UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2011

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from  to 

CAPITAL BANK CORPORATION

(Exact name of registrant as specified in its charter)

North Carolina	000-30062	56-2101930
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

333 Fayetteville Street, Suite 700

Raleigh, North Carolina 27601

(Address of principal executive offices)

(919) 645-6400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes  þ  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o	Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)	Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o  No  þ

As of August 12, 2011 there were 85,802,164 shares outstanding of the registrant’s common stock, no par value.

CAPITAL BANK CORPORATION

Form 10-Q for the Quarterly Period Ended June 30, 2011

INDEX

PART I – FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2011 (Successor) and December 31, 2010 (Predecessor)	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended June 30 2011 (Successor) and 2010 (Predecessor) and the Period of January 29, 2011 to June 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Six Months Ended June 30, 2010 (Predecessor)	4
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Period of January 29, 2011 to June 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Six Months Ended June 30, 2010 (Predecessor)	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Period of January 29, 2011 to June 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Six Months Ended June 30, 2010 (Predecessor)	6
	Unaudited Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	34
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults upon Senior Securities	41
Item 4.	(Removed and Reserved)	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
Signatures

- 2 -

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	Successor Company		Predecessor Company
(Dollars in thousands)	Jun. 30, 2011		Dec. 31, 2010
Assets
Cash and cash equivalents:
Cash and due from banks	$	12,477	$	13,646
Interest-bearing deposits with banks		–		53,099
Total cash and cash equivalents		12,477		66,745
Investment securities:
Investment securities – available for sale, at fair value		–		214,991
Other investments		–		8,301
Total investment securities		–		223,292
Mortgage loans held for sale		–		6,993
Loans:
Loans – net of unearned income and deferred fees		–		1,254,479
Allowance for loan losses		–		(36,061	)
Net loans		–		1,218,418
Investment in and advance to Capital Bank, NA		234,671		–
Other real estate		–		18,334
Premises and equipment, net		–		25,034
Other intangible assets, net		–		1,774
Other assets		428		24,957
Total assets	$	247,576	$	1,585,547
Liabilities
Deposits:
Demand deposits	$	–	$	116,113
NOW accounts		–		185,782
Money market accounts		–		137,422
Savings deposits		–		30,639
Time deposits		–		873,330
Total deposits		–		1,343,286
Borrowings		–		121,000
Subordinated debentures		18,561		34,323
Other liabilities		638		10,250
Total liabilities		19,199		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) 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		227,684		145,594
Retained earnings (accumulated deficit)		693		(108,027	)
Accumulated other comprehensive loss		–		(1,297	)
Total shareholders’ equity		228,377		76,688
Total liabilities and shareholders’ equity	$	247,576	$	1,585,547

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

- 3 -

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Successor Company		Predecessor Company			Successor Company			Predecessor Company
(Dollars in thousands except per share data)	Three Months Ended  Jun. 30, 2011		Three Months Ended Jun. 30, 2010			Jan. 29, 2011 to Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Interest income:
Loans and loan fees	$	14,915	$	17,312		$	25,971		$	5,479		$	34,723
Investment securities:
Taxable interest income		2,216		1,971			3,206			391			3,997
Tax-exempt interest income		239		483			398			74			1,084
Dividends		30		18			59			–			36
Federal funds and other interest income		40		10			87			11			20
Total interest income		17,440		19,794			29,721			5,955			39,860
Interest expense:
Deposits		2,786		5,604			4,560			1,551			11,755
Borrowings and subordinated debentures		765		1,446			1,251			445			2,811
Total interest expense		3,551		7,050			5,811			1,996			14,566
Net interest income		13,889		12,744			23,910			3,959			25,294
Provision for loan losses		1,485		20,037			1,652			40			31,771
Net interest income (loss) after provision for loan losses		12,404		(7,293	)		22,258			3,919			(6,477	)
Noninterest income:
Service charges and other fees		807		854			1,355			291			1,722
Bank card services		547		543			847			174			958
Mortgage origination and other loan fees		255		339			518			210			666
Brokerage fees		212		285			308			78			472
Bank-owned life insurance		114		255			134			10			494
Net gain on sale of investment securities		–		63			–			–			326
Other		130		175			155			69			407
Total noninterest income		2,065		2,514			3,317			832			5,045
Noninterest expense:
Salaries and employee benefits		5,568		5,319			9,525			1,977			10,719
Occupancy		1,786		1,456			2,926			548			2,958
Furniture and equipment		857		700			1,401			275			1,445
Data processing and telecommunications		635		525			911			180			1,042
Advertising and public relations		144		599			325			131			1,029
Office expenses		269		288			498			93			620
Professional fees		208		684			543			190			1,159
Business development and travel		304		307			550			87			574
Amortization of other intangible assets		287		235			478			62			470
ORE losses and miscellaneous loan costs		1,085		708			1,608			176			2,025
Directors’ fees		53		294			93			68			592
FDIC deposit insurance		513		651			1,076			266			1,316
Contract termination fees		374		–			3,955			–			–
Other		670		614			1,093			102			1,021
Total noninterest expense		12,753		12,380			24,982			4,155			24,970
Net income (loss) before taxes		1,716		(17,159	)		593			596			(26,402	)
Income tax expense (benefit)		449		(3,576	)		(100	)		–			(7,485	)
Net income (loss)		1,267		(13,583	)		693			596			(18,917	)
Dividends and accretion on preferred stock		–		589			–			861			1,178
Net (income) loss attributable to common shareholders	$	1,267	$	(14,172	)	$	693		$	(265	)	$	(20,095	)
Net income (loss) per common share – basic	$	0.01	$	(1.09	)	$	0.01		$	(0.02	)	$	(1.60	)
Net income (loss) per common share – diluted	$	0.01	$	(1.09	)	$	0.01		$	(0.02	)	$	(1.60	)

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

- 4 -

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Preferred Stock			Common Stock						Other Comprehensive			Retained
Successor Company	Shares	Amount		Shares			Amount			Income			Earnings			Total
(Dollars in thousands)
Balance at January 28, 2011	–	$	–		83,877,846		$	224,085		$	–		$	–		$	224,085
Comprehensive income:
Net income														693			693
Net unrealized gain on securities, net of tax of $2,820											4,495						4,495
Total comprehensive income																	5,188
Issuance of common stock, net of offering costs of $300					1,613,165			3,814									3,814
Stock option expense								72									72
Restricted stock					(1,751	)		(7	)								(7	)
Directors’ deferred compensation					312,904			–									–
Merger of Old Capital Bank into Capital Bank, NA								(280	)		(4,495	)					(4,775	)
Balance at June 30, 2011	–	$	–		85,802,164		$	227,684		$	–		$	693		$	228,377
	Preferred Stock			Common Stock						Other Comprehensive			Accumulated
Predecessor Company	Shares	Amount		Shares			Amount			Income (Loss)			Deficit			Total
(Dollars in thousands)
Balance at January 1, 2010	41,279	$	40,127		11,348,117		$	139,909		$	3,955		$	(44,206	)	$	139,785
Comprehensive loss:
Net loss														(18,917	)		(18,917	)
Net unrealized loss on securities, net of tax of $157											251						251
Amortization of prior service cost on SERP											4						4
Total comprehensive loss																	(18,662	)
Accretion of preferred stock discount			146											(146	)		–
Issuance of common stock					1,468,770			5,065									5,065
Restricted stock forfeiture					(400	)		(2	)								(2	)
Stock option expense								24									24
Directors’ deferred compensation					64,467			301									301
Dividends on preferred stock														(1,032	)		(1,032	)
Balance at June 30, 2010	41,279	$	40,273		12,880,954		$	145,136		$	4,210		$	(50,129	)	$	125,479
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

