ~~a branch office. The lease is for 65,330 square feet,~~the assets and liabilities of ~~which 47,785 square feet is for~~the Bank were deconsolidated from the Company’s ~~principal offices~~balance sheet. Due to the Bank Merger and ~~for~~related deconsolidation of the ~~branch office. The remaining leased square footage is currently being subleased to various other entities. The Company owns 14~~Bank, there are no properties ~~throughout North Carolina~~ that are used as branch offices, which are located in Burlington (3), Clayton, Fayetteville (3), Graham, Hickory, Mebane, Raleigh, Sanford, Siler City, and Zebulon. The Company’s operations center is located in one ofoperated by the Burlington offices. The Company leases 17 other properties throughout North Carolina that are used as branch offices and which are located in Asheville (4), Cary (2), Fayetteville, Holly Springs, Morrisville, Oxford, Pittsboro, Raleigh (3), Sanford (2), and Wake Forest. Additionally, the Company signed an agreement in 2010 to lease a building under construction to accommodate the Company’s planned relocation of an existing branch in Sanford. Management believes the terms of the various leases, which are reviewed on an annual basis, are consistent with market standards and were arrived at through arm’s length bargaining.Company.

The information set forth in Item 1. Business – Facilities and Real Estate, is incorporated herein by reference.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or its subsidiaries is a party or to which any of the Company’s or its subsidiaries’ property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on the Company’s business, operating results or condition.

ITEM 4. ~~(REMOVED AND RESERVED)~~MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shares of Capital Bank Corporation common stock are traded on the NASDAQ Global Select Market under the symbol “CBKN.” The following table sets forth, for the quarters shown, the range of high and low sales prices of our common stock on the NASDAQ Global Select Market and the cash dividends declared on the common stock. As of March ~~11, 2011,~~20, 2012, we had approximately ~~85,491,011~~85,802,164 shares of common stock outstanding, held of record by approximately ~~2,213~~2,335 shareholders. The last reported sales price of our common stock on the NASDAQ Global Select Market on March ~~11, 2011,~~20, 2012, was ~~$3.49~~$2.08 per share.

	High		Low		Cash Dividends per Share Declared		High		Low		Cash Dividends per Share Declared

2011
First quarter							$	3.92	$	2.44	$	0.00
Second quarter								4.55		3.16		0.00
Third quarter								3.77		2.08		0.00
Fourth quarter								2.45		1.84		0.00

2010
First quarter	$	4.70	$	3.00	$	0.00	$	4.70	$	3.00	$	0.00
Second quarter		6.95		3.01		0.00		6.95		3.01		0.00
Third quarter		3.53		1.60		0.00		3.53		1.60		0.00
Fourth quarter		3.09		1.50		0.00		3.09		1.50		0.00

2009
First quarter	$	7.00	$	4.00	$	0.08
Second quarter		6.39		4.13		0.08
Third quarter		6.90		4.59		0.08
Fourth quarter		5.74		3.80		0.08

Dividend Policy

Our shareholders are entitled to receive such dividends or distributions as our Board of Directors authorizes in its discretion. Our ability to pay dividends is subject to the restrictions of the North Carolina Business Corporation Act, the guidelines of the Federal Reserve regarding capital adequacy and dividends, and our organizational documents, including our Articles of Incorporation. There are also various statutory limitations under federal and North Carolina law on the ability of the Bank to pay dividends to us. The Bank’s MOU requires the Bank to obtain regulatory approval prior to paying any cash dividends to us, and the Company consults with the Federal Reserve Bank of Richmond prior to payment of any dividends or interest on debt.

~~- 28 -~~

~~Index~~

~~Subject to the legal availability of funds to pay dividends, during 2009 we declared and paid dividends totaling $0.32 per share (see chart above for declared quarterly dividends).~~ We have currently suspended payment of our quarterly cash dividend. ~~Our~~The Company’s Board of Directors will continue to evaluate the payment of cash dividends quarterly and determine whether such cash dividends are in our best interest in the business judgment of our Board of Directors and are consistent with maintaining our status as a “well capitalized” institution under applicable banking laws and regulations. Our earnings and projected future earnings as well as capital levels will be reviewed by the Board of Directors on a quarterly basis to determine whether a quarterly dividend will be paid to shareholders, and if so, the appropriate amount. Actual declaration of any future dividends and the establishment of the record dates related thereto remains subject to further action by our Board of Directors as well as the limitations discussed above.

- 48 -

Index

Additionally, the OCC Operating Agreement with Capital Bank, NA prohibits the Bank from paying a dividend for three years following the July 16, 2010 initial acquisition date. Once the three-year period has elapsed, the agreement imposes other restrictions on Capital Bank’s ability to pay dividends including requiring prior approval from the OCC before any distribution is made. Therefore, the Company does not expect to receive dividends from the Bank in the foreseeable future.

Dividends that may be paid by a national bank without express approval of the OCC are limited to that bank’s retained net profits for the preceding two years plus retained net profits up to the date of any dividend declaration in the current calendar year. Based on the retained net profits of the Bank, declaration of dividends by the Bank to the Company during 2011, if not subject to other restrictions, would have been limited to approximately $10.5 million.

Recent Sales of Unregistered Securities

Other than as disclosed in our Current Report on Form 8-K, filed with the SEC on ~~March 22, 2010,~~February 1, 2011, the Company did not sell any securities in the fiscal year ended December 31, ~~2010~~2011 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

Repurchases of Equity Securities

On January 24, 2008, the Company’s Board of Directors authorized the repurchase (in the open market or in any private transaction) of up to 1,000,000 shares of the Company’s currently outstanding shares of common stock. As of December 31, ~~2010,~~2011, there were an aggregate of 989,900 shares remaining authorized for future repurchases. There were no repurchases (both open market and private transactions) during the year ended December 31, ~~2010~~2011 of any of the Company’s securities registered under Section 12 of the Exchange Act, by or on behalf of the Company, or any affiliated purchaser of the Company.

Stock Performance Graph

The following graph compares the cumulative total shareholder return on the Company’s common stock since the last trading day of ~~2005~~2006 with the cumulative return for the same period of: (i) the NASDAQ Composite Index; and (ii) the NASDAQ Bank Index, which is a broad-based capitalization-weighted index of domestic and foreign common stocks of banks that are traded on NASDAQ. The Company’s common stock began trading on the NASDAQ SmallCap Market on December 18, 1997. As of April 1, 2002, the Company’s common stock has been trading on the NASDAQ Global Select Market. The graph assumes an investment of $100 on the last trading day of ~~2005~~2006 in the Company’s common stock and in each index and that all dividends, if any, were reinvested.

Period Ending
Index 12/05 12/06 12/07 12/08 12/09 12/10
Capital Bank Corporation 100.00 112.90 68.73 40.00 25.19 16.22
NASDAQ Composite 100.00 109.52 120.27 71.51 102.89 120.29
NASDAQ Bank Index 100.00 111.01 86.51 65.81 53.63 60.01

- 2949 -

Index

	Period Ending
Index	12/06	12/07	12/08	12/09	12/10	12/11
Capital Bank Corporation	100.00	60.88	35.43	22.31	14.37	11.60
NASDAQ Composite	100.00	109.81	65.29	93.95	109.84	107.86
NASDAQ Bank Index	100.00	77.93	59.29	48.32	54.06	47.34

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth the Company’s selected ~~financial~~balance sheet data for the most recent five years ended December 31:

	Successor Company		Predecessor Company
(Dollars in thousands)	2011			2010		2009		2008		2007

Selected Balance Sheet Data
Cash and cash equivalents	$	2,163		$	66,745	$	29,513	$	54,455	$	40,172
Investment securities		–			223,292		245,492		278,138		259,116
Loans		–			1,254,479		1,390,302		1,254,368		1,095,107
Allowance for loan losses		–			36,061		26,081		14,795		13,571
Investment in and advance to Capital Bank, NA		247,121			–		–		–		–
Intangible assets		–			1,774		2,711		3,857		63,345
Total assets		249,742			1,585,547		1,734,668		1,654,232		1,517,603
Deposits		–			1,343,286		1,377,965		1,315,314		1,098,698
Borrowings and repurchase agreements		–			121,000		173,543		147,010		208,642
Subordinated debentures		19,163			34,323		30,930		30,930		30,930
Shareholders’ equity		224,864			76,688		139,785		148,514		164,300
Tangible common equity 1		224,864			33,635		95,795		103,378		100,955

As of and for the Years Ended December 31,
2010 2009 2008 2007 2006
(Dollars in thousands)

Selected Balance Sheet Data
Cash and cash equivalents $ 66,745 $ 29,513 $ 54,455 $ 40,172 $ 54,332
Investment securities 223,292 245,492 278,138 259,116 239,047
Loans 1,254,479 1,390,302 1,254,368 1,095,107 1,008,052
Allowance for loan losses 36,061 26,081 14,795 13,571 13,347
Intangible assets 1,774 2,711 3,857 63,345 64,543
Total assets 1,585,547 1,734,668 1,654,232 1,517,603 1,422,384
Deposits 1,343,286 1,377,965 1,315,314 1,098,698 1,055,209
Borrowings and repurchase agreements 121,000 173,543 147,010 208,642 160,162
Subordinated debentures 34,323 30,930 30,930 30,930 30,930
Shareholders’ equity 76,688 139,785 148,514 164,300 161,681
Tangible common equity 33,635 95,795 103,378 100,955 97,138

Summary of Operations
Interest income $ 77,722 $ 83,141 $ 85,020 $ 94,537 $ 86,952
Interest expense 26,759 34,263 42,424 50,423 40,770
Net interest income 50,963 48,878 42,596 44,114 46,182
Provision for loan losses 58,545 23,064 3,876 3,606 531
Net interest income (loss) after provision for loan losses (7,582 ) 25,814 38,720 40,508 45,651
Noninterest income 15,549 10,167 11,051 9,511 9,636
Noninterest expense 54,309 49,810 106,662 39,037 36,678
Net income (loss) before taxes (46,342 ) (13,829 ) (56,891 ) 10,982 18,609
Income tax expense (benefit) 15,124 (7,013 ) (1,207 ) 3,124 6,271
Net income (loss) (61,466 ) (6,816 ) (55,684 ) 7,858 12,338
Dividends and accretion on preferred stock 2,355 2,352 124 – –
Net income (loss) attributable to common shareholders $ (63,821 ) $ (9,168 ) $ (55,808 ) $ 7,858 $ 12,338

1	Tangible common equity is a non-GAAP measure calculated as total shareholders’ equity less preferred stock and less goodwill and other intangible assets, net.

- 3050 -

Index

For the Years Ended December 31,
2010 2009 2008 2007 2006

Per Share Data
Net income (loss) – basic $ (4.98 ) $ (0.80 ) $ (4.94 ) $ 0.69 $ 1.06
Net income (loss) – diluted (4.98 ) (0.80 ) (4.94 ) 0.68 1.06
Book value 2.75 8.68 9.54 14.71 14.19
Tangible book value 2.61 8.44 9.20 9.04 8.53
Common stock dividends – 0.32 0.32 0.32 0.24

Common shares outstanding 12,877,846 11,348,117 11,238,085 11,169,777 11,393,990
Diluted shares outstanding 12,810,905 11,470,314 11,302,769 11,492,728 11,683,674
Basic shares outstanding 12,810,905 11,470,314 11,302,769 11,424,171 11,598,502

Performance Ratios
Return on average shareholders’ equity (47.86 )% (4.62 )% (32.93 )% 4.78 % 7.64 %
Return on average assets (3.63 ) (0.40 ) (3.52 ) 0.54 0.91
Net interest margin 1
3.27 3.14 3.07 3.52 3.94
Efficiency ratio 2
81.65 84.36 77.30 72.80 65.71

Capital Ratios
Tangible equity to tangible assets 4.73 % 7.91 % 8.77 % 6.94 % 7.16 %
Tangible common equity to tangible assets 2.12 5.53 6.26 6.94 7.16
Average shareholders’ equity to average total assets 7.59 8.72 10.68 11.32 11.93
Leverage ratio 6.45 8.94 10.58 9.10 9.42
Tier 1 risk-based capital 8.07 10.16 12.17 10.19 10.76
Total risk-based capital 9.59 11.41 13.24 11.28 11.92

Asset Quality Ratios
Nonperforming loans to gross loans 5.73 % 2.84 % 0.73 % 0.55 % 0.49 %
Nonperforming assets to total assets 5.69 2.90 0.63 0.50 0.42
Allowance for loan losses to gross loans 2.87 1.88 1.18 1.24 1.32
Allowance for loan losses to nonperforming loans 50.12 66.01 162.31 226.86 272.28
Net charge-offs to average loans 3.60 0.89 0.30 0.32 0.46

The following tables set forth the Company’s selected financial data for each period presented:

	Successor Company		Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009			Year Ended Dec. 31, 2008			Year Ended Dec. 31, 2007

Summary of Operations
Interest income	$	31,441	$	5,955		$	77,722		$	83,141		$	85,020		$	94,537
Interest expense		6,528		1,996			26,759			34,263			42,424			50,423
Net interest income		24,913		3,959			50,963			48,878			42,596			44,114
Provision for loan losses		1,450		40			58,545			23,064			3,876			3,606
Net interest income (loss) after provision for loan losses		23,463		3,919			(7,582	)		25,814			38,720			40,508
Noninterest income		7,362		832			15,549			10,167			11,051			9,511
Noninterest expense		25,277		4,155			54,309			49,810			106,662			39,037
Net income (loss) before taxes		5,548		596			(46,342	)		(13,829	)		(56,891	)		10,982
Income tax expense (benefit)		281		–			15,124			(7,013	)		(1,207	)		3,124
Net income (loss)		5,267		596			(61,466	)		(6,816	)		(55,684	)		7,858
Dividends and accretion on preferred stock		–		861			2,355			2,352			124			–
Net income (loss) attributable to common shareholders	$	5,267		(265	)	$	(63,821	)	$	(9,168	)	$	(55,808	)	$	7,858

	Successor Company			Predecessor Company
	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009			Year Ended Dec. 31, 2008			Year Ended Dec. 31, 2007

Per Share Data
Net income (loss) – basic	$	0.06		$	(0.02	)	$	(4.98	)	$	(0.80	)	$	(4.94	)	$	0.69
Net income (loss) – diluted		0.06			(0.02	)		(4.98	)		(0.80	)		(4.94	)		0.68
Book value		2.62			NA			2.75			8.68			9.54			14.71
Tangible book value		2.23			NA			2.67			8.50			9.29			9.16
Common stock dividends		–			–			–			0.32			0.32			0.32

Common shares outstanding		85,802,164			12,877,846			12,877,846			11,348,117			11,238,085			11,169,777
Diluted shares outstanding		85,649,203			13,188,612			12,810,905			11,470,314			11,302,769			11,492,728
Basic shares outstanding		85,649,203			13,188,612			12,810,905			11,470,314			11,302,769			11,424,171

Performance Ratios
Return on average shareholders’ equity		2.54	%		9.12	%		(47.86	)%		(4.62	)%		(32.93	)%		4.78	%
Return on average assets		0.64			0.45			(3.63	)		(0.40	)		(3.52	)		0.54
Net interest margin 1		4.13			3.09			3.27			3.14			3.07			3.52
Efficiency ratio 2		78.32			86.73			81.65			84.36			77.30			72.80

Capital Ratios
Tangible equity to tangible assets		90.04	%		NA	%		4.73	%		7.91	%		8.77	%		6.94	%
Tangible common equity to tangible assets		90.04			NA			2.12			5.53			6.26			6.94
Average shareholders’ equity to average total assets		25.22			4.92			7.59			8.72			10.68			11.32
Leverage ratio		96.56			NA			6.45			8.94			10.58			9.10
Tier 1 risk-based capital		96.95			NA			8.07			10.16			12.17			10.19
Total risk-based capital		98.39			NA			9.59			11.41			13.24			11.28

1	Net interest margin is presented on a tax equivalent basis.
2	Efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income, net of the goodwill impairment charge in 2008.

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Index

	Successor Company		Predecessor Company
	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009			Year Ended Dec. 31, 2008			Year Ended Dec. 31, 2007

Asset Quality Ratios
Nonperforming loans to gross loans		NA		NA		5.73	%		2.84	%		0.73	%		0.55	%
Nonperforming assets to total assets		NA		NA		5.69			2.90			0.63			0.50
Allowance for loan losses to gross loans		NA		NA		2.87			1.88			1.18			1.24
Allowance for loan losses to nonperforming loans		NA		NA		50.12			66.01			162.31			226.86
Net charge-offs to average loans		NA		NA		3.60			0.89			0.30			0.32

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to aid the reader in understanding and evaluating the results of operations and financial condition of the Company and its consolidated subsidiaries. As described above, the Trusts are not consolidated with the financial statements of the Company. This discussion is designed to provide more comprehensive information about the major components of the Company’s results of operations and financial condition, liquidity, and capital resources than can be obtained from reading the financial statements alone. This discussion should be read in conjunction with, and is qualified in its entirety by reference to, the Company’s consolidated financial statements, including the related notes thereto presented elsewhere in this report.

Overview

Capital Bank Corporation is a ~~full-service state chartered community~~ bank ~~conducting business throughout North Carolina. The Bank operates through four~~holding company incorporated under the laws of North Carolina ~~regions: Triangle, Sandhills, Triad and Western. The~~on August 10, 1998. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Capital Bank (“Old Capital Bank”), which was a state-chartered banking corporation that was incorporated under the laws of the State of North Carolina on May 30, 1997 and ~~opened its first branch in~~commenced operations on June of that same year in Raleigh, North Carolina. In 1999, the shareholders of the Bank approved the reorganization of the Bank into a bank holding company. In 2001, the Company received approval to become a financial holding company.20, 1997. As of December 31, ~~2010,~~2011 (Successor), the Company ~~conducted no business other than holding stock~~had a 26% equity method investment in ~~the~~Capital Bank, ~~and each of the Trusts.~~

~~- 31 -~~

~~Index~~

~~The Bank’s business consists principally of attracting deposits from the general public and investing these funds~~NA, a national banking association with approximately $6.5 billion in loans secured by commercial real estate, secured and unsecured commercial and consumer loans, single-family residential mortgage loans and home equity lines. As a community bank, the Bank’s profitability depends primarily upon its levels of net interest income, which is the difference between interest income from interest-earningtotal assets and ~~interest expense on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.~~143 full-service banking offices throughout Florida, North Carolina, South Carolina, Tennessee, and Virginia. The Company also has interests in three trusts, Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the “Trusts”).

The Bank’s profitability is also affected by its provision for loan losses, noninterest income and other operating expenses. Noninterest income primarily consists of service charges and ATM fees, debit card transaction fees, fees generated from originating mortgage loans, commission income generated from brokerage activity, and the increase in cash surrender value of bank-owned life insurance, or BOLI. Operating expenses primarily consist of employee compensation and benefits, occupancy related expenses, depreciation and maintenance expenses on furniture and equipment, data processing and telecommunications, advertising and public relations, professional fees, other real estate and loan-related losses, FDIC deposit insurance and other noninterest expenses.

The Bank’s operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The Bank’s cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. Lending activities are affected by the demand for financing, which in turn is affected by the prevailing interest rates.

~~Transaction with North American Financial Holdings, Inc.~~CBF Investment

On January 28, 2011, the Company completed the issuance and sale ~~to North American Financial Holdings, Inc.~~ of ~~71,000,000~~71 million shares of common stock for $181,050,000 in cash. As a result of the Investment and following the completion of the Rights Offering on March 11, 2011, NAFH currently owns approximately 83% of the Company’s common stock. The Company’s shareholders approved the issuance of such shares to NAFH, and an amendment to the Company’s articles of incorporation to increase the authorized shares ofits common stock to ~~300,000,000 shares from 50,000,000 shares, at a special meeting of shareholders held on December 16, 2010.~~CBF for $181.1 million in cash. In connection with the CBF Investment, each ~~existing~~ Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of ~~the~~Old Capital Bank’s then existing loan portfolio.

Also in connection with the CBF Investment, ~~pursuant to an agreement among NAFH, the Treasury, and the Company,~~ the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the ~~TARP~~Troubled Asset Relief Program were repurchased. Following the TARP Repurchase, the Series A Preferred Stock and warrant are no longer outstanding, and accordingly the Company no longer expects to be subject to the restrictions imposed by the terms of the Series A Preferred Stock, or certain regulatory provisions of the EESA and the ARRA that are imposed on TARP recipients.

Pursuant to the CBF Investment, ~~Agreement,~~ shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of ~~the Company’s~~ common stock ~~were issued~~ in exchange for ~~$4,113,570.75~~$4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

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Upon closing of the ~~investment,~~CBF Investment, R. Eugene Taylor, ~~NAFH’s~~CBF’s Chief Executive Officer, Christopher G. Marshall, ~~NAFH’s~~CBF’s Chief Financial Officer, and R. Bruce Singletary, ~~NAFH’s~~CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, ~~to the aforementioned members of NAFH management,~~ the Company’s Board of Directors was reconstituted with a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional ~~NAFH-designated~~CBF-designated members (Peter N. Foss and William A. Hodges).

Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.” Balances and activity prior to the CBF Investment (Predecessor Company) are not comparable to balances and activity from periods subsequent to the CBF Investment (Successor Company) due to new accounting bases as a result of recording them at their fair values as of the CBF Investment date rather than their historical cost basis. To call attention to this lack of comparability, the Company has placed a black line between Successor Company and Predecessor Company columns in the Consolidated Financial Statements, the tables in the notes to the statements, and in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Bank Mergers

On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

Capital Bank, NA (formerly NAFH Bank) was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks – Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina) – from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.

Potential Merger of the Company and CBF

On September 1, 2011, the Boards of Directors of CBF and the Company approved and adopted a merger agreement. The merger agreement provides for the merger, following the receipt of shareholder approval by the Company’s shareholders (including CBF), of the Company with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of the Company’s common stock issued and outstanding immediately prior to the completion of the merger, except for shares for which appraisal rights are properly exercised and certain shares held by CBF or the Company, will be converted into the right to receive 0.1354 of a share of CBF Class A common stock. No fractional shares of Class A common stock will be issued in connection with the merger, and holders of the Company’s common stock will be entitled to receive cash in lieu thereof.

Since CBF is the majority shareholder of the Company, CBF will be able to determine the outcome of the shareholder vote needed to approve the merger.

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Index

Critical Accounting Policies and Estimates

The following discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the allowance for loan losses, other-than-temporary impairment on investment securities, income taxes, and impairment of long-lived assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these estimates under different assumptions or conditions, and the Company may be exposed to gains or losses that could be material.

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~~Index~~

The Company’s significant accounting policies are discussed below and in Item 8,8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements – Note 1. Management believes that the following accounting policies are the most critical to aid in fully understanding and evaluating the Company’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Board of Directors. Due to the CBF Investment, the Company has added an accounting policy related to purchased credit-impaired loans, and due to the Bank Merger, the Company has added an accounting policy related to its equity method investment in Capital Bank, NA.

	•	Allowance for Loan Losses – The allowance for loan losses represents management’s estimate of probable credit losses that are inherent in the existing loan portfolio. Management’s calculation of the allowance for loan losses consists of reserves on loans individually evaluated for impairment and reserves on loans collectively evaluated for impairment. Specific reserves, or charge-offs, are applied to individually impaired loans based on estimated fair value. Reserves on collectively evaluated loans are determined by applying loss rates to pools of loans that are grouped according to loan type and internal risk ratings. Loss rates are based on historical loss experience in each pool and management’s consideration of certain environmental factors such as levels of and trends in delinquencies, impaired loans and classified assets; levels of and trends in charge-offs and recoveries; trends in nature, volume and terms of loans; existence of and changes in portfolio concentrations; changes in national, regional and local economic conditions; changes in the experience, ability and depth of lending management; changes in the quality of the loan review system; and the effect of other external factors such as legal and regulatory requirements. If economic conditions were to decline significantly or the financial ~~condition~~conditions of the Bank’s customers were to deteriorate, additional increases to the allowance for loan losses may be required.

	•	Other-Than-Temporary Impairment on Investment Securities – Management evaluates each held-to-maturity and available-for-sale investment security in an unrealized loss position for other-than-temporary impairment based on an analysis of the facts and circumstances of each individual investment, which includes consideration of changes in general market conditions and changes in the financial strength of specific bond issuers. For debt securities determined to be other-than-temporarily impaired, the impairment is separated into the following: (1) the amount representing credit loss and (2) the amount related to all other factors. The amount representing credit loss is calculated based on management’s estimate of future cash flows and recoverability of the investment and is recorded in current earnings. Future adverse changes in market conditions or adverse changes in the financial strength of bond issuers could result in an other-than-temporary impairment charge that may impact earnings.

	•	Income Tax Valuation Allowance – A valuation allowance is recorded for deferred tax assets if management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers recent and anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need, if any, for a valuation allowance. ~~As of December 31, 2010, the Company recorded a full valuation allowance on its deferred tax assets.~~

	•	Impairment of Long-Lived Assets – Long-lived assets, including identified intangible assets other than goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Assets to be disposed of are transferred to other real estate owned and are reported at the lower of the carrying amount or fair value less costs to sell. Future events or circumstances indicating that the carrying value of long-lived assets is not recoverable may require an impairment charge to earnings.

~~Executive Summary~~

~~The following is a brief summary of our significant results for the year ended December 31, 2010:~~

	•	Net loss to common shareholders was ($34.1) million, or ($2.59) per share, in the fourth quarter of 2010 compared with ($7.8) million, or ($0.68) per share, in the fourth quarter of 2009. In 2010, net loss to common shareholders was ($63.8) million, or ($4.98) per share, compared with ($9.2) million, or ($0.80) per share, in 2009.

	•	Net interest margin was 3.16% in the fourth quarter of 2010 compared with 3.48% in the third quarter of 2010 and 3.25% in the fourth quarter of 2009. In 2010, net interest margin was 3.27% compared with 3.14% in 2009.

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Index

	•	~~Nonperforming assets, including accruing restructured loans, were 5.98%~~ Equity Method Investment – Noncontrolling investments that give the Company the ability to influence the operating or financial decisions of ~~total assets~~the investee are accounted for as equity method investments. An investment (direct or indirect) of ~~December 31, 2010 compared~~20 percent or more of the voting stock of an investee generally indicates that the ability to exercise significant influence over an investee. The carrying amount of an equity method investment is adjusted based on the Company’s share of the earnings or losses of the investee after the date of investment and those recognized earnings or losses are reported as a component of noninterest income. In addition, the Company’s proportionate share of the investee’s equity adjustments for other comprehensive income are recorded as increases or decreases to the investment account with ~~5.69% as of September 30, 2010 and 4.87% as of December 31, 2009.~~corresponding adjustments in equity.

	•	~~Allowance~~ Purchased Credit-Impaired Loans – Loans acquired in a transfer, including business combinations and transactions similar to the CBF Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for ~~loan losses increased~~under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to ~~2.87%~~be collected over the fair value of ~~total~~the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.

Executive Summary

The following is a summary of the Company’s results of operations and significant events occurring in 2011:

	•	Net income totaled $5.3 million, or $0.06 per share, in the successor period from January 29 to December 31, ~~2010 from 2.74% as of September 30, 2010 and 1.88% as of December 31, 2009.~~2011;

	•	~~Provision for loan losses was $20.0 million~~Following the merger of GreenBank, the wholly-owned subsidiary of Green Bankshares, Inc. (“Green Bankshares”), into Capital Bank, NA, the Company held a 26% ownership interest in ~~the fourth quarter of 2010 compared with $6.8 million~~Capital Bank, NA, which has $6.5 billion in ~~the third quarter of 2010~~assets and ~~$11.8 million~~operates 143 branches in ~~the fourth quarter of 2009. In 2010, provision for loan losses was $58.5 million compared with $23.1 million in 2009.~~

	•	~~Deferred tax assets were fully reserved with the valuation allowance increasing to $31.8 million as of December 31, 2010 from $8.8 million as of September 30, 2010~~Florida, North Carolina, South Carolina, Tennessee and ~~$0 as of December 31, 2009.~~Virginia.

Results of Operations

Period from January 29, 2011 to December 31, 2011 (Successor), Period from January 1, 2011 to January 28, 2011 (Predecessor), and Year Ended December 31, 2010 (Predecessor)

In the successor period, net income totaled $5.3 million, or $0.06 per share, in the period from January 29 to December 31, 2011. In the predecessor periods, net loss attributable to common shareholders totaled ($265) thousand, or ($0.02) per share, in the period from January 1 to January 28, 2011, and totaled ($63.8) million, or ($4.98) per share for the year ended December 31, 2010.

Net Interest Income

Net interest income for the period of January 29 to December, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $24.9 million, $4.0 million and $51.0 million, respectively. Net interest margin decreased from 3.27% in the year ended December 31, 2010 (Predecessor) to 3.09% for the period of January 1 to January 28, 2011 (Predecessor), and increased to 4.13% for the period of January 29 to December 31, 2011 (Successor) primarily due to a decline in funding costs. Average earning assets decreased from $1.60 billion in the year ended December 31, 2010 (Predecessor) to $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $670.7 million in the period of January 29 to December 31, 2011 (Successor). The decline in average earning assets in the successor period was primarily related to the Bank Merger, upon which Old Capital Bank’s earning assets and interest-bearing liabilities were deconsolidated from the Company.

The following tables (Average Balances, Interest Earned or Paid, and Interest Yields/Rates) reflect the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from period to period can be explained in terms of fluctuations in volume and rate.

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Index

Average Balances, Interest Earned or Paid, and Interest Yields/Rates

Tax Equivalent Basis 1

	Successor Company							Predecessor Company
(Dollars in thousands)	Period of Jan. 29 to Dec. 31, 2011							Period of Jan. 1 to Jan. 28, 2011
	Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate
Assets
Loans 2	$	495,129	$	27,734		6.12	%	$	1,253,296	$	5,530		5.20	%
Investment securities 3		133,960		3,893		3.17			225,971		504		2.68
Interest-bearing deposits		39,730		87		0.24			63,350		11		0.20
Advance to Capital Bank, NA		1,869		170		9.94			–		–		–
Total interest-earning assets		670,688	$	31,884		5.20	%		1,542,617	$	6,045		4.61	%
Cash and due from banks		10,603							16,112
Other assets		214,626							34,021
Total assets	$	895,917						$	1,592,750

Liabilities and Equity
NOW and money market accounts	$	154,880	$	1,084		0.76	%	$	334,668	$	211		0.74	%
Savings accounts		14,352		16		0.12			30,862		3		0.11
Time deposits		380,278		3,460		0.99			870,146		1,337		1.81
Total interest-bearing deposits		549,510		4,560		0.91			1,235,676		1,551		1.48
Borrowings		42,851		664		1.69			120,032		343		3.36
Subordinated debentures		19,248		1,304		7.40			34,323		102		3.50
Total interest-bearing liabilities		611,609	$	6,528		1.17	%		1,390,031	$	1,996		1.69	%
Noninterest-bearing deposits		53,397							114,660
Other liabilities		4,922							9,635
Total liabilities		669,928							1,514,326
Shareholders’ equity		225,989							78,424
Total liabilities and shareholders’ equity	$	895,917						$	1,592,750

Net interest spread 4						4.03	%						2.92	%
Tax equivalent adjustment			$	443						$	90
Net interest income and net interest margin 5			$	25,356		4.13	%			$	4,049		3.09	%
(continued on next page)

1	The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities.
2	Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded.
3	The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any.
4	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5	Net interest margin represents net interest income divided by average interest-earning assets.

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Index

Average Balances, Interest Earned or Paid, and Interest Yields/Rates (Continued)

Tax Equivalent Basis 1

	Predecessor Company
(Dollars in thousands)	Year Ended Dec. 31, 2010							Year Ended Dec. 31, 2009
	Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate
Assets
Loans 2	$	1,353,191	$	69,084		5.11	%	$	1,316,737	$	70,412		5.35	%
Investment securities 3		213,402		9,986		4.68			269,240		14,483		5.38
Interest-bearing deposits		38,003		89		0.23			25,312		42		0.17
Total interest-earning assets		1,604,596	$	79,159		4.93	%		1,611,289	$	84,937		5.27	%
Cash and due from banks		18,149							15,927
Other assets		68,910							64,748
Total assets	$	1,691,655						$	1,691,964

Liabilities and Equity
NOW and money market accounts	$	327,811	$	2,794		0.85	%	$	363,522	$	4,527		1.25	%
Savings accounts		30,555		41		0.13			29,171		47		0.16
Time deposits		878,068		18,247		2.08			822,003		23,463		2.85
Total interest-bearing deposits		1,236,434		21,082		1.71			1,214,696		28,037		2.31
Borrowings		150,207		4,541		3.02			143,241		5,147		3.59
Subordinated debentures		33,550		1,131		3.37			30,930		1,055		3.41
Repurchase agreements		1,564		5		0.32			10,919		24		0.22
Total interest-bearing liabilities		1,421,755	$	26,759		1.88	%		1,399,786	$	34,263		2.45	%
Noninterest-bearing deposits		130,944							132,535
Other liabilities		10,519							12,148
Total liabilities		1,563,218							1,544,469
Shareholders’ equity		128,437							147,495
Total liabilities and shareholders’ equity	$	1,691,655						$	1,691,964

Net interest spread 4						3.05	%						2.82	%
Tax equivalent adjustment			$	1,437						$	1,796
Net interest income and net interest margin 5			$	52,400		3.27	%			$	50,674		3.14	%

1	The tax equivalent adjustment is computed using a federal tax rate of 34% and is applied to interest income from tax exempt municipal loans and investment securities.
2	Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded.
3	The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any.
4	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5	Net interest margin represents net interest income divided by average interest-earning assets.

Provision for Loan Losses

Provision for loan losses for the period of January 29 to December 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $1.5 million, $40 thousand and $58.5 million, respectively. The loan loss provision in the successor period reflects $752 thousand of estimated losses inherent in loans originated subsequent to the CBF Investment date, $359 thousand of impairment related to probable decreases in cash flows expected to be collected on certain PCI loan pools, and $339 thousand of losses on acquired non-PCI loans.

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Index

Loans acquired in the CBF Investment, prior to the Bank Merger, where there was evidence of credit deterioration since origination and where it was probable that the Company would not collect all contractually required principal and interest payments were accounted for as PCI loans. The Company identified approximately 93% of its acquisition-date loan portfolio as PCI. Subsequent to acquisition, estimates of cash flows expected to be collected were refreshed each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that were reflective of current market conditions. If the Company had probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charged the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company had probable and significant increases in cash flows expected to be collected, the Company would first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans.

Noninterest Income

The following table presents the detail of noninterest income for each period presented:

	Successor Company		Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010

Service charges and other fees	$	1,355	$	291	$	3,311
Bank card services		847		174		2,020
Mortgage origination and other loan fees		518		210		1,861
Brokerage fees		308		78		963
Bank-owned life insurance		134		10		699
Equity income from investment in Capital Bank, NA		4,045		–		–
Net gain on sale of investment securities		–		–		5,855
Other		155		69		840
Total noninterest income	$	7,362	$	832	$	15,549

Noninterest income for the period of January 29 to December 31, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the year ended December 31, 2010 (Predecessor) totaled $7.4 million, $832 thousand and $15.5 million, respectively. Noninterest income in the successor period was significantly impacted by the Company’s $4.0 million of equity income from its investment in Capital Bank, NA. Additionally, noninterest income in the year ended December 31, 2010 (Predecessor) benefited from $5.9 million of gains recorded on the sale of investment securities while no gains or losses were recognized in the period from January 29 to December 31, 2011 (Successor) or the period from January 1 to January 28, 2011 (Predecessor). The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA:

Capital Bank, NA	Jun. 30, 2011 to Dec. 31, 2011
(Dollars in thousands)

Interest income	$	137,508
Interest expense		17,810
Net interest income		119,698
Provision for loan losses		28,636
Noninterest income		28,710
Noninterest expense		97,754
Net income	$	13,984

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Index

Noninterest Expense

The following table presents the detail of noninterest expense for each period presented:

	Successor Company		Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010

Salaries and employee benefits	$	9,525	$	1,977	$	22,675
Occupancy		2,970		548		5,906
Furniture and equipment		1,401		275		3,183
Data processing and telecommunications		911		180		2,092
Advertising and public relations		325		131		1,887
Office expenses		498		93		1,260
Professional fees		543		190		2,514
Business development and travel		550		87		1,350
Amortization of other intangible assets		478		62		937
ORE losses and miscellaneous loan costs		1,608		176		5,006
Directors’ fees		93		68		1,061
FDIC deposit insurance		1,076		266		3,846
Contract termination fees		3,955		–		–
Other		1,344		102		2,592
Total noninterest expense	$	25,277	$	4,155	$	54,309

Noninterest expense for the period from January 29 to December 31, 2011 (Successor), the period from January 1 to January 28, 2011 (Predecessor) and the year ended December 31, 2010 (Predecessor) totaled $25.3 million, $4.2 million and $54.3 million, respectively. Additionally, expenses in the year ended December 31, 2011 were significantly reduced by the Bank Merger and related deconsolidation of Old Capital Bank. Expenses in the period from January 29 to December 31, 2011 (Successor) were impacted by a $4.0 million contract termination fee related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the CBF enterprise. This system conversion is intended to create operating efficiencies and better position the Company for future growth.

Year Ended December 31, 2010 Compared with Year Ended December 31, 2009 (Predecessor Company)

Net loss attributable to common shareholders was ~~$63.8~~($63.8) million, or ~~$4.98~~($4.98) per diluted share, in 2010 compared to net loss attributable to common shareholders of ~~$9.2~~($9.2) million, or ~~$0.80~~($0.80) per diluted share, in 2009. Results of operations for 2010 primarily reflect higher net interest income of $2.1 million on an improved net interest margin, an increase of $35.5 million in provision for loan losses, an increase in noninterest expense by $4.5 million, an increase of $5.4 million in noninterest income primarily due to gains on sales of certain investment securities, and higher tax expense resulting from a full valuation allowance on deferred tax assets.

