UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549





FORM
10-Q





þQUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF
1934




For the Quarterly Period Ended March 31,
2008


or


 ̈TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF
1934





For the Transition Period fromto












CAPITAL
BANK CORPORATION


(Exact name of registrant as specified
in its charter)








North
    Carolina
            
            000-30062
            
            56-2101930(State or other jurisdiction of
      incorporation)
            
            (Commission
              File
Number)
            
            (IRS 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 is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):





Large accelerated filer ̈
            Accelerated filerþ
            Non-accelerated filer ̈





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 May 6, 2008 there were 11,237,085shares
outstanding of the registrant’s common stock, no par
value.





CAPITAL BANK
CORPORATION


Form 10-Q for the Quarterly Period Ended
March 31, 2008








INDEX







PART I – FINANCIAL
      INFORMATION
              Page
      No.Item 1.
              Financial
      StatementsCondensed Consolidated Balance
      Sheets as of March 31, 2008 (Unaudited) andDecember 31,
      2007
              3Condensed Consolidated Statements
      of Operations for the Three Months Ended March 31, 2008 and 2007
      (Unaudited)
              4Condensed Consolidated Statements
      of Changes in Shareholders’ Equity for the Three Months Ended March 31,
      2008 and 2007 (Unaudited)
              5Condensed Consolidated Statements
      of Cash Flows for the Three Months Ended March 31, 2008 and 2007
      (Unaudited)
              6Notes to Condensed Consolidated
      Financial Statements (Unaudited)
              8Item
      2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              15Item
      3.
              Quantitative and Qualitative
      Disclosures about Market Risk
              24Item 4.
              Controls and
      Procedures
              24PART II – OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              25Item
      1A.
              Risk
Factors
              25Item
      2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              29Item 3.
              Defaults upon Senior
      Securities
              30Item
      4.
              Submission of Matters to a Vote of
      Security Holders
              30Item
      5.
              Other
      Information
              30Item
      6.
              Exhibits
              30Signatures




- 2
-
 Index


PART I –
FINANCIAL INFORMATION
 
 Item 1.Financial
Statements
 
 CAPITAL BANK
CORPORATION
 CONDENSED CONSOLIDATED BALANCE
SHEETS
 March 31, 2008 and December 31,
2007
 
 March
      31, 2008
              
              December
      31, 2007(Dollars
      in thousands except share data)
              
              (Unaudited)AssetsCash and due from
      banks:Interest
      earning
              
              $
              10,487
              
              $
              7,815Noninterest
      earning
              
              
              32,661
              
              
              32,347Federal
      funds sold and short term investments
              
              
              104
              
              
              10Total
      cash and cash equivalents
              
              
              43,252
              
              
              40,172Investment
      securities – available for sale, at fair value
              
              
              252,191
              
              
              249,094Investment
      securities – held to maturity, at amortized cost
              
              
              5,895
              
              
              10,022Loans –
      net of unearned income and deferred fees
              
              
              1,150,497
              
              
              1,095,107Allowance
      for loan losses
              
              
              (13,563
              )
              
              (13,571
              )Net
      loans
              
              
              1,136,934
              
              
              1,081,536Premises
      and equipment, net
              
              
              24,584
              
              
              23,863Bank-owned
      life insurance
              
              
              21,702
              
              
              21,589Goodwill
      and deposit premium, net
              
              
              63,087
              
              
              63,345Deferred
      income tax
              
              
              5,010
              
              
              5,829Accrued
      interest receivable
              
              
              6,961
              
              
              7,789Other
      assets
              
              
              15,685
              
              
              14,364Total
      assets
              
              $
              1,575,301
              
              $
              1,517,603LiabilitiesDeposits:Demand,
      noninterest bearing
              
              $
              117,186
              
              $
              114,780Savings
      and interest bearing checking
              
              
              175,718
              
              
              151,698Money
      market deposit accounts
              
              
              199,829
              
              
              229,560Time
      deposits less than $100,000
              
              
              381,824
              
              
              370,416Time
      deposits $100,000 and greater
              
              
              276,340
              
              
              232,244Total
      deposits
              
              
              1,150,897
              
              
              1,098,698Repurchase
      agreements and federal funds purchased
              
              
              35,762
              
              
              45,295Borrowings
              
              
              178,000
              
              
              163,347Subordinated
      debentures
              
              
              30,930
              
              
              30,930Other
      liabilities
              
              
              11,745
              
              
              15,033Total
      liabilities
              
              
              1,407,334
              
              
              1,353,303Commitments
      and contingenciesShareholders’
      EquityCommon
      stock, no par value; 20,000,000 shares authorized; 11,237,085 and
      11,169,777 shares issued and outstanding as of March 31, 2008 and December
      31, 2007, respectively
              
              
              136,845
              
              
              136,154Retained
      earnings
              
              
              29,251
              
              
              27,985Accumulated
      other comprehensive income
              
              
              1,871
              
              
              161Total
      shareholders’ equity
              
              
              167,967
              
              
              164,300Total
      liabilities and shareholders’ equity
              
              $
              1,575,301
              
              $
              1,517,603
 
 The accompanying notes are an integral
part of these condensed consolidated financial statements.
 
 - 3
-
 Index
 
 CAPITAL BANK
CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
 For the Three Months Ended March 31,
2008 and 2007 (Unaudited)
 
 2008
              
              
              2007(Dollars in thousands except per
      share data)Interest
      income:Loans
      and loan fees
              
              $
              19,499
              
              
              $
              19,883Investment
      securities:Taxable
      interest income
              
              
              2,218
              
              
              
              1,926Tax-exempt
      interest income
              
              
              829
              
              
              
              774Dividends
              
              
              117
              
              
              
              107Federal
      funds and other interest income
              
              
              55
              
              
              
              485Total
      interest income
              
              
              22,718
              
              
              
              23,175Interest
      expense:Deposits
              
              
              9,072
              
              
              
              10,006Borrowings
      and repurchase agreements
              
              
              2,737
              
              
              
              2,446Total
      interest expense
              
              
              11,809
              
              
              
              12,452Net
      interest income
              
              
              10,909
              
              
              
              10,723Provision
      for loan losses
              
              
              565
              
              
              
              337Net
      interest income after provision for loan losses
              
              
              10,344
              
              
              
              10,386Noninterest
      income:Service charges and other
      fees
              
              
              959
              
              
              
              877Mortgage fees and
      revenues
              
              
              272
              
              
              
              528Brokerage
    fees
              
              
              156
              
              
              
              103Bank card
      services
              
              
              299
              
              
              
              216Net gain on sale of
      securities
              
              
              71
              
              
              
              –Bank-owned life
      insurance
              
              
              302
              
              
              
              197Other
              
              
              168
              
              
              
              269Total
      noninterest income
              
              
              2,227
              
              
              
              2,190Noninterest
      expense:Salaries and employee
      benefits
              
              
              5,036
              
              
              
              5,042Occupancy
              
              
              958
              
              
              
              956Furniture and
      equipment
              
              
              747
              
              
              
              615Data processing and
      telecommunications
              
              
              432
              
              
              
              388Advertising
              
              
              315
              
              
              
              298Office
    expenses
              
              
              365
              
              
              
              333Professional
      fees
              
              
              370
              
              
              
              183Business development and
      travel
              
              
              333
              
              
              
              313Amortization of deposit
      premiums
              
              
              257
              
              
              
              300Miscellaneous loan handling
      costs
              
              
              94
              
              
              
              186Directors
    fees
              
              
              267
              
              
              
              268Insurance
              
              
              95
              
              
              
              90Other
              
              
              336
              
              
              
              264Total
      noninterest expense
              
              
              9,605
              
              
              
              9,236Net
      income before tax expense
              
              
              2,966
              
              
              
              3,340Income
      tax expense
              
              
              799
              
              
              
              956Net
      income
              
              $
              2,167
              
              
              $
              2,384Earnings
      per share – basic
              
              $
              0.19
              
              
              $
              0.21Earnings
      per share – diluted
              
              $
              0.19
              
              
              $
              0.21
 
 The accompanying notes are an integral
part of these consolidated financial statements.
 
 - 4
-
 Index
 
 CAPITAL BANK
CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
 For the Three Months Ended March 31,
2008 and 2007 (Unaudited)
 
 Shares ofCommonStock
              
              
              Common
                Stock
              
              
              OtherComprehensiveIncome
              
              
              RetainedEarnings
              
              
              Total(Dollars in thousands except share
      data)Balance at January 1,
      2007
              
              
              11,393,990
              
              
              $
              139,484
              
              
              $
              (1,557
              )
              
              $
              23,754
              
              
              $
              161,681Repurchase of outstanding common
      stock
              
              
              (82
              )
              
              
              (1
              )
              
              
              
              
              
              
              
              
              
              
              (1
              )Issuance of common stock for
      options exercised
              
              
              16,793
              
              
              
              146
              
              
              
              
              
              
              
              
              
              
              
              146Noncash
      compensation
              
              
              32,329
              
              
              
              497
              
              
              
              
              
              
              
              
              
              
              
              497Net income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,384
              
              
              
              2,384Other comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              65
              
              
              
              
              
              
              
              65Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,449Dividends ($0.08 per
      share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (917
              )
              
              
              (917
              )Balance at March 31, 2007
              
              
              11,443,030
              
              
              $
              140,126
              
              
              $
              (1,492
              )
              
              $
              25,221
              
              
              $
              163,855Balance at January 1,
      2008
              
              
              11,169,777
              
              
              $
              136,154
              
              
              $
              161
              
              
              $
              27,985
              
              
              $
              164,300Repurchase of outstanding common
      stock
              
              
              (166
              )
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              (2
              )Issuance of common stock for
      options exercised
              
              
              15,591
              
              
              
              103
              
              
              
              
              
              
              
              
              
              
              
              103Issuance of common stock for
      services
              
              
              27,883
              
              
              
              295
              
              
              
              
              
              
              
              
              
              
              
              295Noncash
      compensation
              
              
              24,000
              
              
              
              295
              
              
              
              
              
              
              
              
              
              
              
              295Net income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,167
              
              
              
              2,167Net unrealized gain on securities,
      net of tax of $292
              
              
              
              
              
              
              
              
              
              
              571
              
              
              
              
              
              
              
              571Net unrealized gain related to
      cash flow hedge
              
              
              
              
              
              
              
              
              
              
              1,139
              
              
              
              
              
              
              
              1,139Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,877Dividends ($0.08 per
      share)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (901
              )
              
              
              (901
              )Balance at March 31,
      2008
              
              
              11,237,085
              
              
              $
              136,845
              
              
              $
              1,871
              
              
              $
              29,251
              
              
              $
              167,967
 
 The accompanying notes are an integral
part of these condensed consolidated financial statements.
 