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

- 5 -

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Cash flows from operating activities:
Net income (loss)	$	693		$	596		$	(18,917	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Accretion of purchased credit-impaired loans		(24,968	)		–			–
Amortization/accretion of fair value premium/discount on acquired time deposits, borrowings and subordinated debentures, net		(3,529	)		–			–
Provision for loan losses		1,652			40			31,771
Amortization of other intangible assets		478			62			470
Depreciation		1,348			203			1,271
Stock-based compensation		140			42			386
Gain on sale of securities, net		–			–			(326	)
Amortization of premium on securities, net		695			171			49
Loss (gain) on disposal of premises, equipment and ORE		16			(9	)		334
ORE valuation adjustments		74			–			646
Bank-owned life insurance income		(134	)		(10	)		(518	)
Deferred income tax benefit		–			–			(6,763	)
Net change in:
Mortgage loans held for sale		1,907			4,424			(1,893	)
Accrued interest receivable and other assets		(4,897	)		(1,309	)		815
Accrued interest payable and other liabilities		2,899			(3,939	)		(776	)
Net cash provided by (used in) operating activities		(23,626	)		271			6,549
Cash flows from investing activities:
Principal repayments on loans, net of loans originated or acquired		13,305			14,547			4,057
Purchases of premises and equipment		(399	)		(416	)		(1,655	)
Proceeds from sales of premises, equipment and ORE		4,332			201			6,730
Sales (purchases) of FHLB stock		1,259			–			(2,025	)
Purchases of securities – available for sale		(138,855	)		(6,840	)		(57,013	)
Proceeds from sales of securities – available for sale		–			–			34,702
Proceeds from principal repayments/calls/maturities of securities – available for sale		25,761			3,936			41,179
Proceeds from principal repayments/calls/maturities of securities – held to maturity		–			–			593
Net cash paid in Capital Bank merger		(42,880	)		–			–
Investment in Capital Bank, NA		(6,063	)		–			–
Net cash provided by (used in) investing activities		(143,540	)		11,428			26,568
Cash flows from financing activities:
Increase (decrease) in deposits, net		(2,426	)		(4,960	)		(7,188	)
Decrease in repurchase agreements, net		–			–			(6,543	)
Proceeds from borrowings		–			–			151,000
Principal repayments of borrowings		(30,000	)		(5,000	)		(165,000	)
Proceeds from issuance of subordinated debentures		–			–			3,393
Repurchase of preferred stock		–			(41,279	)		–
Proceeds from North American Financial Holdings, Inc. Investment		–			181,050
Proceeds from issuance of common stock, net of offering costs		3,814			–			5,065
Dividends paid		–			–			(1,940	)
Net cash provided by (used in) financing activities		(28,612	)		129,811			(21,213	)
(continued on next page)

- 6 -

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011		Six Months Ended Jun. 30, 2010
Net change in cash and cash equivalents	$	(195,778	)	$	141,510	$	11,904
Cash and cash equivalents at beginning of period		208,255			66,745		29,513
Cash and cash equivalents at end of period	$	12,477		$	208,255	$	41,417
Supplemental Disclosure of Cash Flow Information
Noncash investing activities:
Transfers of loans and premises to ORE	$	7,573		$	248	$	13,054
Transfers of ORE to loans		857			146		–
Capital leases recorded in premises and other liabilities		6,618			–		–
Cash paid for:
Income taxes	$	130		$	–	$	–
Interest		9,989			1,531		14,516

Supplemental cash flow information related to the NAFH Investment is disclosed in Note 3.

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

- 7 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

1.  Basis of Presentation and 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. Prior to June 30, 2011, the Company’s primary wholly-owned subsidiary was Capital 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. The Company also has interests in three trusts, Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the “Trusts”).

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to North American Financial Holdings, Inc. (“NAFH”) for $181.1 million in cash (the “NAFH Investment”). As a result of the NAFH Investment and the Company’s rights offering on March 11, 2011 (the “Rights Offering”), NAFH currently owns approximately 83% of the Company’s common stock. Upon closing of the NAFH Investment, R. Eugene Taylor, NAFH’s Chief Executive Officer, Christopher G. Marshall, NAFH’s Chief Financial Officer, and R. Bruce Singletary, NAFH’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 NAFH-designated members (Peter N. Foss and William A. Hodges).

On June 30, 2011, Old Capital Bank merged (the “Bank Merger”) with and into NAFH National Bank (“NAFH Bank”), a national banking association and subsidiary of TIB Financial Corp (“TIB Financial”) and NAFH, 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”). NAFH is the owner of approximately 94% of TIB Financial’s common stock. As a result of the Bank Merger, the Company now owns approximately 38% of Capital Bank, NA, with NAFH having a direct ownership of 29% and TIB Financial owning the remaining 33%. 

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. Accounts of the Old Bank were consolidated with the Company until the Bank Merger on June 30, 2011 (and information presented herein “as of” June 30, 2011 gives effect to the completion of the Bank Merger). In connection with the Bank Merger, the Company accounts for its investment in Capital Bank, NA under the equity method. The Trusts have not been consolidated with the financial statements of the Company. The interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). They do not include all of the information and footnotes required by such accounting principles for complete financial statements, and therefore should be read in conjunction with the audited consolidated financial statements and accompanying footnotes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included, and all significant intercompany transactions have been eliminated in consolidation. The Company has considered the impact on these condensed consolidated financial statements of subsequent events. Certain amounts reported in prior periods have been reclassified to conform to the current presentation. Such reclassifications have no effect on total assets, net income or shareholders’ equity as previously reported. The results of operations for the period of January 29 to June 30, 2011 (Successor Company) and the period of January 1 to January 28, 2011 (Predecessor Company) are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2011. The condensed consolidated balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A description of the accounting policies followed by the Company are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Due to the NAFH 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. These new accounting policies are described as follows:

- 8 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

Purchased Credit-Impaired Loans

Loans acquired in a transfer, including business combinations and transactions similar to the NAFH 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.

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.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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.

- 9 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

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. 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 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. Adoption of this update did not 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 were 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.

2.  Bank Merger

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 and subsidiary of TIB Financial and NAFH, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association. NAFH is the owner of approximately 83% of the Company’s common stock and approximately 94% of TIB Financial’s 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. As a result of the Bank Merger, the Company now owns approximately 38% of Capital Bank, NA, with NAFH having a direct ownership of 29% and TIB Financial owning the remaining 33%.  As of June 30, 2011, Capital Bank, NA had total assets of $4.5 billion, total deposits of $3.5 billion and shareholders’ equity of $610.3 million. 

The Bank Merger and the preceding merger of TIB Bank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. The $4.8 million difference between the amount of the Company’s initial equity method investment in Capital Bank, NA, subsequent to the Bank Merger, and the Company’s investment in Old Capital Bank, immediately preceding the Bank Merger, was recorded as a reduction to common stock within shareholders’ equity. Additionally, at the time of the Bank Merger, due to the de-consolidation 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, NAFH, the Company and TIB Financial made 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. The contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.

- 10 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

The Company reports its investment in Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment in that entity. As of June 30, 2011, the Company’s investment in Capital Bank, NA totaled $231.3 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity as a result of the Bank Merger in addition to the capital contribution immediately following the Bank Merger. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of June 30, 2011. In periods subsequent to the Bank Merger, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income.

3.  NAFH Investment

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to NAFH for $181.1 million in cash. In connection with the NAFH Investment, each 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 Old Capital Bank’s then existing loan portfolio. Also in connection with the NAFH 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.

Pursuant to the NAFH 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 NAFH 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 NAFH Investment or any subsequent transaction or series of transactions that result in an affiliate of NAFH 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 NAFH 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 NAFH’s acquisition of 85% of the Company’s outstanding common stock on January 28, 2011.

