UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended March 31, 2001

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Transition Period From _____ to ____

                         Commission File Number 0-30062

                            CAPITAL BANK CORPORATION
                            ------------------------
             (Exact name of registrant as specified in its charter)

      North Carolina                                    56-2101930
      --------------                                    ----------
(State or other jurisdiction of                        (IRS Employer
 incorporation or organization)                     Identification No.)

                              4901 Glenwood Avenue
                          Raleigh, North Carolina 27612
                ------------------------------------------------
               (Address of Principal executive offices) (Zip Code)

      Registrant's telephone number, including area code: (919) 645-6400
                                                         ----------------

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. X Yes ____No

As of May 10, 2001,  there were issued and outstanding  3,658,689  shares of the
Registrant's common stock, no par value.

<PAGE>

                            Capital Bank Corporation

                                    CONTENTS


<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                             Page No.
<S>     <C>                                                                                <C>
        Item 1. Financial Statements

        Condensed consolidated statements of financial condition at March 31, 2001
              (Unaudited) and December 31, 2000                                                1

        Condensed consolidated statements of income for the three months ended
              March 31, 2001 and 2000 (Unaudited)                                              2

        Condensed consolidated statements of comprehensive income for the three
              months ended March 31, 2001 and 2000 (Unaudited)                                 3

        Condensed consolidated statements of cash flows for the three months ended
              March 31, 2001 and 2000 (Unaudited)                                          4 - 5

        Notes to consolidated financial statements                                         6 - 7

        Item 2. Management's Discussion and Analysis of Financial Condition and
              Results of Operations                                                       8 - 11

        Item 3. Quantitative and Qualitative Disclosures About Market Risk                    12


PART II - OTHER INFORMATION

        Item 1. Legal Proceedings                                                             12

        Item 2. Changes in Securities and Use of Proceeds                                     12

        Item 3. Defaults Upon Senior Securities                                               12

        Item 4. Submission of Matters to a Vote of Security Holders                           12

        Item 5. Other Information                                                             12

        Item 6. Exhibits and Reports on Form 8-K                                              12


        Signatures                                                                            13
</TABLE>

<PAGE>

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2001 and December 31, 2000

<TABLE>
<CAPTION>
                                                                                  March 31,           December 31,
                                                                                    2001                 2000
-------------------------------------------------------------------------------------------------------------------
                                                  (In thousands)                (Unaudited)
ASSETS
<S>                                                                             <C>                    <C>
Cash and due from banks:
      Interest earning                                                          $   5,859              $  16,724
      Non-interest earning                                                         12,398                 10,952
Federal funds sold                                                                    557                    750
Investment securities - available for sale, at fair value                          70,895                 61,947
Loans-net of unearned income and deferred fees                                    261,731                242,275
Allowance for loan losses                                                          (3,754)                (3,463)
                                                                                ---------              ---------
         Net loans                                                                257,977                238,812
                                                                                ---------              ---------
Premises and equipment, net                                                         5,434                  5,149
Accrued interest receivable                                                         2,331                  2,346
Deposit premium and goodwill, net                                                   4,488                  4,615
Deferred tax assets                                                                 1,859                  1,412
Other assets                                                                        1,011                    913
                                                                                ---------              ---------
             Total assets                                                       $ 362,809              $ 343,620
                                                                                =========              =========

LIABILITIES
Deposits:
      Demand, non-interest bearing                                              $  26,628              $  20,346
      Savings and interest bearing demand deposits                                 75,242                 68,701
      Time deposits                                                               187,138                190,047
                                                                                ---------              ---------
         Total deposits                                                           289,008                279,094
                                                                                ---------              ---------
Accrued interest payable                                                            1,038                    968
Repurchase agreements                                                               8,694                  9,804
Borrowings                                                                         25,000                 15,000
Other liabilities                                                                   3,047                  3,739
                                                                                ---------              ---------
             Total liabilities                                                    326,787                308,605

SHAREHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
      authorized; 3,658,689 shares issued and outstanding                          34,806                 34,806
Retained earnings (deficit)                                                           823                   (114)
Accumulated other comprehensive income                                                393                    323
                                                                                ---------              ---------
             Total shareholders' equity                                            36,022                 35,015
                                                                                ---------              ---------
             Total liabilities and shareholders' equity                         $ 362,809              $ 343,620
                                                                                =========              =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                      -1-

<PAGE>

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                   2001                   2000
------------------------------------------------------------------------------------------------------------------
                         (In thousands except per share data)                   (Unaudited)

Interest income:
<S>                                                                               <C>                   <C>
      Loans and loan fees                                                         $ 5,538               $ 3,666
      Investment securities                                                         1,179                   765
      Federal funds and other interest income                                         158                   131
                                                                                  -------               -------
         Total interest income                                                      6,875                 4,562
                                                                                  -------               -------

Interest expense:
      Deposits                                                                      3,590                 2,085
      Borrowings and repurchase agreements                                            386                   322
                                                                                  -------               -------
         Total interest expense                                                     3,976                 2,407
                                                                                  -------               -------
         Net interest income                                                        2,899                 2,155
Provision for loan losses                                                             300                   255
                                                                                  -------               -------
         Net interest income after provision for loan losses                        2,599                 1,900

Noninterest income:
      Service charges and other fees                                                  290                   153
      Net gain on sale of securities                                                   50                    --
      Other noninterest income                                                        456                   224
                                                                                  -------               -------
         Total noninterest income                                                     796                   377
                                                                                  -------               -------

Noninterest expenses:
      Salaries and employee benefits                                                1,510                   973
      Occupancy                                                                       274                   138
      Data processing                                                                 152                    93
      Directors fees                                                                   55                    60
      Advertising                                                                     109                   104
      Furniture and equipment                                                         184                    90
      Amortization of intangibles                                                     141                    54
      Other expenses                                                                  389                   365
                                                                                  -------               -------
         Total noninterest expenses                                                 2,814                 1,877
                                                                                  -------               -------
            Net income before income tax expense                                      581                   400
Income tax expense (benefit)                                                         (356)                   --
                                                                                  -------               -------
            Net income                                                            $   937               $   400
                                                                                  =======               =======

Earnings per share - basic and diluted                                            $  0.25               $  0.11
                                                                                  =======               =======
</TABLE>


See Notes to Condensed Consolidated Financial Statements


                                      -2-
<PAGE>

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                     2001                2000
-----------------------------------------------------------------------------------------------------------------
                                                (In thousands)                   (Unaudited)

Three month period ended March 31, 2001:
<S>                                                                                <C>                  <C>
      Net income before comprehensive items                                        $   937              $   400
      Reclassification of gains recognized in net income                               (50)                  --
      Unrealized gains (losses) on securities available for sale
            net of deferred tax effect                                                 120                 (240)
                                                                                   -------              -------
         Comprehensive income                                                      $ 1,007              $   160
                                                                                   =======              =======
</TABLE>


See Notes to Condensed Consolidated Financial Statements


                                      -3-
<PAGE>

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                   2001           2000
-----------------------------------------------------------------------------------------------------------
                                                        (In thousands)          (Unaudited)

