UNITED STATES ~~SECURITIES~~ ~~AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2010~~2011

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

For the transition period from ~~_____________~~ to ~~_____________~~

Commission file number 0-14289

LOGO

GREEN BANKSHARES, INC.

(Exact name of registrant as specified in its charter)


Tennessee		62-1222567
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 North Main Street, Greeneville, Tennessee		37743-4992
(Address of principle executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (423) 639-5111

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of each Exchange on which Registered
Common Stock — $2.00 par value		Nasdaq Global Select Market
Common Stock - $.01 par value		Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: ~~None~~

~~Indicate~~None ~~by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ~~

Indicate by check mark if the registrant is ~~not~~a ~~required~~well-known toseasoned ~~file~~issuer, ~~reports~~as ~~pursuant~~defined toin ~~Section 13~~Rule ~~or Section~~405 ~~15(d)~~ of the Securities Act. YES o ¨ NO x þ

Indicate by check mark ~~whether~~if the registrant ~~(1) has~~is ~~filed~~not ~~all reports~~ required to befile ~~filed~~reports by pursuant to Section 13 or Section 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 x o

Indicate by check mark whether the registrant (1) has ~~submitted~~filed ~~electronically~~all ~~and~~reports ~~posted on its corporate Web site, if any, every Interactive Data File~~ required to be ~~submitted~~filed ~~and~~by ~~posted pursuant~~Section 13 toor ~~Rule 405~~15(d) of ~~Regulation S-T~~the (§Securities ~~232.405~~Exchange Act of ~~this~~1934 ~~chapter)~~ during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such reports), and ~~post~~(2) has been subject to such ~~files).~~filing ~~Yes o~~requirements Nofor o the past 90 days. YES x NO ¨

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~has ~~filers~~submitted ~~pursuant~~electronically toand ~~Item 405~~posted ofon ~~Regulation S-K (§~~its ~~229.405~~corporate ofWeb ~~this~~site, ~~chapter)~~if isany, ~~not~~every ~~contained~~Interactive ~~herein,~~Data ~~and~~File ~~will~~required ~~not~~to be ~~contained,~~submitted and posted pursuant to ~~the~~Rule ~~best~~405 of ~~registrant’s~~ ~~knowledge,~~Regulation inS-T ~~definitive~~(§ ~~proxy~~232.405 orof ~~information~~this ~~statements~~chapter) ~~incorporated~~during bythe ~~reference~~preceding ~~in Part III~~12 ofmonths ~~this~~(or ~~Form~~for ~~10-K~~such orshorter ~~any~~period ~~amendment~~that the registrant was required to ~~this~~submit ~~Form~~and ~~10-K~~post such files). Yes x No ¨ o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o¨ Accelerated filer þ¨ Non-accelerated filer o¨ (Do not check if a smaller reporting company) Smaller reporting company ox

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o ¨ NO x þ

The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, ~~2010~~ 2011, the last business day of the registrant’s most recently completed second fiscal quarter, ~~was~~ was approximately $~~151~~ 32 million. The market value calculation was determined using the closing sale price of the registrant’s common stock on June 30, ~~2010~~2011, as reported on the Nasdaq Global Select Market. For purposes of this calculation, the term “affiliate” refers to all directors, executive officers and 10% shareholders of the registrant. As of the close of business on ~~February~~April 285, ~~2011~~2012, 13 133,~~188~~160,~~896~~384 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following lists the documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

1. Portions of Proxy Statement for ~~2011~~2012 Annual Meeting of Shareholders. (Part III)

TABLE OF CONTENTS

PART I
			PAGE
	ITEM 1. BUSINESS
		PART I
	ITEM 1A. RISK FACTORS
ITEM 1		BUSINESS		3
	ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1A		RISK FACTORS		27
	ITEM 2. PROPERTIES
ITEM 1B		UNRESOLVED STAFF COMMENTS		50
	ITEM 3. LEGAL PROCEEDINGS
ITEM 2		PROPERTIES		50
	ITEM 4. REMOVED AND RESERVED
ITEM 3		LEGAL PROCEEDINGS		50
PART II
ITEM 4		MINE SAFETY DISCLOSURES		51
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
		PART II
	ITEM 6. SELECTED FINANCIAL DATA
ITEM 5		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		52
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 6		SELECTED FINANCIAL DATA		53
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		57
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 7A		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		75
		CONSOLIDATED BALANCE SHEETS
ITEM 8		FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		75
		CONSOLIDATED STATEMENTS OF INCOME
ITEM 9		CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		137
		CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
ITEM 9A		CONTROLS AND PROCEDURES		137
		CONSOLIDATED STATEMENTS OF CASH FLOWS
ITEM 9B		OTHER INFORMATION		138
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		PART III
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 10		DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		139
	ITEM 9A. CONTROLS AND PROCEDURES
ITEM 11		EXECUTIVE COMPENSATION		139
	ITEM 9B. OTHER INFORMATION
ITEM 12		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS		139
PART III
ITEM 13		CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		139
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 14		PRINCIPAL ACCOUNTANT FEES AND SERVICES		139
	ITEM 11. EXECUTIVE COMPENSATION
		PART IV
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 15		EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		139
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
Exhibit 10.51
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1
Exhibit 99.2

PART I

~~Forward~~CAUTIONARY NOTE REGARDING FORWARD-~~Looking~~LOOKING ~~Statements~~ STATEMENTS

~~The~~This ~~information~~document ~~contained herein~~ contains forward-looking statements ~~that involve a number of risks and uncertainties~~. AAny ~~number~~statements ofabout ~~factors~~our expectations, ~~including those discussed herein~~beliefs, ~~could cause results to differ materially from those anticipated by such forward-looking statements which are within the meaning of that term in Section 27A of the Securities Act of 1933~~plans, ~~as amended~~predictions, ~~and Section 21E of the Securities Exchange Act of 1934~~forecasts, ~~as amended. In addition~~objectives, ~~such forward-looking statements are necessarily dependent upon~~ assumptions, ~~estimates~~or ~~and~~future ~~data~~events ~~that may be incorrect~~ or ~~imprecise. Accordingly,~~performance ~~any~~are ~~forward-looking statements included herein do~~ not ~~purport to be predictions of~~historical ~~future~~facts ~~events or circumstances~~ and may ~~not~~ be ~~realized. Forward~~forward-looking. These statements ~~can~~are ~~be identified by~~often, ~~among~~but ~~other~~not ~~things~~always, made through the use of ~~forward-looking~~words ~~terminology~~or phrases such as “~~trends~~anticipate,” ~~“assumptions,”~~ “~~target~~believes,” “~~guidance~~can,” “~~outlook~~could,” “~~opportunity~~may,” “~~future~~predicts,” ~~“plans,” “goals,”~~ “~~objectives~~potential,” “~~expectations~~should,” “~~near-term,” “long-term,” “projection,” “may,” “~~will,” “~~would~~estimate,” ~~“could,”~~ “~~expect~~plans,” “~~intend~~projects,” “~~estimate~~continuing,” “~~anticipate~~ongoing,” “~~believe~~expects,” “~~potential,~~intends” ~~“regular,”~~and ~~or “continue”~~similar orwords ~~the negatives thereof,~~ or ~~other variations thereon of comparable terminology~~phrases. Accordingly, orthese ~~by discussions of strategy or intentions. Such~~ statements ~~may include, but~~ are ~~not~~only ~~limited~~predictions ~~to, projections~~and ofinvolve ~~revenue~~estimates, ~~income~~known orand ~~loss,~~unknown ~~expenditures~~risks, ~~acquisitions,~~assumptions ~~plans~~and ~~for~~uncertainties ~~future~~that ~~operations, financing~~could ~~needs~~cause oractual ~~plans~~results ~~relating~~ to ~~services~~differ ofmaterially ~~the~~from ~~Company,~~those asexpressed ~~well~~in ~~as assumptions relating to the foregoing~~them. ~~The~~Our ~~Company’s~~ actual results ~~may~~could differ materially from ~~the~~those ~~results~~ anticipated in such forward-looking statements ~~due~~as to a ~~variety~~result of several factors, ~~including,~~more ~~but~~fully ~~not~~described ~~limited~~under tothe ~~those identified~~caption in “~~Item 1A.~~ Risk Factors” ~~in this Form 10-K~~ and ~~(1) deterioration~~elsewhere in ~~the~~this financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (2) continuation of the historically low short-term interest rate environment; (3) changes in loan underwritingdocument, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (4) increased levels of non-performing and repossessed assets and the ability to resolve these may result in future losses; (5) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (6) rapid fluctuations or unanticipated changes in interest rates; (7) the impact of governmental restrictions on entities participating in the Capital Purchase Program (the “CPP”) of the United States Department of the Treasury (the “Treasury”); (8) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including ~~regulatory or legislative developments, like~~ the ~~Dodd-Frank~~appendices Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), arising out of current unsettled conditions in the economy (9) the results of regulatory examinations; (10) the remediation efforts related to the Company’s material weakness in its internal control over financial reporting; (11) increased competition with other financial institutions in the markets that the Bank serves; (12) the Company recording a further valuation allowance related to its deferred tax asset; (13) exploring alternatives available for the future repayment or conversion of the preferred stock issued in the CPP; (14) further deterioration in the valuation of other real estate owned (“OREO”); (15) inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions to raise capital if necessary to comply with any regulatory capital requirements; and (16) the loss of key personnelhereto. ~~The Company undertakes no obligation to update forward-looking statements.~~

~~Readers~~Any ~~are~~or ~~cautioned~~all ~~not~~of toour ~~place undue reliance on~~ forward-looking statements ~~made~~ in this document, ~~since~~may ~~the~~turn ~~statements~~out ~~speak~~to ~~only~~be asinaccurate. ofThe ~~the~~inclusion ~~document’s~~of ~~date.~~this ~~All~~ forward-looking ~~statements included~~information inshould ~~this~~not be ~~Annual~~regarded ~~Report~~as ona ~~Form 10-K~~representation ~~are expressly qualified in their entirety~~ by the ~~cautionary~~ ~~statements~~Company inor ~~this~~any ~~section~~other ~~and~~person tothat the ~~more~~future ~~detailed~~plans, ~~risk~~estimates ~~factors~~or ~~included~~expectations ~~below~~contemplated ~~under Part~~by I,the ~~Item 1A~~Company ~~“Risk~~will ~~Factors”~~be achieved. The Company ~~has~~based nothese ~~obligation~~forward-looking ~~and~~statements ~~does~~largely ~~not~~on ~~intend~~current toexpectations ~~publicly~~and ~~update~~projections orabout ~~revise~~future ~~any~~events ~~forward-looking~~and ~~statements~~financial ~~contained~~trends inthat orwe ~~incorporated~~believe bymay ~~reference~~affect ~~into~~our ~~this Annual~~financial ~~Report~~condition, onresults ~~Form 10-K~~of operations, tobusiness ~~reflect~~strategy ~~events~~and orfinancial ~~circumstances~~needs. ~~occurring~~There ~~after~~are ~~the~~important ~~date~~factors ofthat ~~this document~~could orcause toour ~~reflect~~actual ~~the~~results, ~~occurrence~~level of activity, ~~unanticipated~~performance ~~events.~~or ~~Readers~~achievements ~~are advised, however,~~ to ~~consult~~ ~~any~~differ ~~further~~materially ~~disclosures~~from the ~~Company~~results, ~~may~~level ~~make~~of onactivity, ~~related~~performance ~~subjects~~or inachievements ~~its~~expressed ~~documents filed with~~ or ~~furnished~~implied toby the ~~Securities~~forward-looking ~~and~~statements ~~Exchange~~including, ~~Commission~~but ~~(“SEC”)~~not orlimited into, ~~its~~statements ~~other~~regarding: ~~public disclosures.~~

1 • changes in general economic and financial market conditions;

~~Table~~• ofchanges ~~Contents~~in the regulatory environment;

•

economic conditions generally and in the financial services industry;

•

changes in the economy affecting real estate values;

•

our ability to achieve loan and deposit growth;

•

the completion of the proposed merger with our controlling shareholder, Capital Bank Financial Corp.;

•

the completion of our future acquisitions or business combinations and our ability to integrate the acquired business into our business model;

•

projected population and income growth in our targeted market areas; and

•

volatility and direction of market interest rates and a weakening of the economy which could materially impact credit quality trends and the ability to generate loans.

All forward-looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this document. In particular, you should consider the numerous risks described in the “Risk Factors” section of this document. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. You should, however, review the risk factors we describe in the reports we will file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this report.

ITEM 1.

BUSINESS.

~~Presentation~~As ofused ~~Amounts~~in this document, the terms “we,” “us,” “our,” “Green Bankshares,” and “Company” mean Green Bankshares, Inc. and its subsidiaries (unless the context indicates another meaning).

All dollar amounts set forth below, other than share and per-share amounts, are in thousands unless otherwise noted. Unless this Form 10-K indicates otherwise or the context otherwise requires, the terms “we,” “our,” “us,” “the Company” or “Green Bankshares” as used herein refer to Green Bankshares, Inc. and its subsidiaries, including GreenBank, which we sometimes refer to as “GreenBank,” “the Bank” or “our Bank”.

Green Bankshares, Inc.

We are the third-largest bank holding company headquartered in Tennessee, with $2.4 billion in assets as of December 31, 2010. Incorporated in 1985, Green Bankshares is the parent of GreenBank (the “Bank”) and owns 100% of the capital stock of the Bank. The primary business of the Company is operating the Bank.

As a bank holding company, we are subject to regulation by the Board of Governors of the Federal Reserve System, or the Federal Reserve Board (the “FRB”). We are required to file reports with the Federal Reserve Bank of Atlanta (the “FRB-Atlanta”) and are subject to regular examinations by that agency. Shares of our common stock are traded on the NASDAQ Global Select Market under the trading symbol “GRNB.”

At December 31, 2010, the Company maintained a main office in Greeneville, Tennessee and 64 full-service bank branches (of which eleven are leased operating premises), a location for mortgage banking and nine separate locations operated by the Bank’s subsidiaries.

The Company’s assets consist primarily of its investment in the Bank and liquid investments. Its primary activities are conducted through the Bank. At December 31, 2010, the Company’s consolidated total assets were $2,406,040, its consolidated net loans were $1,745,378, its total deposits were $1,976,854 and its total shareholders’ equity was $143,897.

The Company’s net income, or net loss, is dependent primarily on the earnings, or loss, of its wholly-owned subsidiary, GreenBank and its level of net income, or net loss. GreenBank’s net income, or net loss, is dependent upon its level of net interest income, which is the difference between the interest income earned on its loans and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities plus the Bank’s non-interest income, the sum of which is either partially, or fully, offset by the amount of the Bank’s loan loss provision plus the Bank’s total operating expenses.

Lending Activities:

General: The Bank’s lending activities reflect its community banking philosophy, emphasizing secured loans to individuals and businesses in its primary market areas.

Commercial Real Estate Lending: Commercial real estate loans are loans originated by the Bank that are secured by commercial real estate and includes commercial real estate construction loans to developers, mainly to borrowers based in its primary markets.

Residential Real Estate Lending: The Bank originates traditional one-to-four family, owner occupied, residential mortgages secured by property located in its primary market area. Further detail on consumer residential real estate lending may be found on page 7 of this report.

Commercial Business Lending: Commercial business loans are loans originated by the Bank that are generally secured by various types of business assets including inventory, receivables, equipment, financial instruments and commercial real estate. In limited cases, loans may be made on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment.

The Bank concentrates on originating commercial business loans to middle-market companies with borrowing requirements of less than $25 million. Substantially all of the Bank’s commercial business loans outstanding at December 31, 2010, were to borrowers based in its primary markets.

Consumer Lending: The Bank makes consumer loans for personal, family or household purposes, such as debt consolidation, automobiles, vacations and education. Consumer lending loans are typically secured by personal property but may also be unsecured personal loans. They may also be made on a revolving line of credit or fixed-term basis.

Investment Activities:

The Bank has authority to invest in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks and federal funds. The Bank’s investments do not include commercial paper, asset-backed commercial paper, asset-backed securities secured by credit cards, or car loans. The Bank also does not participate in structured investment vehicles. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the returns on loans and leases. The Bank must also meet reserve requirements of the FRB, which are imposed based on amounts on deposit in various deposit categories.

Sources of Funds:

Deposits: Deposits are the primary source of the Bank’s funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by economic and competitive conditions, interest rates, money market conditions and other factors, including depositor confidence. Consumer, small business and commercial deposits are attracted principally from within the Bank’s primary market areas through the offering of a broad selection of deposit instruments including consumer, small business and commercial demand deposit accounts, interest-bearing checking accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans.

The Bank’s marketing strategy emphasizes attracting core deposits held in checking, savings, money- market and certificate of deposit accounts. These accounts are a source of low-interest cost funds and in some cases, provide significant fee income. The composition of the Bank’s deposits has a significant impact on the overall cost of funds. At December 31, 2010, interest-bearing deposits comprised 92% of total deposits, as compared with 91% at December 31, 2009.

Borrowings: Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, federal funds and other borrowings.

The Bank, as a member of the FHLB system, is required to own a minimum level of FHLB stock and is authorized to apply for advances on the security of such stock, mortgage-backed securities, loans secured by real estate and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB’s assessment of the institution’s creditworthiness.

AsThe anCompany additional source of funds, the Bank may sell securities subject to its obligation to repurchase these securities (repurchase agreements) with major customers utilizing government securities or mortgage-backed securities as collateral. Generally, securities with a value in excess of the amount borrowed are required to be maintained as collateral to a repurchase agreement.

~~Information~~Green ~~concerning~~Bankshares ~~the~~is ~~Bank’s~~a ~~FHLB~~bank ~~advances~~holding company incorporated in 1985 and headquartered in Greeneville, ~~repurchase~~Tennessee. ~~agreements~~Prior to September 7, ~~junior~~2011, ~~subordinated~~Green Bankshares conducted its business primarily through its ~~notes~~wholly-owned subsidiary, GreenBank (~~trust~~together ~~preferred)~~with its predecessor entities prior to, and ~~other~~successor ~~borrowings~~entities isfollowing ~~set~~the ~~forth~~Bank Merger (as defined below), the “Bank”). As described in additional detail in Note 3, on September 7, 2011 (the “~~Management’s~~Merger ~~Discussion~~Date”), the Bank merged (the “Bank Merger”) with and ~~Analysis~~ into Capital Bank, National Association (“Capital Bank, NA”), a subsidiary of our majority shareholder, Capital Bank Financial ~~Condition~~Corp. ~~and~~(“CBF”), in ~~Results~~an ofall-stock ~~Operations~~transaction, —with ~~Liquidity~~Capital ~~and~~Bank, NA as the surviving entity. Green Bankshares’ approximately 34% ownership interest in Capital ~~Resources”~~Bank, ~~and~~NA is recorded as an equity-method investment in ~~Note~~that 8entity. In addition, five of the seven directors of ~~Notes~~Green toBankshares, ~~Consolidated~~and the Company’s Chief Executive Officer, Chief Financial ~~Statements~~Officer and Chief Risk Officer are affiliated with CBF. Through our branches, we offer a wide range of commercial and consumer loans and deposits, as well as ancillary financial services.

WeUnless ~~are~~otherwise ~~significantly~~specified, ~~impacted~~this byreport ~~prevailing~~describes ~~economic~~Green ~~conditions~~Bankshares, ~~competition~~Inc. and ~~the monetary,~~its ~~fiscal~~subsidiaries ~~and~~including ~~regulatory~~GreenBank ~~policies~~through ~~of governmental agencies. Lending activities are influenced by~~ the ~~general~~ ~~credit~~Merger ~~needs~~Date, ~~of individuals~~ and ~~small~~subsequent ~~and~~to ~~medium-sized~~that ~~businesses in the Company’s market areas~~date, ~~competition~~includes ~~among~~only ~~lenders,~~Green ~~the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest~~Bankshares, ~~primarily the rates paid on competing funding alternatives~~Inc, ~~account maturities~~ and ~~the~~its ~~levels~~equity ofmethod ~~personal income~~investment ~~and savings~~ in ~~the~~Capital ~~Company’s~~Bank, ~~market areas~~NA.

~~Our~~CBF ~~principal~~Investment executive offices are located at 100 North Main Street, Greeneville, Tennessee 37743-4992 and our telephone number at these offices is (423) 639-5111. Our internet address is www.greenbankusa.com. Please note that our website is provided as an inactive textual reference and the information on our website is not incorporated by reference herein.

~~GreenBank~~On September 7, 2011, (the “Transaction Date”) the Company completed the issuance and ~~its~~sale ~~Subsidiaries~~to CBF of 119.9 million shares of Common Stock to CBF for aggregate consideration of $217,019,000 less $750 thousand of CBF’s expenses which were reimbursed by the Company.

~~Our~~The ~~Bank~~consideration iswas acomprised ~~Tennessee-chartered~~of ~~commercial~~approximately ~~bank~~$147.6 ~~established~~million in ~~1890~~cash ~~which~~and ~~has~~approximately ~~its~~$68.7 ~~principal executive~~million ~~offices~~ in ~~Greeneville,~~the ~~Tennessee.~~form ~~The~~of ~~principal~~a contribution ~~business~~to the Company of ~~the~~all ~~Bank~~72,278 ~~consists~~outstanding shares of ~~attracting~~ ~~deposits~~Series ~~from~~A ~~the~~Preferred ~~general~~Stock ~~public~~previously ~~and~~issued ~~investing~~to ~~those~~the ~~funds,~~United ~~together~~States ~~with~~Department ~~funds generated~~of ~~from~~the ~~operations~~Treasury ~~and~~under ~~from~~the ~~principal~~TARP ~~and~~Capital ~~interest~~Purchase ~~payments~~Program onand ~~loans,~~the ~~primarily~~related ~~in commercial~~warrant ~~and~~to ~~residential~~purchase ~~real~~shares ~~estate~~of ~~loans~~the Company’s Common Stock, ~~commercial~~which ~~loans~~CBF ~~and~~purchased ~~installment~~directly ~~consumer~~from ~~loans~~the Treasury. ~~At December 31,~~The ~~2010,~~Series ~~the~~A ~~Bank~~Preferred ~~had~~Stock 63and ~~Tennessee-based~~the ~~full-service~~related ~~banking~~warrant ~~offices~~were ~~located~~retired inon ~~Greene~~September 7, ~~Blount,~~ ~~Cocke,~~2011 ~~Hamblen,~~and ~~Hawkins,~~are ~~Knox,~~no ~~Loudon,~~longer ~~McMinn,~~outstanding. ~~Monroe,~~In ~~Sullivan,~~connection ~~and~~with ~~Washington~~the ~~Counties~~CBF inInvestment, each ~~East~~Company ~~Tennessee~~shareholder ~~and~~as inof ~~Davidson,~~September ~~Lawrence~~6, ~~Macon,~~2011 ~~Montgomery,~~received ~~Rutherford,~~on ~~Smith,~~contingent ~~Sumner~~value ~~and Williamson~~right ~~Counties~~per inshare ~~Middle~~(“CVR”) ~~Tennessee.~~that ~~The~~entitles ~~Bank~~the ~~also~~holder ~~operates~~to ~~two~~receive ~~other~~up ~~full~~to ~~service branches—one~~$0.75 ~~located~~ in ~~nearby~~cash ~~Madison~~per ~~County,~~CVR ~~North~~at ~~Carolina~~the ~~and~~end ~~the~~of ~~other~~a infive-year ~~nearby~~period ~~Bristol, Virginia.~~based ~~Further,~~on the ~~Bank~~credit ~~operates~~performance aof GreenBank’s ~~mortgage~~then ~~banking~~existing ~~operation~~loan inportfolio ~~Knox~~as ~~County~~of May 5, ~~Tennessee~~2011.

~~Our~~As ~~Bank~~a ~~also~~result ~~offers~~of ~~other~~the ~~financial~~CBF ~~services~~Investment, ~~through~~CBF ~~three~~owns ~~wholly-owned subsidiaries.~~approximately ~~Through~~90% ~~Superior~~of ~~Financial~~the ~~Services,~~issued ~~Inc.~~and ~~(“Superior~~outstanding ~~Financial”),~~voting ~~the~~power ~~Bank~~of ~~operates~~the ~~eight~~Company. ~~consumer finance~~Upon ~~company~~the ~~offices~~completion ~~located~~of inthe ~~Greene~~Investment, ~~Blount,~~R. ~~Hamblen,~~Eugene ~~Washington,~~Taylor ~~Sullivan~~(Chairman), ~~Sevier,~~Christopher ~~Knox~~G. ~~and Bradley Counties~~Marshall, ~~Tennessee~~Peter N. ~~Through~~Foss, ~~GCB~~William ~~Acceptance~~A. ~~Corporation~~Hodges ~~(“GCB~~and ~~Acceptance”),~~R. ~~the~~Bruce ~~Bank operates~~Singletary awere ~~sub-prime~~named ~~automobile~~to ~~lending~~board ~~company~~of ~~with~~directors aof the ~~sole~~Company ~~office~~(the in“Company ~~Johnson~~Board”). ~~City, Tennessee~~Ms. ~~Through~~ Martha M. ~~Fairway~~Bachman ~~Title~~and CoDr. Samuel E. Lynch, ~~the~~existing ~~Bank~~members ~~operates~~of athe ~~title~~Company ~~company headquartered in Knox County~~Board, ~~Tennessee.~~ Atremained ~~December 31,~~as ~~2010,~~such ~~these~~following ~~three~~the ~~subsidiaries~~closing ~~had total combined assets~~ of ~~$42,995~~the ~~and total~~Investment. ~~combined~~All ~~loans,~~other ~~net~~members of ~~unearned~~the ~~interest~~Company ~~and~~Board resigned ~~loan~~effective ~~loss reserve~~September 7, ~~of $40,671~~2011.

