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): January 3, 2006

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)	(I.R.S. Employer Identification Number)

4901 Glenwood Ave.

Raleigh, North Carolina 27612

(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 1.01        Entry into a Material Definitive Agreement.

The material terms of the Employment Agreement entered into between Capital Bank, the banking subsidiary of Capital Bank Corporation, a North Carolina corporation (the “Company”), and A. Christine Baker, the Company’s newly appointed Executive Vice President and Chief Financial Officer (the “Employment Agreement”), are described in Item 5.02 of this report, which is incorporated by reference into this Item 1.01.

Item 2.01        Completion of Acquisition or Disposition of Assets.

On January 3, 2006, 1st State Bancorp, Inc., a Virginia corporation (“1st State Bancorp”) merged with and into the Company, pursuant to the Merger Agreement, dated June 29, 2005 (the “Merger Agreement”) by and between the Company and 1st State Bancorp (the “Merger”).

Under the terms of the Merger Agreement, each share of 1st State Bancorp common stock has been automatically converted into the right to receive, at the election of the holder and subject to certain allocation and proration procedures described in the Merger Agreement, either: (i) 2.434788 shares of the Company’s common stock, rounded to the nearest whole share; (ii) an amount equal to $37.15 in cash; or (iii) 1.684457 shares of the Company’s common stock, rounded to the nearest whole share, plus an amount equal to $11.4486 in cash. The Company will issue an aggregate of 4,882,630 shares of its common stock and pay a total of $33,185,195.76 to 1st State Bancorp shareholders. As a result of the Merger, each outstanding option to purchase shares of 1st State Bancorp common stock was terminated in exchange for a cash payment by the Company to each option holder in an amount equal to $37.15 per option minus the applicable exercise price of such option. In the aggregate, $6,929,741.28 in cash was paid to 1st State Bancorp option holders.

On January 3, 2006, the Company issued a press release announcing the completion of the Merger. A copy of the press release is attached to this Current Report on Form 8-K as Exhibit 99.1 and incorporated into this Item 2.01 by reference.

The foregoing description of the Merger is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which has been filed (by incorporation) as Exhibit 2.1 to this Current Report on Form 8-K and incorporated into this Item 2.01 by reference.

Item 5.02        Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

On January 3, 2006, in connection with the Merger, A. Christine Baker was appointed Executive Vice President and Chief Financial Officer of the Company and of Capital Bank, the Company’s banking subsidiary. Ms. Baker replaces William R. Lampley who has served as the Company’s interim Chief Financial Officer since July 18, 2005. Mr. Lampley’s last day with the Company will be January 31, 2006.

Since April 1985, Ms. Baker (Age 52) held the position of Treasurer and Secretary of 1st State Bancorp and served as the Executive Vice President, Secretary and Treasurer of 1^st State Bank, 1st State Bancorp’s banking subsidiary. Ms. Baker currently serves on the Board of the Alamance County Meals on Wheels, is active with First Presbyterian Church of Burlington and is a member of the Board of Trustees of Elon University.

At the effective time of the Merger, Ms. Baker terminated her existing employment agreement with 1st State Bank and the Company made a payment of $1,288,679 to Ms. Baker in full satisfaction and consideration of the change in control severance payments due to her in her employment agreement with

1st State Bank. In addition, Ms. Baker is entitled to receive the merger consideration (as described more fully in Item 2.01 above) with respect to the shares of 1st State Bancorp common stock and options to purchase shares of 1st State Bancorp common stock she held at the effective time of the Merger.

In connection with her appointment, Ms. Baker entered into an Employment Agreement with Capital Bank, which provides that she will be Executive Vice President and Chief Financial Officer of Capital Bank and of the Company. She will also continue to serve as Executive Vice President and Chief Financial Officer of 1st State Bank on an “at-will” basis pending completion of the merger of 1st State Bank with and into Capital Bank. The initial term of Ms. Baker’s Employment Agreement will be for one (1) year, and the term will be automatically renewed for additional one-year periods unless either party gives notice of intent not to renew.