 - 5
-
 Index
 
 CAPITAL BANK
CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
 For the Three Months Ended March 31,
2008 and 2007 (Unaudited)
 
 2008
              
              2007(Dollars in
      thousands)Cash flows from operating
      activities:Net
      income
              
              $
              2,167
              
              $
              2,384Adjustments
      to reconcile net income to net cash used in operating
      activities:Amortization
      of deposit premium
              
              
              257
              
              
              300Depreciation
              
              
              668
              
              
              612Net
      gains on sale of securities available for sale
              
              
              (71
              )
              
              –Increase
      in cash surrender value of BOLI
              
              
              (113
              )
              
              (197
              )(Gain)
      loss on disposal of premises, equipment and real estate
    owned
              
              
              (21
              )
              
              7Net
      funding of held-for-sale loans
              
              
              –
              
              
              (1,931
              )Amortization
      of premium/discount on securities, net
              
              
              26
              
              
              60Deferred
      income tax expense (benefit)
              
              
              819
              
              
              (252)Issuance
      of stock for compensation
              
              
              295
              
              
              497Other
      noncash compensation expense
              
              
              33
              
              
              –Provision
      for loan losses
              
              
              565
              
              
              337Changes
      in assets and liabilities:Accrued
      interest receivable and other assets
              
              
              (1,865
              )
              
              2,129Accrued
      interest payable and other liabilities
              
              
              679
              
              
              1,284Net
      cash provided by operating activities
              
              
              3,439
              
              
              5,230Cash
      flows from investing activities:Loan
      originations, net of principal repayments
              
              
              (56,054)
              
              
              (16,195
              )Additions
      to premises and equipment
              
              
              (1,412
              )
              
              (653
              )Proceeds
      from sales of premises, equipment and real estate owned
              
              
              84
              
              
              51Net
      (purchase) sales of FHLB and Silverton Bank stock
              
              
              (798
              )
              
              931Purchase
      of securities available for sale
              
              
              (32,045
              )
              
              (19,947
              )Proceeds
      from principal repayments/calls/maturities of available for
      sale
              
              
              30,605
              
              
              9,269Proceeds
      from principal repayments/calls/maturities of securities held to
      maturity
              
              
              4,128
              
              
              306Net
      cash used in investing activities
              
              
              (55,492
              )
              
              (26,238
              )(continued
      on next page)
 
 The accompanying notes are an integral
part of these consolidated financial statements.
 
 - 6
-
 Index
 
 CAPITAL BANK
CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
 For the Three Months Ended March 31,
2008 and 2007 (Unaudited)
 
 2008
              
              2007(Dollars in
      thousands)Cash
      flows from financing activities:Net
      increase in deposits
              
              $
              52,199
              
              $
              65,042Net
      decrease in repurchase agreements
              
              
              (4,138
              )
              
              (10
              )Proceeds
      from borrowings
              
              
              65,500
              
              
              –Principal
      repayments of borrowings
              
              
              (52,500
              )
              
              (9,964
              )Net
      repayments of  federal funds borrowed
              
              
              (5,395
              )
              
              –Dividends
      paid
              
              
              (896
              )
              
              (686
              )Issuance
      of common stock for options and other plans
              
              
              365
              
              
              146Repurchase
      of common stock
              
              
              (2
              )
              
              (1
              )Net
      cash provided by financing activities
              
              
              55,133
              
              
              54,527Net
      change in cash and cash equivalents
              
              
              3,080
              
              
              33,519Cash
      and cash equivalents at beginning of period
              
              
              40,172
              
              
              54,332Cash
      and cash equivalents at end of period
              
              $
              43,252
              
              $
              87,851Supplemental
      Disclosure of Cash Flow InformationTransfer
      of loans and premises to other real estate owned
              
              $
              68
              
              $
              561Dividends
      payable
              
              $
              901
              
              $
              917Cash
      paid for:Income
      taxes
              
              $
              –
              
              $
              –Interest
              
              $
              11,930
              
              $
              12,299
 
 The accompanying notes are an integral
part of these consolidated
financial statements.
 
 - 7
-
 Index
 –
 
 1.      Significant Accounting Policies and
Interim Reporting
 
 The accompanying unaudited condensed
consolidated financial statements include the accounts of Capital Bank
Corporation (the “Company”) and its wholly owned subsidiary, Capital Bank (the
“Bank”). In addition, the Company has interests in three trusts, Capital Bank
Statutory Trust I, II, and III (hereinafter collectively referred to as the
“Trusts”). The Trusts have not been consolidated with the financial statements
of the Companypursuant to the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest
Entities.The interim
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. 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,
2007.
 
 The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
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. The more significant estimates that
are particularly susceptible to significant change relate to the determination
of the allowance for loan losses, valuation of goodwill and intangible assets,
valuation of investments, and tax assets, liabilities and expense. Actual
results could differ from those estimates.
 
 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.Certain amounts reported in
prior periods have been reclassified to conform to the current presentation.
Such reclassifications have no effect ontotal assets,net income or shareholders’ equity as
previously reported.The
results of operations for the three months ended March 31, 2008 are not
necessarily indicative of the results of operations that may be expected for the
year ended December 31, 2008.
 
 The condensed consolidated balance sheet
at December 31, 2007 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, 2007.
 
 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, 2007.
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“Statement No. 161”). The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial condition, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008.
Statement No. 161 will impact disclosures only and will not have an impact
on the Company’s consolidated financial condition, results of operations or cash
flows.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), Business Combinations
(“Statement No. 141R”), which replaces Statement of Financial Accounting
Standards No. 141, Business Combinations(“Statement No. 141”) issued in 2001. Whereas its predecessor
applied only to business combinations in which control was obtained by
transferring consideration, the revised standard applies to all transactions or
other events in which one entity obtains control over another. Statement
No. 141R defines the acquirer as the entity that obtains control over one
or more other businesses and defines the acquisition date as the date the
acquirer achieves control. Statement No. 141R requires the acquirer to recognize
assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree at their respective fair values as of the acquisition date. The revised
standard changes the treatment of acquisition-related costs, restructuring costs
related to an acquisition that the acquirer expects but is not obligated to
incur, contingent consideration associated with the purchase price and
pre-acquisition contingencies associated with acquired assets and liabilities.
Statement No. 141R retains the guidance in Statement No. 141 for
identifying and recognizing intangible assets apart from goodwill. The revised
standard applies prospectively to 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, 2008. The Company will apply the
provisions of Statement No. 141R to any business acquisition which occurs
on or after the date the standard becomes effective.
  - 8
-
 Index
 –
 Also in
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS No. 160”). This statement amends
Accounting Research Bulletin No. 51, Consolidated Financial
Statements. SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interests in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is prohibited. The Company is currently
evaluating the provisions of SFAS No. 160 and assessing the impact it
may have on the Company.
 
 In February 2007, the FASB issued FASB
Statement No. 159,The Fair Value
Options for Financial Assets and Financial Liabilities(“SFAS No. 159”), effective for fiscal
years beginning after November 15, 2007. SFAS No. 159 includes an amendment of
FASB Statement No. 115,Accounting for
Certain Investments in Debt and Equity Securities. SFAS No. 159 permits entities to
choose, at specified election dates, to measure eligible items at fair value and
requires unrealized gains and losses on items for which the fair value option
has been elected to be reported in earnings. At this time, the Company does not
expect to elect the fair value option as outlined in the provisions of SFAS No.
159.
 
 In September 2006, the FASB issued SFAS
No. 157,Fair Value
Measurements(“SFAS No.
157”), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157 will
be effective for the Company beginning January 1, 2008.Certain requirements of SFAS No. 157 are
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date for other requirements of
SFAS No. 157 has been deferred for one year by the FASB. On January 1, 2008, the
Company adopted SFAS No. 157, which has not had a material impact on the
Company’s financial condition or results of operations. See Part I –Financial Information,Item 1. Financial Statements, Notes to
Condensed Consolidated Financial Statements (Unaudited) – Note 8. Fair
Value Measurementfor
additional information.
 In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements
No. 87, 88, 106, and 132(R) (“SFAS No. 158”). SFAS No. 158 requires
employers to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined
benefit pension and other post-retirement benefit plans. SFAS No. 158 requires
prospective application; thus, the recognition and disclosure requirements are
effective for fiscal years ending after December 31, 2006. Additionally, SFAS
No. 158 requires companies to measure plan assets and obligations at their
year-end balance sheet date. This requirement is effective for the Company’s
fiscal year ending after December 31, 2008. The Company is currently evaluating
the effect of the additional provisions of SFAS No. 158, but does not expect the
adoption of the additional provisions of SFAS No. 158 to have a material impact
on the Company’s financial condition or results of operations.
 
 2.      Comprehensive Income
 
 Comprehensive income includes net income
and all other changes to the Company’s equity, with the exception of
transactions with shareholders (“other comprehensive income”). The Company’s
other comprehensive income for the three month periods ended March 31, 2008 and
2007 are as shown in the Company’s Condensed Consolidated Statements of Changes
in Shareholders’ Equity (unaudited).
 
 The
Company’s other comprehensive income and accumulated other comprehensive income
are comprised of unrealized gains and losses on certain investments in debt
securities and derivatives that qualify as cash flow hedges to the extent that
the hedge is effective. Information concerning the Company’s other comprehensive
income for the three months ended March 31, 2008 and 2007 is as
follows:
 
 Three Months Ended March 31, 2008 and
2007 (Unaudited)
 
 2008
              
              2007(Dollars in
      thousands)Unrealized gains on
      available-for-sale securities
              
              $
              863
              
              $
              252Unrealized gain (loss) on change
      in fair value of cash flow hedge
              
              
              1,139
              
              
              (66
              )Income tax
      expense
              
              
              (292
              )
              
              (121
              )Other comprehensive
      income
              
              $
              1,710
              
              $
              65
 
 - 9
-
 Index
 –
  3.      Earnings Per
Share
 
 The Company is required to report both
basic and diluted earnings per share (“EPS”). Basic 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, unless the effect is to reduce a loss or increase
earnings per share. For the Company, EPS is adjusted for outstanding stock
options using the treasury stock method in order to compute diluted EPS. The
following table provides a computation and reconciliation of basic and diluted
EPS for the three month periods ended March 31, 2008 and 2007,
respectively.
 
 Three Months Ended March 31, 2008 and
2007 (Unaudited)
 
 2008
              
              2007(Dollars in thousands except share
      data)Income available to shareholders –
      basic and diluted
              
              $
              2,167
              
              $
              2,384Shares used in the computation of
      earnings per share:Weighted average number of shares
      outstanding – basic
              
              
              11,289,453
              
              
              11,492,749Incremental shares from assumed
      exercise of stock options
              
              
              16,643
              
              
              80,345Weighted average number of shares
      outstanding – diluted
              
              $
              11,306,096
              
              $
              11,573,094
 
 For the
three month periods ended March 31, 2008 and 2007, options to purchase
approximately 17,000 shares and 315,000 shares, respectively, of common stock
were used in the diluted calculation. For the three month periods ended March
31, 2008 and 2007, options to purchase approximately 265,000 shares and 58,000
shares, respectively, of common stock were not included in the diluted
calculation because the option price exceeded the average fair market value of
the associated shares of common stock.
 
 4.      Stock-Based
Compensation
 
 The Company
accounts for stock-based compensation in accordance with SFAS No. 123R,Share-Based
Payments(“SFAS No.
123R”). The Company has stock option plans providing for the issuance of up to
650,000 options to purchase shares of the Company’s common stock to officers and
directors. As ofMarch 31,
2008, optionsto
purchase124,459shares of
common stock remained available for future issuance.In addition, there were
566,071options, which were
assumed under various plans from previously acquired financial institutions, of
which84,384optionsremain outstanding.
 
 The Company also administers the Capital
Bank Corporation Deferred Compensation Plan forOutsideDirectors (the “Deferred Compensation
Plan”). Under the Deferred Compensation Plan, eligible directors may elect to
defer all or part of their directors’ fees for a calendar year, in exchange for
common stock of the Company, based on the year-end share price. The amount
deferred, if elected, is equal to 125 percent of the total director’s fees. Each
participant is fully vested in his or her account balance. The Deferred
Compensation Plan generally provides for payment of share units either in shares
of Company common stock or cash (at the Company’s discretion). The Deferred
Compensation Plan is classified as a liability-based plan under SFAS No. 123R.
Accordingly, changes in the Company’s stock price affect the amount of expense
recognized during the period. For the three month periods ended March 31, 2008
and 2007, the Company recognized $138 thousand and $0,respectively, of share-based expense
related to the Deferred Compensation Plan.
 
