10-Q

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 September 30, 2011

or

¨ 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 þNo  ¨

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  ¨  No  þ

As of November 9, 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 September 30, 2011

INDEX

PART I – FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2011 (Successor) and December 31, 2010 (Predecessor)	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2011 (Successor) and 2010 (Predecessor) and the Period of January 29, 2011 to September 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Nine Months Ended September 30, 2010 (Predecessor)	4
	Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Period of January 29, 2011 to September 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Nine Months Ended September 30, 2010  (Predecessor)	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Period of January 29, 2011 to September 30, 2011 (Successor), the Period of January 1, 2011 to January 28, 2011 (Predecessor) and the Nine Months Ended September 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	33
Item 4.	Controls and Procedures	33
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	53
Item 3.	Defaults upon Senior Securities	53
Item 4.	(Removed and Reserved)	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
Signatures

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	Successor Company		Predecessor Company
(Dollars in thousands)	Sep. 30, 2011		Dec. 31, 2010
Assets
Cash and cash equivalents:
Cash and due from banks	$	2,435	$	13,646
Interest-bearing deposits with banks		–		53,099
Total cash and cash equivalents		2,435		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		244,863		–
Other real estate		–		18,334
Premises and equipment, net		–		25,034
Other intangible assets, net		–		1,774
Other assets		308		24,957
Total assets	$	247,606	$	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		18,625		34,323
Other liabilities		6,150		10,250
Total liabilities		24,775		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		219,362		145,594
Retained earnings (accumulated deficit)		2,633		(108,027	)
Accumulated other comprehensive income (loss)		836		(1,297	)
Total shareholders’ equity		222,831		76,688
Total liabilities and shareholders’ equity	$	247,606	$	1,585,547

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

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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  Sep. 30, 2011			Three Months Ended Sep. 30, 2010			Jan. 29, 2011 to Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Interest income:
Loans and loan fees	$	–		$	17,357		$	25,971		$	5,479		$	52,080
Investment securities:
Taxable interest income		–			1,854			3,206			391			5,851
Tax-exempt interest income		–			285			398			74			1,369
Dividends		–			22			59			–			58
Federal funds and other interest income		85			17			172			11			37
Total interest income		85			19,535			29,806			5,955			59,395
Interest expense:
Deposits		–			4,683			4,560			1,551			16,438
Borrowings and subordinated debentures		355			1,470			1,606			445			4,281
Total interest expense		355			6,153			6,166			1,996			20,719
Net interest income (loss)		(270	)		13,382			23,640			3,959			38,676
Provision for loan losses		–			6,763			1,652			40			38,534
Net interest income (loss) after provision for loan losses		(270	)		6,619			21,988			3,919			142
Noninterest income:
Service charges and other fees		–			746			1,355			291			2,468
Bank card services		–			521			847			174			1,479
Mortgage origination and other loan fees		–			442			518			210			1,108
Brokerage fees		–			271			308			78			743
Bank-owned life insurance		–			138			134			10			632
Equity income from investment in Capital Bank, NA		2,169			–			2,169			–			–
Net gain on sale of investment securities		–			185			–			–			511
Other		–			197			155			69			604
Total noninterest income		2,169			2,500			5,486			832			7,545
Noninterest expense:
Salaries and employee benefits		–			5,918			9,525			1,977			16,637
Occupancy		–			1,460			2,926			548			4,418
Furniture and equipment		–			867			1,401			275			2,312
Data processing and telecommunications		–			488			911			180			1,530
Advertising and public relations		–			435			325			131			1,464
Office expenses		–			320			498			93			940
Professional fees		–			626			543			190			1,785
Business development and travel		–			363			550			87			937
Amortization of other intangible assets		–			235			478			62			705
ORE losses and miscellaneous loan costs		–			1,833			1,608			176			3,858
Directors’ fees		–			236			93			68			828
FDIC deposit insurance		–			712			1,076			266			2,028
Contract termination fees		–			–			3,955			–			–
Other		76			717			1,169			102			1,738
Total noninterest expense		76			14,210			25,058			4,155			39,180
Net income (loss) before taxes		1,823			(5,091	)		2,416			596			(31,493	)
Income tax expense (benefit)		(117	)		3,975			(217	)		–			(3,510	)
Net income (loss)		1,940			(9,066	)		2,633			596			(27,983	)
Dividends and accretion on preferred stock		–			588			–			861			1,766
Net (income) loss attributable to common shareholders	$	1,940		$	(9,654	)	$	2,633		$	(265	)	$	(29,749	)
Earnings (loss) per common share – basic	$	0.02		$	(0.74	)	$	0.03		$	(0.02	)	$	(2.34	)
Earnings (loss) per common share – diluted	$	0.02		$	(0.74	)	$	0.03		$	(0.02	)	$	(2.34	)

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

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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 29, 2011	–	$	–		83,877,846		$	224,085		$	–		$	–		$	224,085
Comprehensive income:
Net income														2,633			2,633
Net unrealized gain on securities, net of tax of $3,332											5,331						5,331
Total comprehensive income																	7,964
Issuance of common stock, net of offering costs of $300					1,613,165			3,814									3,814
Stock option expense								75									75
Restricted stock					(1,751	)		(7	)								(7	)
Directors’ deferred compensation					312,904			–									–
Merger of Old Capital Bank into Capital Bank, NA								(4,124	)		(4,495	)					(8,619	)
Merger of GreenBank into Capital Bank, NA								(4,481	)								(4,481	)
Balance at September 30, 2011	–	$	–		85,802,164		$	219,362		$	836		$	2,633		$	222,831
	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														(27,983	)		(27,983	)
Net unrealized loss on securities, net of tax of $182											291						291
Amortization of prior service cost on SERP											6						6
Total comprehensive loss																	(27,686	)
Accretion of preferred stock discount			218											(218	)		–
Issuance of common stock					1,468,770			5,065									5,065
Restricted stock forfeiture					(400	)		(2	)								(2	)
Stock option expense								37									37
Directors’ deferred compensation					64,467			452									452
Dividends on preferred stock														(1,548	)		(1,548	)
Balance at September 30, 2010	41,279	$	40,345		12,880,954		$	145,461		$	4,252		$	(73,955	)	$	116,103
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.

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Cash flows from operating activities:
Net income (loss)	$	2,633		$	596		$	(27,983	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity income from investment in Capital Bank, NA		(2,169	)		–			–
Accretion of purchased credit-impaired loans		(24,968	)		–			–
Amortization/accretion on acquired liabilities, net		(3,465	)		–			–
Provision for loan losses		1,652			40			38,534
Amortization of other intangible assets		478			62			705
Depreciation		1,348			203			1,939
Stock-based compensation		143			42			581
Gain on sale of securities, net		–			–			(511	)
Amortization of premium on securities, net		695			171			52
Loss (gain) on disposal of premises, equipment and ORE		16			(9	)		299
ORE valuation adjustments		74			–			1,682
Bank-owned life insurance income		(134	)		(10	)		(632	)
Deferred income tax benefit		–			–			(3,238	)
Net change in:
Mortgage loans held for sale		1,907			4,424			(8,528	)
Accrued interest receivable and other assets		(4,777	)		(1,309	)		1,577
Accrued interest payable and other liabilities		2,899			(3,939	)		(669	)
Net cash provided by (used in) operating activities		(23,668	)		271			3,808
Cash flows from investing activities:
Net cash paid in Capital Bank merger		(42,880	)		–			–
Investment in Capital Bank, NA		(16,063	)		–			–
Principal repayments on loans, net of loans originated or acquired		13,305			14,547			20,679
Purchases of premises and equipment		(399	)		(416	)		(3,051	)
Proceeds from sales of premises, equipment and ORE		4,332			201			7,224
Proceeds from surrender of bank-owned life insurance		–			–			16,483
Sales (purchases) of FHLB stock		1,259			–			(1,980	)
Purchases of securities – available for sale		(138,855	)		(6,840	)		(66,035	)
Proceeds from sales of securities – available for sale		–			–			50,158
Proceeds from principal repayments/calls/maturities of securities – available for sale		25,761			3,936			67,512
Proceeds from principal repayments/calls/maturities of securities – held to maturity		–			–			853
Net cash provided by (used in) investing activities		(153,540	)		11,428			91,843
Cash flows from financing activities:
Decrease in deposits, net		(2,426	)		(4,960	)		(18,554	)
Decrease in repurchase agreements, net		–			–			(6,543	)
Proceeds from borrowings		–			–			189,000
Principal repayments of borrowings		(30,000	)		(5,000	)		(227,000	)
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		–			–			(2,456	)
Net cash provided by (used in) financing activities		(28,612	)		129,811			(57,095	)
(continued on next page)

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Successor Company			Predecessor Company
(Dollars in thousands)	Jan. 29, 2011 to Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011		Nine Months Ended Sep. 30, 2010
Net change in cash and cash equivalents	$	(205,820	)	$	141,510	$	38,556
Cash and cash equivalents at beginning of period		208,255			66,745		29,513
Cash and cash equivalents at end of period	$	2,435		$	208,255	$	68,069
Supplemental Disclosure of Cash Flow Information
Noncash investing activities:
Transfers of loans and premises to ORE	$	7,573		$	248	$	16,325
Transfers of ORE to loans		857			146		–
Capital leases recorded in premises and other liabilities		6,618			–		–
Cash paid for:
Income taxes	$	130		$	–	$	–
Interest		10,344			1,531		20,832

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.