The following table summarizes the NAFH Investment and the Company’s opening balance sheet:

- 11 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

	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			–			1,135,164
Goodwill		30,994			1,863			32,857
Other intangible assets		5,004			–			5,004
Deferred tax asset		55,391			–			55,391
Other assets		66,663			(613	)		66,050
Total assets acquired		1,729,376			1,250			1,730,626
Fair value of liabilities assumed:
Deposits		1,351,467			–			1,351,467
Borrowings		123,837			–			123,837
Subordinated debt		19,392			–			19,392
Other liabilities		10,595			1,250			11,845
Total liabilities assumed		1,505,291			1,250			1,506,541
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. Thus, 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.

Measurement period adjustments reflected above were primarily due to (1) refinements to the acquisition date valuation of certain ORE properties based on subsequent selling prices, (2) refinements to the acquisition date valuation of a capital lease asset/obligation based on an updated appraisal of the leased asset, and (3) 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 NAFH 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 NAFH 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.

- 12 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

Loans

All loans in the loan portfolio were adjusted to estimated fair value at the NAFH 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 $104.4 million. All acquired loans were considered to be PCI loans with the exception of certain consumer revolving lines of credit. Subsequent to the NAFH 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 NAFH 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.

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 $55.4 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.

- 13 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

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 $30.9 million and $3.4 million, respectively, and the estimated fair value (discount)/premium on each totaled ($15.1) 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 NAFH 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 estimated the fair value of these CVRs at $568 thousand, which was based on its estimate of credit losses on the existing loan portfolio over the five-year life of these instruments. These CVRs were recorded at fair value in other liabilities in acquisition accounting.

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 NAFH 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 NAFH.

There were no indemnification assets in this transaction, nor was there any contingent consideration to be recognized.

4.  Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) excludes dilution and is computed by dividing income available 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 was based on the following for each period presented:

- 14 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

	Successor Company		Predecessor Company			Successor Company		Predecessor Company
(Dollars in thousands except per share data)	Three Months Ended  Jun. 30, 2011		Three Months Ended Jun. 30, 2010			Jan. 29, 2011 to Jun. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Net income (loss) attributable to common shareholders	$	1,267	$	(14,172	)	$	693	$	(265	)	$	(20,095	)
Weighted average number of common shares outstanding:
Basic		85,802,164		13,021,208			85,465,250		13,188,612			12,520,600
Dilutive effect of options outstanding		9		–			–		–			–
Diluted		85,802,173		13,021,208			85,465,250		13,188,612			12,520,600
Earnings (loss) per share – basic	$	0.01	$	(1.09	)	$	0.01	$	(0.02	)	$	(1.60	)
Earnings (loss) per share – diluted	$	0.01	$	(1.09	)	$	0.01	$	(0.02	)	$	(1.60	)

Weighted average anti-dilutive stock options and warrants and unvested restricted shares excluded from the computation of diluted earnings per share are as follows:

	Successor Company		Predecessor Company		Successor Company		Predecessor Company
	Three Months Ended  Jun. 30, 2011		Three Months Ended Jun. 30, 2010		Jan. 29, 2011 to Jun. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Six Months Ended Jun. 30, 2010
Anti-dilutive stock options		291,980		312,920		292,480		297,880		312,920
Anti-dilutive warrants		–		749,619		–		749,619		749,619

5.  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 derivatives that qualify as cash flow hedges to the extent that the hedge is effective.

The Company’s other comprehensive income (loss) was as follows for each period presented:

	Successor Company			Predecessor Company			Successor Company			Predecessor Company
(Dollars in thousands)	Three Months Ended  Jun. 30, 2011			Three Months Ended Jun. 30, 2010			Jan. 29, 2011 to Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Unrealized gains (losses) on securities – available for sale	$	5,080		$	1,014		$	7,315		$	(528	)	$	408
Amortization of prior service cost on SERP		–			2			–			1			4
Income tax effect		(1,958	)		(391	)		(2,820	)		204			(157	)
Other comprehensive income (loss)	$	3,122		$	625		$	4,495		$	(323	)	$	255

6.  Investment Securities

Due to the Bank Merger, the Company reported no investment securities on its Consolidated Balance Sheet as of June 30, 2011 (Successor). Investment securities as of December 31, 2010 (Predecessor) are summarized as follows:

- 15 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

	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

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

Prior to the Bank Merger, other investment securities primarily included an investment in Federal Home Loan Bank (“FHLB”) stock, which had 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 and that ultimate recoverability of the par value of this investment is probable.

7.  Loans

Due to the Bank Merger, the Company reported no loans on its Consolidated Balance Sheet as of June 30, 2011 (Successor). The composition of the loan portfolio by loan classification as of December 31, 2010 (Predecessor) was as follows:

- 16 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

	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 as of $341.5 million as of December 31, 2010 (Predecessor).

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		(98,777	)
Cash flows expected to be collected at acquisition		1,219,925
Accretable yield		(163,892	)
Fair value of acquired loans at acquisition	$	1,056,033

Accretable yield, or income expected to be collected, related to purchased credit-impaired loans is as follows:

(Dollars in thousands)	Three Months Ended Jun. 30, 2011			Jan. 29, 2011 to Jun. 30, 2011
Balance, beginning of period	$	153,627		$	163,892
New loans purchased		–			–
Accretion of income		(14,703	)		(24,968	)
Reclassifications from nonaccretable difference		18,100			18,100
Merger of Old Capital Bank into Capital Bank, NA		(157,024	)		(157,024	)
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 NAFH 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 NAFH 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:

- 17 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

• 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.

8.  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 Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Balance at beginning of period, predecessor	$	–		$	36,061		$	26,081
Loans charged off		(339	)		(49	)		(22,241	)
Recoveries of loans previously charged off		–			9			151
Net charge-offs		(339	)		(40	)		(22,090	)
Provision for loan losses		1,652			40			31,771
Merger of Old Capital Bank into Capital Bank, NA		(1,313	)		–			–
Balance at the end of period, predecessor		–			36,061			35,762
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 Sheets. Due to the Bank Merger, the Company had no allowance for credit losses as of June 30, 2011 (Successor). As of December 31, 2010 (Predecessor), the reserve for unfunded lending commitments totaled $623 thousand.

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
	Allowance for Loan Losses						Loans
December 31, 2010	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit- Impaired		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Purchased Credit- Impaired
(Dollars in thousands)
Commercial real estate	$	351	$	24,039	$	–	$	65,840	$	739,160	$	–
Consumer real estate		87		4,645		–		3,879		259,076		–
Commercial and industrial		89		6,343		–		6,013		139,422		–
Consumer		2		352		–		6		6,157		–
Other		–		153		–		781		32,961		–
	$	529	$	35,532	$	–	$	76,519	$	1,176,776	$	–

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 is selected on the financial strength and overall resources of the borrower. The nine risk rating categories can generally be described by the following groupings:

- 18 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

• Pass (risk rating 1–6) – These loans range 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 potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result 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 generally undesirable. Loans in this category are currently protected by current sound net worth and paying capacity of the obligor or of the collateral pledged, if any, but are 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 are 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 are 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 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 is highly unlikely. Full collection based on currently known facts, conditions, and values is highly questionable and improbable. The possibility of loss is 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 is 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

The following is an aging analysis of the Company’s portfolio by loan class as of December 31, 2010 (Predecessor):

- 19 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

	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

9.  Stock-Based Compensation

Stock Options

Pursuant to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”), the Company has a stock option plan providing for the issuance of options for the purchase of up to 1,150,000 shares of the Company’s common stock to officers and directors. As of June 30, 2011 (Successor), options for 292,480 shares of common stock were outstanding and options for 609,759 shares of common stock remained available for future issuance.