 The following is a summary of stock
option information and the weighted average exercise price (“WAEP”) for the
three months ended March 31, 2008.
 
 - 10
-
 Index
 –
 Number
                  of Shares
                
                Weighted
                  Average
                  Exercise
    Price
                
                Weighted
      Average
                  Remaining
      Contractual
                  Term in
    Years
                
                Aggregate
                  Intrinsic
    Value(Dollars in thousands except share
      data)Outstanding at January 1,
      2008
                
                
                384,075
                
                $
                12.09Granted
                
                
                3,500
                
                
                10.42Exercised
                
                
                (15,591
                )
                
                6.62Terminated
                
                
                –Outstanding at March 31,
      2008
                
                
                371,984
                
                $
                12.79
                
                
                4.50
                
                $
                245Options exercisable at March 31,
      2008
                
                
                316,484
                
                $
                12.36
                
                
                3.64
                
                $
                245
 
 The following table summarizes
information about the Company’s stock options at March 31,
2008.
  Exercise
    Price
                  Number
                    Outstanding
                  
                  Weighted
      Average
                    Remaining
      Contractual
                    Life in
    Years
                  
                  Number
                    Exercisable$6.62 –
    $9.00
                  80,631
                  
                  2.13
                  
                  80,631$9.01 –
    $12.00
                  91,202
                  
                  3.66
                  
                  87,702$12.01 –
    $15.00
                  49,750
                  
                  3.58
                  
                  33,750$15.01 –
    $18.00
                  96,151
                  
                  6.49
                  
                  60,151$18.01 –
    $18.37
                  54,250
                  
                  6.74
                  
                  54,250371,984
                  
                  4.50
                  
                  316,484
 The fair
values of the options were estimated on the date of grant using the
Black-Scholes option-pricing model. Option pricing models require the use of
highly subjective assumptions, including expected stock volatility, which, if
changed, can materially affect fair value estimates. The expected life of the
options used in this calculation was the period the options are expected to be
outstanding. Expected stock price volatility was based on the historical
volatility of the Company’s common stock for a period approximating the expected
life; the expected dividend yield was based on the Company’s historical annual
dividend payout; and the risk-free rate was based on the implied yield available
on U.S. Treasury issues.
 5.      Investment
Securities
 
 The following table shows the gross
unrealized losses and fair value of the Company’s investments with unrealized
losses that are not deemed to be other-than-temporarily impaired, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, at March 31, 2008.
 
 Less than 12
      Months
                  
                  12 Months or
      Greater
                  
                  Total(Dollars in
      thousands)
                  
                  Fair Value
                  
                  Unrealized
                    Losses
                  
                  Fair Value
                  
                  Unrealized
      Losses
                  
                  Fair Value
                  
                  Unrealized
      LossesAvailable for SaleMunicipal bonds and
      other
                  
                  $
                  57,383
                  
                  $
                  2,918
                  
                  $
                  6,423
                  
                  $
                  509
                  $
                  
                  63,806
                  
                  $
                  3,427Mortgage-backed
      securities
                  
                  
                  5,083
                  
                  
                  68
                  
                  
                  12,114
                  
                  
                  200
                  
                  
                  17,197
                  
                  
                  26862,466
                  
                  
                  2,986
                  
                  
                  18,537
                  
                  
                  709
                  
                  
                  81,003
                  
                  
                  3,695Held to MaturityMortgage-backed
      securities
                  
                  $
                  1,495
                  
                  $
                  3
                  
                  $
                  2,753
                  
                  $
                  78
                  
                  $
                  4,248
                  
                  $
                  811,495
                  
                  
                  3
                  
                  
                  2,753
                  
                  
                  78
                  
                  
                  4,248
                  
                  
                  81Total at March 31,
      2008
                  
                  $
                  63,961
                  
                  $
                  2,989
                  
                  $
                  21,290
                  
                  $
                  787
                  
                  $
                  85,251
                  
                  $
                  3,776
  - 11
-
 Index
 –
  The unrealized losses on the Company’s
investments were primarily the result of interest rate changes. The Company has
the ability and intent to hold these investments until a recovery of fair value,
which may be at maturity. Accordingly, the Company does not consider these
investments to be other-than-temporarily impaired at March 31,
2008.
 
 6.      Loans
 
 The composition of the loan portfolio by
loan classification at March 31, 2008 and December 31, 2007 is as
follows:
 
 March 31,
    2008
                  
                  December 31,
      2007(Dollars in
      thousands)
                  
                  (Unaudited)Commercial
                  
                  $
                  662,433
                  
                  $
                  640,355Construction
                  
                  
                  335,830
                  
                  
                  301,799Consumer
                  
                  
                  11,250
                  
                  
                  12,788Home equity
      lines
                  
                  
                  80,525
                  
                  
                  79,361Mortgage
                  
                  
                  59,354
                  
                  
                  60,5961,149,392
                  
                  
                  1,094,899Plus deferred loan costs,
      net
                  
                  
                  1,105
                  
                  
                  208$
                  1,150,497
                  
                  $
                  1,095,107
 
 There were no loans held for sale at
March 31, 2008 and December 31, 2007.
 
 7.      Financial Instruments with
Off-Balance-Sheet Risk
 
 To meet the financial needs of its
customers, the Company is party to financial instruments with off-balance-sheet
risk in the normal course of business. These financial instruments are
comprised of unused lines of credit, overdraft lines and standby letters of
credit. These instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet.
 
 The Company’s exposure to credit loss in
the event of nonperformance by the other party is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments. The amount of
collateral obtained, if deemed necessary by the Company, upon extension of
credit is based on management’s credit evaluation of the borrower. Collateral
held varies but may include trade accounts receivable, property, plant and
equipment, and income-producing commercial properties. Since many unused lines
of credit expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
 
 The Company’s exposure to
off-balance-sheet credit risk as of March 31, 2008 and December 31, 2007 was as
follows:
 
 March 31,
    2008
                  
                  December 31,
      2007(Dollars in
      thousands)
                  
                  (Unaudited)Unused lines of credit and
      overdraft lines
                  
                  $
                  312,935
                  
                  $
                  301,089Standby letters of
      credit
                  
                  
                  6,594
                  
                  
                  7,697Total
      commitments
                  
                  $
                  319,529
                  
                  $
                  308,786
  - 12
-
 Index
 –
  8.      Fair Value
Measurement
 
 On
January 1, 2008, the Company adopted SFAS No. 157, which defines fair
value, establishes a framework for measuring fair value under accounting
principles generally accepted in the United States, and enhances disclosures
about fair value measurements. The Company elected to delay the application of
SFAS No. 157 to nonfinancial assets and nonfinancial liabilities, as allowed by
FASB Staff Position SFAS No. 157-2. SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
and, therefore, does not expand the use of fair value in any new circumstances.
Fair value is defined as the exchange price that would be received to sell an
asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. SFAS No. 157 clarifies that fair value
should be based on the assumptions market participants would use when pricing an
asset or liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. The fair value hierarchy gives
the highest priority to quoted prices in active markets (observable inputs) and
the lowest priority to the Company’s assumptions (unobservable inputs). SFAS No.
157 requires fair value measurements to be separately disclosed by level within
the fair value hierarchy. For assets and liabilities recorded at fair value, it
is the Company’s policy to maximize the use of observable inputs and minimize
the use of unobservable inputs when developing fair value measurements, in
accordance with the fair value hierarchy in SFAS No. 157.
 
 Fair
value measurements for assets and liabilities where there exists limited or no
observable market data and, therefore, are based primarily upon estimates, are
often calculated based on the economic and competitive environment, the
characteristics of the asset or liability and other factors. Therefore, the
results cannot be determined with precision and may not be realized in an actual
sale or immediate settlement of the asset or liability. Additionally, there may
be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used, including discount rates and estimates of future
cash flows, could significantly affect the results of current or future
values.
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale and derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring
fair value adjustments typically involve application of lower of cost or market
accounting or write-downs of individual assets.
 
 Under
SFAS No. 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. An adjustment
to the pricing method used within either Level 1 or Level 2 inputs could
generate a fair value measurement that effectively falls in a lower level in the
hierarchy. These levels are:
 
 Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange.
 
 Level 2 –
Valuations for assets and liabilities that can be obtained from readily
available pricing sources via independent providers for market transactions
involving similar assets or liabilities. The Company’s principal market for
these securities is the secondary institutional markets, and valuations are
based on observable market data in those markets.
 
 Level 3 –
Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets or
liabilities.
 
 The
following is a description of valuation methodologies used for assets and
liabilities recorded at fair value. The determination of where an asset or
liability falls in the hierarchy requires significant judgment. The Company
evaluates its hierarchy disclosures each quarter and based on various factors,
it is possible that an asset or liability may be classified differently from
quarter to quarter. However, the Company expects changes in classifications
between levels will be rare.
 - 13
-
 Index
 –
 Investment Securities,
Available for Sale and Held to Maturity
 Investment
securities are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other
model-based valuation techniques such as the present value of future cash flows,
adjusted for the security’s credit rating, prepayment assumptions and other
factors such as credit loss assumptions. Level 1 securities include those traded
on an active exchange, such as the New York Stock Exchange, U.S. Treasury
securities that are traded by dealers or brokers in active over-the-counter
markets and money market funds. Level 2 securities include mortgage-backed
securities issued by government sponsored entities, municipal bonds and
corporate debt securities. Securities classified as Level 3 include asset-backed
securities in less liquid markets.
 
 Derivative Assets and
Liabilities
 Derivative
instruments held or issued by the Company for risk management purposes are
traded in over-the-counter markets where quoted market prices are not readily
available. For those derivatives, the Company measures fair value using models
that use primarily market observable inputs, such as yield curves and option
volatilities, and include the value associated with counterparty credit risk.
The Company classifies derivatives instruments held or issued for risk
management purposes as Level 2. As of March 31, 2008 the Company’s derivative
instruments consist solely of interest rate swaps.
 
 Long-term
Debt
 The fair
value of the Company’s long-term debt is estimated using a discounted cash flow
model. The primary inputs into the model are market interest rates for debt with
similar characteristics and an adjustment for the Company’s own credit risk. The
credit risk component of the valuation varies depending on the specific debt
being issued since the Company issues debt with different characteristics such
as senior and subordinated debt or secured and unsecured debt.
 
 Loans Held for
Sale
 Loans
held for sale are carried at the lower of cost or market value. The fair value
of loans held for sale is based on what secondary markets are currently offering
for portfolios with similar characteristics. As such, the Company classifies
loans subjected to nonrecurring fair value adjustments as Level 2. The Company
has no Loans Held for Sale as of March 31, 2008.
 
 Loans
 The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired, and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The fair value of impaired loans is estimated using
one of several methods, including collateral value, market value of similar
debt, enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investments
in such loans. At March 31, 2008, substantially all of the total impaired loans
were evaluated based on the fair value of the collateral. In accordance with
SFAS No. 157, impaired loans where an allowance is established based on the fair
value of collateral require classification in the fair value hierarchy. When the
fair value of the collateral is based on an observable market price or a current
appraised value, the Company records the impaired loan as nonrecurring Level 2.
When an appraised value is not available or management determines the fair value
of the collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring
Level 3. Impaired loans totaled $4.3 million at March 31, 2008. Of such loans,
$3.0 million had specific loss allowances aggregating $1.6 million at that
date.
 