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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, 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”). On September 7, 2011, NAFH acquired a controlling interest in Green Bankshares, Inc. (“Green Bankshares”) and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial Corp. (“TIB Financial”) owning 21%, and Green Bankshares owning the remaining 34%.  NAFH is the owner of approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. The accounts of Old Capital Bank were consolidated with the Company until the Bank Merger on June 30, 2011. In connection with the Bank Merger, the Company now 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 September 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:

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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.

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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. Adoption of this update did not 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, with NAFH Bank as the surviving entity. In connection with the Bank Merger, NAFH Bank changed its name to Capital Bank, NA. On September 7, 2011, NAFH acquired a controlling interest in Green Bankshares and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA.  Following the GreenBank merger, Capital Bank, NA is now owned by the Company, NAFH, TIB Financial Corp. and Green Bankshares. NAFH is the owner of approximately 83% of the Company’s common stock, approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

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

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of September 30, 2011, Capital Bank, NA operated 146 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.6 billion, total deposits of $5.3 billion and shareholders’ equity of $931.1 million.

The Bank Merger, the preceding merger of TIB Bank and Capital Bank, NA, and the succeeding merger of GreenBank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. At the time of the Bank Merger, due to the 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 cash contributions of additional capital to Capital Bank, NA of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, NA. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, NA in exchange for additional shares of Capital Bank, NA. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.

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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 September 30, 2011, the Company’s investment in Capital Bank, NA totaled $241.5 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of September 30, 2011. In the quarter ended September 30, 2011, the Company increased the equity investment balance by $2.2 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $836 thousand based on its equity in Capital Bank, NA’s other comprehensive income.

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

(Dollars in thousands)	Three Months Ended  Sep. 30, 2011
Interest income	$	60,782
Interest expense		8,543
Net interest income		52,239
Provision for loan losses		9,764
Noninterest income		12,840
Noninterest expense		44,778
Net income	$	6,858

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:

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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.

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.

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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.

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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:

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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  Sep. 30, 2011		Three Months Ended Sep. 30, 2010			Jan. 29, 2011 to Sep. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Net income (loss) attributable to common shareholders	$	1,940	$	(9,654	)	$	2,633	$	(265	)	$	(29,749	)
Weighted average number of common shares outstanding:
Basic		85,802,164		13,060,739			85,591,765		13,188,612			12,702,625
Dilutive effect of options outstanding		–		–			–		–			–
Diluted		85,802,164		13,060,739			85,591,765		13,188,612			12,702,625
Earnings (loss) per share – basic	$	0.02	$	(0.74	)	$	0.03	$	(0.02	)	$	(2.34	)
Earnings (loss) per share – diluted	$	0.02	$	(0.74	)	$	0.03	$	(0.02	)	$	(2.34	)

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  Sep. 30, 2011		Three Months Ended Sep. 30, 2010		Jan. 29, 2011 to Sep. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Nine Months Ended Sep. 30, 2010
Anti-dilutive stock options		283,980		313,420		283,980		297,880		313,420
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 primarily comprised of unrealized gains and losses on certain investments in debt securities.

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  Sep. 30, 2011			Three Months Ended Sep. 30, 2010			Jan. 29, 2011 to Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Unrealized gains (losses) on securities – available for sale	$	1,348		$	65		$	8,663		$	(528	)	$	473
Amortization of prior service cost on SERP		–			2			–			1			6
Income tax effect		(512	)		(25	)		(3,332	)		204			(182	)
Other comprehensive income (loss)	$	836		$	42		$	5,331		$	(323	)	$	297

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:

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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:

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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 Sep. 30, 2011		Jan. 29, 2011 to Sep. 30, 2011
Balance, beginning of period	$	–	$	163,892
New loans purchased		–		–
Accretion of income		–		(24,968	)
Reclassifications from nonaccretable difference		–		8,419
Merger of Old Capital Bank into Capital Bank, NA		–		(147,343	)
Balance, end of period	$	–	$	–

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the 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:

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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 Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Balance at beginning of period, predecessor	$	–		$	36,061		$	26,081
Loans charged off		(339	)		(49	)		(29,104	)
Recoveries of loans previously charged off		–			9			738
Net charge-offs		(339	)		(40	)		(28,366	)
Provision for loan losses		1,652			40			38,534
Merger of Old Capital Bank into Capital Bank, NA		(1,313	)		–			–
Balance at the end of period, predecessor		–			36,061			36,249
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 September 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:

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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):

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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 September 30, 2011 (Successor), options for 283,980 shares of common stock were outstanding and options for 618,259 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 Sep. 30, 2011					Period of Jan. 1 to Jan. 28, 2011				Nine Months Ended Sep. 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		(13,900	)		14.69		–		–		(72,413	)		8.53
Outstanding options, end of period		283,980		$	11.99		297,880	$	12.11		313,420		$	12.05
Options exercisable at end of period		244,780		$	12.85		226,430	$	13.53		225,870		$	13.74

The following table summarizes information about the Company’s stock options as of September 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		7.55		41,850	$	–
$6.01 – $9.00		–		–		–		–
$9.01 – $12.00		74,880		0.45		74,880		–
$12.01 – $15.00		16,000		6.02		12,800		–
$15.01 – $18.00		64,000		3.35		64,000		–
$18.00 – $18.37		51,250		3.24		51,250		–
		283,980		3.87		244,780	$	–

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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 nine months ended September 30, 2010 (Predecessor) was $1.80. There were no options granted in the period of January 29, 2011 to September 30, 2011 (Successor) or the period of January 1, 2011 to January 28, 2011 (Predecessor).

For the period from January 29, 2011 to September 30, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the nine months ended September 30, 2010 (Predecessor), the Company recorded total compensation expense related to stock options of $75 thousand, $5 thousand and $37 thousand, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the NAFH Investment.

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 nine months ended September 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 September 30, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the nine months ended September 30, 2010 (Predecessor) totaled $68 thousand, $2 thousand and $92 thousand, respectively. On January 28, 2011, vesting was accelerated on all remaining nonvested restricted shares in connection with the NAFH Investment.

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 nine months ended September 30, 2010 (Predecessor), the Company recognized stock-based compensation expense of $35 thousand and $452 thousand, respectively, related to the Deferred Compensation Plan.

10.  Derivative Instruments

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

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

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 September 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.

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

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

	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 Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 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 into 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.

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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 September 30, 2011 (Successor) and December 31, 2010 (Predecessor) were as follows:

	Successor Company				Predecessor Company
(Dollars in thousands)	Sep. 30, 2011				Dec. 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	2,435	$	2,435	$	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		28		28		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		18,625		18,759		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.

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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 September 30, 2011 (Successor) and September 30, 2010 (Predecessor) as well as the period of January 29 to September 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor) and the nine months ended September 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).

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.”

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

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

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of September 30, 2011, Capital Bank, NA operated 146 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.6 billion, total deposits of $5.3 billion and shareholders’ equity of $931.1 million.

Potential Merger of the Company and NAFH

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

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

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.

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Executive Summary

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

• Net income totaled $1.9 million, or $0.02 per share, in the third quarter of 2011 and totaled $2.6 million, or $0.03 per share, in the period from January 29 to September 30, 2011;

• GreenBank, which was the wholly-owned banking subsidiary of Green Bankshares, was merged with and into Capital Bank, NA on September 7, 2011;

• Following the GreenBank merger, the Company held a 26% ownership interest in Capital Bank, NA, which has $6.6 billion in assets and operates 146 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia; and

• The Company’s technology platform was converted to NAFH’s technology platform.

Results of Operations

In the successor periods, net income totaled $1.9 million, or $0.02 per share, in the third quarter of 2011 and totaled $2.6 million, or $0.03 per share, in the period from January 29 to September 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 ($9.7) million, or ($0.74) per share, for the three months ended September 30, 2010, and totaled ($29.7) million, or ($2.34) per share for the nine months ended September 30, 2010.

Net Interest Income

Net interest income in the third quarter of 2011 was significantly impacted by the Bank Merger, upon which Old Capital Bank’s earning assets and interest-bearing liabilities were de-consolidated from the Company. Following the Bank Merger on June 30, 2011, the Company’s interest-bearing liabilities, which consisted of subordinated debentures, significantly exceeded interest-earning assets, thus creating negative net interest income and a negative net interest margin. Net interest income for the quarter ended September 30, 2011 (Successor) and the quarter ended September 30, 2010 (Predecessor) totaled ($270) thousand and $13.4 million, respectively. Net interest margin decreased from 3.48% in the third quarter of 2010 (Predecessor) to (31.57)% in the third quarter of 2011 (Successor) primarily due to the Bank Merger.