In consideration for her service to the Company and Capital Bank, Ms. Baker will receive an annual salary of $185,000. She will be eligible to participate in Capital Bank’s management incentive plan and may participate in other benefit plans and programs which Capital Bank may provide from time to time.

Ms. Baker’s employment may be terminated for “cause” by Capital Bank or by Ms. Baker for “good reason.” “Cause” and “good reason” are defined in the Employment Agreement. The employment relationship may also be terminated by either Capital Bank or Ms. Baker without cause. If Capital Bank terminates the employment relationship without cause, or if Ms. Baker terminates the relationship for good reason, Ms. Baker will be entitled to receive as severance an amount equal to her then current annual salary plus the amount of any bonus she received from Capital Bank in the prior year. Additionally, she will be entitled to participate in the same benefit plans and programs she participated in immediately prior to the termination for twelve (12) months. The cost of such participation will be at no greater cost to her than the cost she bore immediately prior to the termination.

Ms. Baker has agreed that, during the term of her employment and for one (1) year following the termination of her employment (unless the termination is following a change in control, in which case the period will be six (6) months), she will not compete with Capital Bank or its parents, subsidiaries, or affiliates (collectively, the “Corporation”) or solicit or do business that is the same, similar to, or otherwise in competition with the business engaged in by Corporation, from or with persons or entities who are customers of the Corporation, who were customers of the Corporation at any time during the last year of Ms. Baker’s employment, or to whom the Corporation made proposals for business at any time during the last year of Ms. Baker’s employment or solicit for employment, any employee or other person who is then currently an employee of the Corporation or who was employed by the Corporation during the last year of Ms. Baker’s employment. These non-solicitation and non-competition provisions apply to any city, metropolitan area or county in which the Corporation does business or is located. If Capital Bank terminates the employment relationship without cause, or Ms. Baker terminates employment for good reason, then Ms. Baker can be relieved of her non-solicitation and non-competition obligations by waiving her right to receive severance.

The Employment Agreement also contains a change in control provision. If a change in control (as defined in the Employment Agreement) occurs and Ms. Baker’s employment is terminated by Capital Bank without cause, or by her for good reason, within certain defined time periods, then, depending upon when the termination occurs, Ms. Baker will be entitled to receive severance payments ranging from 1.0 to 2.99 times the amount of her annual salary and bonus received from Capital Bank for the prior bonus year. For as long as Ms. Baker receives severance payments, she will also be entitled to continue to participate in any benefit plans and programs in which she participated immediately prior to the termination of employment.

The foregoing description of the terms of the Employment Agreement is qualified in its entirety by reference to the complete text of the Employment Agreement, a copy of which is filed as Exhibit 10.1 to this Current Report on Form 8-K and is incorporated into this Item 5.02 by reference.

Item 9.01        Financial Statements and Exhibits.

(a) Financial statements of business acquired.

The audited consolidated financial statements for 1st State Bancorp for the periods specified in Rule 3-05(b) of Regulation S-X required to be furnished under this Item 9.01(a) are not included in this Current Report on Form 8-K. Such financial information will be furnished by amendment to this Current Report on Form 8-K no later than 71 calendar days after the date this Current Report on Form 8-K is required to be filed.

The interim financial information for the quarter ended December 31, 2005 required to be furnished under this Item 9.01(a) is not included in this Current Report on Form 8-K. Such financial information will be furnished by amendment to this Current Report on Form 8-K no later than 71 calendar days after the date this Current Report on Form 8-K is required to be filed.

(b) Pro forma financial information.

The pro forma financial information required to be furnished under this Item 9.01(b) is not included in this Current Report on Form 8-K. The pro forma financial information will be furnished by amendment to this Current Report on Form 8-K no later than 71 calendar days after the date this Current Report on Form 8-K is required to be filed.

(d) Exhibits

The following exhibits are being filed herewith:

Exhibit No.	Description
Exhibit 2.1	Merger Agreement, dated June 29, 2005, by and among Capital Bank Corporation and 1st State Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to Capital Bank Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 29, 2005)
Exhibit 2.2	List of Schedules Omitted from Merger Agreement included as Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to Capital Bank Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 29, 2005)
Exhibit 10.1	Employment Agreement, dated January 3, 2006, between Capital Bank and A. Christine Baker

Exhibit No.	Description
Exhibit 99.1	Press Release of Capital Bank Corporation dated January 3, 2006

SIGNATURE

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.