Net Interest Income (Predecessor Company)

Net interest income is the difference between total interest income and total interest expense and is the Company’s principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of supporting funds. Net interest income increased from $48.9 million for the year ended December 31, 2009 to $51.0 million for the year ended December 31, 2010. Net interest spread is the difference between rates earned on interest-earning assets and the interest paid on deposits and other borrowed funds. Net interest margin is the total of net interest income divided by average earning assets. Average interest-earning assets for the year ended December 31, 2010 were $1.60 billion compared to $1.61 billion for the year ended December 31, 2009, a decrease of 0.4%. On a fully taxable equivalent (“TE”) basis, net interest spread was 3.05% and 2.82% for the years ended December 31, 2010 and 2009, respectively. The net interest margin on a fully TE basis increased to 3.27% for the year ended December 31, 2010 from 3.14% for the year ended December 31, 2009. The yield on average interest-earning assets was 4.93% and 5.27% for the years ended December 31, 2010 and 2009, respectively, while the interest rate on average interest-bearing liabilities for those periods was 1.88% and 2.45%, respectively.

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Index

The improvement in net interest margin was primarily due to the significant decline in funding costs through disciplined pricing controls and a declining interest rate environment. Partially offsetting declining funding costs was a significant increase in loans on nonaccrual status and the expiration of an interest rate swap on prime-indexed commercial loans which benefited income in 2009.

The following two tables set forth certain information regarding the Company’s yield on interest-earning assets and cost of interest-bearing liabilities and the component changes in net interest income. The first table, Average Balances, Interest Earned or Paid, and Interest Yields/Rates, reflects the Company’s effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. The second table, Rate and Volume Variance Analysis, presents further information on those changes. For each category of interest-earning asset and interest-bearing liability, we have provided information on changes attributable to:

	•	~~changes in volume, which are changes in average volume multiplied by the average rate for the previous period;~~

	•	~~changes in rates, which are changes in average rate multiplied by the average volume for the previous period;~~

	•	~~changes in rate/volume, which are changes in average rate multiplied by the changes in average volume; and~~

	•	~~total change, which is the sum of the previous columns.~~

~~- 34 -~~

~~Index~~

~~Average Balances, Interest Earned or Paid, and Interest Yields/Rates~~

~~For the Years Ended December 31, 2010, 2009 and 2008~~

~~Tax Equivalent Basis~~ 1

2010 2009 2008
(Dollars in thousands) Average Balance Amount Earned Average Rate Average Balance Amount Earned Average Rate Average Balance Amount Earned Average Rate
Assets
Loans 2
$ 1,353,191 $ 69,084 5.11 % $ 1,316,737 $ 70,412 5.35 % $ 1,174,870 $ 72,494 6.17 %
Investment securities 3
213,402 9,986 4.68 269,240 14,483 5.38 254,216 14,026 5.52
Interest-bearing deposits 38,003 89 0.23 25,312 42 0.17 11,293 128 1.13
Total interest-earning assets 1,604,596 $ 79,159 4.93 % 1,611,289 $ 84,937 5.27 % 1,440,379 $ 86,648 6.02 %
Cash and due from banks 18,149 15,927 22,477
Other assets 103,667 83,283 133,566
Allowance for loan losses (34,757 ) (18,535 ) (13,846 )
Total assets $ 1,691,655 $ 1,691,964 $ 1,582,576

Liabilities and Equity
NOW and money market accounts $ 327,811 $ 2,794 0.85 % $ 363,522 $ 4,527 1.25 % $ 336,899 $ 6,655 1.98 %
Savings deposits 30,555 41 0.13 29,171 47 0.16 29,756 122 0.41
Time deposits 878,068 18,247 2.08 822,003 23,463 2.85 691,140 26,265 3.80
Total interest-bearing deposits 1,236,434 21,082 1.71 1,214,696 28,037 2.31 1,057,795 33,042 3.12
Repurchase agreements 1,564 5 0.32 10,919 24 0.22 29,929 387 1.29
Borrowed funds 150,207 4,541 3.02 143,241 5,147 3.59 168,501 7,234 4.29
Subordinated debt 33,550 1,131 3.37 30,930 1,055 3.41 30,930 1,761 5.69
Total interest-bearing liabilities 1,421,755 $ 26,759 1.88 % 1,399,786 $ 34,263 2.45 % 1,287,155 $ 42,424 3.30 %
Noninterest-bearing deposits 130,944 132,535 114,982
Other liabilities 10,519 12,148 11,352
Total liabilities 1,563,218 1,544,469 1,413,489
Shareholders’ equity 128,437 147,495 169,087
Total liabilities and shareholders’ equity $ 1,691,655 $ 1,691,964 $ 1,582,576

Net interest spread 4
3.05 % 2.82 % 2.72 %
Tax equivalent adjustment $ 1,437 $ 1,796 $ 1,628
Net interest income and net interest margin 5
$ 52,400 3.27 % $ 50,674 3.14 % $ 44,224 3.07 %

1	~~The tax equivalent basis is computed using a federal tax rate of 34%.~~
2	~~Loans include mortgage loans held for sale in addition to nonaccrual loans for which accrual of interest has not been recorded.~~
3	~~The average balance for investment securities excludes the effect of their mark-to-market adjustment, if any.~~
4	~~Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.~~
5	~~Net interest margin represents net interest income divided by average interest-earning assets.~~

~~- 35 -~~

~~Index~~

~~Rate and Volume Variance Analysis~~

~~Tax Equivalent Basis~~ 1

December 31, 2010 vs. 2009 December 31, 2009 vs. 2008
(Dollars in thousands)
Rate
Variance

Volume
Variance

Total
Variance

Rate
Variance

Volume
Variance

Total
Variance

Interest income:
Loans $ (3,189 ) $ 1,861 $ (1,328 ) $ (9,671 ) $ 7,589 $ (2,082 )
Investment securities (1,884 ) (2,613 ) (4,497 ) (351 ) 808 457
Interest-bearing deposits 17 30 47 (109 ) 23 (86 )
Total interest income (5,056 ) (722 ) (5,778 ) (10,131 ) 8,420 (1,711 )
Interest expense:
Savings and interest-bearing demand deposits and other (1,437 ) (302 ) (1,739 ) (2,534 ) 331 (2,203 )
Time deposits (6,381 ) 1,165 (5,216 ) (6,537 ) 3,735 (2,802 )
Repurchase agreements 11 (30 ) (19 ) (321 ) (42 ) (363 )
Borrowed funds (817 ) 211 (606 ) (1,179 ) (908 ) (2,087 )
Subordinated debt (12 ) 88 76 (706 ) – (706 )
Total interest expense (8,636 ) 1,132 (7,504 ) (11,277 ) 3,116 (8,161 )
Increase (decrease) in net interest income $ 3,580 $ (1,854 ) $ 1,726 $ 1,146 $ 5,304 $ 6,450

1	~~The tax equivalent basis is computed using a federal tax rate of 34%.~~

Interest income on loans decreased from $70.2 million in 2009 to $68.5 million in 2010, a decline of $1.7 million, or 2.4%. This decrease was primarily due to declining yields on the Company’s loan portfolio, partially offset by growth in average loan balances over the same period. Declining yields on the loan portfolio reduced interest income by $3.2 million in 2010 compared to 2009, and the increase in average loan balances generated $1.9 million in additional interest income. Average loan balances, which yielded 5.11% and 5.35% for the years ended December 31, 2010 and 2009, respectively, increased from $1.32 billion in 2009 to $1.35 billion in 2010. The Company’s interest rate swap on prime-indexed commercial loans, which expired in October 2009, increased loan interest income by $3.5 million for the year ended December 31, 2009, representing a benefit to net interest margin of 0.22%. The Company received no such benefit in 2010.

Interest income on investment securities decreased from $12.9 million in 2009 to $9.2 million in 2010, a decrease of $3.8 million, or 29.1%. This decrease was due to a decline in the size of the investment portfolio coupled with lower fixed income investment yields. Average investment balances, at book value, decreased from $269.2 million for the year ended December 31, 2009 to $213.4 million for the year ended December 31, 2010, and the tax equivalent yield on investment securities decreased from 5.38% to 4.68% over the same period. Average investment balances declined as management sold certain municipal bonds to reduce the duration of its fixed income portfolio earlier in the year and then repositioned its portfolio later in the year to execute certain interest rate risk, liquidity, and tax strategies. Additionally, yields have fallen as prepayments on higher yielding mortgage-backed securities and proceeds from sales of certain long-dated municipal bonds have been re-invested generally at lower rates in shorter-dated U.S. government agency debt and other high quality mortgage bonds issued by U.S. government sponsored entities.

Interest expense decreased from $34.3 million in 2009 to $26.8 million in 2010, a decline of $7.5 million, or 21.9%. This decrease is primarily due to declining interest rates, partially offset by growth in average interest-bearing liability balances. Declining interest rates reduced interest expense by $8.6 million in 2010 compared to 2009, and the increase in average balances resulted in $1.1 million of higher interest expense. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits, increased from $1.21 billion for the year ended December 31, 2009 to $1.24 billion for the year ended December 31, 2010. The average rate paid on interest-bearing deposits decreased from 2.31% in 2009 to 1.71% in 2010, reflecting disciplined pricing controls and re-pricing of maturing time deposits in a lower interest rate environment. The interest rate on time deposits, which comprised 65.0% of total deposits as of December 31, 2010 and 61.6% of total deposits as of December 31, 2009, decreased from 2.85% in 2009 to 2.08% in 2010.

Average borrowings, including repurchase agreements and subordinated debt, increased from $185.1 million for the year ended December 31, 2009 to $185.3 million for the year ended December 31, 2009. The average rate paid on borrowings decreased from 3.36% in 2009 to 3.06% in 2010.

~~- 36 -~~

~~Index~~

Provision for Loan Losses (Predecessor Company)

Provision for loan losses totaled $58.5 million for the year ended December 31, 2010 compared with $23.1 million for the year ended December 31, 2009. The loan loss provision increased significantly in 2010 due to higher levels of nonperforming assets, increased charge-offs, and downgrades to risk ratings of certain loans in the portfolio. Net charge-offs increased from $11.8 million, or 0.89% of average loans, in 2009 to $48.6 million, or 3.60% of average loans, in 2010. In the fourth quarter of 2010, net charge-offs totaled $20.2 million, or 6.24% of average loans (annualized),which was an increase from $5.3 million, or 1.52% of average loans (annualized), in the fourth quarter of 2009. Of the fourth quarter 2010 charge-offs, $9.5 million was related to one residential development project in the Company’s Triangle region.

Nonperforming assets, which include nonperforming loans and other real estate, totaled 5.69% of total assets as of December 31, 2010, an increase from 2.90% as of December 31, 2009. Nonperforming assets, including accruing restructured loans, totaled 5.98% of total assets as of December 31, 2010, an increase from 4.87% as of December 31, 2009. Loans past due more than 30 days, excluding nonperforming loans, increased to 1.08% of total loans as of December 31, 2010 compared to 0.67% as of December 31, 2009. The allowance for loan losses increased to 2.87% of total loans as of December 31, 2010 compared with 1.88% as of December 31, 2009. The allowance for loan losses covered 50% of nonperforming loans as of December 31, 2010, which was a decrease from 66% as of December 31, 2009.

- 60 -

Index

Prior to the fourth quarter of 2010, the Company provided specific reserves on many of its impaired loans as part of the allowance for loan losses and charged down impaired loans to estimated fair value only if legal action had begun against a borrower in default or where a “confirmed loss” existed. However, during the fourth quarter of 2010, the Company began charging down all impaired loans to current fair value. This change in practice has not impacted the amount of loan loss provision, since impaired loans are valued the same under both methods, but the change does increase the amount of net charge-offs recorded and decreases the level of allowance for loan losses. As of December 31, 2010 and 2009, the Company had recorded cumulative charge-offs of $17.9 million and $6.7 million, respectively, on impaired loans. If these cumulative charge-offs had instead been recorded as specific reserves, the allowance for loan losses would have increased from 2.87% of total loans to 4.24% of total loans as of December 31, 2010 and would have increased from 1.88% of total loans to 2.35% of total loans as of December 31, 2009.

The elevated provision for loan losses, net charge-offs and nonperforming assets reflect the economic climate in the Company’s primary markets and consistent application of the Company’s policy to recognize losses as they occur. Given significant volatility and rapid changes in current market conditions, management cannot predict its nonperforming loan levels into the future but anticipates that problem loans may remain elevated, or even increase, into 2011 as the Company continues working to resolve problem loans in these challenging market conditions.

Noninterest Income (Predecessor Company)

Noninterest income increased from $10.2 million in 2009 to $15.5 million in 2010, an increase of 52.9%. The following table presents the detail of noninterest income and related changes for the years ended December 31, 2010 and 2009:

		2010		2009			$ Change		% Change
(Dollars in thousands)												2010		2009			$ Change		% Change

Noninterest income:
Service charges and other fees	$	3,311	$	3,883		$	(572	)	(14.7	)%	$	3,311	$	3,883		$	(572	)	(14.7	)%
Bank card services		2,020		1,539			481		31.3			2,020		1,539			481		31.3
Mortgage origination and other loan fees		1,861		1,935			(74	)	(3.8	)		1,861		1,935			(74	)	(3.8	)
Brokerage fees		963		698			265		38.0			963		698			265		38.0
Bank-owned life insurance		699		1,830			(1,131	)	(61.8	)		699		1,830			(1,131	)	(61.8	)
Net gain on sale of investment securities		5,855		173			5,682		NM			5,855		173			5,682		NM
Net other-than-temporary impairment losses on securities		–		(498	)		498		(100.0	)		–		(498	)		498		(100.0	)
Other		840		607			233		38.4			840		607			233		38.4
Total noninterest income	$	15,549	$	10,167		$	5,382		52.9	%	$	15,549	$	10,167		$	5,382		52.9	%

~~- 37 -~~

~~Index~~

The increase in noninterest income was primarily related to net gains of $5.9 million recorded on the sale of investment securities in 2010 as compared to net gains of $173 thousand recorded in 2009. The Company sold a significant portion of its U.S. government agency bond and mortgage-backed securities portfolio and reinvested the proceeds in an effort to reposition the investment portfolio to execute certain interest rate risk management, liquidity, and tax strategies. During the years ended December 31, 2010 and 2009, proceeds received from these sales totaled $202.2 million and $23.5 million, respectively. Included as a reduction to net gain on sale of investment securities in 2009 was a $320 thousand loss on an equity investment in Silverton Bank. Additionally, noninterest income was decreased in 2009 as an other-than-temporary impairment loss was recorded on an investment in trust preferred securities issued by a financial institution.

Also contributing to increased noninterest income, bank card services, which includes interchange fees related to debit card and credit card transactions, increased primarily due to higher debit card usage on consumer products where debit card issuance is optional. Brokerage fees increased as a result of improved sales efforts and market conditions.

Partially offsetting the increase in noninterest income was a nonrecurring BOLI gain of $913 thousand recorded in 2009. Service charge income decreased due to a reduction in the volume of overdrafts and non-sufficient funds transactions. Mortgage origination and other loan fees declined by $74 thousand due to fewer prepayment penalties recognized on business loans, partially offset by increased residential mortgage refinancing activity.

- 61 -

Index

Noninterest Expense (Predecessor Company)

Noninterest expense increased from $49.8 million in 2009 to $54.3 million in 2010, an increase of 9.0%. The following table presents the detail of noninterest expense and related changes for the years ended December 31, 2010 and 2009:

		2010		2009		$ Change		% Change
(Dollars in thousands)											2010		2009		$ Change		% Change

Noninterest expense:
Salaries and employee benefits	$	22,675	$	22,112	$	563		2.5	%	$	22,675	$	22,112	$	563		2.5	%
Occupancy		5,906		5,630		276		4.9			5,906		5,630		276		4.9
Furniture and equipment		3,183		3,155		28		0.9			3,183		3,155		28		0.9
Data processing and telecommunications		2,092		2,317		(225	)	(9.7	)		2,092		2,317		(225	)	(9.7	)
Advertising and public relations		1,887		1,610		277		17.2			1,887		1,610		277		17.2
Office expenses		1,260		1,383		(123	)	(8.9	)		1,260		1,383		(123	)	(8.9	)
Professional fees		2,514		1,488		1,026		69.0			2,514		1,488		1,026		69.0
Business development and travel		1,350		1,244		106		8.5			1,350		1,244		106		8.5
Amortization of core deposit intangible		937		1,146		(209	)	(18.2	)
Amortization of other intangible assets											937		1,146		(209	)	(18.2	)
ORE losses and miscellaneous loan costs		5,006		1,646		3,360		204.1			5,006		1,646		3,360		204.1
Directors’ fees		1,061		1,418		(357	)	(25.2	)		1,061		1,418		(357	)	(25.2	)
FDIC deposit insurance		3,846		2,721		1,125		41.3			3,846		2,721		1,125		41.3
Other		2,592		3,940		(1,348	)	(34.2	)		2,592		3,940		(1,348	)	(34.2	)
Total noninterest expense	$	54,309	$	49,810	$	4,499		9.0	%	$	54,309	$	49,810	$	4,499		9.0	%

The increase in noninterest expense was primarily due to a $3.4 million increase in other real estate and miscellaneous loan costs, of which $2.2 million was related to increased valuation adjustments to and losses on the sale of other real estate with the remaining increase representing higher loan workout, appraisal and foreclosure costs to resolve problem assets. FDIC deposit insurance expense rose by $1.1 million with a higher deposit insurance assessment rate and a change in risk category as determined by the FDIC.

Further, salaries and employee benefits expense increased by $563 thousand due to lower deferred loan costs, which decrease expense, and increased employee health insurance expense. Occupancy expense increased primarily due to additional overhead costs incurred as new branches were opened in the Triangle region late in 2009. Advertising and public relations expense increased by $277 thousand due in part from radio and television ads promoting the Company’s special financing program for home buyers. Professional fees increased by $1.0 million due to higher legal and consulting expense. Business development and travel expenses increased primarily due to marketing efforts associated with the Company’s withdrawn public stock offering in 2010. While slightly higher, furniture and equipment expense remained relatively consistent.

~~- 38 -~~

~~Index~~

Partially offsetting the increase in noninterest expense, data processing and telecommunications costs dropped by $225 thousand as the Company realized cost savings through renegotiation of certain vendor contracts. Office expense decreased by $123 thousand primarily due to cost savings initiatives within the Company’s branch network and operations areas. Core deposit intangible amortization decreased by $209 thousand as intangible assets acquired in previous acquisitions are amortized on an accelerated method over the expected benefit of the core deposit premium. Directors’ fees decreased by $357 thousand due to acceleration of benefit payments on a retirement plan upon the death of a former director in 2009 and in part due to the board reduction and reorganization in late 2009. Lastly, other expenses declined as the Company incurred $1.9 million of direct nonrecurring expenses related to its proposed stock offering in 2009. These expenses were recorded in other noninterest expense and primarily represented investment banking, legal and accounting costs related to the proposed offering. The Company also incurred direct nonrecurring expenses related to a separate proposed public stock offering in 2010 that was later withdrawn.

Income Taxes (Predecessor Company)

Income tax expense recorded in the year ended December 31, 2010 was primarily impacted by the valuation allowance recorded against deferred tax assets in 2010. Due to a cumulative three-year, pre-tax loss position, significant net operating losses in 2010, and ongoing stress on the Company’s financial performance from elevated credit losses, the Company fully reserved its deferred tax assets as of December 31, 2010 with a valuation allowance of $31.8 million. A cumulative loss position makes it more difficult for management to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.

~~Year Ended December 31, 2009 Compared with Year Ended December 31, 2008~~

The Company’s net loss totaled $6.8 million for the year ended December 31, 2009 compared to a net loss of $55.7 million for the year ended December 31, 2008. Net loss attributable to common shareholders was $9.2 million, or $0.80 per diluted share, in 2009 compared to net loss attributable to common shareholders of $55.8 million, or $4.94 per diluted share, in 2008. Results of operations for 2009 primarily reflect higher net interest income of $6.3 million on an improved net interest margin and growth in earning assets, an increase of $19.2 million in provision for loan losses, an increase in noninterest expense (excluding a goodwill impairment charge of $65.2 million in 2008) of $8.3 million, and increased income tax benefits of $5.8 million.

~~Net Interest Income~~

~~Net interest income increased from $42.6 million for the year ended December 31, 2008 to $48.9 million for the year ended December 31, 2009.~~ Average interest-earning assets for the year ended December 31, 2009 were $1.61 billion compared to $1.44 billion for the year ended December 31, 2008, an increase of 11.9%. On a fully TE basis, net interest spread was 2.82% and 2.72% for the years ended December 31, 2009 and 2008, respectively. The net interest margin on a fully TE basis increased to 3.14% for the year ended December 31, 2009 from 3.07% for the year ended December 31, 2008. The yield on average interest-earning assets was 5.27% and 6.02% for the years ended December 31, 2009 and 2008, respectively, while the rate on average interest-bearing liabilities for those periods was 2.45% and 3.30%, respectively.

Interest income on loans decreased from $72.5 million in 2008 to $70.2 million in 2009, a decline of $2.3 million, or 3.2%. This decrease was primarily due to declining yields on the Company’s loan portfolio, partially offset by growth in average loan balances over the same period. Declining yields on the loan portfolio reduced interest income by $9.7 million in 2009 compared to 2008, and the increase in average loan balances generated $7.6 million in additional interest income. Average loan balances, which yielded 5.35% and 6.17% for the years ended December 31, 2009 and 2008, respectively, increased from $1.17 billion in 2008 to $1.32 billion in 2009. The Company’s interest rate swap on prime-indexed commercial loans increased loan interest income by $3.5 million and $2.6 million for the years ended December 31, 2009 and 2008, respectively, representing a benefit to net interest margin of 0.22% and 0.18%, respectively.

Interest income on investment securities increased from $12.4 million in 2008 to $12.9 million in 2009, an increase of $523 thousand, or 4.2%. This increase was due to growth in the investment portfolio coupled with lower fixed income investment yields. Average investment balances, at book value, increased from $254.2 million for the year ended December 31, 2008 to $269.2 million for the year ended December 31, 2009 while the tax equivalent yield on investment securities decreased from 5.52% to 5.38% over the same period. These lower investment yields primarily reflect principal paydowns as well as calls and sales of higher yielding mortgage-backed securities and other investments being re-invested at lower market rates.

- 3962 -

Index

Interest expense decreased from $42.4 million in 2008 to $34.3 million in 2009, a decline of $8.2 million, or 19.2%. This decrease is primarily due to declining interest rates, partially offset by growth in average interest-bearing liability balances. Declining interest rates reduced interest expense by $11.3 million in 2009 compared to 2008, and the increase in average balances resulted in $3.1 million of higher interest expense. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits, increased from $1.06 billion for the year ended December 31, 2008 to $1.21 billion for the year ended December 31, 2009. The average rate paid on interest-bearing deposits decreased from 3.12% in 2008 to 2.31% in 2009, primarily due to declining interest rates in the wholesale and retail markets. The interest rate on time deposits, which comprised 61.6% of total deposits as of December 31, 2009 and 61.1% of total deposits as of December 31, 2008, decreased from 3.80% in 2008 to 2.85% in 2009.

Average borrowings, including subordinated debt and repurchase agreements, decreased from $229.4 million for the year ended December 31, 2008 to $185.1 million for the year ended December 31, 2009. The average rate paid on borrowings, including subordinated debt and repurchase agreements, decreased from 4.09% in 2008 to 3.36% in 2009. This decrease reflects the effects of falling interest rates on the Company’s variable rate borrowings.

~~Provision for Loan Losses~~

Provision for loan losses was $23.1 million for the year ended December 31, 2009 compared to $3.9 million for the year ended December 31, 2008. The increase in the provision was due to continued deteriorating economic conditions and weakness in local real estate markets which resulted in significantly higher levels of nonperforming assets and impaired loans as well as downgrades to the credit ratings of certain loans in the portfolio. Further, a significant decline in commercial real estate values contributed to higher levels of specific reserves or charge-offs on impaired loans. Net charge-offs increased from $3.5 million, or 0.30% of average loans, in 2008 to $11.8 million, or 0.89% of average loans, in 2009.

Nonperforming assets, which include nonperforming loans and other real estate, totaled 2.90% of total assets as of December 31, 2009, an increase from 0.63% as of December 31, 2008. Nonperforming assets, including accruing restructured loans, totaled 4.87% of total assets as of December 31, 2009, an increase from 0.99% as of December 31, 2008. Loans past due more than 30 days, excluding nonperforming loans, increased to 0.67% of total loans as of December 31, 2009 compared to 0.42% as of December 31, 2008. The allowance for loan losses increased to 1.88% of total loans as of December 31, 2009 compared with 1.18% as of December 31, 2008. The allowance for loan losses covered 66% of nonperforming loans as of December 31, 2009, which was a decrease from 162% as of December 31, 2008.

~~Noninterest Income~~

Noninterest income decreased from $11.1 million in 2008 to $10.2 million in 2009, a decrease of 8.0%. The following table presents the detail of noninterest income and related changes for the years ended December 31, 2009 and 2008:

2009 2008 $ Change % Change
(Dollars in thousands)

Noninterest income:
Service charges and other fees $ 3,883 $ 4,545 $ (662 ) (14.6 )%
Bank card services 1,539 1,332 207 15.5
Mortgage origination and other loan fees 1,935 2,148 (213 ) (9.9 )
Brokerage fees 698 732 (34 ) (4.6 )
Bank-owned life insurance 1,830 952 878 92.2
Gain on sale of branch – 374 (374 ) (100.0 )
Net gain on sale of investment securities 173 249 (76 ) (30.5 )
Net other-than-temporary impairment losses on securities (498 ) – (498 ) NM
Other 607 719 (112 ) (15.6 )
Total noninterest income $ 10,167 $ 11,051 $ (884 ) (8.0 )%

Contributing to the decrease in noninterest income was a gain of $374 thousand recorded on the sale of the Company’s Greensboro branch in 2008. In 2009, the Company recorded an other-than-temporary credit impairment charge of $498 thousand related to an investment in trust preferred securities issued by a financial institution. Following an analysis of the financial condition of the issuer and a decision by the issuer to suspend interest payments on the securities, management determined the unrealized loss to be credit related and therefore wrote the securities down to estimated fair market value with the loss charged to earnings.

~~- 40 -~~

~~Index~~

Service charge income, which includes overdraft and non-sufficient funds charges, decreased primarily from a decline in consumer spending during the recent economic recession. Bank card services, which includes income received from debit card transactions, increased primarily due to checking account growth. Mortgage origination and other loan fees include origination fees from brokered mortgage loans as well as prepayment penalties and other miscellaneous loan fees that are not recorded to interest income. Mortgage fees increased by $330 thousand, which was primarily a result of higher levels of brokered mortgage originations benefited by a continued favorable interest rate environment for residential mortgage refinancing and home purchase activity. Other loan fees declined by $543 thousand due to a drop in prepayment penalties charged as fewer business loans were prepaid. Brokerage fees declined with increased concerns about the economic recession and volatility in the stock markets. Partially offsetting the noninterest income decline was an increase in BOLI income, which was primarily due to collection of a policy claim in 2009.

~~Noninterest Expense~~

Noninterest expense decreased from $106.7 million in 2008 to $49.8 million in 2009, a decrease of 53.3%. The following table presents the detail of noninterest expense and related changes for the years ended December 31, 2009 and 2008:

2009 2008 $ Change % Change
(Dollars in thousands)

Noninterest expense:
Salaries and employee benefits $ 22,112 $ 20,951 $ 1,161 5.5 %
Occupancy 5,630 4,458 1,172 26.3
Furniture and equipment 3,155 3,135 20 0.6
Data processing and telecommunications 2,317 2,135 182 8.5
Advertising and public relations 1,610 1,515 95 6.3
Office expenses 1,383 1,317 66 5.0
Professional fees 1,488 1,479 9 0.6
Business development and travel 1,244 1,393 (149 ) (10.7 )
Amortization of core deposit intangible 1,146 1,037 109 10.5
ORE losses and miscellaneous loan costs 1,646 898 748 83.3
Directors’ fees 1,418 1,044 374 35.8
FDIC deposit insurance 2,721 685 2,036 297.2
Goodwill impairment charge – 65,191 (65,191 ) (100.0 )
Other 3,940 1,424 2,516 176.7
Total noninterest expense $ 49,810 $ 106,662 $ (56,852 ) (53.3 )%

~~The primary reason for the significant decline in noninterest expense was the $65.2 million goodwill impairment charge in 2008.~~

Salaries and employee benefits rose primarily due to increased staffing requirements as new branches were opened during 2008 and 2009 in addition to the four branches purchased in the Fayetteville market during December 2008. Regular salaries and wages increased by $3.0 million as the average number of full-time equivalent employees increased from 342 in 2008 to 390 in 2009. Partially offsetting increased costs from additional headcount was a reduction in bonus expense of $1.0 million and 401(k) plan employer match expense of $385 thousand as the Company suspended its incentive plan and retirement plan matching contributions in light of market conditions. Further, deferred loan costs increased by $863 thousand which resulted in decreased salaries expense. Loan cost deferrals are applied to each loan originated and renewed based on an estimated cost to process and underwrite those originations and renewals. Deferred costs increase the loan balance and are amortized as a component of interest income through the maturity of the respective loans.

Occupancy expense increased primarily from higher levels of facilities costs related to new branch locations but also from higher rent due to sale-leaseback agreements transactions on three existing branch facilities in September 2008. While slightly higher, furniture and equipment expense, advertising and public relations expense, office expenses, and professional fees remained relatively consistent from 2008 to 2009. Data processing and communications costs rose as management continued to update the Company’s technology infrastructure to support business growth. Business development and travel costs declined as management continued to closely monitor and control discretionary spending and as a second partner was recruited to sublease the corporate airplane. Core deposit intangible amortization increased from additional amortization required on the core deposit intangible recognized as part of the acquisition of four Fayetteville branches in December 2008.

~~- 41 -~~

~~Index~~

Other real estate and miscellaneous loan costs increased $748 thousand, of which $241 thousand was related to increased valuation adjustments to and losses on the sale of other real estate, with the remaining increase representing higher loan workout, appraisal and foreclosure costs to resolve problem assets. Directors’ fees increased largely from an accelerated payout of deferred compensation benefits upon the death of a former director. FDIC deposit insurance expense increased partially due to a mandatory special assessment of $765 thousand charged and collected in 2009. The remaining increase in FDIC deposit insurance expense was due to deposit growth as well as increases in assessment rates charged by the FDIC to cover higher monitoring costs and losses from insured financial institutions taken into receivership. The Company incurred $1.9 million of direct nonrecurring expenses related to its recent proposed public stock offering that was withdrawn in January 2010. These expenses are recorded in other noninterest expense and represent investment banking, due diligence, legal and accounting costs as well as other miscellaneous filing and printing costs related to the proposed offering. The Company also recognized a loss of $361 thousand, which was recorded in other noninterest expense, related to the repurchase of a mortgage loan previously sold to an investor in the secondary market.

~~Income Taxes~~

The Company’s income tax benefit increased from $1.2 million for the year ended December 31, 2008 to $7.0 million for the year ended December 31, 2009. This increase was due primarily to a larger pre-tax loss in 2009 compared to 2008, excluding the goodwill impairment charge in 2008. Also partially contributing to the increased tax benefit was a nonrecurring benefit of $504 thousand recorded from income tax refunds from federal and state tax authorities upon the amendment of multiple tax returns from previous years. These amended returns were filed during the third quarter of 2009 following a thorough review by the Company’s tax professionals of previously filed federal and state tax returns. The Company’s effective tax rate was 50.7% and 2.1% for the years ended December 31, 2009 and 2008, respectively. The increased effective tax rate was related to higher levels of tax exempt income relative to the pre-tax loss in each year. The goodwill impairment charge also significantly reduced the Company’s effective tax rate in 2008.

Analysis of Financial Condition

Overview

The Company’s financial condition ~~is measured~~was significantly impacted by the controlling investment in ~~terms of its asset and liability composition as well as asset quality. The fluctuation and composition~~the Company by CBF on January 28, 2011. CBF owns approximately 83% of the ~~balance sheet in 2010 reflected a decline~~Company’s outstanding common stock. Because of the CBF Investment, the Company’s assets and liabilities were adjusted to estimated preliminary fair value at the acquisition date, and the allowance for loan losses was eliminated at that date.

Due to the Bank Merger on June 30, 2011, the Company deconsolidated the assets and liabilities of Old Capital Bank and began reporting its ownership of Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment. This transaction resulted in the ~~loan portfolio as the Company focused on resolving problem loans and preserving capital.~~

~~Total assets as of December 31, 2010 were $1.59 billion, a decrease of $149.1 million from $1.73 billion as of December 31, 2009. Earning assets, which represented 97.0% and 94.6% of~~Company’s total assets ~~as of December 31, 2010 and 2009, respectively, decreased~~decreasing from ~~$1.64 billion as of December 31, 2009 to $1.54 billion as of December 31, 2010. Loans declined from $1.39 billion as of December 31, 2009 to $1.25~~$1.6 billion as of December 31, 2010 ~~a decrease of 9.8%. The declining loan portfolio reflected an effort by the Company~~(Predecessor) to ~~de-leverage its balance sheet to preserve capital and reduce its exposure to certain sectors of the commercial real estate market. Allowance for loan losses was $36.1~~$249.7 million as of December 31, ~~2010 compared~~2011 (Successor). As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, NA totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity at that date.

The Company also had an advance to ~~$26.1~~Capital Bank, NA totaling $3.4 million as of December 31, ~~2009, representing approximately 2.87% and 1.88%, respectively, of total loans.~~

~~Total investment securities decreased by $22.2 million in 2010 as management sold certain municipal bonds~~2011 (Successor). In the period from June 30, 2011 to reduce the duration of its fixed income portfolio earlier in the year and then repositioned its portfolio later in the year to execute certain interest rate risk, liquidity, and tax strategies. The Company’s portfolio also experienced relatively high levels of paydowns on U.S. government sponsored mortgage-backed securities. The cash surrender value of BOLI policies decreased by $15.8 million afterDecember 31, 2011 (Successor), the Company ~~surrendered certain BOLI contracts~~increased the equity investment balance by $4.0 million based on ~~former employees~~its equity in Capital Bank, NA’s net income and ~~directors~~increased the equity investment balance by $771 thousand based on its equity in ~~2010 for~~Capital Bank, NA’s other comprehensive income. In addition to the ~~purpose of repositioning the BOLI portfolio for capital, liquidity~~investment in and ~~tax planning purposes. Deferred tax assets declined by $12.1 million in 2010 as~~advance to Capital Bank, NA, the Company ~~recorded a full valuation allowance~~also had $2.2 million of cash on ~~its deferred tax position.~~

~~Total deposits declined from $1.38 billion~~deposit with Capital Bank, NA and $458 thousand of other assets as of December 31, ~~2009~~2011 (Successor).

The Company’s subordinated debentures had a carrying value of $19.2 million and a notional value of $33.4 million as of December 31, 2011 (Successor). The decline in the carrying value of these debt instruments since December 31, 2010 (Predecessor) was primarily due to ~~$1.34 billion~~acquisition accounting adjustments resulting from the CBF Investment and accretion of the fair value discount in the successor period.

Total shareholders’ equity was $224.9 million as of December 31, 2011 (Successor) and represented a significant increase from the $76.7 million balance as of December 31, 2010 ~~a decrease of 2.52%~~(Predecessor). Savings accounts and time deposits increased by $1.7 million and $24.6 million, respectively, during 2010 while checking accounts and money market accounts decreased by $14.3 million and $46.7 million, respectively. ~~Time deposits represented 65.0% of total deposits at December 31, 2010 compared~~This increase was primarily due to ~~61.6% at December 31, 2009.~~ ~~Borrowings and securities sold under agreements to repurchase decreased by $52.5 million in 2010 as~~ the ~~Company paid off certain borrowings with increased liquidity from paydowns~~CBF Investment on ~~loans and investment securities as well as the surrender of certain BOLI contracts.~~ ~~Subordinated debt increased by $3.4 million in 2010 from the private placement offering of investment units consisting of subordinated debt and common~~January 28, 2011. Common stock, ~~in the first quarter of the year.~~

~~- 42 -~~

~~Index~~

~~Total shareholders’ equity decreased from $139.8~~no par value, totaled $218.8 million as of December 31, ~~2009 to $76.7 million as of December 31, 2010. The Company’s accumulated deficit increased by $63.8 million for~~2011 (Successor). This amount represents the ~~year ended December 31, 2010, reflecting a $61.5 million net loss and dividends and accretion on preferred stock of $2.3 million. Common stock increased primarily due to $5.1 million~~fair value of net assets acquired of $224.1 million at the CBF Investment date, which includes the non-controlling interest at fair value, in addition to net proceeds of $3.8 million from the issuance of approximately 1.6 million shares of the Company’s common stock ~~as part of~~in the ~~private placement offering. Accumulated other comprehensive income (loss), which includes the unrealized gain or loss~~Rights Offering on ~~available-for-sale investment securities,~~March 11, 2011. Common stock then decreased by a net of ~~tax, was a net unrealized loss of $1.3~~$9.1 million due to the Bank Merger and GreenBank merger. The Company’s retained earnings totaled $5.3 million as of December 31, ~~2010 compared to a~~2011 (Successor), which represents the Company’s net ~~unrealized gain of $4.0 million~~income in the successor period. Accumulated other comprehensive income totaled $771 thousand as of December 31, ~~2009.~~2011 (Successor) and represented the Company’s equity in Capital Bank, NA’s other comprehensive income in the period subsequent to the Bank Merger.

Investment Securities

~~Investment~~Due to the Bank Merger, the Company reported no investment securities ~~represent~~on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, investment securities represented the second largest component of earning assets and ~~are~~were used to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for FHLB advances, public funds and repurchase agreements, as necessary. The Company’s securities portfolio ~~consists~~consisted primarily of debt securities issued by U.S. government agencies, mortgage-backed securities issued by Fannie Mae and Freddie Mac, non-agency mortgage-backed securities, municipal bonds, and corporate bonds.

As securities ~~are~~were purchased, they ~~are~~were designated as available for sale or held to maturity based upon management’s intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies and capital requirements. ~~In recent years, management has~~Management generally identified new securities purchased as available for sale. Investment securities available for sale ~~are~~were carried at their fair value and were in a net unrealized loss position of $2.0 million as of December 31, 2010 ~~a decline from a net unrealized gain position of $6.5 million as of December 31, 2009.~~(Predecessor). Changes to the fair value of available-for-sale investment securities ~~are~~were recorded to other comprehensive income. Investment securities held to maturity ~~are~~were carried at amortized ~~cost and were in a net unrealized loss position of $54 thousand as of December 31, 2009.~~cost. The Company had no investment securities designated as held to maturity as of December 31, ~~2010.~~2010 (Predecessor).