Further, net interest income for the period of January 29 to September 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the nine months ended September 30, 2010 (Predecessor) totaled $23.6 million, $4.0 million and $38.7 million, respectively. Net interest margin increased from 3.30% in the first nine months of 2010 (Predecessor) to 3.85% for the period of January 29 to September 30, 2011 (Successor) primarily due to a decline in funding costs as the average rate on total interest-bearing liabilities fell from 1.94% to 1.11% over that period. Average earning assets decreased from $1.61 billion in the nine months ended September 30, 2010 (Predecessor) to $1.54 billion in the period of January 1 to January 28, 2011 (Predecessor) to $943.2 million in the period of January 29 to September 30, 2011 (Successor). The decline in average earning assets in the successor period was primarily related to the Bank Merger.

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

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

Quarterly Comparison

Tax Equivalent Basis 1

	Successor Company															Predecessor Company
(Dollars in thousands)	Three Months Ended Sep. 30, 2011								Three Months Ended Jun. 30, 2011							Three Months Ended Sep. 30, 2010
	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	%	$	1,342,835	$	17,512		5.23	%
Investment securities 3		–		–			–			334,230		2,639		3.16			211,547		2,309		4.37
Interest-bearing deposits		–		–			–			56,149		40		0.29			23,859		17		0.29
Advance to Capital Bank, NA		3,393		85			9.94			–		–		–			–		–		–
Total interest-earning assets		3,393	$	85			9.94	%		1,518,835	$	17,708		4.68	%		1,578,241	$	19,838		5.04	%
Cash and due from banks		9,268								16,587							17,285
Other assets		238,431								166,859							70,449
Total assets	$	251,092							$	1,702,281						$	1,665,975
Liabilities and Equity
NOW and money market accounts	$	–	$	–			–	%	$	345,307	$	666		0.77	%	$	323,242	$	634		0.79	%
Savings accounts		–		–			–			32,241		10		0.12			31,594		10		0.13
Time deposits		–		–			–			843,725		2,110		1.00			859,968		4,039		1.88
Total interest-bearing deposits		–		–			–			1,221,273		2,786		0.91			1,214,804		4,683		1.55
Borrowings		–		–			–			93,849		410		1.76			150,478		1,156		3.08
Subordinated debentures		18,603		355			7.57			18,848		355		7.55			34,323		314		3.67
Total interest-bearing liabilities		18,603	$	355			7.57	%		1,333,470	$	3,551		1.07	%		1,399,605	$	6,153		1.76	%
Noninterest-bearing deposits		–								122,326							130,758
Other liabilities		711								15,378							10,509
Total liabilities		19,314								1,471,174							1,540,872
Shareholders’ equity		231,778								231,107							125,103
Total liabilities and shareholders’ equity	$	251,092							$	1,702,281						$	1,665,975
Net interest spread 4							2.37	%						3.61	%						3.28	%
Tax equivalent adjustment			$	–							$	268						$	303
Net interest income and net interest margin 5			$	(270	)		(31.57	)%			$	14,157		3.74	%			$	13,685		3.48	%

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

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

Year-to-Date Comparison

Tax Equivalent Basis 1

	Successor Company							Predecessor Company
(Dollars in thousands)	Period of Jan. 29 to Sep. 30, 2011							Period of Jan. 1 to Jan. 28, 2011							Nine Months Ended Sep. 30, 2010
	Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate			Average Balance		Amount Earned		Average Rate
Assets
Loans 2	$	702,197	$	26,184		5.62	%	$	1,253,296	$	5,530		5.20	%	$	1,369,688	$	52,539		5.13	%
Investment securities 3		184,886		3,893		3.16			225,971		504		2.68			220,525		7,987		4.83
Interest-bearing deposits		54,834		87		0.24			63,350		11		0.20			23,142		37		0.21
Advance to Capital Bank, NA		1,290		85		9.94			–		–		–			–		–		–
Total interest-earning assets		943,207	$	30,249		4.84	%		1,542,617	$	6,045		4.61	%		1,613,355	$	60,563		5.02	%
Cash and due from banks		13,752							16,112							18,177
Other assets		188,626							34,021							74,275
Total assets	$	1,145,585						$	1,592,750						$	1,705,807
Liabilities and Equity
NOW and money market accounts	$	213,761	$	1,084		0.76	%	$	334,668	$	211		0.74	%	$	330,596	$	2,168		0.88	%
Savings accounts		19,808		16		0.12			30,862		3		0.11			30,445		30		0.13
Time deposits		524,847		3,460		0.99			870,146		1,337		1.81			874,331		14,240		2.18
Total interest-bearing deposits		758,416		4,560		0.91			1,235,676		1,551		1.48			1,235,372		16,438		1.78
Borrowings		59,141		665		1.70			120,032		343		3.36			158,158		3,446		2.91
Subordinated debentures		18,868		941		7.52			34,323		102		3.50			33,304		830		3.33
Repurchase agreements		–		–		–			–		–		–			2,068		5		0.32
Total interest-bearing liabilities		836,425	$	6,166		1.11	%		1,390,031	$	1,996		1.69	%		1,428,902	$	20,719		1.94	%
Noninterest-bearing deposits		73,696							114,660							132,058
Other liabilities		8,202							9,635							10,585
Total liabilities		918,323							1,514,326							1,571,545
Shareholders’ equity		227,262							78,424							134,262
Total liabilities and shareholders’ equity	$	1,145,585						$	1,592,750						$	1,705,807
Net interest spread 4						3.73	%						2.92	%						3.08	%
Tax equivalent adjustment			$	443						$	90						$	1,168
Net interest income and net interest margin 5			$	24,083		3.85	%			$	4,049		3.09	%			$	39,844		3.30	%

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

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Provision for Loan Losses

 Due to the Bank Merger, there was no provision for loan losses in the quarter ended September 30, 2011 (Successor). Provision for loan losses for the quarter ended September 30, 2010 (Predecessor) totaled $6.8 million. In addition, provision for loan losses for the period of January 29 to September 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the nine months ended September 30, 2010 (Predecessor) totaled $1.7 million, $40 thousand and $38.5 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.

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 Sep. 30, 2011		Three Months Ended Sep. 30, 2010		Jan. 29, 2011 to Sep. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Nine Months Ended Sep. 30, 2010
Service charges and other fees	$	–		746		1,355		291		2,468
Bank card services		–		521		847		174		1,479
Mortgage origination and other loan fees		–		442		518		210		1,108
Brokerage fees		–		271		308		78		743
Bank-owned life insurance		–		138		134		10		632
Equity income from investment in Capital Bank, NA		2,169		–		2,169		–		–
Net gain on sale of investment securities		–		185		–		–		511
Other		–		197		155		69		604
Total noninterest income	$	2,169	$	2,500	$	5,486	$	832	$	7,545

Noninterest income for the quarter ended September 30, 2011 (Successor) and the quarter ended September 30, 2010 (Predecessor) totaled $2.2 million and $2.5 million, respectively. Noninterest income in the third quarter of 2011 (Successor) was solely related to the Company’s equity income from its investment in Capital Bank, NA. The following table presents summarized financial information for the Company’s equity method investee, Capital Bank, NA:

(Dollars in thousands)	Three Months Ended  Sep. 30, 2011
Interest income	$	60,782
Interest expense		8,543
Net interest income		52,239
Provision for loan losses		9,764
Noninterest income		12,840
Noninterest expense		44,778
Net income	$	6,858

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Further, noninterest income for the period of January 29 to September 30, 2011 (Successor), the period of January 1 to January 28, 2011 (Predecessor), and the nine months ended September 30, 2010 (Predecessor) totaled $5.5 million, $832 thousand and $7.5 million, respectively. Noninterest income in the successor period was significantly impacted by the Company’s $2.2 million of equity income from its investment in Capital Bank, NA. Additionally, noninterest income in the first nine months of 2010 (Predecessor) benefited from $511 thousand of gains recorded on the sale of investment securities while no gains or losses were recognized in the period from January 29 to September 30, 2011 (Successor) or the period from January 1 to January 28, 2011 (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 Sep. 30, 2011		Three Months Ended Sep. 30, 2010		Jan. 29, 2011 to Sep. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011		Nine Months Ended Sep. 30, 2010
Salaries and employee benefits	$	–		5,918		9,525		1,977		16,637
Occupancy		–		1,460		2,926		548		4,418
Furniture and equipment		–		867		1,401		275		2,312
Data processing and telecommunications		–		488		911		180		1,530
Advertising and public relations		–		435		325		131		1,464
Office expenses		–		320		498		93		940
Professional fees		–		626		543		190		1,785
Business development and travel		–		363		550		87		937
Amortization of other intangible assets		–		235		478		62		705
ORE losses and miscellaneous loan costs		–		1,833		1,608		176		3,858
Directors’ fees		–		236		93		68		828
FDIC deposit insurance		–		712		1,076		266		2,028
Contract termination fees		–		–		3,955		–		–
Other		76		717		1,169		102		1,738
Total noninterest expense	$	76	$	14,210	$	25,058	$	4,155	$	39,180

Noninterest expense for the quarter ended September 30, 2011 (Successor) and the quarter ended September 30, 2010 (Predecessor) totaled $76 thousand and $14.2 million, respectively. Expenses in the successor period were significantly reduced by the Bank Merger and related de-consolidation of Old Capital Bank.

