8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 20, 2009

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)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

£ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

£ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

£ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

£ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On October 20, 2009, Capital Bank Corporation (Nasdaq: CBKN) issued a press release announcing its financial results for the quarterly period ended September 30, 2009. A copy of the press release is attached as Exhibit 99.1 hereto and is incorporated herein by reference.

Pursuant to General Instruction B.2 of the Current Report on Form 8-K, the information in this Current Report on Form 8-K, including the press release appearing in Exhibit 99.1, is furnished and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Furthermore, the information in this Current Report on Form 8-K, including the press release appearing in Exhibit 99.1, shall not be deemed to be incorporated by reference into the filings of the registrant under the Securities Act of 1933, as amended.

Item 9.01 Financial Statements and Exhibits.

(d) Exhibits

Exhibit No.	Description of Document
Exhibit 99.1	Press release dated October 20, 2009

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 hereunto duly authorized.

Date: October 20, 2009	CAPITAL BANK CORPORATION
	By:  /s/ B. Grant Yarber
	B. Grant Yarber
	President and Chief Executive Officer

Exhibit Index

Exhibit No.	Description of Document
Exhibit 99.1	Press release dated October 20, 2009

EX-99.1

Exhibit 99.1

CONTACT:

B. Grant Yarber

President and Chief Executive Officer

Phone: (919) 645-3494

Email: gyarber@capitalbank-nc.com

FOR IMMEDIATE RELEASE

Capital Bank Announces Strong Third Quarter 2009 Financial Results

RALEIGH, N.C., October 20, 2009 – Capital Bank Corporation (Nasdaq: CBKN), the parent company of Capital Bank, today reported net income of $3.5 million for the quarter ended September 30, 2009 compared to net income of $2.0 million for the quarter ended September 30, 2008. After dividends and accretion on preferred stock issued under the Capital Purchase Program, net income available to common shareholders was $3.0 million, or $0.26 per diluted share, for the third quarter of 2009 compared with $2.0 million, or $0.18 per diluted share, for the same period one year ago. The third quarter results reflect further improvement in net interest margin coupled with recognized tax benefits.

“Capital Bank continued to realize significant margin improvement and positive earnings during the third quarter,” stated B. Grant Yarber, president and CEO. “Management remains focused on asset quality but also considers margin management a key priority. Through highly disciplined margin controls and continued repricing of customer deposits in an increasingly favorable interest rate environment, our net interest margin increased to 3.41% in the third quarter of 2009 from 3.17% in the second quarter. While we continue to face a difficult economy, we are encouraged by the positive trends in our net interest margin and core earnings.”

Net Interest Income

Net interest income increased by $2.7 million for the quarter ended September 30, 2009 from the same quarter one year ago. This improvement was due to an increase in net interest margin by 30 basis points, from 3.11% for the third quarter of 2008 to 3.41% for the third quarter of 2009, coupled with a 14% growth in average earning assets over the same period. Net interest margin benefited from a significant decline in funding costs as rates on total interest-bearing customer deposits fell 79 basis points, from 2.96% for the third quarter of 2008 to 2.17% for the third quarter of 2009. Partially offsetting declining funding costs was a rapid decline in market interest rates late in 2008 which contributed to a decrease in loan yields from 6.03% for the third quarter of 2008 to 5.61% for the third quarter of 2009. In October 2006, the Company entered into a three-year, $100 million (notional) interest rate swap to help mitigate its exposure to interest rate volatility in the prime-based portion of the commercial loan portfolio. The swap, which expired on October 9, 2009, increased loan interest income by $1.1 million and $675 thousand for the quarters ended September 30, 2009 and 2008, respectively, representing a benefit to net interest margin of 27 and 19 basis points, respectively, during the quarters.