- 63 -

Index

As of December 31, 2010 ~~and 2009,~~(Predecessor), the recorded value of investments securities totaled $223.3 million, ~~and $245.5 million, respectively,~~ with $215.0 million ~~and $235.4 million, respectively,~~ classified as available for sale and recorded at fair ~~value and $0 and $3.7 million, respectively, classified as held to maturity and recorded at amortized cost.~~value. In addition, the Company owned other investments which totaled $8.3 million ~~and $6.4 million~~ as of December 31, 2010 ~~and 2009, respectively.~~(Predecessor). Other investments primarily ~~includes~~included the Company’s investment in FHLB stock which does not have a readily determinable fair value and iswas recorded at cost and reviewed periodically for impairment. ~~Factors~~Prior to the Bank Merger, factors affecting changes in the investment portfolio balance ~~include~~included loan growth, funding levels, interest rates available for reinvestment of maturing securities, and changes to the interest rate yield curve.

The following table reflects the carrying value of the Company’s investment portfolio as of December 31, 2010 ~~2009 and 2008:~~(Predecessor):

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Available for sale:
U.S. agency obligations	$	18,934
Municipal bonds		21,009
Mortgage-backed securities issued by GSEs		165,423
Non-agency mortgage-backed securities		6,587
Other securities		3,038
		214,991
Other investments		8,301
Total	$	223,292

2010 2009 2008
(Dollars in thousands)

Available for sale:
U.S. agency obligations $ 18,934 $ 1,029 $ 5,448
Municipal bonds 21,009 72,894 70,430
Mortgage-backed securities issued by GSEs 165,423 151,658 181,906
Non-agency mortgage-backed securities 6,587 7,797 5,809
Other securities 3,038 2,048 3,063
214,991 235,426 266,656
Held to maturity:
U.S. agency obligations – – –
Municipal bonds – 300 300
Mortgage-backed securities issued by GSEs – 1,576 2,103
Non-agency mortgage-backed securities – 1,800 2,791
– 3,676 5,194
Other investments 8,301 6,390 6,288
$ 223,292 $ 245,492 $ 278,138

OnPrior to the Bank Merger, on at least a quarterly basis, the Company ~~completes~~completed an ~~other-than-temporary impairment (“OTTI”)~~OTTI assessment of its investment portfolio. The Company ~~considers~~considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.

~~- 43 -~~

~~Index~~

In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, ~~2009.~~2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management ~~expects~~expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million and ($202,000), respectively, as of both December 31, 2010 and ~~2009. This~~2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management ~~expects~~expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, ~~2009.~~2009 (Predecessor).

The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position ~~for which OTTI has~~ not ~~been~~ recognized in ~~income,~~earnings, aggregated by investment category and length of time that individual securities ~~have~~had been in a continuous unrealized loss position, as of December 31, ~~2010:~~2010 (Predecessor):

Less than 12 Months 12 Months or Greater Total
(Dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Available for sale:
U.S. agency obligations $ 8,916 $ 87 $ – $ – $ 8,916 $ 87
Municipal bonds 14,886 1,134 2,453 387 17,339 1,521
Mortgage-backed securities issued by GSEs 14,473 195 – – 14,473 195
Non-agency mortgage-backed securities – – 4,183 242 4,183 242
Other securities – – 2,536 214 2,536 214
Total at December 31, 2010 $ 38,275 $ 1,416 $ 9,172 $ 843 $ 47,447 $ 2,259
- 64 -

Index

	Predecessor Company
December 31, 2010	Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency obligations	$	8,916	$	87	$	–	$	–	$	8,916	$	87
Municipal bonds		14,886		1,134		2,453		387		17,339		1,521
Mortgage-backed securities issued by GSEs		14,473		195		–		–		14,473		195
Non-agency mortgage-backed securities		–		–		4,183		242		4,183		242
Other securities		–		–		2,536		214		2,536		214
Total	$	38,275	$	1,416	$	9,172	$	843	$	47,447	$	2,259

As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, ~~are~~were related to 4 different securities. These losses ~~are~~were due to a combination of changes in credit spreads and other market factors. These mortgage securities ~~are~~were not issued or guaranteed by an agency of the federal government but ~~are~~were instead issued by private financial institutions and therefore carry an element of credit risk. ~~Management~~Prior to the Bank Merger, management closely ~~monitors~~monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of collateral, remaining terms, interest rates, loan types, etc. The Company ~~has~~ engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.

Unrealized losses on the Company’s investments in municipal bonds ~~are~~were related to 30 different ~~securities.~~securities as of December 31, 2010 (Predecessor). These losses ~~are~~were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. ~~Management monitors~~Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities ~~relate~~related to an investment in subordinated debt of one corporate financial institution. ~~Management monitors~~Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and ~~considers~~considered its capital, liquidity and earnings in this review.

The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI ~~continue~~continued to perform and ~~are~~were expected to perform through maturity, and the issuers ~~have~~had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company ~~does~~did not intend to sell these investments and it iswas not more likely than not that the Company ~~will~~would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company ~~does~~did not consider unrealized losses on such securities to represent OTTI as of December 31, ~~2010.~~2010 (Predecessor).

~~- 44 -~~

~~Index~~

The table below reflects the carrying value and weighted average yield on debt securities by final contractual maturities as of December 31, ~~2010.~~2010 (Predecessor). Expected maturities ~~will differ~~differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Less Than
1 Year
1–5 Years 5–10 Years
More Than
10 Years
Total
Amount Yield Amount Yield Amount Yield Amount Yield Other Amount Yield
(Dollars in thousands)

Available for Sale:
U.S. agency securities $ – – % $ 15,962 1.07 % $ 2,972 2.14 % $ – – % $ – $ 18,934 1.24 %
Municipal bonds 1
301 4.52 1,880 5.14 555 6.29 18,273 6.09 – 21,009 6.00
MBSs issued by GSEs – – 62 5.16 43,707 2.00 121,654 2.89 – 165,423 2.66
Non-agency MBSs – – – – 1,369 4.79 5,218 4.98 – 6,587 4.94
Corporate bonds 2
– – – – 798 3.80 502 – – 1,300 2.53
Other securities – – – – – – – – 1,738 1,738 –
Total $ 301 4.52 % $ 17,904 1.51 % $ 49,401 2.16 % $ 145,647 3.36 % $ 1,738 $ 214,991 2.90 %
- 65 -

Index

	Predecessor Company
	Less Than 1 Year					1–5 Years					5–10 Years					More Than 10 Years							Total
December 31, 2010	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Other		Amount		Yield
(Dollars in thousands)

Available for Sale:
U.S. agency securities	$	–		–	%	$	15,962		1.07	%	$	2,972		2.14	%	$	–		–	%	$	–	$	18,934		1.24	%
Municipal bonds 1		301		4.52			1,880		5.14			555		6.29			18,273		6.09			–		21,009		6.00
MBSs issued by GSEs		–		–			62		5.16			43,707		2.00			121,654		2.89			–		165,423		2.66
Non-agency MBSs		–		–			–		–			1,369		4.79			5,218		4.98			–		6,587		4.94
Corporate bonds 2		–		–			–		–			798		3.80			502		–			–		1,300		2.53
Other securities		–		–			–		–			–		–			–		–			1,738		1,738		–
Total	$	301		4.52	%	$	17,904		1.51	%	$	49,401		2.16	%	$	145,647		3.36	%	$	1,738	$	214,991		2.90	%

1	Municipal bonds shown at tax equivalent yield computed using a federal tax rate of 34%.
2	Corporate bond due after ten years is an other-than-temporarily impaired corporate bond for which the Company is no longer accruing interest.

As of December 31, 2010 (Predecessor), the projected weighted average life of the Company’s U.S. agency bonds, municipal bonds and mortgage-backed securities was 2.1 years, 10.7 years and 4.4 years, respectively, assuming a flat interest rate environment.

Loans

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Total loans were $1.25 ~~billion and $1.39~~ billion as of December 31, 2010 ~~and 2009, respectively. The declining loan portfolio reflects~~(Predecessor). During the year ended December 31, 2010 (Predecessor), the Company made an effort ~~by the Company~~ to ~~de-leverage~~deleverage its balance sheet to preserve capital and reduce its exposure to certain sectors of the commercial real estate market. As of December 31, 2010 (Predecessor), commercial real estate (non-owner occupied), consumer real estate, commercial owner occupied, commercial and industrial, consumer non-real estate and other loans (including agriculture and municipal loans) amounted to $634.5 million, $263.0 million, $170.5 million, $145.4 million, $6.2 million, and $33.7 million, respectively. ~~As of December 31, 2009, such loans amounted~~

Prior to ~~$697.8 million, $262.5 million, $194.4 million, $183.7 million, $9.7 million, and $41.9 million, respectively.~~

~~The~~the Bank Merger, the loan portfolio iswas comprised ~~mainly~~primarily of loans to small- and mid-sized businesses as well as individuals primarily located ~~within~~in the ~~Company’s four primary markets: Triangle, Sandhills, Triad~~central and ~~Western regions.~~western regions of North Carolina. The economic trends of the areas in North Carolina served by the Company ~~are~~were influenced by the significant businesses and industries within these regions. The ultimate collectability of the Company’s loan portfolio iswas highly susceptible to changes in the market conditions of these geographic regions.

The following table reflects contractual maturities and weighted average yields by maturity category as of December 31, ~~2010:~~2010 (Predecessor):

	Predecessor Company
	Less Than 1 Year					1–5 Years					More Than 5 Years					Total
December 31, 2010	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
(Dollars in thousands)

Commercial real estate – non-owner occupied	$	298,681		5.25	%	$	312,998		5.70	%	$	22,851		6.47	%	$	634,530		5.52	%
Consumer real estate		25,360		5.57			65,772		6.20			171,823		4.39			262,955		4.96
Commercial real estate – owner occupied		24,414		5.99			125,998		6.07			20,058		6.36			170,470		6.09
Commercial and industrial		70,124		5.29			70,586		5.32			4,725		6.25			145,435		5.34
Consumer		1,814		6.24			2,863		7.46			1,486		9.24			6,163		7.53
Other		5,380		5.56			4,401		6.13			23,961		4.70			33,742		5.02
Total	$	425,773		5.32	%	$	582,618		5.80	%	$	244,904		4.84	%	$	1,253,295		5.45	%

Less Than
1 Year
1–5 Years
More Than
5 Years
Total
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)

Commercial real estate – non-owner occupied $ 298,681 5.25 % $ 312,998 5.70 % $ 22,851 6.47 % $ 634,530 5.52 %
Consumer real estate 25,360 5.57 65,772 6.20 171,823 4.39 262,955 4.96
Commercial real estate – owner occupied 24,414 5.99 125,998 6.07 20,058 6.36 170,470 6.09
Commercial and industrial 70,124 5.29 70,586 5.32 4,725 6.25 145,435 5.34
Consumer 1,814 6.24 2,863 7.46 1,486 9.24 6,163 7.53
Other 5,380 5.56 4,401 6.13 23,961 4.70 33,742 5.02
Total $ 425,773 5.32 % $ 582,618 5.80 % $ 244,904 4.84 % $ 1,253,295 5.45 %

- 4566 -

Index

The following table reflects the mixture of commercial loans and weighted average yields by rate type for notes with contractual maturities greater than one year as of December 31, ~~2010:~~2010 (Predecessor):

Fixed Rate Floating Rate Adjustable Rate Total
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)

Due after 1 year:
Commercial real estate – non-owner occupied $ 169,117 6.42 % $ 164,304 5.07 % $ 2,428 5.27 % $ 335,849 5.75 %
Commercial real estate – owner occupied 126,773 6.42 16,258 4.06 3,025 3.86 146,056 6.11
Commercial and industrial 26,652 6.56 42,106 4.89 6,553 3.72 75,311 5.38
Total $ 322,542 6.43 % $ 222,668 4.96 % $ 12,006 4.07 % $ 557,216 5.79 %

Given the nature of the Company’s primary markets, a significant portion of the loan portfolio is secured by commercial real estate. As of December 31, 2010, approximately 51% of the loan portfolio had non-owner occupied commercial real estate as a primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. Real estate values in many markets have declined over the past year, which may continue to negatively impact the ability of certain borrowers to repay their loans. The Company continues to thoroughly review and monitor its commercial real estate concentration and sets limits by sector and region based on this internal review.

	Predecessor Company
	Fixed Rate					Floating Rate					Adjustable Rate					Total
December 31, 2010	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
(Dollars in thousands)

Due after 1 year:
Commercial real estate – non-owner occupied	$	169,117		6.42	%	$	164,304		5.07	%	$	2,428		5.27	%	$	335,849		5.75	%
Commercial real estate – owner occupied		126,773		6.42			16,258		4.06			3,025		3.86			146,056		6.11
Commercial and industrial		26,652		6.56			42,106		4.89			6,553		3.72			75,311		5.38
Total	$	322,542		6.43	%	$	222,668		4.96	%	$	12,006		4.07	%	$	557,216		5.79	%

~~Although potentially beneficial~~Prior to the ~~lender and~~Bank Merger, the ~~borrower, the use of interest reserves carries certain risks. Of particular concern is the possibility that~~Company had loans funded by an interest reserve may not accurately reflect problems with a borrower’s willingness or ability to repay the debt consistent with the terms and conditions of the loan obligation. For example, a project that is not completed in a timely manner or falters once completed may appear to perform if the interest reserve keeps the loan current. In some cases, a lender may extend, renew or restructure the term of certain loans, providing additional interest reserves to keep the loan current. As a result, the financial condition of the project may not be apparent and developing problems may not be addressed in a timely manner. Consequently, a lender may end up with a matured loan where the interest reserve has been fully advanced, and the borrower’s financial condition has deteriorated. In addition, the project may not be complete, its sale or lease-up may not be sufficient to ensure timely repayment of the debt or the value of the collateral may have declined, exposing the lender to increasing credit losses.

reserve. To mitigate risks related to the use of interest reserves, the Company ~~follows~~followed an interest reserve policy approved by its Board of Directors which ~~sets~~set underwriting standards for loans with interest reserves. These policies ~~include~~included loan-to-value, or LTV, limits as well as guarantor strength and equity requirements. Additionally, strict monitoring requirements ~~are~~were followed. LTV limits ~~have been~~were established based on regulatory guidelines for each loan type, and interest reserve loans with an LTV (using an updated independent appraisal) exceeding those limits ~~are~~were generally placed on nonaccrual status.

As of December 31, 2010 (Predecessor), the Company had a total of 28 loans funded by an interest reserve with total outstanding balances of $48.0 million, representing approximately 4% of total outstanding loans. Total commitments on these loans equaled $55.2 million with total remaining interest reserves of $1.3 million, representing a weighted average term of approximately 7 months of remaining interest coverage. The following table summarizes the Company’s residential and commercial acquisition, development and construction, or ADC, loans with active interest reserves as of December 31, 2010 ~~and 2009:~~(Predecessor):

~~- 46 -~~

~~Index~~

	Outstanding Balance		Unfunded Commitments		Number of Loans		Remaining Interest Reserves		Balance on Nonaccrual		Predecessor Company
December 31, 2010												Outstanding Balance		Unfunded Commitments		Number of Loans		Remaining Interest Reserves		Balance on Nonaccrual
(Dollars in thousands)

December 31, 2010
Residential ADC	$	12,702	$	1,009		14	$	351	$	3,311		$	12,702	$	1,009		14	$	351	$	3,311
Commercial ADC		35,281		6,174		14		974		–			35,281		6,174		14		974		–
Total 1	$	47,983	$	7,183		28	$	1,325		3,311		$	47,983	$	7,183		28	$	1,325		3,311

December 31, 2009
Residential ADC	$	69,698	$	5,370		31	$	1,449	$	7,099
Commercial ADC		72,565		31,169		19		3,547		–
Total 1	$	142,263	$	36,539		50	$	4,996		7,099

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Index

2010 2009
(Dollars in thousands)

Impaired loans:
Impaired loans with related allowance for loan losses $ 2,378 $ 58,509
Impaired loans for which the full loss has been charged off 74,141 18,756
Total impaired loans 76,519 77,265
Allowance for loan losses related to impaired loans (529 ) (6,112 )
Net carrying value of impaired loans $ 75,990 $ 71,153

Performing TDRs:
Commercial real estate $ 3,856 $ 27,532
Consumer real estate 121 598
Commercial owner occupied 421 4,633
Commercial and industrial 65 1,288
Consumer – 126
Total performing TDRs $ 4,463 $ 34,177

~~Loans are~~

- 68 -

Index

- 69 -

Index

As of December 31,
2010 2009 2008 2007 2006
(Dollars in thousands) Amount
% of
Total
Allowance
Amount
% of
Total
Allowance
Amount
% of
Total
Allowance
Amount
% of
Total
Allowance
Amount
% of
Total
Allowance
Commercial $ 21,734 60 % $ 14,187 54 % $ 9,749 66 % $ 10,231 75 % $ 8,744 59 %
Construction 11,499 32 10,343 40 3,548 24 1,812 13 3,276 25
Consumer 614 2 481 2 620 4 631 5 408 3
Home equity lines 1,003 3 491 2 570 4 419 3 669 8
Mortgage 1,211 3 579 2 308 2 478 4 250 5
Total $ 36,061 100 % $ 26,081 100 % $ 14,795 100 % $ 13,571 100 % $ 13,347 100 %

~~The~~

- 70 -

Index

- 72 -

Index

- 5373 -

Index

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010				Year Ended Dec. 31, 2009

Cash flows from operating activities:
Net income (loss)	$	5,267		$	596		$	(61,466	)	$	(6,816	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity income from investment in Capital Bank, NA		(4,045	)		–			–			–
Accretion of purchased credit-impaired loans		(26,262	)		–			–			–
Amortization/accretion on acquired liabilities, net		(3,403	)		–			–			–
Provision for loan losses		1,450			40			58,545			23,064
Loss on repurchase of mortgage loans		–			–			–			361
Amortization of other intangible assets		478			62			937			1,146
Depreciation		1,354			240			2,629			2,893
Stock-based compensation		146			42			736			702
(Gain) loss on sale of securities, net		–			–			(5,855	)		325
Amortization of premium on securities, net		695			171			98			180
Loss on disposal of premises, equipment and ORE		5			26			444			88
ORE valuation adjustments		74			–			2,088			217
Bank-owned life insurance income		(134	)		(10	)		(699	)		(378	)
Deferred income tax expense (benefit)		3,415			–			15,396			(4,708	)
Net change in:
Mortgage loans held for sale		1,907			4,424			(6,993	)		–
Accrued interest receivable and other assets		(7,659	)		(1,309	)		5,070			(5,972	)
Accrued interest payable and other liabilities		3,024			(3,939	)		(1,279	)		(220	)
Net cash provided by (used in) operating activities		(23,688	)		343			9,651			10,882

Cash flows from investing activities:
Net cash paid in Capital Bank merger		(42,880	)		–			–			–
Investment in Capital Bank, NA		(16,063	)		–			–			–
Principal repayments on loans, net of loans originated or acquired		13,048			14,547			68,805			(162,132	)
Purchases of premises and equipment		(607	)		(307	)		(3,938	)		(3,326	)
Proceeds from sales of premises, equipment and ORE		4,545			20			8,350			5,856
Proceeds from surrender of bank-owned life insurance		–			–			16,473			–
Sales (purchases) of FHLB stock		1,259			–			(1,680	)		(20	)
Purchases of securities – available for sale		(138,855	)		(6,840	)		(232,579	)		(31,842	)
Proceeds from sales of securities – available for sale		–			–			164,012			21,703
Proceeds from principal repayments/calls/maturities of securities – available for sale		25,761			3,936			89,021			48,947
Proceeds from principal repayments/calls/maturities of securities – held to maturity		–			–			853			1,503
Net cash provided by (used in) investing activities		(153,792	)		11,356			109,317			(119,481	)
(continued on next page)

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Index

CAPITAL BANK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010				Year Ended Dec. 31, 2009

Cash flows from financing activities:
(Decrease) increase in deposits, net		(2,426	)		(4,960	)		(34,679	)		62,651
Decrease in repurchase agreements, net		–			–			(6,543	)		(8,467	)
Proceeds from borrowings		–			–			189,000			183,000
Principal repayments of borrowings		(30,000	)		(5,000	)		(235,000	)		(148,000	)
Proceeds from issuance of subordinated debentures		–			–			3,393			–
Repurchase of preferred stock		–			(41,279	)		–			–
Proceeds from CBF Investment		–			181,050			–			–
Proceeds from issuance of common stock, net of offering costs		3,814			–			5,065			–
Dividends paid		–			–			(2,972	)		(5,527	)
Net cash provided by (used in) financing activities		(28,612	)		129,811			(81,736	)		83,657

Net change in cash and cash equivalents	$	(206,092	)	$	141,510		$	37,232		$	(24,942	)
Cash and cash equivalents at beginning of year		208,255			66,745			29,513			54,455
Cash and cash equivalents at end of year	$	2,163		$	208,255		$	66,745		$	29,513

Supplemental Disclosure of Cash Flow Information

Noncash investing activities:
Transfer of noncash assets to Capital Bank, NA	$	1,419,308		$	–		$	–		$	–
Transfer of liabilities to Capital Bank, NA		1,457,413			–			–			–
Equity method investment in Capital Bank, NA		232,264			–			–			–
Transfers of loans and premises to ORE		7,573			248			18,453			15,356
Transfers of OREO to loans		857			146			–			–
Transfers of securities from held to maturity to available for sale		–			–			2,822			–
Capital leases recorded in premises and other liabilities		6,618			–			–			–

Cash paid for (received from):
Income taxes	$	130		$	–		$	(2,190	)	$	(4,521	)
Interest		10,706			1,531			27,219			35,364

The accompanying notes are an integral part of these consolidated financial statements.

- 6083 -

Index

~~CAPITAL BANK CORPORATION~~

~~CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~For the Years Ended December 31, 2010, 2009 and 2008~~

2010 2009 2008
(Dollars in thousands except per share data)

Interest income:
Loans and loan fees $ 68,474 $ 70,178 $ 72,494
Investment securities:
Taxable interest income 7,483 9,849 8,935
Tax-exempt interest income 1,596 3,026 3,169
Dividends 80 46 294
Federal funds and other interest income 89 42 128
Total interest income 77,722 83,141 85,020
Interest expense:
Deposits 21,082 28,037 33,042
Borrowings and repurchase agreements 5,677 6,226 9,382
Total interest expense 26,759 34,263 42,424
Net interest income 50,963 48,878 42,596
Provision for loan losses 58,545 23,064 3,876
Net interest income (loss) after provision for loan losses (7,582 ) 25,814 38,720
Noninterest income:
Service charges and other fees 3,311 3,883 4,545
Bank card services 2,020 1,539 1,332
Mortgage origination and other loan fees 1,861 1,935 2,148
Brokerage fees 963 698 732
Bank-owned life insurance 699 1,830 952
Gain on sale of branch – – 374
Other income 840 607 719
Securities gains (losses):
Realized securities gains, net 5,855 173 249
Other-than-temporary impairments – (1,082 ) –
Less: non-credit portion recognized in other comprehensive income – 584 –
Total securities gains (losses), net 5,855 (325 ) 249
Total noninterest income 15,549 10,167 11,051
Noninterest expense:
Salaries and employee benefits 22,675 22,112 20,951
Occupancy 5,906 5,630 4,458
Furniture and equipment 3,183 3,155 3,135
Data processing and telecommunications 2,092 2,317 2,135
Advertising and public relations 1,887 1,610 1,515
Office expenses 1,260 1,383 1,317
Professional fees 2,514 1,488 1,479
Business development and travel 1,350 1,244 1,393
Amortization of core deposit intangible 937 1,146 1,037
ORE losses and miscellaneous loan costs 5,006 1,646 898
Directors’ fees 1,061 1,418 1,044
FDIC deposit insurance 3,846 2,721 685
Goodwill impairment charge – – 65,191
Other expenses 2,592 3,940 1,424
Total noninterest expense 54,309 49,810 106,662
Net loss before income taxes (46,342 ) (13,829 ) (56,891 )
Income tax expense (benefit) 15,124 (7,013 ) (1,207 )
Net loss (61,466 ) (6,816 ) (55,684 )
Dividends and accretion on preferred stock 2,355 2,352 124
Net loss attributable to common shareholders $ (63,821 ) $ (9,168 ) $ (55,808 )

Net loss per common share – basic $ (4.98 ) $ (0.80 ) $ (4.94 )
Net loss per common share – diluted $ (4.98 ) $ (0.80 ) $ (4.94 )

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~- 61 -~~

~~Index~~

~~CAPITAL BANK CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS~~

~~For the Years Ended December 31, 2010, 2009 and 2008~~

Preferred Stock Common Stock
Other Comprehensive
Income

Retained Earnings
(Accumulated

Shares Amount Shares Amount (Loss) Deficit) Total
(Dollars in thousands)

Balance at January 1, 2008 – $ – 11,169,777 $ 136,154 $ 161 $ 27,985 $ 164,300
Comprehensive loss:
Net loss (55,684 ) (55,684 )
Net unrealized loss on investment securities, net of tax benefit of $9 (13 ) (13 )
Net unrealized gain on cash flow hedge, net of tax of $464 738 738
Total comprehensive loss (54,959 )
Issuance of preferred stock with warrants, net of issuance costs 41,279 39,827 1,333 41,160
Accretion of preferred stock discount 12 (12 ) –
Repurchase of common stock (10,166 ) (92 ) (92 )
Issuance of common stock for options exercised 26,591 206 206
Restricted stock awards 24,000 288 288
Stock option expense 32 32
Modification of directors’ deferred compensation plan 943 943
Directors’ deferred compensation 27,883 345 345
Dividends on preferred stock (112 ) (112 )
Dividends on common stock ($0.32 per share) (3,597 ) (3,597 )
Balance at December 31, 2008 41,279 $ 39,839 11,238,085 $ 139,209 $ 886 $ (31,420 ) $ 148,514

Comprehensive loss:
Net loss (6,816 ) (6,816 )
Net unrealized gain on investment securities, net of tax of $3,169 5,051 5,051
Net unrealized loss on cash flow hedge, net of tax benefit of $1,215 (1,936 ) (1,936 )
Prior service cost recognized on SERP, net of amortization (46 ) (46 )
Total comprehensive loss (3,747 )
Accretion of preferred stock discount 288 (288 ) –
Restricted stock awards 16,692 107 107
Stock option expense 50 50
Directors’ deferred compensation 93,340 543 543
Dividends on preferred stock (2,064 ) (2,064 )
Dividends on common stock ($0.32 per share) (3,618 ) (3,618 )
Balance at December 31, 2009 41,279 $ 40,127 11,348,117 $ 139,909 $ 3,955 $ (44,206 ) $ 139,785

Comprehensive loss:
Net loss (61,466 ) (61,466 )
Net unrealized loss on investment securities, net of tax benefit of $3,300 (5,260 ) (5,260 )
Prior service cost recognized on SERP, net of amortization 8 8
Total comprehensive loss (66,718 )
Accretion of preferred stock discount 291 (291 ) –
Issuance of common stock 1,468,770 5,065 5,065
Restricted stock forfeiture (3,508 ) (10 ) (10 )
Stock option expense 54 54
Directors’ deferred compensation 64,467 576 576
Dividends on preferred stock (2,064 ) (2,064 )
Balance at December 31, 2010 41,279 $ 40,418 12,877,846 $ 145,594 $ (1,297 ) $ (108,027 ) $ 76,688

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~- 62 -~~

~~Index~~

~~CAPITAL BANK CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~For the Years Ended December 31, 2010, 2009 and 2008~~

2010 2009 2008
(Dollars in thousands)

Cash flows from operating activities:
Net loss $ (61,466 ) $ (6,816 ) $ (55,684 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses 58,545 23,064 3,876
Loss on repurchase of mortgage loans – 361 –
Amortization of core deposit intangible 937 1,146 1,037
Depreciation 2,629 2,893 2,639
Goodwill impairment charge – – 65,191
Stock-based compensation 736 702 477
(Gain) loss on securities, net (5,855 ) 325 (249 )
Amortization of premium on securities, net 98 180 80
Loss on disposal of premises, equipment and other real estate 444 88 81
ORE valuation adjustments 2,088 217 –
Bank-owned life insurance income (699 ) (378 ) (779 )
Deferred income tax expense (benefit) 15,396 (4,708 ) (3,715 )
Gain on sale of branch – – (374 )
Net change in:
Mortgage loans held for sale (6,993 ) – –
Accrued interest receivable and other assets 5,070 (5,972 ) 1,344
Accrued interest payable and other liabilities (1,279 ) (220 ) (1,553 )
Net cash provided by operating activities 9,651 10,882 12,371

Cash flows from investing activities:
Loan (originations) principal repayments, net 68,805 (162,132 ) (124,503 )
Additions to premises and equipment (3,938 ) (3,326 ) (4,750 )
Proceeds from sales of premises, equipment and real estate owned 8,350 5,686 7,693
Proceeds from surrender of bank-owned life insurance 16,473 – –
Net cash paid in branch sale – – (7,757 )
Net cash received in business combination – – 50,573
(Purchases) sales of FHLB stock, net (1,680 ) (20 ) 1,272
Purchases of securities – available for sale (232,579 ) (31,842 ) (91,243 )
Proceeds from sales of securities – available for sale 164,012 21,703 38,359
Proceeds from principal repayments/calls/maturities of securities – available
for sale
89,021 48,947 27,913
Proceeds from principal repayments/calls/maturities of securities – held to maturity 853 1,503 4,824
Net cash provided by (used in) investing activities 109,317 (119,481 ) (97,619 )

Cash flows from financing activities:
Increase (decrease) in deposits, net (34,679 ) 62,651 125,134
Decrease in repurchase agreements, net (6,543 ) (8,467 ) (24,890 )
Proceeds from borrowings 189,000 183,000 302,600
Principal repayments of borrowings (235,000 ) (148,000 ) (335,600 )
Repayment of federal funds purchased – – (5,395 )
Proceeds from issuance of subordinated debentures 3,393 – –
Proceeds from issuance of preferred stock – – 41,160
Proceeds from issuance of common stock 5,065 – 206
Repurchase of common stock – – (92 )
Dividends paid (2,972 ) (5,527 ) (3,592 )
Net cash provided by (used in) financing activities (81,736 ) 83,657 99,531
(continued on next page)

~~- 63 -~~

~~Index~~

~~CAPITAL BANK CORPORATION~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

~~For the Years Ended December 31, 2010, 2009 and 2008~~

2010 2009 2008
(Dollars in thousands)

Net change in cash and cash equivalents $ 37,232 $ (24,942 ) $ 14,283
Cash and cash equivalents at beginning of year 29,513 54,455 40,172
Cash and cash equivalents at end of year $ 66,745 $ 29,513 $ 54,455

Supplemental Disclosure of Cash Flow Information

Noncash investing activities:
Transfers of loans and premises to ORE $ 18,453 $ 15,356 $ 2,645
Transfers of securities from held to maturity to available for sale 2,822 – –

Cash paid for (received from):
Income taxes $ (2,190 ) $ (4,521 ) $ 2,815
Interest 27,219 35,364 41,983

~~The accompanying notes are an integral part of these consolidated financial statements.~~

~~- 64 -~~

~~Index~~

Capital Bank Corporation – Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Organization and Nature of Operations

Capital Bank Corporation ~~(the “Company”)~~ is a bank holding company incorporated under the laws of North Carolina on August 10, 1998. ~~The~~Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary iswas Capital Bank ~~(the “Bank”~~(“Old Capital Bank”), a state-chartered banking corporation that was incorporated under the laws of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. ~~In addition, the~~The Company also has ~~interest~~interests in three ~~trusts,~~trusts: Capital Bank Statutory Trust I, II, and ~~III (hereinafter collectively referred to as the “Trusts”).~~

The Bank is a community bank engaged in general commercial banking, providing a full range of banking services. The majority of the Bank’s customers are individuals and small- to medium-size businesses. The Bank’s primary source of revenue is interest earned from loans to customers, interest earned from invested cash and securities, and noninterest income derived from various fees. The Bank operates 32 branch offices in North Carolina: five branch offices in Raleigh, four in Asheville, four in Fayetteville, three in Burlington, three in Sanford, two in Cary, and one each in Clayton, Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Siler City, Pittsboro, Wake Forest and Zebulon. The Company’s corporate headquarters is located at 333 Fayetteville Street in Raleigh, North Carolina.III.

The Trusts were formed for the sole purpose of issuing trust preferred securities and are not consolidated with the financial statements of the Company. The proceeds from such issuances were loaned to the Company in exchange for the subordinated debentures, which are the sole assets of the Trusts. A portion of the proceeds from the issuance of the subordinated debentures were used by the Company to repurchase shares of Company common stock. The Company’s obligation under the subordinated debentures constitutes a full and unconditional guarantee by the Company of the Trust’s obligations under the trust preferred securities. The Trusts have no operations other than those that are incidental to the issuance of the trust preferred securities (See Note 910 – Subordinated Debentures).

~~Transaction~~On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. As a result of the CBF Investment and the Company’s rights offering on March 11, 2011, CBF currently owns approximately 83% of the Company’s common stock. Upon closing of the CBF Investment, R. Eugene Taylor, CBF’s Chief Executive Officer, Christopher G. Marshall, CBF’s Chief Financial Officer, and R. Bruce Singletary, CBF’s Chief Risk Officer, were named as the Company’s CEO, CFO and CRO, respectively, and as members of the Company’s Board of Directors. In addition, the Company’s Board of Directors was reconstituted with ~~North American~~a combination of two existing members (Oscar A. Keller III and Charles F. Atkins), Messrs. Taylor, Marshall and Singletary, and two additional CBF-designated members (Peter N. Foss and William A. Hodges).

On June 30, 2011, Old Capital Bank merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association (“Capital Bank, NA” and the “Bank”). On September 7, 2011, CBF acquired a controlling interest in Green Bankshares, and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial ~~Holdings, Inc.~~owning 21%, and Green Bankshares owning the remaining 34%. CBF is the owner of approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

CBF Investment

On January 28, 2011, the Company completed the issuance and sale ~~to North American Financial Holdings, Inc.~~ of ~~71,000,000~~71 million shares of common stock for $181,050,000 in cash. As a result of the Investment and following the completion of the Rights Offering on March 11, 2011, NAFH currently owns approximately 83% of the Company’s common stock. The Company’s shareholders approved the issuance of such shares to NAFH, and an amendment to the Company’s articles of incorporation to increase the authorized shares ofits common stock to ~~300,000,000 shares from 50,000,000 shares, at a special meeting of shareholders held on December 16, 2010.~~CBF for $181.1 million in cash. In connection with the CBF Investment, each ~~existing~~ Company shareholder as of January 27, 2011 received one contingent value right per share (“CVR”) that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of ~~the~~Old Capital Bank’s then existing loan portfolio.

Also in connection with the CBF Investment, ~~pursuant to an agreement among NAFH, the Treasury, and the Company,~~ the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with the ~~TARP~~Troubled Asset Relief Program (“TARP”) were repurchased. Following the TARP Repurchase, the Series A Preferred Stock and warrant are no longer outstanding, and accordingly the Company no longer expects to be subject to the restrictions imposed by the terms of the Series A Preferred Stock or certain regulatory provisions of the EESA and the ARRA that are imposed on TARP recipients.

Pursuant to the CBF Investment, ~~Agreement,~~ shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of ~~the Company’s~~ common stock ~~were issued~~ in exchange for ~~$4,113,570.75~~$4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

~~See Note 21 (Subsequent Events~~Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan (the “Executive Plan” or “SERP”) to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.

- 84 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more ~~details~~of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on ~~this transaction.~~January 28, 2011.

Bank Mergers

On June 30, 2011, Old Capital Bank, formerly a wholly-owned subsidiary of the Company, merged with and into NAFH Bank, a national banking association, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, NA. On September 7, 2011, CBF acquired a controlling interest in Green Bankshares and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, Capital Bank, NA is now owned by the Company, CBF, TIB Financial Corp. and Green Bankshares. CBF is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

Capital Bank, NA (formerly NAFH Bank) was formed on July 16, 2010 in connection with the purchase and assumption of assets and deposits of three banks – Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the South (Spartanburg, South Carolina) – from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the FDIC covering the large majority of the loans it acquired from the FDIC. On April 29, 2011, Capital Bank, NA merged with TIB Bank, then a wholly-owned subsidiary of TIB Financial.

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with CBF having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of December 31, 2011, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.5 billion, total deposits of $5.1 billion and shareholders’ equity of $939.8 million.

The Bank Merger, the preceding merger of TIB Bank and Capital Bank, NA, and the succeeding merger of GreenBank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. At the time of the Bank Merger, due to the deconsolidation of Old Capital Bank, the balance of accumulated other comprehensive income was reclassified to common stock within shareholders’ equity. Immediately following the Bank Merger, on June 30, 2011, CBF, the Company and TIB Financial made cash contributions of additional capital to Capital Bank, NA of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, NA. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, NA in exchange for additional shares of Capital Bank, NA. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.

The Company reports its investment in Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment in that entity. As of December 31, 2011 (Successor), the Company’s investment in Capital Bank, NA totaled $243.7 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of December 31, 2011 (Successor). In the successor period from June 30, 2011 to December 31, 2011, the Company increased the equity investment balance by $4.0 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $771 thousand based on its equity in Capital Bank, NA’s other comprehensive income.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA:

Capital Bank, NA	Jun. 30, 2011 to Dec. 31, 2011
(Dollars in thousands)

Interest income	$	137,508
Interest expense		17,810
Net interest income		119,698
Provision for loan losses		28,636
Noninterest income		28,710
Noninterest expense		97,754
Net income	$	13,984

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Company in trust are not assets of the Company and are not included in the consolidated financial statements.

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~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The more significant estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, other-than-temporary impairment on investment securities, deferred tax asset valuation allowances, and impairment of long-lived assets. Actual results could differ from those estimates.Due to the CBF Investment, the Company has added an accounting policy related to purchased credit-impaired loans, and due to the Bank Merger, the Company has added an accounting policy related to its equity method investment in Capital Bank, NA.