CAPITAL BANK CORPORATION
By:	/s/    B. Grant Yarber
	B. Grant Yarber Chief Executive Officer

Date: January 9, 2006

EXHIBIT INDEX

Exhibit No.	Description
Exhibit 2.1	Merger Agreement, dated June 29, 2005, by and among Capital Bank Corporation and 1st State Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to Capital Bank Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 29, 2005)
Exhibit 2.2	List of Schedules Omitted from Merger Agreement included as Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to Capital Bank Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 29, 2005)
Exhibit 10.1	Employment Agreement, dated January 3, 2006, between Capital Bank and A. Christine Baker
Exhibit 99.1	Press Release of Capital Bank Corporation dated January 3, 2006

EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (“Agreement”), dated as of January 3, 2006, is made and entered into by CAPITAL BANK (hereinafter the “Bank”), and A. CHRISTINE BAKER (hereinafter the “Employee”).

Capital Bank Corporation, a North Carolina corporation and a financial holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, and a North Carolina bank holding company (“CBC”), and 1st State Bancorp, Inc., a Virginia corporation and a holding company registered with the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended, and a North Carolina bank holding company (the “Company”), are parties to that certain Merger Agreement dated June 29, 2005 pursuant to which the Company is being merged (the “Merger”) with and into CBC effective as of the date of this Agreement (the “Effective Time”). Following the Merger, CBC may elect to merge (the “Bank Merger”) 1st State Bank, a North Carolina bank and, as a result of the Merger, a wholly owned subsidiary of CBC (the “Company Bank”), and the Bank, a North Carolina bank and a wholly owned subsidiary of CBC.

The Bank desires to employ Employee and Employee desires to accept such employment on the terms set forth below.

In consideration of the mutual promises set forth below and other good and valuable consideration, the receipt and sufficiency of which the parties acknowledge, the Bank and Employee agree as follows:

1. Employment. The Bank employs Employee and Employee accepts employment on the terms and conditions set forth in this Agreement.

2. Nature Of Employment. Employee shall serve as Executive Vice President and Chief Financial Officer and shall have such responsibilities and authority consistent with such position as may be reasonably assigned to her by the Bank. Employee shall also serve as Executive Vice President and Chief Financial Officer of CBC. Employee shall devote her full time and attention and best efforts to perform successfully her duties and advance the Bank’s interests. Employee shall abide by the Bank’s policies, procedures, and practices as they may exist from time to time.

During this employment, Employee shall have no other employment of any nature whatsoever without the prior consent of the Bank; provided, however, this Agreement shall not prohibit Employee from personally owning and dealing in stocks, bonds, securities, real estate, commodities or other investment properties for her own benefit or those of her immediate family. Notwithstanding the foregoing, Employee shall also continue to serve as Executive Vice President and Chief Financial Officer of the Company Bank, on an “at will” basis, pending completion of the Bank Merger.

3. Term. Subject to the earlier termination provisions set forth in Section 5, the original term of this Agreement shall be one (1) year commencing at the Effective Time, and terminating on the first anniversary of the Effective Time, and, upon expiration of the original term or any renewal term, the term shall be automatically renewed for an additional one (1) year period unless, at least thirty (30) days prior to the renewal date, either party gives notice of its intent not to continue the relationship. During any renewal term, the terms, conditions and provisions set forth in this Agreement shall remain in effect unless modified in accordance with Section 11.

4. Compensation and Benefits.

(a) Base Salary. Employee’s initial annual base salary for all services rendered shall be One Hundred Eight-Five Thousand and No/100 Dollars ($185,000) (less applicable withholdings), payable in accordance with the Bank’s policies, procedures, and practices as they may exist from time to time. Employee’s salary periodically may be reviewed and adjusted at the Bank’s discretion in accordance with the Bank’s policies, procedures and practices as they may exist from time to time.

(b) Incentive Plan. Employee shall be eligible to participate in the Bank’s Management Incentive Plan in accordance with the applicable terms, conditions, and eligibility requirements of that Plan, some of which are in the plan administrator’s discretion, as they may exist from time to time.