Provision for Loan Losses and Asset Quality

Provision for loan losses for the quarter ended September 30, 2009 totaled $3.6 million, an increase of $2.8 million from the same period one year ago. The increase in the provision was partially due to loan growth of $163.1 million, or 14%, from September 30, 2008, but the increase was also driven by continued deteriorating economic conditions and weakness in the local real estate markets which resulted in higher net charge-offs and downgrades to the credit ratings of certain loans in the portfolio. Net charge-offs increased from $653 thousand during the third quarter of 2008 to $2.7 million during the third quarter of 2009. Management continues to thoroughly review its loan portfolio and the adequacy of its allowance for loan losses.

Nonperforming assets, which include loans on nonaccrual and other real estate owned, increased to 1.55% as a percent of total assets at September 30, 2009 compared to 0.63% at December 31, 2008 and 0.47% at September 30, 2008. Past due loans, which include loans at least 30 days past due, increased to 1.86% as a percent of total loans at September 30, 2009 compared to 1.09% at December 31, 2008 and 0.75% at September 30, 2008. As a result of the deteriorating credit quality, the Company increased the allowance for loan losses to 1.44% of total loans at September 30, 2009 compared to 1.18% at December 31, 2008 and 1.17% at September 30, 2008. The allowance for loan losses was 105% of nonperforming loans at September 30, 2009, which was a decline from 162% at December 31, 2008 and 219% at September 30, 2008.

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“Weakness in the residential and commercial real estate markets from the global recession and credit crisis continues to severely impact the financial health and stability of many businesses within the communities we serve. While we believe our markets represent some of the most resilient in the country, the Company again took steps to increase the provision for loan losses compared to the same quarter one year ago,” commented Mr. Yarber. “Despite the difficult economic conditions, our practice of working proactively with borrowers and dealing with problem loans has enabled Capital Bank to maintain credit quality that is superior to peer banks and other banks across the country. In fact, our nonperforming assets to total assets ratio of 1.55% at September 30, 2009 is significantly better than reported regional and national averages have been in recent quarters. While higher loan loss provisions have negatively impacted our earnings in recent quarters, we continue to believe our focused approach to managing asset quality will position us well to take advantage of a future market recovery.”

Loans grew by $102.9 million during the first nine months of 2009 while deposits increased by $69.9 million. Much of the loan growth occurred in the Triangle region of North Carolina, which we believe continues to present quality growth opportunities in certain sectors. On the deposit side, checking and savings accounts increased $37.0 million during the nine months ended September 30, 2009 as Capital Bank continued to emphasize growth in these critical product areas. Time deposits also increased $45.7 million over the same period while money market accounts declined by $12.7 million. Reliance on brokered and wholesale funding remained low as the Company executed successful strategies to attract customer deposits through its branch network. Customer deposits, which exclude brokered deposits, increased to 77% of total assets at September 30, 2009 from 75% of total assets at December 31, 2008 and 68% of total assets at September 30, 2008. Brokered deposits and borrowed funds, which include customer repurchase agreements and subordinated debt, decreased to 14% of total assets at September 30, 2009 from 15% of total assets at December 31, 2008 and 21% of total assets at September 30, 2008.

Noninterest Income

Noninterest income decreased $760 thousand, or 23%, in the third quarter of 2009 compared to the same period one year ago. Included in this decrease was a nonrecurring gain of $426 thousand recorded on the sale of the Company’s Greensboro branch in the third quarter of 2008. Service charge income, which includes overdraft and non-sufficient funds charges, fell by $248 thousand primarily from a decline in consumer spending during the current economic recession. Other loan fees declined by $335 thousand due to a drop in prepayment penalties charged as fewer business loans were prepaid given the current interest rate and economic environment. Partially offsetting these declines was a $211 thousand increase in mortgage fees, which rose primarily as a result of higher mortgage origination volume that was benefited by a continued favorable interest rate environment for residential mortgage refinancing and home purchase activity.

