UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

or

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from  to 

CAPITAL BANK CORPORATION

(Exact name of registrant as specified in its charter)

North Carolina	000-30062	56-2101930
(State or other jurisdiction of incorporation)	(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 filer þ 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 11,237,085 shares 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 Statements
	Condensed Consolidated Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures

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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)
Assets
Cash and due from banks:
Interest earning	$	10,487		$	7,815
Noninterest earning		32,661			32,347
Federal funds sold and short term investments		104			10
Total cash and cash equivalents		43,252			40,172
Investment securities – available for sale, at fair value		252,191			249,094
Investment securities – held to maturity, at amortized cost		5,895			10,022
Loans – net of unearned income and deferred fees		1,150,497			1,095,107
Allowance for loan losses		(13,563	)		(13,571	)
Net loans		1,136,934			1,081,536
Premises and equipment, net		24,584			23,863
Bank-owned life insurance		21,702			21,589
Goodwill and deposit premium, net		63,087			63,345
Deferred income tax		5,010			5,829
Accrued interest receivable		6,961			7,789
Other assets		15,685			14,364
Total assets	$	1,575,301		$	1,517,603
Liabilities
Deposits:
Demand, noninterest bearing	$	117,186		$	114,780
Savings and interest bearing checking		175,718			151,698
Money market deposit accounts		199,829			229,560
Time deposits less than $100,000		381,824			370,416
Time deposits $100,000 and greater		276,340			232,244
Total deposits		1,150,897			1,098,698
Repurchase agreements and federal funds purchased		35,762			45,295
Borrowings		178,000			163,347
Subordinated debentures		30,930			30,930
Other liabilities		11,745			15,033
Total liabilities		1,407,334			1,353,303
Commitments and contingencies
Shareholders’ Equity
Common 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			136,154
Retained earnings		29,251			27,985
Accumulated other comprehensive income		1,871			161
Total shareholders’ equity		167,967			164,300
Total liabilities and shareholders’ equity	$	1,575,301		$	1,517,603

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

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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	$	19,883
Investment securities:
Taxable interest income		2,218		1,926
Tax-exempt interest income		829		774
Dividends		117		107
Federal funds and other interest income		55		485
Total interest income		22,718		23,175
Interest expense:
Deposits		9,072		10,006
Borrowings and repurchase agreements		2,737		2,446
Total interest expense		11,809		12,452
Net interest income		10,909		10,723
Provision for loan losses		565		337
Net interest income after provision for loan losses		10,344		10,386
Noninterest income:
Service charges and other fees		959		877
Mortgage fees and revenues		272		528
Brokerage fees		156		103
Bank card services		299		216
Net gain on sale of securities		71		–
Bank-owned life insurance		302		197
Other		168		269
Total noninterest income		2,227		2,190
Noninterest expense:
Salaries and employee benefits		5,036		5,042
Occupancy		958		956
Furniture and equipment		747		615
Data processing and telecommunications		432		388
Advertising		315		298
Office expenses		365		333
Professional fees		370		183
Business development and travel		333		313
Amortization of deposit premiums		257		300
Miscellaneous loan handling costs		94		186
Directors fees		267		268
Insurance		95		90
Other		336		264
Total noninterest expense		9,605		9,236
Net income before tax expense		2,966		3,340
Income tax expense		799		956
Net income	$	2,167	$	2,384
Earnings per share – basic	$	0.19	$	0.21
Earnings per share – diluted	$	0.19	$	0.21

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

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2008 and 2007 (Unaudited)

	Shares of CommonStock			Common Stock			Other Comprehensive Income			Retained Earnings			Total
(Dollars in thousands except share data)
Balance at January 1, 2007		11,393,990		$	139,484		$	(1,557	)	$	23,754		$	161,681
Repurchase of outstanding common stock		(82	)		(1	)								(1	)
Issuance of common stock for options exercised		16,793			146									146
Noncash compensation		32,329			497									497
Net income											2,384			2,384
Other comprehensive income								65						65
Comprehensive income														2,449
Dividends ($0.08 per share)											(917	)		(917	)
Balance at March 31, 2007		11,443,030		$	140,126		$	(1,492	)	$	25,221		$	163,855
Balance at January 1, 2008		11,169,777		$	136,154		$	161		$	27,985		$	164,300
Repurchase of outstanding common stock		(166	)		(2	)								(2	)
Issuance of common stock for options exercised		15,591			103									103
Issuance of common stock for services		27,883			295									295
Noncash compensation		24,000			295									295
Net income											2,167			2,167
Net unrealized gain on securities, net of tax of $292								571						571
Net unrealized gain related to cash flow hedge								1,139						1,139
Comprehensive income														3,877
Dividends ($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.