Further, noninterest expense for the period from January 29 to September 30, 2011 (Successor), the period from January 1 to January 28, 2011 (Predecessor) and the nine months ended September 30, 2010 (Predecessor) totaled $25.1 million, $4.2 million and $39.2 million, respectively. Additionally, expenses in the first nine months of 2011 were significantly reduced by the Bank Merger and related de-consolidation of Old Capital Bank. Expenses in the period from January 29 to September 30, 2011 (Successor) were impacted by a $4.0 million contract termination fee related to the conversion and integration of the Company’s operations onto a common technology platform utilized across the NAFH enterprise. This system conversion is intended to create operating efficiencies and better position the Company for future growth.

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 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 September 30, 2011 (Successor). As of September 30, 2011, the Company’s investment in Capital Bank, NA totaled $241.5 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity at that date.

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The Company also had an advance to Capital Bank, NA totaling $3.4 million as of September 30, 2011. In the quarter ended September 30, 2011, the Company increased the equity investment balance by $2.2 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $836 thousand based on its equity in Capital Bank, NA’s other comprehensive income. In addition to the investment in and advance to Capital Bank, NA, the Company also had $2.4 million of cash on deposit with Capital Bank, NA and $308 thousand of other assets as of September 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 September 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 $222.8 million as of September 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 $219.4 million as of September 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 $8.6 million due to the Bank Merger and GreenBank merger. The Company’s retained earnings totaled $2.6 million as of September 30, 2011 (Successor), which represents the Company’s net income in the successor period. Accumulated other comprehensive income totaled $836 thousand as of September 30, 2011 (Successor) and represented the Company’s equity in Capital Bank, NA’s other comprehensive income in the period subsequent to the Bank Merger.

Capital

The Company’s and Capital Bank, NA’s capital amounts and ratios as of September 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)	$	241,456	98.29	%	$	19,653	8.00	%		N/A	N/A
Tier I capital (to risk-weighted assets)		222,831	90.71			9,826	4.00			N/A	N/A
Tier I capital (to average assets)		222,831	88.74			10,044	4.00			N/A	N/A
Capital Bank, NA:
Total capital (to risk-weighted assets)	$	692,118	16.49	%	$	335,796	8.00	%	$	419,745	10.00	%
Tier I capital (to risk-weighted assets)		670,280	15.97			167,898	4.00			251,847	6.00	%
Tier I capital (to average assets)		670,280	13.82			194,024	4.00			242,530	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 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.

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

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%. As of September 30, 2011, Capital Bank, NA operated 146 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.6 billion, total deposits of $5.3 billion and shareholders’ equity of $931.1 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 September 30, 2011, the Company’s investment in Capital Bank, NA totaled $241.5 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of September 30, 2011. The Bank Merger resulted in a significant decrease in the total assets and total liabilities of the Company. As of September 30, 2011, the Company had cash on deposit with Capital Bank, NA of approximately $2.4 million. This cash is available for providing additional capital support to Capital Bank, NA and for other general corporate purposes.

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 September 30, 2011, the Company’s only earning asset was a $3.4 million advance to Capital Bank, NA which is earning interest at a fixed 10% annual rate. The Company’s 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 investment in Capital Bank, NA. Thus, net interest income has become a less significant measure of operating results for the Company. 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.

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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

Except as set forth below and in our Quarterly Reports on Form 10-Q filed since December 31, 2010, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010:

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

The potential merger has been approved without your vote.

NAFH owns approximately 83% of the common stock of the Company and has indicated that it inteds to vote in favor of the merger. As a result, the merger may be completed even if opposed by all of the Company’s shareholders unaffiliated with NAFH.

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

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

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

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

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

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

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

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

The rights associated with the Company’s common stock are different from the rights associated with NAFH’s Class A common stock. For example, NAFH shareholders may only bring proposals before an annual meeting of NAFH shareholders if, among other things, they deliver certain information about their direct, indirect and derivative ownership of NAFH common stock. The Company does not impose this requirement on its shareholders. Also, the Company’s shareholders are permitted to fill vacancies on the Company’s Board of Directors may only be filled by the NAFH Board of Directors.

Risks Relating to NAFH’s Banking Operations

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

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

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

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

Unlike larger financial institutions that are more geographically diversified, NAFH’s national bank subsidiary, Capital Bank, NA, which we also refer to as Capital Bank, is a regional banking franchise concentrated in the southeastern region of the United States. Capital Bank operates branches located in Florida, North Carolina, South Carolina, Tennessee and Virginia. As of September 30, 2011, 32% of Capital Bank’s loans were in Florida, 26% were in North Carolina, 11% were in South Carolina, 30% were in Tennessee and 1% were in Virginia. A deterioration in local economic conditions in the loan market or in the residential, commercial or industrial real estate market could have a material adverse effect on the quality of Capital Bank’s portfolio, the demand for its products and services, the ability of borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely affected and could result in the curtailment of NAFH’s expansion, growth and profitability. If any of these developments were to result in losses that materially and adversely affected Capital Bank’s capital, NAFH and Capital Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital.

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

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

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

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

The FDIC has the right to refuse or delay payment partially or in full for such loan losses if Capital Bank fails to comply with the terms of the loss sharing agreements, which are extensive. Additionally, the loss sharing agreements are limited in duration. Therefore, any losses that Capital Bank experiences after the terms of the loss sharing agreements have ended will not be recoverable from the FDIC, and would negatively impact net income.

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

In addition to the loss sharing agreements, in August 2010, Capital Bank entered into an Operating Agreement with the OCC (which we refer to as the “OCC Operating Agreement”), in connection with the acquisition of the Failed Banks. Capital Bank (and, with respect to certain provisions, the Company and NAFH) is also subject to an Order of the FDIC, dated July 16, 2010 (which we refer to as the “FDIC Order”) issued in connection with the FDIC’s approval of NAFH’s deposit insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the business and they restrict Capital Bank’s ability to pay dividends to NAFH and the Company and to make changes to its capital structure. A failure by NAFH or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could subject NAFH to regulatory sanctions; and failure to comply, or the objection, or imposition of additional conditions, by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent NAFH from executing its business strategy and negatively impact its business, financial condition, liquidity and results of operations.

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Any requested or required changes in how NAFH determines the impact of loss share accounting on its financial information could have a material adverse effect on NAFH’s reported results.

A material portion of NAFH’s financial results is based on loss share accounting, which is subject to assumptions and judgments made by NAFH, its accountants and the regulatory agencies to whom NAFH and Capital Bank report such information. Loss share accounting is a complex accounting methodology. If these assumptions are incorrect or the accountants or the regulatory agencies to whom NAFH and Capital Bank report require that management change or modify these assumptions, such change or modification could have a material adverse effect on NAFH’s financial condition, operations or previously reported results. As such, any financial information generated through the use of loss share accounting is subject to modification or change. Any significant modification or change in such information could have a material adverse effect on NAFH’s results of operations and NAFH’s previously reported results.

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

As a result of NAFH’s recent acquisitions, NAFH’s financial results are heavily influenced by the application of the acquisition method of accounting. The acquisition method of accounting requires management to make assumptions regarding the assets purchased and liabilities assumed to determine their fair market value. Capital Bank’s interest income, interest expense and net interest margin (which were equal to $148.1 million, $23.5 million and 4.18%, respectively, in the first nine months of 2011) reflect the impact of accretion of the fair value adjustments made to the carrying amounts of interest earning assets and interest bearing liabilities and Capital Bank’s non-interest income (which totaled $24.6 million in the first nine months of 2011) for periods subsequent to the acquisitions includes the effects of discount accretion and amortization of the FDIC indemnification asset. In addition, the balances of non-performing assets were significantly reduced by the adjustments to fair value recorded in conjunction with the relevant acquisition. If NAFH’s assumptions are incorrect or the regulatory agencies to whom NAFH reports require that NAFH change or modify its assumptions, such change or modification could have a material adverse effect on NAFH’s financial condition or results of operations or NAFH’s previously reported results.

Our business is highly susceptible to credit risk.

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

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

Recent economic and market developments and the potential for continued economic disruption present considerable risks to NAFH and it is difficult to determine the depth and duration of the economic and financial market problems and the many ways in which they may impact NAFH’s business in general. Any failure to manage such credit risks may materially adversely affect NAFH’s business and its consolidated results of operations and financial condition.

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

A significant portion of Capital Bank’s loan portfolio is secured by real estate. As of September 30, 2011, approximately 85% of Capital Bank’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in Capital Bank’s primary market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on Capital Bank’s profitability and asset quality. If Capital Bank is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, its earnings and shareholders’ equity could be adversely affected. For example, the housing market has been in a four-year recession. Home prices declined by 4.1% (as measured by the S&P/Case-Shiller Home Price Indices) in the first quarter of 2011 (representing a decline of 5.1% versus the first quarter of 2010) and increased by 3.6% in the second quarter of 2011 (representing a decline of 5.9% versus the second quarter of 2010). Further declines in home prices coupled with a deepened economic recession and continued rises in unemployment levels could drive losses beyond the level that is provided for in Capital Bank’s allowance for loan losses. In that event, Capital Bank’s earnings could be adversely affected.