Noninterest Expense

Noninterest expense increased $581 thousand, from $10.5 million during the third quarter of 2008 to $11.1 million during the third quarter of 2009. This increase included higher FDIC deposit insurance expense of $260 thousand due to increases in deposit insurance assessment rates in order to cover higher monitoring costs and claims from the increasing number of failed insured depository institutions. On September 29, 2009, the FDIC announced its intention to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for the following three years. This announcement had no impact on our financial results for the quarter ended September 30, 2009, and if the prepaid assessment is charged as announced, the cost will be recognized as expense ratably over the three year assessment period. Additionally, occupancy expense increased $374 thousand as new branches were opened during the past year in addition to the four branches purchased in the Fayetteville market during December 2008.

Income Taxes

Income taxes represented a benefit of $2.1 million for the quarter ended September 30, 2009 compared to tax expense of $805 thousand for the quarter ended September 30, 2008. Contributing to the benefit during the third quarter of 2009 was a nonrecurring benefit of $504 thousand related to income tax refunds to be received from federal and state tax authorities upon the amendment of multiple tax returns from previous years. These amended returns were filed during the third quarter following a thorough review by the Company’s tax professionals of previously filed federal and state tax returns. These refunds do not represent uncertain tax positions. The majority of the remaining decline in income taxes was related to a change in the Company’s estimated annual effective tax rate given higher than normal levels of nontaxable income, which include municipal bond and loan income and bank-owned life insurance income, as well as higher levels of loan loss provisions over the year to date period. The change in estimated annual effective tax rate increased the tax benefit by $1.8 million for the third quarter of 2009.

***

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Capital Bank Corporation, headquartered in Raleigh, N.C., with approximately $1.7 billion in total assets, offers a broad range of financial services. Capital Bank operates 32 banking offices in Asheville (4), Burlington (3), Cary (2), Clayton, Fayetteville (4), Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Pittsboro, Raleigh (5), Sanford (3), Siler City, Wake Forest and Zebulon. The Company’s website is http://www.capitalbank-nc.com.

Information in this press release contains forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially, including without limitation, the management of our growth, the risks associated with Capital Bank’s loan portfolio, competition within the industry, dependence on key personnel, government regulation and the risks associated with possible or completed acquisitions. Additional factors that could cause actual results to differ materially are discussed in Capital Bank Corporation’s filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K. Capital Bank Corporation does not undertake a duty to update any forward-looking statements in this press release.

###

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CAPITAL BANK CORPORATION

Quarterly Results

(Unaudited)	2009								2008
	September 30			June 30		March 31			December 31(a)			September 30
(In thousands except per share data)
Interest income	$	21,858		$	20,755	$	19,668		$	20,088		$	20,931
Interest expense		8,303			8,591		9,487			10,156			10,104
Net interest income		13,555			12,164		10,181			9,932			10,827
Provision for loan losses		3,564			1,692		5,986			1,701			760
Net interest income after provision for loan losses		9,991			10,472		4,195			8,231			10,067
Noninterest income		2,507			3,724		2,106			2,297			3,267
Noninterest expense		11,098			12,465		11,564			76,286			10,517
Net income (loss) before taxes		1,400			1,731		(5,263	)		(65,758	)		2,817
Income tax (benefit) expense		(2,143	)		382		(800	)		(3,680	)		805
Net income (loss)	$	3,543		$	1,349	$	(4,463	)	$	(62,078	)	$	2,012
Earnings (loss) per common share – basic	$	0.26		$	0.07	$	(0.45	)	$	(5.50	)	$	0.18
Earnings (loss) per common share – fully diluted	$	0.26		$	0.07	$	(0.45	)	$	(5.50	)	$	0.18
Weighted average shares outstanding:
Basic		11,469			11,448		11,293			11,309			11,302
Fully diluted		11,469			11,448		11,293			11,309			11,313

(a)  Results of operations for the quarter ended December 31, 2008 includes a goodwill impairment charge of $65,191.