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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		$	2,384
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of deposit premium		257			300
Depreciation		668			612
Net 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	)		7
Net funding of held-for-sale loans		–			(1,931	)
Amortization of premium/discount on securities, net		26			60
Deferred income tax expense (benefit)		819			(252)
Issuance of stock for compensation		295			497
Other noncash compensation expense		33			–
Provision for loan losses		565			337
Changes in assets and liabilities:
Accrued interest receivable and other assets		(1,865	)		2,129
Accrued interest payable and other liabilities		679			1,284
Net cash provided by operating activities		3,439			5,230
Cash 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			51
Net (purchase) sales of FHLB and Silverton Bank stock		(798	)		931
Purchase of securities available for sale		(32,045	)		(19,947	)
Proceeds from principal repayments/calls/maturities of available for sale		30,605			9,269
Proceeds from principal repayments/calls/maturities of securities held to maturity		4,128			306
Net 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.

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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		$	65,042
Net 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			146
Repurchase of common stock		(2	)		(1	)
Net cash provided by financing activities		55,133			54,527
Net change in cash and cash equivalents		3,080			33,519
Cash and cash equivalents at beginning of period		40,172			54,332
Cash and cash equivalents at end of period	$	43,252		$	87,851
Supplemental Disclosure of Cash Flow Information
Transfer of loans and premises to other real estate owned	$	68		$	561
Dividends payable	$	901		$	917
Cash paid for:
Income taxes	$	–		$	–
Interest	$	11,930		$	12,299

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

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

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 Company pursuant 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 on total 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.

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

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 Measurement for 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		$	252
Unrealized 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

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

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	$	2,384
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding – basic		11,289,453		11,492,749
Incremental shares from assumed exercise of stock options		16,643		80,345
Weighted 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 of March 31, 2008, options to purchase124,459 shares of common stock remained available for future issuance. In addition, there were 566,071 options, which were assumed under various plans from previously acquired financial institutions, of which 84,384options remain outstanding.

The Company also administers the Capital Bank Corporation Deferred Compensation Plan for Outside Directors (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.

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

	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		$	12.09
Granted		3,500			10.42
Exercised		(15,591	)		6.62
Terminated		–
Outstanding at March 31, 2008		371,984		$	12.79		4.50	$	245
Options 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	54,250
	371,984	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 Losses
Available for Sale
Municipal bonds and other	$	57,383	$	2,918	$	6,423	$	509	$		63,806	$	3,427
Mortgage-backed securities		5,083		68		12,114		200			17,197		268
		62,466		2,986		18,537		709			81,003		3,695
Held to Maturity
Mortgage-backed securities	$	1,495	$	3	$	2,753	$	78		$	4,248	$	81
		1,495		3		2,753		78			4,248		81
Total at March 31, 2008	$	63,961	$	2,989	$	21,290	$	787		$	85,251	$	3,776

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

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	$	640,355
Construction		335,830		301,799
Consumer		11,250		12,788
Home equity lines		80,525		79,361
Mortgage		59,354		60,596
		1,149,392		1,094,899
Plus 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	$	301,089
Standby letters of credit		6,594		7,697
Total commitments	$	319,529	$	308,786

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

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.

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

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.

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

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis:

							Fair Value Measurements at March 31, 2008
	Total 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)
Securities	$	258,086		$	258,086		$	–	$	256,631		$	1,455
Borrowings		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 Measurements at March 31, 2008
	Total 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		–		–		1,136,934
Foreclosed 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”).

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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’s critical accounting policies are described in Note 1of the Company’s Annual Report on Form 10-Kfor the year ended December 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 7 of the Company’s Annual Report on Form 10-K for the 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 Company reported 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.

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• 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% and 89.8% 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 $259.1 million 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.

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Results of Operations

Quarter ended March 31, 2008 compared to quarter ended March 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, and competitive pressures in the Company’s primary markets for 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.

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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 Rate
Assets
Loans 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		8.25
Home equity		79,564			1,321		6.66			82,298			1,727		8.51			78,221			1,547		7.85
Residential mortgages		30,259			491		6.51			47,235			748		6.42			35,691			572		6.36
Total loans		1,142,728			19,499		6.84			1,012,483			19,883		7.96			1,090,801			20,834		7.58
Investment securities (3)		256,538			3,590		5.61			243,732			3,303		5.50			242,272			3,347		5.48
Federal funds sold and other interest on short-term investments		8,079			55		2.72			36,596			485		5.37			14,654			170		4.59
Total 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								27,617
Other assets		136,071								130,126								130,340
Allowance for loan losses		(13,662	)							(13,296	)							(13,121	)
Total assets	$	1,555,986							$	1,437,234							$	1,492,563
Liabilities and Equity
Savings 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		3.11
Time deposits		657,609			7,171		4.37			600,865			7,042		4.75			568,604			7,124		4.97
Total interest-bearing deposits		1,021,099			9,072		3.56			978,049			10,006		4.15			951,984			9,930		4.14
Borrowed funds		171,645			2,022		4.73			113,686			1,503		5.36			156,853			2,009		5.08
Subordinated debt		30,930			526		6.82			30,930			586		7.68			30,930			593		7.61
Repurchase agreements and fed funds purchased		35,563			189		2.13			34,328			357		4.22			38,499			339		3.49
Total 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								114,454
Other liabilities		11,132								10,581								33,621
Total liabilities		1,388,376								1,273,943								1,326,341
Shareholders’ equity		167,610								163,291								166,222
Total liabilities and shareholders’ equity	$	1,555,986							$	1,437,234							$	1,492,563
Net interest spread (4)							2.83	%							3.07	%							2.84	%
Tax equivalent adjustment				$	426							$	496							$	511
Net 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-earning assets and the average cost of interest-bearing liabilities.