<S>                                                                             <C>             <C>
Cash Flows From Operating Activities
      Net income                                                                $    937        $    400
      Adjustments to reconcile net income to net cash
         provided by (used in) operating activities:
         Amortization of deposit premium and goodwill                                141              54
         Depreciation                                                                207             125
         Gain on sale of equipment                                                    (1)             --
         Gain on sale of securities available for sale                               (50)             --
         Amortization of premium on securities, net                                  (76)             10
         Deferred income tax benefits                                               (694)           (202)
         Provision for loan losses                                                   300             255
         Changes in assets and liabilities:
            Accrued interest receivable                                               15            (151)
            Other assets                                                             (98)           (336)
            Accrued interest payable and other liabilities                          (622)            204
                                                                                --------        --------
                Net cash provided by operating activities                             59             359
                                                                                --------        --------
Cash Flows From Investing Activities
      Loan originations, net of principal repayments                             (19,465)        (16,149)
      Additions to premises and equipment                                           (518)           (278)
      Proceeds from sale of equipment                                                 27              --
      Purchase of Federal Home Loan Bank stock                                      (250)             --
      Purchase of securities available for sale                                  (26,715)         (1,468)
      Proceeds from maturities of securities available for sale                   12,410             794
      Proceeds from sale of securities available for sale                          6,050              --
      Capitalized purchase costs                                                     (14)             --
                                                                                --------        --------
                Net cash used in investing activities                            (28,475)        (17,101)
                                                                                --------        --------
Cash Flows From Financing Activities
      Net increase in deposits                                                     9,914          26,465
      Net increase in repurchase agreements                                       (1,110)          1,192
      Net increase (decrease) in borrowings                                       10,000          (5,000)
                                                                                --------        --------
                Net cash provided by financing activities                       $ 18,804        $ 22,657
                                                                                --------        --------


                                                                                       (continued)
</TABLE>


See Notes to Condensed Consolidated Financial Statements


                                      -4-
<PAGE>

CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended March 31, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                   2001                2000
----------------------------------------------------------------------------------------------------------------
                                                          (In thousands)        (Unaudited)
<S>                                                                               <C>                <C>
                Net change in cash and cash equivalents                           $ (9,612)          $  5,915
      Cash and cash equivalents:
         Beginning                                                                  28,426             11,662
                                                                                  --------           --------

         Ending                                                                   $ 18,814           $ 17,577
                                                                                  ========           ========

Supplemental Disclosure of Cash Flow Information
      Transfers from loans to real estate acquired
         through foreclosure                                                      $     --           $     32
                                                                                  ========           ========
      Cash paid for:
         Income taxes                                                             $    815           $    319
                                                                                  ========           ========
         Interest                                                                 $  3,906           $  2,437
                                                                                  ========           ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                      -5-
<PAGE>

Notes to the Consolidated Financial Statements

1.   Significant Accounting Policies and Interim Reporting

The  accompanying   unaudited  consolidated  financial  statements  include  the
accounts of Capital  Bank  Corporation  (the  "Company")  and it's  wholly-owned
subsidiaries,  Capital Bank (the "Bank") and Capital  Bank  Investment  Services
("CBIS"). The interim financial statements have been prepared in accordance with
generally accepted accounting  principles for interim financial  information and
the  instructions  to Form 10-Q and  Regulation  S-X.  Accordingly,  they do not
include all of the  information  and  footnotes  required by generally  accepted
accounting  principles for complete financial statements and therefore should be
read in  conjunction  with the audited  financial  statements  and  accompanying
footnotes in the  Company's  2000 Annual  Report on form 10-K. In the opinion of
management,  all adjustments  necessary for a fair presentation of the financial
position and results of operations for the periods  presented have been included
and  all  significant   intercompany   transactions   have  been  eliminated  in
consolidation.  The results of operations for the three month period ended March
31, 2001 are not necessarily indicative of the results of operations that may be
expected for the year ended December 31, 2001.

The  accounting  policies  followed  are as set  forth in Note 1 of the Notes to
Financial Statements in the 2000 Capital Bank Corporation annual report.

2.   Comprehensive Loss 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 only  components of other  comprehensive
income  relate  to  realized  and  unrealized  gains and  losses  on  securities
available  for sale,  net of the  applicable  income tax effect.  The  Company's
comprehensive  net  income  and  information   concerning  the  Company's  other
comprehensive  income  items for the three month period ended March 31, 2001 and
2000 are as shown in the  Condensed  Consolidated  Statements  of  Comprehensive
Income.