End of Period Balances

(Unaudited)	2009						2008
	September 30		June 30		March 31		December 31(a)		September 30
(Dollars in thousands except per share data)
Total assets	$	1,734,950	$	1,695,342	$	1,665,611	$	1,654,232	$	1,594,402
Investment securities		262,499		268,224		286,310		278,138		244,310
Loans (gross)		1,357,243		1,293,340		1,277,064		1,254,368		1,194,149
Allowance for loan losses		19,511		18,602		18,480		14,795		14,017
Total earning assets		1,663,271		1,615,164		1,580,140		1,559,256		1,444,727
Deposits		1,385,250		1,380,842		1,340,974		1,315,314		1,197,721
Shareholders’ equity		149,525		143,306		142,674		148,514		166,521
Book value per common share	$	9.58	$	9.03	$	8.97	$	9.54	$	14.83
Tangible book value per common share	$	9.31	$	8.74	$	8.66	$	9.20	$	9.26

(a)  Derived from audited consolidated financial statements.

Average Quarterly Balances

(Unaudited)	2009						2008
	September  30		June 30		March 31		December 31		September 30
(Dollars in thousands)
Total assets	$	1,705,290	$	1,665,387	$	1,659,767	$	1,620,817	$	1,574,810
Investments		265,976		279,607		289,368		246,658		245,408
Loans (gross)		1,330,199		1,285,571		1,265,438		1,213,027		1,176,491
Total earning assets		1,632,707		1,588,502		1,574,017		1,473,422		1,434,041
Deposits		1,375,931		1,324,507		1,307,827		1,238,343		1,164,362
Shareholders’ equity		145,487		145,216		149,285		171,227		166,570

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CAPITAL BANK CORPORATION

Quarterly Net Interest Margin (a)

(Unaudited)	2009									2008
	September 30			June 30			March 31			December 31			September 30
Yield on earning assets		5.43	%		5.34	%		5.17	%		5.51	%		5.90	%
Cost of interest-bearing liabilities		2.33			2.50			2.80			3.05			3.12
Net interest spread		3.10			2.84			2.37			2.46			2.78
Net interest margin		3.41			3.17			2.72			2.78			3.11

(a)  Annualized and on a fully taxable equivalent basis.

Asset Quality – Nonperforming Assets (a)

(Unaudited)	2009									2008
	September 30			June 30			March 31			December 31(b)			September 30
(Dollars in thousands)
Commercial and industrial	$	586		$	1,060		$	652		$	348		$	440
Commercial real estate		15,701			14,885			13,783			6,754			5,072
Residential mortgage		1,905			2,426			2,477			1,738			620
Home equity		330			140			96			275			275
Consumer		–			19			–			–			4
Total nonperforming loans		18,522			18,530			17,008			9,115			6,411
Other real estate owned (c)		8,441			5,170			3,616			1,347			1,019
Total nonperforming assets	$	26,963		$	23,700		$	20,624		$	10,462		$	7,430
Nonperforming loans to total loans		1.36	%		1.43	%		1.33	%		0.73	%		0.54	%
Nonperforming assets to total assets		1.55	%		1.40	%		1.24	%		0.63	%		0.47	%

(a)  Nonperforming assets include loans that are 90 days or more past due or in nonaccrual status and other real estate owned.

(b)  Derived from audited consolidated financial statements.

(c)  Other real estate owned at September 30, 2009 includes $1,297 of real estate from a closed branch office that is held for sale.

Asset Quality and Funding Sources – Other Key Ratios

(Unaudited)	2009									2008
	September 30			June 30			March 31			December 31			September 30
(Dollars in thousands)
Past due loans (a)	$	25,245		$	15,196		$	17,064		$	13,642		$	8,933
Past due loans to total loans		1.86	%		1.17	%		1.34	%		1.09	%		0.75	%
Net charge-offs	$	2,655		$	1,570		$	2,301		$	1,768		$	653
Net charge-offs to average loans (annualized)		0.80	%		0.49	%		0.73	%		0.58	%		0.22	%
Provision for loan losses	$	3,564		$	1,692		$	5,986		$	1,701		$	760
Provision for loan losses to average loans (annualized)		1.07	%		0.53	%		1.89	%		0.56	%		0.26	%
Allowance for loan losses to total loans		1.44	%		1.44	%		1.45	%		1.18	%		1.17	%
Allowance for loan losses to nonperforming loans		105	%		100	%		109	%		162	%		219	%
Customer deposits to total assets		77	%		77	%		77	%		75	%		68	%
Brokered deposits and borrowed funds to total assets (b)		14	%		13	%		14	%		15	%		21	%

(a)  Past due loans include loans that are 30 days or more past due.