As described in more detail below, deposits of our Bank are insured by the Deposit Insurance Fund (“DIF”) of the Federal Deposit Insurance Corporation (“FDIC”). Our Bank is subject to comprehensive regulation, examination and supervision by the Tennessee Department of Financial Institutions (the “TDFI”), the FRB and the FDIC.

Business Strategy

In 2011, the Company expects that its primary business strategy will be on managing through the current asset quality issues affecting the Company’s performance and strengthening the Company’s capital position, including, if necessary, through the issuance of additional equity securities. Accordingly, the Company expects that over the short term, given the current economic environment and high levels of nonperforming assets, there will be little to no loan growth until the current economic environment in the Company’s markets stabilizes and the economy begins to improve.

~~The~~Because ~~Company’s~~of ~~intermediate~~the ~~term~~controlling ~~prospects~~proportion ~~depend~~of ~~principally~~voting onsecurities in the Company’s ~~ability~~acquired toby ~~deal~~CBF, ~~with~~ the ~~asset~~CBF ~~quality~~Investment ~~issues~~is ~~currently~~considered ~~facing~~an ~~the~~acquisition ~~Company~~for accounting purposes and requires the ~~Company’s~~application ~~ability~~and topush ~~raise capital~~down inof ~~amounts~~the ~~sufficient~~acquisition tomethod ~~allow~~of ~~the~~accounting. ~~Company~~The ~~and~~accounting ~~the~~guidance ~~Bank~~for toacquisition ~~achieve~~accounting ~~capital~~requires ~~levels~~that inthe ~~excess~~assets acquired and ofliabilities ~~those~~assumed ~~required~~be byrecorded ~~federal~~at ~~banking~~their ~~regulations~~respective ~~and~~fair values as of the ~~informal~~acquisition ~~commitments~~date. ~~that~~Any ~~the~~purchase ~~Bank~~price ~~has made~~in toexcess of the ~~TDFI~~net ~~and~~assets ~~FDIC~~acquired ~~described~~is inrecorded ~~more~~as ~~detail below~~goodwill.

The ~~Bank~~most ~~had~~significant ~~historically~~fair ~~operated~~value ~~under~~adjustments aresulting ~~single~~from ~~bank~~the ~~charter~~application ~~while~~of ~~conducting~~the ~~business~~acquisition ~~under~~method of accounting were made to loans. Accounting guidance requires that all loans held by the Company on 18the ~~bank~~Transaction ~~brands~~Date ~~with~~be arecorded ~~distinct~~at ~~community-based~~their ~~brand~~fair value. The fair value of these acquired loans takes into account both the differences in ~~almost~~loan ~~every~~interest rates and market rates and any deterioration in their credit quality. OnBecause ~~March 31~~concerns about the probability of receiving the full amount of the contractual payments from the borrowers was considered in estimating the fair value of the loans, ~~2007~~stating the loans at their fair value results in no allowance for loan loss being provided for these ~~Bank~~loans ~~announced~~as ~~that~~of itthe Transaction Date. As of September 7, 2011, certain loans had ~~changed~~evidence ~~all~~of ~~brand~~credit ~~names~~deterioration tosince ~~GreenBank~~origination, ~~throughout~~and it was probable that not all ~~the~~contractually ~~communities~~required itprincipal and interest payments would be collected. Such ~~serves~~loans identified at the time of the acquisition were accounted for using the measurement provision for purchased credit-impaired (“PCI”) loans, according to ~~better~~the ~~enhance~~FASB ~~recognition~~Accounting ~~and~~Standards ~~customer~~Codification ~~convenience~~(“ASC”) 310-30. The ~~Bank~~special accounting ~~continues~~for toPCI ~~offer~~loans ~~local decision~~not ~~making~~only ~~through~~requires that they are recorded at fair value at the ~~presence~~date of ~~its~~acquisition ~~regional~~and ~~executives~~that inany ~~each~~related ofallowance ~~its~~for ~~markets~~loan and lease losses is not permitted to be carried forward past the Transaction Date, ~~while~~but it also governs ~~maintaining~~how ainterest ~~cost~~income ~~effective~~will ~~organizational~~be ~~structure~~recognized on these loans and how any further deterioration in ~~its~~credit ~~back~~quality ~~office~~after ~~and~~the ~~support~~Transaction ~~areas~~Date will be recognized and reported.

~~The~~As ~~Bank~~a ~~focuses~~result ~~its~~of ~~lending~~the ~~efforts~~adjustments ~~predominately~~required onby ~~individuals~~the acquisition method of accounting, the Company’s balance sheet and ~~small~~results of operations from periods prior to ~~medium-sized~~the Transaction Date are labeled as ~~businesses~~Predecessor ~~while~~Company itamounts ~~generates~~and ~~deposits~~are ~~primarily~~not comparable to balances and results of operations from ~~individuals~~periods insubsequent ~~its~~to ~~local~~the ~~communities~~Transaction Date, which are labeled as Successor Company. ToThe ~~aid~~lack of comparability arises from the assets and liabilities having innew ~~deposit~~accounting ~~generation~~bases ~~efforts,~~as a result of recording them at their fair values as of the ~~Bank~~Transaction ~~offers~~Date ~~its~~rather ~~customers~~than ~~extended~~at ~~hours~~their historical cost basis. As a result of ~~operation~~the ~~during~~change in accounting bases, items of income and expense such as the rate of interest ~~week~~income and expense as well as ~~Saturday~~depreciation and ~~Sunday~~rental ~~banking~~expense will change. In general, these changes in ~~many~~income and expense relate to the amortization of ~~its~~premiums ~~markets.~~or ~~The~~accretion ~~Bank~~of ~~also~~discounts ~~offers~~to ~~free online~~arrive ~~banking~~at ~~along~~contractual ~~with~~amounts ~~its~~due. ~~High~~To ~~Performance~~call ~~Checking~~attention ~~Program~~to this ~~which~~lack ~~since~~of ~~its~~comparability, ~~inception~~the Company has ~~generated~~ placed a ~~significant~~black ~~number~~line between the Successor Company and Predecessor Company columns in the Consolidated Financial Statements and in the tables in the notes to the statements and in Management’s Discussion and Analysis of ~~core~~Financial ~~transaction~~Condition ~~accounts~~and Results of Operations.

InGreenBank ~~addition~~Merger to the Company’s business model, which is described herein, the Company is continuously investigating and analyzing other lines and areas of business. Conversely, the Company frequently evaluates and analyzes the profitability, risk factors and viability of its various business lines and segments and, depending upon the results of these evaluations and analyses, may conclude to exit certain segments and/or business lines. Further, in conjunction with ~~these~~ ~~ongoing~~Capital ~~evaluations and analyses~~Bank, ~~the~~NA ~~Company may decide to sell, merge or close certain branch facilities.~~

~~Lending~~On ~~Activities~~September 7, 2011, GreenBank, which was formerly a wholly-owned subsidiary of the Company, merged with and into Capital Bank, NA, a national banking association and subsidiary of TIB Financial Corp. (the “TIB Financial”), a corporation organized under the laws of the State of Florida, Capital Bank Corporation, a corporation organized under the laws of the state of North Carolina (“Capital Bank Corp.”) and CBF, with Capital Bank, NA as the surviving entity. CBF is the owner of approximately 90% of the Company’s common stock, approximately 83% of Capital Bank Corp’s common stock and approximately 94% of TIB Financial’s common stock. TIB Bank, the former wholly-owned banking subsidiary of TIB Financial, merged with and into Capital Bank, NA (formerly known as NAFH National Bank) on April 29, 2011. Capital Bank, the former wholly-owned banking subsidiary of Capital Bank Corp. merged with and into Capital Bank, NA (formerly known as NAFH National Bank) on June 30, 2011.

~~General.~~At ~~The~~December 31, ~~loan~~2011, ~~portfolio~~the Company’s net investment of $315.3 million in Capital Bank, NA, was recorded in the Consolidated Balance Sheet as “Equity method investment in Capital Bank, NA” which represented the Company’s ispro ~~comprised~~rata ownership of ~~commercial~~Capital ~~real~~Bank, ~~estate~~NA’s total shareholders’ equity. In periods subsequent to the Merger Date, the Company has and will adjust this equity investment balance based on its equity ~~residential~~in ~~real~~Capital ~~estate~~Bank, ~~commercial~~NA’s net income and ~~consumer~~comprehensive ~~loans~~income. ~~Such~~In ~~loans~~connection ~~are~~with ~~primarily~~the ~~originated~~Bank ~~within~~ Merger, assets and liabilities of the Bank were de-consolidated from the Company’s ~~market~~balance ~~areas~~sheet ofresulting ~~East~~in ~~and~~a ~~Middle~~significant ~~Tennessee~~decrease in the total assets and ~~are~~total ~~generally~~liabilities ~~secured~~of bythe ~~residential~~Company in the third quarter of 2011. Accordingly, as of December 31, 2011, no investments, loans or deposits are reported on the Company’s Consolidated Balance Sheet and subsequent to the Merger Date, interest ~~commercial~~expense ~~real~~is ~~estate~~the orresult ~~business~~of orthe ~~personal~~outstanding ~~property~~trust ~~located~~preferred insecurities ~~its~~issued ~~market~~by ~~footprint~~the Company.

~~Loan~~Capital ~~Composition.~~Bank, ~~Given~~NA was formed in connection with the ~~on-going~~July 16, ~~challenging~~2010 ~~economic~~purchase ~~environment~~and ~~which~~assumption ~~began during~~of ~~the~~assets ~~second~~and ~~half~~deposits and other liabilities of ~~2007~~three asbanks (collectively, the ~~recession~~“FDIC ~~emerged~~Banks”) – Metro Bank of Dade County (Miami, Florida), Turnberry Bank (Aventura, Florida) and First National Bank of the ~~resulting~~South ~~precipitous~~(Spartanburg, ~~decline~~South inCarolina) (collectively, the “Failed Banks”) – from the Federal Deposit Insurance Corporation (the “FDIC”) and is a party to loss sharing agreements with the ~~residential~~FDIC ~~real~~covering ~~estate~~the ~~construction~~large ~~values~~majority ~~through~~of ~~2010~~the loans it acquired from the FDIC. As of December 31, 2011, following the ~~Company~~mergers ~~significantly~~of ~~reduced~~TIB ~~its commercial~~Bank, ~~real~~Capital ~~estate~~Bank ~~concentration~~and ~~levels~~GreenBank, as ~~noted~~discussed inabove, ~~the~~Capital ~~table~~Bank, ~~below~~NA ~~for~~had ~~each~~total assets of ~~the~~$6.5 ~~periods~~billion, total ~~presented~~deposits atof $5.1 billion and shareholders’ equity of $939.8 million. As of December 31:, 2011, following the mergers of TIB Bank, Capital Bank and GreenBank as discussed above, Capital Bank, NA operated 143 branches in Florida, North Carolina, South Carolina, Tennessee and Virginia.

	2010			2009			2008			2007			2006
Commercial real estate	$	1,080,805		$	1,306,398		$	1,430,225		$	1,549,457		$	921,190
Residential real estate		378,783			392,365			397,922			398,779			281,629
Commercial		222,927			274,346			315,099			320,264			258,998
Consumer		75,498			83,382			89,733			97,635			87,111
Other		1,913			2,117			4,656			3,871			2,203
Unearned interest		(14,548	)		(14,801	)		(14,245	)		(13,630	)		(11,502	)
Loans, net of unearned interest	$	1,745,378		$	2,043,807		$	2,223,390		$	2,356,376		$	1,539,629
Allowance for loan losses	$	(66,830	)	$	(50,161	)	$	(48,811	)	$	(34,111	)	$	(22,302	)

InPotential ~~addition~~Merger toof ~~the~~Green ~~segment~~Bankshares ~~information listed above, the Company monitors commercial real estate speculative~~ and ~~construction~~Capital byBank ~~purpose~~Financial ~~code~~Corp. ~~as noted in the loan migration table below for each of the periods presented:~~

~~Higher~~On ~~Risk~~September 8, ~~Loan~~2011, ~~Migration~~CBF’s ~~Table:~~Board of Directors approved and adopted a plan of merger which provides for the merger of Green Bankshares, Inc. with and into CBF, with CBF continuing as the surviving entity (the “Merger”). In the merger, each share of Green Bankshares, Inc. common stock issued and outstanding immediately prior to the completion of the merger, except for certain shares held by CBF or Green Bankshares, Inc., will be converted into the right to receive .0915 of a share of CBF Class A common stock. No fractional share of Class A common stock will be issued in connection with the merger, and holders of Green Bankshares, Inc. common stock will be entitled to receive cash in lieu thereof. Since CBF currently owns more than 90% of the common stock of Green Bankshares, Inc., under Delaware and Tennessee law, no vote of our stockholders is required to complete the merger. CBF will determine when and if the merger will ultimately take place.

	2010		2009		2008		2007		2006
Speculative 1-4 family residential real estate
Acquisition and development	$	131,669	$	185,087	$	242,343	$	285,592	$	159,760
Lot warehouse		42,796		66,104		79,555		104,201		64,429
Commercial 1-4 family residential		31,511		70,434		160,786		279,680		134,390
Sub-total		205,976		321,625		482,684		669,473		358,579
Construction
Commercial vacant land		77,081		101,679		103,160		69,298		37,461
Commercial construction — non-owner occupied		63,881		164,887		144,344		157,374		80,032
Commercial construction — owner occupied		5,407		28,213		55,305		58,814		37,515
Consumer residential construction		14,161		19,073		27,632		38,231		25,279
Sub-total		160,530		313,852		330,441		323,717		180,287
Total speculative and construction	$	366,506	$	635,477	$	813,125	$	993,190	$	538,866

Consent Order

~~Loan~~During ~~Maturities.~~the ~~The~~third ~~following~~quarter ~~table~~of ~~reflects~~2011, atthe ~~December 31,~~FDIC ~~2010~~and the ~~dollar~~Tennessee ~~amount~~ Department of ~~loans~~Financial ~~maturing~~Institutions ~~based~~(“TDFI”) issued ona ~~their~~consent ~~contractual~~order ~~terms~~against tothe ~~maturity~~Bank aimed at strengthening the Bank’s operations and its financial condition. ~~Demand~~The ~~loans,~~order’s ~~loans~~provisions ~~having~~included norequirements similar to those that the Bank has already informally committed to comply with, ~~stated~~including ~~schedule~~requirements ofto ~~repayments~~maintain ~~and~~the ~~loans~~Bank’s ~~having~~capital noratios ~~stated~~above ~~maturity~~those ~~are~~levels ~~reported~~required asto ~~due~~be inconsidered ~~one~~“well-capitalized” ~~year or~~under ~~less~~federal banking regulations. The Consent Order terminated on September 7, 2011 when GreenBank was merged with and into Capital Bank, NA.

	Due in One		Due After One Year		Due After
	Year or Less		Through Five Years		Five Years		Total
Commercial real estate	$	437,374	$	613,259	$	30,172	$	1,080,805
Residential real estate (1)		42,826		93,735		235,732		372,293
Commercial		148,500		68,752		5,675		222,927
Consumer (1)		19,110		45,815		2,515		67,440
Other		1,629		236		48		1,913
Total	$	649,439	$	821,797	$	274,142	$	1,745,378

Capital Bank’s Business Strategy

~~(1)~~Our ~~Net~~business strategy is to build a mid-sized regional bank by operating, integrating and growing our existing operations as well as to acquire other banks, including failed, underperforming and undercapitalized banks and other complementary assets. We believe recent and continuing dislocations in the southeastern U.S. banking industry have created an opportunity for us to create a mid-sized regional bank that will be able to realize greater economies of ~~unearned~~scale ~~interest~~compared to smaller community banks while still providing more personalized, local service than larger-sized banks.

~~The~~Operating ~~following~~Strategy table sets forth the dollar amount of the loans maturing subsequent to the year ended December 31, 2011 distinguished between those with predetermined interest rates and those with floating, or variable, interest rates.

	Fixed Rate		Variable Rate		Total
Commercial real estate	$	432,141	$	211,290	$	643,431
Residential real estate		111,198		218,269		329,467
Commercial		46,740		27,687		74,427
Consumer		47,696		634		48,330
Other		236		48		284
Total	$	638,011	$	457,928	$	1,095,939

Our operating strategy emphasizes relationship banking focused on commercial and consumer lending and deposit gathering. We have organized operations under a line of business operating model, under which we have appointed experienced bankers to oversee loan and deposit production in each of our markets, while centralizing credit, finance, technology and operations functions. Our management team possesses significant executive-level leadership experience at Fortune 500 financial services companies, and we believe this experience is an important advantage in executing this regional, more focused, bank business model.

~~Commercial~~Organic ~~Real~~Loan ~~Estate Loans. The Company has significantly curtailed the origination of residential real estate construction~~ and ~~development loans over the past three years~~ asDeposit ~~noted~~Growth in the higher risk loan migration table above. The Company had historically originated commercial real estate loans, including residential real estate construction and development loans, generally to existing business customers, secured by real estate located in the Company’s market area. At December 31, 2010, commercial real estate loans totaled $1,080,805, or 62%, of the Company’s net loan portfolio. Commercial real estate loans were generally underwritten by addressing cash flow (debt service coverage), primary and secondary source of repayment, financial strength of any guarantor, and strength of the tenant (if any), liquidity, leverage, management experience, ownership structure, economic conditions and collateral. Generally, the Company would loan up to 80-85% of the value of improved property, 65% of the value of raw land and 75% of the value of land to be acquired and developed. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case-by-case basis.

The primary components of our operating strategy are to originate high-quality loans and low-cost customer deposits. Our executive management team has developed a hands-on operating culture focused on performance and accountability, with frequent and detailed oversight by executive management of key performance indicators. We have implemented a sales management system for our branches that is focused on growing loans and core deposits in each of our markets. We believe that this system holds loan officers and branch managers accountable for achieving loan production goals, which are subject to the conservative credit standards and disciplined underwriting practices that we have implemented as well as compliance, profitability and other standards that we monitor. We also believe that accountability is crucial to our results. Our executive management monitors production, credit quality and profitability measures on a quarterly, monthly, weekly and, in some cases, daily basis and provides ongoing feedback to our business unit leaders. During 2011, we originated $728.4 million of new commercial and consumer loans. During this period, the Bank we also grew its core deposits by $265.4 million (or 29.3%) annualized growth) excluding the initial increase in deposits resulting from CBF’s acquisitions of Capital Bank Corp. and Green Bankshares, Inc.

The current market conditions have forced many banks to focus internally, which we believe creates an opportunity for organic growth by strongly capitalized banks such as ourselves. We seek to grow our loan portfolio by offering personalized customer service, local market knowledge and a long-term perspective. We have selectively hired experienced loan officers with local market knowledge and existing client relationships. Additionally, our executive management team takes an active role in soliciting, developing and maintaining client relationships.

~~Residential~~Efficiency Real Estate. The Company also originates one-to-four family, owner-occupied residential mortgage loans secured by property located in the Company’s primary market areas. The majority of the Company’s residential mortgage loans consists of loans secured by owner-occupied, single-family residences. At December 31, 2010, the Company had $378,783, or 21%, of its net loan portfolio in residential real estate loans, net of unearned income. Residential real estate loans generally have a loan-to-value ratio of 85% or less. These loans are underwritten by giving consideration to the ability to pay, stability of employment, source of income, credit history and ~~loan-to-value~~Cost ~~ratio.~~Savings Home equity loans make up approximately 52% of residential real estate loans. Home equity loans may have higher loan-to-value ratios when the borrower’s repayment capacity and credit history conform to underwriting standards. Superior Financial extends sub-prime mortgages to borrowers who generally have a higher risk of default than mortgages extended by the Bank. Sub-prime mortgages totaled $11,742, or 3%, of the Company’s residential real estate loans, net of unearned income, at December 31, 2010.

~~The~~Another ~~Company~~key ~~sells~~element ~~most~~ of ~~its~~our ~~one-to-four~~strategy ~~family~~is ~~mortgage~~to ~~loans~~operate inefficiently ~~the~~by ~~secondary~~carefully ~~market~~managing ~~to Freddie~~our ~~Mac~~cost structure and ~~other~~taking ~~mortgage~~advantage ~~investors~~of ~~through~~economies ~~the~~of ~~Bank’s~~scale ~~mortgage~~afforded ~~banking~~by ~~operation.~~our ~~Sales~~acquisitions ~~of such loans~~ to ~~Freddie~~control ~~Mac~~operating ~~and~~costs. We ~~other~~have ~~mortgage~~been ~~investors~~able ~~totaled~~to ~~$47,881~~reduce ~~and~~headcount ~~$43,050~~by ~~during~~consolidating ~~2010~~duplicative ~~and 2009,~~operations ~~respectively,~~of ~~and~~ the ~~related~~acquired ~~mortgage~~banks ~~servicing~~and ~~rights~~streamlining ~~were~~management. ~~sold~~In ~~together~~addition, ~~with~~we ~~the~~expect ~~loans. All~~to ~~mortgage~~recognize ~~loans~~additional ~~sales~~cost ~~are~~savings ~~without~~now ~~recourse~~that ~~and~~we ~~all~~have ~~notes~~fully ~~are~~integrated ~~endorsed~~Green toBankshares, Inc., with the ~~investor~~rest ~~stating without~~of ~~recourse~~CBF’s business. ~~Certain~~We ~~contingencies~~plan doto ~~come~~further ~~into~~improve ~~play~~efficiency ~~for~~by ~~early~~boosting ~~prepayment~~the orproductivity ~~early~~of ~~payment defaults~~our ~~and~~sales ~~would~~force ~~involve~~through aour ~~refund~~focus ofon ~~the~~accountability ~~yield~~and ~~spread~~employee ~~premium~~incentives ~~earned~~and onthrough ~~the~~selective ~~transaction~~hiring ~~given certain events~~ of ~~default.~~experienced ~~During~~loan ~~2010,~~officers nowith existing ~~refunds~~books ~~or events~~ of ~~default occurred~~business.

~~Commercial~~To ~~Loans.~~evaluate ~~Commercial~~and ~~loans~~control ~~are~~operating ~~made~~costs, ~~for~~we amonitor ~~variety~~certain ofperformance ~~business~~metrics ~~purposes,~~ including ~~working~~our efficiency ~~capital~~ratio, ~~inventory~~which ~~and~~equals ~~equipment~~total ~~and~~non-interest ~~capital~~expenses ~~expansion.~~divided Atby ~~December 31,~~net ~~2010, commercial~~revenues ~~loans~~(net ~~outstanding~~interest ~~totaled~~income ~~$222,927,~~plus ornon-interest ~~13%,~~income). ofOur ~~the~~efficiency ~~Company’s~~ratio ~~net~~has ~~loan~~been ~~portfolio.~~and ~~Such loans~~is ~~are~~expected ~~usually~~to ~~amortized~~continue ~~over one~~ to ~~seven~~be ~~years~~significantly ~~and~~impacted ~~generally~~by ~~mature~~certain ~~within~~costs ~~five~~that ~~years.~~follow ~~Commercial~~acquisitions ~~loan~~of ~~applications must be supported by current~~ financial ~~information~~institutions. onCapital ~~the~~Bank’s ~~borrower and,~~efficiency ~~where~~ratio ~~appropriate,~~for by2011 ~~adequate~~was ~~collateral~~69.6%, ~~Commercial~~which ~~loans~~was ~~are~~impacted ~~generally underwritten~~ by ~~addressing~~ ~~cash~~$7.6 ~~flow~~million ~~(debt~~of ~~service~~conversion ~~coverage),~~expenses ~~primary~~due ~~and~~to ~~secondary~~integration ~~sources~~ of ~~repayment,~~the ~~financial strength~~acquired ofbanks. ~~any~~Excluding ~~guarantor,~~the ~~liquidity,~~impact ~~leverage,~~of ~~management~~these ~~experience~~items, ~~ownership structure,~~Capital ~~economic~~Bank’s ~~conditions~~adjusted ~~and~~efficiency ~~industry-specific~~ratio ~~trends~~for ~~and~~2011 ~~collateral~~was 66.6%. The ~~loan~~adjusted toefficiency ~~value~~ ratio ~~depends on~~is ~~the~~a ~~type~~non-GAAP ofmeasure ~~collateral.~~which ~~Generally~~we ~~speaking,~~believe ~~accounts~~provides ~~receivable~~investors ~~are~~with ~~financed~~information ~~between~~useful ~~70%~~in ~~and 80%~~understanding ofour ~~accounts~~business ~~receivable~~and ~~less~~our ~~than~~operating ~~90 days past due~~efficiency. IfComparison ~~other~~of ~~collateral is taken to support the~~our ~~loan,~~adjusted ~~the~~efficiency ~~loan~~ratio towith ~~value~~those of ~~accounts~~other ~~receivable~~companies may ~~approach~~not ~~85%.~~be ~~Inventory~~possible ~~financing~~because ~~will~~other ~~range between~~companies ~~50%~~may ~~and~~calculate ~~60%~~the ~~depending~~adjusted onefficiency ~~the~~ratio ~~borrower~~differently. ~~and~~The ~~nature~~adjusted ofefficiency ~~the~~ratio, ~~inventory.~~which ~~The~~equals ~~Company~~adjusted ~~requires~~non-interest aexpense (non-interest ~~first~~expense ~~lien~~less ~~position~~conversion ~~for~~expense) ~~such~~divided ~~loans.~~by ~~These~~net ~~types~~revenues of(net ~~loans~~interest ~~are~~income ~~generally~~plus ~~considered~~non-interest toincome), befor athe ~~higher credit~~twelve ~~risk~~months ~~than~~ended ~~other~~December 31, ~~loans~~2011 ~~originated~~is byas ~~the~~follows: ~~Company.~~

Consumer Loans. At December 31, 2010, the Company’s consumer loan portfolio, net of unearned income, totaled $67,440, or 4%, of the Company’s total net loan portfolio. The Company’s consumer loan portfolio is composed of secured and unsecured loans originated by the Bank, Superior Financial and GCB Acceptance. The consumer loans of the Bank generally have a higher risk of default than other loans originated by the Bank. Further, consumer loans originated by Superior Financial and GCB Acceptance, which are finance companies rather than banks, generally have a greater risk of default than such loans originated by commercial banks and, accordingly, carry a higher interest rate. Superior Financial and GCB Acceptance consumer loans totaled approximately $32,194, or 48%, of the Company’s installment consumer loans, net of unearned income, at December 31, 2010. The performance of consumer loans will be affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics.