3.   Earnings Per Share

The Bank 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.  For loss periods,  diluted EPS is the same as basic
EPS due to the fact that including common stock equivalents computed as a result
of the 160,148 stock options outstanding in the calculation of diluted EPS would
not be dilutive.  For periods where the Bank has positive earnings,  diluted EPS
are presented  due to the effect of those same options using the Treasury  Stock
method.  The following tables provide a computation and  reconciliation of basic
and diluted EPS for the three month periods ended March 31, 2001 and 2000.

                                      -6-

<PAGE>


<TABLE>
<CAPTION>
                                                                2001                   2000
                                                            ----------------------------------
(In thousands except number of shares)                                 (Unaudited)

Three month periods ended March 31, 2001 and 2000:
<S>                                                         <C>                     <C>
Income available to stockholders - basic and diluted        $      937              $      400
                                                            ==========              ==========
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding - basic        3,732,840               3,709,005
Incremental shares from assumed exercise of stock
      options                                                   21,260                     806
                                                            ----------              ----------
Weighted average number of shares outstanding - diluted      3,754,100               3,709,811
                                                            ==========              ==========
</TABLE>


An aggregate of  approximately  375,395 options were not included in the diluted
calculation  because the option  exercise price exceeded the average fair market
value of the associated shares.

4.   Income Taxes

Prior to the three month period ended March 31, 2001, the  Corporation  recorded
minimal  income  tax  expenses.  This was due  primarily  to the  generation  of
consolidated   net   operating   losses  during  the  start  up  phase  and  the
establishment  of a valuation  allowance  against deferred tax assets until such
time as the Company  demonstrated  the  ability to utilize  those  deferred  tax
assets in the future.  Since the Company  has had eight  successive  quarters of
profitability  since March, 1999,  management  determined during the three month
period  ended  March 31,  2001 that the  Company  will be able to utilize  those
assets in the future.  Accordingly,  during the period ended March 31, 2001, the
remaining  valuation  allowances  were  reversed and all  reserved  deferred tax
assets were recorded on the  consolidated  financial  statements of the Company,
resulting in a one time net tax benefit of $356,000.  In the future, the Company
will be fully taxable.

5.   New Accounting Pronouncements

In  April  2000,   the  Financial   Accounting   Standards   Board  issued  FASB
Interpretation  No. 44 ("FIN 44") which  clarifies the application of Accounting
Principles  Board  Opinion  25  for  certain  transactions.  The  interpretation
addresses many issues related to granting or modifying  stock options  including
changes in accounting for modifications of awards (increased life,  reduction of
exercise  price,  etc.).  It was effective July 1, 2000 but certain  conclusions
cover specific  events that occurred  after either  December 15, 1998 or January
12, 2000. The effects of applying the  interpretation  are to be recognized on a
prospective  basis from July 1, 2000.  FIN 44 is not expected to have a material
impact on the Company.

                                      -7-

<PAGE>

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 month periods ended March 31, 2001 and 2000 for Capital
Bank  Corporation  and its wholly owned  subsidiaries,  Capital Bank and Capital
Bank  Investment  Services,  Inc.  This  discussion  and analysis is intended to
provide  pertinent  information   concerning  financial  position,   results  of
operations,  liquidity,  and capital resources. It 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 and Section 21E of the
Securities  Exchange  Act of 1934,  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 the  Company's
periodic reports and other filings with the SEC.

Overview

Capital Bank Corporation is a financial holding company  incorporated  under the
laws of North Carolina on August 10, 1998. The Company's  primary function is to
serve as the holding company for its wholly-owned subsidiaries, Capital Bank and
Capital Bank Investment  Services,  Inc. Capital Bank was incorporated under the
laws of the State of North Carolina on May 30, 1997, and commenced operations as
a state-chartered banking corporation on June 20, 1997. The Bank is not a member
of the Federal Reserve System and has no  subsidiaries.  At a special meeting of
shareholders  held on March 26, 1999, the  shareholders of Capital Bank approved
the reorganization of Capital Bank into Capital Bank Corporation. In the holding
company  reorganization,  the shareholders of Capital Bank each received a right
to one share of Company  stock for each  share of  Capital  Bank stock that they
owned.