 Foreclosed
Assets
 Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying
value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or management’s estimation of the value of
the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records
the foreclosed asset as nonrecurring Level 3. There were no fair value
adjustments related to foreclosed real estate of $0.9 million at March 31,
2008.
 - 14
-
 Index
 –
 Below is
a table that presents information about certain assets and liabilities measured
at fair value on a recurring basis:
 
 Fair Value Measurementsat March 31,
      2008Total Carrying Amount in the
      Consolidated Balance Sheet
                    3/31/2008
                  
                  
                  Assets/Liabilities Measured
      atFair Value
                    3/31/2008
                  
                  
                  Quoted Prices in Active Markets
      for Identical Assets
                    (Level 1)
                  
                  
                  Significant Other Observable
      Inputs
                    (Level 2)
                  
                  
                  Significant Unobservable
      Inputs
                    (Level 3)(Dollars in
      Thousands)Securities
                  
                  $
                  258,086
                  
                  
                  $
                  258,086
                  
                  
                  $
                  –
                  
                  
                  $
                  256,631
                  
                  
                  $
                  1,455Borrowings
                  
                  
                  26,015
                  
                  
                  
                  26,015
                  
                  
                  
                  –
                  
                  
                  
                  26,015
                  
                  
                  
                  –Fair value interest rate
      swaps
                  
                  
                  (1,015
                  )
                  
                  
                  (1,015
                  )
                  
                  
                  –
                  
                  
                  
                  (1,015
                  )
                  
                  
                  –Cash flow interest rate
      swaps
                  
                  
                  3,802
                  
                  
                  
                  3,802
                  
                  
                  
                  –
                  
                  
                  
                  3,802
                  
                  
                  
                  –
 
 Below is
a table that presents information about certain assets and liabilities measured
at fair value on a nonrecurring basis:
 
 Fair Value Measurementsat March 31,
      2008Total Carrying Amount in the
      Consolidated Balance Sheet
                    3/31/2008
                  
                  
                  Assets/ Liabilities Measured at
      Fair Value
                    3/31/2008
                  
                  
                  Quoted Prices in Active Markets
      for Identical Assets
                    (Level 1)
                  
                  
                  Significant Other Observable
      Inputs
                    (Level 2)
                  
                  
                  Significant Unobservable
      Inputs
                    (Level 3)(Dollars in
      Thousands)Loans held for
      sale
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –
                  
                  
                  $
                  –Loans
                  
                  
                  1,136,934
                  
                  
                  
                  1,136,934
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1,136,934Foreclosed
      assets
                  
                  
                  890
                  
                  
                  
                  890
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  890
 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 March
31, 2008 and 2007 for Capital Bank Corporation (the “Company”) and its wholly
owned subsidiary, Capital Bank (the “Bank”). 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 (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 (“SEC”).
 - 15
-
 Index
  Overview
 
 The Bank is a full-service state
chartered community bank conducting business throughout North Carolina. The
Bank’s business consists principally of attracting deposits from the general
public and investing these funds in loans secured by commercial real estate,
secured and unsecured commercial and consumer loans, single-family residential
mortgage loans, and home equity lines. As a community bank, the Bank’s
profitability depends primarily upon its levels of net interest income, which is
the difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Bank’s profitability is also
affected by its provision for loan losses, noninterest income, and other
operating expenses. Noninterest income primarily consists of service charges,
interchange income and ATM fees, fees generated from originating mortgage loans
that are sold, and the increase in cash surrender value of bank-owned life
insurance. Operating expenses primarily consist of compensation and benefits,
occupancy related expenses, advertising, data processing, professional fees and
other expenses.
 
 The Bank’s operations are influenced
significantly by local economic conditions and by policies of financial
institution regulatory authorities. The Bank’s cost of funds is influenced by
interest rates on competing investments and by rates offered on similar
investments by competing financial institutions in its market area, as well as
general market interest rates. Lending activities are affected by the demand for
financing, which in turn is affected by the prevailing interest
rates.
 
 Critical Accounting Policies and
Estimates
 
 The Company’scriticalaccounting policies are described in
Note 1of the Company’s Annual Report on Form
10-Kfor the year endedDecember 31, 2007.These policies are important in
understanding management’s
discussion and analysis.Some of the Company’s accounting
policies require the Company to make estimates and judgments regarding
uncertainties that may affect the reported amounts of assets, liabilities,
revenues and expenses.
 
 The Company has identified five
accounting policies as being critical in terms of significant judgments and the
extent to which estimates are used: allowance for loan losses, investments,
valuation allowances, goodwill and the impairment of long-lived assets.In many cases, there are
several alternative judgments that could be used in the estimation process.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.Actual results may differ from these
estimates under different
assumptions or conditions.For more information on the Company’s critical accounting policies, refer to Part II, Item
7of the
Company’sAnnual Report on Form 10-K forthe year ended December 31,
2007.


Executive Summary





As discussed in more detail below, the
following is a summary of our significant results for the quarter ended March
31, 2008.





•
            The Companyreported net
      income for the quarter ended March 31, 2008 of $2.2 million compared to
      $2.4 million for the quarter ended March 31, 2007. Earnings per share on a
      fully diluted basis were $0.19 for the first quarter of 2008 compared to
      $0.21 for the first quarter of 2007.•
            Nonperforming
      assets, which includes loans on nonaccrual and other real estate owned,
      decreased to 0.33% of total assets at the end of March 2008 compared to
      0.50% at the end of December 2007 and 0.63% at the end of March 2007. In
      addition, past due loans declined to 0.82% of total loans at the end of
      March 2008 compared to 0.98% at the end of December 2007 and 1.58% at the
      end of March 2007. Allowance for loan losses totaled 1.18% of total loans
      at the end of March 2008 compared to 1.32% at the end of March 2007. The
      allowance for loan losses as a percent of nonperforming loans was 319% at
      end of the first quarter 2008 compared to 184% at the end of the first
      quarter 2007.•
            The provision for loan losses for
      the quarter ended March 31, 2008 was $565 thousand compared to $337
      thousand for the quarter ended March 31, 2007. The difference in the
      provision is primarily attributable to the impact of the net increase in
      total loans from March 31, 2007 to March 31, 2008 of $125.0
      million.


- 16 -
 Index




•
            Net
      interest income for the first quarter of 2008 increased $186 thousand
      compared to the first quarter of 2007. This improvement was primarily due
      to the higher level of average earning assets partially offset by the
      decline in net interest margin from 3.52% in the quarter ended March 31,
      2007 to 3.23% in the quarter ended March 31, 2008. The decline in the net
      interest margin is a result of the 3.00% reduction in the prime rate over
      the last twelve months.•
            In
      the quarter ended March 31, 2008, noninterest income increased $37
      thousand compared to the same period one year ago. Mortgage revenue was
      down $256 thousand from one year ago due to the slower housing market and
      the Company’s recent decision to focus efforts on other areas of its
      business that have greater potential to produce positive results in the
      present economy. On the other hand, service charge income, bank card
      income, and brokerage income increased a combined $218 thousand compared
      to the first quarter of 2007.•
            Noninterest
      expense increased 4.0% to $9.6 million in the quarter ended March 31,
      2008, from $9.2 million in the quarter ended March 31, 2007. Employment
      and occupancy cost were flat when compared to the first quarter of 2007.
      Other noninterest expense increased primarily from increases in equipment
      expense of $132 thousand and professional fees of $187 thousand. The
      increase in equipment expense was due to equipment upgrades and increased
      maintenance cost.





Financial Condition





Total consolidated assets of the Company
at March 31, 2008 were $1.58 billion, a 3.8% increase over total assets of $1.52
billion at December 31, 2007, an increase of $57.7 million. The increase in
total consolidated assets for the three months ended March 31, 2008 is primarily
due to a $55.4 million increase in the Bank’s loan portfolio, net of the
allowance for loan losses, since December 31, 2007. Total deposits as of March
31, 2008 were $1.15 billion, which represents growth of $52.2 million from
December 31, 2007.





Total earning assets were $1.42 billion
at March 31, 2008 compared to $1.36 billion at December 31, 2007. Earning assets
represented 90.1% and89.8%
of total assets as of March 31, 2008 and December 31, 2007, respectively. At
March 31, 2008, investment securities were $258.1 million, compared to
$259.1million at December
31, 2007. Interest-earning cash, federal funds sold and short term investments
were $10.6 million at March 31, 2008 compared to $7.8 million at December 31,
2007.





The allowance for loan losses as of
March 31, 2008 and December 31, 2007 was flat at $13.6 million, representing
approximately 1.18% and 1.24%, respectively, of total loans as of both dates.
Management believes that the amount of the allowance is adequate to absorb the
estimated losses inherent in the current loan portfolio. See“Asset
Quality”below for further
discussion of the allowance for loan losses.





Total deposits as of March 31, 2008 were
$1.15 billion, an increase of $52.2 million, or 4.8%, from December 31, 2007.
The increase was primarily due to a $26.4 million increase in demand deposit
accounts, and a $55.5 million increase in CDs partially offset by a $29.7
million decrease in money market deposits. Total time deposits represented 57.2%
of total deposits at March 31, 2008 compared to 54.9% at December 31,
2007.





Total consolidated shareholders’ equity
was $168.0 million as of March 31, 2008, an increase of $3.7 million from
December 31, 2007. Retained earnings increased by $1.3 million, reflecting $2.2
million of net income for the three months ended March 31, 2008 less $0.9
million of dividends declared during the three months ended March 31, 2008.
Accumulated other comprehensive loss, which represents the unrealized gains and
losses on available-for-sale securities and derivatives accounted for as cash
flow hedges, net of related tax benefits, was $1.9 million and $0.2 million as
of March 31, 2008 and December 31, 2007, respectively. The increase is due to
the derivatives being in the money from the decline in the prime rate. See Item
1. Financial Statements – Condensed Consolidated Statements of Changes in
Shareholders’ Equity for additional information.


- 17 -
 Index




Results of
Operations





Quarter endedMarch 31, 2008compared to quarter endedMarch 31, 2007





For the quarter ended March 31, 2008,
the Company reported net income of $2.2 million, or $0.19 per diluted share,
compared to net income of $2.4 million, or $0.21 per diluted share, for the
quarter ended March 31, 2007. Net income decreased by $217 thousand, primarily
due to the $228 thousand increase in the provision for loan losses and the $369
thousand increase in noninterest expense in the quarter ended March 31, 2008
compared to the quarter ended March 31, 2007. Partially offsetting these
increased costs was a $186 thousand increase in net interest
income.





Net interest income increased $186
thousand, or 1.7%, from $10.7 million for the quarter ended March 31, 2007, to
$10.9 million for the quarter ended March 31, 2008. Average earning assets
increased $114.5 million to $1.4 billion for the quarter ended March 31, 2008
from $1.3 billion for the quarter ended March 31, 2007. Average interest-bearing
liabilities increased $102.2 million to $1.3 billion for the quarter ended March
31, 2008 from $1.2 billion for the quarter ended March 31, 2007. The net
interest margin on a fully taxable equivalent basis decreased by 29 basis
points (“bps”) to 3.23% for the quarter ended March 31, 2008 from 3.52% for the
quarter ended March 31, 2007. The earned yield on average interest-earning
assets was 6.60% and 7.43% for the quarter ended March 31, 2008 and 2007,
respectively, while the interest rate on average interest-bearing liabilities
for those periods was 3.76% and 4.36%, respectively.The decline in the
net interest margin is a result of the 3.00% reduction in the prime rate over
the last twelve months, andcompetitive pressures in the Company’s primary marketsfor retail deposits. The majority of
the Company’s loans are linked to prime, while the Company’s
interest-bearing deposits are impacted more by rates paid by competitors on time
deposits.