(c) Benefits. Employee may participate in any medical insurance or other employee benefit plans and programs which may be made available from time to time to other Bank employees at Employee’s level; provided, however, that Employee’s participation in such benefit plans and programs is subject to the applicable terms, conditions, and eligibility requirements of those plans and programs, some of which are within the plan administrator’s discretion, as they may exist from time to time.

(d) Expenses. Employee shall be reimbursed by the Bank for any reasonable and necessary business expenses incurred by Employee on behalf of the Bank or in connection with Employee’s performance of her duties hereunder. Such reimbursement shall be in accordance with the Bank’s practices or policies as they may exist from time to time.

(e) Vacation. Employee shall be entitled to four (4) weeks of vacation during calendar year 2006 and thereafter vacation entitlement shall be in accordance with the Bank’s policies. Such vacation shall be taken in accordance with the Bank’s policies and practices as they may exist from time to time.

5. Termination of Employment and Post-Termination Compensation.

(a) With Notice. Either the Bank or Employee may terminate the employment relationship at any time for any reason or no reason by giving thirty (30) days’ written notice to the other party.

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(b) Cause, Disability, or Death. The Bank may terminate Employee’s employment immediately for “Disability,” “Cause,” or in the event of Employee’s death. For purposes of this Agreement, Disability shall mean Employee’s mental or physical inability to perform the essential functions of her duties satisfactorily for a period of one hundred eighty (180) consecutive days or one hundred eighty (180) days within a 365-day period as determined by the Bank in its reasonable discretion and in accordance with applicable law. For purposes of this Agreement, “Cause” shall mean: (i) any act of Employee involving dishonesty; (ii) any material violation by Employee of any Bank rule, regulation, or policy; (iii) gross negligence committed by Employee; (iv) material failure of Employee to perform her duties hereunder; or (v) Employee’s breach of any of the express obligations of this Agreement.

(c) Post-Termination Compensation.

(i) In the event of termination for Cause or termination upon the expiration of the original or any renewal term of this Agreement (non-renewal), the Bank’s obligation to compensate Employee ceases on the date of termination except as to the amounts of salary due at that time.

(ii) In the event of a termination for death or Disability, the Bank’s obligation to compensate Employee ceases on the date of termination, except as to any salary and prorated bonuses to which she may be entitled as of the date of termination. The Bank shall pay any such amounts to Employee or Employee’s estate.

(iii) If, prior to expiration of the original or any renewal term of this Agreement, the Bank terminates Employee’s employment without Cause or Employee terminates her employment for Good Reason (as defined below), then Employee upon her execution of an enforceable general release in a form prepared by the Bank shall be entitled to (A) receive a gross amount equal to her then current annual base salary plus the amount of bonus paid to Employee by the Bank (excluding any bonus paid by 1^st State Bank or 1^st State Bancorp, Inc.), if any, in the prior bonus year with the Bank, payable in substantially equal amounts over the twelve (12) month period following such termination; and (B) for the period of time Employee receives payments pursuant to Section 5(c)(iii)(A), participate in all life insurance, retirement, health, accidental death and dismemberment, and disability plans and other benefit programs and other services paid by the Bank for Employee in which Employee participates immediately prior to the termination, provided that Employee’s continued participation is possible under the applicable terms, conditions and eligibility requirements of such plans and programs. Employee’s continued participation in such plans and programs shall be at no greater cost to Employee than the cost she bore for such participation immediately prior to termination. If Employee’s participation in any such plan or program is barred, the Bank shall arrange upon comparable terms, and at no greater cost to Employee than the cost she bore for such plans and programs prior to termination, to provide Employee with benefits substantially similar to, or greater than, those which she is entitled to receive under any such plan or program.