(b)  Borrowed funds include customer repurchase agreements and subordinated debt.

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CAPITAL BANK CORPORATION

Asset Quality – Loan Portfolio Analysis

(Unaudited)	As of September 30, 2009
	Loans Outstanding		Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		ALLL to Loans Outstanding
(Dollars in thousands)
Commercial:
Commercial and industrial	$	178,879	$	586		0.33	%	$	2,222		1.24	%
Municipal		18,382		–		–			10		0.05
Agriculture		15,670		–		–			112		0.71
Other		1,967		–		–			12		0.61
Total commercial		214,898		586		0.27			2,356		1.10
Commercial real estate:
Residential acquisition, development and construction		288,016		13,254		4.60			8,394		2.91
Other commercial real estate		410,729		1,737		0.42			4,243		1.03
Owner occupied		191,112		710		0.37			2,434		1.27
Total commercial real estate		889,857		15,701		1.76			15,071		1.69
Consumer		9,749		–		–			303		3.11
Residential:
First lien, closed-end		129,355		1,809		1.40			1,028		0.79
Junior lien, closed-end		16,498		96		0.58			303		1.84
Home equity lines		96,886		330		0.34			450		0.46
Total residential		242,739		2,235		0.92			1,781		0.73
Total loans	$	1,357,243	$	18,522		1.36	%	$	19,511		1.44	%

Asset Quality – Commercial Real Estate

Residential Acquisition, Development and Construction Portfolio Analysis by Type

(Unaudited)	As of September 30, 2009
	Residential Land / Development			Residential Construction			Total
(Dollars in thousands)
Loans outstanding	$	170,206		$	117,810		$	288,016
Loans outstanding in category to total loans		12.54	%		8.68	%		21.22	%
Nonaccrual loans	$	9,238		$	4,016		$	13,254
Nonaccrual loans to total loans in category		5.43	%		3.41	%		4.60	%
Allowance for loan losses	$	6,365		$	2,029		$	8,394
Allowance for loan losses to total loans in category		3.74	%		1.72	%		2.91	%

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CAPITAL BANK CORPORATION

Asset Quality – Commercial Real Estate

Residential Acquisition, Development and Construction Portfolio Analysis by Region

(Unaudited)

	As of September 30, 2009
	Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		ALLL to Loans Outstanding
(Dollars in thousands)
Triangle	$	213,382		74.09	%	$	7,657		3.59	%	$	6,630		3.11	%
Sandhills		19,900		6.91			–		–			481		2.42
Triad		5,732		1.99			–		–			61		1.06
Western		49,002		17.01			5,597		11.42			1,222		2.49
Total	$	288,016		100.00	%	$	13,254		4.60	%	$	8,394		2.91	%

Asset Quality – Commercial Real Estate

Other Commercial Real Estate Portfolio Analysis by Type

(Unaudited)

	As of September 30, 2009
	Commercial Land / Development			Commercial Construction			Multifamily			C&I Real Estate Secured			Total
(Dollars in thousands)
Loans outstanding	$	121,479		$	57,261		$	43,583		$	188,406		$	410,729
Loans outstanding in category to total loans		8.95	%		4.22	%		3.21	%		13.88	%		30.26	%
Nonaccrual loans	$	32		$	–		$	–		$	1,705		$	1,737
Nonaccrual loans to total loans category		0.03	%		0.00	%		0.00	%		0.90	%		0.42	%
Allowance for loan losses	$	1,361		$	367		$	356		$	2,159		$	4,243
Allowance for loan losses to total loans in category		1.12	%		0.64	%		0.82	%		1.15	%		1.03	%