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit with Capital Bank, NA, demand and time deposits (with original maturities of 90 days or less) at other high quality financial institutions, federal funds sold and other short-term investments. Generally, federal funds are purchased and sold for one-day periods. At times, the Company places deposits with high credit quality financial institutions in amounts, which may be in excess of federally insured limits. Depository institutions are required to maintain reserve and clearing balances with the Federal Reserve Bank (“FRB”). Accordingly, the Company held funds with the FRB to cover daily reserve and clearing balance requirements totaling $5.2 million and $6.1 million as of December 31, 2010 and 2009, respectively.

Investment Securities

Investments in certain securities are classified into three categories and accounted for as follows:

	•	Held to Maturity – Debt securities that the institution has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; or

	•	Trading Securities – Debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; or

	•	Available for Sale – 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 reported as other comprehensive income, a separate component of shareholders’ equity.

The initial classification of securities is determined at the date of purchase. Gains and losses on sales of investment securities, computed based on specific identification of the adjusted cost of each security, are included in noninterest income at the time of the sales. Premiums and discounts on debt securities are recognized in interest income using the level interest yield method over the period to maturity, or when the debt securities are called.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

At each reporting date, the Company evaluates each held to maturity and available for sale investment security in a loss position for other-than-temporary ~~impairment.~~impairment (“OTTI”). The review includes an analysis of the facts and circumstances of each individual investment such as (1) the length of time and the extent to which the fair value has been below cost, (2) changes in the earnings performance, credit rating, asset quality, or business prospects of the issuer, (3) the ability of the issuer to make principal and interest payments, (4) changes in the regulatory, economic, or technological environment of the issuer, and (5) changes in the general market condition of either the geographic area or industry in which the issuer operates.

Regardless of these factors, if the Company has developed a plan to sell the security or it is likely that the Company will be forced to sell the security in the near future, then the impairment is considered other-than-temporary and the carrying value of the security is permanently written down to the current fair value with the difference between the new carrying value and the amortized cost charged to earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the other-than-temporary impairment is separated into the following: (1) the amount representing the credit loss and (2) the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings, and the amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes.

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~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Other investments primarily include Federal Home Loan Bank of Atlanta (“FHLB”) stock, which does not have a readily determinable fair value because its ownership is restricted and lacks a market for trading. This investment is carried at cost and is periodically evaluated for impairment.

Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

Equity Method Investment

Noncontrolling investments that give the Company the ability to influence the operating or financial decisions of the investee are accounted for as equity method investments. An investment (direct or indirect) of 20 percent or more of the voting stock of an investee generally indicates that the ability to exercise significant influence over an investee. The carrying amount of an equity method investment is adjusted based on the Company’s share of the earnings or losses of the investee after the date of investment and those recognized earnings or losses are reported as a component of noninterest income. In addition, the Company’s proportionate share of the investee’s equity adjustments for other comprehensive income are recorded as increases or decreases to the investment account with corresponding adjustments in equity.

Mortgage Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

Due to the Bank Merger, the Company reported no mortgage loans held for sale on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

Loans

Loans are stated at the amount of unpaid principal, net of any unearned income, charge-offs, net deferred loan origination fees and costs, and unamortized premiums or discounts. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Deferred loan fees and costs are amortized to interest income over the contractual life of the loan using the level interest yield method.

For disclosures regarding the credit quality of loans and the allowance for loan losses, the loan portfolio is disaggregated into segments and then further disaggregated into classes. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. A class is generally determined based on the initial measurement attribute (i.e. amortized cost or purchased credit impaired), risk characteristics of the loan, and an entity’s method for monitoring and assessing credit risk. Commercial loan portfolio segments include commercial real estate (“CRE”), commercial and industrial (“C&I”), and other loans, which includes agricultural and municipal loans. Classes within CRE include CRE – construction and land development, CRE – non-owner occupied, and CRE – owner occupied. Consumer loan portfolio segments include consumer real estate and other consumer loans. Classes within consumer real estate include residential mortgage and home equity lines of credit.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

Purchased Credit-Impaired Loans

Loans acquired in a transfer, including business combinations and transactions similar to the CBF Investment, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments, are accounted for under accounting guidance for purchased credit-impaired (“PCI”) loans. This guidance provides that the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for purchased credit-impaired loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.

Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If the Company has probable decreases in cash flows expected to be collected (other than due to decreases in interest rate indices), the Company charges the provision for credit losses, resulting in an increase to the allowance for loan losses. If the Company has probable and significant increases in cash flows expected to be collected, the Company will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the pool of loans. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income. The accounting pools of acquired loans are defined as of the date of acquisition of a portfolio of loans and are comprised of groups of loans with similar collateral types and risk.

Due to the Bank Merger, the Company had no purchase credit-impaired loans as of December 31, 2011 (Successor).

Nonperforming Assets and Impaired Loans

Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. Loans are generally classified as nonaccrual if they are past due for a period of more than 90 days, unless such loans are well secured and in the process of collection. If a loan or a portion of a loan is classified as doubtful or as partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower in accordance with the contractual terms.

While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to the principal outstanding, except in the case of loans with scheduled amortizations where the payment is generally applied to the oldest payment due. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

Assets acquired as a result of foreclosure are recorded at estimated fair value in other real estate. Any excess of cost over estimated fair value at the time of foreclosure is charged to the allowance for loan losses. Valuations are periodically performed on these properties, and any subsequent write-downs are charged to noninterest expense. Routine maintenance and other holding costs are included in noninterest expense.

A loan is classified as a troubled debt restructuring (“TDR”) by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest, and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. The Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restructured agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value.

The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. The Company closely monitors these loans and ceases accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If a loan is restructured a second time, after previously being classified as a TDR, that loan is automatically placed on nonaccrual status. The Company’s policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.

Due to the Bank Merger, the Company had no nonperforming assets or impaired loans as of December 31, 2011 (Successor).

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses represents management’s best estimate of probable credit losses that are inherent in the loan portfolio at the balance sheet date and is determined by management through at least quarterly evaluations of the loan portfolio.

The allowance calculation consists of reserves on loans individually evaluated for impairment and reserves on loans collectively evaluated for impairment. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Reserves, or charge-offs, on individually impaired loans that are collateral dependent are based on the fair value of the underlying collateral while reserves, or charge-offs, on loans that are not collateral dependent are based on either an observable market price, if available, or the present value of expected future cash flows discounted at the historical effective interest rate. Management evaluates loans that are classified as doubtful, substandard or special mention to determine whether or not they are individually impaired. This evaluation includes several factors, including review of the loan payment status and the borrower’s financial condition and operating results such as cash flows, operating income or loss, etc.

Reserves on loans collectively evaluated for impairment are determined by applying loss rates to pools of loans that are grouped according to loan collateral type and credit risk. Loss rates are based on the Company’s historical loss experience in each pool and management’s consideration of the following environmental factors:

	•	Levels of and trends in delinquencies, impaired loans and classified assets;

	•	Levels of and trends in charge-offs and recoveries;

	•	Trends in nature, volume and terms of loans;

	•	Existence of and changes in portfolio concentrations by product type and geographical location;

	•	Changes in national, regional and local economic conditions;

	•	Changes in the experience, ability and depth of lending management;

	•	Changes in the quality of the loan review system; and

	•	The effect of other external factors such as legal and regulatory requirements.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

The evaluation of the allowance for loan losses is inherently subjective, and management uses the best information available to establish this estimate. However, if factors such as economic conditions differ substantially from assumptions, or if amounts and timing of future cash flows expected to be received on impaired loans vary substantially from the estimates, future adjustments to the allowance for loan losses may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about all relevant information available to them at the time of their examination. Any adjustments to original estimates are made in the period in which the factors and other considerations indicate that adjustments to the allowance for loan losses are necessary.

Due to the Bank Merger, the Company reported no allowance for loan losses on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

In the successor period prior to the Bank Merger, allowance for loans losses were established through a provision for loan losses charged to expense, and reflected estimated losses inherent in loans originated subsequent to the CBF investment date, estimated impairment related to probable decreases in cash flows expected to be collected on certain purchase credit-impaired loan pools, and losses on acquired non-PCI loans.

Bank-Owned Life Insurance

The Company has purchased life insurance policies on certain key employees and directors. These policies are recorded in other assets at their cash surrender value, or the amount that can be realized. Income from these policies and changes in the net cash surrender value are recorded in noninterest income.

Due to the Bank Merger, the Company reported no bank-owned life insurance on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed by the straight-line method based on estimated service lives of assets. Useful lives range from 3 to 10 years for furniture and equipment, and 10 to 40 years for buildings. The cost of leasehold improvements is being amortized using the straight-line method over the terms of the related leases. Repairs and maintenance are charged to expense as incurred. Upon disposition, the asset and related accumulated depreciation and/or amortization are relieved, and any gains or losses are reflected in earnings.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Assets to be disposed of are transferred to other real estate owned and are reported at the lower of the carrying amount or fair value less costs to sell.

Due to the Bank Merger, the Company reported no premises and equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor).

Goodwill and Other Intangible Assets

Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business combinations. Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess.

Other intangible assets include premiums paid for acquisitions of core deposits and other identifiable intangible assets. Intangible assets other than goodwill, which are determined to have finite lives, are amortized based upon the estimated economic benefits received.

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~~Capital~~Due to the Bank ~~Corporation – Notes to~~Merger, the Company reported no goodwill or other intangible assets on its Consolidated ~~Financial Statements~~

Balance Sheet as of December 31, 2011 (Successor).

Income Taxes

Deferred tax asset and liability balances are determined by application to temporary differences of the tax rate expected to be in effect when taxes will become payable or receivable. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. The effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

A valuation allowance is recorded for deferred tax assets if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.

Derivative Instruments

The Company uses derivative instruments to manage and mitigate interest rate risk, to facilitate asset and liability management strategies, and to manage other risk exposures. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index, or referenced interest rate.

Derivatives are recorded on the consolidated balance sheet at fair value. For fair value hedges, the change in the fair value of the derivative and the corresponding change in fair value of the hedged risk in the underlying item being hedged are accounted for in earnings. Any difference in these two changes in fair value results in hedge ineffectiveness that results in a net impact to earnings. For cash flow hedges, changes in the fair value of the derivative are, to the extent that the hedging relationship is effective, recorded as other comprehensive income and subsequently recognized in earnings at the same time that the hedged item is recognized in earnings. Any portion of a hedge that is ineffective is recognized immediately as other noninterest income or expense.

Derivative contracts are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between parties and are not a measure of financial risk. Like other financial instruments, derivatives contain an element of credit risk, which is the possibility that the Company will incur a loss because a counterparty fails to meet its contractual obligations. Potential credit losses are minimized through careful evaluation of counterparty credit standing, selection of counterparties from a limited group of high quality institutions, and other contract provisions.

Due to the Bank Merger, the Company had no derivative instruments as of December 31, 2011 (Successor).

Advertising Costs

The Company expenses advertising costs as they are incurred and advertising communications costs the first time the advertising takes place. The Company may establish accruals for committed advertising costs as incurred.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees in addition to stock issued through a deferred compensation plan for non-employee directors. Compensation cost is measured as the fair value of these awards on their date of grant. A Black-Scholes option pricing model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used as the fair value of restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period for stock options awards and as the restriction period for restricted stock awards.

Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which if changed can materially affect fair value estimates. The expected life of options used in the option pricing model is the period the options are expected to remain outstanding. Expected stock price volatility is based on the historical volatility of the Company’s common stock for a period approximating the expected life of the option, the expected dividend yield is based on the Company’s historical annual dividend payout, and the risk-free rate is based on the implied yield available on U.S. Treasury issues.

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~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Fair Value Measurements

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company follows the fair value hierarchy which gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to the management’s assumptions (unobservable inputs). For assets and liabilities recorded at fair value, the Company’s policy is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available-for-sale investment securities and derivatives are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls to a lower level in the hierarchy. These levels are described as follows:

	•	Level 1 – Valuations for assets and liabilities traded in active exchange markets.

	•	Level 2 – Valuations for assets and liabilities that can be obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets, and valuations are based on observable market data in those markets.

	•	Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The determination of where an asset or liability falls in the fair value hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures at each reporting period and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.

Earnings (Loss) per Common Share

Basic earnings (loss) per common share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments, such as stock options and warrants, unless the effect is to reduce a loss or increase earnings. Basic EPS is adjusted for outstanding stock options and warrants using the treasury stock method in order to compute diluted EPS. ~~The calculation of basic and diluted EPS~~ ~~for the years ended December 31, 2010, 2009 and 2008 were as follows:~~

2010 2009 2008
(Dollars in thousands except per share data)

Net loss attributable to common shareholders $ (63,821 ) $ (9,168 ) $ (55,808 )
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding – basic 12,810,905 11,470,314 11,302,769
Incremental shares from assumed exercise of stock options – – –
Weighted average number of shares outstanding – diluted 12,810,905 11,470,314 11,302,769

Net loss per common share – basic $ (4.98 ) $ (0.80 ) $ (4.94 )
Net loss per common share – diluted $ (4.98 ) $ (0.80 ) $ (4.94 )

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Capital Bank Corporation – Notes to Consolidated Financial Statements

~~For~~The calculation of basic and diluted EPS was based on the ~~years ended December 31, 2010, 2009~~following for each period presented:

	Successor Company		Predecessor Company
(Dollars in thousands except per share data)	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Net loss attributable to common shareholders	$	5,267	$	(265	)	$	(63,821	)	$	(9,168	)
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding – basic		85,649,203		13,188,612			12,810,905			11,470,314
Incremental shares from assumed exercise of stock options		–		–			–			–
Weighted average number of shares outstanding – diluted		85,649,203		13,188,612			12,810,905			11,470,314

Earnings (loss) per common share – basic	$	0.06	$	(0.02	)	$	(4.98	)	$	(0.80	)
Earnings (loss) per common share – diluted	$	0.06	$	(0.02	)	$	(4.98	)	$	(0.80	)

Weighted average anti-dilutive stock options and ~~2008, outstanding options to purchase 297,880, 366,583~~warrants and ~~238,672~~unvested restricted shares ~~respectively, of common stock were~~ excluded from the computation of diluted calculation because the option price exceeded the average fair market value of the associated shares of common stock. For the year ended December 31, 2008, outstanding options to purchase 139,411 shares of common stock were excluded from the diluted calculation because the dilutive effect of those options would have reduced net lossearnings per ~~common~~ share ~~in that year.~~

for each period presented are as follows:

For the years ended December 31, 2010, 2009 and 2008, outstanding warrants issued to the U.S. Treasury to purchase 749,619 shares of common stock were excluded from the diluted calculation because the warrant exercise price exceeded the average fair market value of the associated shares of common stock.

	Successor Company		Predecessor Company
	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010		Year Ended Dec. 31, 2009

Anti-dilutive stock options		193,600		297,880		297,880		366,583
Anti-dilutive warrants		–		749,619		749,619		749,619

Comprehensive Income (Loss)

Comprehensive income (loss) represents the change in the Company’s equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of unrealized gains and losses on certain investments in debt securities, and in prior years, derivatives that qualified as cash flow hedges to the extent that the hedge was effective.

The Company’s other comprehensive income (loss) ~~for the years ended December 31, 2010, 2009 and 2008~~ was as ~~follows:~~follows for each period presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Unrealized gains (losses) on securities – available for sale	$	8,633		$	(528	)	$	(8,560	)	$	8,220
Unrealized gain (loss) on cash flow hedge		–			–			–			(3,151	)
Amortization of prior service cost on SERP		0			1			8			(46	)
Income tax effect		(3,367	)		204			3,300			(1,954	)
Other comprehensive income (loss)	$	5,266		$	(323	)	$	(5,252	)	$	3,069

2010 2009 2008
(Dollars in thousands)

Unrealized gains (losses) on securities – available for sale $ (8,560 ) $ 8,220 $ (22 )
Unrealized gain (loss) on cash flow hedge – (3,151 ) 1,202
Prior service cost recognized on SERP, net of amortization 8 (46 ) –
Income tax effect 3,300 (1,954 ) (455 )
Other comprehensive income (loss) $ (5,252 ) $ 3,069 $ 725

- 93 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that it has one significant operating segment, which is the providing of general commercial banking and financial services to individuals and businesses primarily ~~located~~ in ~~North Carolina.~~the southeastern region of the United States. The Company’s various products and services are those generally offered by community banks, and the allocation of its resources is based on the overall performance of the institution versus individual regions, branches or products and services.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current year’s presentation. These reclassifications impacted certain noninterest income and noninterest expense items and had no effect on total assets, net income, or shareholders’ equity previously reported. The noninterest income and noninterest expense reclassifications were made in an effort to more clearly disclose certain elements in the Consolidated Statements of Operations.

Current Accounting Developments

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.

~~- 72 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In April 2010, the FASB issued ASU 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 320, Receivables. The amendments in this update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

2. CBF Investment ~~Securities~~

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. In connection with the CBF Investment, ~~securities~~each Company shareholder as of ~~December 31, 2010~~January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also, in connection with the CBF Investment, the Company’s Series A Preferred Stock and ~~2009 are summarized as follows:~~warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with TARP were repurchased.

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

(Dollars in thousands)

December 31, 2010
Available for sale:
U.S. agency obligations $ 19,003 $ 18 $ 87 $ 18,934
Municipal bonds 22,455 75 1,521 21,009
Mortgage-backed securities issued by GSEs 165,540 78 195 165,423
Non-agency mortgage-backed securities 6,790 39 242 6,587
Other securities 3,252 – 214 3,038
217,040 210 2,259 214,991
Other investments 8,301 – – 8,301
Total at December 31, 2010 $ 225,341 $ 210 $ 2,259 $ 223,292

- 7395 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.

Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.

The following table summarizes the CBF Investment and the Company’s opening balance sheet:

	Successor Company
(Dollars in thousands)	Originally Reported as of Jan. 28, 2011			Measurement Period Adjustments			Revised as of Jan. 28, 2011

Fair value of assets acquired:
Cash and cash equivalents	$	208,255		$	–		$	208,255
Investment securities		225,336			–			225,336
Mortgage loans held for sale		2,569			–			2,569
Loans		1,135,164			(30,701	)		1,104,463
Goodwill		30,994			19,099			50,093
Other intangible assets		5,004			–			5,004
Deferred tax asset		55,391			11,118			66,509
Other assets		66,663			(613	)		66,050
Total assets acquired		1,729,376			(1,097	)		1,728,279
Fair value of liabilities assumed:
Deposits		1,351,467			–			1,351,467
Borrowings		123,837			–			123,837
Subordinated debt		19,392			475			19,867
Other liabilities		10,595			(1,572	)		9,023
Total liabilities assumed		1,505,291			(1,097	)		1,504,194
Net assets acquired		224,085			–			224,085
Less: non-controlling interest at fair value		(43,785	)		–			(43,785	)
		180,300			–			180,300
Underwriting and legal costs		750			–			750
Purchase price	$	181,050		$	–		$	181,050

The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts.

- 96 -

Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value

(Dollars in thousands)

December 31, 2009
Available for sale:
U.S. agency obligations $ 1,000 $ 29 $ – $ 1,029
Municipal bonds 72,556 1,006 668 72,894
Mortgage-backed securities issued by GSEs 144,762 6,896 – 151,658
Non-agency mortgage-backed securities 8,345 19 567 7,797
Other securities 2,252 – 204 2,048
228,915 7,950 1,439 235,426
Held to maturity:
Municipal bonds $ 300 $ 7 $ – $ 307
Mortgage-backed securities issued by GSEs 1,576 84 – 1,660
Non-agency mortgage-backed securities 1,800 – 145 1,655
3,676 91 145 3,622
Other investments 6,390 – – 6,390
Total at December 31, 2009 $ 238,981 $ 8,041 $ 1,584 $ 245,438

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Measurement period adjustments reflected above were primarily due to (1) refinements to the acquisition date estimated fair values on certain acquired PCI loans (2) refinements to the acquisition date valuation of certain ORE properties based on subsequent selling prices, (3) refinements to the acquisition date valuation of a capital lease asset/obligation based on an updated appraisal of the leased asset, (4) refinements to the acquisition date valuation of off-balance sheet commitments to extend credit, (5) refinements to the acquisition date valuation of subordinated debentures, and (6) write-offs of miscellaneous other assets to properly reflect acquisition date fair value. The provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.

~~Credit~~A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:

Cash and Cash Equivalents

The cash and cash equivalents, which include proceeds from the CBF Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.

Investment Securities

Investment securities are reported at fair value at acquisition date. To account for the CBF Investment, the difference between the fair value and par value became the new premium or discount for each security held by the Company. The fair value of investment securities is primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities. Two equity securities were valued at their respective stock market prices, and two corporate bonds were valued using an internal valuation model. Immediately before the acquisition, the investment portfolio had an amortized cost of $228.1 million and was in a net unrealized loss position of $2.8 million.

Loans

All loans in the loan portfolio were adjusted to estimated fair value at the CBF Investment date. Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates at acquisition, the Company recorded a loan fair value discount of $135.1 million. All acquired loans were considered to be PCI loans with the exception of certain consumer revolving lines of credit. Subsequent to the CBF Investment, PCI loans will be accounted for as described in Note 1 (Basis of Presentation and Significant Accounting Policies).

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.

Core Deposit Intangible

The estimated value of the CDI at acquisition date was $4.4 million. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on an accelerated method over an eight year period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.

Trade Name Intangible

Trademarks, service marks and other registered marks (collectively referred to as the “Trade Name”) can have great significance to customers. The function of a mark is to indicate to the consumer the sources from which goods and services originate. The Trade Name considered to have value is Capital Bank. The Trade Name value of $604 thousand at acquisition date was based on the present value of the Company’s projected income multiplied by an assumed royalty rate. This intangible will be amortized on a straight-line basis over a three year period.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Other Assets

A majority of other assets held by the Company did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $66.5 million. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deposits

Time deposits were not included in the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. Term deposits evaluated for acquisition accounting consisted of certificates of deposit (“CDs”), brokered deposits and CDs through the Certificate of Deposit Account Registry Services (“CDARS”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates.

The outstanding balance of CDs at acquisition date was $730.5 million, and the estimated fair value premium totaled $12.4 million. The outstanding balance of brokered deposits was $100.5 million, and the estimated fair value premium totaled $616 thousand. The outstanding balance of CDARS was $27.0 million, and the estimated fair value premium totaled $111 thousand. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.

Borrowings

Included in borrowings are FHLB advances and structured repurchase agreements. Fair values for these borrowings were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The outstanding balance of FHLB advances and structured repurchase agreements at acquisition date was $66.0 million and $50.0 million, respectively, and the estimated fair value premiums on each totaled $1.8 million and $6.0 million, respectively. The Company will amortize the premium into income as a reduction of interest expense on a level-yield basis over the contractual term of each debt instrument.

Subordinated Debt

Included in subordinated debt are variable rate trust preferred securities issued by the Company and fixed rate subordinated debt issued as part of a private placement offering early in 2010. Fair values for the trust preferred securities and subordinated debt were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The outstanding balance of trust preferred securities and subordinated debt at acquisition date was $30.0 million and $3.4 million, respectively, and the estimated fair value (discount)/premium on each totaled ($14.7) million and $211 thousand, respectively. The Company will accrete the discount as an increase to interest expense and will amortize the premium as a decrease to interest expense on a level-yield basis over the contractual term of each debt instrument.

Contingent Value Rights

In connection with the CBF Investment, each existing shareholder as of January 27, 2011 received one contingent value right per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. The Company assigned no value to the CVRs, which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments.

- 98 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Non-controlling Interest

In determining the estimated fair value of the non-controlling interest, the Company utilized the closing market price of its common stock on the acquisition date of $3.40 and multiplied this stock price by the number of outstanding non-controlling shares at that date.

Transaction Expenses

As required by the CBF Investment, the Company incurred and reimbursed third party expenses of $750 thousand which were recorded as a reduction of proceeds received from the issuance of common shares to CBF.

There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized.

3. Investment Securities

Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:

	Predecessor Company
December 31, 2010	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Dollars in thousands)

Available for sale:
U.S. agency obligations	$	19,003	$	18	$	87	$	18,934
Municipal bonds		22,455		75		1,521		21,009
Mortgage-backed securities issued by GSEs		165,540		78		195		165,423
Non-agency mortgage-backed securities		6,790		39		242		6,587
Other securities		3,252		–		214		3,038
		217,040		210		2,259		214,991
Other investments		8,301		–		–		8,301
Total	$	225,341	$	210	$	2,259	$	223,292

Prior to the Bank Merger, credit related other than temporary impairments (“OTTI”) ~~are~~were recognized in net income (loss) and non-credit related impairments ~~are~~were recognized in other comprehensive income (loss) during the period the impairment iswas identified. Gross realized gains and losses and OTTI recognized in net income and other comprehensive income are reflected in the following ~~table:~~table for each period presented:

- 99 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Years Ended December 31,
		2010			2009			2008			Successor Company		Predecessor Company
(Dollars in thousands)											Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Gross realized gains		$	5,863		$	493		$	323		$	–	$	–	$	5,863		$	493
Gross realized losses			(8	)		(320	)		(74	)		–		–		(8	)		(320	)
Net realized gains			5,855			173			249			–		–		5,855			173

OTTI recognized on non-agency mortgage-backed securities:
Total OTTI on non-agency mortgage-backed securities			–			(381	)		–			–		–		–			(381	)
Non-credit portion recognized in other comprehensive income			–			381			–			–		–		–			381
Credit related OTTI on non-agency mortgage-backed securities recognized in income			–			–			–			–		–		–			–
OTTI recognized on corporate bonds (in other securities):
Total OTTI on corporate bonds			–			(701	)		–			–		–		–			(701	)
Non-credit portion recognized in other comprehensive income			–			202			–			–		–		–			202
Credit related OTTI on corporate bonds recognized in income			–			(498	)		–			–		–		–			(498	)
Total OTTI recognized in income			–			(498	)		–			–		–		–			(498	)

Securities gains (losses), net		$	5,855		$	(325	)	$	249		$	–	$	–	$	5,855		$	(325	)

OnPrior to the Bank Merger, on at least a quarterly basis, the Company ~~completes~~completed an OTTI assessment of its investment portfolio. The Company ~~considers~~considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.

~~- 74 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, ~~2009.~~2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management ~~expects~~expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million and ($202,000), respectively, as of both December 31, 2010 and ~~2009. This~~2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management ~~expects~~expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, ~~2009.~~2009 (Predecessor).

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Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position ~~for which OTTI has~~ not ~~been~~ recognized in ~~income,~~earnings, aggregated by investment category and length of time that individual securities ~~have~~had been in a continuous unrealized loss position, as of December 31, 2010 ~~and 2009:~~(Predecessor):

	Less than 12 Months				12 Months or Greater				Total				Predecessor Company
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2010													Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)													Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency obligations	$	8,916	$	87	$	–	$	–	$	8,916	$	87	$	8,916	$	87	$	–	$	–	$	8,916	$	87
Municipal bonds		14,886		1,134		2,453		387		17,339		1,521		14,886		1,134		2,453		387		17,339		1,521
Mortgage-backed securities issued by GSEs		14,473		195		–		–		14,473		195		14,473		195		–		–		14,473		195
Non-agency mortgage-backed securities		–		–		4,183		242		4,183		242		–		–		4,183		242		4,183		242
Other securities		–		–		2,536		214		2,536		214		–		–		2,536		214		2,536		214
Total at December 31, 2010	$	38,275	$	1,416	$	9,172	$	843	$	47,447	$	2,259

December 31, 2009
Available for sale:
Municipal bonds	$	21,194	$	448	$	2,382	$	220	$	23,576	$	668
Non-agency mortgage-backed securities		3,711		93		2,791		474		6,502		567
Other securities		–		–		1,546		204		1,546		204
		24,905		541		6,719		898		31,624		1,439
Held to maturity:
Non-agency mortgage-backed securities		–		–		1,655		145		1,655		145
Total at December 31, 2009	$	24,905	$	541	$	8,374	$	1,043	$	33,279	$	1,584
Total													$	38,275	$	1,416	$	9,172	$	843	$	47,447	$	2,259

As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, ~~are~~were related to 4 different securities. These losses ~~are~~were due to a combination of changes in credit spreads and other market factors. These mortgage securities ~~are~~were not issued or guaranteed by an agency of the federal government but ~~are~~were instead issued by private financial institutions and therefore carry an element of credit risk. ~~Management~~Prior to the Bank Merger, management closely ~~monitors~~monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of collateral, remaining terms, interest rates, loan types, etc. The Company ~~has~~ engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.

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~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Unrealized losses on the Company’s investments in municipal bonds ~~are~~were related to 30 different ~~securities.~~securities as of December 31, 2010 (Predecessor). These losses ~~are~~were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. ~~Management monitors~~Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities ~~relate~~related to an investment in subordinated debt of one corporate financial institution. ~~Management monitors~~Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and ~~considers~~considered its capital, liquidity and earnings in this review.

The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI ~~continue~~continued to perform and ~~are~~were expected to perform through maturity, and the issuers ~~have~~had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company ~~does~~did not intend to sell these investments and it iswas not more likely than not that the Company ~~will~~would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company ~~does~~did not consider unrealized losses on such securities to represent OTTI as of December 31, ~~2010.~~2010 (Predecessor).

~~Other~~Prior to the Bank Merger, the Company’s other investment securities primarily ~~include~~included an investment in Federal Home Loan Bank (“FHLB”) stock, which has no readily determinable market value and iswas recorded at cost. As of December 31, 2010 ~~and 2009,~~(Predecessor) the Company’s investment in FHLB stock totaled $7.7 ~~million and $6.0 million, respectively.~~million. Based on its ~~quarterly~~ evaluation prior to the Bank Merger, management ~~has~~ concluded that the Company’s investment in FHLB stock was not impaired as of December 31, 2010 (Predecessor), and that ultimate recoverability of the par value of this investment iswas probable. During 2009 (Predecessor), the Company recorded an investment loss of $320,000 related to an equity investment in Silverton Bank, a correspondent financial institution that was closed by its regulators in 2009. The loss represented the full amount of the Company’s investment in Silverton Bank and was recorded as a reduction to noninterest income.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

The amortized cost and estimated market values of available-for-sale debt securities as of December 31, 2010 (Predecessor) by final contractual maturities are summarized in the table below. Expected maturities ~~will differ~~differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Predecessor Company
December 31, 2010					Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Debt securities:
Due within one year	$	300	$	301	$	300	$	301
Due after one year through five years		17,882		17,904		17,882		17,904
Due after five years through ten years		49,567		49,401		49,567		49,401
Due after ten years		147,541		145,647		147,541		145,647
Total debt securities		215,290		213,253		215,290		213,253
Equity securities		1,750		1,738		1,750		1,738
Total investment securities	$	217,040	$	214,991	$	217,040	$	214,991

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~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

4. Loans

~~3. Loans~~

2010 2009
(Dollars in thousands)

Commercial real estate:
Construction and land development $ 350,587 $ 452,120
Commercial real estate – non-owner occupied 283,943 245,674
Total commercial real estate – non-owner occupied 634,530 697,794
Consumer real estate:
Residential mortgage 173,777 165,374
Home equity lines 89,178 97,129
Total consumer real estate 262,955 262,503
Commercial real estate – owner occupied 170,470 194,359
Commercial and industrial 145,435 183,733
Consumer 6,163 9,692
Other loans 33,742 41,851
1,253,295 1,389,932
Deferred loan fees and origination costs, net 1,184 370
$ 1,254,479 $ 1,390,302

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Capital Bank Corporation – Notes to Consolidated Financial Statements

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Capital Bank Corporation – Notes to Consolidated Financial Statements

- 80106 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following is an aging analysis of the Company’s portfolio by loan class as of December 31, ~~2010:~~

2010 (Predecessor):

~~- 81 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

6.7. Goodwill and Other Intangible Assets

Capital Bank Corporation – Notes to Consolidated Financial Statements

~~- 82 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

In the normal course of business, prior to the Bank Merger, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, may behave been deposit customers.

Capital Bank Corporation – Notes to Consolidated Financial Statements

~~Advances~~

~~- 83 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Outstanding structured repurchase agreements totaled $50.0 million as of December 31, 2010 ~~and 2009.~~(Predecessor). These repurchase agreements had a weighted average rate of 4.06% as of December 31, 2010 ~~and 2009~~(Predecessor) and were collateralized by certain U.S. agency and mortgage-backed securities with a book value of $61.2 million ~~and $57.4 million~~ as of December 31, 2010 ~~and 2009, respectively.~~

(Predecessor).

9.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

10. Subordinated Debentures

~~- 84 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

Private Placement Offering of Investment Units

On March 18, 2010, the Company sold 849 investment units (“Units”) to certain accredited investors for gross proceeds of $8.5 million. Each Unit was priced at $10,000 and consisted of a $3,996.90 subordinated promissory note and a number of shares of the Company’s common stock valued at $6,003.10. As a result of the sale of the Units, the Company sold $3.4 million in aggregate principal amount of subordinated promissory notes due March 18, 2020 (the “Notes”) and 1,468,770 shares of the Company’s common stock valued at $5.1 million. The Notes are recorded in subordinated debentures on the Condensed Consolidated Balance Sheets. The Company may prepay the Notes at any time after March 18, 2015 subject to regulatory approval and compliance with applicable law. The Company’s obligation to repay the Notes is subordinate to all indebtedness owed by the Company to its current and future secured creditors and general creditors and certain other financial obligations of the Company.

The Company is obligated to pay annual interest on the Notes at 10% payable in quarterly installments. The Company recorded interest expense on the Notes of $297,000, $28,000 and $266,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the year ended December 31, ~~2010.~~2010 (Predecessor), respectively.

~~10.~~11. Leases

~~The~~Due to the Bank Merger, the company had no operating lease obligations as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company ~~has~~had non-cancelable operating leases for its corporate office, certain branch locations and corporate aircraft that ~~expire~~expired at various times through 2036. Certain of the leases ~~contain~~contained escalating rent clauses, for which the Company ~~recognizes~~recognized rent expense on a straight-line basis. The Company ~~subleases~~subleased certain office space and the corporate aircraft to outside parties. Future minimum lease payments under the leases and sublease receipts for years subsequent to December 31, 2010 ~~are~~(Predecessor) were as follows:

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Capital Bank Corporation – Notes to Consolidated Financial Statements

	Lease Payments		Sublease Receipts		Predecessor Company
December 31, 2010					Lease Payments		Sublease Receipts
(Dollars in thousands)

2011	$	4,112	$	383	$	4,112	$	383
2012		4,058		295		4,058		295
2013		3,919		242		3,919		242
2014		3,817		240		3,817		240
2015		3,623		247		3,623		247
Thereafter		29,747		62		29,747		62
	$	49,276	$	1,469	$	49,276	$	1,469

~~- 85 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

~~12.~~13. Employee Benefit Plans

Capital Bank Corporation – Notes to Consolidated Financial Statements

- 86113 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that it has one significant operating segment, which is the providing of general commercial banking and financial services to individuals and businesses primarily in the southeastern region of the United States. The Company’s various products and services are those generally offered by community banks, and the allocation of its resources is based on the overall performance of the institution versus individual regions, branches or products and services.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current year’s presentation. These reclassifications impacted certain noninterest income and noninterest expense items and had no effect on total assets, net income, or shareholders’ equity previously reported. The noninterest income and noninterest expense reclassifications were made in an effort to more clearly disclose certain elements in the Consolidated Statements of Operations.

Current Accounting Developments

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In April 2010, the FASB issued ASU 2010-18, Effect of a Loan ModificationWhen the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 320, Receivables. The amendments in this update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

2. CBF Investment

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also, in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with TARP were repurchased.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.

Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.

The following table summarizes the CBF Investment and the Company’s opening balance sheet:

	Successor Company
(Dollars in thousands)	Originally Reported as of Jan. 28, 2011			Measurement Period Adjustments			Revised as of Jan. 28, 2011

Fair value of assets acquired:
Cash and cash equivalents	$	208,255		$	–		$	208,255
Investment securities		225,336			–			225,336
Mortgage loans held for sale		2,569			–			2,569
Loans		1,135,164			(30,701	)		1,104,463
Goodwill		30,994			19,099			50,093
Other intangible assets		5,004			–			5,004
Deferred tax asset		55,391			11,118			66,509
Other assets		66,663			(613	)		66,050
Total assets acquired		1,729,376			(1,097	)		1,728,279
Fair value of liabilities assumed:
Deposits		1,351,467			–			1,351,467
Borrowings		123,837			–			123,837
Subordinated debt		19,392			475			19,867
Other liabilities		10,595			(1,572	)		9,023
Total liabilities assumed		1,505,291			(1,097	)		1,504,194
Net assets acquired		224,085			–			224,085
Less: non-controlling interest at fair value		(43,785	)		–			(43,785	)
		180,300			–			180,300
Underwriting and legal costs		750			–			750
Purchase price	$	181,050		$	–		$	181,050

The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Measurement period adjustments reflected above were primarily due to (1) refinements to the acquisition date estimated fair values on certain acquired PCI loans (2) refinements to the acquisition date valuation of certain ORE properties based on subsequent selling prices, (3) refinements to the acquisition date valuation of a capital lease asset/obligation based on an updated appraisal of the leased asset, (4) refinements to the acquisition date valuation of off-balance sheet commitments to extend credit, (5) refinements to the acquisition date valuation of subordinated debentures, and (6) write-offs of miscellaneous other assets to properly reflect acquisition date fair value. The provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.

A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:

Cash and Cash Equivalents

The cash and cash equivalents, which include proceeds from the CBF Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.

Investment Securities

Investment securities are reported at fair value at acquisition date. To account for the CBF Investment, the difference between the fair value and par value became the new premium or discount for each security held by the Company. The fair value of investment securities is primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities. Two equity securities were valued at their respective stock market prices, and two corporate bonds were valued using an internal valuation model. Immediately before the acquisition, the investment portfolio had an amortized cost of $228.1 million and was in a net unrealized loss position of $2.8 million.

Loans

All loans in the loan portfolio were adjusted to estimated fair value at the CBF Investment date. Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates at acquisition, the Company recorded a loan fair value discount of $135.1 million. All acquired loans were considered to be PCI loans with the exception of certain consumer revolving lines of credit. Subsequent to the CBF Investment, PCI loans will be accounted for as described in Note 1 (Basis of Presentation and Significant Accounting Policies).

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.