For purposes of this Section 5(c), Good Reason shall mean the occurrence of any of the following events or conditions without Employee’s prior written consent:

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(A) a change in Employee’s status, title, position, or responsibilities (including reporting responsibilities) which represents a material adverse change from her status, title, position, or responsibilities in effect immediately prior thereto; the assignment to Employee of any duties or responsibilities which are materially inconsistent with her status, title, position or responsibilities; or any removal of Employee from or failure to reappoint or re-elect her to any of such positions, status, or title (including positions, titles, and responsibilities with any affiliate), except in connection with the termination of her employment for Disability, Cause, or death, or by Employee other than for Good Reason;

(B) the Bank’s requiring Employee to be based at any place outside a thirty (30) mile radius from Raleigh, North Carolina, except for reasonably required travel on the Bank’s business;

(C) any material breach by the Bank of any express provision of this Agreement.

6. Non-Solicitation/Non-Compete. Employee acknowledges that by virtue of Employee’s employment with the Bank, Employee shall have access to and control of confidential and proprietary information concerning the Bank’s and/or its parents’, subsidiaries’ or affiliates’ (collectively, the “Corporation”) business and that the Corporation’s business depends to a considerable extent on the individual skills, efforts, and leadership of Employee. Additionally, Employee acknowledges that the covenants contained in this Section 6: are reasonably necessary to protect the legitimate business interests of the Corporation; are described with sufficient accuracy and definiteness to enable her to understand the scope of the restrictions imposed on her; and were disclosed to her prior to the commencement of her employment, such employment being conditioned on her execution of an agreement containing such terms. Accordingly and in consideration of the Corporation’s commitments to Employee under this Agreement, Employee expressly covenants and agrees that Employee shall not, without the prior consent of the Bank, during her employment and, subject to Section 6(c) below, for one (1) year following the cessation of her employment regardless of the reason for the cessation,

(a) on Employee’s own or another’s behalf, whether as an officer, director, stockholder, partner, associate, owner, employee, consultant or otherwise:

(i) within any city, metropolitan area or county in which the Corporation does business or is located, engage in any business activity (or assist others to engage in any business activity) that directly competes with the Corporation;

(ii) solicit or do business that is the same, similar to, or otherwise in competition with the business engaged in by the Corporation from or with persons or entities who are customers of the Corporation, who were customers of the Corporation at any time during the last year of Employee’s employment with the Bank, or to whom the Corporation made proposals for business at any time during the last year of Employee’s employment with the Bank; or

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(iii) employ, offer employment to, or otherwise solicit for employment, any employee or other person who is then currently an employee of the Corporation or who was employed by the Corporation during the last year of Employee’s employment with the Bank.

(b) within any city, metropolitan area or county in which the Corporation does business or is located, be employed or otherwise engaged by any entity that engages in the same, similar or otherwise competitive business as the Corporation, to provide the same or similar services that Employee provided to the Corporation.

(c) (i) If (A) the Bank terminates Employee’s employment without Cause or Employee terminates her employment for Good Reason and (B) Employee waives in writing her right to receive payments pursuant to Section 5(c)(iii) hereof, the restrictions on Employee’s ability to compete with the Bank contained in this Section 6 shall terminate on the later of (A) the cessation of Employee’s employment with the Bank or (B) the Bank’s receipt of Employee’s waiver described in this Section 6(c)(i). (ii) In the event that Employee’s employment terminates under any of the circumstances described in Section 8(b), the restrictions on Employee’s ability to compete with the Bank contained in this Section 6 shall terminate six (6) months following cessation of Employee’s employment with the Bank.

7. Proprietary Information And Property. Employee shall not, at any time during or following employment with the Bank, disclose or use, except in the course of her employment with the Bank or as may be required by law, any confidential or proprietary information of the Corporation received by Employee, whether such information is in Employee’s memory or embodied in writing or other physical form.

Confidential or proprietary information is information which is not generally available to the general public, or Corporation’s competitors, or ascertainable through common sense or general business knowledge; including, but not limited to data, compilations, methods, financial data, financial plans, business plans, product plans, lists of actual or potential customers, marketing information and information regarding executives and employees.

All records, files or other objects maintained by or under the control, custody or possession of the Corporation or its agents in their capacity as agents shall be and remain the Corporation’s property. Upon cessation of her employment or the Corporation’s earlier request, Employee shall return to the Corporation all property (including, but not limited to, credit cards, keys, company car, cell phones, computer hardware and software, records, files, manuals and other documents in whatever form they exist, whether electronic, hard copy or otherwise and all copies, notes or summaries thereof) which she received in connection with her employment. At the Corporation’s request, Employee shall bring current all such records, files or documents before returning them.