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

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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 securities on a fully tax equivalent basis increased from 5.50% for the quarter ended March 31, 2007 to 5.61% for the quarter ended March 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 borrowings including subordinated debentures for the quarter ended March 31, 2008 was 4.61%, compared to 5.48% for the quarter ended March 31, 2007. In July 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 thousand and $124 thousand for the quarters ended March 31, 2008and 2007, respectively.

For the 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. The increase 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-offs for 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 and past due loans decreased from $9.3 million and $16.2 million, respectively, as of March 31, 2007 to $5.1 million and $9.4 million, respectively, as of March 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.

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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 related to 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.

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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% at March 31, 2008. Nonperforming loans, which includes all loans past due greater than 90 days or in nonaccrual status, as a percentage of total loans, decreased from 0.72% at March 31, 2007 to 0.37% at March 31, 2008. Nonperforming assets as a percentage of total assets were 0.33% and 0.63% at March 31, 2008 and March 31, 2007, respectively. Management believes the allowance for loan losses as of March 31, 2008 is adequate to absorb 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 at March 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 Ended March 31,
	2008			2007
(Dollars in thousands)
Allowance for loan losses, beginning of period	$	13,571		$	13,347
Net charge-offs:
Loans charged off:
Commercial		678			71
Consumer		593			50
Home equity lines		–			25
Mortgage		–			17
Total charge-offs		1,271			163
Recoveries of loans previously charged off:
Commercial		661			–
Consumer		35			8
Home equity lines		1			2
Mortgage		1			–
Total recoveries		698			10
Total net charge-offs		573			153
Loss provision charged to operations		565			337
Allowance for loan losses, end of period	$	13,563		$	13,531
Net 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.

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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		$	4,489
Construction		230			–			562
Consumer		61			241			28
Home equity lines		579			433			397
Mortgage		463			957			506
Total nonperforming loans		4,252			7,356			5,982
Foreclosed property held		890			1,961			1,571
Total nonperforming assets	$	5,142		$	9,317		$	7,553
Nonperforming 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 primarily due to 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.

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	Actual				Minimum Requirements To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio
2008
Total 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	6.00
Tier I capital (to average assets)		132,870	8.91			74,530	5.00
2007
Total 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	6.00
Tier 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.

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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 Operations above.

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 many other 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 net income and profits may decline.

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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.

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

A significant source of risk for us arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. We have underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our loan portfolio. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations. Loan defaults result in a decrease in interest income 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 pace of change in competition. We compete for loans, deposits and customers with various bank and nonbank financial services providers, many of which have substantially greater resources, including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services.

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Our trading volume has been low compared with larger banks.

The trading volume in the Company’s common stock on the NASDAQ Global Select Market has been comparable to other similarly-sized banks. Nevertheless, this trading is relatively low when compared with more seasoned companies listed on the NASDAQ Global Select Market 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.

We depend 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.

Technological advances 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 financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources than we do to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to our customers.

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

Current and future legislation and the policies established by federal and state regulatory authorities will affect our operations. 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 SEC may adversely affect our ability to operate profitably.

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There are 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 and other 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 in integrating 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 such acquisitions. Any given acquisition, if and when consummated, may adversely affect our results of operations or overall financial condition. In addition, we may expand our branch network through de novo branches in existing or new markets. These de novo branches will have expenses in excess of revenues for varying periods after opening, which could decrease our reported earnings.

Compliance with 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 of management 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, our CEO, our CFO and 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.

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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.

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Issuer Purchases of Equity Securities

Month	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs
January 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		–		–		–		1,000,000
March 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.	Description
Exhibit 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 Plan
Exhibit 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, 2008
Exhibit 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, 2008
Exhibit 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

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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 2002
Exhibit 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.]

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 8th day of May 2008.

CAPITAL BANK CORPORATION

By:  /s/  Michael R. Moore

Michael R. Moore

Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description
Exhibit 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 Plan
Exhibit 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, 2008
Exhibit 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, 2008
Exhibit 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
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 2002
Exhibit 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.]

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