The following is a summary of the activity in the Company’s stock option plans, including the weighted average exercise price (“WAEP”), for each period presented:

	Successor Company					Predecessor Company
	Period of Jan. 29 to Jun. 30, 2011					Period of Jan. 1 to Jan. 28, 2011				Six Months Ended Jun. 30, 2010
	Shares			WAEP		Shares		WAEP		Shares			WAEP
Outstanding options, beginning of period		297,880		$	12.11		297,880	$	12.11		366,583		$	11.76
Granted		–			–		–		–		19,250			4.38
Exercised		–			–		–		–		–			–
Forfeited and expired		(5,400	)		14.51		–		–		(72,413	)		8.53
Outstanding options, end of period		292,480		$	12.07		297,880	$	12.11		313,420		$	12.05
Options exercisable at end of period		253,280		$	12.92		226,430	$	13.53		220,470		$	13.70

The following table summarizes information about the Company’s stock options as of June 30, 2011 (Successor):

	Successor Company
Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life in Years		Number Exercisable		Intrinsic Value
$3.85 – $6.00		77,850		7.80		41,850	$	–
$6.01 – $9.00		–		–		–		–
$9.01 – $12.00		74,880		0.70		74,880		–
$12.01 – $15.00		20,000		5.13		16,800		–
$15.01 – $18.00		66,000		3.57		66,000		–
$18.00 – $18.37		53,750		3.49		53,750		–
		292,480		4.05		253,280	$	–

- 20 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

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 price volatility, which when changed can materially affect fair value estimates. The weighted average fair value of options granted for the six months ended June 30, 2010 (Predecessor) was $1.80. There were no options granted in the period of January 29, 2011 to June 30, 2011 (Successor) or the period of January 1, 2011 to January 28, 2011 (Predecessor).

As of June 30, 2011 (Successor), the Company had unamortized compensation expense related to unvested stock options of $24 thousand, which is expected to be fully amortized over the next two years. For the period from January 29, 2011 to June 30, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the six months ended June 30, 2010 (Predecessor), the Company recorded total compensation expense related to stock options of $72 thousand, $5 thousand and $24 thousand, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the NAFH Investment. Compensation expense related to the accelerated vesting was recorded in the Successor period.

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. Nonvested shares are subject to forfeiture if employment terminates prior to the vesting dates. The Company expenses 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 six months ended June 30, 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		–		$	–

Total compensation expense related to these restricted stock awards for the period of January 29  to June 30, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the six months ended June 30, 2010 (Predecessor) totaled $68 thousand, $2 thousand and $61 thousand, respectively. On January 28, 2011, vesting was accelerated on all remaining nonvested restricted shares in connection with the NAFH Investment. Compensation expense related to the accelerated vesting was recorded in the Successor period.

Deferred Compensation for Non-employee Directors

Until the NAFH Investment, 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% 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 NAFH Investment, the Deferred Compensation Plan was terminated and all phantom shares in the Plan were distributed to the participants. For the period of January 1 to January 28, 2011 (Predecessor) and the six months ended June 30, 2010 (Predecessor), the Company recognized stock-based compensation expense of $35 thousand and $301 thousand, respectively, related to the Deferred Compensation Plan.

- 21 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

10.  Derivative Instruments

Due to the Bank Merger, the Company had no derivative instruments as of June 30, 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.

11.  Commitments and Contingencies

Due to the Bank Merger, the Company had no outstanding commitments or contingencies as of June 30, 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.

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

Prior to the Bank Merger, 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 Sheets. Remaining capital commitments to these funds totaled $1.6 million as of December 31, 2010 (Predecessor).

12.  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 Banker 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.

- 22 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 (Predecessor) are summarized below:

	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 the periods presented:

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Jun. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Six Months Ended Jun. 30, 2010
Balance at beginning of period	$	1,107		$	1,300		$	1,300
Total unrealized losses included in:
Net income		–			–			–
Other comprehensive income		–			(193	)		–
Purchases, sales and issuances, net		–			–			–
Transfers in and (out) of Level 3		–			–			–
Merger of Old Capital Bank into Capital Bank, NA		(1,107	)
Balance at end of period	$	–		$	1,107		$	1,300

Assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2010 (Predecessor) are summarized below:

	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)
Impaired loans	$	–	$	61,006	$	14,985	$	75,990
Other real estate		–		18,334		–		18,334

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.

- 23 -

Capital Bank Corporation – Notes to Condensed Consolidated Financial Statements (Unaudited)

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 have also been factored into expected future cash flows. 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).

The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2011 (Successor) and December 31, 2010 (Predecessor) were as follows:

	Successor Company				Predecessor Company
	Jun. 30, 2011				Dec. 31, 2010
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	12,477	$	12,477	$	66,745	$	66,745
Investment securities		–		–		223,292		223,292
Mortgage loans held for sale		–		–		6,993		6,993
Loans		–		–		1,218,418		1,146,256
Accrued interest receivable		266		266		5,158		5,158
Financial Liabilities:
Non-maturity deposits	$	–	$	–	$	469,956	$	469,956
Time deposits		–		–		873,330		885,105
Borrowings		–		–		121,000		126,787
Subordinated debentures		18,561		20,695		34,323		19,164
Accrued interest payable		70		70		1,363		1,363
Unrecognized financial instruments:
Commitments to extend credit		–		–	$	175,318	$	167,817
Standby letters of credit		–		–		10,285		10,285

13.  TARP Capital Purchase Program

On December 12, 2008, the Company entered into a Securities Purchase Agreement with the U.S. Treasury pursuant to which, among other things, the Company sold to the Treasury 41,279 shares of Series A Preferred Stock and warrants to purchase up to 749,619 shares of common stock (“Warrants”) of the Company for an aggregate purchase price of $41.3 million.

On January 28, 2011, in connection with the NAFH Investment, all outstanding shares of Series A Preferred Stock and the Warrants were repurchased and cancelled for an aggregate purchase price of $41.3 million. The Company recognized a charge of $861 thousand for dividends and accretion on preferred stock during the period of January 1, 2011 to January 28, 2011 (Predecessor), which reflected the difference between the carrying value of the preferred stock and its redemption price.

- 24 -

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

The following discussion presents an overview of the unaudited financial statements for the three months ended June 30, 2011 (Successor) and June 30, 2010 (Predecessor) as well as the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor) and the six months ended June 30, 2010 (Predecessor) for Capital Bank Corporation (“Capital Bank Corp.” or the “Company”). This discussion and analysis is intended to provide pertinent information concerning financial condition, results of operations, liquidity, and capital resources for the periods covered and should be read in conjunction with the unaudited financial statements and related footnotes contained in Part I, Item 1 of this report.

Information set forth below contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. 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. The Company cautions that 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, as well as the factors set forth in Part II, Item 1A of this report, and the Company’s periodic reports and other filings with the Securities and Exchange Commission, or SEC.

Overview

Capital Bank Corporation is a financial holding company incorporated under the laws of North Carolina 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 commenced operations on June 20, 1997. The Company also has interests in three trusts, Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the “Trusts”).

North American Financial Holdings, Inc. Investment

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to NAFH for $181.1 million in cash. In connection with the NAFH Investment, each 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 Old Capital Bank’s then existing loan portfolio. Also in connection with the NAFH 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 were repurchased.

Pursuant to the NAFH 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.

Upon closing of the NAFH Investment, R. Eugene Taylor, NAFH’s Chief Executive Officer, Christopher G. Marshall, NAFH’s Chief Financial Officer, and R. Bruce Singletary, NAFH’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 NAFH-designated members (Peter N. Foss and William A. Hodges).