Capital Bank, NA	Efficiency Ratio for the Twelve Months Ended December 31, 2011
(Dollars in thousands)	Non-adjusted			Adjusted
Non-interest expense	$	163,710		$	163,710
Less: Conversion expense		—			(7,620	)

Non-interest expense, adjusted	$	163,710		$	156,090

Net interest income	$	193,598		$	193,598
Non-interest income		40,660			40,660

Net Revenue	$	234,258		$	234,258

Efficiency Ratio		69.9	%		66.6	%

~~Past~~Capital ~~Due,~~Bank’s ~~Special~~Acquisition ~~Mention, Classified~~ and ~~Nonaccrual~~Integration ~~Loans.~~Strategy ~~The Company classifies its loans of concern into three categories: past due loans, special mention loans and classified loans (both accruing and non-accruing interest).~~

~~When~~Acquisition ~~management determines that a loan is no longer performing~~ and ~~that~~Integration ~~collection~~Strategy of interest appears doubtful, the loan is placed on nonaccrual status. All loans that are 90 days past due are considered nonaccrual unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Management closely monitors all loans that are contractually 90 days past due, treated as “special mention” or otherwise classified or on nonaccrual status. Nonaccrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses.

We seek acquisition opportunities consistent with our business strategy that we believe will produce attractive returns for our stockholders. We plan to pursue acquisitions that position us in southeastern U.S. markets with attractive demographics and business growth trends, expand our branch network in existing markets, increase our earnings power or enhance our suite of products. Our future acquisitions may include distressed assets sold by the FDIC or another seller where our operations, underwriting and servicing capabilities or management experience give us an advantage in evaluating and resolving the assets.

Our acquisition process begins with detailed research of target institutions and the markets they serve. We then draw on our management team’s extensive experience and network of industry contacts in the southeastern region of the United States. Our research and analytics team, led by our Chief of Investment Analytics and Research, maintains lists of priority targets for each of our markets. The team analyzes financial, accounting, tax, regulatory, demographic, transaction structures and competitive considerations for each target and prepares acquisition projections for review by our executive management team and Board of Directors.

As part of our diligence process in connection with potential acquisitions, we undertake a detailed portfolio- and loan-level analysis conducted by a team of experienced credit analysts led by our Chief Risk Officer. In addition, our executive management team engages the target management teams in active dialogue and personally conducts extensive on-site diligence at target branches.

~~The~~Our ~~Company~~executive ~~may~~management ~~elect~~team tohas ~~formally~~demonstrated ~~restructure~~success anot ~~loan~~only ~~due~~in toacquiring ~~the~~financial institutions ~~weakening~~and ~~credit~~combining ~~status~~them ofonto a ~~borrower~~ socommon ~~that~~platform, but also in managing the ~~restructuring~~integration ~~may~~of ~~facilitate~~those afinancial ~~repayment~~institutions. ~~plan~~Our ~~that~~management ~~minimizes~~team develops integration plans prior to the ~~potential losses~~closing of a given transaction that allows us to (1) reorganize the ~~Company~~acquired ~~may~~institution’s ~~have~~management toteam ~~otherwise~~under ~~incur.~~our Atline ~~December~~of business model immediately after closing; (2) 31implement our credit, ~~2010~~risk and ~~2009~~interest rate risk management, ~~the~~liquidity ~~Company~~and compliance and governance policies ~~had~~and ~~$49,537~~procedures; and ~~$16~~(3) integrate our target’s technology and processing systems rapidly. Using our procedures,~~061~~ we have already integrated credit and operational policies across each of ~~restructured~~our ~~loans~~acquisitions. We reorganized the management of the ~~which~~Failed $9Banks within three months of closing,~~597~~ and ~~$4,429~~we ~~were~~merged ~~classified~~their ~~as non-accrual~~core processing systems with TIB Financial’s platform within six months. We also fully integrated legacy Capital Bank in July 2011 and ~~the~~GreenBank ~~remaining~~in ~~were~~February ~~performing~~2012.

~~The~~Sound ~~following~~Risk ~~table~~Management ~~sets forth information with respect to the Company’s nonperforming assets at the dates indicated.~~

	At December 31,
	2010		2009		2008		2007		2006
Loans accounted for on a non-accrual basis	$	143,707	$	75,411	$	30,926	$	32,060	$	3,479
Accruing loans which are contractually past due 90 days or more as to interest or principal payments		2,112		147		509		18		28
Total non-performing loans		145,819		75,558		31,435		32,078		3,507
Real estate owned:
Foreclosures		59,965		56,952		44,964		4,401		1,445
Other real estate held and repossessed assets		130		216		407		458		243
Total non-performing assets	$	205,914	$	132,726	$	76,806	$	36,937	$	5,195
Restructured loans not included above	$	39,940	$	11,632	$	—	$	—	$	—

Sound risk management is an important element of our commercial/retail bank business model and is overseen by our Chief Risk Officer, Bruce Singletary, who has over 19 years of experience managing credit risk. Our credit risk policy, which has been implemented across our organization, establishes prudent underwriting guidelines, limits portfolio concentrations by geography and loan type and incorporates an independent loan review function. Mr. Singletary has created a special assets division with 35 employees to work out or dispose of legacy problem assets using a detailed process taking into account a borrower’s repayment capacity, available guarantees, collateral value, interest accrual and other factors. We believe our risk management policies establish conservative regulatory capital ratios, robust liquidity (including contingency planning), limitations on wholesale funding (including brokered CDs, holding company debt and advances from the FHLB), and restrictions on interest rate risk.

Total non-performing assets increased by $73,188 from December 31, 2009 to December 31, 2010. This increase was principally driven by deterioration in the economy during 2010 which was reflected principally in the Company’s residential real estate construction and development portfolio. In 2010, the Company devoted significant attention to our asset quality issues, including having segregated these assets within our Special Assets Group so that we may diligently work through the resolution of each on an asset-by-asset basis. The Special Assets Group meets monthly to discuss the performance of the portfolio and specific relationships with emphasis on the underperforming assets. The Special Assets Group is responsible for the resolution of problem credits by creating action plans, which could include foreclosure, restructuring the loan, issuing demand letters or other actions. If nonaccrual loans at December 31, 2010 had been current according to their original terms and had been outstanding throughout 2010, or since origination if originated during the year, interest income on these loans in 2010 would have been approximately $5,948. Interest actually recognized on these loans during 2010 was $4,843. Interest income not recognized on restructured loans was not significant for 2010.

OREO increased by $2,927 from December 31, 2009 to December 31, 2010. The real estate consists of 122 properties, of which 49 are 1-4 family residential properties with a carrying value of $3,966; 38 are construction development of 1-4 residential properties with a carrying value of $37,481; two are multi-family residential properties with a carrying value of $648; four are parcels of commercial vacant land with a carrying value of $3,192; 23 are vacant 1-4 family residential lots with a carrying value of $7,038; five are commercial buildings with a carrying value of $5,321; and one is a commercial construction project with a carrying value of $2,318. Management has recorded these properties at estimated fair market value, based on current appraisals, less estimated selling costs. Other repossessed assets decreased from $216 at December 31, 2009 to $130 at December 31, 2010. The decrease is due primarily to the disposition of repossessed automobiles at one of the Company’s subsidiaries.

~~The~~Our ~~recorded~~Competitive ~~investment~~Strengths of impaired loans, defined under Accounting Standards Codification (“ASC”) Topic ASC 310 as loans which, based upon current information and events, it is considered probable that the Company will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement, increased by $70,753 from $115,238 at December 31, 2009 to $185,991 at December 31, 2010. The related allowance on the recorded investment of impaired loans also increased by $19,097 from $5,737 at December 31, 2009 to $24,834 at December 31, 2010. Under accounting guidance for impaired loans, the impairment is probable if the future events indicate that the Bank will not collect principal and interest in accordance with contractual terms. Impaired loans are included in non-performing loans. This increase is primarily attributable to the continued deterioration throughout 2010 in residential real estate construction loans located in the Company’s urban markets. The recorded investment of impaired loans of $185,991 at December 31, 2010 and $115,238 at December 31, 2009 are net of balances previously charged-off of $36,574 and $27,937 respectively.

~~Allowance~~• ~~for~~Experienced ~~Loan~~and ~~Losses.~~Respected ~~The~~Management ~~allowance~~Team ~~for~~with ~~loan losses is maintained at~~ a ~~level~~Successful ~~which management~~Track ~~believes~~Record. isMembers ~~adequate~~of toour ~~absorb~~executive ~~all~~management ~~probable~~team ~~losses~~and onBoard ~~loans~~of ~~then~~Directors ~~present~~have served in ~~the~~executive ~~loan portfolio.~~leadership ~~The~~roles ~~amount~~at ofFortune ~~the~~500 ~~allowance~~financial isservices ~~affected by: (1) loan charge-offs~~companies, ~~which~~including ~~decrease~~Bank ~~the allowance;~~of ~~(2) recoveries on loans previously charged-off~~America, ~~which~~Fifth ~~increase~~Third ~~the~~Bancorp ~~allowance;~~ and ~~(3) the~~Morgan ~~provision for possible loan losses charged against income, which increases the allowance~~Stanley. ~~In determining~~The ~~the~~executive ~~provision for possible loan losses, it is necessary for~~ management toteam ~~monitor fluctuations~~has inextensive ~~the~~experience ~~allowance~~overseeing ~~resulting~~commercial ~~from actual charge-offs~~ and ~~recoveries,~~consumer ~~and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions~~banking, ~~including~~mergers ~~residential real estate prices~~ and ~~transaction volume in the Company’s market areas~~acquisitions, insystems ~~an effort to evaluate portfolio risks. In evaluating residential real estate market conditions~~integrations, ~~the Company’s internal policies require new appraisals on adversely rated collateral dependent loans to be obtained at least annually. On a quarterly basis~~technology, ~~the Company receives a written report from an independent nationally recognized organization which provides updated valuation trends~~operations, bycredit ~~price point~~ and byregulatory ~~zip~~compliance. ~~code,~~Many ~~for~~members ~~each~~ of ~~the~~our ~~major~~executive ~~markets~~management inteam ~~which~~are ~~the Company~~from ~~is conducting business. The information is then used in~~ the ~~Company’s~~southeastern ~~impairment~~region ~~analysis~~ of ~~collateral~~the ~~dependent~~United ~~loans.~~States Ifand ~~actual~~have ~~losses~~an ~~exceed~~extensive ~~the~~network ~~amount~~ of ~~the~~contacts ~~allowance~~with ~~for~~banking ~~loan losses~~executives, ~~earnings~~existing ofand ~~the~~potential ~~Company~~customers, ~~could~~and bebusiness ~~adversely~~and ~~affected.~~civic ~~The~~leaders ~~amount~~throughout of the ~~provision is based on management’s judgment of those risks~~region. ~~During~~We ~~the~~believe ~~year~~our ~~ended~~executive ~~December 31,~~management ~~2010, the Company~~team’s ~~provision~~ ~~for~~reputation ~~loan~~and ~~losses~~track ~~increased~~record bygive ~~$20,861~~us toan ~~$71,107~~advantage ~~from~~in ~~$50,246~~negotiating ~~for~~acquisitions ~~the~~and ~~year~~hiring ~~ended December 31, 2009~~ and ~~the~~retaining ~~allowance~~experienced ~~for loan losses increased by $16,669 to $66,830 at December 31, 2010 from $50,161 at December 31, 2009~~bankers.

~~The~~• ~~elevated~~Growth-Oriented ~~allowance~~Business ~~for~~Model. ~~loan~~Our ~~losses~~executive ~~was~~management ~~attributable~~team ~~primarily~~seeks to ~~continuing~~foster ~~weakened economic~~a ~~conditions~~strong ~~experienced~~sales inculture ~~the~~with ~~Company’s~~a ~~urban~~focus ~~markets,~~on ~~principally~~developing ~~the~~key ~~Nashville~~client ~~and Knoxville markets~~relationships, ~~beginning~~including direct participation in ~~the~~sales ~~fourth~~calls, ~~quarter~~and ofthrough ~~2007~~regular reporting and ~~continuing~~accountability ~~through~~while ~~2010,~~emphasizing ~~accompanied by~~risk ~~deteriorating~~management. ~~credit~~Our ~~quality~~executive ~~associated~~management ~~primarily~~and ~~with~~line ~~residential~~of ~~real~~business ~~estate~~executives ~~construction~~monitor ~~and development~~performance ~~loans~~on ina ~~these~~quarterly, ~~markets.~~monthly, ~~The~~weekly ~~allowance~~and ~~for~~in ~~loan~~some ~~losses~~cases asdaily abasis, ~~percentage~~and ofour ~~total~~compensation ~~loans was~~plans ~~3.83%~~reward atcore ~~the~~deposit ~~end~~and ofresponsible ~~2010~~commercial ~~versus~~loan ~~2.45%~~growth, atsubject ~~December 31~~to credit quality, ~~2009.~~compliance ~~The~~and ~~loan~~profitability ~~loss~~standards. ~~reserves~~We ~~reflected the~~have ~~higher~~an ~~level~~integrated, ofscalable ~~non-performing~~core ~~banking~~processing ~~assets,~~platform and ~~losses~~centralized ~~inherent~~credit, infinance ~~this~~and ~~segment~~technology ofoperations ~~the Company’s~~that ~~business,~~we asbelieve ~~noted~~will insupport ~~Notes~~future 3growth. ~~and~~Our 17business ofmodel ~~Notes~~contributed to ~~Consolidated~~the ~~Financial~~Bank’s ~~Statements~~$728. ~~Although~~4 ~~Management~~million ~~believes~~of ~~that~~commercial ~~the~~and ~~allowance~~consumer ~~for~~ loan ~~losses~~originations isand ~~adequate~~$265.4 tomillion ~~cover~~in ~~estimated losses~~total ~~inherent~~deposit ingrowth ~~the~~for ~~portfolio~~2011, ~~there~~excluding ~~can~~the beinitial noincrease ~~assurances~~in ~~that~~deposits ~~additional~~resulting ~~reserves~~CBF’s ~~may~~acquisitions ~~not~~of ~~be required~~Capital inBank ~~the~~Corporation ~~future~~and Green Bankshares, Inc.

•

Highly Skilled and Disciplined Acquirer. CBF has executed six acquisitions in just 14 months. CBF integrated its first four investments into a common core processing platform within six months, integrated the fifth in July 2011 and the sixth in February 2012. We believe our track record of completing and integrating transactions quickly has helped us negotiate transactions on more economically favorable terms. CBF has conducted due diligence on more than 82 financial institutions, many of which its diligence process indicated would not meet its strategic objectives.

•

Reduced-Risk Legacy Portfolio. Our acquired loan portfolios have been marked-to-market with the application of the acquisition method of accounting, meaning that the carrying value of these assets at the time of their acquisitions reflected our estimate of lifetime credit losses. In addition, as of December 31, 2011, approximately 13% of our loan portfolio was covered by the loss sharing agreements we entered into with the FDIC, resulting in limited credit risk exposure for these assets.

•

Excess Capital and Liquidity. As a result of its private placements and the disciplined deployment of capital, CBF has ample capital with which to make acquisitions. As of December 31, 2011, CBF had a 13.2% tangible common equity ratio (which is a non-GAAP measure used by certain regulators, financial analysts and others to measure core capital strength) and a 12.6% Tier 1 leverage ratio, which provides CBF with $165.9 million in excess capital relative to the 10% Tier 1 leverage standard required under Capital Bank’s operating agreement with the OCC. As of December 31, 2011, Capital Bank had a 10.4% Tier 1 leverage ratio, a 15.7% Tier 1 risk-based ratio and a 16.7% total risk-based capital ratio. As of December 31, 2011, Capital Bank had cash and securities equal to 21.6% of total assets, representing $427.3 million of liquidity in excess of our target of 15%, which provides ample liquidity to support our existing banking franchises. Further, our investment portfolio consists primarily of U.S. agency-guaranteed mortgage-backed securities, which have limited credit or liquidity risk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a discussion of the use of the tangible common equity ratio in our business and the reconciliation of tangible common equity ratio.

•

Scalable Back-Office Systems. All of CBF’s acquired institutions operate on a single information processing system. Our systems are designed to accommodate all of our projected future growth and allow us to offer our customers virtually all of the services currently offered by the nation’s largest financial institutions, including state-of-the-art online banking. Enhancements made to our systems are included to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support.

Our Market Area

We view our market area as the southeastern region of the United States. Our six acquisitions have established a footprint defined by the Miami-Raleigh-Nashville triangle, which includes the Carolinas, Southwest Florida (Naples) and Southeast Florida (Miami-Dade and the Keys). These markets include a combination of large and fast-growing metropolitan areas that we believe will offer us opportunities for organic loan and deposit growth. Approximately 47% of our current branches are located in our target MSAs.

~~The~~Products ~~following~~and isServices ~~a summary of activity in the allowance for loan losses for the periods indicated:~~

	Year Ended December 31,
	2010			2009			2008			2007			2006
Balance at beginning of year	$	50,161		$	48,811		$	34,111		$	22,302		$	19,739
Reserve acquired in acquisition		—			—			—			9,022			—
Subtotal		50,161			48,811			34,111			31,324			19,739
Charge-offs:
Commercial real estate		(48,617	)		(40,893	)		(28,759	)		(7,516	)		(494	)
Commercial		(3,210	)		(6,941	)		(6,177	)		(2,065	)		(879	)
Subtotal		(51,827	)		(47,834	)		(34,936	)		(9,581	)		(1,373	)
Residential real estate		(3,102	)		(3,176	)		(2,275	)		(840	)		(947	)
Consumer		(2,889	)		(3,880	)		(4,058	)		(3,050	)		(2,009	)
Other		—			—			—			—			(28	)
Total charge-offs		(57,818	)		(54,890	)		(41,269	)		(13,471	)		(4,357	)
Recoveries:
Commercial real estate		1,301			3,066			1,691			289			17
Commercial		909			1,669			221			227			171
Subtotal		2,210			4,735			1,912			516			188
Residential real estate		287			402			138			213			284
Consumer		882			853			1,106			1,038			936
Other		1			4			3			8			5
Total recoveries		3,380			5,994			3,159			1,775			1,413
Net charge-offs		(54,438	)		(48,896	)		(38,110	)		(11,696	)		(2,944	)
Provision for loan losses		71,107			50,246			52,810			14,483			5,507
Balance at end of year	$	66,830		$	50,161		$	48,811		$	34,111		$	22,302
Ratio of net charge-offs to average loans outstanding, net of unearned discount, during the period		2.84	%		2.25	%		1.63	%		.57	%		.20	%
Ratio of allowance for loan losses to non-performing loans		45.83	%		66.39	%		155.28	%		106.34	%		635.93	%
Ratio of allowance for loan losses to total loans, net of unearned income		3.83	%		2.45	%		2.20	%		1.45	%		1.45	%

Banking Services by Business Line

~~Breakdown~~Capital ofBank ~~allowance~~has ~~for~~integrated ~~loan~~each ~~losses~~of CBF’s bysix ~~portfolio~~acquisitions ~~segment.~~under ~~The~~a ~~following~~single ~~table presents~~line anof ~~allocation~~business ~~among~~operating ~~the~~model. ~~listed~~Under ~~loan~~this ~~categories~~model, ofwe ~~the~~have ~~Company’s~~appointed ~~allowance~~experienced ~~for~~bankers ~~loan~~to ~~losses at~~oversee ~~the~~loan ~~dates~~and ~~indicated~~deposit ~~and~~growth ~~the~~in ~~percentage~~each of ~~loans~~our inmarkets, ~~each~~while ~~category~~we tohave ~~the~~centralized ~~total~~other ~~amount~~functions, ofincluding credit, ~~loans~~finance, ~~at the~~operations, ~~respective~~marketing, ~~year-ends:~~ human resources and information technology.

	At December 31,
	2010					2009					2008					2007					2006
			Percent of					Percent of					Percent of					Percent of					Percent of
			loans in					loans in					loans in					loans in					loans in
			each					each					each					each					each
			category					category					category					category					category
Balance at end of period			to total					to total					to total					to total					to total
applicable to:	Amount		loans			Amount		loans			Amount		loans			Amount		loans			Amount		loans
Commercial real estate	$	54,203		61.93	%	$	36,527		63.93	%	$	35,714		64.33	%	$	20,489		65.38	%	$	10,619		59.38	%
Residential real estate		4,431		21.33	%		4,350		18.88	%		3,669		17.63	%		2,395		16.83	%		1,639		18.16	%
Commercial		5,080		12.78	%		5,840		13.42	%		6,479		14.17	%		7,575		13.51	%		6,645		16.70	%
Consumer		3,108		3.86	%		3,437		3.67	%		2,927		3.66	%		3,635		4.12	%		3,384		5.62	%
Other		8		0.11	%		7		0.10	%		22		0.21	%		17		0.16	%		15		0.14	%
Totals	$	66,830		100.00	%	$	50,161		100.00	%	$	48,811		100.00	%	$	34,111		100.00	%	$	22,302		100.00	%

The Commercial Bank

Our commercial bank business consists of teams of commercial loan officers operating under the leadership of commercial banking executives in Florida the Carolinas and Tennessee markets. The commercial banking executives are responsible for production goals for loans, deposits and fees. They work with senior credit officers to ensure that loan production is consistent with our loan policies and with financial officers to ensure that loan pricing is consistent with our profitability goals. We focus our commercial bank business on loan originations for established small and middle-market businesses with whom we develop personal relationships that we believe give us a competitive advantage and differentiates us from larger banking institutions. In addition, our commercial lending teams coordinate with personnel in our consumer bank business to provide personal loans and other services to the owners and managers and employees of the bank’s commercial clients. At December 31, 2011, commercial loans totaled $2.9 billion (or 67.0% of our total loan portfolio). Commercial underwriting is driven by cash flow analysis supported by collateral analysis and review. Our commercial lending teams offer a wide range of commercial loan products, including:

•

owner occupied commercial real estate construction and term loans;

•

working capital loans and lines of credit;

•

demand, term and time loans; and

•

equipment, inventory and accounts receivable financing.

During 2011, Capital Bank originated $561.8 million of new commercial loans. Our commercial lending teams also seek to gather low-cost deposits from commercial customers in connection with extending credit. In addition to business demand, savings and money market accounts, we also provide specialized cash management services and deposit products.

The Consumer Bank

Our consumer bank business consists of Capital Bank’s retail banking branches and associated businesses. Similar to our commercial bank business, we have organized the consumer bank by geographical market, with divisions consisting of our Florida, Carolina and Tennessee branches. Each division reports to a consumer banking executive responsible for achieving core deposit and consumer loan growth goals. Pricing of our deposit products is reviewed and approved by our asset-liability committee and the standards for consumer loan credit quality are documented in our loan policy and reviewed by our credit executives.

We seek to differentiate our consumer bank business from competitors through the personalized service offered by our branch managers, customer service representatives, tellers and other staff. We offer various services to meet the needs of our customers, including checking, savings and money market accounts, certificates of deposit and debit and credit cards. Our products are designed to foster relationships by rewarding our best customers for desirable activities such as debit card transactions, e-statements and direct deposit. In addition to traditional products and services, we offer competitive technology in Internet banking services, which we plan to further upgrade in order to keep pace with technological improvements. Consumer loan products we offer include:

•

home equity lines of credit;

•

residential first lien mortgages;

•

second lien mortgages;

•

new and used auto loans;

•

new and used boat loans;

~~Investment~~• ~~Activities~~ overdraft protection; and

~~General.~~• ~~The~~unsecured ~~Company~~personal ~~maintains~~credit ~~a portfolio of investments for general liquidity purposes and to cover minimum pledging requirements for municipal deposits and borrowings~~lines.

~~Securities~~Branch bymanagers ~~Category.~~and ~~The~~their ~~following~~staff ~~table~~are ~~sets~~charged ~~forth~~with ~~the~~growing ~~carrying~~core ~~value~~deposits ofwith ~~the~~a special focus on new demand deposit accounts and expected ~~securities~~to conduct outbound telephone campaigns, bygenerate ~~major~~qualified ~~categories~~referrals, ~~held~~collaborate bywith business partners in the ~~Company~~commercial atlending teams and evaluate, and make informed decisions with respect to, existing and prospective customers. In 2011, the Bank generated organic core deposit growth of $265.4 million (or 29.3% annualized growth) excluding the initial increase in deposits resulting from the acquisitions of Capital Bank Corporation and Green Bankshares, Inc. As of December 31, ~~2010~~2011, consumer ~~2009~~loans ~~and~~totaled ~~2008:~~ $1.4 billion. During 2011, the Bank originated $166.6 million of new consumer loans.