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

Capital Bank’s construction and land development loans are based upon estimates of costs and the values of the complete projects.

While Capital Bank intends to focus on originating loans other than non-owner occupied commercial real estate loans, its portfolio includes construction and land development loans (which we refer to as “C&D loans”) extended to builders and developers, primarily for the construction and/or development of properties. These loans have been extended on a presold and speculative basis and they include loans for both residential and commercial purposes.

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

As of September 30, 2011, C&D loans totaled $575.1 million (or 13% of Capital Bank’s total loan portfolio), of which $89.9 million was for construction and/or development of residential properties and $485.2 million was for construction/development of commercial properties. As of September 30, 2011, non-performing C&D loans covered under FDIC loss share agreements totaled $40.5 million and non-performing C&D loans not covered under FDIC loss share agreements totaled $135.8 million.

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

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

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As of September 30, 2011, Capital Bank’s non-owner occupied commercial real estate loans totaled $950.4 million (or 22% of its total loan portfolio). As of September 30, 2011, non-performing non-owner occupied commercial real estate loans covered under FDIC loss share agreements totaled $27.2 million and non-performing non-owner occupied commercial real estate loans not covered under FDIC loss share agreements totaled $50.0 million.

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

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

As of September 30, 2011, Capital Bank’s commercial business loans totaled $1.3 billion (or 29% of its total loan portfolio). Of this amount, $844.7 million was secured by owner-occupied real estate and $439.1 million was secured by business assets. As of September 30, 2011, non-performing commercial business loans covered under FDIC loss share agreements totaled $18.7 million and non-performing commercial business loans not covered under FDIC loss share agreements totaled $67.4 million.

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

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

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

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

• the duration of the loan;

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

• the credit history of a particular borrower; and

• changes in economic and industry conditions.

Non-performing loans covered under loss share agreements with the FDIC totaled $128.7 million, and Non-performing loans not covered under loss share agreements with the FDIC totaled $296.8 million as of September 30, 2011. Capital Bank maintains an allowance for loan losses with respect to loans it originates, which is a reserve established through a provision for loan losses charged to expense, which management believes is appropriate to provide for probable losses in Capital Bank’s loan portfolio. The amount of this allowance is determined by Capital Bank’s management team through periodic reviews. As of September 30, 2011, the allowance on loans covered by loss share agreements with the FDIC was $7.0 million, and the allowance on loans not covered by loss share agreements with the FDIC was $10.1 million. As of September 30, 2011, the ratio of Capital Bank’s allowance for loan losses to non-performing loans covered by loss share agreements with the FDIC was 5.4% and the ratio of its allowance for loan losses to non-performing loans not covered by loss share agreements with the FDIC was 3.4%.

The application of the acquisition method of accounting to NAFH’s completed acquisitions impacted Capital Bank’s allowance for loan losses. Under the acquisition method of accounting, all loans were recorded in financial statements at their fair value at the time of their acquisition and the related allowance for loan loss was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into consideration estimated credit quality. Capital Bank may in the future determine that the estimates of fair value are too high, in which case Capital Bank would provide for additional loan losses associated with the acquired loans. As of September 30, 2011, the allowance for loan losses on purchased credit-impaired loan pools totaled $10.5 million, of which $7.0 million was related to loan pools covered by loss share agreements with the FDIC and $3.5 million was related to loan pools not covered by loss share agreements with the FDIC.

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

Capital Bank continues to hold and acquire other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.

Capital Bank forecloses on and take title to the real estate serving as collateral for many of its loans as part of its business. Real estate owned by Capital Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. At September 30, 2011, Capital Bank had $152.5 million of OREO. Increased OREO balances have led to greater expenses as costs are incurred to manage and dispose of the properties. Capital Bank’s management expects that its earnings will continue to be negatively affected by various expenses associated with OREO, including personnel costs, insurance and taxes, completion and repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Any further decrease in real estate market prices may lead to additional OREO write-downs, with a corresponding expense in Capital Bank’s statement of operations. Capital Bank’s management evaluates OREO properties periodically and writes down the carrying value of the properties if the results of such evaluations require it. The expenses associated with OREO and any further property write-downs could have a material adverse effect on Capital Bank’s financial condition and results of operations.

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

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

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

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

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

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

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

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

Additionally, an increase in interest rates may, among other things, reduce the demand for loans and Capital Bank’s ability to originate loans and decrease loan repayment rates, while a decrease in the general level of interest rates may adversely affect the fair value of the Bank’s financial assets and liabilities and its ability to realize gains on the sale of assets. A decrease in the general level of interest rates may affect Capital Bank through, among other things, increased prepayments on its loan and mortgage-backed securities portfolios and increased competition for deposits.

Accordingly, changes in the level of market interest rates affect Capital Bank’s net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios and its overall results. Changes in interest rates may also have a significant impact on any future mortgage loan origination revenues. Historically, there has been an inverse correlation between the demand for mortgage loans and interest rates. Mortgage origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the assets on Capital Bank’s balance sheet. Interest rates are highly sensitive to many factors beyond the Bank’s management’s control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System (which we refer to as the “Federal Reserve”). Capital Bank’s management cannot predict the nature and timing of the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions, which could negatively impact the Bank’s financial performance.

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

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

As of September 30, 2011, approximately 94% of Capital Bank’s investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises mortgage-backed securities and securities of municipalities. As of September 30, 2011, the fair value of Capital Bank’s investment securities portfolio was approximately $783.1 million. Factors beyond Capital Bank’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the credit markets. In addition, Capital Bank has historically taken a conservative investment posture, concentrating on government issuances of short duration. In the future, Capital Bank may seek to increase yields through more aggressive investment strategies, which may include a greater percentage of corporate issuances and structured credit products.

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Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on Capital Bank’s business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, Capital Bank may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on its financial condition and results of operations.

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

Capital Bank’s net deferred tax asset totaled $134.6 million as of September 30, 2011. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of any applicable net operating losses. If Capital Bank’s estimates and assumptions about future taxable income are not accurate, the value of its deferred tax asset may not be recoverable and may result in a valuation allowance that would impact the Bank’s earnings.

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

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

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

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

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

Capital Bank expects to depend on checking, savings and money market deposit account balances and other forms of customer deposits as its primary source of funding for the Bank’s lending activities. Capital Bank’s future growth will largely depend on its ability to retain and grow a strong deposit base. Because 52% of Capital Bank’s deposits as of September 30, 2011 were time deposits, it may prove harder to maintain and grow the Bank’s deposit base than would otherwise be the case. Capital Bank is also working to transition certain of its customers to lower cost traditional banking services as higher cost funding sources, such as high interest certificates of deposit, mature. There may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Customers may not transition to lower yielding savings or investment products or continue their business with Capital Bank, which could adversely affect its operations. In addition, with recent concerns about bank failures, customers have become concerned about the extent to which their deposits are insured by the FDIC, particularly customers that may maintain deposits in excess of insured limits. Customers may withdraw deposits in an effort to ensure that the amount that they have on deposit with Capital Bank is fully insured and may place them in other institutions or make investments that are perceived as being more secure.

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Further, even if Capital Bank is able to grow and maintain its deposit base, the account and deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments (or similar products at other institutions that may provide a higher rate of return), Capital Bank could lose a relatively low cost source of funds, increasing its funding costs and reducing the Bank’s net interest income and net income. Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact Capital Bank’s growth strategy and results of operations.

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

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

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

Capital Bank’s ability to compete successfully depends on a number of factors, including:

• the ability to develop, maintain and build upon long-term customer relationships based on quality service and high ethical standards;

• the ability to attract and retain qualified employees to operate the Bank’s business effectively;

• the scope, relevance and pricing of products and services offered to meet customer needs and demands;

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

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

• industry and general economic trends.

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

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

Capital Bank is exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Capital Bank’s business is dependent on its employees as well as third-party service providers to process a large number of increasingly complex transactions. Capital Bank could be materially adversely affected if one of its employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates the Bank’s operations or systems. When Capital Bank originates loans, it relies upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, Capital Bank generally bears the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of Capital Bank to operate its business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact the Bank’s business, financial condition and results of operations.

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

Capital Bank’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems and third-party servicers. Capital Bank outsources many of its major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt the Bank’s operations. Because Capital Bank’s information technology and telecommunications systems interface with and depend on third-party systems, the Bank could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of Capital Bank’s ability to process new and renewal loans, gather deposits and provide customer service, compromise the Bank’s ability to operate effectively, damage its reputation, result in a loss of customer business and/or subject the Bank to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on the Bank’s financial condition and results of operations.

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

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

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

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Risks Relating to Capital Bank’s Growth Strategy

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

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

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

• to scale its technology platform;

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

• to manage a growing number of client relationships.