Prior to April 14, 2000, the Bank operated primarily throughout the central part
of North  Carolina  with branch  facilities  located in Raleigh  (1),  Cary (2),
Sanford (3), and Siler City (1). In April,  2000,  the Bank  acquired 5 branches
from another area  financial  institution  which was accounted for as a purchase
transaction.  The  transaction  included  branches in the eastern  part of North
Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). In
June, 2000, the Bank opened a new branch and moved its corporate headquarters to
an office on Glenwood Avenue in Raleigh,  North  Carolina.  In January 2001, the
Bank opened an additional  branch in Raleigh bringing the total to 3 branches in
Raleigh.

On March 1, 2001, Capital Bank Corporation  announced that it had formed Capital
Bank Investment Services,  Inc., an investment services subsidiary and agreed to
acquire  an  independent  branch  brokerage  office  located in  Raleigh,  North
Carolina.

                                      -8-

<PAGE>


CBIS will make  available  a full range of  non-deposit  investment  services to
individuals  and  corporations,  including  the  customers  of the  Bank.  These
investment  services  will  include  full-service  securities  brokerage,  asset
management,  financial planning and retirement  services,  such as 401(k) plans,
all  provided  exclusively  through a  strategic  alliance  with  Raymond  James
Financial Services,  Inc. ("Raymond James"). These services will be available in
the offices of Capital Bank through registered investment representatives.

As used in this report,  the term "Company"  refers to Capital Bank  Corporation
and its subsidiaries,  Capital Bank and Capital Bank Investment Services,  Inc.,
after the holding company reorganization.

The Company has no operations other than those of its subsidiaries, Capital Bank
and Capital Bank Investment Services,  Inc. The Bank is a full-service community
bank and the Investment  Company is a full service brokerage firm. The Company's
profitability  depends  principally upon the net interest income,  provision for
loan losses,  non-interest income and non-interest  expenses of the Bank and the
net commissions generated by CBIS.

Financial Condition

Total  consolidated  assets of the Company for the quarter  ended March 31, 2001
were $362.8 million compared to $343.6 million at December 31, 2000, an increase
of $19.2  million,  or 5.6%. On March 31, 2001,  loans were $261.7  million,  up
$19.5 million,  or 8.0%,  compared to December 31, 2000.  Investment  securities
were $70.9  million and  federal  funds sold were  $557,000  at March 31,  2001.
During the three month period ended March 31, 2001,  cash and cash  equivalents,
including  federal  funds sold,  decreased by $9.6 million due  primarily to the
increase  in loans,  which is an  outlay  of cash,  exceeding  the  increase  in
deposits by $9.6  million.  Earning  assets  represented  93% of total assets on
March 31, 2001. The allowance for loan losses on March 31, 2001 was $3.8 million
and represented approximately 1.43% of total loans. Management believes that the
amount of the allowance is adequate at this time.

Deposits on March 31, 2001 were $289.0  million,  an increase of $9.9 million or
3.6% from  December  31, 2000.  In addition to the  increase in total  deposits,
there was a large shift in deposit mix as total Certificates of Deposit balances
declined and demand deposit and interest bearing demand deposit account balances
increased.  During the three month period ended March 31, 2001,  Certificates of
Deposit  decreased  by $2.9  million,  or 1.53%  from  $190.0  million to $187.1
million.  At  the  same  time,  non-interest  bearing  demand  deposit  accounts
increased  $6.3  million,  or 30.9%,  from $20.3  million to $26.6  million  and
savings and interest bearing demand deposit accounts increased $6.5 million,  or
9.5%, from $68.7 million to $75.5 million. The overall change in deposit mix was
the result of a conscious effort on management's part to attract lower cost core
deposits such as money market and interest bearing checking  accounts along with
an effort to reduce the  overall  rates paid on  Certificates  of Deposit  while
still remaining price  competitive.  Borrowings  increased from $15.0 million at
December  31,  2000 to $25.0  million at March 31,  2001,  as the  Company  took
advantage of the low rates currently being offered by the Federal Home Loan Bank
and leveraged those  additional  borrowings  into higher  yielding  investments.
Total consolidated  shareholders' equity was $36.0 million at March 31, 2001, an
increase of $1.0 million from December 31, 2000, due primarily to net income.