	At December 31,
	2010		2009		2008
Securities Held to Maturity:
State and political subdivisions	$	215	$	251	$	404
Other securities		250		375		253
Total	$	465	$	626	$	657
Securities Available for Sale:
U.S. government agencies	$	83,299	$	52,048	$	98,806
State and political subdivisions		31,501		32,192		31,804
Collateralized mortgage obligations		67,575		44,677		68,373
Mortgage-backed securities		17,964		16,892		2,086
Trust preferred securities		1,663		1,915		2,493
Total	$	202,002	$	147,724	$	203,562

Ancillary Fee-Based Businesses

~~Maturity~~Mortgage ~~Distributions~~Banking ~~of Securities. The following table sets forth the distributions of maturities of securities at amortized cost as of December 31, 2010:~~

				Due After One
	Due in One			Year through			Due After Five Years			Due
	Year or Less			Five Years			through 10 Years			After 10 Years			Total
Securities Held to Maturity:
State and political subdivisions	$	215		$	—		$	—		$	—		$	215
Other securities		250			—			—			—			250
Securities Available for Sale:
U.S. government agencies		—			—			39,004			45,102			84,106
State and political subdivisions		1,005			4,067			21,986			4,133			31,191
Collateralized mortgage obligations		—			651			1,584			63,809			66,044
Mortgage-backed securities		—			5,989			4,012			7,167			17,168
Trust preferred securities		—			—			—			1,850			1,850
Subtotal	$	1,470		$	10,707		$	66,586		$	122,061		$	200,824
Market value adjustment on available for sale securities		3			535			554			553			1,645
Total	$	1,473		$	11,242		$	67,140		$	122,614		$	202,469
Weighted average yield (a)		7.08	%		4.83	%		3.94	%		3.44	%		3.75	%

Through our newly established mortgage banking business, we aim to originate high-quality loans for customers who are willing to establish a deposit relationship with us. The mortgage loans in our portfolio that do not meet this criteria are sold in to the secondary market to buyers, such as Fannie Mae and Freddie Mac, and provide an additional source of fee income. Our mortgage banking capabilities include conventional and nonconforming mortgage underwriting and construction and permanent financing.

~~(a)~~Private ~~Weighted~~Banking, ~~average~~Trust ~~yields~~and onInvestment ~~tax-exempt~~Management ~~obligations have been computed on a fully taxable-equivalent basis using a tax rate of 35%.~~

~~Expected~~We ~~maturities~~offer ~~may~~private ~~differ~~banking ~~from~~and ~~contractual~~wealth ~~maturities~~management ~~because~~services ~~borrowers~~to ~~may~~affluent ~~have~~clients, ~~the~~business ~~right~~owners and retirees, building new relationships and expanding existing relationships to grow deposits, loans and fiduciary and investment management fee income. Through private banking, we offer deposit products, commercial and consumer loans, including mortgage financing, and investment accounts ~~call~~providing oraccess ~~prepay~~to ~~obligations~~a wide range of mutual funds, annuities and other financial products, as well as access to our affiliate, Naples Capital Advisors, which is a registered investment advisor with orapproximately ~~without~~$102 ~~call~~million orin ~~prepayment~~assets ~~penalties.~~under management as of December 31, 2011.

Lending Activities

We originate a variety of loans, including loans secured by real estate, loans for construction, loans for commercial purposes, loans to individuals for personal and household purposes, loans to municipalities and loans for new and used cars. A significant portion of our loan portfolio is related to real estate. As of December 31, 2011, loans related to real estate totaled $3.7 billion (or 86% of our total loan portfolio). The economic trends in the regions we serve are influenced by the industries within those regions. Consistent with our emphasis on being a community-oriented financial institution, most of our lending activity is with customers located in and around counties in which we have banking offices. As of December 31, 2011, our owner occupied commercial real estate loans, non-owner occupied commercial real estate loans, residential mortgage loans and commercial and industrial loans represented 21%, 21%, 19% and 11%, respectively, of our $4.3 billion loan portfolio.

We use a centralized risk management process to ensure uniform credit underwriting that adheres to our loan policies as approved annually by the CBF Board of Directors. Lending policies are reviewed on a regular basis to confirm that we are prudent in setting underwriting criteria. Credit risk is managed through a number of methods, including a loan approval process that establishes consistent procedures for the processing and approval of loan requests, risk grading of all commercial loans and certain consumer loans and coding of all loans by purpose, class and collateral type. We seek to focus on underwriting loans that enhance a balanced, diversified portfolio. Management analyzes our commercial real estate concentrations by market and region on a regular basis in an attempt to prevent overexposure to any one type of commercial real estate loan and incorporates third-party real estate and market analysis to monitor market conditions. As of December 31, 2011, the carrying value of our commercial real estate loans in North Carolina, South Carolina, Florida, Tennessee and Virginia totaled $699.2 million, $303.6 million, $794.4 million, $596.0 million and $15.8 million, respectively. At December 31, 2011, commercial real estate loans in all regions totaled $2.4 billion (21% of which was owner occupied commercial real estate). We have recently tightened underwriting and pricing standards for indirect auto and residential mortgage lending and de-emphasized originations of commercial real estate mortgages.

We believe that early detection of potential credit problems through regular contact with our clients, coupled with consistent reviews of the borrowers’ financial condition, are important factors in overall credit risk management. Our approach to proactively manage credit quality is to aggressively work with customers for whom a problem loan has been identified and assist in resolving issues before a default occurs.

A key component of our growth strategy is to grow our loan portfolio by originating high-quality commercial and consumer loans, other than non-owner occupied real estate loans, that comply with our conservative credit policies and that produce revenues consistent with our financial objectives. From December 31, 2010 to December 31, 2011, the Bank’s loan portfolio grew organically by $107.9 million (or 6.2%

annualized growth), excluding the initial increase in deposits resulting from the acquisitions of Capital Bank Corporation and Green Bankshares, Inc., with $728.4 million in new originations partially offset by pay-downs, dispositions and charge-offs. Additionally, we are working to reduce excessive concentrations in commercial real estate, which characterized our acquisitions’ legacy portfolios, in order to achieve a more diversified portfolio. It is our long-term goal to reduce the commercial real estate concentration to approximately 20% of our total loan portfolio.

In addition, we operate an indirect auto lending business which originates loans for new and used cars through relationships with dealers in Southwest Florida, Southeast Florida, the Florida Keys and Tennessee. Loans are approved subject to review of FICO credit scores, vehicle age, and loan-to-value. We are in the process of implementing an expert scoring model which will include additional proprietary underwriting factors. We set pricing for loans based on credit score, vehicle age, and loan term. As of December 31, 2011, we had $87.2 million of indirect auto loans.

Deposits

Deposits are the primary source of funds for lending and investing activities and their cost is the ~~Company~~largest category of interest expense. ~~Such~~Deposits ~~deposits~~are ~~consist~~attracted principally from clients within our branch network through the offering of a wide selection of ~~noninterest~~deposit ~~bearing~~instruments to individuals and businesses, including non-interest-bearing ~~demand~~checking ~~deposit~~ accounts, ~~regular~~interest-bearing checking accounts, savings ~~deposits~~accounts, ~~Money Market~~money market deposit accounts, certificates of deposit and ~~market~~individual ~~rate~~retirement accounts. We are focused on reducing our reliance on high-cost certificates of deposit as a source of funds with low-cost deposit accounts. ~~Deposits~~Deposit ~~are~~account ~~attracted~~terms ~~from~~vary ~~individuals~~with respect to the minimum balance required, ~~partnerships~~ ~~and~~the ~~corporations~~time inperiod the ~~Company’s~~funds ~~market~~must ~~areas~~remain on deposit and service charge schedules. InInterest ~~addition,~~rates paid on specific deposit types are determined based on (1) the ~~Company~~interest ~~obtains deposits~~rates ~~from~~offered ~~state~~by ~~and~~competitors, ~~local~~(2) the ~~entities~~anticipated amount and, totiming aof ~~lesser~~funding ~~extent~~needs, ~~U.S.~~(3) the ~~Government~~availability and ~~other~~cost ~~depository~~of ~~institutions~~alternative sources of funding and (4) the anticipated future economic conditions and interest rates. ~~The~~Client ~~Company’s~~deposits ~~Asset/Liability~~are ~~Management~~attractive ~~Policy~~sources ~~permits~~of ~~the~~funding ~~acceptance~~because of their stability and relatively low cost. Deposits are regarded as an important ~~limited~~part ~~amounts~~of the overall client relationship and provide opportunities to cross-sell other services. In addition, we gather a portion of our deposit base through brokered deposits. At December 31, ~~2010~~2011, ~~the~~total ~~percentage~~deposits were $5.1 billion of ~~the~~which ~~Company’s~~$5.0 billion (or 97%) were non-brokered deposits toand $143.1 million (or 3%) were brokered deposits. At December 31, 2011, our core deposits (total deposits ~~was~~less 0time deposits) consisted of $683.~~07%~~3 million of non-interest checking accounts, ~~which~~$1.1 billion ~~was~~of ~~within~~negotiable ~~the~~order ~~limits~~of withdrawal accounts, $296.4 million of ~~the~~savings ~~Asset/Liability Management~~accounts ~~Policy~~and $868.4 ~~The~~million ~~Company’s~~of ~~brokered~~money market deposits. ~~were~~For ~~also~~the ~~within~~foreseeable ~~the~~future, ~~limits~~we ofremain ~~the~~focused on retaining and growing a strong deposit base and transitioning ~~Asset/Liability~~certain ~~Management~~of ~~Policy~~our atcustomers ~~December 31~~to low-cost banking services as high-cost funding sources, ~~2009~~such ~~and~~as ~~2008~~high-interest certificates of deposit, ~~respectively~~mature.

~~The~~Investing ~~following~~Activities ~~table sets forth the average balances and average interest rates based on daily balances for deposits for the periods indicated:~~

	Year Ended December 31,
	2010					2009					2008
	Average		Average			Average		Average			Average		Average
	Balance		Rate Paid			Balance		Rate Paid			Balance		Rate Paid
Types of deposits (all in domestic offices):
Noninterest bearing demand deposits	$	166,814		—		$	162,765		—		$	187,058		—
Interest-bearing demand deposits		881,978		1.01	%		700,586		1.30	%		577,024		1.57	%
Savings deposits		98,900		1.02	%		83,549		1.13	%		68,612		.77	%
Time deposits		841,458		2.20	%		1,166,640		3.06	%		1,317,362		3.68	%
Total deposits	$	1,989,150				$	2,113,540				$	2,150,056

Investment securities represent a significant portion of Capital Bank, NA’s assets. The Bank invests in securities as allowable under bank regulations. These securities include obligations of the U.S. Treasury, U.S. government agencies, U.S. government-sponsored entities, including mortgage-backed securities, bank eligible obligations of any state or political subdivision, privately-issued mortgage-backed securities, bank eligible corporate obligations, mutual funds and limited types of equity securities. Our investment activities are governed internally by a written, Board-approved policy. The investment policy is carried out by the Bank’s Asset-Liability Committee (“ALCO”), which meets regularly to review the economic environment and establish investment strategies.

~~The~~Investment ~~following~~strategies ~~table~~are ~~indicates~~reviewed by ALCO based on the ~~amount~~interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Bank. In general, the ~~Company’s~~investment ~~certificates~~portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall ~~brokered~~funds ~~certificates~~management ofobjectives; ~~deposit~~(ii) to ofprovide ~~$100~~eligible orsecurities ~~more~~to bysecure ~~time~~public ~~remaining~~funds ~~until~~and ~~maturity~~other asborrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of ~~December 31,~~(i) and ~~2010:~~(ii).

	Certificates of
Maturity Period	Deposits
Three months or less	$	41,190
Over three through six months		43,741
Over six through twelve months		112,097
Over twelve months		112,673
Total	$	309,701

Marketing

Our marketing activities support all of our products and services described above. Historically, most of our marketing efforts have supported our real estate mortgage, commercial and retail banking businesses. Our marketing strategy aims to:

•

capitalize on our personal relationship approach, which we believe differentiates us from our larger competitors in both the commercial and residential mortgage lending businesses;

•

meet our growth objectives based on current economic and market conditions;

•

attract core deposits held in checking, savings, money market and certificate of deposit accounts;

•

provide customers with access to our local executives;

•

appeal to customers in our region who value quality banking products and personal service;

•

pursue commercial and industrial lending opportunities with small to mid-sized businesses that are underserved by our larger competitors;

•

cross-sell our products and services to our existing customers to leverage our relationships, grow fee income and enhance profitability;

•

utilize existing industry relationships cultivated by our senior management team; and

•

adhere to safe and sound credit standards.

We use a variety of targeted marketing media including the Internet, print, direct mail and financial newsletters. Our online marketing activities include paid advertising, as well as cross-sale marketing through our website and Internet banking services. We believe our marketing strategy will enable us to take advantage of lower average customer acquisition costs, build valuable brand awareness and lower our funding costs.

Information Technology Systems

We have made and continue to make investments in our information technology systems for our banking and lending operations and cash management activities. We seek to integrate our acquisitions quickly and successfully and believe this is a necessary investment in order to enhance our capabilities to offer new products and overall customer experience and to provide scale for future growth and acquisitions. Our enhancements are tailored to improve our commercial and consumer loan origination, electronic banking and direct response marketing processes, as well as enhance cash management, streamlined reporting, reconciliation support and sales support. We work closely with certain third-party service providers to which we outsource certain of our systems and infrastructure. We use the Jack Henry SilverLake System as our banking platform and believe that the scalability of our infrastructure will support our growth strategy and that this platform will support our growth needs.

Competition

The ~~Company~~financial ~~seeks~~services toindustry in general and our primary markets of South Florida, Tennessee and the Carolinas are highly competitive. We compete ~~effectively~~actively ~~through~~with ~~its~~national, ~~reliance~~regional onand local ~~commercial activity;~~financial ~~personal~~services ~~contacts~~providers, byincluding ~~its~~banks, ~~directors~~thrifts, ~~officers~~credit unions, ~~other~~mortgage ~~employees~~bankers and ~~shareholders;~~finance ~~personalized services;~~companies, money market mutual funds and ~~its~~other ~~reputation~~financial ininstitutions, some of which are not subject to the ~~communities~~same itdegree ~~serves~~of regulation and restrictions imposed upon us. Our largest competitors include Bank of America, Wells Fargo, BB&T, First Citizens, Royal Bank of Canada, SunTrust, Regions, FNB United Corp., Toronto-Dominion, Synovus, First Financial, SCBT, JPMorgan Chase, Citigroup, EverBank, Fifth Third Bancorp, First Horizon, Pinnacle Financial, First South and U.S. Bancorp.

~~According~~Competition toamong ~~data~~providers as of ~~June 30,~~financial products ~~2010~~and ~~published~~services bycontinues ~~SNL~~to ~~Financial~~increase, LCwith ~~and~~consumers ~~using~~having ~~information from~~ the ~~FDIC,~~opportunity ~~the~~to ~~Bank~~select ~~ranked~~from asa ~~the~~growing ~~largest~~variety ~~independent~~of ~~commercial~~traditional ~~bank~~and ~~headquartered~~nontraditional inalternatives. ~~East Tennessee,~~The ~~and~~primary ~~its~~factors ~~major~~driving ~~market~~commercial ~~areas~~and ~~include~~consumer ~~Greene,~~competition ~~Blount,~~for ~~Davidson,~~loans ~~Hamblen, Hawkins, Knox,~~and ~~Lawrence,~~deposits ~~Loudon,~~are ~~Macon,~~interest ~~McMinn~~rates, ~~Montgomery,~~the ~~Rutherford,~~fees ~~Smith~~charged, ~~Sullivan,~~customer ~~Sumner,~~service ~~Washington~~levels and ~~Williamson~~ ~~Counties,~~the ~~Tennessee~~range ~~and portions~~ of ~~Cocke~~products and ~~Monroe~~services ~~Counties, Tennessee~~offered. In ~~Greene County~~addition, inother ~~which~~competitive ~~the~~factors ~~Company~~include ~~enjoyed~~the ~~its~~location ~~largest~~and ~~deposit~~hours ~~share as~~ of ~~June 30,~~our ~~2010, there were seven commercial banks and one savings bank, operating 26~~ branches and ~~holding~~customer ~~an aggregate of approximately $1~~service.~~0 billion~~ in deposits as of June 30, 2010. The following table sets forth the Bank’s deposit share, excluding credit unions, in each county in which it has a full-service branch(s) as of June 30, 2010, according to data published by the FDIC:

County	Deposit Share
Greene, TN		28.72	%
Hawkins, TN		19.36	%
Lawrence, TN		17.53	%
Smith, TN		10.58	%
Sumner, TN		10.12	%
Hamblen, TN		8.78	%
Blount, TN		8.15	%
Cocke, TN		8.15	%
Macon, TN		7.10	%
Madison, NC		6.66	%
Montgomery, TN		6.36	%
Loudon, TN		6.00	%
Washington, TN		5.91	%
McMinn, TN		5.63	%
Bristol, VA1		4.39	%
Sullivan, TN		2.82	%
Williamson, TN		2.80	%
Rutherford, TN		2.62	%
Monroe, TN		1.49	%
Knox, TN		0.82	%
Davidson, TN		0.79	%

1 Bristol, VA is deemed a city.

Employees

~~As of~~ At December 31, ~~2010~~2011, ~~the~~Capital ~~Company~~Bank ~~employed~~had ~~730~~over 1,375 full-time ~~equivalent~~employees and 165 part-time employees. None of ~~the Company’s~~our employees are ~~presently~~parties ~~represented~~to by a ~~union or covered under a~~ collective bargaining agreement. ~~Management~~We ~~considers~~consider ~~relations~~our relationship with our employees to be ~~good~~adequate.

Facilities and Real Estate

Capital Bank currently leases approximately 263,000 square feet of office and operations space in North Carolina, Florida and South Carolina. We operate 35 branches in Florida, 31 in North Carolina, 13 in South Carolina, 63 in Tennessee and one in Virginia. Of these branches, 42 were leased and the rest were owned. In addition, the Company owns approximately 110,000 and leases approximately 100,000 square feet of non-branch office space. Management believes the terms of the various leases are consistent with market standards and were arrived at through arm’s-length bargaining.

Related Person Transactions

Certain of the directors and executive officers of Capital Bank, NA, members of their immediate families and entities with which they are involved are customers of and borrowers from the Bank. As of December 31, 2011, total loans outstanding to directors and executive officers of the Bank, and their associates as a group, equaled approximately $13.1 million. All outstanding loans and commitments included in such transactions were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time in comparable transactions with persons not related to the Bank, and did not involve more than the normal risk of collectability or present other unfavorable features.

~~Regulation~~Due to the Bank Merger, ~~Supervision~~the ~~and~~Company ~~Governmental~~reported ~~Policy~~no loans or deposits on its Consolidated Balance Sheet as of December 31, 2011.

~~The~~SUPERVISION ~~following~~AND isREGULATION a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. A number of other statutes and regulations have an impact on their operations. These laws and regulations are generally intended to protect depositors and borrowers, not shareholders. The following discussion describes the material elements of the regulatory framework that currently apply. In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. Many of these reforms will be implemented over the course of 2011 through regulations to be adopted by various federal banking and securities regulations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations.

The ~~Dodd-Frank~~U.S. ~~Wall~~banking ~~Street~~industry ~~Reform~~is highly regulated under federal and ~~Consumer~~state ~~Protection~~law. ~~Act~~These regulations affect the operations of the Company and its subsidiaries. Investors should understand that the primary objectives of the U.S. bank regulatory regime are the protection of depositors and consumers and maintaining the stability of the U.S. financial system, and not the protection of stockholders.

OnAs ~~July 21,~~a ~~2010,~~bank ~~the~~holding ~~Dodd-Frank~~company, ~~Act~~we ~~was~~are ~~signed~~subject ~~into~~to ~~law.~~supervision ~~The~~and ~~Dodd-Frank~~regulation ~~Act~~by ~~implements far-reaching reforms of major elements of~~ the ~~financial~~Federal ~~landscape,~~Reserve. ~~particularly~~Our ~~for larger~~national ~~financial~~bank ~~institutions.~~subsidiary ~~Many~~(which ofwill ~~its~~be ~~most~~our ~~far-reaching~~sole ~~provisions~~bank dosubsidiary ~~not~~following ~~directly impact community-based institutions like~~ the ~~Company.~~reorganization) ~~For~~is ~~instance,~~subject ~~provisions~~to ~~that~~supervision ~~regulate derivative transactions~~ and ~~limit~~regulation ~~derivatives~~by ~~trading~~the ~~activity of federally-insured institutions~~OCC, ~~enhance supervision~~the ofConsumer ~~“systemically~~Financial ~~significant”~~Protection ~~institutions,~~Bureau ~~impose~~(which ~~new~~we ~~regulatory~~refer ~~authority~~to ~~over~~as ~~hedge funds,~~the ~~limit~~“CFPB”) ~~proprietary trading by banks,~~ and ~~phase-out~~ the ~~eligibility~~FDIC. ~~of trust preferred~~In ~~securities~~addition, ~~for~~we ~~Tier~~expect 1that ~~capital are among~~ the ~~provisions~~additional businesses that dowe ~~not~~may ~~directly~~invest ~~impact~~in ~~the~~or ~~Company either~~acquire ~~because~~will ofbe ~~exemptions~~regulated ~~for~~by ~~institutions~~various ~~below~~state ~~a certain asset size~~ and/or ~~because~~federal ofregulators, including the ~~nature of~~OCC, the ~~Company’s~~Federal ~~operations.~~Reserve, ~~Those provisions that will impact~~ the ~~Company~~CFPB ~~include~~and the ~~following:~~ FDIC.

•The ~~Changing~~description below summarizes certain elements of the ~~assessment~~applicable ~~base~~bank ~~for~~regulatory ~~federal~~framework. ~~deposit~~This ~~insurance~~description ~~from~~is ~~the~~not ~~amount~~intended ofto describe ~~insured~~all ~~deposits~~laws and regulations applicable to ~~consolidated~~us ~~assets~~and ~~less~~our ~~tangible~~subsidiaries. ~~capital~~Banking statutes, ~~eliminating~~regulations ~~the~~and ~~ceiling~~policies are continually under review by Congress and ~~increasing~~state ~~the~~legislatures ~~size~~and offederal ~~the~~and ~~floor~~state ofregulatory ~~the~~agencies ~~DIF~~and changes in them, including changes in how they are interpreted or implemented, could have material effects on our business. In addition to laws and ~~offsetting~~regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to us and our subsidiaries. These issuances also may affect the ~~impact~~conduct of ~~the~~our ~~increase~~business or impose additional regulatory obligations. The description is qualified in its entirety by reference to the ~~minimum~~full ~~floor~~text onof ~~institutions~~the statutes, ~~with~~regulations, ~~less~~policies, ~~than~~interpretive ~~$10~~letters ~~billion~~and inother ~~assets;~~written guidance that are described.

•Bank ~~Making~~Holding ~~permanent~~Company the $250,000 limit for federal deposit insurance, increasing the cash limit of Securities Investor Protection Corporation protection to $250,000 and providing unlimited federal deposit insurance until December 31, 2012 for non-interest bearing demand transaction accounts at all insured depository institutions;Regulations

•Any ~~Repealing~~entity ~~the~~that ~~federal~~acquires ~~prohibition~~direct onor ~~payment~~indirect control of ~~interest~~a onbank ~~demand~~must ~~deposits~~obtain prior approval of the Federal Reserve to become a bank holding company pursuant to the BHCA. As a bank holding company, ~~thereby~~we ~~permitting~~are ~~depositing~~subject to regulation under the BHCA and to examination, supervision and enforcement by the Federal Reserve. While subjecting us to supervision and regulation, we believe that being a bank holding company (as opposed to a non-controlling investor) broadens the investment opportunities available to us among public and private financial institutions, failing and distressed financial institutions, seized assets and deposits and FDIC auctions. Federal Reserve jurisdiction also extends to ~~pay~~any ~~interest~~company onthat ~~business~~is ~~transaction~~directly or indirectly controlled by a bank holding company, such as subsidiaries and other ~~accounts;~~companies in which the bank holding company makes a controlling investment.

•Statutes, ~~Centralizing~~regulations ~~responsibility~~and ~~for~~policies ~~consumer~~could ~~financial~~restrict ~~protection~~our byability ~~creating~~to adiversify ~~new~~into ~~agency~~other areas of financial services, ~~the~~acquire ~~Consumer~~depository ~~Financial~~institutions ~~Protection~~and ~~Bureau,~~make ~~responsible~~distributions ~~for~~or ~~implementing~~pay ~~federal~~dividends ~~consumer~~on ~~protection~~our ~~laws,~~equity ~~although~~securities. ~~banks~~They ~~below~~may ~~$10~~also ~~billion~~require inus ~~assets~~to ~~will~~provide ~~continue~~financial support to beany ~~examined~~bank ~~and~~that ~~supervised~~we ~~for~~control, ~~compliance~~maintain ~~with~~capital ~~these~~balances ~~laws~~in excess of those desired by management ~~their~~and ~~federal~~pay ~~banking~~higher ~~regulator;~~deposit insurance premiums as a result of a general deterioration in the financial condition of Capital Bank or other depository institutions we control. They may also limit the fees and prices Capital Bank charges for its consumer services.