The following table shows 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.





- 18 -
 Index





CAPITAL
BANK CORPORATION


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


For the Three Months Ended March
31, 2008, March 31,
2007,and December 31,
2007


Tax Equivalent Basis(1)





1st
      Quarter 2008
            
            1st
      Quarter 2007
            
            4th
      Quarter 2007(Dollars
      in thousands)
            
            Average
      Balance
            
            Amount
      Earned
            
            Average
      Rate
            
            Average
      Balance
            
            Amount
      Earned
            
            Average
      Rate
            
            Average
      Balance
            
            Amount
      Earned
            
            Average
      RateAssetsLoans
      receivable: (2)Commercial
            
            $
            986,205
            
            $
            16,777
            
            
            6.82
            %
            $
            852,128
            
            $
            16,756
            
            
            7.97
            %
            $
            933,847
            
            $
            17,820
            
            
            7.57
            %Consumer
            
            
            46,700
            
            
            910
            
            
            7.81
            
            
            30,822
            
            
            652
            
            
            8.58
            
            
            43,042
            
            
            895
            
            
            8.25Home
      equity
            
            
            79,564
            
            
            1,321
            
            
            6.66
            
            
            82,298
            
            
            1,727
            
            
            8.51
            
            
            78,221
            
            
            1,547
            
            
            7.85Residential
      mortgages
            
            
            30,259
            
            
            491
            
            
            6.51
            
            
            47,235
            
            
            748
            
            
            6.42
            
            
            35,691
            
            
            572
            
            
            6.36Total
      loans
            
            
            1,142,728
            
            
            19,499
            
            
            6.84
            
            
            1,012,483
            
            
            19,883
            
            
            7.96
            
            
            1,090,801
            
            
            20,834
            
            
            7.58Investment
      securities (3)
            
            
            256,538
            
            
            3,590
            
            
            5.61
            
            
            243,732
            
            
            3,303
            
            
            5.50
            
            
            242,272
            
            
            3,347
            
            
            5.48Federal
      funds sold and other interest on short-term investments
            
            
            8,079
            
            
            55
            
            
            2.72
            
            
            36,596
            
            
            485
            
            
            5.37
            
            
            14,654
            
            
            170
            
            
            4.59Total
      interest earning assets
            
            
            1,407,345
            
            $
            23,144
            
            
            6.60
            %
            
            1,292,811
            
            $
            23,671
            
            
            7.43
            %
            
            1,347,727
            
            $
            24,351
            
            
            7.17
            %Cash
      and due from banks
            
            
            26,232
            
            
            
            
            
            
            
            
            27,593
            
            
            
            
            
            
            
            
            27,617Other
      assets
            
            
            136,071
            
            
            
            
            
            
            
            
            130,126
            
            
            
            
            
            
            
            
            130,340Allowance
      for loan losses
            
            
            (13,662
            )
            
            
            
            
            
            
            
            (13,296
            )
            
            
            
            
            
            
            
            (13,121
            )Total
      assets
            
            $
            1,555,986
            
            
            
            
            
            
            
            $
            1,437,234
            
            
            
            
            
            
            
            $
            1,492,563Liabilities
      and EquitySavings
      deposits
            
            $
            30,382
            
            $
            46
            
            
            0.61
            %
            $
            34,370
            
            $
            42
            
            
            0.50
            %
            $
            32,800
            
            $
            56
            
            
            0.68
            %Interest-bearing
      demand deposits
            
            
            333,108
            
            
            1,855
            
            
            2.23
            
            
            342,814
            
            
            2,922
            
            
            3.46
            
            
            350,580
            
            
            2,750
            
            
            3.11Time
      deposits
            
            
            657,609
            
            
            7,171
            
            
            4.37
            
            
            600,865
            
            
            7,042
            
            
            4.75
            
            
            568,604
            
            
            7,124
            
            
            4.97Total
      interest-bearing deposits
            
            
            1,021,099
            
            
            9,072
            
            
            3.56
            
            
            978,049
            
            
            10,006
            
            
            4.15
            
            
            951,984
            
            
            9,930
            
            
            4.14Borrowed
      funds
            
            
            171,645
            
            
            2,022
            
            
            4.73
            
            
            113,686
            
            
            1,503
            
            
            5.36
            
            
            156,853
            
            
            2,009
            
            
            5.08Subordinated
      debt
            
            
            30,930
            
            
            526
            
            
            6.82
            
            
            30,930
            
            
            586
            
            
            7.68
            
            
            30,930
            
            
            593
            
            
            7.61Repurchase
      agreements and fed funds purchased
            
            
            35,563
            
            
            189
            
            
            2.13
            
            
            34,328
            
            
            357
            
            
            4.22
            
            
            38,499
            
            
            339
            
            
            3.49Total
      interest-bearing liabilities
            
            
            1,259,237
            
            $
            11,809
            
            
            3.76
            %
            
            1,156,993
            
            $
            12,452
            
            
            4.36
            %
            
            1,178,266
            
            $
            12,870
            
            
            4.33
            %Noninterest-bearing
      deposits
            
            
            118,007
            
            
            
            
            
            
            
            
            106,369
            
            
            
            
            
            
            
            
            114,454Other
      liabilities
            
            
            11,132
            
            
            
            
            
            
            
            
            10,581
            
            
            
            
            
            
            
            
            33,621Total
      liabilities
            
            
            1,388,376
            
            
            
            
            
            
            
            
            1,273,943
            
            
            
            
            
            
            
            
            1,326,341Shareholders’
      equity
            
            
            167,610
            
            
            
            
            
            
            
            
            163,291
            
            
            
            
            
            
            
            
            166,222Total
      liabilities and shareholders’ equity
            
            $
            1,555,986
            
            
            
            
            
            
            
            $
            1,437,234
            
            
            
            
            
            
            
            $
            1,492,563Net
      interest spread(4)
            
            
            
            
            
            
            
            
            2.83
            %
            
            
            
            
            
            
            
            3.07
            %
            
            
            
            
            
            
            
            2.84
            %Tax
      equivalent adjustment
            
            
            
            
            $
            426
            
            
            
            
            
            
            
            $
            496
            
            
            
            
            
            
            
            $
            511Net
      interest income and net interest margin(5)
            
            
            
            
            $
            11,335
            
            
            3.23
            %
            
            
            
            $
            11,219
            
            
            3.52
            %
            
            
            
            $
            11,480
            
            
            3.38
            %





(1)
            The tax equivalent basis is
      computed using a blended federal and state tax rate of approximately
      38%.


(2)
            Loans receivable include
      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-earningassets and the average cost ofinterest-bearing
      liabilities.


(5)
            Net interest margin represents net
      interest income divided by average interest-earning
      assets.





- 19 -
 Index





Interest income on loans decreased from
$19.9 million for the quarter ended March 31, 2007 to $19.5 million for the
quarter ended March 31, 2008. The decrease is primarily due to lower loan
yields, which decreased from 7.96% in the quarter ended March 31, 2007 to 6.84%
in the quarter ended March 31, 2008, the effect of which was partially offset by
higher average loan balances, which increased by $130.2 million. The Company’s
prime rate was 5.25% as of March 31, 2008 and 8.25% as of March 31, 2007. In
November 2006, the Company entered into a $100 million (notional) interest rate
swap to help mitigate its exposure to interest rate volatility in the loan
portfolio. This swap increased the loan interest income by 4 bp or $0.4 million
in the quarter ended March 31, 2008, whereas for the quarter ended March 31,
2007 the swap decreased loan interest income by 0.5 bp or $0.1
million.





Interest income on investment securities
increased from $2.8 million for the quarter ended March 31, 2007 to $3.2 million
for the quarter ended March 31, 2008. The increase is primarily due to a $12.8
million increase in average balances outstanding between the periods. The yield on investment
securitieson a fully tax
equivalent basisincreased
from5.50% for thequarter ended March 31, 2007to 5.61% for the quarter endedMarch 31, 2008.





Interest expense on deposits decreased
from $10.0 million for the quarter ended March 31, 2007 to $9.1 million for the
quarter ended March 31, 2008. The decrease is primarily due to decrease in
average deposit rates from 4.15% for the quarter ended March 31, 2007 to 3.56%
for the quarter ended March 31, 2008. For time deposits, which represented 64.4%
and 61.4% of total average interest-bearing deposits for the quarters ended
March 31, 2008 and 2007, respectively, the average rate decreased from 4.75% for
the quarter ended March 31, 2007 to 4.37 % for the quarter ended March 31, 2008,
reflective of the decreasing rate environment.





Interest expense on borrowings increased
from $2.4 million for the quarter ended March 31, 2007 to $2.7 million for the
quarter ended March 31, 2008, primarily due to a $59.1 million increase in
average borrowings partially offset by lower borrowing rates in the quarter
ended March 31, 2008.The
rate on average borrowingsincludingsubordinated debentures for the quarter
endedMarch 31,
2008was4.61%, compared to5.48%for thequarter ended March 31, 2007. InJuly of 2003, the Bank entered into
interest rate swap agreements on $25.0 million of its outstanding Federal Home
Loan Bank advances to swap fixed rate borrowings to a variable rate. The net
effect of the swaps was an increase in interest expense of $43 thousandand $124 thousandfor the quarters endedMarch 31, 2008and 2007, respectively.





Forthe quarter ended March 31, 2008, the
provision for loan losses was $565 thousand compared to a provision of $337
thousand for the quarter ended March 31, 2007.Theincrease in the provision for loan
losses reflects the $124.8 million increase in total loans from $1.0 billion to
$1.2 billion for the quarters ended March 31, 2007 and 2008, respectively.Net charge-offsfor the quarter ended March
31, 2008 were $573 thousand, or 0.05% of average loans, compared to net
charge-offs of $153 thousand or 0.015% of average loans for the quarter ended
March 31, 2007.Total
nonperforming assets andpast due loans decreased from $9.3 million and
$16.2million,
respectively,as of March
31, 2007 to $5.1 million and $9.4million, respectively, as ofMarch 31, 2008. Past due
loans consist of all loans past due 30 days or more.





Noninterest income for the quarters
ended March 31, 2008 and March 31, 2007 was flat at $2.2 million. Service
charges and other fees increased $82 thousand, primarily due to an increase in
non-sufficient fund fees partially offset by lower miscellaneous charges.
Mortgage fees and revenues decreased $256 thousand, which reflects the Company’s
decision to de-emphasize this business line. Brokerage fees and Bank card
services increased $53 thousand and $83 thousand, respectively. Bank owned life
insurance increased $105 thousand, mainly due to proceeds from a life insurance
policy on a former board member who passed away during the quarter. In the
quarter ended March 31, 2008 noninterest income includes a $71 thousand gain on
sale of securities, $31 thousand of which was the result of bonds called by the
issuers, and $40 thousand of which was from the sale of callable agency bonds,
which were reinvested for interest rate risk management purposes. Other
miscellaneous noninterest income decreased from $269 thousand for the quarter
ended March 31, 2007 to $168 thousand for the quarter ended March 31, 2008 from
a lower gain on the sale of collateral in 2008.





Noninterest expense for the quarter
ended March 31, 2008 was $9.6 million compared to $9.2 million for the quarter
ended March 31, 2007. Salaries and employee benefits, representing the largest
noninterest expense category, was flat at $5.0 million for both quarters.
Occupancy expenses, the second largest component of noninterest expense, was
also flat at $1.0 million for the quarters. Furniture and equipment expenses for
the quarter ended March 31, 2008 increased $132 thousand from the same period in
2007, primarily due to higher maintenance expenses. Data processing and
telecommunications expenses for the quarter ended March 31, 2008 increased $44
thousand from the same period in 2007, primarily due to the Company’s
implementation of an internet-based phone system, which increased network
expenses but reduced telecommunication costs.