Bank Merger

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 and subsidiary of TIB Financial and NAFH, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, National Association. NAFH is the owner of approximately 83% of the Company’s common stock and approximately 94% of TIB Financial’s 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. 

- 25 -

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. As a result of the Bank Merger, the Company now owns approximately 38% of Capital Bank, NA, with NAFH having a direct ownership of 29% and TIB Financial owning the remaining 33%.  As of June 30, 2011, Capital Bank, NA had total assets of $4.5 billion, total deposits of $3.5 billion and shareholders’ equity of $610.3 million. 

The Bank Merger and the preceding merger of TIB Bank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. The $4.8 million difference between the amount of the Company’s initial equity method investment in Capital Bank, NA, subsequent to the Bank Merger, and the Company’s investment in Old Capital Bank, immediately preceding the Bank Merger, was recorded as a reduction to common stock within shareholders’ equity. Additionally, at the time of the Bank Merger, due to the de-consolidation 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, NAFH, the Company and TIB Financial made 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. The 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 June 30, 2011, the Company’s investment in Capital Bank, NA totaled $231.3 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity as a result of the Bank Merger in addition to the capital contribution immediately following the Bank Merger. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of June 30, 2011. In periods subsequent to the Bank Merger, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income.

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 condensed 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. 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.

Prior to the Bank Merger, the Company had identified the following accounting policies as being critical in terms of significant judgments and the extent to which estimates were used: (1) allowance for loan losses, (2) other-than-temporary impairment on investment securities, (3) valuation allowance on deferred income tax assets, and (4) impairment of goodwill and long-lived assets. These policies are important in understanding management’s discussion and analysis. For more information on the Company’s critical accounting policies, refer to Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Executive Summary

The following is a brief summary of the Company’s financial results for the three months ended June 30, 2011 (Successor) and June 30, 2010 (Predecessor) as well as the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor) and the six months ended June 30, 2010 (Predecessor):

• Capital Bank, formerly the wholly-owned banking subsidiary of Capital Bank Corporation, was merged with and into NAFH National Bank on June 30, 2011;

• NAFH Bank changed its name to and was rebranded as Capital Bank, NA immediately following the merger;

• The Company’s technology platform was converted to NAFH’s enterprise-wide technology platform;

• Core deposits (total deposits minus time deposits) grew by $27.9 million, or 5.7%, in the second quarter of 2011 immediately prior to the Bank Merger; and

• Net income totaled $1.3 million, or $0.01 per share, in the second quarter of 2011 and totaled $693 thousand, or $0.01 per share, in the period from January 29 to June 30, 2011.

- 26 -

Results of Operations

Results of operations for all successor periods in 2011 were significantly impacted by the controlling investment in the Company by NAFH. The Company has used push-down accounting, and as such, has applied the acquisition method of accounting to the NAFH Investment. Accordingly, the Company’s assets and liabilities were adjusted to estimated preliminary fair value at the acquisition date, resulting in elimination of the allowance for loan losses at that date. The Company is still in the process of completing its fair value analysis of assets and liabilities, and final fair value adjustments may differ significantly from the preliminary estimates recorded to date. Balances and activity in the Company’s consolidated financial statements prior to the NAFH Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the NAFH Investment have been labeled with “Successor Company.”

In the successor periods, net income totaled $1.3 million, or $0.01 per share, in the second quarter of 2011 and totaled $693 thousand, or $0.01 per share, in the period from January 29 to June 30, 2011. In the predecessor periods, net loss to common shareholders totaled ($265) thousand, or ($0.02) per share, for the period of January 1 to January 28, 2011, totaled ($14.2) million, or ($1.09) per share, for the three months ended June 30, 2010, and totaled ($20.1) million, or ($1.60) per share for the six months ended June 30, 2010.

Net Interest Income

Net interest income for the quarter ended June 30, 2011 (Successor) and the quarter ended June 30, 2010 (Predecessor) totaled $13.9 million and $12.7 million, respectively. Net interest margin increased from 3.25% in the second quarter of 2010 (Predecessor) to 3.74% in the second quarter of 2011 (Successor) primarily due to a decline in funding costs as the average rate on total interest-bearing liabilities fell from 1.97% to 1.07% over that period. Net amortization of purchase accounting fair value adjustments on interest-bearing liabilities increased net interest income by $2.1 million in the quarter ended June 30, 2011 (Successor) and lowered funding costs in the quarter by 0.63%. Average earning assets decreased from $1.62 billion in the quarter ended June 30, 2010 (Predecessor) to $1.52 billion in the quarter ended June 30, 2011 (Successor) primarily due to purchase accounting fair value adjustments, principal pay-downs and charge-offs on the loan portfolio.

Further, net interest income for the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the six months ended June 30, 2010 (Predecessor) totaled $23.9 million, $4.0 million and $25.3 million, respectively. Net interest margin increased from 3.23% in the first half of 2010 (Predecessor) to 3.90% for the period of January 29 to June 30, 2011 (Successor) primarily due to a decline in funding costs as the average rate on total interest-bearing liabilities fell from 2.03% to 1.06% over that period. Net amortization of purchase accounting fair value adjustments on interest-bearing liabilities increased net interest income by $3.5 million in the period from January 29 to June 30, 2011 (Successor) and lowered funding costs in the period by 0.62 %. Average earning assets decreased from $1.63 billion in the six months ended June 30, 2010 (Predecessor) to $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $1.52 billion in the period of January 29 to June 30, 2011 (Successor).

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.

- 27 -

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

Quarterly Comparison

Tax Equivalent Basis 1

	Successor Company														Predecessor Company
	Three Months Ended Jun. 30, 2011							Period of Jan. 29 to Mar. 31, 2011							Three Months Ended Jun. 30, 2010
(Dollars in thousands)	Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate
Assets
Loans 2	$	1,128,456	$	15,029		5.34	%	$	1,139,698	$	11,155		6.06	%	$	1,373,613	$	17,465		5.10	%
Investment securities 3		334,230		2,639		3.16			242,840		1,254		3.10			224,366		2,722		4.85
Interest-bearing deposits		56,149		40		0.29			138,309		47		0.21			25,300		10		0.16
Total interest-earning assets		1,518,835	$	17,708		4.68	%		1,520,847	$	12,456		5.07	%		1,623,279	$	20,197		4.99	%
Cash and due from banks		16,587							16,373							17,819
Other assets		166,859							156,670							78,142
Total assets	$	1,702,281						$	1,693,890						$	1,719,240
Liabilities and Equity
NOW and money market accounts	$	345,307	$	666		0.77	%	$	344,189	$	418		0.75	%	$	326,706	$	648		0.80	%
Savings accounts		32,241		10		0.12			31,521		6		0.12			30,721		10		0.13
Time deposits		843,725		2,110		1.00			851,424		1,350		0.98			891,645		4,946		2.22
Total interest-bearing deposits		1,221,273		2,786		0.91			1,227,134		1,774		0.89			1,249,072		5,604		1.80
Borrowings		93,849		410		1.76			98,599		254		1.59			153,264		1,146		3.00
Subordinated debentures		18,848		355		7.55			19,313		232		7.43			34,323		298		3.48
Repurchase agreements		–		–		–			–		–		–			1,590		2		0.50
Total interest-bearing liabilities		1,333,470	$	3,551		1.07	%		1,345,046	$	2,260		1.04	%		1,438,249	$	7,050		1.97	%
Noninterest-bearing deposits		122,326							113,607							133,455
Other liabilities		15,378							8,814							10,587
Total liabilities		1,471,174							1,467,467							1,582,291
Shareholders’ equity		231,107							226,423							136,949
Total liabilities and shareholders’ equity	$	1,702,281						$	1,693,890						$	1,719,240
Net interest spread 4						3.61	%						4.03	%						3.02	%
Tax equivalent adjustment			$	268						$	175						$	403
Net interest income and net interest margin 5			$	14,157		3.74	%			$	10,196		4.15	%			$	13,147		3.25	%

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.