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

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

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

• the effect of the acquisition on competition;

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

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

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

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

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

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

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The success of future transactions will depend on NAFH’s ability to successfully identify and consummate transactions with target financial institutions that meet its investment criteria. There are significant risks associated with NAFH’s ability to identify and successfully consummate transactions with target financial institutions. There are a limited number of acquisition opportunities, and NAFH expects to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and effecting acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater technical, human and other resources than NAFH and Capital Bank do, and NAFH’s financial resources will be relatively limited when contrasted with those of many of these competitors. These organizations may be able to achieve greater cost savings through consolidating operations than NAFH could.

NAFH’s ability to compete in acquiring certain sizable target institutions will be limited by its available financial resources. These inherent competitive limitations give others an advantage in pursuing the acquisition of certain target financial institutions. In addition, increased competition may drive up the prices for the types of acquisitions NAFH intends to target, which would make the identification and successful consummation of acquisition opportunities more difficult. Competitors may be willing to pay more for target financial institutions than NAFH believes are justified, which could result in NAFH having to pay more for target financial institutions than it prefers or to forego target financial institutions. As a result of the foregoing, NAFH may be unable to successfully identify and consummate future transactions to grow its business on commercially attractive terms, or at all.

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

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

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

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

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

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

NAFH’s officers and directors may have conflicts of interest in determining whether to present business opportunities to NAFH or another entity with which they are, or may become, affiliated.

NAFH and Capital Bank’s officers and directors may become subject to fiduciary obligations in connection with their service on the boards of directors of other corporations. To the extent that NAFH’s officers and directors become aware of acquisition opportunities that may be suitable for entities other than NAFH to which they have fiduciary or contractual obligations, or they are presented with such opportunities in their capacities as fiduciaries to such entities, they may honor such obligations to such other entities. In addition, NAFH’s officers and directors will not have any obligation to present NAFH with any acquisition opportunity that does not fall within certain parameters of NAFH’s business. You should assume that to the extent any of NAFH’s officers or directors becomes aware of an opportunity that may be suitable both for NAFH and another entity to which such person has a fiduciary obligation or contractual obligation to present such opportunity as set forth above, he or she may first give the opportunity to such other entity or entities and may give such opportunity to NAFH only to the extent such other entity or entities reject or are unable to pursue such opportunity. In addition, you should assume that to the extent any of NAFH’s officers or directors becomes aware of an acquisition opportunity that does not fall within the above parameters but that may otherwise be suitable for NAFH, he or she may not present such opportunity to NAFH. In general, officers and directors of a corporation incorporated under Delaware law are required to present business opportunities to a corporation if the corporation could financially undertake the opportunity, the opportunity is within the corporation’s line of business and it would not be fair to the corporation and its stockholders for the opportunity not to be brought to the attention of the corporation. However, NAFH’s certificate of incorporation provides that NAFH renounce any interest or expectancy in certain acquisition opportunities that its officers or directors become aware of in connection with their service to other entities to which they have a fiduciary or contractual obligation.

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

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

Risks Relating to the Regulation of Capital Bank’s Industry

Capital Bank operates in a highly regulated industry and the laws and regulations that govern its operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in them or Capital Bank’s failure to comply with them, may adversely affect us.

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

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

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

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

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

• changes to regulatory capital requirements;

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

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

• potential limitations on federal preemption;

• changes to deposit insurance assessments;

• regulation of debit interchange fees the Bank earns;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• stockholders are commonly controlled or managed;

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

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

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

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

Risks Related to NAFH’s Common Stock

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

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

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

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

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

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

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

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• general market conditions;

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

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

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

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

• changes in market valuations or earnings of similar companies;

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

• additions or departures of key personnel.

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

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

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

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

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

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

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The loss sharing agreements with the FDIC require that Capital Bank receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to NAFH, Capital Bank or the Company’s stockholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the relevant loss sharing arrangement. Among other things, prior FDIC consent is required for (1) a merger or consolidation of NAFH or its bank subsidiary with or into another company if NAFH’s stockholders will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of any of NAFH’s bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of Capital Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of any class of NAFH’s voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of 25% or more of any class of NAFH’s voting securities). If NAFH or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share protection, there could be a material adverse effect on Capital Bank’s financial condition, results of operations and cash flows. In addition, statutes, regulations and policies that govern bank holding companies, including the BHCA, may restrict NAFH’s ability to enter into certain transactions.

NAFH is also subject to anti-takeover provisions under Delaware law. NAFH has not opted out of Section 203 of the Delaware General Corporation Law (which we refer to as the “DGCL”), which, subject to certain exceptions, prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless (1) prior to such time the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

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 nine months ended September 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 nine months ended September 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

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Item 6. Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Merger of GreenBank with and into Capital Bank, National Association by and between GreenBank and Capital Bank, National Association, dated as of September 7, 2011 (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed by Green Bankshares, Inc. on September 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.)
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
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
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
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
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 10th day of November 2011.

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

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Exhibit Index

Exhibit No.	Description
2.1	Agreement and Plan of Merger of GreenBank with and into Capital Bank, National Association by and between GreenBank and Capital Bank, National Association, dated as of September 7, 2011 (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed by Green Bankshares, Inc. on September 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.)
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
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
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
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
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Users of this data are advised that pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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EX-31.1

Exhibit 31.1

Certification by Chief Executive Officer

pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, R. Eugene Taylor, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of Capital Bank Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2011	CAPITAL BANK CORPORATION
	By:	/s/ R. Eugene Taylor
		R. Eugene Taylor
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification by Chief Financial Officer

pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Christopher G. Marshall, certify that:

1.      I have reviewed this Quarterly Report on Form 10-Q of Capital Bank Corporation;

2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.      The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 10, 2011	CAPITAL BANK CORPORATION
	By:	/s/ Christopher G. Marshall
		Christopher G. Marshall
		Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification by Chief Executive Officer

pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Capital Bank Corporation (the “Company”) for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, R. Eugene Taylor, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ R. Eugene Taylor

R. Eugene Taylor

President and Chief Executive Officer

November 10, 2011

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification by Chief Financial Officer

pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Capital Bank Corporation (the “Company”) for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher G. Marshall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Christopher G. Marshall

Christopher G. Marshall

Chief Financial Officer

November 10, 2011

This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Sep. 30, 2011 Successor Company	Dec. 31, 2010 Predecessor Company
Preferred stock, par value		$ 1,000
Preferred stock, shares authorized		100,000
Preferred stock, shares issued		41,279
Preferred stock, shares outstanding		41,279
Preferred stock, liquidation preference		$ 41,279,000
Common stock, no par value	$ 0	$ 0
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares issued	85,802,164	12,877,846
Common stock, shares outstanding	85,802,164	12,877,846

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data	3 Months Ended	8 Months Ended	1 Months Ended	3 Months Ended	9 Months Ended
	Sep. 30, 2011 Successor Company	Sep. 30, 2011 Successor Company	Jan. 28, 2011 Predecessor Company	Sep. 30, 2010 Predecessor Company	Sep. 30, 2010 Predecessor Company
Interest income:
Loans and loan fees		$ 25,971	$ 5,479	$ 17,357	$ 52,080
Investment securities:
Taxable interest income		3,206	391	1,854	5,851
Tax-exempt interest income		398	74	285	1,369
Dividends		59		22	58
Federal funds and other interest income	85	172	11	17	37
Total interest income	85	29,806	5,955	19,535	59,395
Interest expense:
Deposits		4,560	1,551	4,683	16,438
Borrowings and subordinated debentures	355	1,606	445	1,470	4,281
Total interest expense	355	6,166	1,996	6,153	20,719
Net interest income (loss)	(270)	23,640	3,959	13,382	38,676
Provision for loan losses		1,652	40	6,763	38,534
Net interest income (loss) after provision for loan losses	(270)	21,988	3,919	6,619	142
Noninterest income:
Service charges and other fees		1,355	291	746	2,468
Bank card services		847	174	521	1,479
Mortgage origination and other loan fees		518	210	442	1,108
Brokerage fees		308	78	271	743
Bank-owned life insurance		134	10	138	632
Equity income from investment in Capital Bank, NA	2,169	2,169
Net gain on sale of investment securities				185	511
Other		155	69	197	604
Total noninterest income	2,169	5,486	832	2,500	7,545
Noninterest expense:
Salaries and employee benefits		9,525	1,977	5,918	16,637
Occupancy		2,926	548	1,460	4,418
Furniture and equipment		1,401	275	867	2,312
Data processing and telecommunications		911	180	488	1,530
Advertising and public relations		325	131	435	1,464
Office expenses		498	93	320	940
Professional fees		543	190	626	1,785
Business development and travel		550	87	363	937
Amortization of other intangible assets		478	62	235	705
ORE losses and miscellaneous loan costs		1,608	176	1,833	3,858
Directors' fees		93	68	236	828
FDIC deposit insurance		1,076	266	712	2,028
Contract termination fees		3,955
Other	76	1,169	102	717	1,738
Total noninterest expense	76	25,058	4,155	14,210	39,180
Net income (loss) before taxes	1,823	2,416	596	(5,091)	(31,493)
Income tax expense (benefit)	(117)	(217)		3,975	(3,510)
Net income (loss)	1,940	2,633	596	(9,066)	(27,983)
Dividends and accretion on preferred stock			861	588	1,766
Net (income) loss attributable to common shareholders	$ 1,940	$ 2,633	$ (265)	$ (9,654)	$ (29,749)
Earnings (loss) per common share - basic	$ 0.02	$ 0.03	$ (0.02)	$ (0.74)	$ (2.34)
Earnings (loss) per common share - diluted	$ 0.02	$ 0.03	$ (0.02)	$ (0.74)	$ (2.34)

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Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 07, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Trading Symbol	CBKN
Entity Registrant Name	CAPITAL BANK CORP
Entity Central Index Key	0001071992
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		85,802,164

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Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2011

Comprehensive Income (Loss)

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 primarily comprised of unrealized gains and losses on certain investments in debt securities.