Upon notice of cessation of her employment with the Bank, Employee shall fully cooperate with the Bank in winding up her pending work and transferring her work to those individuals designated by the Bank.

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8. Change in Control.

(a) Definition. For purposes of this Agreement, “Change in Control” shall mean any of the following:

(i) Any “person” (as such term is used in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Act”)) acquiring “beneficial ownership”) (as such term is used in Rule 13d-3 under the Act), directly or indirectly, of securities of Capital Bank Corporation, the parent holding company of the Bank (“CBC”) representing fifty percent (50%) or more of the combined voting power of CBC’s then outstanding voting securities (the “Voting Power”), but excluding for this purpose an acquisition by CBC or an “affiliate” (as defined in Rule 12b-2 under the Act) or by an employee benefit plan of CBC or of an affiliate.

(ii) The individuals who constitute the Board of Directors of CBC (“Board”) on the effective date hereof or their successors duly appointed in the ordinary course (collectively, the “Incumbent Directors”) cease to constitute at least a majority of the Board. Any director whose nomination is approved by a majority of the Incumbent Directors shall be considered an Incumbent Director; provided, however, that no Director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of CBC shall be considered an Incumbent Director.

(iii) The shareholders of CBC approve a reorganization, share exchange, merger or consolidation related to CBC or the Bank following which the owners of the Voting Power of CBC immediately prior to the closing of such transaction do not beneficially own, directly or indirectly, more than fifty percent (50%) of the Voting Power of the Bank.

(iv) The shareholders of the Bank approve a complete liquidation or dissolution of the Bank, or a sale or other disposition of all or substantially all of the capital stock or assets of the Bank, but excluding for this purpose any sale or disposition of all or substantially all of the capital stock or assets of the Bank to an “affiliate” (as defined in Rule 12b-2 under the Act) of CBC.

Change in Control shall not include a transaction, or series of transactions, whereby CBC or the Bank becomes a subsidiary of a holding company if the shareholders of the holding company are substantially the same as the shareholders of CBC prior to such transaction or series of series of transactions.

(b) Change in Control Termination. After the occurrence of a Change in Control, Employee shall be entitled to receive payments and benefits pursuant to this Agreement in the following circumstances:

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(i) if within the period beginning ninety (90) days prior to and ending three (3) years after the occurrence of a Change in Control, the Bank terminates Employee’s employment for any reason other than Cause, Disability, or death; or

(ii) if within three (3) years after the occurrence of a Change in Control, Employee terminates her employment with the Bank for Good Reason. For purposes of this Section 8(b), Good Reason shall include the failure of CBC to obtain an agreement, satisfactory to Employee, from any successor or assign of CBC to assume and agree to perform this Agreement.

(c) Change in Control Benefits. In the event that Employee’s employment with the Bank terminates under any of the circumstances described above in this Section 8 at any time, Employee shall be entitled to receive all accrued compensation and any pro rata bonuses to which she may be entitled and which Employee may have earned up to the date of termination and, upon Employee’s execution of an enforceable general release in a form prepared by the Bank, severance payments and benefits according to the following schedule and terms:

(i) a severance payment equal to: 2.99 times the amount of Employee’s then current annual base salary plus the amount of bonus paid to Employee, if any, in the prior bonus year by the Bank (excluding any bonus paid by 1^st State Bank or 1^st State Bancorp, Inc.), in the event the termination occurs no later than twelve (12) months after the occurrence of a Change in Control; 2.0 times the amount of Employee’s then current annual base salary plus the amount of bonus paid to Employee, if any, in the prior bonus year by the Bank (excluding any bonus paid by 1^st State Bank or 1^st State Bancorp, Inc.), in the event the termination occurs more than twelve (12) months but within (up to and including) twenty-four (24) months after the occurrence of a Change in Control; or 1.0 times the amount of Employee’s then current annual base salary plus the amount of bonus paid to Employee, if any, in the prior bonus year by the Bank (excluding any bonus paid by 1^st State Bank or 1^st State Bancorp, Inc.), in the event the termination occurs more than twenty-four (24) months but within (up to and including) thirty-six (36) months after the occurrence of a Change in Control. The severance payment shall be paid in substantially equal monthly installments without interest, commencing one month after the date of termination.