- 28 -

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

Year-to-Date Comparison

Tax Equivalent Basis 1

	Successor Company							Predecessor Company
	Period of Jan. 29 to Jun. 30, 2011							Period of Jan. 1 to Jan. 28, 2011							Six Months Ended Jun. 30, 2010
(Dollars in thousands)	Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate
Assets
Loans 2	$	1,132,878	$	26,184		5.62	%	$	1,253,296	$	5,530		5.20	%	$	1,383,337	$	35,027		5.11	%
Investment securities 3		298,283		3,893		3.13			225,971		504		2.68			225,088		5,678		5.05
Interest-bearing deposits		88,465		87		0.24			63,350		11		0.20			22,777		20		0.18
Total interest-earning assets		1,519,626	$	30,164		4.83	%		1,542,617	$	6,045		4.61	%		1,631,202	$	40,725		5.03	%
Cash and due from banks		16,503							16,112							18,630
Other assets		158,079							34,021							76,219
Total assets	$	1,694,208						$	1,592,750						$	1,726,051
Liabilities and Equity
NOW and money market accounts	$	344,867	$	1,084		0.76	%	$	334,668	$	211		0.74	%	$	334,334	$	1,534		0.93	%
Savings accounts		31,958		16		0.12			30,862		3		0.11			29,861		20		0.14
Time deposits		846,753		3,460		0.99			870,146		1,337		1.81			881,632		10,201		2.33
Total interest-bearing deposits		1,223,578		4,560		0.91			1,235,676		1,551		1.48			1,245,827		11,755		1.90
Borrowings		95,414		665		1.70			120,032		343		3.36			162,061		2,290		2.85
Subordinated debentures		19,031		586		7.49			34,323		102		3.50			32,786		516		3.17
Repurchase agreements		–		–		–			–		–		–			3,120		5		0.32
Total interest-bearing liabilities		1,338,023	$	5,811		1.06	%		1,390,031	$	1,996		1.69	%		1,443,794	$	14,566		2.03	%
Noninterest-bearing deposits		118,896							114,660							132,718
Other liabilities		12,796							9,635							10,622
Total liabilities		1,469,715							1,514,326							1,587,134
Shareholders’ equity		224,493							78,424							138,917
Total liabilities and shareholders’ equity	$	1,694,208						$	1,592,750						$	1,726,051
Net interest spread 4						3.77	%						2.92	%						3.00	%
Tax equivalent adjustment			$	443						$	90						$	865
Net interest income and net interest margin 5			$	24,353		3.90	%			$	4,049		3.09	%			$	26,159		3.23	%

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.

- 29 -

Provision for Loan Losses

Provision for loan losses for the quarter ended June 30, 2011 (Successor) and the quarter ended June 30, 2010 (Predecessor) totaled $1.5 million and $20.0 million, respectively. The loan loss provision in the successor period reflects $585 thousand of estimated losses inherent in loans originated subsequent to the NAFH Investment date, $561 thousand of impairment related to probable decreases in cash flows expected to be collected on certain of the Company’s purchased credit-impaired (“PCI”) loan pools, and $339 thousand of losses on acquired non-PCI loans.

In addition, provision for loan losses for the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the six months ended June 30, 2010 (Predecessor) totaled $1.7 million, $40 thousand and $31.8 million, respectively. The loan loss provision in the successor period reflects $752 thousand of estimated losses inherent in loans originated subsequent to the NAFH Investment date, $561 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.

Loans acquired in the NAFH Investment where there was evidence of credit deterioration since origination and where it was probable that the Company will not collect all contractually required principal and interest payments are 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 are refreshed 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. In the second quarter of 2011 (Successor), the Company estimated an $18.1 million increase in cash flows expected to be collected on several PCI loan pools. This increase in expected cash flows will result in a prospective yield increase over the remaining life of the respective pools.

Noninterest Income

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

	Successor Company		Predecessor Company		Successor Company		Predecessor Company
(Dollars in thousands)	Three Months Ended  Jun. 30, 2011		Three Months Ended Jun. 30, 2010		Jan. 29, 2011 to Jun. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Six Months Ended Jun. 30, 2010
Service charges and other fees	$	807	$	854	$	1,355	$	291	$	1,722
Bank card services		547		543		847		174		958
Mortgage origination and other loan fees		255		339		518		210		666
Brokerage fees		212		285		308		78		472
Bank-owned life insurance		114		255		134		10		494
Net gain on sale of investment securities		–		63		–		–		326
Other		130		175		155		69		407
Total noninterest income	$	2,065	$	2,514	$	3,317	$	832	$	5,045

Noninterest income for the quarter ended June 30, 2011 (Successor) and the quarter ended June 30, 2010 (Predecessor) totaled $2.1 million and $2.5 million, respectively. Noninterest income in the second quarter of 2010 (Predecessor) benefited from $63 thousand of gains recorded on the sale of investment securities while no gains or losses were recognized in the second quarter of 2011 (Successor). Mortgage fees were negatively impacted in the quarter ended June 30, 2011 (Successor) by sluggish demand in the local housing market and by an uptick in mortgage rates early in 2011. Additionally, income from bank-owned life insurance (“BOLI”) in the second quarter of 2011 (Successor) was lower than the second quarter of 2010 (Predecessor) after the Company surrendered certain BOLI contracts on former employees and directors late in 2010.

- 30 -

Further, noninterest income for the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the six months ended June 30, 2010 (Predecessor) totaled $3.3 million, $832 thousand and $5.0 million, respectively. Noninterest income in the first half of 2010 (Predecessor) benefited from $326 thousand of gains recorded on the sale of investment securities while no gains or losses were recognized in the period from January 29 to June 30, 2011 (Successor). Additionally, income from bank-owned life insurance BOLI in the period was significantly lower than the six months ended June 30, 2010 (Predecessor) after the Company surrendered certain BOLI contracts on former employees and directors late in 2010. Other noninterest income for the period of January 29 to June 30, 2011 (Successor) was negatively impacted by a $50 thousand loss from a decline in the stock price of an equity security that the Company marks to market through noninterest income, while the Company recorded a gain of $71 thousand from appreciation in value of this security in the first quarter of 2010 (Predecessor).

Noninterest Expense

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

	Successor Company		Predecessor Company		Successor Company		Predecessor Company
(Dollars in thousands)	Three Months Ended  Jun. 30, 2011		Three Months Ended Jun. 30, 2010		Jan. 29, 2011 to Jun. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Six Months Ended Jun. 30, 2010
Salaries and employee benefits	$	5,568	$	5,319	$	9,525	$	1,977	$	10,719
Occupancy		1,786		1,456		2,926		548		2,958
Furniture and equipment		857		700		1,401		275		1,445
Data processing and telecommunications		635		525		911		180		1,042
Advertising and public relations		144		599		325		131		1,029
Office expenses		269		288		498		93		620
Professional fees		208		684		543		190		1,159
Business development and travel		304		307		550		87		574
Amortization of other intangible assets		287		235		478		62		470
ORE losses and miscellaneous loan costs		1,085		708		1,608		176		2,025
Directors’ fees		53		294		93		68		592
FDIC deposit insurance		513		651		1,076		266		1,316
Contract termination fees		374		–		3,955		–		–
Other		670		614		1,093		102		1,021
Total noninterest expense	$	12,753	$	12,380	$	24,982	$	4,155	$	24,970

Noninterest expense for the quarter ended June 30, 2011 (Successor) and the quarter ended June 30, 2010 (Predecessor) totaled $12.8 million and $12.4 million, respectively. Expenses in the second quarter of 2011 (Successor) were significantly impacted by a $374 thousand contract termination fee related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the NAFH enterprise. This system conversion is intended to create operating efficiencies and better position the Company for future growth.