- 20 -
 Index





Advertising expenses and office expenses
increased $17 thousand and $32 thousand, respectively, for the quarter ended
March 31, 2008 from the same period in 2007, mainly due to the production and
mailing of brochures about the Company’s new products and services. Professional
fees increased $187 thousand for the quarter ended March 31, 2008 from the same
period in 2007, however the 2007 quarter expenses were lower than the Company’s
normal run rate for professional fees. In the first quarter of 2008, business
development and travel expenses increased $20 thousand over the first quarter of
2007, predominantly due to the higher costs of mileage and the annual employee
meeting. The amortization of deposit premiums paid on prior acquisitions
continued to decrease, and the Company incurred lower loan handling costs than
in the first quarter of 2007 as the result of the liquidation of some of its
other real estate owned during the quarter ended March 31, 2008. Directors’ fees
for the quarter ended March 31, 2008 were comparable to the same period in 2007,
while there was a small increase in insurance expenses. Other expenses for the
quarter ended March 31, 2008 increased $72 thousand from the same period in
2007, primarily due to miscellaneous charge-offs and deposit fraud
losses.





Income tax expense for the quarters
ended March 31, 2008 and 2007 was $0.8 million and $1.0 million, respectively.
The Company’s effective tax rate for the quarter ended March 31, 2008 was 26.9 %
compared to 28.6% for the quarter ended March 31, 2007. The decrease in the
effective tax rate is due in part to the life insurance proceeds received in
2008, as well as to a $55 thousand increase in tax-exempt income for the quarter
ended March 31, 2008 compared to the same period in 2007.





Asset Quality





Determining the allowance for loan
losses is based on a number of factors, many of which are subject to judgments
made by management. At the origination of each commercial loan, management
assesses the relative risk of the loan and assigns a corresponding risk grade.
To ascertain that the credit quality is maintained after the loan is booked, a
loan review officer performs an annual review of all unsecured loans over a
predetermined loan amount, a sampling of loans within a lender’s authority, and
a sampling of the entire loan pool. Loans are reviewed for credit quality,
sufficiency of credit and collateral documentation, proper loan approval,
covenant, policy and procedure adherence, and continuing accuracy of the loan
grade. This officer reports directly to the Chief Credit Officer and the Audit
Committee of the Company’s Board of Directors.





The Company estimates the amount of
allowance needed to cover losses inherent in the portfolio by applying a loss
allowance factor to each risk grade.Unless identified as an at-risk
loan,consumer loans and mortgages are not
risk graded, but a loss allocation factor is utilized for these loans based on
historical losses. The loss allocation factors have been developed based on the
Bank’s historical losses and industry trends. In addition to this quantitative
analysis, a qualitative assessment of the general economic trends, portfolio
concentration and the trend of delinquencies are taken into consideration. The
loan loss allowance is adjusted to an amount that management believes is
adequate to absorb losses inherent in the loan portfolio as of the balance sheet
date presented.





The Company provides a specific
allowance for loan losses associated with certain commercial loans rated special
mention and/or classified with outstanding balances greater than $750 thousand,
including all related loans, as well as all loans management has identified as
impaired. Management determines the level of specific allowance based on the
facts and circumstances of each loan, including among other factors, payment
history, collateral values, guarantor liquidity, and net worth. Of the $13.6
million allowance for loan losses as of March 31, 2008, $3.0 million has been
allocated to specific loans, including loans considered to be impaired. As of
March 31, 2008 and December 31, 2007, there were $23.8 million and $16.4
million, respectively, of specific impaired loans with balances greater than
$750 thousand. As of March 31, 2008 and December 31, 2007, there were $1.5
million and $1.7 million, respectively, of impaired loans with balances less
than $750 thousand. As of March 31, 2008 and December 31, 2007, $0.4 million and
$0.2 million, respectively, are included in the allowance for loan losses for
impaired loans less than $750 thousand. At March 31, 2008 and December 31, 2007,
there were no impaired loans that did not have an allowance for loan
losses.





A loan is considered impaired, based on
current information and events, if it is probable that the Bank will be unable
to collect the scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. The Bank uses several factors in
determining if a loan is impaired. Internal asset classification procedures
include a review of significant loans and lending relationships by management.
The loan reviews include the accumulation of related data on loan payment
status, borrowers’ financial data and borrowers’ operating factors such as cash
flows, operating income or loss. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows discounted
at the historical effective interest rate, while all collateral-dependent loans
are measured for impairment based on the fair value of the collateral. Impaired
loans at March 31, 2008 include $1.6 million relatedto a developer who
has been accused by the North Carolina Attorney General of engaging in
fraudulent marketing and financing practices in Western North Carolina. The
Company has established a specific loan loss allocation of $1.2 million for this
exposure, which management believes is adequate.





- 21 -
 Index





The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. Based on this allowance
calculation, management recorded a provision of $565 thousand for the quarter
ended March 31, 2008 compared to a provision for the quarter ended March 31,
2007 of $337 thousand. The increase in the provision was primarily due to the
loan growth during the quarter ended March 31, 2008. In the second
quarter of 2007, the Company revised its estimation methodology to take into
consideration the Company’s historical loss experience and utilizes a greater
dispersion of risk rating classifications based on the collateral backing of the
loans.





Past due loans as a percentage of
average loans
decreased from 0.99% at December 31, 2007 to
0.82% atMarch 31, 2008.Nonperforming loans, which includes all
loans past due greater than
90 daysor in nonaccrual
status,as a percentage
of total loans, decreased
from 0.72% at March 31, 2007 to 0.37% atMarch 31, 2008. Nonperforming assets as a percentage
of total assets were0.33%
and 0.63% atMarch 31, 2008 and March 31,
2007,respectively.Management believes the allowance for
loan losses as ofMarch 31,
2008is adequate toabsorb the inherent losses on existing loans that may become
uncollectible, based on evaluations of the collectability of loans and prior
loan loss experience.





At March 31, 2008, nonperforming loans
were $4.3 million, a decrease of $1.7 million from December 31, 2007. The
majority of the Company’s nonperforming loans are secured by real estate, and to
a lesser extent the Company relies on the support of guarantors. The Company
monitors the value of the underlying collateral and the liquidity of the
guarantors on a periodic basis.Based on this review and analysis, the
Company does not currently anticipate any material losses associated with the
nonperforming loans atMarch 31, 2008.





The following table presents an analysis
of changes in the allowance for loan losses for the three month periods ended
March 31, 2008 and 2007, respectively.





Three Months EndedMarch 31,2008
                
                2007(Dollars in
      thousands)Allowance for loan losses,
      beginning of period
                
                $
                13,571
                
                $
                13,347Net
      charge-offs:Loans charged
      off:Commercial
                
                
                678
                
                
                71Consumer
                
                
                593
                
                
                50Home equity
      lines
                
                
                –
                
                
                25Mortgage
                
                
                –
                
                
                17Total
      charge-offs
                
                
                1,271
                
                
                163Recoveries of loans previously
      charged off:Commercial
                
                
                661
                
                
                –Consumer
                
                
                35
                
                
                8Home equity
      lines
                
                
                1
                
                
                2Mortgage
                
                
                1
                
                
                –Total
      recoveries
                
                
                698
                
                
                10Total net
      charge-offs
                
                
                573
                
                
                153Loss provision charged to
      operations
                
                
                565
                
                
                337Allowance for loan losses, end of
      period
                
                $
                13,563
                
                $
                13,531Net charge-offs to average loans
      during the period (annualized)
                
                
                0.05
                %
                
                0.06
                %Allowance as a percent of gross
      loans
                
                
                1.18
                %
                
                1.32
                %
 The Company’s determination of the
allowance for loan losses is subject to management’s judgment and analysis of
many internal and external factors. While management is comfortable with the
adequacy of the current allowance for loan losses, it is possible that these
factors and management’s evaluation of the adequacy of the allowance for loan
losses will change.
 - 22 -
 Index
  The following table presents an analysis
of nonperforming assets as of March 31, 2008, March 31, 2007, and December 31,
2007.
 March 31,
    2008
                  
                  March 31,
    2007
                  
                  December 31,
      2007(Dollars in
      thousands)
                  
                  (Unaudited)Nonperforming
      loans:Commercial
                  
                  $
                  2,919
                  
                  $
                  5,725
                  
                  $
                  4,489Construction
                  
                  
                  230
                  
                  
                  –
                  
                  
                  562Consumer
                  
                  
                  61
                  
                  
                  241
                  
                  
                  28Home equity
      lines
                  
                  
                  579
                  
                  
                  433
                  
                  
                  397Mortgage
                  
                  
                  463
                  
                  
                  957
                  
                  
                  506Total nonperforming
      loans
                  
                  
                  4,252
                  
                  
                  7,356
                  
                  
                  5,982Foreclosed property
      held
                  
                  
                  890
                  
                  
                  1,961
                  
                  
                  1,571Total nonperforming
      assets
                  
                  $
                  5,142
                  
                  $
                  9,317
                  
                  $
                  7,553Nonperforming loans to total
      loans
                  
                  
                  0.37
                  %
                  
                  0.72
                  %
                  
                  0.55
                  %Nonperforming assets to total
      assets
                  
                  
                  0.33
                  %
                  
                  0.63
                  %
                  
                  0.50
                  %Allowance coverage of
      nonperforming loans
                  
                  
                  319
                  %
                  
                  184
                  %
                  
                  227
                  %
 Foreclosed property decreased to $890
thousand at March 31, 2008 from $1.6 million at December 31, 2007. The decrease
was primarilydueto the disposition of
certain foreclosed commercial and residential properties. The Company is
actively marketing all of its foreclosed property. All foreclosed assets are
recorded at the lower of cost or net realizable fair value.
 
 Liquidity and Capital
Resources
 
 The Company’s liquidity management
involves planning to meet the Company’s anticipated funding needs at a
reasonable cost. Liquidity management is guided by policies formulated by the
Company’s senior management and the Asset and Liability Committee of the Bank’s
Board of Directors. The Company had $43.3 million in its most liquid assets,
cash and cash equivalents as of March 31, 2008. The Company’s principal sources
of funds are loan repayments, deposits, Federal Home Loan Bank borrowings,
capital and, to a lesser extent, investment repayments. Core deposits (total
deposits less certificates of deposits in the amount of $100 thousand or more),
one of the most stable sources of liquidity, together with equity capital, which
totaled $1.0 billion at both March 31, 2008 and December 31, 2007, funded 66.2%
of total assets at March 31, 2008 compared to 67.9% at December 31, 2007. In
addition, the Company has the ability to take advantage of various other funding
programs available from the Federal Home Loan Bank of Atlanta, as well as access
to funding through various brokered deposit programs, federal funds lines and
security repurchase agreements.
 
 The management of equity is a critical
aspect of capital management in any business. The determination of the
appropriate amount of equity is affected by a wide number of factors. The
primary factor for a regulated financial institution is the amount of capital
needed to meet regulatory requirements, although other factors, such as the
“risk equity” the business requires and balance sheet leverage, also affect the
determination.
 
 On
January 24, 2008, the Company’s Board of Directors authorized the repurchase of
up to 1.0 million shares of the Company’s currently outstanding shares of common
stock, and all previous authorizations for the repurchase of the Company’s
currently outstanding shares of common stock were superseded and revoked. During the quarter ended March 31, 2008,
the Company repurchased 166 shares at a weighted average price of $11.01 per
share. See Part II – Other Information, Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds for more information on the Company’s share
repurchases.
 