• Restricting the preemption of state law by federal law and disallowing national bank subsidiaries from availing themselves of such preemption;

• Imposing new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet certain provision qualifications, prohibitions and limitations on certain mortgage terms and various new mandated disclosures to mortgage borrowers;

• Applying the same leverage and risk based capital requirements that apply to insured depository institutions to holding companies, although the Company’s currently outstanding subordinated debentures (but not new issuances) will continue to qualify as Tier 1 capital, subject to existing limitations on the amount that may so qualify;

• Permitting national and state banks to establish de novo interstate branches at any location where a bank based in that state could establish a branch, and requiring that bank holding companies and banks be well capitalized and well managed in order to acquire banks located outside their home state;

• Imposing new limits on affiliated transactions and causing derivative transactions to be subject to lending limits; and

• Implementing corporate governance revisions, including with regard to executive compensation and proxy access to shareholders, that apply to all public companies not just financial institutions.

~~Many~~Capital ~~aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years~~Bank, ~~and~~N.A. ~~their~~as ~~impact~~a onNational ~~the~~Bank ~~Company or the financial industry is difficult to predict before such regulations are adopted.~~

Capital Bank ~~Holding~~is ~~Company~~a ~~Regulation.~~national ~~The~~bank ~~Company~~and is ~~registered~~subject asto asupervision ~~bank~~(including ~~holding~~regular ~~company~~examination) by its primary banking regulator, the OCC. ~~under~~Retail operations of the bank are also subject to supervision and regulation by the CFPB. Capital Bank’s ~~Holding~~deposits ~~Company~~are insured by the FDIC through the DIF up to applicable limits in the manner and extent provided by law. Capital Bank is subject to the Federal Deposit Insurance Act, as amended (which we refer to as the “~~Holding~~FDI ~~Company~~ Act”), and, asFDIC ~~such,~~regulations isrelating ~~subject~~ to ~~supervision,~~ ~~regulation~~deposit insurance and ~~examination~~may byalso ~~the~~be ~~Board~~subject ofto ~~Governors~~supervision ofby the ~~FRB~~FDIC under certain circumstances.

~~Acquisitions~~OCC ~~and~~Operating ~~Mergers.~~Agreement ~~Under~~and ~~the~~FDIC ~~Holding~~Order Company Act, a bank holding company must obtain the prior approval of the FRB before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Also, any company must obtain approval of the FRB prior to acquiring control of the Company or the Bank. For purposes of the Holding Company Act, “control” is defined as ownership of more than 25% of any class of voting securities of a bank holding company or bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the a bank holding company or bank. Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

•Capital ~~The~~Bank ~~bank~~is ~~holding~~subject ~~company~~to ~~has~~specific ~~registered~~requirements ~~securities~~pursuant ~~under~~to ~~Section~~the 12OCC Operating Agreement, which it entered into with the OCC in connection with our acquisition of the ~~Securities~~Failed ~~Exchange~~Banks. ~~Act~~The OCC Operating Agreement requires, among other things, that Capital Bank maintain various financial and capital ratios and provide notice to, and obtain consent from, the OCC with respect to any additional failed bank acquisitions from the FDIC or the appointment of ~~1934;~~any new director or senior executive officer of Capital Bank.

•Capital NoBank (and, with respect to certain provisions, CBF) is also subject to the FDIC Order issued in connection with the FDIC’s approval of our applications for deposit insurance for the Failed Banks. The FDIC Order requires, among other ~~person~~things, ~~owns~~that aduring ~~greater~~the ~~percentage~~first three years following our acquisition of the Failed Banks, Capital Bank must obtain the FDIC’s approval before implementing certain compensation plans and submit updated business plans and reports of material deviations from those plans to the FDIC. Additionally, the FDIC Order requires that ~~class~~Capital Bank maintain Tier 1 common equity (a non-GAAP measure) to total assets of ~~voting~~at ~~securities~~least ~~immediately~~10% during such three-year period and after ~~the~~such ~~transaction~~three-year period to remain “well capitalized.”

~~Our~~A ~~common~~failure ~~stock~~by isCBF ~~registered~~or ~~under~~Capital ~~Section 12~~Bank to comply with the requirements of the ~~Securities~~OCC ~~Exchange~~Operating ~~Act~~Agreement or the FDIC Order could subject CBF to regulatory sanctions; and failure to comply, or the objection, or imposition of ~~1934.~~additional ~~The~~conditions by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent CBF from executing its business ~~regulations~~strategy ~~provide~~and anegatively ~~procedure~~impact ~~for~~its ~~challenge~~business, financial condition, liquidity and results of operations. As of December 31, 2011, Capital Bank was in compliance with all of the ~~rebuttable~~material ~~control~~terms ~~presumption~~of the OCC Operating Agreement and FDIC Order.

~~The~~Regulatory ~~Change~~Notice ~~in Bank Control Act~~ and ~~the~~Approval ~~related~~Requirements ~~regulations of the FRB require any person or persons acting in concert (except~~ for ~~companies~~Acquisitions ~~required to make application under the Holding Company Act), to file a written notice with the FRB before such person or persons may acquire control~~ of ~~a bank holding company or bank. The Change in Bank~~ Control ~~Act defines “control” as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank.~~

~~Bank~~We ~~holding~~must ~~companies~~generally ~~like~~receive ~~the~~federal ~~Company~~regulatory ~~are~~approval ~~currently~~before ~~prohibited~~we ~~from~~can ~~engaging~~acquire inan ~~activities other~~institution ~~than~~or ~~banking~~business. ~~and~~Specifically, ~~activities~~a sobank ~~closely~~holding ~~related~~company tomust ~~banking~~obtain orprior ~~managing~~approval orof ~~controlling~~the ~~banks~~Federal asReserve in connection towith beany aacquisition ~~proper~~that ~~incident~~results ~~thereto.~~in ~~The~~the ~~FRB’s~~bank ~~regulations~~holding ~~contain~~company aowning ~~list~~or ofcontrolling ~~permissible~~more ~~nonbanking activities~~than ~~that~~5% ~~are~~of ~~closely~~any ~~related~~class toof ~~banking~~voting orsecurities ~~managing~~of ora ~~controlling~~bank ~~banks.~~or Aanother bank holding company. ~~must~~In ~~file~~acting anon ~~application~~such orapplications ~~notice~~of ~~with~~approval, the ~~FRB~~Federal ~~prior~~Reserve toconsiders, among ~~acquiring~~other ~~more~~factors: ~~than~~the 5%effect of the ~~voting~~ ~~shares~~acquisition on competition; the financial condition and future prospects of athe ~~company~~applicant ~~engaged~~and inthe ~~such~~banks ~~activities.~~involved; ~~The~~the ~~Gramm-Leach-Bliley~~managerial ~~Act~~resources of ~~1999~~the (applicant and the banks involved; the convenience and needs of ~~“GLB~~the ~~Act”)~~community, ~~however,~~including ~~greatly~~the ~~broadened~~record of performance under the ~~scope~~CRA; ofthe ~~activities~~effect ~~permissible~~of ~~for~~the ~~bank~~acquisition ~~holding companies.~~on ~~The~~the ~~GLB~~stability ~~Act~~of ~~permits~~the ~~bank~~United ~~holding~~States ~~companies,~~banking ~~upon~~or ~~election~~financial system; and ~~classification~~the ~~as financial~~effectiveness ~~holding~~of ~~companies,~~the applicant in combating money laundering activities. Our ability to ~~engage~~make investments in adepository ~~broad~~institutions ~~variety~~will ofdepend ~~activities~~on ~~“financial”~~our inability ~~nature~~to obtain approval of the Federal Reserve. The ~~Company~~ ~~has~~Federal ~~not~~Reserve ~~filed~~could andeny ~~election~~our ~~with~~application based on the ~~FRB~~above tocriteria or other considerations. We may also be required to sell branches as a ~~financial~~condition ~~holding~~to ~~company~~receiving regulatory approval, ~~but~~which may ~~choose~~not be acceptable to do sous inor, if acceptable to us, may reduce the ~~future~~benefit of any acquisition.

Capital Requirements. The Company is also subject to FRB guidelines that require bank holding companies to maintain specified minimum ratios of capital to total assets and capital to risk-weighted assets. The Dodd-Frank Act extended additional capital requirements to bank holding companies on a consolidated basis. See “Capital Requirements.”

Dividends. The FRB has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The FRB has issued a policy statement expressing its view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.

~~The~~Federal ~~Company is a legal entity separate~~ and ~~distinct~~state ~~from~~laws ~~the~~impose ~~Bank.~~additional ~~Over time~~notice, ~~the~~approval ~~principal source~~and ofongoing ~~the~~regulatory requirements ~~Company’s~~on ~~cash~~any ~~flow,~~investor ~~including~~that ~~cash~~seeks ~~flow~~ to ~~pay~~acquire ~~interest~~direct toor ~~its~~indirect ~~holders~~“control” of ~~trust preferred~~an ~~securities~~FDIC-insured ~~and~~depository ~~dividends~~institution toor ~~holders~~bank ofholding ~~the Series A preferred stock the Company issued to the U~~company.S. ~~Treasury~~These inlaws ~~connection~~include ~~with~~ the ~~Capital~~BHCA ~~Purchase Program (“CPP”)~~ and to the ~~Company’s common~~Change ~~stock~~in ~~shareholders, will be dividends that the~~ Bank ~~pays~~Control ~~to the Company as its sole shareholder~~Act. ~~Under~~Among ~~Tennessee~~other ~~law~~things, ~~the Company is not permitted to pay dividends if, after giving~~these ~~effect~~laws torequire ~~such~~regulatory ~~payment,~~filings ~~the~~by ~~Company~~an ~~would~~investor ~~not~~that beseeks ~~able~~ to ~~pay~~acquire ~~its~~direct ~~debts as they become due in the normal course of business~~ or ~~the~~indirect ~~Company’s~~“control” ~~total assets would be less than the sum~~ of ~~its~~an ~~total liabilities~~FDIC-insured ~~plus~~depository ~~any amounts needed to satisfy any preferential rights if the Company were dissolving~~institution. In addition, in deciding whether or not to declare a dividend of any particular size, the Company’s board of directors must consider the Company’s current and prospective capital, liquidity, and other needs.

InBroad ~~addition~~Supervision to the limitations on the Company’s ability to pay dividends under Tennessee law, the Company’s ability to pay dividends on its common stock is also limited by the Company’s participation in the CPP, by certain statutory or regulatory limitations and byEnforcement anPowers informal commitment the Company has made to the FRB-Atlanta that it will not pay dividends on its common or preferred stock (or interest on its subordinated debentures) without the prior approval of the FRB-Atlanta. The Company also informally committed to the FRB-Atlanta that it will not incur any indebtedness or repurchase any shares of its capital stock without the prior approval of the FRB-Atlanta. Prior to December 23, 2011, unless the Company has redeemed the Series A preferred stock issued to the U.S. Treasury in the CPP or the U.S. Treasury has transferred the Series A preferred stock to a third party, the consent of the U.S. Treasury must be received before the Company can declare or pay any dividend or make any distribution on the Company’s common stock in excess of $0.13 per quarter. Furthermore, if the Company is not current in the payment of quarterly dividends on the Series A preferred stock, it cannot pay dividends on its common stock. These dividend restrictions resulting from the Company’s participation in the CPP are in addition to those resulting from the Company’s informal commitment to the FRB-Atlanta.

~~Statutory~~The ~~and~~Federal ~~regulatory~~Reserve, ~~limitations~~the ~~also~~OCC ~~apply to~~ and the ~~Bank’s~~FDIC ~~payment~~have ofbroad ~~dividends~~supervisory toand ~~the Company.~~enforcement ~~Under~~authority ~~Tennessee~~with ~~law,~~regard ~~the~~to ~~Bank~~bank ~~can~~holding ~~only~~companies ~~pay~~and ~~dividends~~banks, toincluding the ~~Company~~power ~~in an amount equal~~ to or ~~less~~conduct ~~than~~examinations ~~the~~and ~~total~~investigations, ~~amount~~issue ofcease ~~its~~and ~~net~~desist ~~income~~orders, ~~for~~impose ~~that~~fines ~~year~~and ~~combined~~other ~~with~~civil ~~retained~~and ~~net income for~~criminal ~~the~~penalties, ~~preceding~~terminate ~~two~~deposit ~~years.~~insurance ~~Payment~~and ofappoint ~~dividends~~a inconservator ~~excess~~or ofreceiver. ~~this~~The ~~amount~~CFPB ~~requires~~similarly ~~the~~has ~~consent~~broad ofregulatory ~~the Commissioner~~supervision ofand ~~the~~enforcement ~~TDFI~~authority ~~(the~~with ~~“Commissioner”).~~regard ~~Because~~to ~~the~~consumer ~~Bank~~protection ~~incurred~~matters aaffecting ~~loss~~us inor ~~both~~our ~~2010~~subsidiaries. ~~and 2009, dividends from the~~ Bank toregulators regularly ~~the~~examine ~~Company, including, if necessary, dividends to support~~ the ~~Company’s~~ ~~payment~~operations of ~~interest~~banks ~~on its subordinated debt~~ and ~~dividends~~bank onholding ~~the~~companies. ~~Series A~~In ~~preferred stock~~addition, itbanks ~~sold~~and tobank ~~the~~holding ~~U.S.~~companies ~~Treasury~~are ~~will~~subject ~~require~~to ~~prior~~periodic ~~approval~~reporting byand ~~the~~filing ~~Commissioner~~requirements.

~~The payment of dividends by the~~ Bank ~~and~~regulators ~~the~~have ~~Company~~various ~~may~~remedies ~~also~~available beif ~~affected~~they bydetermine ~~other~~that ~~factors, such as~~ the ~~requirement~~financial tocondition, ~~maintain adequate~~ capital ~~above~~resources, ~~regulatory~~asset ~~guidelines.~~quality, ~~The~~earnings ~~federal banking~~prospects, ~~agencies~~management, ~~have~~liquidity ~~indicated~~or ~~that~~other ~~paying~~aspects ~~dividends~~of ~~that deplete~~ a ~~depository institution~~banking organization’s ~~capital~~ ~~base~~operations toare anunsatisfactory. ~~inadequate~~The ~~level~~regulators ~~would~~may bealso antake ~~unsafe~~action ~~and~~if ~~unsound~~they ~~banking~~determine ~~practice.~~that ~~Under~~ the ~~Federal~~ ~~Deposit~~banking ~~Insurance~~organization ~~Corporation~~or ~~Improvement~~its ~~Act~~management ofis ~~1991~~violating ~~(“FDICIA”),~~or ahas ~~depository~~violated ~~institution may not pay~~ any ~~dividend~~law ~~if payment would cause it to become undercapitalized~~ or ~~if it already is undercapitalized~~regulation. ~~Moreover,~~The ~~the~~regulators ~~federal agencies~~ have ~~issued~~the ~~policy~~power ~~statements~~to, ~~that provide that~~among ~~bank~~other ~~holding~~things: ~~companies~~enjoin ~~and~~“unsafe ~~insured~~or ~~banks~~unsound” ~~should~~practices, ~~generally~~require ~~only~~affirmative ~~pay~~actions ~~dividends~~to ~~out~~correct ofany ~~current operating~~violation ~~earnings.~~or ~~Recent~~practice, ~~supervisory~~issue ~~guidance~~administrative ~~from~~orders ~~the~~that ~~FRB~~can ~~indicates~~be ~~that~~judicially ~~bank~~enforced, ~~holding~~direct ~~companies that~~increases ~~are~~in ~~participants~~capital, indirect the ~~CPP~~sale ~~that~~of ~~are~~subsidiaries or ~~experiencing~~other ~~financial difficulty generally should eliminate~~assets, ~~reduce~~limit ~~or defer~~ dividends onand ~~Tier~~distributions, 1restrict ~~capital instruments including trust preferred securities~~growth, ~~preferred~~assess ~~stock~~civil ormonetary ~~common stock~~penalties, ifremove ~~the~~officers ~~holding company needs to conserve capital for safe~~ and ~~sound~~directors ~~operation~~ and toterminate ~~serve~~deposit ~~as a source of strength to its subsidiaries~~insurance.

OnEngaging ~~November 9,~~in ~~2010,~~unsafe ~~following~~or ~~consultation~~unsound ~~with~~practices ~~the~~or ~~FRB-Atlanta,~~failing ~~the Company notified the U.S. Treasury that the Company was suspending the payment of regular quarterly cash dividends on the Series A preferred stock issued~~ to ~~the~~comply ~~U.S.~~with ~~Treasury~~applicable ~~The dividends~~laws, ~~which~~regulations ~~are~~and ~~cumulative,~~supervisory ~~will continue~~agreements tocould besubject ~~reported as a preferred dividend requirement that is deducted from net income for financial statement purposes. Additionally, following consultation with~~ the ~~FRB-Atlanta~~Company, ~~the Company has exercised~~ its ~~rights~~subsidiaries toand ~~defer~~their ~~regularly~~respective ~~scheduled interest payments on all of its~~officers, ~~issues~~directors ofand ~~junior~~institution-affiliated ~~subordinated~~parties ~~notes~~to ~~having~~the anremedies ~~outstanding~~described ~~principal~~above ~~amount~~and ofother ~~$88~~sanctions.~~6 million, relating~~ toIn ~~outstanding trust preferred securities (“TRUPs”). Under the terms of the trust documents~~addition, the ~~Company~~FDIC may ~~defer~~terminate ~~payments~~a ofbank’s ~~interest~~depository ~~for~~insurance upupon ~~to 20 consecutive quarterly periods without triggering an event of default. During~~ a ~~deferral~~finding ~~period,~~that the ~~Company~~bank’s ~~may~~financial ~~not~~condition ~~pay~~is ~~dividends~~unsafe ~~on its common~~ or ~~preferred~~ ~~stock~~unsound or ~~interest on indebtedness~~ that ~~ranks pari passu or junior to~~ the ~~subordinated debentures.~~bank ~~The~~has ~~regular~~engaged ~~scheduled~~in ~~interest~~unsafe ~~payments~~or ~~will~~unsound ~~continue~~practices toor behas ~~accrued~~violated ~~for payment in the future and reported as~~ an ~~expense~~applicable ~~for~~rule, ~~financial statement purposes. Together~~regulation, ~~the~~order ~~deferral~~or ~~of interest~~condition ~~payments~~enacted onor ~~TRUPs~~imposed ~~and~~by ~~suspension of dividend payments to~~ the ~~U.S.~~bank’s ~~Treasury~~regulatory ~~will preserve about $5~~agency.~~1 million~~ ~~per year in cash flow.~~

Interstate Banking

Interstate Banking for State and National Banks

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (which we refer to as the “Riegle-Neal Act”), a bank holding company may acquire banks in states other than its home state, subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company not control, prior to or following the proposed acquisition, more than 10% of the total amount of deposits of insured depository institutions nationwide or, unless the acquisition is the bank holding company’s initial entry into the state, more than 30% of such deposits in the state (or such lesser or greater amount set by the state). The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches. The Dodd-Frank Act permits a national or state bank, with the approval of its regulator, to open a branch in any state if the law of the state in which the branch is located would permit the establishment of the branch if the bank were a bank chartered in that state. National banks may provide trust services in any state to the same extent as a trust company chartered by that state.

Limits on Transactions with Affiliates

Federal law restricts the amount and the terms of both credit and non-credit transactions between a bank and its nonbank affiliates. Transactions with any single affiliate may not exceed 10% of the capital stock and surplus of the bank.

~~Support~~Bank ofHolding ~~Banking~~Companies ~~Subsidiaries. Under the Dodd-Frank Act, and previously under FRB policy, the Company is expected to act~~ as a ~~source~~Source of ~~financial~~Strength strength to the Bank and, where required, to commit resources to support the Bank. This support can be required at times when it would not be in the best interest of the Company’s shareholders or creditors to provide it. Further, if the Bank’s capital levels were to fall below minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its capital levels and the Company would be required to guarantee the Bank’s compliance with the capital plan in order for such plan to be accepted by the federal regulatory authority. In the event of the Company’s bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the bankruptcy trustee and entitled to a priority of payment.

~~Under the “cross guarantee” provisions of the~~ Federal ~~Deposit~~Reserve ~~Insurance~~law ~~Act~~requires ~~(the~~that ~~“FDI~~a ~~Act”), any~~bank ~~FDIC-insured~~holding ~~subsidiary~~company ofserve ~~the Company such~~ as ~~the~~a ~~Bank~~source ~~could~~of befinancial ~~liable~~and ~~for~~managerial ~~any~~strength ~~loss incurred by, or reasonably expected~~ to beeach ~~incurred~~bank ~~by,~~that ~~the FDIC in connection with (i) the default of any~~it ~~other~~controls ~~FDIC-insured~~and, ~~subsidiary~~under ~~also~~appropriate ~~controlled~~circumstances, byto ~~the~~commit ~~Company~~resources ~~or (ii) any assistance provided by the FDIC~~ to ~~any~~support ~~FDIC-insured~~each ~~subsidiary~~such ofcontrolled ~~the Company in danger of default~~bank.

~~Transactions~~Under ~~with~~the ~~Affiliates.~~prompt corrective ~~The~~action ~~Federal~~provisions, ~~Reserve~~if ~~Act,~~a ascontrolled ~~amended~~bank byis ~~Regulation W~~undercapitalized, ~~imposes legal~~then ~~restrictions~~the onregulators could require the ~~quality~~bank ~~and~~holding ~~amount~~company ofto ~~credit~~guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s oractivities, ~~its~~assets ~~non-bank subsidiaries~~or (“affiliates”) ~~may~~represent ~~obtain~~a ~~from~~significant ~~bank~~risk ~~subsidiaries~~to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company. ~~For instance~~to terminate the activities, liquidate ~~these~~the ~~restrictions~~assets ~~generally~~or divest the affiliates. The regulators may require ~~that~~these ~~any~~and ~~such~~other ~~extensions~~actions in support of ~~credit~~controlled bybanks aeven ~~bank~~if tosuch ~~its affiliates~~actions beare onnot ~~non-preferential~~in ~~terms~~the ~~and~~best beinterests ~~secured~~of bythe ~~designated~~bank ~~amounts~~holding ofcompany ~~specified collateral~~or its stockholders. ~~Further,~~Because awe are a bank’s ~~ability~~holding tocompany, ~~lend~~we to(and ~~its~~our ~~affiliates~~consolidated isassets) ~~limited~~are toviewed ~~10%~~as ~~per~~a ~~affiliate (20%~~source inof ~~the~~financial ~~aggregate~~and tomanagerial ~~all~~strength ~~affiliates)~~for ofany ~~the~~controlled ~~bank’s~~depository ~~capital~~institutions, ~~and~~such ~~surplus~~as Capital Bank.

~~Bank~~The ~~Regulation~~Dodd-Frank Act also directs federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as sources of financial strength for the institution. AsThe aterm ~~federally~~“source of financial strength” is defined under the Dodd-Frank Act as the ability of a company to provide financial assistance to its insured, depository ~~Tennessee~~institution subsidiaries in the event of financial distress. The appropriate federal banking agency for such a depository institution, may require reports from companies that control the ~~Bank~~insured isdepository ~~subject~~ institution to ~~regulation,~~assess ~~supervision~~their abilities ~~and~~to ~~regular~~serve ~~examination~~as bysources ~~the~~of ~~TDFI~~strength and to enforce compliance with the ~~FDIC~~source-of-strength requirements. ~~Tennessee~~The ~~and~~appropriate federal banking ~~laws~~agency ~~and~~may ~~regulations~~also ~~control,~~require ~~among~~a ~~other~~holding ~~things,~~company ~~required~~to ~~reserves,~~provide ~~investments,~~financial ~~loans,~~assistance to a bank with impaired capital. ~~mergers~~The ~~and~~Dodd-Frank ~~consolidations,~~Act ~~issuance~~requires ofthat ~~securities~~federal banking regulators propose implementing regulations no later than July 21, ~~payment~~2011. ofUnder ~~dividends~~this requirement, ~~and~~in ~~establishment~~the ~~of branches~~future ~~and~~we ~~other~~could ~~aspects~~be ofrequired ~~the~~to provide financial assistance to Capital Bank’s ~~operations~~should it experience financial distress. ~~Supervision,~~Based ~~regulation~~on ~~and~~our ~~examination~~ownership of a national bank subsidiary, the ~~Company~~OCC ~~and~~could assess us if the capital of Capital Bank bywere to become impaired. If we failed to pay the ~~bank~~assessment ~~regulatory~~within ~~agencies~~three ~~are~~months, ~~intended~~the ~~primarily~~OCC ~~for~~could order the ~~protection~~ sale of ~~depositors~~our stock ~~rather~~in ~~than~~Capital ~~for~~Bank ~~the~~to ~~Company’s~~cover ~~security~~the ~~holders~~deficiency.

~~Extensions~~In ~~of Credit. Under joint regulations of the federal banking agencies~~addition, ~~including~~capital ~~the FDIC,~~loans ~~banks~~by ~~must~~us ~~adopt~~to ~~and~~Capital ~~maintain~~Bank ~~written~~will ~~policies~~be ~~that~~subordinate ~~establish appropriate limits and standards for extensions of credit that are secured by liens or interests~~ in ~~real estate or are~~right ~~made for the purpose~~ of ~~financing~~payment ~~permanent improvements~~ to ~~real~~deposits ~~estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits that are clear~~ and ~~measurable,~~certain ~~loan~~other ~~administration~~indebtedness ~~procedures~~of ~~and documentation,~~Capital ~~approval and reporting requirements~~Bank. AIn ~~bank’s~~the ~~real~~event ~~estate lending policy must reflect consideration~~ of ~~the~~our ~~Interagency~~bankruptcy, ~~Guidelines~~any ~~for~~commitment ~~Real Estate Lending Policies (the “Interagency Guidelines”) that have been adopted~~ by ~~the~~us ~~federal banking regulators. The Interagency Guidelines, among other things, call upon depository institutions~~ to ~~establish~~a ~~internal loan-to-value~~federal ~~limits~~bank ~~for~~regulatory ~~real~~agency ~~estate loans that are not in excess of the loan-~~to~~-value~~ ~~limits specified~~maintain in the ~~Interagency~~capital ~~Guidelines for the various types~~ of ~~real~~Capital ~~estate~~Bank ~~loans.~~will ~~The Interagency Guidelines state that it may~~ be ~~appropriate~~assumed inby ~~individual cases to originate or purchase loans with loan-to-value ratios in excess of~~ the ~~supervisory~~bankruptcy ~~loan-to-value~~trustee ~~limits. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital,~~ and ~~the total of such loans secured by commercial, agricultural,~~ ~~multifamily~~entitled ~~and other non-one-~~to~~-four~~ ~~family~~a ~~residential~~priority ~~properties should not exceed 30%~~ of ~~total capital~~payment.