(ii) a continuation of benefits for the period of time Employee receives the severance benefits described in Section 8(c)(i) above as follows: During such time, the Bank shall maintain and Employee shall be entitled to participate in all life insurance, retirement, health, accidental death and dismemberment, and disability plans and other benefit programs and other services paid by the Bank for Employee in which Employee participated immediately prior to the termination, provided that Employee’s continued participation is possible under the applicable terms, conditions and eligibility requirements of such plans and programs. Employee’s continued participation in such plans and programs shall be at no greater cost to Employee than the cost she bore for such participation immediately prior to termination. If Employee’s participation in any such plan or program is barred, the Bank shall arrange upon comparable terms, and at no greater cost to Employee than the cost she bore for such plans and programs prior to termination,

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to provide Employee with benefits substantially similar to, or greater than, those which he is entitled to receive under any such plan or program; and

(iii) a lump sum payment (or otherwise as specified by Employee to the extent permitted by the applicable plan) of any and all amounts contributed to a Bank pension or retirement plan which Employee is entitled to under the terms of any such plan. In the event Employee fails to execute the general release described above, he shall receive any such payments in accordance with the payment provisions of the applicable plan(s).

(d) Limitation on Payments. To the extent that any of the payments and benefits provided for under this Agreement or otherwise payable to Employee constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and but for this Section 8 would be subject to the excise tax imposed by Section 4999 of the Code, the Bank shall reduce the aggregate amount of such payments and benefits such that the present value thereof (as determined under the Code and the applicable regulations) is equal to 2.99 times Employee’s “base amount” as defined in Section 280G(b)(3) of the Code.

9. Survival. The terms and conditions of Sections 6 and 7 shall survive termination of this Agreement and/or Employee’s employment and shall not be affected by any change or modification of this Agreement unless specific reference is made to such sections.

10. Remedies. Employee agrees that her breach or threatened violation of Sections 6 and 7, will result in immediate and irreparable harm to the Corporation for which legal remedies would be inadequate. Therefore, in addition to any legal or other relief to which the Corporation may be entitled, (a) the Corporation may seek legal and equitable relief, including but not limited to, preliminary and permanent injunctive relief, (b) the Corporation will be released of its obligations under this Agreement, including but not limited to, payments pursuant to Section 5, and (c) Employee will indemnify the Corporation for all expenses, including attorneys’ fees, in seeking to enforce these paragraphs.

11. Waiver Of Breach. The Bank’s or Employee’s waiver of any breach of a provision of this Agreement shall not waive any subsequent breach by the other party.

12. Entire Agreement. This Agreement: (i) supersedes all other understandings and agreements, oral or written, between the parties with respect to the subject matter of this Agreement; and (ii) constitutes the sole agreement between the parties with respect to this subject matter. Each party acknowledges that: (i) no representations, inducements, promises or agreements, oral or written, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement; and (ii) no agreement, statement or promise not contained in this Agreement shall be valid. No change or modification of this Agreement shall be valid or binding upon the parties unless such change or modification is in writing and is signed by the parties.

13. Severability. If a court of competent jurisdiction holds that any provision or sub-part thereof contained in this Agreement is invalid, illegal or unenforceable, that invalidity,

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illegality or unenforceability shall not affect any other provision in this Agreement. Additionally, if any of the provisions, clauses or phrases set forth in Section 6 or 7 of this Agreement are held unenforceable by a court of competent jurisdiction, then the parties desire that such provision, clause or phrase be “blue-penciled” or rewritten by the court to the extent necessary to render it enforceable.

14. Parties Bound. The terms, provisions, covenants and agreements contained in this Agreement shall apply to, be binding upon and inure to the benefit of the Bank’s successors and assigns. The Bank, at its discretion, may assign this Agreement. Employee may not assign this Agreement without the Bank’s prior written consent.