Additionally, salaries and benefits expense increased due primarily to lower deferred loan costs, which reduce expense. Occupancy expense was negatively impacted in the second quarter of 2011 (Successor) from the relocation of two previously existing branch offices into larger facilities that were opened early in 2011. Advertising and public relations costs were elevated in the second quarter of 2010 (Predecessor) compared to the second quarter of 2011 (Successor) due in part from radio and television ads promoting the Company’s special financing programs which were discontinued in early 2011. Professional fees were elevated in the second quarter of 2010 (Predecessor) primarily due to higher legal costs as the Company explored various capital raising options prior to being recapitalized by NAFH. Other real estate losses and miscellaneous loan costs were higher in the second quarter of 2011 (Successor) because of higher loan workout, appraisal and foreclosure costs to resolve problem assets. Directors’ fees were reduced significantly in the second quarter of 2011 (Successor) as the Company’s board of directors was reconstituted post-acquisition and the Capital Bank Corporation Deferred Compensation Plan for Outside Directors was terminated.

- 31 -

Further, noninterest expense for the period of January 29 to June 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the six months ended June 30, 2010 (Predecessor) totaled $25.0 million, $4.2 million and $25.0 million, respectively. Expenses in the successor period were significantly impacted by $4.0 million of contract termination fees related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the NAFH enterprise.

Additionally, salaries and benefits expense increased in the successor period from the accelerated vesting of stock options and restricted shares at closing of the NAFH Investment. Salaries expense also increased in the successor period and period of January 1 to January 28, 2011 (Predecessor) from lower deferred loan costs, which reduce expense. Occupancy expense was impacted in the successor period and period of January 1 to January 28, 2011 (Predecessor) from the relocation of two previously existing branch offices into larger facilities that were opened early in 2011. Advertising and public relations costs were elevated in the first six months of 2010 (Predecessor) due in part from radio and television ads promoting the Company’s special financing programs which were discontinued in early 2011. Professional fees were elevated in the first six months of 2010 (Predecessor) primarily due to higher legal costs as the Company explored various capital raising options prior to being recapitalized by NAFH. Other real estate losses and miscellaneous loan costs were lower in the successor period because of valuation adjustments to reduce the value of certain bank-owned properties at the NAFH Investment date. Directors’ fees were reduced significantly in the successor period as the Company’s board of directors was reconstituted post-acquisition and the Capital Bank Corporation Deferred Compensation Plan for Outside Directors was terminated.

Analysis of Financial Condition

The Company’s financial condition was significantly impacted by the controlling investment in the Company by NAFH on January 28, 2011. NAFH owns approximately 83% of the Company’s outstanding common stock. Because of the NAFH 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 de-consolidated the assets and liabilities of Old Capital Bank and began reporting its approximately 38% ownership of Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment. This transaction resulted in the Company’s total assets decreasing from $1.6 billion as of December 31, 2010 (Predecessor) to $247.6 million as of June 30, 2011 (Successor). As of June 30, 2011, the Company’s investment in Capital Bank, NA totaled $231.3 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity as a result of the Bank Merger in addition to the capital contribution immediately following the Bank Merger. The Company also had an advance to Capital Bank, NA totaling $3.4 million. In periods subsequent to the Bank Merger, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income. In addition to the investment in and advance to Capital Bank, NA, the Company also had $12.5 million of cash on deposit with Capital Bank, NA and $428 thousand of other assets as of June 30, 2011 (Successor).

The Company’s subordinated debentures had a carrying value of $18.6 million and a notional value of $33.4 million as of June 30, 2011 (Successor). The decline in the carrying value of these debt instruments since December 31, 2010 (Predecessor) was primarily due to acquisition accounting adjustments resulting from the NAFH Investment and accretion of the fair value discount in the successor period.

Total shareholders’ equity was $228.4 million as of June 30, 2011 (Successor) and represented a significant increase from the $76.7 million balance as of December 31, 2010 (Successor). This increase was primarily due to the NAFH Investment on January 28, 2011. Common stock, no par value, totaled $227.7 million as of June 30, 2011 (Successor). This amount represents the fair value of net assets acquired of $224.1 million at the NAFH 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 in the Rights Offering on March 11, 2011. Common stock then decreased by a net of $280 thousand due to the Bank Merger and related reclassification of accumulated other comprehensive income. The Company’s retained earnings totaled $693 thousand as of June 30, 2011 (Successor), which represents the Company’s net income in the successor period. Accumulated other comprehensive income was reclassified to common stock in connection with the Bank Merger and de-consolidation of Old Capital Bank on June 30, 2011.

- 32 -

Capital

The Company’s and Capital Bank, NA’s capital amounts and ratios as of June 30, 2011 (Successor) are presented in the following table:

					Minimum Requirements To Be:
	Actual				Adequately Capitalized				Well Capitalized
(Dollars in thousands)		Amount	Ratio			Amount	Ratio			Amount	Ratio
Capital Bank Corporation:
Total capital (to risk-weighted assets)	$	246,938	105.04	%	$	18,808	8.00	%		N/A	N/A
Tier I capital (to risk-weighted assets)		243,341	103.51			9,404	4.00			N/A	N/A
Tier I capital (to average assets)		243,341	14.29			68,091	4.00			N/A	N/A
Capital Bank, NA:
Total capital (to risk-weighted assets)	$	472,047	17.45	%	$	216,469	8.00	%	$	270,587	10.00	%
Tier I capital (to risk-weighted assets)		459,853	16.99			108,235	4.00			162,352	6.00	%
Tier I capital (to average assets)		459,853	10.50			175,199	4.00			218,999	5.00	%

NAFH Investment

On January 28, 2011, the Company completed the issuance and sale of 71 million shares of its common stock to NAFH for $181.1 million in cash. In connection with the NAFH 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 the Bank’s existing loan portfolio. Also in connection with the NAFH 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.

Pursuant to the NAFH 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.

Liquidity

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 and subsidiary of TIB Financial and NAFH, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, NA. NAFH is the owner of approximately 83% of the Company’s common stock and approximately 94% of TIB Financial’s common stock. 

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. As a result of the Bank Merger, the Company now owns approximately 38% of Capital Bank, NA, with NAFH owning 29% and TIB Financial owning the remaining 33%.  As of June 30, 2011, Capital Bank, NA had total assets of $4.5 billion, total deposits of $3.5 billion and shareholders’ equity of $610.3 million. 

The Company reports its investment in Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment in that entity. As of the Bank Merger date, the Company’s investment in Capital Bank, NA totaled $231.3 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity at that date. In addition, the Company had an advance to Capital Bank, NA totaling $3.4 million at the Bank Merger date. In periods subsequent to the Bank Merger, the Company will adjust this equity investment balance based on its equity in Capital Bank, NA’s net income and comprehensive income.

The Bank Merger resulted in a significant decrease in the total assets and total liabilities of the Company in the second quarter of 2011. As of June 30, 2011, the Company had cash on deposit with Capital Bank, NA of approximately $12.5 million. This cash is available for providing additional capital support to Capital Bank, NA and for other general corporate purposes.

- 33 -

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk that a financial institution’s earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk. As of June 30, 2011, the Company held no interest-earning assets, and its interest-bearing liabilities consisted of subordinated debentures with notional amounts totaling $33.4 million. Accordingly, the Company’s net interest income and net interest margin are sensitive to changes in interest rates.