Asset Quality – Commercial Real Estate

Other Commercial Real Estate Portfolio Analysis by Region

(Unaudited)

	As of September 30, 2009
	Loans Outstanding		Percent of Total Loans Outstanding			Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		ALLL to Loans Outstanding
(Dollars in thousands)
Triangle	$	283,002		68.90	%	$	37		0.01	%	$	2,929		1.03	%
Sandhills		37,920		9.23			709		1.87			510		1.34
Triad		33,751		8.22			971		2.88			384		1.14
Western		56,056		13.65			20		0.04			420		0.75
Total	$	410,729		100.00	%	$	1,737		0.42	%	$	4,243		1.03	%

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30, 2009 and December 31, 2008

	September 30, 2009			December 31, 2008
(Dollars in thousands except share data)	(Unaudited)
Assets
Cash and due from banks:
Interest-earning	$	43,529		$	26,621
Noninterest-earning		9,165			27,705
Federal funds sold and short term investments		–			129
Total cash and cash equivalents		52,694			54,455
Investment securities – available for sale, at fair value		258,619			272,944
Investment securities – held to maturity, at amortized cost		3,880			5,194
Loans – net of unearned income and deferred fees		1,357,243			1,254,368
Allowance for loan losses		(19,511	)		(14,795	)
Net loans		1,337,732			1,239,573
Premises and equipment, net		23,762			24,640
Bank-owned life insurance		22,571			22,368
Deposit premium, net		2,995			3,857
Deferred income tax		5,733			9,342
Accrued interest receivable		6,910			6,225
Other assets		20,054			15,634
Total assets	$	1,734,950		$	1,654,232
Liabilities
Deposits:
Demand, noninterest-bearing	$	136,228		$	125,281
Savings and interest-bearing checking		199,726			173,711
Money market deposit accounts		200,052			212,780
Time deposits less than $100,000		503,628			509,231
Time deposits $100,000 and greater		345,616			294,311
Total deposits		1,385,250			1,315,314
Repurchase agreements and federal funds purchased		9,464			15,010
Borrowings		147,000			132,000
Subordinated debentures		30,930			30,930
Other liabilities		12,781			12,464
Total liabilities		1,585,425			1,505,718
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $1,000 par value; 100,000 shares authorized; 41,279 shares issued and outstanding (liquidation preference of $41,279)		40,055			39,839
Common stock, no par value; 20,000,000 shares authorized; 11,300,369 and 11,238,085 shares issued and outstanding		139,784			139,209
Retained deficit		(35,465	)		(31,420	)
Accumulated other comprehensive income		5,151			886
Total shareholders’ equity		149,525			148,514
Total liabilities and shareholders’ equity	$	1,734,950		$	1,654,232

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CAPITAL BANK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2009 and 2008