Core Deposit Intangible

The estimated value of the CDI at acquisition date was $4.4 million. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on an accelerated method over an eight year period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.

Trade Name Intangible

Trademarks, service marks and other registered marks (collectively referred to as the “Trade Name”) can have great significance to customers. The function of a mark is to indicate to the consumer the sources from which goods and services originate. The Trade Name considered to have value is Capital Bank. The Trade Name value of $604 thousand at acquisition date was based on the present value of the Company’s projected income multiplied by an assumed royalty rate. This intangible will be amortized on a straight-line basis over a three year period.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Other Assets

A majority of other assets held by the Company did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $66.5 million. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deposits

Time deposits were not included in the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. Term deposits evaluated for acquisition accounting consisted of certificates of deposit (“CDs”), brokered deposits and CDs through the Certificate of Deposit Account Registry Services (“CDARS”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates.

The outstanding balance of CDs at acquisition date was $730.5 million, and the estimated fair value premium totaled $12.4 million. The outstanding balance of brokered deposits was $100.5 million, and the estimated fair value premium totaled $616 thousand. The outstanding balance of CDARS was $27.0 million, and the estimated fair value premium totaled $111 thousand. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.

Borrowings

Included in borrowings are FHLB advances and structured repurchase agreements. Fair values for these borrowings were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The outstanding balance of FHLB advances and structured repurchase agreements at acquisition date was $66.0 million and $50.0 million, respectively, and the estimated fair value premiums on each totaled $1.8 million and $6.0 million, respectively. The Company will amortize the premium into income as a reduction of interest expense on a level-yield basis over the contractual term of each debt instrument.

Subordinated Debt

Included in subordinated debt are variable rate trust preferred securities issued by the Company and fixed rate subordinated debt issued as part of a private placement offering early in 2010. Fair values for the trust preferred securities and subordinated debt were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The outstanding balance of trust preferred securities and subordinated debt at acquisition date was $30.0 million and $3.4 million, respectively, and the estimated fair value (discount)/premium on each totaled ($14.7) million and $211 thousand, respectively. The Company will accrete the discount as an increase to interest expense and will amortize the premium as a decrease to interest expense on a level-yield basis over the contractual term of each debt instrument.

Contingent Value Rights

In connection with the CBF Investment, each existing shareholder as of January 27, 2011 received one contingent value right per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. The Company assigned no value to the CVRs, which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Non-controlling Interest

In determining the estimated fair value of the non-controlling interest, the Company utilized the closing market price of its common stock on the acquisition date of $3.40 and multiplied this stock price by the number of outstanding non-controlling shares at that date.

Transaction Expenses

As required by the CBF Investment, the Company incurred and reimbursed third party expenses of $750 thousand which were recorded as a reduction of proceeds received from the issuance of common shares to CBF.

There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized.

3. Investment Securities

Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:

	Predecessor Company
December 31, 2010	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Dollars in thousands)

Available for sale:
U.S. agency obligations	$	19,003	$	18	$	87	$	18,934
Municipal bonds		22,455		75		1,521		21,009
Mortgage-backed securities issued by GSEs		165,540		78		195		165,423
Non-agency mortgage-backed securities		6,790		39		242		6,587
Other securities		3,252		–		214		3,038
		217,040		210		2,259		214,991
Other investments		8,301		–		–		8,301
Total	$	225,341	$	210	$	2,259	$	223,292

Prior to the Bank Merger, credit related other than temporary impairments (“OTTI”) were recognized in net income (loss) and non-credit related impairments were recognized in other comprehensive income (loss) during the period the impairment was identified. Gross realized gains and losses and OTTI recognized in net income and other comprehensive income are reflected in the following table for each period presented:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Successor

Company

Predecessor

Company

(Dollars in thousands)

Jan. 29, 2011

to

Dec. 31, 2011

Jan. 1, 2011

to

Jan. 28, 2011

Year

Ended

Dec. 31, 2010

Year

Ended

Dec. 31, 2009

Gross realized gains

$

–

$

–

$

5,863

$

493

Gross realized losses

–

(8

)

(320

)

Net realized gains

–

5,855

173

OTTI recognized on non-agency mortgage-backed securities:

Total OTTI on non-agency mortgage-backed securities

–

(381

)

Non-credit portion recognized in other comprehensive income

–

381

Credit related OTTI on non-agency mortgage-backed securities recognized in income

–

OTTI recognized on corporate bonds (in other securities):

Total OTTI on corporate bonds

–

(701

)

Non-credit portion recognized in other comprehensive income

–

202

Credit related OTTI on corporate bonds recognized in income

–

(498

)

Total OTTI recognized in income

–

(498

)

Securities gains (losses), net

$

–

$

–

$

5,855

$

(325

)

Prior to the Bank Merger, on at least a quarterly basis, the Company completed an OTTI assessment of its investment portfolio. The Company considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.

In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, 2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million and ($202,000), respectively, as of both December 31, 2010 and 2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, 2009 (Predecessor).

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position not recognized in earnings, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency obligations	$	8,916	$	87	$	–	$	–	$	8,916	$	87
Municipal bonds		14,886		1,134		2,453		387		17,339		1,521
Mortgage-backed securities issued by GSEs		14,473		195		–		–		14,473		195
Non-agency mortgage-backed securities		–		–		4,183		242		4,183		242
Other securities		–		–		2,536		214		2,536		214
Total	$	38,275	$	1,416	$	9,172	$	843	$	47,447	$	2,259

As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, were related to 4 different securities. These losses were due to a combination of changes in credit spreads and other market factors. These mortgage securities were not issued or guaranteed by an agency of the federal government but were instead issued by private financial institutions and therefore carry an element of credit risk. Prior to the Bank Merger, management closely monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of collateral, remaining terms, interest rates, loan types, etc. The Company engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.

Unrealized losses on the Company’s investments in municipal bonds were related to 30 different securities as of December 31, 2010 (Predecessor). These losses were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities related to an investment in subordinated debt of one corporate financial institution. Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and considered its capital, liquidity and earnings in this review.

The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI continued to perform and were expected to perform through maturity, and the issuers had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company did not intend to sell these investments and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider unrealized losses on such securities to represent OTTI as of December 31, 2010 (Predecessor).

Prior to the Bank Merger, the Company’s other investment securities primarily included an investment in Federal Home Loan Bank (“FHLB”) stock, which has no readily determinable market value and was recorded at cost. As of December 31, 2010 (Predecessor) the Company’s investment in FHLB stock totaled $7.7 million. Based on its evaluation prior to the Bank Merger, management concluded that the Company’s investment in FHLB stock was not impaired as of December 31, 2010 (Predecessor), and that ultimate recoverability of the par value of this investment was probable. During 2009 (Predecessor), the Company recorded an investment loss of $320,000 related to an equity investment in Silverton Bank, a correspondent financial institution that was closed by its regulators in 2009. The loss represented the full amount of the Company’s investment in Silverton Bank and was recorded as a reduction to noninterest income.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The amortized cost and estimated market values of available-for-sale debt securities as of December 31, 2010 (Predecessor) by final contractual maturities are summarized in the table below. Expected maturities differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Predecessor Company
December 31, 2010	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Debt securities:
Due within one year	$	300	$	301
Due after one year through five years		17,882		17,904
Due after five years through ten years		49,567		49,401
Due after ten years		147,541		145,647
Total debt securities		215,290		213,253
Equity securities		1,750		1,738
Total investment securities	$	217,040	$	214,991

As of December 31, 2010 (Predecessor), investment securities with book values totaling $68.2 million were pledged to secure public deposits, FHLB advances and other borrowings.

4. Loans

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The composition of the loan portfolio by loan classification as of December 31, 2010 (Predecessor) was as follows:

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Commercial real estate:
Construction and land development	$	350,587
Real estate – non-owner occupied		283,943
Real estate – owner occupied		170,470
Total commercial real estate		805,000
Consumer real estate:
Residential mortgage		173,777
Home equity lines		89,178
Total consumer real estate		262,955
Commercial and industrial		145,435
Consumer		6,163
Other loans		33,742
		1,253,295
Deferred loan fees and origination costs, net		1,184
	$	1,254,479

Loans pledged as collateral for certain borrowings totaled $341.5 million as of December 31, 2010 (Predecessor).

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Successor Company:

Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

(Dollars in thousands)		As of Jan. 28, 2011

Contractually required payments	$	1,318,702
Nonaccretable difference		(125,626	)
Cash flows expected to be collected at acquisition		1,193,076
Accretable yield		(163,630	)
Fair value of acquired loans at acquisition	$	1,029,446

Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:

(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011

Balance, beginning of period	$	163,630
New loans purchased		–
Accretion of income		(26,262	)
Reclassifications from nonaccretable difference		9,975
Merger of Old Capital Bank into Capital Bank, NA		(147,343	)
Balance, end of period	$	–

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the CBF Investment. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the CBF Investment. The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:

	•	the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;

	•	the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

	•	indices for PCI loans with variable rates of interest.

For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

5. Allowance for Loan Losses and Credit Quality

The following is a summary of activity in the allowance for loan losses for each period presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Balance at beginning of period, predecessor	$	–		$	36,061		$	26,081		$	14,795
Loans charged off		(339	)		(49	)		(49,420	)		(12,197	)
Recoveries of loans previously charged off		–			9			855			419
Net charge-offs		(339	)		(40	)		(48,565	)		(11,778	)
Provision for loan losses		1,450			40			58,545			23,064
Merger of Old Capital Bank into Capital Bank, NA		(1,111	)		–			–			–
Balance at the end of period, predecessor		–			36,061			36,061			26,081
Acquisition accounting adjustment		–			(36,061	)		–			–
Balance at end of period, successor	$	–		$	–		$	–		$	–

The allowance for credit losses includes the allowance for loan losses, detailed above, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheet. Due to the Bank Merger, the Company had no allowance for credit losses as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the reserve for unfunded lending commitments totaled $623,000.

The following is an analysis of the allowance for loan losses by portfolio segment in addition to the disaggregation of the allowance and outstanding loan balances by impairment method as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	CRE – Non-Owner Occupied			Consumer Real Estate			CRE – Owner Occupied			Commercial and Industrial			Consumer			Other			Total
(Dollars in thousands)

Allowance for loan losses:
Beginning balance	$	14,987		$	2,383		$	2,650		$	5,536		$	326		$	199		$	26,081
Charge-offs		(33,803	)		(3,923	)		(4,417	)		(6,639	)		(429	)		(209	)		(49,420	)
Recoveries		616			54			48			115			22			–			855
Provision		39,195			6,218			5,114			7,420			435			163			58,545
Ending balance – total	$	20,995		$	4,732		$	3,395		$	6,432		$	354		$	153		$	36,061
Ending balance – individually evaluated for impairment	$	212		$	87		$	139		$	89		$	2		$	–		$	529
Ending balance – collectively evaluated for impairment	$	20,783		$	4,645		$	3,256		$	6,343		$	352		$	153		$	35,532

Loans:
Ending balance – total	$	634,530		$	262,955		$	170,470		$	145,435		$	6,163		$	33,742		$	1,253,295
Ending balance – individually evaluated for impairment	$	57,227		$	3,879		$	8,613		$	6,013		$	6		$	781		$	76,519
Ending balance – collectively evaluated for impairment	$	577,303		$	259,076		$	161,857		$	139,422		$	6,157		$	32,961		$	1,176,776

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following is an analysis presenting impaired loan information by loan class as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance
(Dollars in thousands)

Impaired loans for which the full loss has been charged-off:
Commercial real estate:
Construction and land development	$	53,675	$	65,918	$	–
Commercial real estate – non-owner occupied		2,678		3,772		–
Consumer real estate:
Residential mortgage		3,222		4,436		–
Home equity lines		236		332		–
Commercial real estate – owner occupied		8,083		10,475		–
Commercial and industrial		5,466		6,128		–
Other loans		781		990		–
Total with no related allowance		74,141		92,051		–

Impaired loans with an allowance recorded:
Commercial real estate:
Construction and land development		874		874		212
Consumer real estate:
Residential mortgage		380		380		79
Home equity lines		41		41		8
Commercial real estate – owner occupied		530		530		139
Commercial and industrial		547		565		89
Consumer		6		6		2
Total with an allowance		2,378		2,396		529

Total impaired loans:
Commercial		72,634		89,252		440
Consumer		3,885		5,195		89
Total impaired loans	$	76,519	$	94,447	$	529

Prior to the Bank Merger, all TDRs were classified as individually impaired. The following table summarizes the Company’s recorded investment in TDRs as of December 31, 2010 (Predecessor):

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Nonperforming TDRs:
Commercial real estate	$	10,775
Consumer real estate		808
Commercial owner occupied		2,271
Commercial and industrial		106
Total nonperforming TDRs		13,960
Performing TDRs:
Commercial real estate		3,856
Consumer real estate		121
Commercial owner occupied		421
Commercial and industrial		65
Consumer		–
Total performing TDRs		4,463
Total TDRs	$	18,423

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

As of December 31, 2010 (Predecessor), there was no allowance for loan losses allocated to TDRs as all of these loans were charged down to estimated fair value.

Prior to the Bank Merger, to monitor and quantify credit risk in the loan portfolio, the Company ~~had 11,700 shares~~used a risk rating system. The risk rating scale ranged from 1 to 9, where a higher rating represents higher credit risk and was selected on the financial strength and overall resources of ~~nonvested restricted stock grants, which represented unrecognized compensation~~the borrower. The nine risk rating categories can generally be described by the following groupings:

	•	Pass (risk rating 1–6) – These loans ranged from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.

	•	Special Mention (risk rating 7) – Loans in this category had potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may have resulted in deterioration of the repayment prospects for the asset or the institution’s credit position at some future date. They contain unfavorable characteristics and were generally undesirable. Loans in this category were currently protected by current sound net worth and paying capacity of the obligor or of the collateral pledged, if any, but were potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification.

	•	Substandard (risk rating 8) – Loans in this category were inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies were not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. A substandard loan normally had one or more well-defined weaknesses that could jeopardize repayment of the debt.

	•	Doubtful (risk rating 9) – For loans in this category, the borrower’s ability to continue repayment was highly unlikely. Full collection based on currently known facts, conditions, and values was highly questionable and improbable. The possibility of loss was extremely high, but because of certain important and specific reasonable pending factors, which work to the bank’s advantage and strengthen the asset in the near term, its classification as loss was deferred until its more exact status may be determined.

The following is an analysis of the Company’s credit risk profile on internally assigned risk ratings as of December 31, 2010 (Predecessor):

	Commercial Loans
December 31, 2010 (Predecessor Company)	Construction and Land Development		Non-Owner Occupied Real Estate		Owner Occupied Real Estate		Commercial and Industrial		Other		Total
(Dollars in thousands)

Pass	$	250,557	$	266,523	$	154,156	$	101,674	$	32,961	$	805,871
Special mention		20,178		12,505		2,287		20,488		–		55,458
Substandard		79,852		4,610		13,967		23,266		781		122,476
Doubtful		–		305		60		7		–		372
Total	$	350,587	$	283,943	$	170,470	$	145,435	$	33,742	$	984,177

	Consumer Loans
December 31, 2010 (Predecessor Company)	Residential Mortgage		Home Equity Lines		Other Consumer		Total
(Dollars in thousands)

Pass	$	162,002	$	85,000	$	5,803	$	252,805
Special mention		5,518		1,972		188		7,678
Substandard		6,138		2,110		172		8,420
Doubtful		119		96		–		215
Total	$	173,777	$	89,178	$	6,163	$	269,118

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following is an aging analysis of the Company’s portfolio by loan class as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	30–59 Days Past Due		60–89 Days Past Due		Over 90 Days Past Due and Accruing		Nonaccrual Loans		Current Loans		Total Loans
(Dollars in thousands)

Commercial real estate:
Construction and land development	$	6,166	$	204	$	–	$	50,693	$	293,524	$	350,587
Real estate – non-owner occupied		509		–		–		2,678		280,756		283,943
Real estate – owner occupied		3,165		–		–		8,198		159,107		170,470
Consumer real estate:
Residential mortgage		2,213		329		–		3,481		167,754		173,777
Home equity lines		498		109		–		277		88,294		89,178
Commercial and industrial		175		146		–		5,830		139,284		145,435
Consumer		4		4		–		6		6,149		6,163
Other loans		–		–		–		781		32,961		33,742
Total	$	12,730	$	792	$	–	$	71,944	$	1,167,829	$	1,253,295

For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), no interest income was recognized on loans while in nonaccrual status, including cash received for interest on these loans. Prior to the Bank Merger, cumulative interest payments collected on nonaccrual loans were applied as a reduction to the principal balance. Cumulative interest payments collected on nonaccrual loans totaled $837,000 as of December 31, 2010 (Predecessor).

6. Premises and Equipment

Due to the Bank Merger, the Company reported no premises and equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Premises and equipment as of December 31, 2010 (Predecessor):

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Land	$	6,795
Buildings and leasehold improvements		17,927
Furniture and equipment		19,163
Automobiles		265
Construction in progress		411
		44,561
Less accumulated depreciation and amortization		(19,527	)
	$	25,034

Depreciation expense for the period of ~~$70,000~~January 29, 2011 to ~~be recognized~~December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) was $1.4 million, $240 thousand, $2.6 million, and $2.9 million, respectively.

7. Goodwill and Other Intangible Assets

Due to the Bank Merger, the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The changes in carrying amounts of goodwill and other intangible assets for each period presented were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Predecessor Company	Goodwill				Other Intangible Assets
(Dollars in thousands)					Gross			Accumulated Amortization			Net

Balance at January 1, 2009		$	–		$	8,414		$	(4,557	)	$	3,857

Amortization expense			–			–			(1,146	)		(1,146	)
Balance at December 31, 2009			–			8,414			(5,703	)		2,711

Amortization expense			–			–			(937	)		(937	)
Balance at December 31, 2010			–			8,414			(6,640	)		1,774

Amortization expense			–			–			(62	)		(62	)
Balance at January 28, 2011, predecessor		$	–		$	8,414		$	(6,702	)	$	1,712


Successor Company		Goodwill			Other Intangible Assets
(Dollars in thousands)					Gross			Accumulated Amortization			Net

Acquisition accounting adjustment		$	–		$	(8,414)		$	6,702		$	(1,712)

Balance at January 29, 2011, successor			50,093			5,004			–			5,004

Amortization expense			–			–			(478	)		(478	)
Merger of Old Capital Bank into Capital Bank, NA			(50,093	)		(5,004	)		478			(4,526	)
Balance at December 31, 2011		$	–		$	–		$	–		$	–

Goodwill represents the excess of the purchase price over the ~~remaining vesting~~fair value of acquired net assets in connection with the CBF Investment on January 28, 2011. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.

Other intangible assets were amortized over periods of up to ten years using an accelerated method approximating the period of economic benefits received. Due to the ~~respective grants. Total compensation~~Bank Merger, the Company reported no intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor), and thus will record no amortization expense ~~related~~in future periods.

Prior to ~~these restricted stock awards~~the Bank Merger, Goodwill was reviewed for potential impairment at least annually at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company’s annual goodwill impairment evaluation in the years ended December 31, 2010 and 2009 (Predecessor), respectively, did not result in a goodwill impairment charge.

Core deposit intangibles were evaluated for impairment if events and ~~2008~~circumstances indicate a potential for impairment. Such an evaluation of other intangible assets was based on undiscounted cash flow projections. No impairment charges were recorded for other intangible assets in the years ended December 31, 2010 and 2009 (Predecessor), respectively.

As of December 31, 2011 (Successor), the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet, thus no impairment evaluations were required in the successor period.

8. Deposits

Due to the Bank Merger, the Company reported no deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the scheduled maturities of time deposits were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
December 31, 2010		Amount		Weighted Average Rate
(Dollars in thousands)

2011		$	234,572		1.06	%
2012			311,121		2.02
2013			257,327		1.76
2014			11,698		2.69
2015			58,568		2.72
Thereafter			44		2.64
		$	873,330		1.74	%

Time deposits of $100,000 or greater totaled $327.5 million as of December 31, 2010 (Predecessor) while brokered deposits (excluding reciprocal CDARS deposits of $29.2 million) totaled $110.5 million as of December 31, 2010 (Predecessor). Deposit overdrafts of $71,000 were included in total loans as of December 31, 2010 (Predecessor).

In the normal course of business, prior to the Bank Merger, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, may have been deposit customers.

9. Borrowings

Due to the Bank Merger, the Company reported no outstanding borrowings on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The following is an analysis of securities sold under agreements to repurchase as of December 31, 2010 (Predecessor):

Predecessor Company

December 31, 2010

End of Period

Daily Average Balance

(Dollars in thousands)

Balance

Weighted

Average Rate

Balance

Interest

Rate

Maximum

Outstanding at

Any Month End

Securities sold under agreements to repurchase

$

–

%

$

1,564

0.32

%

$

5,026

Interest expense on federal funds purchased totaled $0, $0, $0, and $2,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively. Interest expense on securities sold under agreements to repurchase totaled $0, $0, $5,000, and $21,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

The following table presents information regarding the Company’s outstanding borrowings as of December 31, 2010 (Predecessor):

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

FHLB advances without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 ranging from 1.86% to 5.50%; maturity dates on those advances ranging from January 26, 2011 to January 20, 2015	$	41,000

FHLB advance with next quarterly call option on February 22, 2011; fixed interest rate of 3.63%; matures on August 21, 2017		10,000

FHLB overnight borrowings; interest rate of 0.47% as of December 31, 2010, subject to change daily		20,000

Structured repurchase agreements without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 of 3.72% and 3.79%; agreements mature on December 18, 2017		20,000

Structured repurchase agreements with various forms of call options remaining; fixed interest rates ranging from 3.56% to 4.75%; maturity dates ranging from November 6, 2016 to March 22, 2019		30,000

Federal Reserve Bank primary credit facility; current interest rate of 0.75% as of December 31, 2010		–
	$	121,000

Prior to the Bank Merger, advances from the FHLB totaled $51.0 million and had a weighted average rate of 4.22% as of December 31, 2010 (Predecessor). In addition, overnight borrowings on the Company’s credit line at the FHLB totaled $20.0 million as of December 31, 2010 (Predecessor). These fixed rate advances as well as the Company’s credit line with the FHLB were collateralized by eligible 1–4 family mortgages, home equity loans and commercial loans totaling $216.3 million as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $20.7 million of available borrowing capacity with the FHLB.

Outstanding structured repurchase agreements totaled $50.0 million as of December 31, 2010 (Predecessor). These repurchase agreements had a weighted average rate of 4.06% as of December 31, 2010 (Predecessor) and were collateralized by certain U.S. agency and mortgage-backed securities with a book value of $61.2 million as of December 31, 2010 (Predecessor).

Prior to the Bank Merger, the Company maintained a credit line at the FRB discount window that was used for short-term funding needs and as an additional source of liquidity. Primary credit borrowings as well as the Company’s credit line at the discount window were collateralized by eligible commercial construction as well as commercial and industrial loans totaling $125.2 as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $77.0 million of available borrowing capacity with the FRB.

As of December 31, 2010 (Predecessor), the scheduled maturities of borrowings were as follows:

	Predecessor Company
December 31, 2010		Balance		Weighted Average Rate
(Dollars in thousands)

2011		$	51,000		3.21	%
2012			–		–
2013			3,000		1.86
2014			3,000		2.43
2015			4,000		2.92
Thereafter			60,000		3.99
		$	121,000		3.54	%

- 110 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

10. Subordinated Debentures

Capital Bank Statutory Trusts

The Company formed Capital Bank Statutory Trust I, Capital Bank Statutory Trust II and Capital Bank Statutory Trust III (the “Trusts”) in June 2003, December 2003 and December 2005, respectively. Each issued $10 million of its floating-rate capital securities (the “trust preferred securities”), with a liquidation amount of $1,000 per capital security, in pooled offerings of trust preferred securities. The Trusts sold their common securities to the Company for an aggregate of $900,000, resulting in total proceeds from each offering equal to $10.3 million, or $30.9 million in aggregate. The Trusts then used these proceeds to purchase $30.9 million in principal amount of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). Following payment by the Company of a placement fee and other expenses of the offering, the Company’s net proceeds from the offerings aggregated $30.0 million.

The trust preferred securities each have 30-year maturities and became redeemable after five years by the Company with certain exceptions. Prior to the redemption date, the trust preferred securities may be redeemed at the option of the Company after the occurrence of certain events, including without limitation events that would have a negative tax effect on the Company or the Trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as an investment company. The Trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the Debentures. The Company’s obligation under the Debentures constitutes a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities.

The securities associated with each trust are floating rate, based on 90-day LIBOR, and adjust quarterly. Trust I securities adjust at LIBOR + 3.10%, Trust II securities adjust at LIBOR + 2.85% and Trust III securities adjust at LIBOR +1.40%.

The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of the Company, are the sole assets of the Trusts, and the Company’s payment under the Debentures is the sole source of revenue for the Trusts.

The assets and liabilities of the Trusts are not consolidated into the consolidated financial statements of the Company. Interest on the Debentures is included in the Consolidated Statements of Operations as interest expense. The Debentures are recorded in subordinated debentures on the Consolidated Balance Sheets. For regulatory purposes, the $30 million of trust preferred securities qualifies as Tier 1 capital, subject to certain limitations, or Tier 2 capital in accordance with regulatory reporting requirements. The Company recorded interest expense on the Debentures of $1.0 million, $74 thousand, $865 thousand, and $1.1 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

Private Placement Offering of Investment Units

On March 18, 2010, the Company sold 849 investment units (“Units”) to certain accredited investors for gross proceeds of $8.5 million. Each Unit was priced at $10,000 and consisted of a $3,996.90 subordinated promissory note and a number of shares of the Company’s common stock valued at $6,003.10. As a result of the sale of the Units, the Company sold $3.4 million in aggregate principal amount of subordinated promissory notes due March 18, 2020 (the “Notes”) and 1,468,770 shares of the Company’s common stock valued at $5.1 million. The Notes are recorded in subordinated debentures on the Condensed Consolidated Balance Sheets. The Company may prepay the Notes at any time after March 18, 2015 subject to regulatory approval and compliance with applicable law. The Company’s obligation to repay the Notes is subordinate to all indebtedness owed by the Company to its current and future secured creditors and general creditors and certain other financial obligations of the Company.

The Company is obligated to pay annual interest on the Notes at 10% payable in quarterly installments. The Company recorded interest expense on the Notes of $297,000, $28,000 and $266,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the year ended December 31, 2010 (Predecessor), respectively.

11. Leases

Due to the Bank Merger, the company had no operating lease obligations as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company had non-cancelable operating leases for its corporate office, certain branch locations and corporate aircraft that expired at various times through 2036. Certain of the leases contained escalating rent clauses, for which the Company recognized rent expense on a straight-line basis. The Company subleased certain office space and the corporate aircraft to outside parties. Future minimum lease payments under the leases and sublease receipts for years subsequent to December 31, 2010 (Predecessor) were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
December 31, 2010	Lease Payments		Sublease Receipts
(Dollars in thousands)

2011	$	4,112	$	383
2012		4,058		295
2013		3,919		242
2014		3,817		240
2015		3,623		247
Thereafter		29,747		62
	$	49,276	$	1,469

Rent expense under operating leases was $1.9 million, $343 thousand, $3.8 million and $3.3 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

12. Related Party Transactions

Due to the Bank Merger, the Company reported no loans or deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, in the normal course of business, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, were borrowers. Total loans to such groups and activity for each period presented is summarized as follows:

Predecessor Company		2011
(Dollars in thousands)

Balance as of January 1, 2011	$	86,970
Advances		55
Repayments		(11,150	)
Reconstitution of Board of Directors in connection with CBF Investment		(63,709	)
Balance as of January 28, 2011	$	12,166

Successor Company		2011
(Dollars in thousands)

Advances	$	487
Repayments		(744	)
Merger of Old Capital Bank into Capital Bank, NA		(11,909	)
Balance as of December 31, 2011	$	–

These transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company. Prior to the Bank Merger, certain deposits were held by related parties, and the rates and terms of these accounts are consistent with those of non-related parties.

13. Employee Benefit Plans

401(k) Retirement Plan

The Company maintains the Capital Bank 401(k) Retirement Plan (the “Plan”) for the benefit of its employees, which includes provisions for employee contributions, subject to limitation under the Internal Revenue Code, and discretionary matching contributions by the Company. The Plan provides that employee’s contributions are 100% vested at all times, and the Company’s matching contributions vest 20% after the second year of service, an additional 20% after the third and fourth years of service and the remaining 40% after the fifth year of service. Through May 31, 2009, the Company matched 100% of employee contributions up to 6% of an employee’s salary. Effective June 1, 2009, the Company suspended its discretionary matching contributions to the Plan. Aggregate matching contributions, which are recorded in salaries and employee benefits expense on the Consolidated Statements of Operations, for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) were $0, $0, $0, and $387,000, respectively.

- 112 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Supplemental Retirement Plans

In May 2005, the Company established two supplemental retirement plans for the benefit of certain executive officers and certain directors of the Company. The Capital Bank Defined Benefit Supplemental Executive Retirement Plan (“Executive Plan”) covers the Company’s chief executive officer and three other members of executive management. Under the Executive Plan, the participants were to receive a supplemental retirement benefit equal to a targeted percentage of the participant’s average annual salary during the last three years of employment. Under the Executive Plan, benefits vest over an eight-year period with the first 20% vesting after four years of service and 20% vesting annually thereafter. The Capital Bank Supplemental Retirement Plan for Directors (“Director Plan”) covered certain directors and provided for a fixed annual retirement benefit to be paid for a number of years equal to the director’s total years of service, up to a maximum of ten years. The Executive Plan was terminated in connection with the closing of the CBF Investment. As of December 31, 2011 (Successor), no current or former directors were participating in the Director Plan, and it is not anticipated that any current or future directors will be permitted to participate in the plan.

For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recognized $106,000, ~~$109,000~~$18,000, $255,000, and ~~$98,000, respectively.~~$236,000, respectively, of expense related to the Executive Plan; and $0, $17,000, $238,000, and $353,000, respectively, of expense related to the Director Plan. Prior to the Bank Merger, the obligations associated with the two plans were included in other liabilities on the Consolidated Balance Sheet and totaled $1.0 million (Executive Plan) and $1.6 million (Director Plan) as of December 31, 2010 (Predecessor). On January 28, 2011, cash benefit payments were made to participants from both the Executive Plan and Director Plan in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details on these transactions.

14. Stock-Based Compensation

Stock Options

Pursuant to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”), the Company had a stock option plan providing for the issuance of up to 1,150,000 options to purchase shares of the Company’s stock to officers and directors. As of December 31, 2011 (Successor), options for 193,600 shares of common stock were outstanding and options for 698,859 shares of common stock remained available for future issuance; however, pursuant to the Equity Incentive Plan, no option may be granted after February 21, 2012 and the Equity Incentive Plan has expired. In addition, there were 566,071 options which were assumed under various plans from previously acquired financial institutions, none of which remain outstanding. Grants of options were made by the Board of Directors or the Compensation/Human Resources Committee of the Board. All grants were made with an exercise price at no less than fair market value on the date of grant and must be exercised no later than 10 years from the date of grant.

A summary of the activity of the Company’s stock option plans, including the weighted average exercise price (“WAEP”), for each period is presented below:

	Successor Company					Predecessor Company
	Period of Jan. 29 to Dec. 31, 2011					Period of Jan. 1 to Jan. 28, 2011				Year Ended Dec. 31, 2010					Year Ended Dec. 31, 2009
	Shares			WAEP		Shares		WAEP		Shares			WAEP		Shares			WAEP

Outstanding options, beginning of period		297,880		$	12.11		297,880	$	12.11		366,583		$	11.76		377,083		$	11.71
Granted		–			–		–		–		19,250			4.38		–			–
Exercised		–			–		–		–		–			–		–			–
Forfeited and expired		(104,280	)		10.26		–		–		(87,953	)		8.93		(10,500	)		10.09
Outstanding options, end of period		193,600		$	13.11		297,880	$	12.11		297,880		$	12.11		366,583		$	11.76

Options exercisable at end of period		180,000		$	13.59		226,430	$	13.53		226,430		$	13.53		285,983		$	12.33

- 113 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table summarizes information about the Company’s stock options as of December 31, 2011 (Successor):

Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life in Years		Number Exercisable		Intrinsic Value

$3.85 – $6.00		59,850		7.39		47,850	$	–
$6.01 – $9.00		–		–		–		–
$9.01 – $12.00		2,500		6.15		2,500		–
$12.01 – $15.00		16,000		5.76		14,400		–
$15.01 – $18.00		64,000		3.10		64,000		–
$18.01 – $18.37		51,250		2.99		51,250		–
		193,600		4.66		180,000	$	–

The fair values of options granted are estimated on the date of the grants using the Black-Scholes option pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. The expected life of the options used in this calculation is the period the options are expected to be outstanding. Expected stock price volatility is based on the historical volatility of the Company’s common stock for a period approximating the expected life; the expected dividend yield is based on the Company’s historical annual dividend payout; and the risk-free rate is based on the implied yield available on U.S. Treasury issues. The following weighted-average assumptions were used in determining fair value for options granted for each period presented:

Assumptions	2011	2010	2009

Dividend yield	–	–	–
Expected volatility	–	33.0%	–
Risk-free interest rate	–	3.1%	–
Expected life	–	7 years	–

The weighted average fair value of options granted for the year ended December 31, 2010 (Predecessor) was $1.80. There were no options granted in the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) or the year ended December 31, 2009 (Predecessor).

For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recorded total compensation expense related to stock options of $78,000, $5,000, $54,000 and $50,000, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding ~~nonvested restricted shares~~stock options in connection with the controlling investment in the Company made by ~~NAFH.~~CBF. See Note 212 (~~Subsequent Events~~CBF Investment)) for more details.

~~Deferred Compensation for Non-employee Directors~~

The Company administered the Capital Bank Corporation Deferred Compensation Plan for Outside Directors (“Deferred Compensation Plan”). Eligible directors may have elected to participate in the Deferred Compensation Plan by deferring all or part of their directors’ fees for at least one calendar year, in exchange for common stock of the Company. If a director did not elect to defer all or part of his fees, then he was not considered a participant in the Deferred Compensation Plan. The amount deferred was equal to 125 percent of total director fees. Each participant was fully vested in his account balance. The Deferred Compensation Plan provided for payment of share units in shares of common stock of the Company after the participant ceased to serve as a director for any reason. For the years ended December 31, 2010, 2009 and 2008, the Company recognized compensation expense of $576,000, $543,000 and $322,000, respectively, related to the Deferred Compensation Plan.

Prior to amendment on November 20, 2008, the Deferred Compensation Plan was classified as a liability-based plan due to certain plan provisions which would have allowed plan participants to receive payments in either cash or shares of common stock. The Deferred Compensation Plan was reclassified to an equity-based plan when amended after the plan terms were modified to require all participants in the Deferred Compensation Plan to receive deferred payments in shares of common stock. Upon amendment in 2008, the liability for plan benefits was adjusted to a fair market value of $943,000 and was reclassified to equity. Benefits under this plan are now recognized as compensation expense and a corresponding increase to equity based on fair value of the deferred stock at date of grant.

On January 28, 2011, all of the share units under the Deferred Compensation Plan became payable to participants in shares of common stock of the Company in connection with the controlling investment in the Company made by NAFH, which was a change in control under the Deferred Compensation Plan. See Note 21 (~~Subsequent Events) for more details.~~

~~14. Income Taxes~~

~~Income taxes charged to operations for the years ended December 31, 2010, 2009 and 2008 consisted of the following components:~~

2010 2009 2008
(Dollars in thousands)

Current income tax expense (benefit) $ (272 ) $ (2,305 ) $ 2,508
Deferred income tax expense (benefit) 15,396 (4,708 ) (3,715 )
Total income tax expense (benefit) $ 15,124 $ (7,013 ) $ (1,207 )

~~A reconciliation of the difference between income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 34% is as follows:~~

Amount Percent of Pretax Loss
(Dollars in thousands) 2010 2009 2008 2010 2009 2008

Tax benefit at statutory rate on net loss before taxes $ (15,756 ) $ (4,702 ) $ (19,342 ) 34.00 % 34.00 % 34.00 %
State taxes, net of federal benefit (1,894 ) (558 ) 18 4.09 4.03 (0.03 )
Increase (reduction) in taxes resulting from:
Valuation allowance on deferred tax asset 31,821 – – (68.67 ) – –
Tax exempt interest (945 ) (1,184 ) (1,085 ) 2.04 8.56 1.91
Nontaxable BOLI income (238 ) (622 ) (324 ) 0.51 4.50 0.57
Taxable income on BOLI surrender 1,981 – – (4.27 ) – –
Goodwill impairment charge – – 19,360 – – (34.03 )
Other, net 155 53 166 (0.34 ) (0.38 ) (0.29 )
$ 15,124 $ (7,013 ) $ (1,207 ) (32.64 )% 50.71 % 2.13 %

~~- 88 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

~~Significant components of deferred tax assets and liabilities as of December 31, 2010 and 2009 were as follows:~~

2010 2009
(Dollars in thousands)

Deferred tax assets:
Allowance for loan losses $ 14,143 $ 10,191
ORE valuation adjustments 666 84
Intangible assets 1,808 1,743
Net unrealized loss on investment securities 790 –
Deferred compensation 2,632 2,485
Deferred rent 335 242
Nonaccrual interest 323 141
Deferred gain on sale-leaseback 318 359
Stock offering costs – 640
Net operating loss carryforwards 11,587 –
AMT credit carryforward 1,831 596
Other 304 412
Gross deferred tax assets before valuation allowance 34,737 16,893
Less: valuation allowance (31,821 ) –
Gross deferred tax assets after valuation allowance 2,916 16,893

Deferred tax liabilities:
Depreciation 1,202 834
FHLB stock dividends 343 343
Net unrealized gain on investment securities – 2,510
Deferred loan origination costs 719 493
Prepaid expenses 515 328
Other 137 289
Gross deferred tax liabilities 2,916 4,797
Net deferred tax asset $ – $ 12,096

As of December 31, 2010 and 2009, the Company had net deferred tax assets before valuation allowance of $31.8 million and $12.1 million, respectively. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Due to a cumulative three-year, pre-tax loss position, significant net operating losses in 2010, and ongoing stress on the Company’s financial performance from elevated credit losses, the Company fully reserved its deferred tax assets as of December 31, 2010. A cumulative loss position makes it more difficult for management to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.