Depositor Preference

The FDI Act provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If our insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including us, with respect to any extensions of credit they have made to such insured depository institution.

Regulatory Capital Requirements

In General

Bank regulators view capital levels as important indicators of an institution’s financial soundness. FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The final supervisory judgment on an institution’s capital adequacy is based on the regulator’s individualized assessment of numerous factors.

As a bank holding company, we are subject to various regulatory capital adequacy requirements administered by the Federal Reserve. In addition, the OCC imposes capital adequacy requirements on our subsidiary bank. The FDIC also may impose these requirements on Capital Bank and other depository institution subsidiaries that we may acquire or control in the future. The FDI Act requires that the federal regulatory agencies adopt regulations defining five capital tiers for banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial condition.

~~Federal~~Quantitative ~~Deposit~~measures, ~~Insurance.~~established ~~The~~by ~~deposits~~the ofregulators ~~the~~to ~~Bank~~ensure ~~are~~capital ~~insured~~adequacy, byrequire that ~~the~~a ~~FDIC~~bank toholding ~~the~~company ~~maximum extent~~maintain ~~provided~~minimum byratios ~~law,~~of ~~and~~capital ~~the~~to ~~Bank~~risk-weighted isassets. ~~subject~~There toare ~~FDIC~~three ~~deposit~~categories ~~insurance~~of ~~assessments.~~capital ~~The~~under ~~FDIC has~~the ~~adopted~~guidelines. aWith ~~risk-based~~the ~~assessment~~implementation ~~system~~of ~~for~~the ~~insured~~Dodd-Frank ~~depository~~Act, ~~institutions~~certain ~~that~~changes ~~takes~~have ~~into~~been ~~account~~made as to the ~~risks~~type of ~~attributable~~capital tothat ~~different~~falls under each of these categories. ~~and~~For ~~concentrations~~us, ofas ~~assets~~a ~~and~~bank ~~liabilities.~~holding Incompany, ~~early~~Tier ~~2006~~1 capital includes common shareholders’ equity, ~~Congress~~ ~~passed~~qualifying ~~the~~preferred ~~Federal~~stock ~~Deposit~~and ~~Insurance~~trust ~~Reform~~preferred ~~Act~~securities ofissued ~~2005,~~before ~~which~~May ~~made~~19, ~~certain~~2010, ~~changes~~less togoodwill ~~the~~and ~~Federal~~certain ~~deposit~~other ~~insurance~~deductions ~~program.~~(including ~~These~~a ~~changes~~portion ~~included~~of ~~merging~~servicing assets and the ~~Bank~~unrealized ~~Insurance~~net ~~Fund~~gains and ~~the Savings~~losses, ~~Association~~after ~~Insurance Fund~~taxes, ~~increasing~~on ~~retirement~~securities ~~account~~available ~~coverage~~for tosale). ~~$250,000~~Tier ~~and providing~~2 ~~for~~capital ~~inflationary~~includes ~~adjustments~~preferred tostock ~~general~~and ~~coverage~~trust ~~beginning~~preferred insecurities ~~2010,~~not ~~providing~~qualifying ~~the~~as ~~FDIC~~Tier ~~with~~1 ~~authority~~capital, tosubordinated ~~set~~debt, the ~~fund’s~~allowance ~~reserve~~for ~~ratio~~credit ~~within~~losses aand ~~specified~~net ~~range,~~unrealized ~~and~~gains ~~requiring~~on ~~dividends~~marketable equity securities, subject to ~~banks~~ iflimitations by the ~~reserve~~guidelines. ~~ratio~~Tier ~~exceeds~~2 ~~certain~~capital ~~levels.~~is ~~The~~limited ~~statute~~to ~~grants~~the ~~banks~~amount anof ~~assessment~~Tier ~~credit based~~1 oncapital ~~their~~(i.e., ~~share~~at least half of the ~~assessment~~total ~~base~~capital onmust ~~December 31,~~be ~~1996,~~in ~~and~~ the ~~amount~~form of ~~the~~Tier ~~credit~~1 ~~can be~~capital). ~~used~~Tier to3 ~~reduce~~capital ~~assessments~~includes certain qualifying unsecured subordinated debt. See “—Changes in ~~any~~Laws, ~~year~~Regulations ~~subject~~or toPolicies ~~certain~~and ~~limitations~~the Dodd-Frank Act. ”

Under the ~~Dodd-Frank Act~~guidelines, capital is compared with the ~~FDIC~~relative ~~was~~risk ~~required~~related to ~~adopt~~the ~~regulations~~balance ~~that~~sheet. ~~would~~To ~~base~~derive ~~deposit~~the risk included in the balance ~~insurance~~sheet, ~~assessments~~a risk weighting is applied to each balance sheet asset and off-balance sheet item, primarily based on ~~total~~the ~~assets~~relative ~~less~~credit ~~capital~~risk ~~rather~~of ~~than~~the ~~deposit~~asset ~~liabilities~~or counterparty. For example, claims guaranteed by the U.S. government or one of its agencies are risk-weighted at 0% and tocertain ~~include~~real estate-related loans risk-weighted at 50%. Off-balance sheet items, such as loan commitments and derivatives, are also applied a risk weight after calculating balance sheet equivalent amounts. A credit conversion factor is assigned to loan commitments based on the likelihood of the off-balance sheet ~~liabilities~~item ofbecoming ~~institutions~~an ~~and~~asset. ~~their~~For ~~affiliates~~example, incertain loan commitments are converted at 50% and then risk-weighted at 100%. Derivatives are converted to balance sheet equivalents based ~~assessments~~on notional values, replacement costs and remaining contractual terms. For certain recourse obligations, direct credit substitutes, residual interests in asset securitization and other securitized transactions that expose institutions primarily to credit risk, the capital amounts and classification under the guidelines are subject to qualitative judgments by the regulators about components, risk weightings and other factors.

~~The~~Banks ~~Emergency~~and ~~Economic~~bank ~~Stabilization~~holding ~~Act~~companies ofcurrently ~~2008~~are ~~(“EESA”)~~required ~~provided~~to ~~for~~maintain aTier ~~temporary~~1 ~~increase~~capital in and the ~~basic~~sum ~~limit~~of onTier ~~federal~~1 ~~deposit~~and ~~insurance~~Tier ~~coverage~~2 ~~from~~capital ~~$100,000~~equal to ~~$250,000~~at least ~~per~~6% ~~depositor.~~and ~~This increased~~10%, ~~level~~respectively, of ~~basic~~their ~~deposit~~total ~~insurance~~risk-weighted ~~was~~assets ~~made~~(including ~~permanent~~certain ~~by the Dodd~~off-~~Frank~~balance ~~Act.~~sheet ~~In addition~~items, on ~~October 14,~~such ~~2008,~~as ~~the~~standby ~~FDIC~~letters ~~instituted~~of ~~temporary~~credit) ~~unlimited~~to ~~FDIC~~be ~~coverage~~deemed of“well ~~non-interest~~capitalized.” ~~bearing deposit~~The ~~transaction~~federal ~~accounts.~~bank ~~Following~~regulatory ~~passage~~agencies ofmay, ~~the~~however, ~~Dodd-Frank~~set higher ~~Act,~~capital requirements for an ~~institution~~individual ~~can~~bank ~~provide full~~or ~~coverage~~when ona ~~non-interest~~bank’s ~~bearing~~particular ~~transaction~~circumstances ~~accounts~~warrant. ~~until~~At ~~December 31~~this time, ~~2012.~~the ~~The~~bank ~~Dodd-Frank Act~~regulatory ~~also~~agencies ~~repealed~~are ~~the~~more ~~prohibition~~inclined onto ~~paying~~impose ~~interest~~higher oncapital ~~demand~~requirements ~~transaction~~in ~~accounts,~~order ~~but~~to ~~did~~meet ~~not~~well-capitalized ~~extend~~standards, ~~unlimited~~and ~~insurance~~future ~~protection~~regulatory ~~for~~change ~~these~~could ~~accounts~~impose higher capital standards as a routine matter.

The ~~FDIC~~Federal Reserve may also ~~terminate~~set ~~its~~higher ~~insurance~~capital ofrequirements ~~deposits~~for ifholding companies whose circumstances warrant it. ~~finds~~For ~~that~~example, ~~the~~holding ~~institution~~companies ~~has~~experiencing ~~engaged~~internal growth or making acquisitions are expected to maintain strong capital positions substantially above the inminimum ~~unsafe~~supervisory ~~and~~levels, ~~unsound~~without ~~practices~~significant reliance on intangible assets. Also, isthe Federal Reserve considers a “tangible Tier 1 leverage ratio” (deducting all intangibles) and other indications of capital strength in anevaluating proposals ~~unsafe~~for expansion or ~~unsound~~engaging ~~condition~~in tonew ~~continue~~activities. ~~operations~~In addition, orthe federal bank regulatory agencies have established minimum leverage (Tier 1 capital to adjusted average total assets) guidelines for banks within their regulatory jurisdictions. ~~has~~These ~~violated~~guidelines ~~any~~provide ~~applicable~~for ~~law,~~a ~~regulation,~~minimum ~~rule,~~leverage ~~order~~ratio orof ~~condition~~5% ~~imposed~~for bybanks ~~the~~to ~~FDIC~~be deemed “well capitalized.” Our regulatory capital ratios and those of Capital Bank are in excess of the levels established for “well-capitalized” institutions.

~~Safety~~As ~~and~~an ~~Soundness~~additional ~~Standards.~~means ~~The~~to ~~FDICIA~~identify ~~required~~problems in the financial management of depository institutions, the FDI Act requires federal bank regulatory agencies to ~~prescribe,~~ byestablish ~~regulation,~~certain non-capital safety and soundness standards for ~~all insured depository~~ institutions ~~and~~for ~~depository~~which ~~institution~~they ~~holding~~are ~~companies. The FDIC and~~ the ~~other~~primary federal ~~banking agencies have adopted guidelines prescribing safety and soundness standards pursuant to FDICIA~~regulator. The ~~safety and soundness guidelines establish general~~ standards ~~relating~~relate generally to ~~internal~~operations ~~controls~~ and ~~information~~ ~~systems~~management, ~~internal~~asset ~~audit systems~~quality, ~~loan documentation, credit underwriting,~~ interest rate exposure, ~~asset growth,~~ and ~~compensation,~~executive ~~fees and benefits~~compensation. ~~Among~~The ~~other~~agencies ~~things,~~are ~~the~~authorized ~~guidelines require banks~~ to ~~maintain~~take ~~appropriate~~action ~~systems~~against ~~and~~institutions ~~practices~~that fail to ~~identify~~meet ~~and~~such ~~manage risks and exposures identified in the guidelines~~standards.

~~Participation~~In ~~in the Capital Purchase Program of the Troubled Asset Relief Program. On October 3~~addition, ~~2008,~~ the ~~EESA~~Dodd-Frank ~~became~~Act ~~law.~~requires ~~Under~~ the ~~Troubled~~federal ~~Asset~~banking ~~Relief~~agencies ~~Program~~to ~~(“TARP”)~~adopt ~~authorized~~capital byrequirements ~~EESA, the~~that ~~U.S.~~address ~~Treasury established~~ the ~~CPP~~risks ~~providing~~that ~~for~~ the ~~purchase~~activities of ~~senior~~an ~~preferred~~institution ~~shares~~pose ~~of qualifying~~to ~~U.S.~~the ~~controlled~~institution ~~banks, savings associations~~ and ~~certain~~the ~~bank~~public and ~~savings and loan~~ ~~holding~~private ~~companies. On December 23~~stakeholders, ~~2008,~~including ~~the~~risks ~~Company~~arising ~~sold~~from ~~72,278~~certain ~~shares~~enumerated ~~of Series A preferred stock and warrants to acquire 635,504 shares of common stock to the U~~activities.S. ~~Treasury~~The ~~pursuant~~federal tobanking ~~the~~agencies ~~CPP~~may ~~for aggregate~~change ~~consideration~~existing ofcapital ~~$83 million.~~guidelines Asor aadopt ~~result~~new ofcapital ~~the~~guidelines ~~Company’s participation~~ in the ~~CPP,~~future ~~the Company~~pursuant ~~agreed~~ to ~~certain~~the ~~limitations~~Dodd-Frank ~~on executive compensation. On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment~~ Act ~~of 2009 (“ARRA”)~~, ~~more commonly known as~~ the ~~economic~~implementation ~~stimulus or economic recovery package. ARRA, which amends EESA, includes a wide variety~~ of ~~programs intended to stimulate the economy and provide for extensive~~ ~~infrastructure,~~Basel ~~energy,~~III ~~health,~~(described ~~and~~below) ~~education~~or ~~needs.~~other ~~Under~~regulatory ~~ARRA,~~or ~~the~~supervisory ~~Company is subject to additional and more extensive executive compensation limitations and corporate governance requirements~~changes. ~~ARRA~~We ~~also~~cannot ~~permits~~be ~~the~~certain ~~Company~~what ~~to redeem~~ the ~~preferred~~impact ~~shares~~of itchanges ~~sold~~ to ~~the~~existing ~~U.S. Treasury without penalty and without the need to raise new~~ capital, ~~subject~~guidelines towill ~~the~~have ~~U.S.~~on ~~Treasury’s consultation~~us ~~with~~or ~~the~~Capital ~~Company’s and the~~ Bank~~’s appropriate regulatory agency~~.

~~For~~Basel ~~as long as the U.S. Treasury owns any debt or equity securities of the Company issued in connection with the CPP~~I, ~~the~~Basel ~~Company~~II will be required to take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply in all respects with Section 111(b) of the EESA, as amended by the ARRA, and ~~the~~Basel ~~regulations~~III ~~issued~~Accords and in effect thereunder, including the interim final rule related to executive compensation and corporate governance issued by the U.S. Treasury on June 15, 2009 (the “IFR”). This means that, among other things, while the U.S. Treasury owns debt or equity securities issued by the Company in connection with the CPP, the Company must:

•The ~~Ensure~~current risk-based capital guidelines that apply to us and our subsidiary bank are based on the ~~incentive~~1988 ~~compensation~~capital ~~programs~~accord, ~~for~~referred ~~its~~to ~~senior~~as Basel ~~executive~~I, ~~officers~~of dothe ~~not~~International ~~encourage~~Basel ~~unnecessary~~Committee on Banking Supervision (which we refer to as the “Basel Committee”), a committee of central banks and ~~excessive~~bank ~~risks~~supervisors, ~~that~~as ~~threaten~~implemented by federal bank regulators. In 2008, the ~~value~~bank regulatory agencies began to phase in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or “core” international banks and bank holding companies (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or “core” international bank in the ~~Company;~~foreseeable future, Basel II will not apply to us.

•On ~~Implement~~September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase in arrangements for a ~~required~~strengthened ~~clawback~~set of capital requirements, known as Basel III. While the timing and scope of any ~~bonus~~U.S. orimplementation ~~incentive~~of ~~compensation~~Basel ~~paid~~III toremains uncertain, the ~~Company’s~~following ~~senior~~items ~~executive~~provide ~~officers~~a brief ~~and~~description of the ~~next~~relevant ~~twenty~~provisions ~~most~~of ~~highly~~Basel ~~compensated~~III ~~employees~~and ~~based~~their potential impact on ~~materially~~our ~~inaccurate~~capital ~~financial~~levels ~~statements~~if orapplied ~~any~~to ~~other~~us ~~materially~~and ~~inaccurate~~Capital ~~performance~~Bank. ~~metric;~~

•New ~~Not~~Minimum ~~make~~Capital ~~any~~Requirements. ~~bonus,~~Subject ~~incentive~~to orimplementation ~~retention~~by ~~payment~~the toU.S. ~~any~~federal ofbanking ~~the~~agencies, ~~Company’s~~Basel ~~five~~III ~~most~~would ~~highly~~be ~~compensated~~expected, ~~employees~~among other things, ~~except~~to asincrease ~~permitted~~required ~~under~~capital ~~the~~ratios ~~IFR;~~of banking institutions to which it applies, as follows:

• ~~Not~~Minimum ~~make~~Common ~~any~~Equity. ~~“golden~~The ~~parachute~~minimum ~~payment”~~requirement ~~(as~~for ~~defined~~common inequity, the ~~IFR)~~highest form of loss absorbing capital, would be raised from the current 2.0% level, before the application of regulatory adjustments, to ~~any~~3.5% as of January 11, 2013 and 4.5% by January 1, 2015 after the ~~Company’s~~application ~~senior~~of ~~executive~~stricter ~~officers~~adjustments. orThe ~~next~~“capital ~~five~~conversion ~~most~~buffer,” ~~highly~~discussed ~~compensated~~below, ~~employees;~~would ~~and~~cause required total common equity to rise to 7.0% by January 1, 2019 (4.5% attributable to the minimum required common equity plus 2.5% attributable to the “capital conservation buffer”).

• ~~Agree~~Minimum ~~not~~Tier 1 Capital. The minimum Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, would increase from 4.0% to ~~deduct~~4.5% ~~for~~by ~~tax~~January ~~purposes~~1, ~~executive~~2013, ~~compensation~~and in6.0% ~~excess~~by ofJanuary ~~$500~~1,~~000~~ in2015. ~~any~~Total ~~one~~Tier ~~fiscal~~1 ~~year~~capital ~~for~~would ~~each~~rise ofto 8.5% by January 1, 2019 (6.0% attributable to the ~~Company’s~~minimum ~~senior~~required ~~executive~~Tier ~~officers~~1 capital ratio plus 2.5% attributable to the capital conservation buffer, as discussed below).

~~Capital~~• ~~Requirements.~~Minimum ~~Both~~Total ~~the Company and the Bank are required to comply with the capital adequacy standards established by the FRB, in the Company’s case, and the FDIC, in the case of the Bank~~Capital. The ~~FRB~~minimum ~~has~~Total ~~established~~Capital a(Tier ~~risk-based~~1 and aTier ~~leverage~~2 ~~measure of~~ capital) ~~adequacy~~requirement ~~for~~would ~~bank holding~~increase ~~companies,~~to ~~like~~8.0% ~~the Company~~(10.5% ~~The Bank is also subject to risk-based and leverage capital requirements adopted~~ by ~~the~~January ~~FDIC~~1, ~~which are substantially similar to those adopted by the FRB for bank holding companies. In addition~~2019, ~~the~~including ~~FDIC and TDFI may require state banks that are not members of~~ the ~~FRB, like the Bank, to maintain~~ capital atconservation ~~levels higher than those required by general regulatory requirements~~buffer).

~~The~~• ~~risk-based~~Capital Conservation Buffer. The capital ~~standards~~conservation ~~are~~buffer ~~designed~~would add 2.5% to ~~make~~the regulatory ~~capital~~minimum ~~requirements~~common ~~more sensitive~~equity torequirement ~~differences~~(adding in0.625% ~~risk~~during ~~profiles~~each ~~among~~of ~~banks~~the ~~and~~three ~~bank~~years ~~holding~~beginning ~~companies~~in January 1, to2016 ~~account~~through ~~for off-balance-sheet~~January ~~exposure~~1, ~~and~~2019). The buffer would be added to ~~minimize~~common ~~disincentives~~equity, ~~for~~after ~~holding~~the ~~liquid~~application ~~assets~~of deductions. ~~Assets~~The ~~and off-balance-sheet~~purpose ~~items,~~of ~~such~~the asconservation ~~letters~~buffer is to ensure that banks maintain a buffer of ~~credit~~capital that can be used to absorb losses during periods of financial and ~~unfunded~~economic ~~loan~~stress. ~~commitments~~It is expected that, ~~are~~while ~~assigned~~banks would be allowed to ~~broad~~ ~~risk~~draw ~~categories,~~on ~~each~~the ~~with~~buffer ~~appropriate~~during ~~risk~~such ~~weights.~~periods ~~The~~of ~~resulting~~stress, the closer their regulatory capital ratios ~~represent capital~~approach asthe aminimum ~~percentage~~requirement, ofthe ~~total~~greater ~~risk-weighted~~the ~~assets~~constraints ~~and~~that ~~off-balance-sheet~~would ~~items~~be applied to earnings distributions.

~~The~~• ~~minimum~~Countercyclical ~~statutory~~Buffer. ~~guideline~~Basel ~~for~~III ~~the~~expects ~~ratio~~regulators ~~of total capital~~ to ~~risk-weighted~~require, ~~assets~~as isappropriate ~~8%. Total~~to ~~capital~~national ~~consists~~circumstances, ofa ~~two~~“countercyclical ~~components,~~buffer” ~~Tier~~within 1a ~~capital~~range ~~and~~of ~~Tier~~0% 2to ~~capital~~2.5% ~~Tier 1 capital generally consists~~ of common ~~stock, minority interests in the~~ equity ~~accounts~~or ~~of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and~~ other ~~specified~~fully ~~intangible~~loss-absorbing ~~assets~~capital. The ~~Series A~~purpose ~~preferred~~of ~~stock that~~ the ~~Company~~countercyclical ~~sold~~buffer is to achieve the ~~U.S.~~broader ~~Treasury~~goal inof ~~connection~~protecting ~~with~~ the ~~CPP~~banking ~~and~~sector ~~the~~from ~~TRUPs~~periods ~~each~~of ~~qualifies as~~excess ~~Tier~~aggregate 1credit ~~capital,~~growth. ~~and~~For asany ~~described~~given ~~below~~country, ~~will~~it ~~continue~~is toexpected ~~qualify~~that asthis ~~Tier~~buffer 1would ~~capital~~only ~~following passage~~be ofapplied ~~the~~when ~~Dodd-Frank~~there ~~Act.~~is ~~Under~~excess ~~statutory~~credit ~~guidelines,~~growth ~~Tier~~that 1is ~~capital~~resulting ~~must~~in ~~equal~~a atperceived ~~least~~system-wide 4%buildup of ~~risk-weighted~~ ~~assets~~risk. ~~Tier~~The 2countercyclical ~~capital~~buffer, ~~generally~~when ~~consists~~in ~~of subordinated debt~~effect, ~~other~~would ~~preferred stock,~~be ~~and~~introduced aas ~~limited~~an ~~amount~~extension of ~~loan~~the ~~loss reserves. The total amount of Tier 2~~ capital isconservation ~~limited~~buffer ~~to 100% of Tier 1 capital~~range.

In• ~~addition,~~Regulatory ~~the~~Deductions ~~FRB~~from ~~has~~Common ~~established~~Equity. ~~minimum~~The ~~leverage~~regulatory ~~ratio~~adjustments ~~guidelines for bank holding companies~~(i.e., ~~These~~deductions ~~guidelines~~and ~~provide~~prudential ~~for~~filters), aincluding ~~minimum~~minority ~~ratio~~interests ofin ~~Tier~~financial 1institutions, ~~capital~~mortgage-servicing ~~to average assets~~rights, ~~less goodwill~~ and ~~other~~deferred ~~specified~~tax ~~intangible~~ assets, offrom 3%timing ~~for~~differences, ~~bank~~would ~~holding~~be ~~companies~~deducted ~~that~~in ~~meet specified~~increasing ~~criteria,~~percentages ~~including~~beginning ~~having~~January ~~the~~1, ~~highest~~2014, ~~regulatory rating~~ and ~~implementing~~would ~~the~~be ~~FRB’s risk-based~~fully ~~capital~~deducted ~~measure~~from ~~for~~common ~~market~~equity ~~risk.~~by ~~All~~January ~~other~~1, ~~bank holding companies generally are required to maintain a leverage ratio of at least 4%~~2018. ~~The~~Certain ~~guidelines~~instruments ~~also provide~~ that ~~bank~~no ~~holding companies~~longer ~~experiencing~~qualify ~~high~~as ~~internal~~Tier ~~growth~~1 ~~or making acquisitions will be expected to maintain strong~~ capital, ~~positions~~such ~~substantially~~as ~~above~~trust ~~the~~preferred ~~minimum supervisory levels. Furthermore~~securities, ~~the~~also ~~FRB has~~would ~~indicated~~be ~~that~~subject itto ~~will~~phaseout ~~consider~~over a ~~bank~~10-year ~~holding~~period ~~company’s~~beginning ~~Tier~~January 1 ~~capital leverage~~, ~~after deducting all intangibles, and other indicators of capital strength in evaluating proposals for expansion or new activities~~2013.