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  Sep. 30, 2011			Three Months Ended Sep. 30, 2010			Jan. 29, 2011 to Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Unrealized gains (losses) on securities – available for sale	$	1,348		$	65		$	8,663		$	(528	)	$	473
Amortization of prior service cost on SERP		–			2			–			1			6
Income tax effect		(512	)		(25	)		(3,332	)		204			(182	)
Other comprehensive income (loss)	$	836		$	42		$	5,331		$	(323	)	$	297

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Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments

10.  Derivative Instruments

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

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Basis of Presentation and Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Basis of Presentation and Significant Accounting Policies

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, 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”). On September 7, 2011, NAFH acquired a controlling interest in Green Bankshares, Inc. (“Green Bankshares”) and merged its banking subsidiary, GreenBank, with and into Capital Bank, NA. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial Corp. (“TIB Financial”) owning 21%, and Green Bankshares owning the remaining 34%.  NAFH is the owner of approximately 94% of TIB Financial’s common stock and approximately 90% of Green Bankshares’ common stock.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. The accounts of Old Capital Bank were consolidated with the Company until the Bank Merger on June 30, 2011. In connection with the Bank Merger, the Company now 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 September 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:

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.

In April 2011, the FASB issued ASU 2011-2, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, to amend ASC Topic 320, Receivables. The amendments in this update clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a borrower is experiencing financial difficulties. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. This update also indicates that companies should disclose the information regarding troubled debt restructurings required by paragraphs 310-10-50-33 through 50-34, which was deferred by ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Adoption of this update did not have a material impact on the Company’s financial position or results of operations.

In 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.

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Loans

9 Months Ended

Sep. 30, 2011

Loans

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:

	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 Sep. 30, 2011		Jan. 29, 2011 to Sep. 30, 2011
Balance, beginning of period	$	–	$	163,892
New loans purchased		–		–
Accretion of income		–		(24,968	)
Reclassifications from nonaccretable difference		–		8,419
Merger of Old Capital Bank into Capital Bank, NA		–		(147,343	)
Balance, end of period	$	–	$	–

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the 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:

● the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;

● the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

● indices for PCI loans with variable rates of interest.

For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

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Fair Value

9 Months Ended

Sep. 30, 2011

Fair Value

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.

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 Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 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 into 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.

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 September 30, 2011 (Successor) and December 31, 2010 (Predecessor) were as follows:

	Successor Company				Predecessor Company
(Dollars in thousands)	Sep. 30, 2011				Dec. 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	$	2,435	$	2,435	$	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		28		28		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		18,625		18,759		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

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Allowance for Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2011

Allowance for Loan Losses and Credit Quality

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 Sep. 30, 2011			Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Balance at beginning of period, predecessor	$	–		$	36,061		$	26,081
Loans charged off		(339	)		(49	)		(29,104	)
Recoveries of loans previously charged off		–			9			738
Net charge-offs		(339	)		(40	)		(28,366	)
Provision for loan losses		1,652			40			38,534
Merger of Old Capital Bank into Capital Bank, NA		(1,313	)		–			–
Balance at the end of period, predecessor		–			36,061			36,249
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 September 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:

● 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):

	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

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Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities

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:

	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.

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) (USD $) In Thousands	8 Months Ended	1 Months Ended	9 Months Ended
	Sep. 30, 2011 Successor Company	Jan. 28, 2011 Predecessor Company	Sep. 30, 2010 Predecessor Company
Net unrealized gain (loss) on securities, tax/(benefit)	$ 3,332	$ (204)	$ 182
Issuance of common stock, offering costs	$ 300

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Bank Merger

9 Months Ended

Sep. 30, 2011

Bank Merger

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

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

The Bank Merger occurred pursuant to the terms of an Agreement of Merger entered into by and between Old Capital Bank and Capital Bank, NA, dated as of June 30, 2011. In the Bank Merger, each share of Old Capital Bank common stock was converted into the right to receive shares of Capital Bank, NA common stock based on each entity’s relative tangible book value on March 31, 2011. Following the GreenBank merger, the Company now owns approximately 26% of Capital Bank, NA, with NAFH having a direct ownership of 19%, TIB Financial owning 21%, and Green Bankshares owning the remaining 34%.  As of September 30, 2011, Capital Bank, NA operated 146 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia and had total assets of $6.6 billion, total deposits of $5.3 billion and shareholders’ equity of $931.1 million. 

The Bank Merger, the preceding merger of TIB Bank and Capital Bank, NA, and the succeeding merger of GreenBank and Capital Bank, NA were restructuring transactions between commonly-controlled entities. At the time of the Bank Merger, due to the 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 cash contributions of additional capital to Capital Bank, NA of $4.7 million, $6.1 million and $5.2 million, respectively, in proportion to their respective ownership interests in Capital Bank, NA. On September 30, 2011, the Company made a $10.0 million contribution of additional capital to Capital Bank, NA in exchange for additional shares of Capital Bank, NA. These capital contributions were made to provide additional capital support for the general business operations of Capital Bank, NA.

The Company reports its investment in Capital Bank, NA on the Consolidated Balance Sheet as an equity method investment in that entity. As of September 30, 2011, the Company’s investment in Capital Bank, NA totaled $241.5 million, which reflected the Company’s pro rata ownership of Capital Bank, NA’s total shareholders’ equity. The Company also had an advance to Capital Bank, NA totaling $3.4 million as of September 30, 2011. In the quarter ended September 30, 2011, the Company increased the equity investment balance by $2.2 million based on its equity in Capital Bank, NA’s net income and increased the equity investment balance by $836 thousand based on its equity in Capital Bank, NA’s other comprehensive income.

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

(Dollars in thousands)	Three Months Ended  Sep. 30, 2011
Interest income	$	60,782
Interest expense		8,543
Net interest income		52,239
Provision for loan losses		9,764
Noninterest income		12,840
Noninterest expense		44,778
Net income	$	6,858

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NAFH Investment

9 Months Ended

Sep. 30, 2011

NAFH Investment

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:

	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.

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.

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.

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.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies

11.  Commitments and Contingencies

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

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Earnings (Loss) Per Share

9 Months Ended

Sep. 30, 2011

Earnings (Loss) Per Share

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:

	Successor Company		Predecessor Company			Successor Company		Predecessor Company
(Dollars in thousands except per share data)	Three Months Ended  Sep. 30, 2011		Three Months Ended Sep. 30, 2010			Jan. 29, 2011 to Sep. 30, 2011		Jan. 1, 2011 to Jan. 28, 2011			Nine Months Ended Sep. 30, 2010
Net income (loss) attributable to common
shareholders	$	1,940	$	(9,654	)	$	2,633	$	(265	)	$	(29,749	)
Weighted average number of common
shares outstanding:
Basic		85,802,164		13,060,739			85,591,765		13,188,612			12,702,625
Dilutive effect of options outstanding		–		–			–		–			–
Diluted		85,802,164		13,060,739			85,591,765		13,188,612			12,702,625
Earnings (loss) per share – basic	$	0.02	$	(0.74	)	$	0.03	$	(0.02	)	$	(2.34	)
Earnings (loss) per share – diluted	$	0.02	$	(0.74	)	$	0.03	$	(0.02	)	$	(2.34	)

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  Sep. 30, 2011		Three Months Ended Sep. 30, 2010		Jan. 29, 2011 to Sep. 30, 2011	Jan. 1, 2011 to Jan. 28, 2011		Nine Months Ended Sep. 30, 2010
Anti-dilutive stock options		283,980		313,420	283,980		297,880		313,420
Anti-dilutive warrants		–		749,619	–		749,619		749,619