                                      -9-

<PAGE>


Results of Operations

For the three month period ended March 31, 2001, the Company reported net income
of  $937,000  or $.25 per share  compared  to $400,000 or $.11 per share for the
same period in 2000.  Net interest  income in the first quarter of 2001 was $2.9
million,  up 34.5%  compared to $2.2 million in the first  quarter of 2000.  The
increase was primarily due to increased loan and deposit balances as compared to
previous  periods and the resulting net interest spread on those  balances.  The
Company's net interest  margin (net  interest  income as a percentage of average
earning  assets) was 3.51% for the three  month  period  ended  March 31,  2001,
compared to 3.82% in the same period in 2000.

The  provision  for loan losses was  $300,000  for the three month  period ended
March 31, 2001.  This  provision was used to build the allowance for loan losses
to a prudent level to support the Company's loan growth.  At March 31, 2001, the
allowance  for loan losses was 1.43% of total loans.  Loans 90 days or more past
due totaled $404,000 and represented .15% of total loans on March 31, 2001.

Non-interest  income  for the three  month  period  ended  March 31,  2001,  was
$796,000 ,  compared to $377,000  for the same period in 2000.  The  increase in
non-interest  income is primarily  attributable  to increases in fees associated
with deposit  accounts  relative to the overall increase in deposits and a large
increase in fees associated with the mortgage loan origination department, which
had a large  increase  in  activity  as the  result of the lower  interest  rate
environment. Mortgage loan origination fees increased from $167,000 in the first
quarter of 2000 to $375,000 in the first quarter of 2001.

Non-interest  expense for the three month period ended March 31, 2001,  was $2.8
million,  compared to $1.9  million for the same  period in 2000.  Salaries  and
employee benefits,  representing the largest expense category during the period,
increased  from  $973,000 for the three month period in 2000 to $1.5 million for
the same period in 2001.  These  increases  reflect an increase in the number of
personnel  employed by the Company to maintain  adequate staffing levels to meet
customer needs and keep pace with its expected growth. As of March 31, 2001, the
Company  had 124  full-time  equivalent  employees  compared  to 77 for the same
period in 2000.  Occupancy costs,  the second highest  component of non-interest
expenses, increased from $138,000 for the three month period in 2000 to $274,000
for the same period in 2001.  This  increase is  primarily  associated  with the
acquisition  of 5 branches  and the opening of two new  branches in Wake County.
Although  management  expects  non-interest  expense to  increase on an absolute
basis as the Company  continues  its growth,  these  expenses as a percentage of
asset size and operating revenue are anticipated to decrease over time.

At March 31,  2001,  the Company  had net  deferred  tax assets of $1.9  million
resulting from timing  differences  associated with the deductibility of certain
expenses  reflected  on the  financial  statements.  Due to prior net  operating
losses, a valuation  allowance was established against deferred tax assets until
such time as the Company  demonstrated the ability to utilize those deferred tax
assets in the future.  During the year ended  December 31, 2000, the Company was
able to use deferred tax benefits and to record  deferred tax assets only to the
extent those amounts  offset  current  taxes.  During the period ended March 31,
2001, the remaining valuation allowances were reversed and all reserved deferred
tax  assets  were  recorded  on the  consolidated  financial  statements  of the
Company, resulting in a one-time net tax benefit of $356,000. In the future, the
Company will be fully taxable.