In• ~~late~~Non-Risk-Based ~~2010,~~Leverage ~~the~~Ratios. ~~Basel~~These ~~Committee~~capital onrequirements ~~Banking~~are ~~Supervision~~supplemented ~~issued~~by ~~Basel III,~~ a ~~new~~non-risk-based ~~capital framework~~leverage ~~for~~ratio ~~banks~~that ~~and~~will ~~bank~~serve ~~holding~~as ~~companies.~~a Ifbackstop ~~implemented~~to in the ~~United~~risk-based ~~States,~~measures ~~Basel~~described ~~III~~above. ~~will impose~~In aJuly ~~stricter definition of capital~~2010, ~~with~~the ~~more~~Governors ~~focus~~and onHeads ~~common~~of ~~equity.~~Supervision Atagreed ~~this~~to ~~time,~~test ~~the Company~~a ~~does~~minimum ~~not~~Tier ~~know~~1 ~~whether~~leverage ~~Basel~~ratio ~~III~~of ~~will~~3.0% beduring ~~implemented in~~ the ~~United~~parallel ~~States,~~run ~~and~~period. ifBased ~~so implemented~~on ~~whether~~the itresults ~~will~~of ~~be applicable to~~ the ~~Company~~parallel ~~and~~run ~~the Bank~~period, ~~because~~any byfinal ~~its~~adjustments ~~terms~~would itbe ~~is applicable~~carried ~~only~~out ~~to internationally active banks. But, if Basel III is implemented~~ in the ~~United States~~first ~~and~~half ~~becomes~~of ~~applicable~~2017 towith ~~the~~a ~~Company,~~view ~~the~~to ~~Company~~adopting ~~and~~ the ~~Bank~~3.0% ~~would~~leverage ~~likely~~ratio beon ~~subject~~January ~~to higher~~1, ~~minimum~~2018, ~~capital~~based ~~ratios~~on ~~than~~appropriate ~~those~~review ~~to which the Company~~ and ~~the Bank are currently subject~~calibration.

~~Failure~~Basel toIII ~~meet~~also ~~statutorily~~introduces ~~mandated~~a ~~capital~~non-risk ~~guidelines~~adjusted orTier ~~more~~1 ~~restrictive~~leverage ~~ratios~~ratio ~~separately established~~of ~~for~~3%, abased ~~financial~~on ~~institution~~a measure ~~(like~~of ~~those~~total exposure that ~~the~~includes ~~Bank~~balance ~~has~~sheet ~~informally~~assets, ~~agreed~~net ~~with~~of ~~the TDFI~~provisions and ~~FDIC~~valuation ~~that~~adjustments, itas ~~will~~well ~~maintain)~~as ~~could~~potential ~~subject~~future aexposure ~~bank~~to oroff-balance ~~bank~~sheet ~~holding~~items, ~~company~~such toas aderivatives. ~~variety~~Basel ~~of enforcement~~III ~~remedies,~~also ~~including~~includes ~~issuance~~both ofshort- aand ~~capital~~long-term liquidity ~~directive,~~standards. ~~the~~The ~~termination~~phase-in of ~~deposit insurance~~the bynew ~~the~~rules ~~FDIC,~~is ato ~~prohibition~~commence on ~~accepting~~January or1, ~~renewing brokered deposits~~2013, ~~limitations~~with on the ~~rates~~ phase-in of ~~interest that~~ the ~~institution~~capital ~~may~~conservation ~~pay~~buffer oncommencing ~~its deposits and other restrictions~~ on ~~its business.~~January ~~As described above~~1, ~~significant~~2016 ~~additional~~and ~~restrictions~~the ~~can~~rules to be ~~imposed~~fully onphased ~~FDIC-insured depository~~in ~~institutions~~by ~~that~~January ~~fail~~1, ~~to meet applicable capital requirements~~2019.

~~Additionally~~In November 2010, ~~the~~Basel ~~Federal~~III ~~Deposit~~was ~~Insurance~~endorsed ~~Corporation~~by ~~Improvement~~the ~~Act~~Group of ~~1991~~Twenty ~~establishes~~(G-20) ~~a system~~Finance ofMinisters ~~prompt~~and ~~corrective~~Central ~~action~~Bank Governors and will be subject to ~~resolve~~individual ~~the~~adoption ~~problems~~by ofmember ~~undercapitalized~~nations, ~~financial institutions~~including the United States. ~~Under~~On ~~this~~December ~~system~~16, 2010, the ~~federal~~Basel ~~banking~~Committee ~~regulators~~issued ~~have~~the ~~established~~text ~~five~~of ~~capital categories~~the ~~(well~~Basel ~~capitalized,~~III ~~adequately capitalized~~rules, ~~undercapitalized,~~which ~~significantly undercapitalized~~presents ~~and~~the ~~critically~~details ~~undercapitalized)~~of ~~into~~global ~~one~~regulatory ofstandards ~~which~~on ~~all~~bank ~~institutions~~capital ~~are~~adequacy ~~placed.~~and liquidity ~~Federal~~agreed ~~banking~~by ~~regulators~~the ~~are~~Basel ~~required~~Committee toand ~~take~~endorsed ~~various~~by ~~mandatory~~the ~~supervisory~~G-20 ~~actions~~leaders. ~~and~~In ~~are authorized~~January to2011, ~~take~~the ~~other~~Basel ~~discretionary~~Committee ~~actions~~issued ~~with~~further ~~respect~~guidance toon ~~institutions~~the qualification criteria for inclusion in ~~the~~Tier ~~three undercapitalized~~1 ~~categories~~capital. The ~~severity~~federal ofbanking ~~the~~agencies ~~action~~will ~~depends~~likely ~~upon~~implement changes to the current capital ~~category~~adequacy standards applicable to us and our bank subsidiary in ~~which the~~light ~~institution~~of isBasel ~~placed~~III. ~~Generally~~If adopted by federal banking agencies, ~~subject~~Basel III could lead to ahigher ~~narrow~~capital ~~exception~~requirements, ~~the~~including ~~banking~~a ~~regulator~~restrictive ~~must~~leverage ratio and new ~~appoint~~liquidity aratios. ~~receiver~~The orultimate ~~conservator~~impact ~~for~~of anthe ~~institution~~new ~~that~~capital and liquidity standards on us and our bank subsidiary is ~~critically~~currently ~~undercapitalized.~~being ~~The federal~~reviewed ~~banking~~and ~~agencies~~will ~~have~~depend ~~specified~~on bya ~~regulation~~number of factors, including the ~~relevant~~rule-making ~~capital~~and ~~level~~implementation ~~for~~by ~~each~~the ~~category~~U.S. banking regulators.

AnPrompt ~~institution~~Corrective ~~that~~Action is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2010, the Bank would be considered “well capitalized” under the FDIC’s prompt corrective action provisions; however, the Bank has informally committed to the TDFI and the FDIC that it will maintain a Tier 1 leverage ratio of not less than 10% and a Total risk-based capital ratio of not less than 14%. Because of the significant losses that the Bank incurred in the second half of 2010, the Bank’s capital levels fell below these required minimum levels at December 31, 2010. At December 31, 2010, the Bank’s Tier 1 leverage ratio was 8.88% and its ratio of Total capital to risk-weighted assets was 13.22%.

~~Because~~The ~~the~~FDI ~~Bank’s~~Act ~~capital~~requires ~~levels~~federal atbank ~~December 31,~~regulatory ~~2010~~agencies ~~were~~to ~~below~~take ~~those~~“prompt ~~that~~corrective ~~the~~action” ~~Bank~~with ~~had informally~~respect ~~committed~~ to ~~its~~FDIC-insured ~~primary~~depository ~~regulators~~institutions that itdo ~~would~~not ~~maintain,~~meet minimum capital requirements. A depository institution’s treatment for purposes of the ~~Bank~~prompt ~~was~~corrective ~~required~~action ~~to submit~~provisions awill ~~Capital~~depend ~~Action~~upon ~~Plan~~how its capital levels compare to ~~its~~various ~~primary~~capital ~~regulators~~measures and certain other factors, as established by regulation.

~~The~~Under ~~Dodd-Frank~~this ~~Act contains a number of provisions dealing with capital adequacy of insured depository institutions and their holding companies~~system, ~~and for~~ the ~~most~~federal ~~part~~banking ~~will~~regulators ~~result~~have inestablished ~~insured depository~~five ~~institutions and their holding companies being subject to more stringent~~ capital ~~requirements.~~ ~~Under~~categories, ~~the~~well ~~so-called Collins Amendment to the Dodd-Frank Act~~capitalized, ~~federal~~adequately ~~regulators were~~capitalized, ~~directed~~undercapitalized, tosignificantly ~~establish~~undercapitalized ~~minimum leverage~~ and ~~risk-based~~critically ~~capital requirements for~~undercapitalized, ~~among~~in ~~other entities,~~which ~~banks~~all ~~and~~institutions ~~bank~~are ~~holding companies on a consolidated basis~~placed. ~~These~~The ~~minimum~~federal ~~requirements can’t~~banking beregulators ~~less~~have ~~than~~also ~~the~~specified ~~generally~~by ~~applicable~~regulation ~~leverage and risk-based capital requirements established for insured depository institutions nor quantitatively lower than~~ the ~~leverage~~relevant ~~and risk-based~~ capital ~~requirements~~levels ~~established~~ for ~~insured~~each ~~depository institutions that were in effect as~~ of the ~~date~~other ~~that the Dodd-Frank Act was enacted~~categories. ~~These requirements in effect create capital~~ ~~level~~Federal ~~floors~~banking ~~for~~regulators ~~bank~~are ~~holding~~required ~~companies similar~~ to ~~those~~take invarious ~~place~~mandatory ~~currently~~supervisory ~~for~~actions ~~insured~~and ~~depository institutions.~~are ~~The~~authorized ~~Collins~~to ~~Amendment~~take ~~also~~other ~~excludes~~discretionary ~~trust~~actions ~~preferred~~with ~~securities~~respect ~~issued~~to ~~after~~institutions ~~May 19, 2010 from being included~~ in ~~Tier 1 capital unless~~ the ~~issuing~~three ~~company~~undercapitalized ~~is a bank holding company with less than $500 million in total assets~~categories. ~~Trust~~The ~~preferred~~severity ~~securities~~of ~~issued~~the ~~prior~~action ~~to that date~~depends ~~will~~upon ~~continue~~the ~~to count as Tier 1~~ capital ~~for~~category ~~bank holding companies with less than $15 billion~~ in ~~total~~ ~~assets,~~which ~~and~~the ~~such~~institution ~~securities~~is ~~will be phased out of Tier 1 capital treatment for bank holding companies with over $15 billion in total assets over a three-year period beginning in 2013~~placed. ~~The Collins~~Generally, ~~Amendment~~subject ~~did not exclude preferred stock issued~~ to ~~the~~a ~~U.S.~~narrow ~~Treasury through the CPP from Tier 1 capital treatment. Accordingly~~exception, the ~~Company’s~~banking ~~TRUPs~~regulator ~~and~~must ~~Series A~~appoint ~~preferred~~a ~~stock~~receiver ~~issued~~or ~~to the~~conservator ~~U.S.~~for ~~Treasury~~an ~~through~~institution ~~the~~that ~~CPP~~is ~~will~~critically ~~continue to qualify as Tier 1 capital~~undercapitalized.

Federal Reserve Board regulations require that each bank maintain reserve balances on deposits with the Federal Reserve Bank.

Reserve Requirements

Pursuant to regulations of the Federal Reserve, all banks are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Banks.

Deposit Insurance Assessments

FDIC-insured banks are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. The FDIC recently raised assessment rates to increase funding for the DIF, which is currently underfunded.

The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured deposits. In addition, federal deposit insurance for the full net amount of deposits in non-interest-bearing transaction accounts was extended to January 1, 2013 for all insured banks.

~~More~~The ~~information~~Dodd-Frank ~~concerning~~Act changes the ~~Company’s~~deposit insurance assessment framework, ~~and~~primarily ~~the~~by ~~Bank~~basing assessments on an institution’s, ~~regulatory~~total ~~capital~~assets ~~ratios~~less ~~at December 31~~tangible equity (subject to risk-based adjustments that would further reduce the assessment base for custodial banks) rather than domestic deposits, ~~2010~~which is ~~included~~expected into ~~Note~~shift 12a togreater portion of the ~~“Notes~~aggregate assessments to ~~Consolidated~~large ~~Financial~~banks, ~~Statements” included~~as ~~elsewhere~~described in ~~this~~detail ~~Annual~~below. ~~Report~~The onDodd-Frank ~~Form~~Act ~~10-K.~~also eliminates the upper limit for the reserve ratio designated by the FDIC each year, increases the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

~~Legislative, Legal and Regulatory Developments.~~ The ~~banking~~Dodd-Frank ~~industry~~Act isrequires ~~generally~~the ~~subject~~ DIF to ~~extensive~~reach ~~regulatory oversight. The Company, as~~ a ~~publicly~~reserve ~~held~~ratio ~~bank~~of ~~holding~~1.35% ~~company,~~of ~~and~~insured ~~the Bank, as a state-chartered bank with~~ deposits ~~insured~~ by ~~the~~September ~~FDIC~~30, ~~are subject to a number of laws and regulations~~2020. ~~Many~~On ofDecember ~~these~~20, ~~laws and regulations have undergone significant change in recent years. In July~~ 2010, the ~~U.S.~~FDIC ~~Congress~~raised ~~passed, and President Obama signed into law,~~ the ~~Dodd-Frank Act,~~minimum ~~which~~designated ~~includes~~reserve ~~significant~~ratio ~~consumer~~of ~~protection~~DIF ~~provisions related~~ to ~~residential~~2%. ~~mortgage loans~~The ~~that~~ratio is ~~likely~~higher tothan ~~increase~~the ~~our regulatory compliance costs. These laws and regulations impose restrictions on activities,~~ minimum ~~capital~~reserve ~~requirements,~~ratio ~~lending~~of ~~and deposit restrictions and numerous other requirements~~1.35% ~~Future~~as ~~changes~~set toby ~~these~~the ~~laws~~Dodd-Frank ~~and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty~~Act. ~~With~~Under the ~~enactments of EESA, AARA and the~~ Dodd-Frank Act, ~~and~~ the ~~significant~~FDIC ~~amount~~is ~~of regulations~~required ~~that are~~ to ~~come~~offset ~~from~~ the ~~passage~~effect of ~~that legislation,~~ the ~~nature~~higher ~~and extent of the~~reserve ~~future~~ratio ~~legislative~~on ~~and~~insured ~~regulatory~~depository ~~changes affecting financial~~ institutions ~~and~~with ~~the~~consolidated ~~resulting~~assets ~~impact on those institutions is very unpredictable at this time. The Dodd-Frank Act, in particular, will require that a significant number~~ of ~~new~~less ~~regulations~~than be$10 ~~adopted by various financial regulatory agencies over 2011 and 2012~~billion.

~~USA~~On ~~Patriot~~February ~~Act~~7, 2011, the FDIC approved a final rule on Assessments, Dividends, Assessment Base and Large Bank Pricing. The ~~President~~final ofrule, mandated by the ~~United~~Dodd-Frank ~~States~~Act, ~~signed~~changes the ~~Uniting~~deposit ~~and~~insurance ~~Strengthening America~~assessment bysystem ~~Providing~~from ~~Appropriate~~one ~~Tools~~that ~~Required~~is tobased ~~Intercept~~on ~~and~~domestic ~~Obstruct~~deposits ~~Terrorism~~to ~~Act~~one ~~(the~~that is based ~~“Patriot~~on ~~Act”),~~average ~~into~~consolidated ~~law~~total onassets ~~October 26,~~minus ~~2001~~average tangible equity. ~~The~~Because ~~Patriot~~the new assessment base under the Dodd-Frank Act ~~establishes~~is alarger ~~wide~~than ~~variety~~the ofcurrent ~~new and~~assessment ~~enhanced~~base, ~~ways~~the offinal ~~combating~~rule’s ~~international~~assessment ~~terrorism.~~rates ~~The~~are ~~provisions~~lower ~~that~~than ~~affect~~the ~~banks~~current ~~(and~~rates, which ~~other~~achieves ~~financial~~the ~~institutions)~~FDIC’s ~~most~~goal ~~directly~~of ~~are~~not ~~contained~~significantly inaltering ~~Title~~the ~~III~~total amount of revenue collected from the ~~act~~industry. In ~~general~~addition, ~~Title~~the ~~III~~final ~~amended~~rule ~~existing~~adopts ~~law~~a —“scorecard” ~~primarily~~assessment scheme for larger banks and suspends dividend payments if the ~~Bank~~DIF ~~Secrecy~~reserve ~~Act~~ratio —exceeds to1.5% ~~provide~~but provides for decreasing assessment rates when the ~~Secretary~~DIF ofreserve Uratio reaches certain thresholds.S. ~~Treasury~~The ~~and~~final ~~other~~rule ~~departments~~also ~~and~~determines ~~agencies~~how of the ~~federal~~effect ~~government~~of ~~with~~the ~~enhanced~~higher ~~authority~~reserve toratio ~~identify,~~will ~~deter,~~be ~~and~~offset ~~punish~~for ~~international~~institutions ~~money~~with less ~~laundering~~than ~~and~~$10 ~~other~~billion ~~crimes~~of consolidated assets.

~~Among~~Continued ~~other~~action ~~things,~~by the ~~Patriot~~FDIC ~~Act~~to ~~prohibits~~replenish ~~financial~~the ~~institutions~~DIF ~~from~~as ~~doing~~well ~~business~~as ~~with foreign~~changes ~~“shell”~~contained ~~banks~~in the ~~and~~Dodd-Frank ~~requires~~Act ~~increased~~may ~~due~~result ~~diligence~~in ~~for~~higher ~~private~~assessment ~~banking transactions and correspondent accounts for foreign banks~~rates. InCapital ~~addition,~~Bank ~~financial~~may ~~institutions~~be ~~will~~able ~~have~~ to ~~follow new~~pass ~~minimum~~part ~~verification~~or ~~of identity standards for~~ all ~~new~~of ~~accounts~~this ~~and~~cost ~~will~~on ~~be permitted~~ to ~~share information~~its ~~with~~customers, ~~law~~including ~~enforcement~~in ~~authorities~~the ~~under~~form ~~circumstances that were not previously permitted. These and other provisions~~ of ~~the~~lower ~~Patriot~~interest ~~Act~~rates ~~became~~on ~~effective~~deposits, ator ~~varying~~fees ~~times~~to ~~and~~some ~~the Treasury~~depositors, ~~and~~depending ~~various~~on ~~federal banking agencies are responsible for issuing regulations to implement~~market ~~the new law~~conditions.

~~Additional~~The ~~Information~~FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. If deposit insurance for a banking business we invest in or acquire were to be terminated, that would have a material adverse effect on that banking business and potentially on the Company as a whole.

~~The~~Permitted ~~Company~~Activities ~~maintains a website at www.greenbankusa.com~~ and isInvestments ~~not including the information contained on this website as a part of, or incorporating it~~ by ~~reference~~Bank ~~into,~~Holding ~~this~~Companies Annual Report on Form 10-K. The Company makes available free of charge (other than an investor’s own internet access charges) through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the SEC.

The BHCA generally prohibits a bank holding company from engaging in activities other than banking or managing or controlling banks except for activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Provisions of the Gramm-Leach-Bliley Financial Modernization Act of 1999 (which we refer to as the “GLB Act”) expanded the permissible activities of a bank holding company that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to financial activity. Those activities include, among other activities, certain insurance and securities activities. We have not yet determined whether it would be appropriate or advisable in the future to become a financial holding company.

~~ITEM~~Privacy ~~1A.~~Provisions ~~RISK~~of ~~FACTORS.~~the GLB Act and Restrictions on Cross-Selling

~~Investing~~Federal inbanking ~~our~~regulators, ~~common~~as ~~stock~~required ~~involves~~under ~~various~~the ~~risks~~GLB ~~which~~Act, ~~are~~have ~~particular~~adopted torules ~~our~~limiting ~~company, our~~the ~~industry~~ability ~~and~~of ~~our~~banks ~~market~~and ~~area.~~other ~~Several~~financial institutions ~~risk~~to ~~factors~~disclose ~~regarding~~nonpublic ~~investing~~information inabout ~~our~~consumers ~~common~~to ~~stock~~nonaffiliated ~~are discussed~~third ~~below~~parties. ~~This~~The ~~listing~~rules ~~should~~require ~~not~~disclosure ~~be considered as all-inclusive. If any~~ of ~~the~~privacy ~~following risks~~policies ~~were~~ to ~~occur~~consumers and, wein ~~may~~some ~~not~~circumstances, beallow ~~able~~consumers to ~~conduct~~prevent ~~our~~disclosure ~~business~~of ascertain ~~currently~~personal information ~~planned~~to ~~and~~nonaffiliated ~~our financial~~third ~~condition~~parties. orThe ~~operating~~privacy ~~results~~provisions ~~could~~of bethe ~~negatively~~GLB ~~impacted.~~Act ~~These~~affect ~~matters~~how ~~could~~consumer ~~cause the~~information ~~trading~~is ~~price~~transmitted ofthrough ~~our~~diversified ~~common~~financial ~~stock~~services tocompanies ~~decline~~and inconveyed ~~future~~to ~~periods~~outside vendors.

WeFederal ~~could~~financial ~~sustain~~regulators ~~additional~~have ~~losses~~issued ifregulations ~~our~~under ~~asset~~the ~~quality~~Fair ~~declines~~and ~~further.~~Accurate Credit Transactions Act, which have the effect of increasing the length of the waiting period, after privacy disclosures are provided to new customers, before information can be shared among different companies that we own or may come to own for the purpose of cross-selling products and services among companies we own. A number of states have adopted their own statutes concerning financial privacy and requiring notification of security breaches.

Our earnings are affected by general economic conditions, economic conditions within our markets, loan concentrations and our ability to properly originate, underwrite and service loans. We could sustain additional losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Recent problems with asset quality, particularly within the commercial real estate segment of our loan portfolio, have caused, and could continue to cause, our interest income and net interest margin to decrease and our provisions for loan losses and noninterest expenses to increase, which could continue to adversely affect our results of operations and financial condition. Further increases in nonAnti-~~performing~~Money ~~loans~~Laundering ~~would~~Requirements ~~reduce net interest income below levels that would exist if such loans were performing.~~

~~Our~~Under ~~loan~~federal ~~portfolio~~law, ~~includes~~including anthe ~~elevated~~Bank Secrecy Act, ~~although~~the ~~shrinking~~PATRIOT ~~level~~Act and the International Money Laundering Abatement and Anti-Terrorist Financing Act, certain types of ~~residential~~financial ~~construction~~institutions, ~~and~~including insured depository institutions, must maintain anti-money laundering programs that ~~land~~include ~~development~~established ~~loans~~internal policies, ~~which~~procedures ~~loans~~and ~~have~~controls; a ~~greater~~designated ~~credit~~compliance ~~risk~~officer; ~~than~~an ~~residential~~ongoing ~~mortgage~~employee ~~loans~~training program; and testing of the program by an independent audit function. Among other things, these laws are intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed “cease and desist” orders and civil money penalty sanctions against institutions found to be violating these obligations.

The ~~Company~~OFAC ~~engages~~is inresponsible ~~both~~for ~~traditional~~helping ~~single-family residential lending and residential construction and land development lending~~ to ~~developers. The percentage of speculative 1-4 family~~ ~~loans~~insure tothat ~~developers plus construction and land development loans to developers in the Bank’s portfolio was approximately 21~~U.~~9% at December 31, 2010 compared to 31~~S.1% ofentities ~~total~~do ~~loans~~not atengage ~~December 31, 2009. This type of lending is generally considered to have relatively high credit risks because the principal is concentrated~~ in atransactions ~~limited~~with ~~number~~certain ofprohibited ~~loans~~parties, ~~with~~as ~~repayment~~defined ~~dependent~~by onvarious ~~the successful~~Executive ~~completion~~Orders and ~~operation~~Acts of ~~the related real estate project~~Congress. ~~Consequently,~~OFAC ~~the~~publishes ~~credit quality~~lists of ~~many~~persons, oforganizations ~~these loans have deteriorated as a result of the current adverse conditions in the real estate market within our markets. These loans are generally less predictable~~ and ~~more difficult~~countries tosuspected ~~evaluate and monitor and collateral may be difficult to dispose~~ of inaiding, aharboring ~~market~~or ~~decline.~~engaging ~~A continued reduction~~ in ~~residential~~terrorist ~~real~~acts, ~~estate~~known ~~market~~as ~~prices~~Specially ~~and~~Designated ~~demand~~Nationals ~~could result in further price reductions in home~~ and ~~land~~Blocked ~~values~~Persons. ~~adversely~~If ~~affecting the value of collateral securing the construction and development loans that~~ we ~~hold.~~or ~~These~~Capital ~~adverse~~Bank ~~economic~~find ~~and~~a ~~real estate~~name ~~market~~on ~~conditions~~any ~~may~~transaction, ~~lead~~account toor ~~further~~wire ~~increases~~transfer inthat ~~non-performing~~is ~~loans~~on ~~and~~an ~~other~~OFAC ~~real estate owned~~list, ~~increased~~we ~~losses~~or ~~and~~Capital ~~expenses~~Bank ~~from~~must ~~the~~freeze ~~management~~or ~~and~~block ~~disposition~~such ofaccount ~~non-performing~~or ~~assets~~transaction, ~~increases~~file ~~in provision for loan losses, and increases in operating expenses as~~ a ~~result~~suspicious ~~of the~~activity ~~allocation~~report ~~of management time~~ and ~~resources~~notify to the ~~collection~~appropriate ~~and work out of these loans, all of which would negatively impact our financial condition and results of operations~~authorities.

~~Furthermore,~~Consumer ~~during~~Laws ~~adverse general economic conditions, such as we believe are now being experienced in residential real estate construction nationwide, borrowers involved in the residential real estate construction~~ and ~~development~~Regulations business may suffer above normal financial strain. Throughout 2010, the number of newly constructed homes or lots sold in our market areas has continued to decline, but at a lesser rate than experienced in 2009, negatively affecting collateral values. As the residential real estate development and construction market in our markets has deteriorated, our borrowers in this segment have experienced difficulty repaying their obligations to us. As a result, our loans to these borrowers have deteriorated and may deteriorate further and may result in additional charge-offs negatively impacting our results of operations.