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
(Dollars in thousands except per share data)
Interest income:
Loans and loan fees	$	18,720		$	17,875	$	52,224		$	55,485
Investment securities:
Taxable interest income		2,348			2,182		7,708			6,616
Tax-exempt interest income		759			801		2,286			2,435
Dividends		13			58		26			293
Federal funds and other interest income		18			15		34			103
Total interest income		21,858			20,931		62,278			64,932
Interest expense:
Deposits		6,797			7,837		21,596			24,935
Borrowings and repurchase agreements		1,506			2,267		4,782			7,333
Total interest expense		8,303			10,104		26,378			32,268
Net interest income		13,555			10,827		35,900			32,664
Provision for loan losses		3,564			760		11,242			2,175
Net interest income after provision for loan losses		9,991			10,067		24,658			30,489
Noninterest income:
Service charges and other fees		990			1,238		2,901			3,463
Mortgage fees and revenues		353			142		971			768
Other loan fees		57			392		549			892
Brokerage fees		155			169		468			570
Bank card services		409			357		1,133			1,010
Bank-owned life insurance		240			255		1,663			817
Net gain on investment securities		148			109		164			249
Gain on sale of branch		–			426		–			426
Other		155			179		488			559
Total noninterest income		2,507			3,267		8,337			8,754
Noninterest expense:
Salaries and employee benefits		5,128			5,065		16,945			15,237
Occupancy		1,471			1,097		4,192			3,297
Furniture and equipment		771			778		2,340			2,318
Data processing and telecommunications		555			565		1,759			1,525
Advertising		394			480		940			1,000
Office expenses		386			298		1,043			978
Professional fees		358			362		1,171			1,013
Business development and travel		268			360		843			1,033
Amortization of deposit premiums		287			256		862			770
Miscellaneous loan handling costs		339			252		874			570
Directors fees		295			360		1,131			949
Insurance		121			138		365			336
FDIC deposit insurance		474			214		1,882			442
Other		251			292		780			908
Total noninterest expense		11,098			10,517		35,127			30,376
Net income (loss) before tax (benefit) expense		1,400			2,817		(2,132	)		8,867
Income tax (benefit) expense		(2,143	)		805		(2,561	)		2,473
Net income	$	3,543		$	2,012	$	429		$	6,394
Dividends and accretion on preferred stock		590			–		1,764			–
Net income (loss) attributable to common shareholders	$	2,953		$	2,012	$	(1,335	)	$	6,394
Earnings (loss) per common share – basic	$	0.26		$	0.18	$	(0.12	)	$	0.57
Earnings (loss) per common share – diluted	$	0.26		$	0.18	$	(0.12	)	$	0.57

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CAPITAL BANK CORPORATION

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

For the Three Months Ended September 30, 2009, June 30, 2009 and September 30, 2008

Tax Equivalent Basis (1)

	September 30, 2009								June 30, 2009								September 30, 2008
(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	$	1,153,514		$	16,550		5.69	%	$	1,115,003		$	15,244		5.48	%	$	1,018,947		$	15,469		6.02	%
Home equity		93,651			983		4.16			94,054			974		4.15			84,441			1,133		5.32
Consumer and residential mortgage		83,034			1,276		6.15			76,514			1,194		6.24			73,103			1,273		6.97
Total loans		1,330,199			18,809		5.61			1,285,571			17,412		5.43			1,176,491			17,875		6.03
Investment securities (3)		263,513			3,512		5.33			278,033			3,731		5.37			250,896			3,452		5.50
Federal funds sold and interest-earning cash (4)		38,995			18		0.18			24,898			6		0.10			6,654			15		0.89
Total interest-earning assets		1,632,707		$	22,339		5.43	%		1,588,502		$	21,149		5.34	%		1,434,041		$	21,342		5.90	%
Cash and due from banks		8,256								15,294								22,517
Other assets		83,589								80,296								132,304
Allowance for loan losses		(19,262	)							(18,705	)							(14,052	)
Total assets	$	1,705,290							$	1,665,387							$	1,574,810
Liabilities and Equity
Savings deposits	$	29,267		$	11		0.15	%	$	29,609		$	13		0.18	%	$	30,169		$	30		0.39	%
Interest-bearing demand deposits		366,632			1,095		1.18			368,132			1,152		1.26			342,575			1,802		2.09
Time deposits		845,311			5,691		2.67			796,306			5,868		2.96			679,162			6,005		3.51
Total interest-bearing deposits		1,241,210			6,797		2.17			1,194,047			7,033		2.36			1,051,906			7,837		2.96
Borrowed funds		130,098			1,260		3.84			140,682			1,273		3.63			174,735			1,786		4.06
Subordinated debt		30,930			240		3.08			30,930			278		3.61			30,930			407		5.22
Repurchase agreements and fed funds purchased		10,646			6		0.22			12,010			7		0.23			27,039			74		1.09
Total interest-bearing liabilities		1,412,884		$	8,303		2.33	%		1,377,669		$	8,591		2.50	%		1,284,610		$	10,104		3.12	%
Noninterest-bearing deposits		134,721								130,460								112,456
Other liabilities		12,198								12,042								11,174
Total liabilities		1,559,803								1,520,171								1,408,240
Shareholders’ equity		145,487								145,216								166,570
Total liabilities and shareholders’ equity	$	1,705,290							$	1,665,387							$	1,574,810
Net interest spread (5)							3.10	%							2.84	%							2.78	%
Tax equivalent adjustment				$	481							$	394							$	411
Net interest income and net interest margin (6)				$	14,036		3.41	%				$	12,558		3.17	%				$	11,238		3.11	%