The most significant component of the Company’s future operating results will be derived from its 38% investment in Capital Bank, NA. Thus, the Company anticipates that net interest income will become a less significant measure of operating results in future periods. As $30.0 million of notional value of the Company’s subordinated debentures are trust preferred securities with interest rates tied to 90-day LIBOR, changes in net interest income would be directly correlated to changes in this rate. Accordingly, 100 and 200 basis point changes in this rate would result in $300 thousand and $600 thousand changes in interest expense, respectively.

Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports it files or submits 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 its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the CEO and CFO concluded that, as of the end of the period covered by the report, the Company’s disclosure controls and procedures are effective in that the information the Company is required to disclose in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

There are no material pending legal proceedings to which the Company is a party or to which any of the Company’s 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, liquidity, operating results or condition.

Item 1A.  Risk Factors

The following discussion addresses some of the risks and uncertainties that could cause, or contribute to causing, actual results to differ materially from expectations. In evaluating our business, you should pay particular attention to the descriptions of risks and uncertainties described below. If any of the events described below occur, the Company’s business, financial condition, or results of operations could be materially adversely affected. In that event, the trading price of the Company’s common stock may decline, in which case the value of your investment may decline as well. References herein to “we”, “us”, and “our” refer to Capital Bank Corporation, a North Carolina corporation, unless the context otherwise requires.

Risks Related to Our Business

- 34 -

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 condition 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 or in the future to address the recent liquidity and credit crisis in the financial industry may significantly affect our liquidity or financial condition.

The Federal Reserve, U.S. Congress, the Treasury, the FDIC and others have taken numerous actions to address the current liquidity and credit situation in the financial markets. These measures include actions to encourage loan restructuring and modification for homeowners; the establishment of significant 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 part 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.

On February 17, 2009, 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 million 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 or 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 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.

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 may not be known for many months or years. We are closely monitoring all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effect of the Dodd-Frank Act on us cannot be determined yet, the law is likely to result in increased compliance costs and fees paid to regulators, along with possible restrictions on 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, regulations 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 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 or scrutiny 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, the effect that it, or any regulations, would have on our business, financial condition or results of operations.

- 35 -

Government regulations may prevent or impact our ability to pay dividends, engage in acquisitions or operate in other ways.

Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to our current and/or potential investors by restricting certain of our activities, such as:

• payment of dividends to our shareholders;

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

• our desired investments;

• loans and interest rates on loans;

• interest rates paid on our deposits;

• the possible expansion of our branch offices; and/or

• our 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.

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 banking regulators. 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 NAFH 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. Atkinsremained as members of our Board of Directors following the closing of the NAFH 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 NAFH 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.

- 36 -

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.

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 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;

• changes in technology and product delivery systems; and

• the accelerating pace of consolidation among financial services providers.

We 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 of other financial institutions could adversely affect us.

Our ability to engage in routine transactions, including, for example, funding transactions, could be adversely affected by the actions and potential failures 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 services industry. As a result, defaults by, or even rumors or concerns about, one or more financial institutions with which we do business, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by others.

- 37 -

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.

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

Technology and other changes are allowing parties 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 without the assistance of banks through the use of various electronic payment systems. The process of eliminating banks as intermediaries could result in 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 our financial condition and results of operations.

Technological advances impact our business.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products 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 systems, and those of third party contractors, to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed 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 could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Our controls and procedures may fail or be circumvented.

Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.

We have experienced net losses during the last three completed fiscal years, and we are uncertain as to whether or when we will again be profitable.

We experienced net losses during the years ended December 31, 2010, 2009 and 2008, and losses may continue. Our ability to generate profit in the future requires successful growth in revenues and management 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 of time.

Risks Related to Ownership of Our Common Stock

- 38 -

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

NAFH currently owns approximately 83.1% of the Company’s outstanding voting power. In addition, NAFH directly owns, or indirectly owns through its controlled subsidiaries, approximately 92% of Capital Bank, NA. As a result, NAFH 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 of the Company with or into NAFH), sales of all or some of the Company’s assets (including sales of such assets to NAFH and/or NAFH’s other subsidiaries) or purchases of assets from NAFH and/or NAFH’s other subsidiaries, and other significant corporate transactions.

Fiveof our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officerare affiliated with NAFH. NAFH also has sufficient voting power to amend our organizational documents. The interests of NAFH 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 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 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 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 corporate governance requirements.

NAFH owns more than 50% of our voting power for the election of directors. Accordingly, we are exempt from certain corporate governance requirements, and holders of our common stock 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.

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 NAFH 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.

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

We may choose to, or our majority shareholder NAFH may cause us to, voluntarily delist from the NASDAQ Global Select Market. If we were to delist from 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 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, we would no longer be subject to any of the corporate governance rules applicable to NASDAQ listed companies. See also “—As a controlled company, we are exempt from certain NASDAQ corporate governance requirements.”

- 39 -

We may issue additional shares of common stock or convertible securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.

Our authorized capital includes 300,000,000 shares of common stock. As of August 12, 2011, we had 85,802,164 shares of common stock outstanding and had reserved for issuance 244,780 shares underlying options that are exercisable at an average price of $12.85 per share. In addition, as of August 12, 2011, we had the ability to issue 618,259 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 to applicable NASDAQ Listing Rules, our Board of Directors generally has 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 convertible securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock.

Our ability to pay dividends and other obligations is subject to regulatory limitations and Capital Bank, NA’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 Capital Bank, NA and our other subsidiaries, and we do not have significant operations of our own. We have historically depended on our subsidiary bank’s cash and liquidity as well as dividends to pay our operating expenses. Our ability to pay dividends will directly depend on the ability of our subsidiary 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 the regulatory policies and capital guidelines. In addition, NAFH directly owns, or indirectly owns through its controlled subsidiaries, approximately 92% of Capital Bank, NA. As a result, NAFH will be able to control Capital Bank, NA’s payment of dividends to us, subject to applicable law.

In the event that Capital Bank, NA is unable or unwilling 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 Capital Bank, NA 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.

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.

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.

- 40 -

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

As previously reported on our Current Report on Form 8-K filed on February 1, 2011, on January 28, 2011, during the six months ended June 30, 2011, we completed the issuance and sale to NAFH of 71 million shares of Common Stock for aggregate consideration of $181.1 million. This issuance and sale was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of the Securities Act.

There were no repurchases (both open market and private transactions) during the three or six months ended June 30, 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.

Item 3.  Defaults upon Senior Securities

None

Item 4.  (Removed and Reserved)

Item 5.  Other Information

None

Item 6.  Exhibits

Exhibit No.	Description
Exhibit 2.1	Agreement of Merger of Capital Bank with and into NAFH National Bank, by and between NAFH National Bank and Capital Bank, dated as of June 30, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2011) (Exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.)
Exhibit 31.1	Certification of R. Eugene Taylor pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Christopher G. Marshall pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of R. Eugene Taylor pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Christopher G. Marshall pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- 41 -

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 15th day of August 2011.

CAPITAL BANK CORPORATION
By:	/s/ Christopher G. Marshall
	Christopher G. Marshall
	Chief Financial Officer

- 42 -

Exhibit Index

Exhibit No.	Description
Exhibit 2.1	Agreement of Merger of Capital Bank with and into NAFH National Bank, by and between NAFH National Bank and Capital Bank, dated as of June 30, 2011 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2011) (Exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted exhibit will be furnished supplementally to the Securities and Exchange Commission upon request.)
Exhibit 31.1	Certification of R. Eugene Taylor pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Christopher G. Marshall pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of R. Eugene Taylor pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Christopher G. Marshall pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

- 43 -