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (USD $) In Thousands, except Share data	Successor Company	Successor Company Common Stock	Successor Company Other Comprehensive Income	Successor Company Retained Earnings	Predecessor Company	Predecessor Company Preferred Stock	Predecessor Company Common Stock	Predecessor Company Other Comprehensive Income	Predecessor Company Retained Earnings
Beginning Balance at Dec. 31, 2009					$ 139,785	$ 40,127	$ 139,909	$ 3,955	$ (44,206)
Beginning Balance (in shares) at Dec. 31, 2009						41,279	11,348,117
Comprehensive income (loss)
Net income (loss)					(27,983)				(27,983)
Net unrealized gain (loss) on securities, (net of tax $3,332 in September 2011, tax benefit of $204 in January 2011, tax of $182 in September 2010)					291			291
Amortization of prior service cost on SERP					6			6
Total comprehensive income (loss)					(27,686)
Accretion of preferred stock discount						218			(218)
Issuance of common stock (in shares)							1,468,770
Issuance of common stock					5,065		5,065
Stock option expense					37		37
Restricted stock forfeiture (in shares)							(400)
Restricted stock forfeiture					(2)		(2)
Directors' deferred compensation (in shares)							64,467
Directors' deferred compensation					452		452
Dividends on preferred stock					(1,548)				(1,548)
Ending Balance at Sep. 30, 2010					116,103	40,345	145,461	4,252	(73,955)
Ending Balance (in shares) at Sep. 30, 2010						41,279	12,880,954
Beginning Balance at Jun. 30, 2010
Comprehensive income (loss)
Net income (loss)					(9,066)
Ending Balance at Sep. 30, 2010					116,103
Beginning Balance at Dec. 31, 2010					76,688	40,418	145,594	(1,297)	(108,027)
Beginning Balance (in shares) at Dec. 31, 2010						41,279	12,877,846
Comprehensive income (loss)
Net income (loss)					596				596
Net unrealized gain (loss) on securities, (net of tax $3,332 in September 2011, tax benefit of $204 in January 2011, tax of $182 in September 2010)					(324)			(324)
Amortization of prior service cost on SERP					1			1
Total comprehensive income (loss)					273
Accretion of preferred stock discount						24			(24)
Stock option expense					5		5
Directors' deferred compensation					35		35
Dividends on preferred stock					(172)				(172)
Ending Balance at Jan. 28, 2011	224,085	224,085			76,829	40,442	145,634	(1,620)	(107,627)
Ending Balance (in shares) at Jan. 28, 2011		83,877,846				41,279	12,877,846
Comprehensive income (loss)
Net income (loss)	2,633			2,633
Net unrealized gain (loss) on securities, (net of tax $3,332 in September 2011, tax benefit of $204 in January 2011, tax of $182 in September 2010)	5,331		5,331
Total comprehensive income (loss)	7,964
Issuance of common stock (in shares)		1,613,165
Issuance of common stock	3,814	3,814
Stock option expense	75	75
Restricted stock forfeiture (in shares)		(1,751)
Restricted stock forfeiture	(7)	(7)
Directors' deferred compensation (in shares)		312,904
Merger of Old Capital Bank into Capital Bank, NA	(8,619)	(4,124)	(4,495)
Merger of GreenBank into Capital Bank, NA	(4,481)	(4,481)
Ending Balance at Sep. 30, 2011	222,831	219,362	836	2,633
Ending Balance (in shares) at Sep. 30, 2011		85,802,164
Beginning Balance at Jun. 30, 2011
Comprehensive income (loss)
Net income (loss)	1,940
Ending Balance at Sep. 30, 2011	$ 222,831

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	8 Months Ended	1 Months Ended	9 Months Ended
	Sep. 30, 2011 Successor Company	Jan. 28, 2011 Predecessor Company	Sep. 30, 2010 Predecessor Company
Cash flows from operating activities:
Net income (loss)	$ 2,633	$ 596	$ (27,983)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Equity income from investment in Capital Bank, NA	(2,169)
Accretion of purchased credit-impaired loans	(24,968)
Amortization/accretion on acquired liabilities, net	(3,465)
Provision for loan losses	1,652	40	38,534
Amortization of other intangible assets	478	62	705
Depreciation	1,348	203	1,939
Stock-based compensation	143	42	581
Gain on sale of securities, net			(511)
Amortization of premium on securities, net	695	171	52
Loss (gain) on disposal of premises, equipment and ORE	16	(9)	299
ORE valuation adjustments	74		1,682
Bank-owned life insurance income	(134)	(10)	(632)
Deferred income tax benefit			(3,238)
Net change in:
Mortgage loans held for sale	1,907	4,424	(8,528)
Accrued interest receivable and other assets	(4,777)	(1,309)	1,577
Accrued interest payable and other liabilities	2,899	(3,939)	(669)
Net cash provided by (used in) operating activities	(23,668)	271	3,808
Cash flows from investing activities:
Net cash paid in Capital Bank merger	(42,880)
Investment in Capital Bank, NA	(16,063)
Principal repayments on loans, net of loans originated or acquired	13,305	14,547	20,679
Purchases of premises and equipment	(399)	(416)	(3,051)
Proceeds from sales of premises, equipment and ORE	4,332	201	7,224
Proceeds from surrender of bank-owned life insurance			16,483
Sales (purchases) of FHLB stock	1,259		(1,980)
Purchases of securities - available for sale	(138,855)	(6,840)	(66,035)
Proceeds from sales of securities - available for sale			50,158
Proceeds from principal repayments/calls/maturities of securities - available for sale	25,761	3,936	67,512
Proceeds from principal repayments/calls/maturities of securities - held to maturity			853
Net cash provided by (used in) investing activities	(153,540)	11,428	91,843
Cash flows from financing activities:
Decrease in deposits, net	(2,426)	(4,960)	(18,554)
Decrease in repurchase agreements, net			(6,543)
Proceeds from borrowings			189,000
Principal repayments of borrowings	(30,000)	(5,000)	(227,000)
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			(2,456)
Net cash provided by (used in) financing activities	(28,612)	129,811	(57,095)
Net change in cash and cash equivalents	(205,820)	141,510	38,556
Cash and cash equivalents at beginning of period	208,255	66,745	29,513
Cash and cash equivalents at end of period	2,435	208,255	68,069
Noncash investing activities:
Transfers of loans and premises to ORE	7,573	248	16,325
Transfers of ORE to loans	857	146
Capital leases recorded in premises and other liabilities	6,618
Cash paid for:
Income taxes	130
Interest	$ 10,344	$ 1,531	$ 20,832

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation

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 September 30, 2011 (Successor), options for 283,980 shares of common stock were outstanding and options for 618,259 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 Sep. 30, 2011					Period of Jan. 1 to Jan. 28, 2011				Nine Months Ended Sep. 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		(13,900	)		14.69		–		–		(72,413	)		8.53
Outstanding options, end of period		283,980		$	11.99		297,880	$	12.11		313,420		$	12.05
Options exercisable at end of period		244,780		$	12.85		226,430	$	13.53		225,870		$	13.74

The following table summarizes information about the Company’s stock options as of September 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	7.55	41,850	$	–
$6.01 – $9.00	–	–	–		–
$9.01 – $12.00	74,880	0.45	74,880		–
$12.01 – $15.00	16,000	6.02	12,800		–
$15.01 – $18.00	64,000	3.35	64,000		–
$18.00 – $18.37	51,250	3.24	51,250		–
	283,980	3.87	244,780	$	–

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 nine months ended September 30, 2010 (Predecessor) was $1.80. There were no options granted in the period of January 29, 2011 to September 30, 2011 (Successor) or the period of January 1, 2011 to January 28, 2011 (Predecessor).

For the period from January 29, 2011 to September 30, 2011 (Successor), the period from January 1, 2011 to January 28, 2011 (Predecessor) and the nine months ended September 30, 2010 (Predecessor), the Company recorded total compensation expense related to stock options of $75 thousand, $5 thousand and $37 thousand, respectively, related to stock options. On January 28, 2011, vesting was accelerated on certain outstanding stock options in connection with the NAFH Investment.

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 nine months ended September 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 September 30, 2011 (Successor), the period of January 1, 2011 to January 28, 2011 (Predecessor) and the nine months ended September 30, 2010 (Predecessor) totaled $68 thousand, $2 thousand and $92 thousand, respectively. On January 28, 2011, vesting was accelerated on all remaining nonvested restricted shares in connection with the NAFH Investment.

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 nine months ended September 30, 2010 (Predecessor), the Company recognized stock-based compensation expense of $35 thousand and $452 thousand, respectively, related to the Deferred Compensation Plan.

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TARP Capital Purchase Program

9 Months Ended

Sep. 30, 2011

TARP Capital Purchase Program

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.

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Sep. 30, 2011 Successor Company	Dec. 31, 2010 Predecessor Company
Cash and cash equivalents:
Cash and due from banks	$ 2,435	$ 13,646
Interest-bearing deposits with banks		53,099
Total cash and cash equivalents	2,435	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	244,863
Other real estate		18,334
Premises and equipment, net		25,034
Other intangible assets, net		1,774
Other assets	308	24,957
Total assets	247,606	1,585,547
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	18,625	34,323
Other liabilities	6,150	10,250
Total liabilities	24,775	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	219,362	145,594
Retained earnings (accumulated deficit)	2,633	(108,027)
Accumulated other comprehensive income (loss)	836	(1,297)
Total shareholders' equity	222,831	76,688
Total liabilities and shareholders' equity	$ 247,606	$ 1,585,547