~~The Company and its subsidiaries are subject to U.S. federal income tax as well as North Carolina income tax. The Company has concluded all U.S. federal income tax matters for years through 2006.~~

~~15. Derivative Instruments~~

The Company enters into interest rate lock commitments with customers and commitments to sell mortgages to investors. The period of time between the issuance of a mortgage loan commitment and the closing and sale of the mortgage loan is generally less than 60 days. Interest rate lock commitments and forward loan sale commitments represent derivative instruments which are carried at fair value. These derivative instruments do not qualify for hedge accounting. The fair values of the Company’s interest rate lock commitments and forward loan sales commitments are based on current secondary market pricing and are included on the Condensed Consolidated Balance Sheets in mortgage loans held for sale and on the Condensed Consolidated Statements of Operations in mortgage origination and other loan fees.

As of December 31, 2010, the Company had $10.3 million of commitments outstanding to originate mortgage loans held for sale at fixed rates and $17.3 million of forward commitments under best efforts contracts to sell mortgages to three different investors. The fair value adjustments of the interest rate lock commitments and forward loan sales commitments were not considered material as of December 31, 2010. Thus, there was no impact to the Condensed Consolidated Statements of Operations for the year ended December 31, 2010. There were no such commitments outstanding as of December 31, 2009.

~~- 89 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

~~16. Commitments, Contingencies~~ ~~and Concentrations of Credit Risk~~

To meet the financial needs of its customers, the Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments are comprised of unused lines of credit, overdraft lines and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Company uses the same credit policies in making these commitments as it does for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include trade accounts receivable, property, plant and equipment, and income-producing commercial properties. Since many unused lines of credit expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

~~The Company’s exposure to off-balance-sheet credit risk as of December 31, 2010 and 2009 was as follows:~~

2010 2009
(Dollars in thousands)

Commitments to extend credit $ 175,318 $ 231,691
Standby letters of credit 10,285 9,144
Total commitments $ 185,603 $ 240,835

Because the majority of the Company’s lending is concentrated in Alamance, Buncombe, Catawba, Chatham, Cumberland, Granville, Johnston, Lee and Wake counties in North Carolina, economic conditions in those and surrounding counties significantly impact the ability of borrowers to repay their loans. As of December 31, 2010 and 2009, $1.07 billion (85%) and $1.15 billion (83%), respectively, of the total loan portfolio was secured by real estate, including commercial owner occupied loans. The credits in the loan portfolio are diversified, and the Company does not have significant concentrations to any one credit relationship.

The Company has limited partnership investments in two related private investment funds which totaled $1.8 million as of December 31, 2010 and 2009. These investments were included in other assets on the Consolidated Balance Sheets. Remaining capital commitments for these funds totaled $1.6 million as of December 31, 2010.

~~17. Fair Value~~

Fair Value Measurements

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company follows the fair value hierarchy which gives the highest priority to quoted prices in active markets (observable inputs) and the lowest priority to the management’s assumptions (unobservable inputs). For assets and liabilities recorded at fair value, the Company’s policy is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ~~For example,~~Available-for-sale investment securities ~~available for sale,~~and derivatives are recorded at fair value on a recurring basis. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls to a lower level in the hierarchy. These levels are described as follows:

	•	Level 1 – Valuations for assets and liabilities traded in active exchange markets.

	•	Level 2 – Valuations for assets and liabilities that can be obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company’s principal market for these securities is the secondary institutional markets, and valuations are based on observable market data in those markets.

	•	Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The determination of where an asset or liability falls in the fair value hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures at each reporting period and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.

Earnings (Loss) per Common Share

Basic earnings (loss) per common share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments, such as stock options and warrants, unless the effect is to reduce a loss or increase earnings. Basic EPS is adjusted for outstanding stock options and warrants using the treasury stock method in order to compute diluted EPS.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The calculation of basic and diluted EPS was based on the following for each period presented:

	Successor Company		Predecessor Company
(Dollars in thousands except per share data)	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Net loss attributable to common shareholders	$	5,267	$	(265	)	$	(63,821	)	$	(9,168	)
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding – basic		85,649,203		13,188,612			12,810,905			11,470,314
Incremental shares from assumed exercise of stock options		–		–			–			–
Weighted average number of shares outstanding – diluted		85,649,203		13,188,612			12,810,905			11,470,314

Earnings (loss) per common share – basic	$	0.06	$	(0.02	)	$	(4.98	)	$	(0.80	)
Earnings (loss) per common share – diluted	$	0.06	$	(0.02	)	$	(4.98	)	$	(0.80	)

Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share for each period presented are as follows:

	Successor Company		Predecessor Company
	Jan. 29, 2011 to Dec. 31, 2011		Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010		Year Ended Dec. 31, 2009

Anti-dilutive stock options		193,600		297,880		297,880		366,583
Anti-dilutive warrants		–		749,619		749,619		749,619

Comprehensive Income (Loss)

Comprehensive income (loss) represents the change in the Company’s equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). The Company’s other comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of unrealized gains and losses on certain investments in debt securities, and in prior years, derivatives that qualified as cash flow hedges to the extent that the hedge was effective.

The Company’s other comprehensive income (loss) was as follows for each period presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Unrealized gains (losses) on securities – available for sale	$	8,633		$	(528	)	$	(8,560	)	$	8,220
Unrealized gain (loss) on cash flow hedge		–			–			–			(3,151	)
Amortization of prior service cost on SERP		0			1			8			(46	)
Income tax effect		(3,367	)		204			3,300			(1,954	)
Other comprehensive income (loss)	$	5,266		$	(323	)	$	(5,252	)	$	3,069

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Segment Information

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company has determined that it has one significant operating segment, which is the providing of general commercial banking and financial services to individuals and businesses primarily in the southeastern region of the United States. The Company’s various products and services are those generally offered by community banks, and the allocation of its resources is based on the overall performance of the institution versus individual regions, branches or products and services.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the current year’s presentation. These reclassifications impacted certain noninterest income and noninterest expense items and had no effect on total assets, net income, or shareholders’ equity previously reported. The noninterest income and noninterest expense reclassifications were made in an effort to more clearly disclose certain elements in the Consolidated Statements of Operations.

Current Accounting Developments

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt even if its annual test date is before the issuance of the final standard, provided that the entity has not yet performed its 2011 annual impairment test or issued its financial statements. The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial condition or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, to amend FASB Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and will require them to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement format would include the traditional income statement and the components and total other comprehensive income as well as total comprehensive income. In the two statement approach, the first statement would be the traditional income statement which would immediately be followed by a separate statement which includes the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this update are to be applied retrospectively and are effective for the first interim or annual period beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, to amend ASC Topic 820, Fair Value Measurement. The amendments in this update result in common fair value measurement and disclosure requirements in GAAP and IFRS. Some of the amendments clarify the application of existing fair value measurement requirements and others change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Many of the previous fair value requirements are not changed by this standard. The amendments in this update are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In January 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2011-1, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, to amend FASB Accounting Standards Codification (“ASC”) Topic 320, Receivables. The amendments in this update temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, to amend ASC Topic 805, Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Management does not believe that adoption of this update will have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to amend ASC Topic 320, Receivables. The amendments in this update are intended to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In April 2010, the FASB issued ASU 2010-18, Effect of a Loan ModificationWhen the Loan Is Part of a Pool That Is Accounted for as a Single Asset, to amend ASC Topic 320, Receivables. The amendments in this update provide that for acquired troubled loans which meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments were effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In February 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, to amend ASC Topic 855, Subsequent Events. The amendments in this update removed the requirement to disclose the date through which subsequent events have been evaluated and became effective immediately upon issuance. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

2. CBF Investment

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to CBF for $181.1 million in cash. In connection with the CBF Investment, each Company shareholder as of January 27, 2011 received one CVR per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. Also, in connection with the CBF Investment, the Company’s Series A Preferred Stock and warrant to purchase shares of common stock issued by the Company to the U.S. Treasury in connection with TARP were repurchased.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Pursuant to the CBF Investment, shareholders as of January 27, 2011 received non-transferable rights to purchase a number of shares of the Company’s common stock proportional to the number of shares of common stock held by such holders on such date, at a purchase price equal to $2.55 per share, subject to certain limitations. The Company issued 1,613,165 shares of common stock in exchange for $4.1 million upon completion of the Rights Offering on March 11, 2011. Direct offering costs of $300 thousand were recorded as a reduction to the proceeds of the Rights Offering.

Also in connection with the closing of the CBF Investment, the Company amended its Supplemental Executive Retirement Plan to waive, with respect to unvested amounts only, any change in control provision and corresponding entitlement to change in control benefits that would otherwise be triggered by the CBF Investment or any subsequent transaction or series of transactions that result in an affiliate of CBF holding the Company’s outstanding voting securities or total voting power. On January 28, 2011, the Company received written waivers from each of the participants in the Executive Plan pursuant to which such executives waived the previously described change in control benefits under the SERP and the accelerated vesting of their outstanding unvested Company stock options in connection with the transactions contemplated by the CBF Investment. Cash payments made to participants in the Executive Plan upon change in control related to vested benefits totaled $1.1 million. The Supplemental Retirement Plan for Directors was not amended, and cash payments made to participants upon change in control pursuant to terms of this plan totaled $3.2 million.

Push-down accounting is required in purchase transactions that result in an entity becoming substantially wholly owned. Push-down accounting is required if 95% or more of the company has been acquired, permitted if 80% to 95% has been acquired, and prohibited if less than 80% of the company is acquired. The Company determined push-down accounting to be appropriate for this transaction, and as such, has applied the acquisition method of accounting due to CBF’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.

The following table summarizes the CBF Investment and the Company’s opening balance sheet:

	Successor Company
(Dollars in thousands)	Originally Reported as of Jan. 28, 2011			Measurement Period Adjustments			Revised as of Jan. 28, 2011

Fair value of assets acquired:
Cash and cash equivalents	$	208,255		$	–		$	208,255
Investment securities		225,336			–			225,336
Mortgage loans held for sale		2,569			–			2,569
Loans		1,135,164			(30,701	)		1,104,463
Goodwill		30,994			19,099			50,093
Other intangible assets		5,004			–			5,004
Deferred tax asset		55,391			11,118			66,509
Other assets		66,663			(613	)		66,050
Total assets acquired		1,729,376			(1,097	)		1,728,279
Fair value of liabilities assumed:
Deposits		1,351,467			–			1,351,467
Borrowings		123,837			–			123,837
Subordinated debt		19,392			475			19,867
Other liabilities		10,595			(1,572	)		9,023
Total liabilities assumed		1,505,291			(1,097	)		1,504,194
Net assets acquired		224,085			–			224,085
Less: non-controlling interest at fair value		(43,785	)		–			(43,785	)
		180,300			–			180,300
Underwriting and legal costs		750			–			750
Purchase price	$	181,050		$	–		$	181,050

The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available to make preliminary estimates of the fair value. While the Company believes that information provides a reasonable basis for estimating the fair values, it expects to obtain additional information and evidence during the measurement period (not to exceed one year from the acquisition date) that may result in changes to the estimated fair value amounts.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Measurement period adjustments reflected above were primarily due to (1) refinements to the acquisition date estimated fair values on certain acquired PCI loans (2) refinements to the acquisition date valuation of certain ORE properties based on subsequent selling prices, (3) refinements to the acquisition date valuation of a capital lease asset/obligation based on an updated appraisal of the leased asset, (4) refinements to the acquisition date valuation of off-balance sheet commitments to extend credit, (5) refinements to the acquisition date valuation of subordinated debentures, and (6) write-offs of miscellaneous other assets to properly reflect acquisition date fair value. The provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. Subsequent adjustments, if any, will be retrospectively reflected in future filings.

A summary and description of the assets, liabilities and non-controlling interests fair valued in conjunction with applying the acquisition method of accounting is as follows:

Cash and Cash Equivalents

The cash and cash equivalents, which include proceeds from the CBF Investment, held at acquisition date approximated fair value on that date and did not require a fair value adjustment.

Investment Securities

Investment securities are reported at fair value at acquisition date. To account for the CBF Investment, the difference between the fair value and par value became the new premium or discount for each security held by the Company. The fair value of investment securities is primarily based on values obtained from third parties pricing models which are based on recent trading activity for the same or similar securities. Two equity securities were valued at their respective stock market prices, and two corporate bonds were valued using an internal valuation model. Immediately before the acquisition, the investment portfolio had an amortized cost of $228.1 million and was in a net unrealized loss position of $2.8 million.

Loans

All loans in the loan portfolio were adjusted to estimated fair value at the CBF Investment date. Upon analyzing estimated credit losses as well as evaluating differences between contractual interest rates and market interest rates at acquisition, the Company recorded a loan fair value discount of $135.1 million. All acquired loans were considered to be PCI loans with the exception of certain consumer revolving lines of credit. Subsequent to the CBF Investment, PCI loans will be accounted for as described in Note 1 (Basis of Presentation and Significant Accounting Policies).

Goodwill and Other Intangible Assets

Goodwill represents the excess of purchase price over the fair value of acquired net assets. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.

Core Deposit Intangible

The estimated value of the CDI at acquisition date was $4.4 million. This amount represents the present value of the difference between a market participant’s cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the acquired deposit base and will be amortized on an accelerated method over an eight year period. Deposit accounts evaluated for the CDI were demand deposit accounts, money market accounts and savings accounts.

Trade Name Intangible

Trademarks, service marks and other registered marks (collectively referred to as the “Trade Name”) can have great significance to customers. The function of a mark is to indicate to the consumer the sources from which goods and services originate. The Trade Name considered to have value is Capital Bank. The Trade Name value of $604 thousand at acquisition date was based on the present value of the Company’s projected income multiplied by an assumed royalty rate. This intangible will be amortized on a straight-line basis over a three year period.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Other Assets

A majority of other assets held by the Company did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value. The most significant other asset impacted by the application of the acquisition method of accounting was the recognition of a net deferred tax asset of $66.5 million. The net deferred tax asset is primarily related to the recognition of differences between certain tax and book bases of assets and liabilities related to the acquisition method of accounting, including fair value adjustments discussed elsewhere in this section, along with federal and state net operating losses that the Company determined to be realizable as of the acquisition date. A valuation allowance is recorded for deferred tax assets, including net operating losses, if the Company determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deposits

Time deposits were not included in the CDI valuation. Instead, a separate valuation of term deposit liabilities was conducted due to the contractual time frame associated with these liabilities. Term deposits evaluated for acquisition accounting consisted of certificates of deposit (“CDs”), brokered deposits and CDs through the Certificate of Deposit Account Registry Services (“CDARS”). The fair value of these deposits was determined by first stratifying the deposit pool by maturity and calculating the interest rate for each maturity period. Then cash flows were projected by period and discounted to present value using current market interest rates.

The outstanding balance of CDs at acquisition date was $730.5 million, and the estimated fair value premium totaled $12.4 million. The outstanding balance of brokered deposits was $100.5 million, and the estimated fair value premium totaled $616 thousand. The outstanding balance of CDARS was $27.0 million, and the estimated fair value premium totaled $111 thousand. The Company will amortize these premiums into income as a reduction of interest expense on a level-yield basis over the weighted average term.

Borrowings

Included in borrowings are FHLB advances and structured repurchase agreements. Fair values for these borrowings were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments, current interest rates, and prepayment penalties. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash flows to the present value. The outstanding balance of FHLB advances and structured repurchase agreements at acquisition date was $66.0 million and $50.0 million, respectively, and the estimated fair value premiums on each totaled $1.8 million and $6.0 million, respectively. The Company will amortize the premium into income as a reduction of interest expense on a level-yield basis over the contractual term of each debt instrument.

Subordinated Debt

Included in subordinated debt are variable rate trust preferred securities issued by the Company and fixed rate subordinated debt issued as part of a private placement offering early in 2010. Fair values for the trust preferred securities and subordinated debt were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a market rate for comparable subordinated debt was used to discount the cash flows to the present value. The outstanding balance of trust preferred securities and subordinated debt at acquisition date was $30.0 million and $3.4 million, respectively, and the estimated fair value (discount)/premium on each totaled ($14.7) million and $211 thousand, respectively. The Company will accrete the discount as an increase to interest expense and will amortize the premium as a decrease to interest expense on a level-yield basis over the contractual term of each debt instrument.

Contingent Value Rights

In connection with the CBF Investment, each existing shareholder as of January 27, 2011 received one contingent value right per share that entitles the holder to receive up to $0.75 in cash per CVR at the end of a five-year period based on the credit performance of Old Capital Bank’s then existing loan portfolio. The Company assigned no value to the CVRs, which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments.

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Capital Bank Corporation – Notes to Consolidated Financial Statements

Non-controlling Interest

In determining the estimated fair value of the non-controlling interest, the Company utilized the closing market price of its common stock on the acquisition date of $3.40 and multiplied this stock price by the number of outstanding non-controlling shares at that date.

Transaction Expenses

As required by the CBF Investment, the Company incurred and reimbursed third party expenses of $750 thousand which were recorded as a reduction of proceeds received from the issuance of common shares to CBF.

There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized.

3. Investment Securities

Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:

	Predecessor Company
December 31, 2010	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Dollars in thousands)

Available for sale:
U.S. agency obligations	$	19,003	$	18	$	87	$	18,934
Municipal bonds		22,455		75		1,521		21,009
Mortgage-backed securities issued by GSEs		165,540		78		195		165,423
Non-agency mortgage-backed securities		6,790		39		242		6,587
Other securities		3,252		–		214		3,038
		217,040		210		2,259		214,991
Other investments		8,301		–		–		8,301
Total	$	225,341	$	210	$	2,259	$	223,292

Prior to the Bank Merger, credit related other than temporary impairments (“OTTI”) were recognized in net income (loss) and non-credit related impairments were recognized in other comprehensive income (loss) during the period the impairment was identified. Gross realized gains and losses and OTTI recognized in net income and other comprehensive income are reflected in the following table for each period presented:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Successor

Company

Predecessor

Company

(Dollars in thousands)

Jan. 29, 2011

to

Dec. 31, 2011

Jan. 1, 2011

to

Jan. 28, 2011

Year

Ended

Dec. 31, 2010

Year

Ended

Dec. 31, 2009

Gross realized gains

$

–

$

–

$

5,863

$

493

Gross realized losses

–

(8

)

(320

)

Net realized gains

–

5,855

173

OTTI recognized on non-agency mortgage-backed securities:

Total OTTI on non-agency mortgage-backed securities

–

(381

)

Non-credit portion recognized in other comprehensive income

–

381

Credit related OTTI on non-agency mortgage-backed securities recognized in income

–

OTTI recognized on corporate bonds (in other securities):

Total OTTI on corporate bonds

–

(701

)

Non-credit portion recognized in other comprehensive income

–

202

Credit related OTTI on corporate bonds recognized in income

–

(498

)

Total OTTI recognized in income

–

(498

)

Securities gains (losses), net

$

–

$

–

$

5,855

$

(325

)

Prior to the Bank Merger, on at least a quarterly basis, the Company completed an OTTI assessment of its investment portfolio. The Company considered many factors, including the severity and duration of the impairment and recent events specific to the issuer or industry, including any changes in credit ratings.

In the year ended December 31, 2009 (Predecessor), losses on 3 securities were determined to represent OTTI. The first of these investments was a private label mortgage security with a book value and unrealized loss of $699,000 and ($212,000), respectively, as of December 31, 2010 (Predecessor) compared with a book value and unrealized loss of $810,000 and ($381,000), respectively, as of December 31, 2009 (Predecessor). This impairment determination was based on the extent and duration of the unrealized loss as well as credit rating downgrades from rating agencies to below investment grade. Based on its analysis of expected cash flows prior to the Bank Merger, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was subordinated debt of a community bank with a book value and unrealized loss of $1.0 million and ($202,000), respectively, as of both December 31, 2010 and 2009 (Predecessor). Prior to the Bank Merger, management’s impairment determination was based on the extent of the unrealized loss as well as recent adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management expected to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third of these investments was an investment in trust preferred securities of a community bank with a par value of $1.0 million. This investment was determined to be credit impaired and was written down to estimated fair value with a $498,000 charge to income in the year ended December 31, 2009 (Predecessor).

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table summarizes the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position not recognized in earnings, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position, as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	Less than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for sale:
U.S. agency obligations	$	8,916	$	87	$	–	$	–	$	8,916	$	87
Municipal bonds		14,886		1,134		2,453		387		17,339		1,521
Mortgage-backed securities issued by GSEs		14,473		195		–		–		14,473		195
Non-agency mortgage-backed securities		–		–		4,183		242		4,183		242
Other securities		–		–		2,536		214		2,536		214
Total	$	38,275	$	1,416	$	9,172	$	843	$	47,447	$	2,259

As of December 31, 2010 (Predecessor), unrealized losses on the Company’s investments in non-agency mortgage-backed securities, or private label mortgage securities, were related to 4 different securities. These losses were due to a combination of changes in credit spreads and other market factors. These mortgage securities were not issued or guaranteed by an agency of the federal government but were instead issued by private financial institutions and therefore carry an element of credit risk. Prior to the Bank Merger, management closely monitored the performance of these securities and the underlying mortgages, which includes a detailed review of credit ratings, prepayment speeds, delinquency rates, default rates, current loan-to-values, geography of collateral, remaining terms, interest rates, loan types, etc. The Company engaged a third party expert to provide a quarterly “stress test” of each private label mortgage security through a model using assumptions to simulate certain credit events and recessionary conditions and their impact on the performance and expected cash flows of each mortgage security.

Unrealized losses on the Company’s investments in municipal bonds were related to 30 different securities as of December 31, 2010 (Predecessor). These losses were primarily related to concerns in the marketplace regarding credit quality of certain municipalities in light of the recent economic recession and high unemployment rates as well as expectations of future market interest rates. Prior to the Bank Merger, management monitored the underlying credit of these bonds by reviewing the financial strength of the issuers and the sources of taxes and other revenues available to service the debt. Unrealized losses on other securities related to an investment in subordinated debt of one corporate financial institution. Prior to the Bank Merger, management monitored the financial strength of this institution by reviewing its quarterly financial reports and considered its capital, liquidity and earnings in this review.

The securities in an unrealized loss position as of December 31, 2010 (Predecessor) not previously determined to have OTTI continued to perform and were expected to perform through maturity, and the issuers had not experienced significant adverse events that would call into question their ability to repay these debt obligations according to contractual terms. Further, because the Company did not intend to sell these investments and it was not more likely than not that the Company would be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company did not consider unrealized losses on such securities to represent OTTI as of December 31, 2010 (Predecessor).

Prior to the Bank Merger, the Company’s other investment securities primarily included an investment in Federal Home Loan Bank (“FHLB”) stock, which has no readily determinable market value and was recorded at cost. As of December 31, 2010 (Predecessor) the Company’s investment in FHLB stock totaled $7.7 million. Based on its evaluation prior to the Bank Merger, management concluded that the Company’s investment in FHLB stock was not impaired as of December 31, 2010 (Predecessor), and that ultimate recoverability of the par value of this investment was probable. During 2009 (Predecessor), the Company recorded an investment loss of $320,000 related to an equity investment in Silverton Bank, a correspondent financial institution that was closed by its regulators in 2009. The loss represented the full amount of the Company’s investment in Silverton Bank and was recorded as a reduction to noninterest income.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The amortized cost and estimated market values of available-for-sale debt securities as of December 31, 2010 (Predecessor) by final contractual maturities are summarized in the table below. Expected maturities differed from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Predecessor Company
December 31, 2010	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Debt securities:
Due within one year	$	300	$	301
Due after one year through five years		17,882		17,904
Due after five years through ten years		49,567		49,401
Due after ten years		147,541		145,647
Total debt securities		215,290		213,253
Equity securities		1,750		1,738
Total investment securities	$	217,040	$	214,991

As of December 31, 2010 (Predecessor), investment securities with book values totaling $68.2 million were pledged to secure public deposits, FHLB advances and other borrowings.

4. Loans

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The composition of the loan portfolio by loan classification as of December 31, 2010 (Predecessor) was as follows:

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Commercial real estate:
Construction and land development	$	350,587
Real estate – non-owner occupied		283,943
Real estate – owner occupied		170,470
Total commercial real estate		805,000
Consumer real estate:
Residential mortgage		173,777
Home equity lines		89,178
Total consumer real estate		262,955
Commercial and industrial		145,435
Consumer		6,163
Other loans		33,742
		1,253,295
Deferred loan fees and origination costs, net		1,184
	$	1,254,479

Loans pledged as collateral for certain borrowings totaled $341.5 million as of December 31, 2010 (Predecessor).

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Successor Company:

Purchased credit-impaired loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

(Dollars in thousands)		As of Jan. 28, 2011

Contractually required payments	$	1,318,702
Nonaccretable difference		(125,626	)
Cash flows expected to be collected at acquisition		1,193,076
Accretable yield		(163,630	)
Fair value of acquired loans at acquisition	$	1,029,446

Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:

(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011

Balance, beginning of period	$	163,630
New loans purchased		–
Accretion of income		(26,262	)
Reclassifications from nonaccretable difference		9,975
Merger of Old Capital Bank into Capital Bank, NA		(147,343	)
Balance, end of period	$	–

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the CBF Investment. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the CBF Investment. The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:

	•	the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;

	•	the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

	•	indices for PCI loans with variable rates of interest.

For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

5. Allowance for Loan Losses and Credit Quality

The following is a summary of activity in the allowance for loan losses for each period presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Balance at beginning of period, predecessor	$	–		$	36,061		$	26,081		$	14,795
Loans charged off		(339	)		(49	)		(49,420	)		(12,197	)
Recoveries of loans previously charged off		–			9			855			419
Net charge-offs		(339	)		(40	)		(48,565	)		(11,778	)
Provision for loan losses		1,450			40			58,545			23,064
Merger of Old Capital Bank into Capital Bank, NA		(1,111	)		–			–			–
Balance at the end of period, predecessor		–			36,061			36,061			26,081
Acquisition accounting adjustment		–			(36,061	)		–			–
Balance at end of period, successor	$	–		$	–		$	–		$	–

The allowance for credit losses includes the allowance for loan losses, detailed above, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheet. Due to the Bank Merger, the Company had no allowance for credit losses as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the reserve for unfunded lending commitments totaled $623,000.

The following is an analysis of the allowance for loan losses by portfolio segment in addition to the disaggregation of the allowance and outstanding loan balances by impairment method as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	CRE – Non-Owner Occupied			Consumer Real Estate			CRE – Owner Occupied			Commercial and Industrial			Consumer			Other			Total
(Dollars in thousands)

Allowance for loan losses:
Beginning balance	$	14,987		$	2,383		$	2,650		$	5,536		$	326		$	199		$	26,081
Charge-offs		(33,803	)		(3,923	)		(4,417	)		(6,639	)		(429	)		(209	)		(49,420	)
Recoveries		616			54			48			115			22			–			855
Provision		39,195			6,218			5,114			7,420			435			163			58,545
Ending balance – total	$	20,995		$	4,732		$	3,395		$	6,432		$	354		$	153		$	36,061
Ending balance – individually evaluated for impairment	$	212		$	87		$	139		$	89		$	2		$	–		$	529
Ending balance – collectively evaluated for impairment	$	20,783		$	4,645		$	3,256		$	6,343		$	352		$	153		$	35,532

Loans:
Ending balance – total	$	634,530		$	262,955		$	170,470		$	145,435		$	6,163		$	33,742		$	1,253,295
Ending balance – individually evaluated for impairment	$	57,227		$	3,879		$	8,613		$	6,013		$	6		$	781		$	76,519
Ending balance – collectively evaluated for impairment	$	577,303		$	259,076		$	161,857		$	139,422		$	6,157		$	32,961		$	1,176,776

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following is an analysis presenting impaired loan information by loan class as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	Recorded Investment		Unpaid Principal Balance		Related Allowance
(Dollars in thousands)

Impaired loans for which the full loss has been charged-off:
Commercial real estate:
Construction and land development	$	53,675	$	65,918	$	–
Commercial real estate – non-owner occupied		2,678		3,772		–
Consumer real estate:
Residential mortgage		3,222		4,436		–
Home equity lines		236		332		–
Commercial real estate – owner occupied		8,083		10,475		–
Commercial and industrial		5,466		6,128		–
Other loans		781		990		–
Total with no related allowance		74,141		92,051		–

Impaired loans with an allowance recorded:
Commercial real estate:
Construction and land development		874		874		212
Consumer real estate:
Residential mortgage		380		380		79
Home equity lines		41		41		8
Commercial real estate – owner occupied		530		530		139
Commercial and industrial		547		565		89
Consumer		6		6		2
Total with an allowance		2,378		2,396		529

Total impaired loans:
Commercial		72,634		89,252		440
Consumer		3,885		5,195		89
Total impaired loans	$	76,519	$	94,447	$	529

Prior to the Bank Merger, all TDRs were classified as individually impaired. The following table summarizes the Company’s recorded investment in TDRs as of December 31, 2010 (Predecessor):

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Nonperforming TDRs:
Commercial real estate	$	10,775
Consumer real estate		808
Commercial owner occupied		2,271
Commercial and industrial		106
Total nonperforming TDRs		13,960
Performing TDRs:
Commercial real estate		3,856
Consumer real estate		121
Commercial owner occupied		421
Commercial and industrial		65
Consumer		–
Total performing TDRs		4,463
Total TDRs	$	18,423

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

As of December 31, 2010 (Predecessor), there was no allowance for loan losses allocated to TDRs as all of these loans were charged down to estimated fair value.

Prior to the Bank Merger, to monitor and quantify credit risk in the loan portfolio, the Company used a risk rating system. The risk rating scale ranged from 1 to 9, where a higher rating represents higher credit risk and was selected on the financial strength and overall resources of the borrower. The nine risk rating categories can generally be described by the following groupings:

	•	Pass (risk rating 1–6) – These loans ranged from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.

	•	Special Mention (risk rating 7) – Loans in this category had potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may have resulted in deterioration of the repayment prospects for the asset or the institution’s credit position at some future date. They contain unfavorable characteristics and were generally undesirable. Loans in this category were currently protected by current sound net worth and paying capacity of the obligor or of the collateral pledged, if any, but were potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification.

	•	Substandard (risk rating 8) – Loans in this category were inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies were not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. A substandard loan normally had one or more well-defined weaknesses that could jeopardize repayment of the debt.

	•	Doubtful (risk rating 9) – For loans in this category, the borrower’s ability to continue repayment was highly unlikely. Full collection based on currently known facts, conditions, and values was highly questionable and improbable. The possibility of loss was extremely high, but because of certain important and specific reasonable pending factors, which work to the bank’s advantage and strengthen the asset in the near term, its classification as loss was deferred until its more exact status may be determined.

The following is an analysis of the Company’s credit risk profile on internally assigned risk ratings as of December 31, 2010 (Predecessor):

	Commercial Loans
December 31, 2010 (Predecessor Company)	Construction and Land Development		Non-Owner Occupied Real Estate		Owner Occupied Real Estate		Commercial and Industrial		Other		Total
(Dollars in thousands)

Pass	$	250,557	$	266,523	$	154,156	$	101,674	$	32,961	$	805,871
Special mention		20,178		12,505		2,287		20,488		–		55,458
Substandard		79,852		4,610		13,967		23,266		781		122,476
Doubtful		–		305		60		7		–		372
Total	$	350,587	$	283,943	$	170,470	$	145,435	$	33,742	$	984,177

	Consumer Loans
December 31, 2010 (Predecessor Company)	Residential Mortgage		Home Equity Lines		Other Consumer		Total
(Dollars in thousands)

Pass	$	162,002	$	85,000	$	5,803	$	252,805
Special mention		5,518		1,972		188		7,678
Substandard		6,138		2,110		172		8,420
Doubtful		119		96		–		215
Total	$	173,777	$	89,178	$	6,163	$	269,118

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following is an aging analysis of the Company’s portfolio by loan class as of December 31, 2010 (Predecessor):

	Predecessor Company
December 31, 2010	30–59 Days Past Due		60–89 Days Past Due		Over 90 Days Past Due and Accruing		Nonaccrual Loans		Current Loans		Total Loans
(Dollars in thousands)

Commercial real estate:
Construction and land development	$	6,166	$	204	$	–	$	50,693	$	293,524	$	350,587
Real estate – non-owner occupied		509		–		–		2,678		280,756		283,943
Real estate – owner occupied		3,165		–		–		8,198		159,107		170,470
Consumer real estate:
Residential mortgage		2,213		329		–		3,481		167,754		173,777
Home equity lines		498		109		–		277		88,294		89,178
Commercial and industrial		175		146		–		5,830		139,284		145,435
Consumer		4		4		–		6		6,149		6,163
Other loans		–		–		–		781		32,961		33,742
Total	$	12,730	$	792	$	–	$	71,944	$	1,167,829	$	1,253,295

For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), no interest income was recognized on loans while in nonaccrual status, including cash received for interest on these loans. Prior to the Bank Merger, cumulative interest payments collected on nonaccrual loans were applied as a reduction to the principal balance. Cumulative interest payments collected on nonaccrual loans totaled $837,000 as of December 31, 2010 (Predecessor).

6. Premises and Equipment

Due to the Bank Merger, the Company reported no premises and equipment on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Premises and equipment as of December 31, 2010 (Predecessor):

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Land	$	6,795
Buildings and leasehold improvements		17,927
Furniture and equipment		19,163
Automobiles		265
Construction in progress		411
		44,561
Less accumulated depreciation and amortization		(19,527	)
	$	25,034

Depreciation expense for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) was $1.4 million, $240 thousand, $2.6 million, and $2.9 million, respectively.

7. Goodwill and Other Intangible Assets

Due to the Bank Merger, the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The changes in carrying amounts of goodwill and other intangible assets for each period presented were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Predecessor Company	Goodwill				Other Intangible Assets
(Dollars in thousands)					Gross			Accumulated Amortization			Net

Balance at January 1, 2009		$	–		$	8,414		$	(4,557	)	$	3,857

Amortization expense			–			–			(1,146	)		(1,146	)
Balance at December 31, 2009			–			8,414			(5,703	)		2,711

Amortization expense			–			–			(937	)		(937	)
Balance at December 31, 2010			–			8,414			(6,640	)		1,774

Amortization expense			–			–			(62	)		(62	)
Balance at January 28, 2011, predecessor		$	–		$	8,414		$	(6,702	)	$	1,712


Successor Company		Goodwill			Other Intangible Assets
(Dollars in thousands)					Gross			Accumulated Amortization			Net

Acquisition accounting adjustment		$	–		$	(8,414)		$	6,702		$	(1,712)

Balance at January 29, 2011, successor			50,093			5,004			–			5,004

Amortization expense			–			–			(478	)		(478	)
Merger of Old Capital Bank into Capital Bank, NA			(50,093	)		(5,004	)		478			(4,526	)
Balance at December 31, 2011		$	–		$	–		$	–		$	–

Goodwill represents the excess of the purchase price over the fair value of acquired net assets in connection with the CBF Investment on January 28, 2011. This acquisition was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill associated with the acquisition is deductible for tax purposes. Other intangible assets identified as part of the valuation of the CBF Investment were Core Deposit Intangibles (“CDI”) and the Trade Name Intangible. All of the identified intangible assets are amortized as noninterest expense over their estimated useful lives.

Other intangible assets were amortized over periods of up to ten years using an accelerated method approximating the period of economic benefits received. Due to the Bank Merger, the Company reported no intangible assets on its Consolidated Balance Sheet as of December 31, 2011 (Successor), and thus will record no amortization expense in future periods.

Prior to the Bank Merger, Goodwill was reviewed for potential impairment at least annually at the reporting unit level. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company’s annual goodwill impairment evaluation in the years ended December 31, 2010 and 2009 (Predecessor), respectively, did not result in a goodwill impairment charge.

Core deposit intangibles were evaluated for impairment if events and circumstances indicate a potential for impairment. Such an evaluation of other intangible assets was based on undiscounted cash flow projections. No impairment charges were recorded for other intangible assets in the years ended December 31, 2010 and 2009 (Predecessor), respectively.

As of December 31, 2011 (Successor), the Company reported no goodwill or other intangible assets on its Consolidated Balance Sheet, thus no impairment evaluations were required in the successor period.

8. Deposits

Due to the Bank Merger, the Company reported no deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). As of December 31, 2010 (Predecessor), the scheduled maturities of time deposits were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
December 31, 2010		Amount		Weighted Average Rate
(Dollars in thousands)

2011		$	234,572		1.06	%
2012			311,121		2.02
2013			257,327		1.76
2014			11,698		2.69
2015			58,568		2.72
Thereafter			44		2.64
		$	873,330		1.74	%

Time deposits of $100,000 or greater totaled $327.5 million as of December 31, 2010 (Predecessor) while brokered deposits (excluding reciprocal CDARS deposits of $29.2 million) totaled $110.5 million as of December 31, 2010 (Predecessor). Deposit overdrafts of $71,000 were included in total loans as of December 31, 2010 (Predecessor).

In the normal course of business, prior to the Bank Merger, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, may have been deposit customers.

9. Borrowings

Due to the Bank Merger, the Company reported no outstanding borrowings on its Consolidated Balance Sheet as of December 31, 2011 (Successor). The following is an analysis of securities sold under agreements to repurchase as of December 31, 2010 (Predecessor):

Predecessor Company

December 31, 2010

End of Period

Daily Average Balance

(Dollars in thousands)

Balance

Weighted

Average Rate

Balance

Interest

Rate

Maximum

Outstanding at

Any Month End

Securities sold under agreements to repurchase

$

–

%

$

1,564

0.32

%

$

5,026

Interest expense on federal funds purchased totaled $0, $0, $0, and $2,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively. Interest expense on securities sold under agreements to repurchase totaled $0, $0, $5,000, and $21,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

The following table presents information regarding the Company’s outstanding borrowings as of December 31, 2010 (Predecessor):

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

FHLB advances without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 ranging from 1.86% to 5.50%; maturity dates on those advances ranging from January 26, 2011 to January 20, 2015	$	41,000

FHLB advance with next quarterly call option on February 22, 2011; fixed interest rate of 3.63%; matures on August 21, 2017		10,000

FHLB overnight borrowings; interest rate of 0.47% as of December 31, 2010, subject to change daily		20,000

Structured repurchase agreements without call options or where call options expired prior to December 31, 2010; fixed interest rates on advances outstanding as of December 31, 2010 of 3.72% and 3.79%; agreements mature on December 18, 2017		20,000

Structured repurchase agreements with various forms of call options remaining; fixed interest rates ranging from 3.56% to 4.75%; maturity dates ranging from November 6, 2016 to March 22, 2019		30,000

Federal Reserve Bank primary credit facility; current interest rate of 0.75% as of December 31, 2010		–
	$	121,000

Prior to the Bank Merger, advances from the FHLB totaled $51.0 million and had a weighted average rate of 4.22% as of December 31, 2010 (Predecessor). In addition, overnight borrowings on the Company’s credit line at the FHLB totaled $20.0 million as of December 31, 2010 (Predecessor). These fixed rate advances as well as the Company’s credit line with the FHLB were collateralized by eligible 1–4 family mortgages, home equity loans and commercial loans totaling $216.3 million as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $20.7 million of available borrowing capacity with the FHLB.