 To be categorized as well capitalized,
the Company and the Bank each must maintain minimum amounts and ratios. The
Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2008
and the minimum requirements are presented in the following
table.
  - 23 -
 Index
  Actual
                
                Minimum
      Requirements
                  To Be Well
      Capitalized(Dollars
      in thousands)
                
                Amount
                
                
                Ratio
                
                Amount
                
                
                Ratio2008Total
      capital (to risk-weighted assets)
                
                $
                146,732
                
                
                10.88
                %
                $
                134,837
                
                
                10.00
                %Tier
      I capital (to risk-weighted assets)
                
                
                132,870
                
                
                9.85
                
                
                80,902
                
                
                6.00Tier
      I capital (to average assets)
                
                
                132,870
                
                
                8.91
                
                
                74,530
                
                
                5.002007Total
      capital (to risk-weighted assets)
                
                $
                144,540
                
                
                11.36
                %
                $
                127,205
                
                
                10.00
                %Tier
      I capital (to risk-weighted assets)
                
                
                130,671
                
                
                10.27
                
                
                76,323
                
                
                6.00Tier
      I capital (to average assets)
                
                
                130,671
                
                
                9.16
                
                
                71,339
                
                
                5.00
 
 Shareholders’ equity was $168.0 million,
or $14.95 per share, at March 31, 2008. Management believes this level of
shareholders’ equity provides adequate capital to support the Company’s growth
and to maintain a well capitalized position.
 
 Item 3.Quantitative and
Qualitative Disclosures about Market Risk
 
 As described in more detail in our
Annual Report on Form 10-K for the year ended December 31, 2007, asset/liability
management involves the evaluation, monitoring and management of interest rate
risk, liquidity and funding. While the Board of Directors has overall
responsibility for the Company’s asset/liability management policies, the Bank’s
Asset and Liability Committee monitors loan, investment, and liability
portfolios to ensure comprehensive management of interest rate risk and
adherence to the Bank’s policies.The Company has not experienced any
material change in the risk of its portfolios of interest-earning assets and
interest-bearing liabilities from December 31, 2007 to March 31,
2008.
 
 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 Securities Exchange
Act of 1934 (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 (“CEO”) and Chief Financial Officer
(“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. During the course
of their evaluation, the officers discovered that, as a result of human error,
the Company failed to file a Form 8-K pursuant to Item 5.01 (Departure of
Directors or Certain Officers; Elections of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers) in connection with the
adoption of its Annual Incentive Plan. As a result, management has implemented
further training of relevant Company personnel regarding Form 8-K triggers and
the timing related thereto. Based upon that evaluation, the CEO and CFO
concluded that, as of the period covered by the report, the Company’s disclosure
controls and procedures are effective in that they provide reasonable assurances
that the information the Company is required to disclose in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods required by the SEC’s rules and
forms.
 
 Changes in Internal Control over
Financial Reporting
 
 There were no changes in the Company’s
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) that occurred during the period covered by this
report that have materially affected or are reasonably likely to materially
affect, the Company’s internal control over financial reporting. Management has
implemented changes in internal control over financial reporting as a result of
remediation of matters identified through its review of internal control over
financial reporting as required under Section 404 of the Sarbanes-Oxley Act;
however, it does not believe any of the changes implemented were material in
nature.
 - 24 -
 Index
 PART II –
OTHER INFORMATION
 
  Item 1.Legal
Proceedings
 
 There are no material pending legal
proceedings to which the Company or its subsidiaries is a party or to which any
of the Company’s or its subsidiaries’ property is subject. In addition, the
Company is not aware of any threatened litigation, unasserted claims or
assessments that could have a material adverse effect on the Company’s business,
operating results or condition.
 
 Item 1A.Risk
Factors
 
 You should consider the following
material risk factors carefully before deciding to invest in the Company’s
securities. Additional risks and uncertainties not presently known to us, that
we may currently deem to be immaterial or that are similar to those faced by
other companies in our industry or business in general, such as competitive
conditions, may also impact our business operations. If any of the events
described below occur, the Company’s business, financial condition, or results
of operations could be materially adversely affected. In that event, the trading
price of the Company’s common stock may decline, in which case the value of your
investment may decline as well. References herein to “we”, “us”, and “our” refer
to Capital Bank Corporation, a North Carolina corporation, and its subsidiaries,
unless the context otherwise requires.
 
 Changes in local economic conditions
could lead to higher loan charge-offs and reduce our net income and
growth.
 Our business is subject to periodic
fluctuations based on local economic conditions in Central and Western North
Carolina.These fluctuations are not predictable,
cannot be controlled, and may have a material adverse impact on our operations
and financial condition even if other favorable events occur.Our operations are locally oriented and
community-based.Accordingly, we expect to continue to be
dependent upon local business conditions as well as conditions in the local
residential and commercial real estate markets we serve.For example, an increase in
unemployment, a decrease in real estate values or increases in interest rates,
as well as other factors, could weaken the economies of the communities we
serve.Weakness in our market areas could
depress our earnings and consequently our financial condition
because:
 
 •
                  customers may not want or need our
      products or services;•
                  borrowers may not be able to repay
      their loans;•
                  the value of the collateral
      securing loans to borrowers may decline; and•
                  the quality of our loan portfolio
      may decline.
 
 Any of the latter three scenarios could
require us to charge-off a higher percentage of loans and/or increase provisions
for credit losses, which would reduce our net income.For an analysis of our recent charge off
experience, please refer to the “Assets” section in Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operationsabove.
 
 Because the majority of our borrowers
are individuals and businesses located and doing business in Wake, Granville,
Lee, Chatham, Alamance, Guilford, Buncombe and Catawba Counties, North Carolina,
our success will depend significantly upon the economic conditions in those and
the surrounding counties.Unfavorable economic conditions in those
and the surrounding counties may result in, among other things, a deterioration
in credit quality or a reduced demand for credit and may harm the financial
stability of our customers.Due to our limited market areas, these
negative conditions may have a more noticeable effect on us than would be
experienced by a larger institution that is able to spread these risks of
unfavorable local economic conditions across a large number of diversified
economies.
 
 Weakness in the markets for residential
or commercial real estate could reduce our net income and
profitability.
 
 Fiscal 2007 was highlighted by
volatility in the financial markets associated with subprime mortgages,
including adverse impacts on credit quality and liquidity within the financial
markets.The volatility has been exacerbated by a
general decline in the real estate and housing market along with significant
mortgage loan related losses reported by manyother financial institutions.Our financial results may
be adversely affected by changes in real estate values.Decreases in real estate values could
adversely affect the value of property used as collateral for loans and
investments.If poor economic conditions result in
decreased demand for real estate loans, our netincome and profits may
decline.
  - 25 -
 Index
  The declines in home prices in the
markets we serve, along with the reduced availability of mortgage credit, also
may result in increases in delinquencies and losses in our portfolio of loans
related to residential real estate construction and development.Further declines in home prices coupled
with an economic recession and associated rises in unemployment levels could
drive losses beyond that which is provided for in our allowance for loan
losses.In that event, our earnings could be
adversely affected.
 
 Additionally, recent weakness in the
secondary market for residential lending could have an adverse impact upon our
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, mortgage loan originations and gains on
sale of mortgage loans.As of December 31, 2007, approximately
13.4% of our total loans were secured by real estate.Continued declines in real estate values
and home sales volumes, and financial stress on borrowers as a result of job
losses, or other factors, could have further adverse effects on borrowers that
result in higher delinquencies and greater charge-offs in future periods, which
would adversely affect our financial condition or results of
operations.
 
 Changes in interest rates may have an
adverse effect on our profitability.
 
 Our earnings and financial condition are
dependent to a large degree upon net interest income, which is the difference
between interest earned from loans and investments and interest paid on deposits
and borrowings.The narrowing of interest rate spreads,
meaning the difference between interest rates earned on loans and investments
and the interest rates paid on deposits and borrowings, could adversely affect
our earnings and financial condition.We cannot predict with certainty or
control changes in interest rates.Regional and local economic conditions
and the policies of regulatory authorities, including monetary policies of the
Federal Reserve Board, affect interest income and interest expense.We have ongoing policies and procedures
designed to manage the risks associated with changes in market interest
rates.However, changes in interest rates still
may have an adverse effect on our profitability.
 
 Weare exposed to risks in connection with
the loans we make.
 
 A significant source of risk for us
arises from the possibility that losses will be sustained because borrowers,
guarantors and related parties may fail to perform in accordancewith the terms of their loans.We have underwriting and
credit monitoring procedures and credit policies, including the establishment
and review of the allowance for loan losses, that we believe are appropriate to
minimize this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying our loan portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could adversely affect our
results of operations.Loan
defaults result in a decrease in interest income resulting from a loan default
or defaults may be for a prolonged period of time as we seek to recover,
primarily through legal proceedings, the outstanding principal balance, accrued
interest and default interest due on a defaulted loan plus the legal costs
incurred in pursuing our legal remedies. No assurance can be given that recent
market conditions will not result in our need to increase loan loss reserves or
charge off a higher percentage of loans, thereby reducing net
income.
 
 We compete with larger companies for
business.
 
 The banking and financial services
business in our market areas continues to be a competitive field and is becoming
more competitive as a result of:
 
 •
                  changes in
      regulations;•
                  changes in technology and product
      delivery systems; and•
                  the accelerating pace of
      consolidation among financial services
  providers.
 
 We may not be able to compete
effectively in our markets, and our results of operations could be adversely
affected by the nature or paceof change in competition.We compete for loans, deposits and
customers with various bank and nonbank financial services providers, many of
which have substantially greater resources,including higher total assets and
capitalization, greater access to capital markets and a broader offering of
financial services.
 - 26 -
 Index
  Ourtrading volume has been low compared
with larger banks.
 
 The trading volume in the
Company’s common stock on the NASDAQGlobal SelectMarket has been comparable
to other similarly-sized
banks.Nevertheless, this
trading is relatively low when compared with more seasoned companies listed on
the NASDAQGlobal
SelectMarket or other
consolidated reporting
systems or stock exchanges.Thus, the market in the
Company’s common stock may be limited in scope
relative to other companies.
 
 Wedepend heavily on our key management
personnel.
 
 The Company’s success depends in part on its ability
to retain key executives and to attract and retain additional qualified
management personnel who have experience both in sophisticated banking matters
and in operating a small-
to mid-size bank.Competition for such personnel is strong
in the banking industry,and we may not be successful in
attracting or retaining the
personnel we require.We
expect to effectively compete in this area by offering financial packages that
include incentive-based compensation and the opportunity to join in the
rewarding work of building a growing bank.
 
 Technologicaladvances impact our
business.
 
 The banking industry is undergoing
technological changes with frequent introductions of new technology-driven products and
services.In addition to
improving customer services, the effective use of technology increases
efficiency and enables financialinstitutions to reduce costs.Our future success will
depend, in part, on our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations.Many of our competitors
have substantially greater resources than we do to investin technological improvements.We may not be able to
effectively implement new technology-driven products and services or
successfully market such products and services to our
customers.
 
 Governmentregulations may prevent or impact our
ability to pay dividends, engage in acquisitions or operate in other
ways.
 