(1)	The tax equivalent basis is computed using a tax rate of 34%.
(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)	The Federal Reserve began paying interest on cash balances in the quarter ended December 31, 2008. For comparison purposes, average balances have been adjusted for all periods presented to include cash held at the Federal Reserve as interest earning.
(5)	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(6)	Net interest margin represents net interest income divided by average interest-earning assets.

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CAPITAL BANK CORPORATION

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

For the Nine Months Ended September 30, 2009 and 2008

Tax Equivalent Basis (1)

	September 30, 2009								September 30, 2008
(Dollars in thousands)	Average Balance			Amount Earned		Average Rate			Average Balance			Amount Earned		Average Rate
Assets
Loans receivable: (2)
Commercial	$	1,121,652		$	45,736		5.45	%	$	1,005,400		$	47,959		6.35	%
Home equity		93,855			2,923		4.16			81,626			3,555		5.80
Consumer and residential mortgage		78,467			3,654		6.21			75,032			3,971		7.06
Total loans		1,293,974			52,313		5.41			1,162,058			55,485		6.36
Investment securities (3)		276,649			11,200		5.40			251,028			10,596		5.63
Federal funds sold and interest-earning cash (4)		28,001			34		0.16			9,203			103		1.49
Total interest-earnings assets		1,598,624		$	63,547		5.31	%		1,422,289		$	66,184		6.20	%
Cash and due from banks		15,171								22,893
Other assets		80,917								138,346
Allowance for loan losses		(17,731	)							(13,791	)
Total assets	$	1,676,981							$	1,569,737
Liabilities and Equity
Savings deposits	$	29,225		$	37		0.17	%	$	30,363		$	112		0.49	%
Interest-bearing demand deposits		362,724			3,449		1.27			337,198			5,291		2.09
Time deposits		814,328			18,110		2.97			668,526			19,532		3.89
Total interest-bearing deposits		1,206,277			21,596		2.39			1,036,087			24,935		3.21
Borrowed funds		138,945			3,923		3.77			176,069			5,628		4.26
Subordinated debt		30,930			839		3.63			30,930			1,336		5.75
Repurchase agreements and fed funds purchased		12,156			20		0.22			32,575			369		1.51
Total interest-bearing liabilities		1,388,308		$	26,378		2.54	%		1,275,661		$	32,268		3.37	%
Noninterest-bearing deposits		130,061								114,676
Other liabilities		11,963								11,032
Total liabilities		1,530,332								1,401,369
Shareholders’ equity		146,649								168,368
Total liabilities and shareholders’ equity	$	1,676,981							$	1,569,737
Net interest spread (5)							2.77	%							2.83	%
Tax equivalent adjustment				$	1,269							$	1,252
Net interest income and net interest margin (6)				$	37,169		3.11	%				$	33,916		3.18	%

(1)	The tax equivalent basis is computed using a tax rate of 34%.
(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)	The Federal Reserve began paying interest on cash balances in the quarter ended December 31, 2008. For comparison purposes, average balances have been adjusted for all periods presented to include cash held at the Federal Reserve as interest earning.
(5)	Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(6)	Net interest margin represents net interest income divided by average interest-earning assets.

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