Outstanding structured repurchase agreements totaled $50.0 million as of December 31, 2010 (Predecessor). These repurchase agreements had a weighted average rate of 4.06% as of December 31, 2010 (Predecessor) and were collateralized by certain U.S. agency and mortgage-backed securities with a book value of $61.2 million as of December 31, 2010 (Predecessor).

Prior to the Bank Merger, the Company maintained a credit line at the FRB discount window that was used for short-term funding needs and as an additional source of liquidity. Primary credit borrowings as well as the Company’s credit line at the discount window were collateralized by eligible commercial construction as well as commercial and industrial loans totaling $125.2 as of December 31, 2010 (Predecessor). As of December 31, 2010 (Predecessor), the Company had $77.0 million of available borrowing capacity with the FRB.

As of December 31, 2010 (Predecessor), the scheduled maturities of borrowings were as follows:

	Predecessor Company
December 31, 2010		Balance		Weighted Average Rate
(Dollars in thousands)

2011		$	51,000		3.21	%
2012			–		–
2013			3,000		1.86
2014			3,000		2.43
2015			4,000		2.92
Thereafter			60,000		3.99
		$	121,000		3.54	%

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

10. Subordinated Debentures

Capital Bank Statutory Trusts

The Company formed Capital Bank Statutory Trust I, Capital Bank Statutory Trust II and Capital Bank Statutory Trust III (the “Trusts”) in June 2003, December 2003 and December 2005, respectively. Each issued $10 million of its floating-rate capital securities (the “trust preferred securities”), with a liquidation amount of $1,000 per capital security, in pooled offerings of trust preferred securities. The Trusts sold their common securities to the Company for an aggregate of $900,000, resulting in total proceeds from each offering equal to $10.3 million, or $30.9 million in aggregate. The Trusts then used these proceeds to purchase $30.9 million in principal amount of the Company’s Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”). Following payment by the Company of a placement fee and other expenses of the offering, the Company’s net proceeds from the offerings aggregated $30.0 million.

The trust preferred securities each have 30-year maturities and became redeemable after five years by the Company with certain exceptions. Prior to the redemption date, the trust preferred securities may be redeemed at the option of the Company after the occurrence of certain events, including without limitation events that would have a negative tax effect on the Company or the Trusts, would cause the trust preferred securities to no longer qualify as Tier 1 capital, or would result in the Trusts being treated as an investment company. The Trusts’ ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the Debentures. The Company’s obligation under the Debentures constitutes a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities.

The securities associated with each trust are floating rate, based on 90-day LIBOR, and adjust quarterly. Trust I securities adjust at LIBOR + 3.10%, Trust II securities adjust at LIBOR + 2.85% and Trust III securities adjust at LIBOR +1.40%.

The Debentures, which are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations of the Company, are the sole assets of the Trusts, and the Company’s payment under the Debentures is the sole source of revenue for the Trusts.

The assets and liabilities of the Trusts are not consolidated into the consolidated financial statements of the Company. Interest on the Debentures is included in the Consolidated Statements of Operations as interest expense. The Debentures are recorded in subordinated debentures on the Consolidated Balance Sheets. For regulatory purposes, the $30 million of trust preferred securities qualifies as Tier 1 capital, subject to certain limitations, or Tier 2 capital in accordance with regulatory reporting requirements. The Company recorded interest expense on the Debentures of $1.0 million, $74 thousand, $865 thousand, and $1.1 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

Private Placement Offering of Investment Units

On March 18, 2010, the Company sold 849 investment units (“Units”) to certain accredited investors for gross proceeds of $8.5 million. Each Unit was priced at $10,000 and consisted of a $3,996.90 subordinated promissory note and a number of shares of the Company’s common stock valued at $6,003.10. As a result of the sale of the Units, the Company sold $3.4 million in aggregate principal amount of subordinated promissory notes due March 18, 2020 (the “Notes”) and 1,468,770 shares of the Company’s common stock valued at $5.1 million. The Notes are recorded in subordinated debentures on the Condensed Consolidated Balance Sheets. The Company may prepay the Notes at any time after March 18, 2015 subject to regulatory approval and compliance with applicable law. The Company’s obligation to repay the Notes is subordinate to all indebtedness owed by the Company to its current and future secured creditors and general creditors and certain other financial obligations of the Company.

The Company is obligated to pay annual interest on the Notes at 10% payable in quarterly installments. The Company recorded interest expense on the Notes of $297,000, $28,000 and $266,000 for the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the year ended December 31, 2010 (Predecessor), respectively.

11. Leases

Due to the Bank Merger, the company had no operating lease obligations as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company had non-cancelable operating leases for its corporate office, certain branch locations and corporate aircraft that expired at various times through 2036. Certain of the leases contained escalating rent clauses, for which the Company recognized rent expense on a straight-line basis. The Company subleased certain office space and the corporate aircraft to outside parties. Future minimum lease payments under the leases and sublease receipts for years subsequent to December 31, 2010 (Predecessor) were as follows:

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
December 31, 2010	Lease Payments		Sublease Receipts
(Dollars in thousands)

2011	$	4,112	$	383
2012		4,058		295
2013		3,919		242
2014		3,817		240
2015		3,623		247
Thereafter		29,747		62
	$	49,276	$	1,469

Rent expense under operating leases was $1.9 million, $343 thousand, $3.8 million and $3.3 million for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), respectively.

12. Related Party Transactions

Due to the Bank Merger, the Company reported no loans or deposits on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, in the normal course of business, certain directors and executive officers of the Company, including their immediate families and companies in which they have an interest, were borrowers. Total loans to such groups and activity for each period presented is summarized as follows:

Predecessor Company		2011
(Dollars in thousands)

Balance as of January 1, 2011	$	86,970
Advances		55
Repayments		(11,150	)
Reconstitution of Board of Directors in connection with CBF Investment		(63,709	)
Balance as of January 28, 2011	$	12,166

Successor Company		2011
(Dollars in thousands)

Advances	$	487
Repayments		(744	)
Merger of Old Capital Bank into Capital Bank, NA		(11,909	)
Balance as of December 31, 2011	$	–

These transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company. Prior to the Bank Merger, certain deposits were held by related parties, and the rates and terms of these accounts are consistent with those of non-related parties.

13. Employee Benefit Plans

401(k) Retirement Plan

The Company maintains the Capital Bank 401(k) Retirement Plan (the “Plan”) for the benefit of its employees, which includes provisions for employee contributions, subject to limitation under the Internal Revenue Code, and discretionary matching contributions by the Company. The Plan provides that employee’s contributions are 100% vested at all times, and the Company’s matching contributions vest 20% after the second year of service, an additional 20% after the third and fourth years of service and the remaining 40% after the fifth year of service. Through May 31, 2009, the Company matched 100% of employee contributions up to 6% of an employee’s salary. Effective June 1, 2009, the Company suspended its discretionary matching contributions to the Plan. Aggregate matching contributions, which are recorded in salaries and employee benefits expense on the Consolidated Statements of Operations, for the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) were $0, $0, $0, and $387,000, respectively.

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Supplemental Retirement Plans

In May 2005, the Company established two supplemental retirement plans for the benefit of certain executive officers and certain directors of the Company. The Capital Bank Defined Benefit Supplemental Executive Retirement Plan (“Executive Plan”) covers the Company’s chief executive officer and three other members of executive management. Under the Executive Plan, the participants were to receive a supplemental retirement benefit equal to a targeted percentage of the participant’s average annual salary during the last three years of employment. Under the Executive Plan, benefits vest over an eight-year period with the first 20% vesting after four years of service and 20% vesting annually thereafter. The Capital Bank Supplemental Retirement Plan for Directors (“Director Plan”) covered certain directors and provided for a fixed annual retirement benefit to be paid for a number of years equal to the director’s total years of service, up to a maximum of ten years. The Executive Plan was terminated in connection with the closing of the CBF Investment. As of December 31, 2011 (Successor), no current or former directors were participating in the Director Plan, and it is not anticipated that any current or future directors will be permitted to participate in the plan.

For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recognized $106,000, $18,000, $255,000, and $236,000, respectively, of expense related to the Executive Plan; and $0, $17,000, $238,000, and $353,000, respectively, of expense related to the Director Plan. Prior to the Bank Merger, the obligations associated with the two plans were included in other liabilities on the Consolidated Balance Sheet and totaled $1.0 million (Executive Plan) and $1.6 million (Director Plan) as of December 31, 2010 (Predecessor). On January 28, 2011, cash benefit payments were made to participants from both the Executive Plan and Director Plan in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details on these transactions.

14. Stock-Based Compensation

Stock Options

Pursuant to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”), the Company had a stock option plan providing for the issuance of up to 1,150,000 options to purchase shares of the Company’s stock to officers and directors. As of December 31, 2011 (Successor), options for 193,600 shares of common stock were outstanding and options for 698,859 shares of common stock remained available for future issuance; however, pursuant to the Equity Incentive Plan, no option may be granted after February 21, 2012 and the Equity Incentive Plan has expired. In addition, there were 566,071 options which were assumed under various plans from previously acquired financial institutions, none of which remain outstanding. Grants of options were made by the Board of Directors or the Compensation/Human Resources Committee of the Board. All grants were made with an exercise price at no less than fair market value on the date of grant and must be exercised no later than 10 years from the date of grant.

A summary of the activity of the Company’s stock option plans, including the weighted average exercise price (“WAEP”), for each period is presented below:

	Successor Company					Predecessor Company
	Period of Jan. 29 to Dec. 31, 2011					Period of Jan. 1 to Jan. 28, 2011				Year Ended Dec. 31, 2010					Year Ended Dec. 31, 2009
	Shares			WAEP		Shares		WAEP		Shares			WAEP		Shares			WAEP

Outstanding options, beginning of period		297,880		$	12.11		297,880	$	12.11		366,583		$	11.76		377,083		$	11.71
Granted		–			–		–		–		19,250			4.38		–			–
Exercised		–			–		–		–		–			–		–			–
Forfeited and expired		(104,280	)		10.26		–		–		(87,953	)		8.93		(10,500	)		10.09
Outstanding options, end of period		193,600		$	13.11		297,880	$	12.11		297,880		$	12.11		366,583		$	11.76

Options exercisable at end of period		180,000		$	13.59		226,430	$	13.53		226,430		$	13.53		285,983		$	12.33

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

The following table summarizes information about the Company’s stock options as of December 31, 2011 (Successor):

Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life in Years		Number Exercisable		Intrinsic Value

$3.85 – $6.00		59,850		7.39		47,850	$	–
$6.01 – $9.00		–		–		–		–
$9.01 – $12.00		2,500		6.15		2,500		–
$12.01 – $15.00		16,000		5.76		14,400		–
$15.01 – $18.00		64,000		3.10		64,000		–
$18.01 – $18.37		51,250		2.99		51,250		–
		193,600		4.66		180,000	$	–

The fair values of options granted are estimated on the date of the grants using the Black-Scholes option pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. The expected life of the options used in this calculation is the period the options are expected to be outstanding. Expected stock price volatility is based on the historical volatility of the Company’s common stock for a period approximating the expected life; the expected dividend yield is based on the Company’s historical annual dividend payout; and the risk-free rate is based on the implied yield available on U.S. Treasury issues. The following weighted-average assumptions were used in determining fair value for options granted for each period presented:

Assumptions	2011	2010	2009

Dividend yield	–	–	–
Expected volatility	–	33.0%	–
Risk-free interest rate	–	3.1%	–
Expected life	–	7 years	–

The weighted average fair value of options granted for the year ended December 31, 2010 (Predecessor) was $1.80. There were no options granted in the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) or the year ended December 31, 2009 (Predecessor).

For the period from January 29, 2011 to December 31, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recorded total compensation expense related to stock options of $78,000, $5,000, $54,000 and $50,000, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details.

Restricted Stock

Pursuant to the Equity Incentive Plan, the Board of Directors may grant restricted stock to certain employees and Board members at its discretion. There have been no restricted stock grants since 2008, and the Equity Incentive Plan expired on February 21, 2012. Nonvested shares were subject to forfeiture if employment was terminated prior to the vesting dates. The Company expensed the cost of the stock awards, determined to be the fair value of the shares at the date of grant, ratably over the period of the vesting.

Nonvested restricted stock activity for the year ended December 31, 2011 is summarized in the following table:

	Shares			Weighted Avg. Grant Date Fair Value

Nonvested at beginning of period		11,700		$	6.00
Granted		–			–
Vested		(11,700	)		6.00
Nonvested at end of period		–		$	–

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Total compensation expense related to these restricted stock awards for the period of January 29 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor) totaled $68,000, $2,000, $106,000 and $109,000, respectively. On January 28, 2011, vesting was accelerated on certain outstanding nonvested restricted shares in connection with the controlling investment in the Company made by CBF. See Note 2 (CBF Investment) for more details.

Deferred Compensation for Non-employee Directors

The Company administered the Capital Bank Corporation Deferred Compensation Plan for Outside Directors (“Deferred Compensation Plan”). Eligible directors may have elected to participate in the Deferred Compensation Plan by deferring all or part of their directors’ fees for at least one calendar year, in exchange for common stock of the Company. If a director did not elect to defer all or part of his fees, then he was not considered a participant in the Deferred Compensation Plan. The amount deferred was equal to 125 percent of total director fees. Each participant was fully vested in his account balance. The Deferred Compensation Plan provides for payment of share units in shares of common stock of the Company after the participant ceased to serve as a director for any reason.

Upon closing of the CBF Investment, the Deferred Compensation Plan was terminated and all phantom shares in the Plan were distributed to the participants. For the period of January 29, 2011 to December 31, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the years ended December 31, 2010 and 2009 (Predecessor), the Company recognized stock-based compensation expense of $0, $35 thousand, $576 thousand and $543 thousand, respectively, related to the Deferred Compensation Plan.

15. Income Taxes

Income taxes charged to operations consisted of the following components for each period presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011		Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Current income tax expense (benefit)	$	(3,134	)		–	$	(272	)	$	(2,305	)
Deferred income tax expense (benefit)		3,415			–		15,396			(4,708	)
Total income tax expense (benefit)	$	281			–	$	15,124		$	(7,013	)

A reconciliation of the difference between income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate for each period presented is as follows:

	Successor Company			Predecessor Company
Amount Computed	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009
(Dollars in thousands)

Tax expense (benefit) at statutory rate on net income (loss) before taxes	$	1,942		$	203		$	(15,756	)	$	(4,702	)
State taxes, net of federal benefit		100			41			(1,894	)		(558	)
Increase (reduction) in taxes resulting from:
Valuation allowance on deferred tax asset		–			(187	)		31,821			–
Tax exempt interest		(296	)		(57	)		(945	)		(1,184	)
Nontaxable BOLI income		–			(3	)		(238	)		(622	)
Taxable income on BOLI surrender		–			–			1,981			–
Equity income from investment in Capital Bank, NA		(1,416	)		–			–			–
Other, net		(49	)		3			155			53
	$	281		$	–		$	15,124		$	(7,013	)

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Successor Company			Predecessor Company
Percent of Pretax Income (Loss)	Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010			Year Ended Dec. 31, 2009

Tax expense (benefit) at statutory rate on net income (loss) before taxes		35.00	%		34.00	%		34.00	%		34.00	%
State taxes, net of federal benefit		1.81			6.90			4.09			4.03
Increase (reduction) in taxes resulting from:
Valuation allowance on deferred tax asset		–			(31.33	)		(68.67	)		–
Tax exempt interest		(5.34	)		(9.58	)		2.04			8.56
Nontaxable BOLI income		–			(0.58	)		0.51			4.50
Taxable income on BOLI surrender		–			–			(4.27	)		–
Equity income from investment in Capital Bank, NA		(25.52	)		–			(4.27	)		–
Other, net		(0.88	)		0.59			(0.34	)		(0.38	)
		5.07	%		–			(32.64	)%		50.71	%

Significant components of deferred tax assets and liabilities as of December 31, 2011 (Successor) and 2010 (Predecessor) were as follows:

	Successor Company			Predecessor Company
(Dollars in thousands)	Dec. 31, 2011			Dec. 31, 2010

Deferred tax assets:
Allowance for loan losses	$	–		$	14,143
ORE valuation adjustments		–			666
Intangible assets		–			1,808
Net unrealized loss on investment securities		–			790
Deferred compensation		–			2,632
Deferred rent		–			335
Nonaccrual interest		–			323
Deferred gain on sale-leaseback		–			318
Stock offering costs		–			–
Net operating loss carryforwards		–			11,587
AMT credit carryforward		–			1,831
Other		–			304
Gross deferred tax assets before valuation allowance		–			34,737
Less: valuation allowance		–			(31,821	)
Gross deferred tax assets after valuation allowance		–			2,916

Deferred tax liabilities:
Purchase accounting adjustment		(5,215	)		–
Depreciation		–			1,202
FHLB stock dividends		–			343
Net unrealized gain on investment securities		–			–
Deferred loan origination costs		–			719
Prepaid expenses		–			515
Other		–			137
Gross deferred tax liabilities		(5,215	)		2,916
Net deferred tax asset	$	(5,215	)	$	–

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

As of December 31, 2011 (Successor) and 2010 (Predecessor), the Company had net deferred tax liabilities and assets before valuation allowance of $5.2 million and $31.8 million, respectively. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Due to a cumulative three-year, pre-tax loss position, significant net operating losses in 2010 (Predecessor), and ongoing stress on the Company’s financial performance from elevated credit losses, the Company fully reserved its deferred tax assets as of December 31, 2010 (Predecessor). A cumulative loss position makes it more difficult for management to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.

The Company and its subsidiaries are subject to U.S. federal income tax as well as North Carolina income tax. The Company has concluded all U.S. federal income tax matters for years through 2008.

16. Derivative Instruments

Due to the Bank Merger, the Company had no derivative instruments as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company entered into interest rate lock commitments with customers and commitments to sell mortgages to investors. The period of time between the issuance of a mortgage loan commitment and the closing and sale of the mortgage loan was generally less than 60 days. Interest rate lock commitments and forward loan sale commitments represented derivative instruments which were carried at fair value. These derivative instruments did not qualify for hedge accounting. The fair values of the Company’s interest rate lock commitments and forward loan sales commitments were based on current secondary market pricing and were included on the Condensed Consolidated Balance Sheets in mortgage loans held for sale and on the Condensed Consolidated Statements of Operations in mortgage origination and other loan fees.

As of December 31, 2010 (Predecessor), the Company had $10.3 million of commitments outstanding to originate mortgage loans held for sale at fixed rates and $17.3 million of forward commitments under best efforts contracts to sell mortgages to four different investors. The fair value of the interest rate lock commitments and forward loan sales commitments were not considered material as of December 31, 2010 (Predecessor). Thus, there was no impact to the Condensed Consolidated Statements of Operations at that date.

17. Commitments, Contingencies and Concentrations of Credit Risk

Due to the Bank Merger, the Company had no outstanding commitments or contingencies as of December 31, 2011 (Successor). Prior to the Bank Merger, the Company was party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments were comprised of various types of commitments to extend credit, including unused lines of credit and overdraft lines, as well as standby letters of credit. These instruments involved, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.

Prior to the Bank Merger, the Company’s exposure to credit loss in the event of nonperformance by the other party was represented by the contractual amount of those instruments. The Company used the same credit policies in making these commitments as it had for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit was based on management’s credit evaluation of the borrower. Collateral held varied but included trade accounts receivable, property, plant and equipment, and income-producing commercial properties. Since many unused lines of credit expired without being drawn upon, the total commitment amounts did not necessarily represent future cash requirements.

The Company’s exposure to off-balance-sheet credit risk as of December 31, 2010 (Predecessor) was as follows:

	Predecessor Company
(Dollars in thousands)	Dec. 31, 2010

Commitments to extend credit	$	175,318
Standby letters of credit		10,285
Total commitments	$	185,603

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Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of December 31, 2011 (Successor). Prior to the Bank Merger, the majority of the Company’s lending was concentrated in Alamance, Buncombe, Catawba, Chatham, Cumberland, Granville, Johnston, Lee and Wake counties in North Carolina, and economic conditions in those and surrounding counties significantly impacted the ability of borrowers to repay their loans. As of December 31, 2010 (Predecessor), $1.07 billion (85%) of the total loan portfolio was secured by real estate, including commercial owner occupied loans. The credits in the loan portfolio were diversified, and the Company did not have significant concentrations to any one credit relationship.

Further, the Company had limited partnership investments in two related private investment funds which totaled $1.8 million as of December 31, 2010 (Predecessor). These investments were recorded on the cost basis and were included in other assets on the Condensed Consolidated Balance Sheet. Remaining capital commitments to these funds totaled $1.6 million as of December 31, 2010 (Predecessor).

18. Fair Value

Fair Value Measurements

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Prior to the Bank Merger, investment securities, available for sale, were recorded at fair value on a recurring basis. Additionally, prior to the Bank Merger, the Company may have been required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, impaired loans and certain other assets. These nonrecurring fair value adjustments typically involved application of lower of cost or market accounting or write-downs of individual assets. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

~~Investment~~Prior to the Bank Merger, investment securities, available for sale, ~~are~~were recorded at fair value on a recurring basis. Fair value measurement iswas based upon quoted prices, if available. If quoted prices ~~are~~were not available, fair values ~~are~~were measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities ~~include~~included those traded on an active exchange, U.S. Treasury securities that ~~are~~were traded by dealers or brokers in active over-the-counter markets, and money market funds. Level 2 securities ~~include~~included mortgage-backed securities issued by government sponsored entities and corporate entities as well as municipal bonds. Securities classified as Level 3 ~~include~~included corporate debt instruments that ~~are~~were not actively traded and where certain assumptions ~~are~~were used to calculate fair value.

Mortgage loans held for sale ~~are~~were carried at the lower of cost or estimated fair value. The fair values of mortgage loans held for sale ~~are~~were based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustment for mortgage loans held for sale iswere classified as nonrecurring Level 2.

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~~Index~~

~~Capital~~Prior to the Bank ~~Corporation – Notes to Consolidated Financial Statements~~

~~Loans are~~Merger, loans were not recorded at fair value on a recurring basis. However, certain loans ~~are~~were determined to be impaired, and those loans ~~are~~were charged down to estimated fair value. The fair value of impaired loans that ~~are~~were collateral dependent iswas based on collateral value. For impaired loans that ~~are~~were not collateral dependent, estimated value iswas based on either an observable market price, if available, or the present value of expected future cash flows. Those impaired loans not requiring a charge-off represent loans for which the estimated fair value exceeds the recorded investments in such loans. When the fair value of an impaired loan iswas based on an observable market price or a current appraised value with no adjustments, the Company ~~records~~recorded the impaired loan as nonrecurring Level 2. When an appraised value iswas not available, or management ~~determines~~determined the fair value of the collateral iswas further impaired below the appraised value, and there iswas no observable market price, the Company ~~classifies~~classified the impaired loan as nonrecurring Level 3.

~~Other~~Prior to the Bank Merger, other real estate, which includes foreclosed assets, iswas adjusted to fair value upon transfer of loans and premises to other real estate. Subsequently, other real estate iswas carried at the lower of carrying value or fair value. Fair value iswas based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral iswas based on an observable market price or a current appraised value, the Company ~~records~~recorded other real estate as nonrecurring Level 2. When an appraised value iswas not available, or management determines the fair value of the collateral iswas further impaired below the appraised value, and there iswas no observable market price, the Company ~~classifies~~classified other real estate as nonrecurring Level 3.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 ~~and 2009~~(Predecessor) are summarized below:

Quoted Prices in
Active Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Total
(Dollars in thousands)

December 31, 2010
Investment securities – available for sale:
U.S. agency obligations $ – $ 18,934 $ – $ 18,934
Municipal bonds – 21,009 – 21,009
Mortgage-backed securities issued by GSEs – 165,423 – 165,423
Non-agency mortgage-backed securities – 6,587 – 6,587
Other securities 1,738 – 1,300 3,038
Total $ 1,738 $ 211,953 $ 1,300 $ 214,991

Quoted Prices in
Active Markets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Total
(Dollars in thousands)

December 31, 2009
Investment securities – available for sale:
U.S. agency obligations $ – $ 1,029 $ – $ 1,029
Municipal bonds – 72,894 – 72,894
Mortgage-backed securities issued by GSEs – 151,658 – 151,658
Non-agency mortgage-backed securities – 7,797 – 7,797
Other securities 748 – 1,300 2,048
Total $ 748 $ 233,378 $ 1,300 $ 235,426

- 91118 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

	Predecessor Company
December 31, 2010	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
(Dollars in thousands)

Investment securities – available for sale:
U.S. agency obligations	$	–	$	18,934	$	–	$	18,934
Municipal bonds		–		21,009		–		21,009
Mortgage-backed securities issued by GSEs		–		165,423		–		165,423
Non-agency mortgage-backed securities		–		6,587		–		6,587
Other securities		1,738		–		1,300		3,038
Total	$	1,738	$	211,953	$	1,300	$	214,991

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for ~~year ended December 31, 2010:~~

each period presented:

		Level 3 Securities	Successor Company			Predecessor Company
(Dollars in thousands)			Jan. 29, 2011 to Dec. 31, 2011			Jan. 1, 2011 to Jan. 28, 2011			Year Ended Dec. 31, 2010		Year Ended Dec. 31, 2009

Balance at beginning of period	$	1,300	$	1,107		$	1,300		$	1,300	$	2,000
Total unrealized losses included in:
Net income (loss)		–		–			–			–		(498	)
Other comprehensive income (loss)		–		–			(193	)		–		(202	)
Purchases, sales and issuances, net		–		–			–			–		–
Transfers in and (out) of Level 3		–
Transfers into Level 3				–			–			–		–
Merger of Old Capital Bank into Capital Bank, NA				(1,107	)		–			–		–
Balance at end of period	$	1,300	$	–		$	1,107		$	1,300	$	1,300

Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010 ~~and 2009~~(Predecessor) are summarized below:

	Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Predecessor Company
December 31, 2010									Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
(Dollars in thousands)

December 31, 2010
Impaired loans	$	–	$	61,006	$	14,985	$	75,990	$	–	$	61,006	$	14,985	$	75,990
Other real estate		–		18,334		–		18,334		–		18,334		–		18,334

December 31, 2009
Impaired loans	$	–	$	36,972	$	34,181	$	71,153
Other real estate		–		10,732		–		10,732

Fair Value of Financial Instruments

Due to the nature of the Company’s business, a significant portion of its assets and liabilities consist of financial instruments. Accordingly, the estimated fair values of these financial instruments are disclosed. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole.

- 119 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Fair values of cash and cash equivalents are equal to the carrying value. Estimated fair values of investment securities are based on quoted market prices, if available, or model-based values from pricing sources for mortgage-backed securities and municipal bonds. Fair value of the loan portfolio has been estimated using the present value of expected future cash flows, discounted at a current market rate for each loan type. The amount of expected credit losses and the timing of those losses were factored into expected future cash flows as of December 31, 2010. At December 31, 2009, the credit risk component of the loan portfolio was set at the recorded allowance for loan losses balance for purposes of estimating fair value. Thus, there was no difference between the carrying amount and estimated fair value attributed to credit risk in the portfolio as of December 31, 2009.cash. Carrying amounts for accrued interest approximate fair value given the short-term nature of interest receivable and payable.

Fair values of time deposits and borrowings are estimated by discounting the future cash flows using the current rates offered for similar deposits and borrowings with the same remaining maturities. Fair value of subordinated debt is estimated based on current market prices for similar trust preferred issues of financial institutions with equivalent credit risk. The estimated fair value for the Company’s subordinated debt is significantly lower than carrying value since credit spreads (i.e., spread to LIBOR) on similar trust preferred issues are currently much wider than when these securities were originally issued. Interest-bearing deposit liabilities and repurchase agreements with no stated maturities are predominately at variable rates and, accordingly, the fair values have been estimated to equal the carrying amounts (the amount payable on demand).

~~- 92 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2011 (Successor) and December 31, 2010 ~~and 2009 are~~(Predecessor) were as follows:

	2010				2009				Successor Company				Predecessor Company
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Dec. 31, 2011				Dec. 31, 2010
Financial assets:
									Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	66,745	$	66,745	$	29,513	$	29,513	$	2,163	$	2,163	$	66,745	$	66,745
Investment securities		223,292		223,292		245,492		245,438		–		–		223,292		223,292
Mortgage loans held for sale		6,993		6,993		–		–		–		–		6,993		6,993
Loans		1,218,418		1,146,256		1,364,221		1,368,233		–		–		1,218,418		1,146,256
Accrued interest receivable		5,158		5,158		6,590		6,590		11		11		5,158		5,158

Financial liabilities:
Financial Liabilities:
Non-maturity deposits	$	469,956	$	469,956	$	529,257	$	529,257	$	–	$	–	$	469,956	$	469,956
Time deposits		873,330		885,105		848,708		861,378		–		–		873,330		885,105
Securities sold under agreements to repurchase		–		–		6,543		6,543
Borrowings		121,000		126,787		167,000		171,278		–		–		121,000		126,787
Subordinated debt		34,323		19,164		30,930		12,200
Subordinated debentures										19,163		22,205		34,323		19,164
Accrued interest payable		1,363		1,363		1,824		1,824		73		73		1,363		1,363

Unrecognized financial instruments:
Commitments to extend credit		175,318		167,817		231,691		231,691	$	–	$	–	$	175,318	$	167,817
Standby letters of credit		10,285		10,285		9,144		9,144		–		–		10,285		10,285

Capital Bank Corporation – Notes to Consolidated Financial Statements

~~- 93 -~~

~~Index~~

~~Capital Bank Corporation – Notes to Consolidated Financial Statements~~

The fair value of the Series A Preferred Stock was estimated using a discount rate of 11%, which approximated the dividend yield on the S&P U.S. Preferred Stock Index on the issuance date, and an expected life of five years. The fair value of each Warrant issued was estimated to be $1.42 on the date of issuance using the Black-Scholes option pricing model. The following assumptions were used in determining fair value for the Warrants:

- 121 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

- 95123 -

Index

Capital Bank Corporation – Notes to Consolidated Financial Statements

Condensed Statements of Cash Flows

To the Board of Directors and Shareholders

~~Capital Bank Corporation and Subsidiaries~~

~~We have audited the accompanying consolidated balance sheet~~ of Capital Bank Corporation ~~(the Company) and Subsidiaries as of December 31, 2010, and~~

In our opinion, the ~~related~~accompanying consolidated statements of operations, changes in ~~shareholders’~~shareholders' equity and ~~loss~~comprehensive income, and cash flows for the ~~year ended December 31, 2010.~~period January 1, 2011 to January 28, 2011 present fairly, in all material respects, the results of operations and cash flows of Capital Bank Corporation and its subsidiaries (Predecessor Company) for the period January 1, 2011 to January 28, 2011 in conformity with accounting principles generally accepted in the United States of America. These ~~consolidated~~ financial statements are the responsibility of the ~~Corporation’s~~Company’s management. Our responsibility is to express an opinion on these ~~consolidated~~ financial statements based on our audit.

We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial ~~statements. An audit also includes~~statements, assessing the accounting principles used and significant estimates made by management, ~~as well as~~and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Ft. Lauderdale, FL

April 9, 2012

- 126 -

Report of Independent Registered Certified Public Accounting Firm

To the Board of Directors and Shareholders

of Capital Bank Corporation

In our opinion, the accompanying consolidated ~~financial~~balance sheet as of December 31, 2011 and the related consolidated statements ~~referred~~of operations, changes in shareholders' equity and comprehensive income, and cash flows for the period January 29, 2011 to ~~above~~December 31, 2011 present fairly, in all material respects, the financial position of Capital Bank Corporation and ~~Subsidiaries as of~~its subsidiaries (Successor Company) at December 31, ~~2010~~2011 and the results of their operations and their cash flows for the ~~year ended~~period January 29, 2011 to December 31, ~~2010,~~2011 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of Capital Bank Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in ~~Internal Control—Integrated Framework~~ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2011, expressed an unqualified opinion on the effectiveness of Capital Bank Corporation’s internal control over financial reporting.

~~/s/ ELLIOTT DAVIS PLLC~~

~~Charlotte, North Carolina~~

~~March 15, 2011~~

~~- 99 -~~

~~Index~~

~~Report of Independent Registered Public Accounting Firm~~

~~Board of Directors and Shareholders~~

~~of Capital Bank Corporation and Subsidiaries~~

We have audited the accompanying consolidated balance sheet of Capital Bank Corporation (a North Carolina corporation) and subsidiaries as of December 31, 2009, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income (loss) and cash flows for the years in the periods ended December 31, 2009 and 2008. These ~~consolidated~~ financial statements are the responsibility of the ~~Corporation’s~~Company’s management. Our responsibility is to express an opinion on these ~~consolidated~~ financial statements based on our ~~audits.~~

audit. We conducted our ~~audits~~audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the ~~audits~~audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial ~~statements. An audit also includes~~statements, assessing the accounting principles used and significant estimates made by management, ~~as well as~~and evaluating the overall financial statement presentation. We believe that our ~~audits provide~~audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Bank Corporation and subsidiaries as of December 31, 2009, and the results of its operations and its cash flows for the years in the periods ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Capital Bank Corporation’s internal control over financial reporting as of December 31, 2009, based on criteria established in ~~Internal Control—Integrated Framework~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 10, 2010 (not separately included herein), expressed an unqualified opinion.~~

/s/ ~~GRANT THORNTON~~PricewaterhouseCoopers LLP

~~Raleigh, North Carolina~~Ft. Lauderdale, FL

~~March 10, 2010~~April 9, 2012

- ~~100~~127 -

Index

~~ITEM 9. CHANGES IN AND DISAGREEMENTS~~ ~~WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~

~~None~~

~~ITEM 9A. CONTROLS~~ ~~AND PROCEDURES~~

~~Evaluation of Disclosure Controls and Procedures~~. The Company’s management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their control objectives. Based on our evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable assurance level, in that they are reasonably designed to ensure that all material information relating to the Company required to be included in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~Changes in Internal Control Over Financial Reporting.~~ There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. From time to time, the Company makes changes to its internal control over financial reporting that are intended to enhance the effectiveness of its internal control over financial reporting and which do not have a material effect on its overall internal control over financial reporting.

~~Management’s Report on Internal Control Over Financial Reporting.~~ The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. Management based its assessment on the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission in ~~Internal Control—Integrated Framework. Based on this assessment, management concluded that, as of December 31, 2010, the Company maintained effective internal control over financial reporting.~~

Elliott Davis PLLC, an independent registered public accounting firm, who audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has also audited the effectiveness of the Company’s internal control over financial reporting. Such report is included below.

~~Limitations on the Effectiveness of Controls.~~ A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Further, the design of disclosure controls and internal control over financial reporting must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The Company plans to continue to evaluate the effectiveness of its disclosure controls and procedures and its internal control over financial reporting on an ongoing basis and will take action as appropriate.

~~- 101 -~~

~~Index~~

Report of Independent Registered Public Accounting Firm

~~To the~~ Board of Directors and Shareholders

Capital Bank Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheet of Capital Bank Corporation (the Company) and ~~Subsidiaries’ (the “Company”) internal control over financial reporting~~Subsidiaries as of December 31, 2010, ~~based on criteria established~~and the related consolidated statements of operations, changes in ~~Internal Control — Integrated Framework~~ ~~issued by~~shareholders’ equity and comprehensive loss and cash flows for the ~~Committee of Sponsoring Organizations~~year ended December 31, 2010. These consolidated financial statements are the responsibility of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Corporation’s management. Our responsibility is to express an opinion on ~~the company’s internal control over~~these consolidated financial ~~reporting~~statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether ~~effective internal control over~~the financial ~~reporting was maintained~~statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in ~~all material respects. Our~~the financial statements. An audit ~~included obtaining an understanding of internal control over financial reporting,~~also includes assessing the ~~risk that a material weakness exists,~~accounting principles used and ~~testing and~~significant estimates made by management, as well as evaluating the ~~design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.~~overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Bank Corporation and Subsidiaries as of December 31, 2010 and the results of their operations and their cash flows for the year ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

~~A company’s~~We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), of Capital Bank Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2011, expressed an unqualified opinion (not included herein) on the effectiveness of Capital Bank Corporation’s internal control over financial reporting.

/s/ ELLIOTT DAVIS PLLC

Charlotte, North Carolina

March 15, 2011

- 128 -

Index

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

of Capital Bank Corporation and Subsidiaries

We have audited the accompanying consolidated statements of operations, changes in shareholders’ equity and comprehensive loss and cash flows for the year ended December 31, 2009 of Capital Bank Corporation (a North Carolina corporation) and subsidiaries (the “Company”) as of December 31, 2009. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a ~~process~~test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, Capital Bank Corporation and subsidiaries as results of its operations and its cash flows for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Raleigh, North Carolina

March 10, 2010

- 129 -

Index

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. The Company’s management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their control objectives. Based on our evaluation, the Company’s Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable assurance level, in that they are reasonably designed to ensure that all material information relating to the Company required to be included in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. From time to time, the Company makes changes to its internal control over financial reporting that are intended to enhance the effectiveness of its internal control over financial reporting and which do not have a material effect on its overall internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted ~~accounting principles. A company’s internal control over financial reporting includes those policies and procedures that~~ ~~(a)~~ ~~pertain to~~in the ~~maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;~~ ~~(b)~~ provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and ~~(c)~~ provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with ~~the~~ policies or procedures may deteriorate.