 Current and future legislation and the
policies established by federal and state regulatory authorities will affect our operations.We are subject to
supervision and periodic examination by the Federal Deposit Insurance
Corporation and the North Carolina State Banking Commission. Banking
regulations, designed primarily for the protection of depositors, may limit our
growth and the return to you, our investors, by restricting certain of our
activities, such as:
 
 •
                  the payment of dividends to our
      shareholders;•
                  possible mergers with,or acquisitions of or
      by,other
      institutions;•
                  our desired
      investments;•
                  loans and interest rates on
      loans;•
                  interest rates paid on our
      deposits;•
                  the possible expansion of our
      branch offices; and/or•
                  our ability to provide securities
      or trust services.
 
 We also are subject to capitalization
guidelines set forth in federal legislation, and could be subject to enforcement
actions to the extent that we are found by regulatory examiners to be undercapitalized.We cannot predict what
changes, if any, will be made to existing federal and state legislation and
regulations or the effect that such changes may have on our future
business and earnings
prospects.The cost of
compliance with regulatory requirements including those imposed by the
SECmay adversely affect our ability to
operate profitably.
 - 27 -
 Index
  Thereare potential risks associated with
future acquisitions and expansions.
 
 We intend to continue to explore
expanding our branch system through selective acquisitions of existing banks or
bank branches in the Research Triangle area andother North Carolina markets.We cannot say with any
certainty that we will be able to consummate, or if consummated, successfully
integrate, future acquisitions, or that we will not incur disruptions or
unexpected expenses inintegrating such acquisitions.In the ordinary course of
business, we evaluate potential acquisitions that would bolster our ability to
cater to the small business, individual and residential lending markets in North Carolina.In attempting to make such
acquisitions, we anticipate competing with other financial institutions, many of
which have greater financial and operational resources.In addition, since the
consideration for an acquired bank or branch may involve cash, notes or the
issuance of shares of common stock, existing shareholders could experience
dilution in the value of their shares of our common stock in connection with
suchacquisitions.Any given acquisition, if
and when consummated, may adversely affect our results of operationsor overall financial
condition.In addition, we
may expand our branch network through de novo branches in existing or new markets.These de novo branches will
have expenses in excess of revenues for varying periods after opening, which
could decrease our reported earnings.
 
 Compliancewith changing regulation of corporate
governance and public disclosure may result in additional risks and
expenses.
 
 Changing laws, regulations and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating
uncertainty for companies
such as ours.These laws,
regulations and standards are subject to varying interpretations in many cases,
and as a result, their application in practice may evolve over time as new
guidance is provided by regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices.We are committed to
maintaining high standards of corporate governance and public disclosure.As a result, our efforts to
comply with evolving laws, regulations and standards have resulted in, and are
likely to continue to result in, increased expenses and a diversion ofmanagement time and
attention.In particular,
our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the
related regulations regarding management’s required assessment of our internal
control over financial reporting and our external auditors’audit of that assessment has required
the commitment of significant financial and managerial
resources.
 
 We expect these efforts to require the
continued commitment of
significant resources.Further, the members of our Board of
Directors, members of the
Audit or Compensation/Human Resources Committees, ourCEO, ourCFOand certain other of our executive
officers could face an increased risk of personal liability in connection with
the performance of their
duties.As a result, our
ability to attract and retain executive officers and qualified Board and
committee members could be
more difficult.In
addition, it may become more difficult and more expensive to obtain director and
officer liability insurance.
 
 We
are subject to environmental liability risk associated with lending
activities.
 
 A
significant portion of our loan portfolio is secured by real property. During
the ordinary course of business, we 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, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur
substantial expenses and may materially reduce the affected property’s value or
limit our ability to use or sell the affected property. In addition, future laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. Although we
have policies and procedures to perform an environmental review before
initiating any foreclosure action on nonresidential real property, these reviews
may not be sufficient to detect all potential environmental hazards. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial
condition and results of operations.Loan defaults result in a decrease in
interest income and may require the establishment of or an increase in loan loss
reserves. Furthermore, the decrease in interest income resulting from a loan
default or defaults may be for a prolonged period of time as we seek to recover,
primarily through legal proceedings, the outstanding principal balance, accrued
interest and default interest due on a defaulted loan plus the legal costs
incurred in pursuing our
legal remedies.No
assurance can be given that recent market conditions will not result in our need
to increase loan loss reserves or charge-off a higher percentage of loans,
thereby reducing net income.
 - 28 -
 Index
  Our
controls and procedures may fail or be circumvented.
 
 Management
regularly reviews and updates our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations and financial condition.
 
 The
holders of our subordinated debentures have rights that are senior to those of
our shareholders.
 
 We have
issued $30.9 million of subordinated debentures in connection with three trust
preferred securities issuances by our subsidiaries, Trust I, II and III. We
conditionally guarantee payments of the principal and interest on the trust
preferred securities. Our subordinated debentures are senior to our shares of
common stock. As a result, we must make payments on the subordinated debentures
(and the related trust preferred securities) before any dividends can be paid on
our common stock and, in the event of bankruptcy, dissolution or liquidation,
the holders of the debentures must be satisfied before any distributions can be
made to the holders of common stock.
 
 Our information systems may
experience an interruption or breach in security.
 
 We rely
heavily on communications and information systems to conduct our business. Any
failure, interruption or breach in security of these systems could result in
failures or disruptions in our customer relationship management, general ledger,
deposit, loan and other systems. While we have policies and procedures designed
to prevent or limit the effect of the failure, interruption or security breach
of our information systems, there can be no assurance that we can prevent any
such failures, interruptions or security breaches or, if they do occur, that
they will be adequately addressed. The occurrence of any failures, interruptions
or security breaches of our information systems could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any
of which could have a material adverse effect on our financial condition and
results of operations.
 
 An
investment in our common stock is not an insured deposit.
 
 Our
common stock is not a bank deposit and, therefore, is not insured against loss
by the FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for the reasons
described in this “Risk Factors” section and elsewhere in this report and is
subject to the same market forces that affect the price of common stock in any
company. As a result, if you acquire our common stock, you may lose some or all
of your investment.
 
 Consumers
may decide not to use banks to complete their financial
transactions.
 
 Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For example,
consumers can now maintain funds in brokerage accounts or mutual funds that
would have historically been held as bank deposits. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the
assistance of banks. The process of eliminating banks as intermediaries could
result in the loss of fee income, as well as the loss of customer deposits and
the related income generated from those deposits. The loss of these revenue
streams and the lower cost deposits as a source of funds could have a material
adverse effect on our financial condition and results of
operations.
 Item 2.Unregistered Sales of
Equity Securities and Use of Proceeds
 
 The following table lists all
repurchases (both open market and private transactions) during the three months
ended March 31, 2008 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.
 - 29 -
 Index
  Issuer Purchases of Equity
Securities
 
 Month
                    
                    Total
      Number
                      of
      SharesPurchased
                    
                    Average
      Price
                      Paid
      per Share
                    
                    Total
      Number of SharesPurchased as Part ofPublicly AnnouncedPlans or
      Programs
                    
                    Maximum
      Number ofShares that May Yet BePurchased under thePlans or
      ProgramsJanuary
      1, 2008 – January 24, 2008
                    
                    
                    66
                    
                    $
                    12.70
                    
                    
                    66
                    
                    
                    265,215
                    (1)January
      25, 2008 – January 31, 2008
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    1,000,000
                    (2)February
      1, 2008 – February 29, 2008
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    1,000,000March
      1, 2008 – March 31, 2008
                    
                    
                    100
                    
                    $
                    9.90
                    
                    
                    100
                    
                    
                    999,900
 
 (1)
                    The 66 shares were repurchased
      under the repurchase program in effect up until January 24, 2008, which
      had previously been approved on
      February 23, 2006 with an expiration date of February 23, 2008. The
      Company was authorized to repurchase (in the open market or in any private
      transaction), up to 1.0 million shares of the Company’s outstanding common
      stock.This
      repurchase program was terminated and replaced with a new repurchase
      program approved before the Company’s Board of Directors on January 24,
      2008.
 
 (2)
                    On
      January 24, 2008, the Company’s Board of Directors authorized the
      repurchase of up to 1.0 million shares of the Company’s currently
      outstanding shares of common stock. There is no expiration date for the
      repurchase program.
 
 Item 3.Defaults upon Senior
Securities
 
 None
 
 Item 4.Submission of Matters
to a Vote of Security Holders
 
 None
 
 Item 5.Other
Information
 
 None
 
 Item 6.Exhibits
  Exhibit No.
                      
                      DescriptionExhibit 4.1
                      
                      In accordance with Item
      601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting
      long-term debt of the registrant have been omitted but will be furnished
      to the Commission upon request.Exhibit
10.1
                      
                      Summary of Material Terms of the
      Capital Bank Annual Incentive PlanExhibit
10.2
                      
                      Employment Agreement among the
      Company, Capital Bank and David C. Morgan dated January 25, 2008,
      incorporated by reference from the Current Report on Form 8-K filed
      January 31, 2008Exhibit
10.3
                      
                      Employment Agreement among the
      Company, Capital Bank and Michael R. Moore dated January 31, 2008,
      incorporated by reference from the Current Report on Form 8-K filed
      January 31, 2008Exhibit
31.1
                      
                      Certification of B. Grant Yarber
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of
2002
 - 30 -
 Index
  Exhibit
31.2
                      
                      Certification of Michael R. Moore
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002Exhibit
32.1
                      
                      Certification of B. Grant Yarber
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant
      to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to
      the extent required by that Act, be deemed to be incorporated by reference
      into any document or filed herewith for purposes of liability under the
      Securities Exchange Act of 1934, as amended, or the Securities Act of
      1933, as amended, as the case may be.]Exhibit
32.2
                      
                      Certification of Michael R. Moore
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
      the extent required by that Act, be deemed to be incorporated by reference
      into any document or filed herewith for purposes of liability under the
      Securities Exchange Act of 1934, as amended, or the Securities Act of
      1933, as amended, as the case may
be.]
  - 31 -
 Index
  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 8th day of May 2008.
  CAPITAL
      BANK CORPORATIONBy:  /s/Michael R.
      MooreMichael R.
      MooreChief Financial
      Officer
  - 32 -
 Index
  EXHIBIT INDEX
 Exhibit No.
                        
                        DescriptionExhibit 4.1
                        
                        In accordance with Item
      601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting
      long-term debt of the registrant have been omitted but will be furnished
      to the Commission upon request.Exhibit
10.1
                        
                        Summary of Material Terms of the
      Capital Bank Annual Incentive PlanExhibit
10.2
                        
                        Employment Agreement among the
      Company, Capital Bank and David C. Morgan dated January 25, 2008,
      incorporated by reference from the Current Report on Form 8-K filed
      January 31, 2008Exhibit
10.3
                        
                        Employment Agreement among the
      Company, Capital Bank and Michael R. Moore dated January 31, 2008,
      incorporated by reference from the Current Report on Form 8-K filed
      January 31, 2008Exhibit
31.1
                        
                        Certification of B. Grant Yarber
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002Exhibit
31.2
                        
                        Certification of Michael R. Moore
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002Exhibit
32.1
                        
                        Certification of B. Grant Yarber
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant
      to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to
      the extent required by that Act, be deemed to be incorporated by reference
      into any document or filed herewith for purposes of liability under the
      Securities Exchange Act of 1934, as amended, or the Securities Act of
      1933, as amended, as the case may be.]Exhibit
32.2
                        
                        Certification of Michael R. Moore
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
      the extent required by that Act, be deemed to be incorporated by reference
      into any document or filed herewith for purposes of liability under the
      Securities Exchange Act of 1934, as amended, or the Securities Act of
      1933, as amended, as the case may
be.]
 
  - 33 -
 Index