15. Governing Law. This Agreement and the employment relationship created by it shall be governed by North Carolina law. The parties hereby consent to exclusive jurisdiction in North Carolina for the purpose of any litigation relating to this Agreement and agree that any litigation by or involving them relating to this Agreement shall be conducted in the court of Wake County or the federal court of the United States for the Eastern District of North Carolina.

[Signature Page Follows]

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[Signature Page to Employment Agreement]

IN WITNESS WHEREOF, the parties have entered into this Agreement on the day and year written below.

EMPLOYEE
/s/ A. Christine Baker		January 3, 2006
A. Christine Baker		Date
CAPITAL BANK
By:	/s/ B. Grant Yarber	January 3, 2006
	Name: B. Grant Yarber Title:   President and             Chief Executive Officer	Date
CAPITAL BANK CORPORATION
By:	/s/ B. Grant Yarber	January 3, 2006
	Name: B. Grant Yarber Title:   President and             Chief Executive Officer	Date

EX-99.1

Exhibit 99.1

News Release	CONTACT:
FOR IMMEDIATE RELEASE	B. Grant Yarber President and Chief Executive Officer Capital Bank Corporation Phone: (919) 645-3494 Email: gyarber@capitalbank-nc.com

Capital Bank Corporation Completes Merger

With 1st State Bancorp, Inc.

RALEIGH, N.C. – January 3, 2006 – Capital Bank Corporation (Nasdaq: CBKN), headquartered in Raleigh, N.C. and the parent company of Capital Bank, today announced that it has completed the acquisition of 1st State Bancorp, Inc. (Nasdaq: FSBC) headquartered in Burlington, N.C. and the parent company of 1st State Bank. Additionally, A. Christine Baker, who served as Chief Financial Officer of 1st State Bancorp, has been named Executive Vice President and Chief Financial Officer for Capital Bank Corporation. Fairfax C. Reynolds, Executive Vice President of 1st State Bank since 1989, has been named Executive Vice President and Regional President of Capital Bank. Four Burlington businessmen, James A. Barnwell, Jr., Ernest A. Koury, Jr., James G. McClure, Jr. and Richard H. Shirley will join Capital Bank’s Board of Directors in January 2006.

The aggregate purchase price for 1st State Bancorp was approximately $115 million, and the consideration paid was a combination of cash and Capital Bank Corporation common stock, as more fully described in Capital Bank Corporation’s June 29, 2005 announcement. As a result of this acquisition, Capital Bank will have approximately 22 percent of the deposits in Alamance County, North Carolina. The combined company, which will operate as Capital Bank Corporation, will have approximately $1.3 billion in assets and $1.0 billion in deposits. 1st State Bank will operate as a separate subsidiary of Capital Bank Corporation until its locations, accounts and ATMs are merged into Capital Bank on January 17, 2006.

**more**

P. O. Box 18949 Ÿ Raleigh, NC 27619-8949 Ÿ Phone (919) 645-6400 Ÿ Fax (919) 645-6353 Ÿ www.capitalbank-nc.com

“We are very pleased to welcome 1st State Bank clients and associates to the Capital Bank team,” said B. Grant Yarber, President and CEO. “We believe this combination enhances our ongoing commitment to serving the Triad. We are excited about the opportunity to build upon these strong customer relationships as we continue to provide the same exceptional, personalized service for which 1st State Bank and Capital Bank are known.”

Capital Bank Corporation, headquartered in Raleigh, N.C., with more than $1.3 billion in total assets, offers a broad range of financial services. Capital Bank operates 25 banking offices in Asheville (3), Burlington (4), Cary, Graham (2), Greensboro, Hickory, Mebane, Morrisville, Oxford, Pittsboro, Raleigh (4), Sanford (3), Siler City, and Wake Forest. 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 ability of Capital Bank Corporation to realize expected synergies from this acquisition, the ability of Capital Bank Corporation to successfully integrate the operations of First State Bancorp, Inc., the effects of future economic conditions, governmental fiscal and monetary policies, legislative and regulatory changes, the risks of changes in interest rates, and the effects of competition. 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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