~~In our opinion, Capital Bank Corporation and Subsidiaries maintained, in all material respects, effective~~Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2010,~~2011. Management based its assessment on the criteria ~~established in~~ ~~Internal Control — Integrated Framework~~ ~~issued~~for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway ~~Commission.~~

~~We have also audited,~~Commission in ~~accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company~~Internal Control—Integrated Framework. Based on this assessment, management concluded that, as of December 31, ~~2010~~2011, the Company maintained effective internal control over financial reporting.

Limitations on the Effectiveness of Controls. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Further, the design of disclosure controls and internal control over financial reporting must reflect the fact that there are resource constraints, and the ~~related consolidated statements~~benefits of ~~operations, changes~~controls must be considered relative to their costs. Because of the inherent limitations in ~~shareholders’ equity~~all control systems, no evaluation of controls can provide absolute assurance that all control issues and ~~comprehensive loss~~instances of fraud, if any, within the Company have been detected. The Company plans to continue to evaluate the effectiveness of its disclosure controls and ~~cash flows in the year ended December 31, 2010~~procedures and ~~our report dated March 15, 2011, expressed~~its internal control over financial reporting on an ~~unqualified opinion.~~ongoing basis and will take action as appropriate.

~~/s/ ELLIOTT DAVIS PLLC~~

~~Charlotte, North Carolina~~

~~March 15, 2011~~

- ~~102~~130 -

Index

ITEM 9A(T). CONTROLS AND PROCEDURES

Not applicable.

ITEM 9B. OTHER INFORMATION

Not ~~Applicable.~~applicable.

~~ITEM 9B. OTHER INFORMATION~~

~~Submission of Matters to a Vote of Security Holders~~

~~A Special Meeting of Shareholders was held on December 16, 2010. The following matters were submitted to a vote of the shareholders with the results shown below:~~

Proposal 1: To approve the issuance of shares of the Company’s common stock, no par value per share (“Common Stock”), under the terms of the Investment Agreement, dated November 3, 2010, among the Company, its wholly-owned subsidiary Capital Bank, and North American Financial Holdings, Inc. The votes were cast as follows:

Votes For Votes Against Abstained Broker Non-Votes
6,480,642 365,389 49,440 0

~~Proposal 1 was approved.~~

Proposal 2: To approve an amendment to the Company’s Articles of Incorporation to increase the authorized shares of Common Stock to three hundred million (300,000,000) shares from fifty million (50,000,000) shares. The votes were cast as follows:

Votes For Votes Against Abstained Broker Non-Votes
6,442,376 410,462 42,633 0

~~Proposal 2 was approved.~~

Proposal 3: To grant the proxy holders discretionary authority to vote to adjourn the Special Meeting, if necessary, in order to solicit additional proxies in the event that there are not sufficient affirmative votes present at the Special Meeting to approve the proposals that may be considered and acted upon at the Special Meeting. The votes were cast as follows:

Votes For Votes Against Abstained Broker Non-Votes
6,341,664 448,896 104,911 0

~~Proposal 3 was approved.~~

~~The matters listed above are described in detail in our definitive proxy statement dated November 19, 2010 for the Special Meeting of Shareholders held on December 16, 2010.~~

PART III

This Part incorporates certain information from the definitive proxy statement (the ~~“2011~~“2012 Proxy Statement”) for the Company’s ~~2011~~2012 Annual Meeting of Shareholders, to be filed with the SEC within 120 days after the end of the Company’s fiscal year.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning the Company’s executive officers is included under the caption ~~“Executive~~“Directors and Executive Officers” in Part I. – Item 1. Business of this report. Information concerning the Company’s directors and filing of certain reports of beneficial ownership is incorporated by reference to the sections entitled “Proposal 1: Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the ~~2011~~2012 Proxy Statement. Information concerning the Audit Committee of the Company’s Board of Directors is incorporated by reference to the section entitled “Information about Our Board of Directors – Board of Directors Committees – Audit Committee” in the ~~2011~~2012 Proxy Statement. There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors since the date of the Company’s Proxy Statement for the Company’s ~~2010~~2011 Annual Meeting of Shareholders.

~~- 103 -~~

~~Index~~

The Company has adopted a Code of Business Conduct and Ethics (our “Code of Ethics”) that applies to our employees, officers and directors. The complete Code of Ethics is available on our website at www.capitalbank-us.com. If at any time it is not available on our website, we will provide a copy upon written request made to our Corporate Secretary, Capital Bank Corporation, 333 Fayetteville Street, Suite 700, Raleigh, North Carolina 27601, telephone (919) 645-6400. Information on our website is not part of this report. If we amend or grant any waiver from a provision of our Code of Ethics that applies to our executive officers, we will publicly disclose such amendment or waiver as required by applicable law, including by posting such amendment or waiver on our website at www.capitalbank-us.com or by filing a Current Report on Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION

This information is incorporated by reference from the sections entitled “Compensation,” ~~“Compensation/Human Resources~~“Compensation Committee Interlocks and Insider Participation” and ~~“Compensation/Human Resources~~“Compensation Committee Report” in the ~~2011~~2012 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

This information is incorporated by reference from the sections entitled “Principal Shareholders” and “Compensation – Equity Compensation Plan Information” in the ~~2011~~2012 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

This information is incorporated by reference from the sections entitled “Director Compensation – Certain Transactions” and “Information about Our Board of Directors” in the ~~2011~~2012 Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

This information is incorporated by reference from the section entitled “Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm – Audit Firm Fee Summary” in the ~~2011~~2012 Proxy Statement.

- 131 -

Index

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)

Financial Statements. The financial statements and information listed below are included in this report in Part II, Item 8:

Financial Statements and Information

	•	Consolidated Balance Sheets as of December 31, 2011 (Successor) and December 31, 2010 ~~and 2009~~(Predecessor)

	•	Consolidated Statements of Operations for the ~~years ended~~Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 ~~and 2008~~(Predecessor)

	•	Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the ~~years ended~~Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 ~~and 2008~~(Predecessor)

	•	Consolidated Statements of Cash Flows for the ~~years ended~~Period of January 29, 2011 to December 31, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor), and the Years Ended December 31, 2010 and 2009 ~~and 2008~~(Predecessor)

	•	Notes to Consolidated Financial Statements

	•	Reports of Independent Registered Public Accounting Firm

(a)(2)	Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X and pursuant to to Industry Guide 3 under the Securities Act have been included in the Notes to the Consolidated Financial Statements or in Part II Item 7.

(a)(3)	Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately following the signature pages to this report.

- ~~104~~132 -

Index

We have issued our reports dated March 15, 2011, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of Capital Bank Corporation on Form 10-K for the year ended December 31, 2010. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Capital Bank Corporation on Form S-3 (File No. 333-155567, effective November 21, 2008) and Forms S-8 (File No. 333-148273, effective December 21, 2007, No. 333-125195, effective May 24, 2005, No. 333-42628, effective July 31, 2000, No. 333-82602, effective February 12, 2002, No. 333-102774, effective January 28, 2003, No. 333-76919, effective April 23, 1999, No. 333-151782, effective June 19, 2008, No. 333-160689, effective July 20, 2009 and No. 333-160699, effective July 20, 2009).

/s/ ELLIOTT DAVIS PLLC

Charlotte, North Carolina

~~March 15, 2011~~April 9, 2012

North Carolina		000-30062		56-2101930
(State or other jurisdiction of incorporation ~~incorporation~~ or organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer o	(Do not check ~~here~~ if a smaller reporting company)
Smaller reporting company þ

DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated		Where

1.	Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May ~~26, 2011~~23, 2012	Part III

Region	12/08	12/09	12/10	% Change 2008–2010	% Change 2009–2010
United States	7.1%	9.7%	9.1%	28.2%	-6.2%
North Carolina	8.2%	11.1%	9.7%	18.3%	-12.6%
Triangle:
Raleigh/Cary MSA	6.2%	9.0%	7.8%	25.8%	-13.3%
Sandhills:
Fayetteville MSA	7.2%	9.3%	9.0%	25.0%	-3.2%
Triad:
Burlington MSA	8.8%	12.5%	10.1%	14.8%	-19.2%
Western:
Asheville MSA	6.4%	9.0%	7.9%	23.4%	-12.2%
Hickory/Lenoir/Morganton MSA	10.2%	14.9%	12.4%	21.6%	-16.8%

Source: North Carolina Employment Security Commission (NC ESC)

	Period Ending
Index	12/05	12/06	12/07	12/08	12/09	12/10
Capital Bank Corporation	100.00	112.90	68.73	40.00	25.19	16.22
NASDAQ Composite	100.00	109.52	120.27	71.51	102.89	120.29
NASDAQ Bank Index	100.00	111.01	86.51	65.81	53.63	60.01

	For the Years Ended December 31,
	2010			2009			2008			2007			2006

Per Share Data
Net income (loss) – basic	$	(4.98	)	$	(0.80	)	$	(4.94	)	$	0.69		$	1.06
Net income (loss) – diluted		(4.98	)		(0.80	)		(4.94	)		0.68			1.06
Book value		2.75			8.68			9.54			14.71			14.19
Tangible book value		2.61			8.44			9.20			9.04			8.53
Common stock dividends		–			0.32			0.32			0.32			0.24

Common shares outstanding		12,877,846			11,348,117			11,238,085			11,169,777			11,393,990
Diluted shares outstanding		12,810,905			11,470,314			11,302,769			11,492,728			11,683,674
Basic shares outstanding		12,810,905			11,470,314			11,302,769			11,424,171			11,598,502

Performance Ratios
Return on average shareholders’ equity		(47.86	)%		(4.62	)%		(32.93	)%		4.78	%		7.64	%
Return on average assets		(3.63	)		(0.40	)		(3.52	)		0.54			0.91
Net interest margin 1		3.27			3.14			3.07			3.52			3.94
Efficiency ratio 2		81.65			84.36			77.30			72.80			65.71

Capital Ratios
Tangible equity to tangible assets		4.73	%		7.91	%		8.77	%		6.94	%		7.16	%
Tangible common equity to tangible assets		2.12			5.53			6.26			6.94			7.16
Average shareholders’ equity to average total assets		7.59			8.72			10.68			11.32			11.93
Leverage ratio		6.45			8.94			10.58			9.10			9.42
Tier 1 risk-based capital		8.07			10.16			12.17			10.19			10.76
Total risk-based capital		9.59			11.41			13.24			11.28			11.92

Asset Quality Ratios
Nonperforming loans to gross loans		5.73	%		2.84	%		0.73	%		0.55	%		0.49	%
Nonperforming assets to total assets		5.69			2.90			0.63			0.50			0.42
Allowance for loan losses to gross loans		2.87			1.88			1.18			1.24			1.32
Allowance for loan losses to nonperforming loans		50.12			66.01			162.31			226.86			272.28
Net charge-offs to average loans		3.60			0.89			0.30			0.32			0.46

	December 31, 2010 vs. 2009									December 31, 2009 vs. 2008
(Dollars in thousands)	Rate Variance			Volume Variance			Total Variance			Rate Variance			Volume Variance			Total Variance
Interest income:
Loans	$	(3,189	)	$	1,861		$	(1,328	)	$	(9,671	)	$	7,589		$	(2,082	)
Investment securities		(1,884	)		(2,613	)		(4,497	)		(351	)		808			457
Interest-bearing deposits		17			30			47			(109	)		23			(86	)
Total interest income		(5,056	)		(722	)		(5,778	)		(10,131	)		8,420			(1,711	)
Interest expense:
Savings and interest-bearing demand deposits and other		(1,437	)		(302	)		(1,739	)		(2,534	)		331			(2,203	)
Time deposits		(6,381	)		1,165			(5,216	)		(6,537	)		3,735			(2,802	)
Repurchase agreements		11			(30	)		(19	)		(321	)		(42	)		(363	)
Borrowed funds		(817	)		211			(606	)		(1,179	)		(908	)		(2,087	)
Subordinated debt		(12	)		88			76			(706	)		–			(706	)
Total interest expense		(8,636	)		1,132			(7,504	)		(11,277	)		3,116			(8,161	)
Increase (decrease) in net interest income	$	3,580		$	(1,854	)	$	1,726		$	1,146		$	5,304		$	6,450

	As of December 31,
	2010					2009					2008					2007					2006
(Dollars in thousands)	Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance			Amount		% of Total Allowance
Commercial	$	21,734		60	%	$	14,187		54	%	$	9,749		66	%	$	10,231		75	%	$	8,744		59	%
Construction		11,499		32			10,343		40			3,548		24			1,812		13			3,276		25
Consumer		614		2			481		2			620		4			631		5			408		3
Home equity lines		1,003		3			491		2			570		4			419		3			669		8
Mortgage		1,211		3			579		2			308		2			478		4			250		5
Total	$	36,061		100	%	$	26,081		100	%	$	14,795		100	%	$	13,571		100	%	$	13,347		100	%

Residential Construction & Development Loan Analysis by Type:	Residential Land / Development			Residential Construction			Total			Residential Land / Development			Residential Construction			Total
(Dollars in thousands)

December 31, 2010
December 31, 2010 (Predecessor Company)
Loans outstanding	$	102,797		$	77,120		$	179,917		$	102,797		$	77,120		$	179,917
Nonaccrual loans		35,934			3,180			39,114			35,934			3,180			39,114
Allowance for loan losses		4,975			3,996			8,971			4,975			3,996			8,971
YTD net charge-offs		27,096			3,382			30,478			27,096			3,382			30,478

Loans outstanding to total loans		8.19	%		6.15	%		14.34	%		8.19	%		6.15	%		14.34	%
Nonaccrual loans to loans in category		34.96			4.12			21.74			34.96			4.12			21.74
Allowance to loans in category		4.84			5.18			4.99			4.84			5.18			4.99
YTD net charge-offs to average loans in category (annualized)		20.41			3.80			13.75			20.41			3.80			13.75

December 31, 2009
Loans outstanding	$	162,733		$	100,724		$	263,457
Nonaccrual loans		16,935			7,102			24,037
Allowance for loan losses		7,569			1,707			9,276

Loans outstanding to total loans		11.70	%		7.24	%		18.95	%
Nonaccrual loans to loans in category		10.41			7.05			9.12
Allowance to loans in category		4.65			1.69			3.52

Loan Analysis by Region:	Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		Allowance to Loans Outstanding			Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		Allowance to Loans Outstanding
(Dollars in thousands)

December 31, 2010
December 31, 2010 (Predecessor Company)
Triangle	$	134,858		74.96	%	$	30,310		22.48	%	$	6,898		5.12	%	$	134,858		74.96	%	$	30,310		22.48	%	$	6,898		5.12	%
Sandhills		24,816		13.79			979		3.95			1,080		4.35			24,816		13.79			979		3.95			1,080		4.35
Triad		4,584		2.55			–		–			417		9.10			4,584		2.55			–		–			417		9.10
Western		15,659		8.70			7,825		49.97			576		3.68			15,659		8.70			7,825		49.97			576		3.68
Total	$	179,917		100.00	%	$	39,114		21.74	%	$	8,971		4.99	%	$	179,917		100.00	%	$	39,114		21.74	%	$	8,971		4.99	%

December 31, 2009
Triangle	$	185,319		70.34	%	$	14,349		7.74	%	$	7,325		3.95	%
Sandhills		31,257		11.86			–		–			412		1.32
Triad		5,509		2.09			106		1.92			86		1.56
Western		41,372		15.71			9,582		23.16			1,453		3.51
Total	$	263,457		100.00	%	$	24,037		9.12	%	$	9,276		3.52	%

and Other CRE Loan Analysis by Type:	Commercial Land / Development			Commercial Construction			Multifamily			Other Non- Residential CRE			Total			Commercial Land / Development			Commercial Construction			Multifamily			Other Non- Residential CRE			Total
(Dollars in thousands)

December 31, 2010
December 31, 2010 (Predecessor Company)
Loans outstanding	$	121,415		$	49,255		$	39,831		$	244,112		$	454,613		$	121,415		$	49,255		$	39,831		$	244,112		$	454,613
Nonaccrual loans		11,579			–			–			2,678			14,257			11,579			–			–			2,678			14,257
Allowance for loan losses		5,122			1,268			668			4,966			12,024			5,122			1,268			668			4,966			12,024
YTD net charge-offs		1,641			(3	)		10			1,061			2,709			1,641			(3	)		10			1,061			2,709

Loans outstanding to total loans		9.68	%		3.93	%		3.18	%		19.46	%		36.24	%		9.68	%		3.93	%		3.18	%		19.46	%		36.24	%
Nonaccrual loans to loans in category		9.54			–			–			1.10			3.14			9.54			–			–			1.10			3.14
Allowance to loans in category		4.22			2.57			1.68			2.03			2.64			4.22			2.57			1.68			2.03			2.64
YTD net charge-offs to average loans in category (annualized)		1.31			(0.01	)		0.02			0.48			0.61			1.31			(0.01	)		0.02			0.48			0.61

December 31, 2009
Loans outstanding	$	128,745		$	59,918		$	43,379		$	202,295		$	434,337
Nonaccrual loans		529			–			325			702			1,556
Allowance for loan losses		1,732			462			474			3,043			5,711

Loans outstanding to total loans		9.26	%		4.31	%		3.12	%		14.55	%		31.24	%
Nonaccrual loans to loans in category		0.41			–			0.75			0.35			0.36
Allowance to loans in category		1.35			0.77			1.09			1.50			1.31

and Other CRE Loan Analysis by Region:	Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		Allowance to Loans Outstanding			Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		Allowance to Loans Outstanding
(Dollars in thousands)

December 31, 2010
December 31, 2010 (Predecessor Company)
Triangle	$	291,377		64.09	%	$	13,364		4.59	%	$	7,240		2.48	%	$	291,377		64.09	%	$	13,364		4.59	%	$	7,240		2.48	%
Sandhills		66,292		14.58			815		1.23			2,504		3.78			66,292		14.58			815		1.23			2,504		3.78
Triad		41,441		9.12			–		–			1,122		2.71			41,441		9.12			–		–			1,122		2.71
Western		55,503		12.21			78		0.14			1,158		2.09			55,503		12.21			78		0.14			1,158		2.09
Total	$	454,613		100.00	%	$	14,257		3.14	%	$	12,024		2.64	%	$	454,613		100.00	%	$	14,257		3.14	%	$	12,024		2.64	%

December 31, 2009
Triangle	$	281,664		64.85	%	$	361		0.13	%	$	3,653		1.30	%
Sandhills		60,593		13.95			605		1.00			937		1.55
Triad		35,987		8.29			41		0.11			576		1.60
Western		56,093		12.91			549		0.98			545		0.97
Total	$	434,337		100.00	%	$	1,556		0.36	%	$	5,711		1.31	%

	Time Deposits $100,000 or Greater					Time Deposits Less than $100,000					Predecessor Company
December 31, 2010											Time Deposits $100,000 or Greater					Time Deposits Less than $100,000
(Dollars in thousands)	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate

Three months or less	$	13,952		1.11	%	$	77,004		0.64	%	$	13,952		1.11	%	$	77,004		0.64	%
Over three months to one year		28,930		1.76			114,686		1.15			28,930		1.76			114,686		1.15
Over one year to three years		253,107		1.95			315,341		1.87			253,107		1.95			315,341		1.87
Over three years		31,463		2.73			38,847		2.71			31,463		2.73			38,847		2.71
	$	327,452		1.97	%	$	545,878		1.61	%	$	327,452		1.97	%	$	545,878		1.61	%

	Successor Company
					Minimum Requirements To Be:
December 31, 2011	Actual				Adequately Capitalized				Well Capitalized
(Dollars in thousands)		Amount	Ratio			Amount	Ratio			Amount	Ratio

Capital Bank Corporation:
Total capital (to risk-weighted assets)	$	244,027	98.39	%	$	19,841	8.00	%		N/A	N/A
Tier I capital (to risk-weighted assets)		240,437	96.95			9,920	4.00			N/A	N/A
Tier I capital (to average assets)		240,437	96.56			9,960	4.00			N/A	N/A

Capital Bank, NA:
Total capital (to risk-weighted assets)	$	687,971	16.67	%	$	330,201	8.00	%	$	412,752	10.00	%
Tier I capital (to risk-weighted assets)		649,523	15.74			165,101	4.00			247,651	6.00	%
Tier I capital (to average assets)		649,523	10.38			250,180	4.00			312,725	5.00	%

	Payments Due by Period
(Dollars in thousands)	Less Than 1 Year		1–3 Years		3–5 Years		More Than 5 Years		Total Committed
Contractual obligations:
Borrowings	$	51,000	$	3,000	$	7,000	$	60,000	$	121,000
Subordinated debentures		–		–		–		34,323		34,323
Operating leases		4,112		7,977		7,440		29,747		49,276
	$	55,112	$	10,977	$	14,440	$	124,070	$	204,599

	Amount of Commitment Expiration by Period
(Dollars in thousands)	Less Than 1 Year		1–3 Years		3–5 Years		More Than 5 Years		Total Committed
Off-balance sheet commitments:
Standby letters of credit	$	10,268	$	17	$	–	$	–	$	10,285
Commitments to extend credit		80,525		16,924		17,058		60,811		175,318
	$	90,793	$	16,941	$	17,058	$	60,811	$	185,603

	Estimated % Change in NII (over 12 months following change)	Estimated % Change in EVE (immediately following change)

Changes in rates:
+ 2.00%	12.6%	0.4%
+ 1.00%	2.4%	(2.5%)
No rate change:
– 1.00%	(1.8%)	4.2%
– 2.00%	(5.5%)	24.1%

		~~Cumulative Gap Ratio~~

	~~1 year~~	~~1.89~~
	~~2 years~~	~~1.23~~
	~~3 years~~	~~0.98~~
	~~4 years~~	~~1.02~~
	~~5 years~~	~~0.98~~
	~~Overall~~	~~1.09~~

	December 31,
	2010			2009			Successor Company		Predecessor Company
(Dollars in thousands)							Dec. 31, 2011		Dec. 31, 2010

Assets
Cash and cash equivalents:
Cash and due from banks	$	13,646		$	25,002		$	2,163	$	13,646
Interest-bearing deposits with banks		53,099			4,511			–		53,099
Total cash and cash equivalents		66,745			29,513			2,163		66,745
Investment securities:
Investment securities – available for sale, at fair value		214,991			235,426			–		214,991
Investment securities – held to maturity, at amortized cost		–			3,676
Other investments		8,301			6,390			–		8,301
Total investment securities		223,292			245,492			–		223,292
Mortgage loans held for sale		6,993			–			–		6,993
Loans:
Loans – net of unearned income and deferred fees		1,254,479			1,390,302			–		1,254,479
Allowance for loan losses		(36,061	)		(26,081	)		–		(36,061	)
Net loans		1,218,418			1,364,221			–		1,218,418
Other real estate (“ORE”)		18,334			10,732
Investment in and advance to Capital Bank, NA								247,121		–
Other real estate								–		18,334
Premises and equipment, net		25,034			23,756			–		25,034
Bank-owned life insurance		6,972			22,746
Core deposit intangible, net		1,774			2,711
Deferred tax asset		–			12,096
Other intangible assets, net								–		1,774
Other assets		17,985			23,401			458		24,957
Total assets	$	1,585,547		$	1,734,668		$	249,742	$	1,585,547

Liabilities
Deposits:
Demand, noninterest checking	$	116,113		$	141,069
Demand deposits							$	–	$	116,113
NOW accounts		185,782			175,084			–		185,782
Money market deposit accounts		137,422			184,146
Savings accounts		30,639			28,958
Money market accounts								–		137,422
Savings deposits								–		30,639
Time deposits		873,330			848,708			–		873,330
Total deposits		1,343,286			1,377,965			–		1,343,286
Securities sold under agreements to repurchase		–			6,543
Borrowings		121,000			167,000			–		121,000
Subordinated debentures		34,323			30,930			19,163		34,323
Other liabilities		10,250			12,445			5,715		10,250
Total liabilities		1,508,859			1,594,883			24,878		1,508,859

Shareholders’ Equity
Preferred stock, $1,000 par value; 100,000 shares authorized; 41,279 shares issued and outstanding (liquidation preference of $41,279)		40,418			40,127
Common stock, no par value; 300,000,000 shares authorized; 12,877,846 and 11,348,117 shares issued and outstanding		145,594			139,909
Accumulated deficit		(108,027	)		(44,206	)
Preferred stock, $1,000 par value; 100,000 shares authorized; 41,279 shares issued and outstanding (liquidation preference of $41,279) at December 31, 2010								–		40,418
Common stock, no par value; 300,000,000 shares authorized; 85,802,164 and 12,877,846 shares issued and outstanding								218,826		145,594
Retained earnings (accumulated deficit)								5,267		(108,027	)
Accumulated other comprehensive income (loss)		(1,297	)		3,955			771		(1,297	)
Total shareholders’ equity		76,688			139,785			224,864		76,688
Total liabilities and shareholders’ equity	$	1,585,547		$	1,734,668		$	249,742	$	1,585,547

	Preferred Stock			Common Stock						Other Comprehensive Income			Retained Earnings (Accumulated
Predecessor Company	Shares	Amount		Shares			Amount			(Loss)			Deficit)			Total
(Dollars in thousands)

Balance at January 1, 2009	41,279	$	39,839		11,238,085		$	139,209		$	886		$	(31,420	)	$	148,514

Comprehensive loss:
Net loss														(6,816	)		(6,816	)
Net unrealized gain on securities, net of tax of $3,169											5,051						5,051
Net unrealized loss on cash flow hedge, net of tax benefit of $1,215											(1,936	)					(1,936	)
Amortization of prior service cost on SERP											(46	)					(46	)
Total comprehensive loss																	(3,747	)
Accretion of preferred stock discount			288											(288	)		–
Restricted stock awards					16,692			107									107
Stock option expense								50									50
Directors’ deferred compensation					93,340			543									543
Dividends on preferred stock														(2,064	)		(2,064	)
Dividends on common stock ($0.32 per share)														(3,618	)		(3,618	)
Balance at December 31, 2009	41,279	$	40,127		11,348,117		$	139,909		$	3,955		$	(44,206	)	$	139,785

Comprehensive loss:
Net loss														(61,466	)		(61,466	)
Net unrealized loss on securities, net of tax benefit of $3,300											(5,260	)					(5,260	)
Amortization of prior service cost on SERP											8						8
Total comprehensive loss																	(66,718	)
Accretion of preferred stock discount			291											(291	)		–
Issuance of common stock					1,468,770			5,065									5,065
Restricted stock forfeiture					(3,508	)		(10	)								(10	)
Stock option expense								54									54
Directors’ deferred compensation					64,467			576									576
Dividends on preferred stock														(2,064	)		(2,064	)
Balance at December 31, 2010	41,279	$	40,418		12,877,846		$	145,594		$	(1,297	)	$	(108,027	)	$	76,688
(continued on next page)

	Preferred Stock			Common Stock						Other Comprehensive Income			Retained Earnings (Accumulated
Predecessor Company	Shares	Amount		Shares			Amount			(Loss)			Deficit)			Total
(Dollars in thousands)

Balance at January 1, 2011	41,279	$	40,418		12,877,846		$	145,594		$	(1,297	)	$	(108,027	)	$	76,688
Comprehensive income:
Net income														596			596
Net unrealized loss on securities, net of tax benefit of $204											(324	)					(324	)
Amortization of prior service cost on SERP											1						1
Total comprehensive income																	273
Accretion of preferred stock discount			24											(24	)		–
Stock option expense								5									5
Directors’ deferred compensation								35									35
Dividends on preferred stock														(172	)		(172	)
Balance at January 28, 2011	41,279	$	40,442		12,877,846		$	145,634		$	(1,620	)	$	(107,627	)	$	76,829



	Preferred Stock			Common Stock						Other Comprehensive Income			Retained Earnings (Accumulated
Successor Company	Shares	Amount		Shares			Amount			(Loss)			Deficit)			Total
(Dollars in thousands)

Balance at January 29, 2011	–	$	–		83,877,846		$	224,085		$	–		$	–		$	224,085
Comprehensive income:
Net income														5,267			5,267
Net unrealized gain on securities, net of tax of $3,367											5,266						5,266
Total comprehensive income																	10,533
Issuance of common stock, net of offering costs of $300					1,613,165			3,814									3,814
Stock option expense								78									78
Restricted stock forfeiture					(1,751	)		(7	)								(7	)
Directors’ deferred compensation					312,904			–									–
Merger of Old Capital Bank into Capital Bank, NA								(4,124	)		(4,495	)					(8,619	)
Merger of GreenBank into Capital Bank, NA								(5,020	)								(5,020	)
Balance at December 31, 2011	–	$	–		85,802,164		$	218,826		$	771		$	5,267		$	224,864

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
(Dollars in thousands)

December 31, 2010
Available for sale:
U.S. agency obligations	$	19,003	$	18	$	87	$	18,934
Municipal bonds		22,455		75		1,521		21,009
Mortgage-backed securities issued by GSEs		165,540		78		195		165,423
Non-agency mortgage-backed securities		6,790		39		242		6,587
Other securities		3,252		–		214		3,038
		217,040		210		2,259		214,991
Other investments		8,301		–		–		8,301
Total at December 31, 2010	$	225,341	$	210	$	2,259	$	223,292

	•	Pass (risk rating 1–6) – These loans ~~range~~ranged from superior quality with minimal credit risk to loans requiring heightened management attention but that are still an acceptable risk and continue to perform as contracted.

	•	Special Mention (risk rating 7) – Loans in this category ~~have~~had potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may ~~result~~have resulted in deterioration of the repayment prospects for the asset or the institution’s credit position at some future date. They contain unfavorable characteristics and ~~are~~were generally undesirable. Loans in this category ~~are~~were currently protected by current sound net worth and paying capacity of the obligor or of the collateral pledged, if any, but ~~are~~were potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandard classification. ~~A Special Mention loan has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank’s position at some future date.~~

	•	Substandard (risk rating 8) – Loans in this category ~~are~~were inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the ~~Bank~~bank will sustain some loss if the deficiencies ~~are~~were not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. A substandard loan normally ~~has~~had one or more well-defined weaknesses that could jeopardize repayment of the debt. ~~The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between Special Mention and Substandard.~~

	•	Doubtful (risk rating 9) – For loans in this category, the borrower’s ability to continue repayment was highly unlikely. Full collection based on currently known facts, conditions, and values was highly questionable and improbable. The possibility of loss was extremely high, but because of certain important and specific reasonable pending factors, which work to the bank’s advantage and strengthen the asset in the near term, its classification as loss was deferred until its more exact status may be determined.

	CRE – Construction and Land Development		CRE – Non-Owner Occupied		CRE – Owner Occupied		Commercial and Industrial		Other		Total		Commercial Loans
December 31, 2010 (Predecessor Company)													Construction and Land Development		Non-Owner Occupied Real Estate		Owner Occupied Real Estate		Commercial and Industrial		Other		Total
(Dollars in thousands)

Risk rating:
Pass	$	250,557	$	266,523	$	154,156	$	101,674	$	32,961	$	805,871	$	250,557	$	266,523	$	154,156	$	101,674	$	32,961	$	805,871
Special mention		20,178		12,505		2,287		20,488		–		55,458		20,178		12,505		2,287		20,488		–		55,458
Substandard		79,852		4,610		13,967		23,266		781		122,476		79,852		4,610		13,967		23,266		781		122,476
Doubtful		–		305		60		7		–		372		–		305		60		7		–		372
Total	$	350,587	$	283,943	$	170,470	$	145,435	$	33,742	$	984,177	$	350,587	$	283,943	$	170,470	$	145,435	$	33,742	$	984,177

	Consumer Real Estate – Residential Mortgage		Consumer Real Estate – Home Equity		Other Consumer		Total		Consumer Loans
December 31, 2010 (Predecessor Company)									Residential Mortgage		Home Equity Lines		Other Consumer		Total
(Dollars in thousands)

Risk rating:
Pass	$	162,002	$	85,000	$	5,803	$	252,805	$	162,002	$	85,000	$	5,803	$	252,805
Special mention		5,518		1,972		188		7,678		5,518		1,972		188		7,678
Substandard		6,138		2,110		172		8,420		6,138		2,110		172		8,420
Doubtful		119		96		–		215		119		96		–		215
Total	$	173,777	$	89,178	$	6,163	$	269,118	$	173,777	$	89,178	$	6,163	$	269,118

	30–59 Days Past Due and Still Accruing		60–89 Days Past Due and Still Accruing		Greater than 90 Days and Still Accruing		Total Past Due and Still Accruing		Nonaccrual Loans		Current Loans		Total Loans		Predecessor Company
December 31, 2010															30–59 Days Past Due		60–89 Days Past Due		Over 90 Days Past Due and Accruing		Nonaccrual Loans		Current Loans		Total Loans
(Dollars in thousands)

Commercial real estate:
Construction and land development	$	6,166	$	204	$	–	$	6,370	$	50,693	$	293,524	$	350,587	$	6,166	$	204	$	–	$	50,693	$	293,524	$	350,587
Commercial real estate – non-owner occupied		509		–		–		509		2,678		280,756		283,943
Real estate – non-owner occupied																509		–		–		2,678		280,756		283,943
Real estate – owner occupied																3,165		–		–		8,198		159,107		170,470
Consumer real estate:
Residential mortgage		2,213		329		–		2,542		3,481		167,754		173,777		2,213		329		–		3,481		167,754		173,777
Home equity lines		498		109		–		607		277		88,294		89,178		498		109		–		277		88,294		89,178
Commercial real estate – owner occupied		3,165		–		–		3,165		8,198		159,107		170,470
Commercial and industrial		175		146		–		321		5,830		139,284		145,435		175		146		–		5,830		139,284		145,435
Consumer		4		4		–		8		6		6,149		6,163		4		4		–		6		6,149		6,163
Other loans		–		–		–		–		781		32,961		33,742		–		–		–		781		32,961		33,742
Total	$	12,730	$	792	$	–	$	13,522	$	71,944	$	1,167,829	$	1,253,295	$	12,730	$	792	$	–	$	71,944	$	1,167,829	$	1,253,295

	Shares			Weighted Average Grant Date Fair Value

Nonvested at beginning of period		24,000		$	8.08
Granted		–			–
Vested		(11,900	)		10.19
Forfeited		(400	)		6.00
Nonvested at end of period		11,700		$	6.00

		Amount								Percent of Pretax Loss
(Dollars in thousands)		2010			2009			2008		2010		2009		2008

Tax benefit at statutory rate on net loss before taxes	$	(15,756	)	$	(4,702	)	$	(19,342	)	34.00	%	34.00	%	34.00	%
State taxes, net of federal benefit		(1,894	)		(558	)		18		4.09		4.03		(0.03	)
Increase (reduction) in taxes resulting from:
Valuation allowance on deferred tax asset		31,821			–			–		(68.67	)	–		–
Tax exempt interest		(945	)		(1,184	)		(1,085	)	2.04		8.56		1.91
Nontaxable BOLI income		(238	)		(622	)		(324	)	0.51		4.50		0.57
Taxable income on BOLI surrender		1,981			–			–		(4.27	)	–		–
Goodwill impairment charge		–			–			19,360		–		–		(34.03	)
Other, net		155			53			166		(0.34	)	(0.38	)	(0.29	)
	$	15,124		$	(7,013	)	$	(1,207	)	(32.64	)%	50.71	%	2.13	%

	Warrant Assumptions	December 12, 2008

	Dividend yield	4.4%
	Expected volatility	26.4%
	Risk-free interest rate	2.6%
	Expected life	10 years

	Three Months Ended
	December 31			September 30			June 30			March 31
(Dollars in thousands except per share data)

2010
Total assets	$	1,585,547		$	1,649,699		$	1,694,336		$	1,739,857
Cash and cash equivalents		66,745			68,069			41,417			53,341
Investment securities		223,292			196,046			228,812			232,780
Loans		1,254,479			1,324,932			1,351,101			1,376,085
Allowance for loan losses		36,061			36,249			35,762			29,160
Deposits		1,343,286			1,359,411			1,370,777			1,380,539
Borrowings		121,000			129,000			153,000			172,000
Subordinated debt		34,323			34,323			34,323			34,323
Shareholders’ equity		76,688			116,103			125,479			138,792

Net interest income	$	12,287		$	13,382		$	12,744		$	12,550
Provision for loan losses		20,011			6,763			20,037			11,734
Noninterest income		8,004			2,500			2,514			2,531
Noninterest expense		15,129			14,210			12,380			12,590
Net loss before taxes		(14,849	)		(5,091	)		(17,159	)		(9,243	)
Income tax expense (benefit)		18,634			3,975			(3,576	)		(3,909	)
Net loss		(33,483	)		(9,066	)		(13,583	)		(5,334	)
Dividends and accretion on preferred stock		589			588			589			589
Net loss attributable to common shareholders	$	(34,072	)	$	(9,654	)	$	(14,172	)	$	(5,923	)

Net loss per common share – basic	$	(2.59	)	$	(0.74	)	$	(1.09	)	$	(0.49	)
Net loss per common share – diluted	$	(2.59	)	$	(0.74	)	$	(1.09	)	$	(0.49	)

Proposal 1: To approve the issuance of shares of the Company’s common stock, no par value per share (“Common Stock”), under the terms of the Investment Agreement, dated November 3, 2010, among the Company, its wholly-owned subsidiary Capital Bank, and North American Financial Holdings, Inc. The votes were cast as follows:
Votes For	Votes Against	Abstained	Broker Non-Votes
6,480,642	365,389	49,440	0

	CAPITAL BANK CORPORATION


	By:	/s/ Christopher G. Marshall
		Christopher G. Marshall
		Chief Financial Officer

	Signature		Title


	/s/ R. Eugene Taylor		President, Chief Executive Officer
	R. Eugene Taylor		and Chairman of the Board
			(Principal Executive Officer)


	/s/ Christopher G. Marshall		Executive Vice President, Chief Financial Officer
	Christopher G. Marshall		and Director
			(Principal Financial Officer and Principal
			Accounting Officer)

	/s/ R. Bruce Singletary		Executive Vice President, Chief Risk Officer
	R. Bruce Singletary		and Director



	/s/ Charles F. Atkins		Director
	Charles F. Atkins



	/s/ Peter N. Foss		Director
	Peter N. Foss



	/s/ William A. Hodges		Director
	William A. Hodges



	/s/ Oscar A. Keller, III		Director
	Oscar A. Keller, III