                                      -10-

<PAGE>

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/Liability  Management Committee of the Board of Directors. The Company had
$18.8 million in its most liquid  assets,  cash and cash  equivalents at quarter
end. The Company's  principal  sources of funds are deposits,  Federal Home Loan
Bank borrowings and capital.  Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more),  one of the most stable  sources of
liquidity,  together with equity capital funded 78% of total assets at March 31,
2001.  In  addition,  the Company has the ability to take  advantage  of various
other funding programs available from the Federal Home Loan Bank of Atlanta.

Shareholders'  equity was $36.0  million  or $9.85 per share at March 31,  2001.
Management believes this level of shareholders' equity provides adequate capital
to support the Company's  growth for at least the next 12 months and to maintain
a  well-capitalized  position.  At March  31,  2001,  Capital  Bank had a Tier 1
capital  ratio of  11.2%,  a total  risk-based  capital  ratio of  12.4%,  and a
leverage  ratio of 9.0%.  These  ratios  exceed the federal  regulatory  minimum
requirements for a  "well-capitalized"  bank.  Management's  challenge is to use
this  capital  to  implement  a  prudent  growth  strategy  of  branch  and bank
acquisitions while growing the existing branch structure through quality service
and responsiveness to its customers' needs,  although there is no assurance that
the Company will meet these objectives.

Effects of Inflation

Inflation  can  have a  significant  effect  on  the  operating  results  of all
industries.  However,  management  believes the inflationary  factors are not as
critical to the banking  industry  as they are to other  industries,  due to the
high concentration of relatively  short-duration  monetary assets in the banking
industry.  Inflation does,  however,  have some impact on the Company's  growth,
earnings and total assets, and on its need to closely monitor capital levels.

Interest rates are significantly  affected by inflation,  but it is difficult to
assess the impact,  since neither the timing nor the magnitude of the changes in
the  various  inflation  indices  coincides  with  changes  in  interest  rates.
Inflation does impact the economic value of longer-term  interest-bearing assets
and  liabilities,  but the Company  attempts to limit its  long-term  assets and
liabilities.

Recent Accounting Developments

In  April  2000,   the  Financial   Accounting   Standards   Board  issued  FASB
Interpretation  No. 44 ("FIN 44") which  clarifies the application of Accounting
Principles  Board  Opinion  25  for  certain  transactions.  The  interpretation
addresses many issues related to granting or modifying  stock options  including
changes in accounting for modifications of awards (increased life,  reduction of
exercise  price,  etc.).  It was effective July 1, 2000 but certain  conclusions
cover specific  events that occurred  after either  December 15, 1998 or January
12, 2000. The effects of applying the  interpretation  are to be recognized on a
prospective  basis from July 1, 2000.  FIN 44 is not expected to have a material
impact on the Company.

                                      -11-

<PAGE>

Item 3     Quantitative and Qualitative Disclosures About Market Risk
------     ----------------------------------------------------------

The Company has not  experienced  any material change in its portfolio risk from
December 31, 2000 to March 31, 2001.

Part II - Other Information

Item 1     Legal Proceedings
------     -----------------

There are no material pending legal  proceedings to which the Company is a party
or to which any of its  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 2     Changes in Securities and Use of Proceeds
------     -----------------------------------------

           None

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 and Reports on Form 8-K
------     --------------------------------

           (a)   Exhibits
                 --------

                 None

           (b)   Reports on Form 8-K
                 -------------------

                 No reports on form 8-K were filed during the period covered
                 by this report.


                                      -12-

<PAGE>

                                   Signatures

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                        CAPITAL BANK CORPORATION


Date:  May 10, 2001                     By:     /s/ Allen T. Nelson, Jr.
                                            ----------------------------------
                                                  Allen T. Nelson, Jr.,
                                              Senior Vice President and CFO



                                      -13-