~~Additionally,~~Banks toand ~~the~~other ~~extent~~financial ~~repayment~~institutions isare ~~dependent~~subject ~~upon~~to ~~the~~numerous ~~sale~~laws ofand ~~newly~~regulations ~~constructed~~intended ~~homes~~to ~~or of~~protect ~~lots,~~consumers ~~such~~in ~~sales~~their ~~are~~transactions with ~~likely~~banks. toThese belaws atinclude, ~~lower~~among ~~prices~~others, orlaws atregarding aunfair ~~slower~~and ~~rate~~deceptive ~~than~~acts asand ~~expected~~practices ~~when~~and ~~the loan~~usury ~~was made~~laws, ~~which~~as ~~may~~well ~~result~~as inthe ~~such~~following ~~loans~~consumer ~~being~~protection ~~placed~~statutes: onTruth ~~non-accrual~~in ~~status~~Lending ~~and~~Act, ~~subject~~Truth ~~to higher~~in ~~loss~~Savings ~~estimates~~Act, ~~even~~Electronic ifFunds ~~the~~Transfer ~~borrower keeps interest payments current. These adverse economic~~Act, ~~and~~Expedited ~~real~~Funds ~~estate~~Availability ~~market~~Act, ~~conditions~~Equal ~~may~~Credit ~~lead~~Opportunity toAct, ~~further~~Fair ~~increases~~and inAccurate ~~non-performing~~Credit ~~loans~~Transactions ~~and~~Act, ~~other real~~Fair ~~estate~~Housing ~~owned~~Act, ~~increased~~Fair ~~charge-offs~~Credit ~~from~~Reporting ~~the~~Act, ~~disposition~~Fair ofDebt ~~non-performing~~Collection ~~assets~~Act, ~~and increases~~GLB inAct, ~~provision~~Home ~~for~~Mortgage ~~loan~~Disclosure ~~losses~~Act, ~~all~~Right ofto ~~which~~Financial ~~would~~Privacy ~~negatively impact our financial~~Act ~~condition~~ and ~~results~~Real ofEstate ~~operations~~Settlement Procedures Act.

~~Negative~~Many ~~developments~~states and local jurisdictions have consumer protection laws analogous, and in ~~the~~addition, Uto those listed above.S. These federal, state and local ~~economy~~laws ~~and~~regulate the manner in ~~local~~which ~~real~~financial ~~estate~~institutions ~~markets~~deal ~~have~~with ~~adversely impacted~~customers ~~our~~when ~~operations~~taking ~~and~~deposits, ~~results~~making loans or conducting other types of transactions. Failure to comply with these laws and ~~may~~regulations ~~continue~~could give rise to ~~adversely~~regulatory ~~impact~~sanctions, ~~our~~customer ~~results~~rescission inrights, ~~the~~action ~~future~~by state and local attorneys general and civil or criminal liability.

Economic conditions in the markets in which we operate deteriorated significantly between early 2008 and the second half of 2010. As a result, we incurred significant losses in 2008, 2009 and 2010. These challenges resulted primarily from provisions for loan losses related to declining collateral values in our construction and development loan portfolio plus rising OREO related costs associated with the holding and disposition of these assets. Although the FRB has issued statements that economic data suggests strongly that the recession ended in the latter half of 2009, we believe that this difficult economic environment will continue at least into the second half of 2011, and we expect that our results of operations will continue to be negatively impacted as a result. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally or us in particular, will improve materially, or at all, in the near future, or thereafter, in which case we could continue to experience significant losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges.

~~Negative~~The ~~developments~~Dodd-Frank inAct creates the CFPB, a new independent bureau that will have broad authority to regulate, supervise and enforce retail financial services ~~industry~~activities of banks and Uvarious non-bank providers.S. The CFPB will have authority to promulgate regulations, issue orders, guidance and ~~global~~policy ~~credit~~statements, ~~markets~~conduct ~~may~~examinations and bring ~~adversely~~enforcement ~~impact~~actions ~~our~~with ~~operations~~regard to consumer financial products and ~~results~~services. In general, banks with assets of $10 billion or less, such as Capital Bank, will be subject to regulation of the CFPB but will continue to be examined for consumer compliance by their bank regulator. However, given our growth and bank acquisition strategy, if our total assets were to exceed $10 billion, then we will become subject to the CFPB’s exclusive examination authority and primary enforcement authority.

Negative developments beginning in 2008 and continuing into 2010 in the capital markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing into 2011. Loan portfolio performances have deteriorated at many institutions resulting from, amongst other factors, a weak economy and a decline in the value of the collateral supporting their loans. The ~~competition~~Community ~~for~~Reinvestment ~~our~~Act deposits has increased significantly due to liquidity concerns at many of these same institutions. Stock prices of bank holding companies have been negatively affected by the current condition of the financial markets, as has our ability, if needed, to raise capital at reasonable prices or borrow in the debt markets compared to recent years.

~~Our~~The ~~business~~CRA is ~~subject~~intended to encourage banks to help meet the ~~success~~credit needs of their service areas, including low-and moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine banks and assign each bank a public CRA rating. A bank’s record of fair lending compliance is part of the ~~local~~resulting ~~economies~~CRA ~~where~~examination wereport. ~~operate~~The CRA then requires bank regulators to take into account the bank’s record in meeting the needs of its service area when considering an application by a bank to establish a branch or to conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.

~~Our~~When ~~success significantly depends upon the growth in population, income levels, deposits, residential real estate stability and housing starts in our market areas. If the communities in which~~ we ~~operate~~apply dofor ~~not~~regulatory ~~grow~~approval ~~or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Adverse economic conditions in our specific market areas could cause us~~ to ~~continue~~make tocertain ~~experience negative~~investments, orthe ~~limited,~~regulators ~~growth,~~will ~~affect~~consider the ~~ability~~CRA record of ~~our customers~~the totarget ~~repay their loans to us~~ institution and ~~generally affect~~ our ~~financial~~depository ~~condition~~institution ~~and results of operations~~subsidiary. ~~Moreover,~~An weunsatisfactory ~~cannot~~CRA ~~give~~record ~~any~~could ~~assurance~~substantially ~~that~~delay weapproval ~~will benefit from any market growth~~ or ~~favorable~~ ~~economic~~result ~~conditions~~ in ~~our~~denial ~~primary~~of ~~market~~an ~~areas if they do occur~~application.

~~Continued~~Changes ~~adverse market or economic conditions~~ in ~~the state of Tennessee generally~~Laws, ~~and~~Regulations in our markets specifically, may increase the risk that our borrowers will be unable to timely make their loan payments. In addition, the market value of the real estate securing loans as collateral has been and may continue to be adversely affected by continued unfavorable changes in market and economic conditions. As of December 31, 2010, approximately 47% of our loans held for investment were secured by non-owner occupied commercial real estate. Of this amount, approximately 26% were speculative 1-4 residential construction and land development loans to developers, 21% were commercial construction and development loans and 53% were non-owner occupied commercial real estate loans. We experienced increased payment delinquencies with respect to these loans throughout 2009 and 2010 which negatively impacted our results of operations and a sustained period of increased payment delinquencies, foreclosures or ~~losses~~Policies ~~caused by continuing adverse market or economic conditions in the state of Tennessee generally,~~ and ~~in our markets specifically, could adversely affect~~ the ~~value~~Dodd-Frank ofAct ~~our assets, revenues, results of operations and financial condition.~~

AnVarious federal, ~~inadequate~~state ~~allowance~~and ~~for~~local ~~loan~~legislators ~~losses~~introduce from time to time measures or take actions that would ~~reduce~~modify ~~our~~the ~~earnings~~regulatory requirements or the examination or supervision of banks or bank holding companies. Such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks and other financial institutions, all of which could affect our investment opportunities and our assessment of how attractive such opportunities may be. We cannot predict whether potential legislation will be enacted and, if enacted, the effect that it or any implementing regulations would have on our business, results of operations or financial condition.

The ~~risk~~Dodd-Frank ofAct, ~~credit~~which ~~losses~~was onsigned ~~loans~~into ~~varies~~law ~~with,~~on ~~among~~July ~~other things~~21, ~~general economic conditions~~2010, ~~the~~will ~~type~~have ofa ~~loan~~broad ~~being~~impact ~~made,~~on the ~~creditworthiness~~financial ofservices ~~the~~industry, ~~borrower~~imposing significant ~~over~~regulatory ~~the~~and ~~term~~compliance ~~of the loan and~~changes, inincreased ~~the case of a collateralized loan~~capital, ~~the~~leverage ~~value~~ and ~~marketability~~liquidity ofrequirements ~~the~~and ~~collateral~~numerous ~~for the loan. Management maintains an allowance for loan losses based upon, among~~ other ~~things, historical~~provisions ~~experience,~~designed anto ~~evaluation~~improve ofsupervision ~~economic conditions~~ and ~~regular~~oversight ~~reviews~~ of ~~delinquencies and~~the ~~loan~~financial ~~portfolio~~services ~~quality~~sector. ~~Based~~The ~~upon~~following ~~such~~items ~~factors,~~briefly ~~management makes various assumptions and~~describe ~~judgments~~some ~~about the ultimate collectability~~ of the ~~loan~~key ~~portfolio~~provisions ~~and provides an allowance for loan losses based upon a percentage~~ of the ~~outstanding~~Dodd-Frank ~~balances~~Act: ~~and takes a charge against earnings with respect to specific loans when their ultimate collectability is considered questionable.~~

•

Source of Strength. The Dodd-Frank Act requires all companies that directly or indirectly control a depository institution to serve as a source of strength for the institution.

•

Limitation on Federal Preemption. The Dodd-Frank Act may limit the ability of national banks to rely upon federal preemption of state consumer financial laws. Under the Dodd-Frank Act, the OCC will have the ability to make preemption determinations only if certain conditions are met and on a case-by-case basis. The Dodd-Frank Act also eliminates the extension of preemption to operating subsidiaries of national banks. However, the Dodd-Frank Act preserves certain preemption standards articulated by the U.S. Supreme Court and existing interpretations thereunder, as well as express preemption provisions in other federal laws (such as the Equal Credit Opportunity Act and the Truth in Lending Act) that specifically address the application of state law in relation to that federal law. The Dodd-Frank Act authorizes state enforcement authorities to bring lawsuits under state law against national banks and authorizes suits by state attorney generals against national banks to enforce rules issued by the CFPB. With this broad grant of enforcement authority to states, institutions, including national banks, could be subject to varying and potentially conflicting interpretations of federal law by various state attorney generals, state regulators and the courts.

If• ~~management’s~~Mortgage ~~assumptions~~Loan Origination and ~~judgments~~Risk ~~prove~~Retention. toThe beDodd-Frank ~~incorrect~~Act ~~and~~imposes ~~the~~new ~~allowance~~standards for mortgage loan ~~losses~~ isoriginations ~~inadequate~~on toall ~~absorb losses~~lenders, orincluding ifbanks, ~~the~~in ~~bank~~an ~~regulatory~~effort ~~authorities~~to require ussteps to ~~increase our~~verify ~~allowance for loan losses as~~ a ~~part~~borrower’s ofability ~~their~~to ~~examination~~repay. ~~process~~The ~~additional~~Dodd-Frank ~~provision~~Act ~~expense~~also ~~would~~generally berequires ~~incurred~~lenders ~~and~~or ~~our earnings~~securitizers ~~and~~to ~~capital~~retain ~~could~~an beeconomic ~~significantly~~interest ~~and~~in ~~adversely~~the ~~affected.~~credit ~~Moreover,~~risk ~~additions~~relating to loans the ~~allowance~~ ~~may~~lender besells ~~necessary~~or ~~based~~mortgages ~~on changes in economic~~ and ~~real~~other ~~estate~~asset-backed ~~market~~securities ~~conditions,~~that ~~new information~~the ~~regarding~~securitizer ~~existing~~issues. ~~loans~~The orrisk ~~borrowers,~~retention ~~identification~~requirement ofgenerally ~~additional~~will ~~problem~~be ~~loans and other factors~~5%, ~~both~~but ~~within~~could ~~and~~be ~~outside of our management’s control. These additions may require~~ increased ~~provision~~or ~~expense~~decreased ~~which~~by ~~would negatively impact our results of operations~~regulation.

• Consumer Financial Protection Bureau. The ~~Company’s~~Dodd-Frank ~~policy~~Act ~~requires~~creates ~~new~~the ~~appraisals~~CFPB onwithin ~~adversely~~the ~~rated~~Federal ~~collateral~~Reserve. ~~dependent~~The ~~loans~~CFPB ~~to be~~is ~~obtained~~tasked atwith ~~least~~establishing ~~annually.~~and Onimplementing arules ~~quarterly~~and ~~basis,~~regulations ~~the~~under ~~Company~~certain ~~receives~~federal aconsumer ~~written~~protection ~~report~~laws ~~from~~with ~~an independent~~respect ~~nationally~~to ~~recognized~~the ~~organization~~conduct ~~which~~of ~~provides~~providers ~~updated~~of ~~valuation~~certain ~~trends,~~consumer byfinancial ~~price point~~products and byservices. ~~zip~~The ~~code,~~CFPB ~~for~~has ~~each~~rulemaking authority over many of the ~~major~~statutes ~~markets~~governing inproducts ~~which~~and ~~the~~services ~~Company~~offered isto ~~conducting~~bank ~~business~~customers. ~~The~~ ~~information~~For ~~obtained~~banking isorganizations ~~then~~with ~~used~~assets inof ~~the~~more ~~Company’s~~than ~~impaired~~$10 ~~loan~~billion, ~~analysis~~the ofCFPB ~~collateral dependent~~has ~~loans~~exclusive rule-making and ~~potentially~~examination ~~could~~and ~~impact~~primary enforcement authority under federal consumer financial laws. In addition, the ~~allowance~~Dodd-Frank ~~for~~Act ~~loan~~permits ~~losses~~states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.

~~We,~~• orDeposit ~~our~~Insurance. ~~bank~~The ~~subsidiary~~Dodd-Frank Act makes permanent the general $250,000 ~~may~~deposit ~~become~~insurance ~~subject~~limit tofor ~~supervisory~~insured ~~actions~~deposits. ~~and/or~~The ~~enhanced~~Dodd-Frank ~~regulation that~~Act ~~could~~also ~~have~~provides anunlimited ~~additional~~deposit ~~material~~coverage ~~negative~~for ~~effect~~noninterest-bearing ontransaction ~~our~~accounts ~~business,~~until ~~operating~~January ~~flexibility~~1, ~~financial~~ ~~condition~~2013. ~~and~~Amendments to the ~~value~~FDI ofAct ~~our~~also ~~common~~revise ~~stock~~the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated. InUnder ~~addition~~these amendments, ~~addressing~~the ~~regulatory~~assessment ~~concerns in~~base ~~this~~will ~~market~~no ~~environment~~longer ~~will~~be ~~require~~the ~~significant~~institution’s ~~time~~deposit ~~and~~base, ~~attention~~but ~~from~~rather ~~our~~its ~~management~~average ~~team~~consolidated total assets less its average tangible equity. Additionally, ~~which~~ ~~may~~the ~~increase~~Dodd-Frank ~~our~~Act ~~costs~~makes changes to the minimum designated reserve ratio of the DIF, ~~impede~~increasing the ~~efficiency~~minimum from 1.15% to 1.35% of ~~our~~the ~~internal~~estimated ~~business~~amount ~~processes~~of total insured deposits and ~~adversely~~ ~~affect~~eliminating ~~our~~the ~~profitability~~requirement inthat the ~~near-term~~FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

~~Under~~• ~~federal~~Transactions ~~and~~with ~~state~~Affiliates ~~laws~~ and ~~regulations~~Insiders. ~~pertaining~~The toDodd-Frank ~~the~~Act ~~safety~~generally ~~and~~enhances ~~soundness of insured depository institutions,~~ the ~~FRB~~restrictions ~~(for~~on ~~bank~~transactions ~~holding~~with ~~companies),~~affiliates ~~the~~under ~~TDFI~~Sections ~~(for~~23A ~~Tennessee-chartered banks)~~ and, ~~separately,~~23B ~~the~~of ~~FDIC (as~~ the ~~insurer~~Federal ofReserve ~~bank deposits)~~Act, ~~have~~including ~~the~~an ~~authority~~expansion toof ~~compel~~the ~~or restrict~~definition ~~certain~~of ~~actions~~“covered ontransactions” ~~our~~and ~~part,~~an orincrease in the ~~part~~amount of ~~the~~time ~~Bank,~~for ifwhich ~~they~~collateral ~~determine~~requirements ~~that~~regarding ~~we,~~covered orcredit ~~the Bank,~~transactions ~~have~~must ~~insufficient~~be ~~capital~~satisfied. orInsider ~~are~~transaction ~~otherwise~~limitations ~~operating~~are inexpanded athrough ~~manner~~the ~~that~~strengthening ~~may~~of beloan ~~deemed~~restrictions to ~~be inconsistent~~insiders ~~with safe~~ and ~~sound~~the ~~banking~~expansion ~~practices.~~of ~~Under this authority, our, and~~ the ~~Bank’s regulators~~types ~~can~~of ~~require~~transactions ussubject to ~~enter~~the ~~into~~various ~~informal or formal enforcement orders~~limits, including ~~board resolutions,~~derivatives ~~memoranda of understanding~~transactions, ~~written~~repurchase agreements, ~~and~~reverse ~~consent~~repurchase oragreements ~~cease~~ and ~~desist~~securities ~~orders, pursuant~~lending ~~to which we,~~ or ~~the~~borrowing ~~Bank,~~transactions. ~~would~~Restrictions beare ~~required~~also toplaced ~~take~~on ~~identified~~certain ~~corrective~~asset ~~actions~~sales to ~~address~~ ~~cited concerns~~ and ~~to refrain~~ from ~~taking~~an ~~certain~~insider ~~actions. For additional information relating~~ to ~~the~~an ~~extensive regulation~~institution, ~~supervision~~including ~~and~~requirements ~~legislation~~ that ~~govern~~such ~~most~~sales ~~aspects~~be ofon ~~our operations~~market terms and, ~~limit the businesses~~ in ~~which~~certain ~~we engage~~circumstances, ~~please~~approved ~~see “Regulation,~~by ~~Supervision~~the ~~and~~institution’s ~~Governmental~~board ~~Policy” beginning~~of ~~on page 14~~directors.

In light of declining asset quality and earnings in 2010, the Bank informally committed to the TDFI and the FDIC that, among other things, it would maintain a Tier 1 leverage ratio of at least 10% and Total risk-based capital ratio of at least 14%, and the Company informally committed to the FRB-Atlanta that, among other things, we would not incur any additional indebtedness, pay dividends on our common or preferred stock or pay interest on our TRUPs, without, in each case, the prior approval of the FRB-Atlanta.

During the third quarter of 2010, the Bank was subject to a joint examination by the FDIC and the TDFI. Based on initial findings presented to the Bank’s management, the Bank expects that either the FDIC or the TDFI or both will require the Bank to agree to certain improvements in its operations, particularly in relation to asset quality matters. We also believe that the Bank will be required to agree to maintain or increase capital to levels above those required to be considered well capitalized. We do not know at this time what minimum levels of capital the regulators will require. If the requirement to maintain higher capital levels than those required to be well capitalized under the prompt corrective action provisions of the FDICIA is contained in a formal enforcement action of the FDIC, the Bank may be subject to additional limitations on its operations including its ability to pay interest on deposits above proscribed rates, which could adversely affect the Bank’s liquidity and/or operating results. The terms of any such supervisory action that goes beyond the steps we have already taken may have a significant negative effect on our business, operating flexibility, results of operations, financial condition and the value of our common stock.

If• ~~we,~~Corporate orGovernance. ~~our~~The ~~bank~~Dodd-Frank ~~subsidiary,~~Act ~~are~~addresses ~~unable~~many toinvestor ~~maintain~~protection, ~~capital~~corporate ~~levels~~governance ~~above~~and ~~those~~executive compensation matters that ~~we,~~will oraffect ~~the bank~~most ~~subsidiary~~U.S. publicly traded companies, ~~are~~including ~~required~~the toCompany. ~~maintain~~The ~~either~~Dodd-Frank asAct a(1) ~~result~~grants stockholders of ~~federal~~U.S. ~~regulations~~publicly ortraded ascompanies aan ~~result of~~advisory ~~commitments~~vote oron ~~agreements~~executive ~~that~~compensation; ~~we,~~(2) orenhances ~~our~~independence ~~bank~~requirements ~~subsidiary,~~for ~~have~~compensation ~~made~~committee members; (3) requires companies listed on national securities exchanges to, oradopt incentive-based compensation clawback policies for executive officers; and (4) provides the SEC with, ~~our regulators,~~authority weto adopt proxy access rules that would ~~likely~~allow ~~need~~stockholders of publicly traded companies to ~~raise~~nominate ~~additional~~candidates ~~capital,~~for ~~but~~election ~~that~~as ~~capital~~a ~~may~~director ~~not~~and behave ~~available when~~those itnominees isincluded ~~needed~~in a company’s proxy materials.

~~We,~~• ~~and~~Interchange Fees. Under the ~~Bank,~~so-called ~~are~~Durbin ~~required~~Amendment byof ~~federal~~the ~~and~~Dodd-Frank ~~state~~Act, ~~regulatory~~interchange ~~authorities~~transaction tofees ~~maintain adequate~~that ~~levels~~a ofcard ~~capital~~issuer toreceives ~~support~~or ~~our,~~charges ~~and~~for ~~the~~an ~~Bank’s,~~electronic ~~operations.~~debit Intransaction ~~addition,~~must ~~the~~be ~~Bank~~“reasonable ~~has informally~~and ~~committed~~proportional” to the ~~TDFI~~cost ~~and~~incurred by the ~~FDIC~~card ~~that~~issuer itin ~~will~~processing ~~maintain~~the atransaction. ~~Tier~~Banks 1that ~~leverage~~have ~~ratio~~less ofthan ~~at least~~ $10% ~~and~~billion ain ~~Total~~assets ~~risk-based~~are ~~capital~~exempt ~~ratio~~from ofthe atinterchange ~~least~~transaction ~~14%~~fee limitation. AtOn ~~December 31~~June 29, ~~2010~~2011, the ~~Bank’s Tier~~Federal 1Reserve ~~leverage~~issued ~~ratio~~a ~~and~~final ~~Total~~rule ~~risk-based~~establishing ~~capital~~standards ~~ratio~~for ~~were~~determining ~~each~~whether ~~below~~ the ~~levels~~amount ~~that~~of ~~the~~any ~~Bank had~~interchange ~~committed~~transaction tofee ~~maintain~~is reasonable and aproportional, ~~Capital~~taking ~~Action~~into ~~Plan~~consideration ~~was~~fraud ~~submitted~~prevention tocosts, ~~our~~and ~~regulators.~~prescribing Atregulations ~~December 31,~~to ~~2010,~~ensure ~~the~~that ~~Company~~network ~~did~~fees are not ~~have~~used, ~~sufficient~~directly ~~capital~~or ~~available~~indirectly, to ~~contribute~~compensate tocard ~~the~~issuers ~~Bank~~with respect to ~~aid the~~electronic ~~Bank~~debit intransactions ~~meeting~~or ~~its~~to ~~commitment.~~circumvent Ifor evade the ~~Bank~~restrictions isthat ~~unable~~interchange totransaction ~~generate~~fees ~~sufficient~~be ~~earnings~~reasonable ~~or reduce~~and ~~the~~proportional. ~~size~~Under ofthe ~~its~~final ~~assets~~rule, tothe ~~achieve~~maximum ~~the~~permissible ~~capital~~interchange ~~levels~~fee that itan ~~has~~issuer ~~informally~~may ~~committed~~receive ~~to maintain,~~for ~~the~~an ~~Company~~electronic debit will ~~likely~~be ~~have~~the tosum ~~raise~~of ~~additional~~$0.21 ~~capital~~per transaction and ~~contribute~~five ~~that~~basis ~~capital~~points to multiplied by the ~~Bank~~value of the transaction. WeThe ~~can~~Federal ~~give~~Board ~~you~~also noapproved ~~assurance~~on June 29, 2011 an interim final rule that weallows ~~will~~for bean ~~able~~upward adjustment of no more than $0.01 to ~~raise~~an ~~this~~issuer’s ~~additional~~debit ~~capital~~card ~~on terms~~interchange ~~acceptable~~fee toif usthe issuer develops and ~~given~~implements ~~our~~policies ~~current~~and ~~stock~~procedures ~~price~~reasonably ~~and~~designed ~~recent~~to ~~financial~~achieve ~~performance,~~certain itfraud-prevention ~~is likely~~standards ~~that~~set out in the ~~price~~interim atfinal ~~which~~rule. weThe ~~could~~Dodd-Frank ~~raise~~Act ~~such~~also ~~capital,~~bans ifcard atissuers ~~all,~~and ~~would~~payment ~~result~~card innetworks ~~significant dilution~~from toentering ~~our~~into ~~existing~~exclusivity ~~shareholders.~~arrangements ~~Further,~~for ~~our~~debit ~~ability~~card toprocessing ~~raise~~and ~~common~~prohibits ~~equity~~card isissuers ~~limited~~and ~~by the~~payment ~~number~~networks offrom ~~authorized,~~inhibiting ~~but~~the ~~unissued~~ability ~~shares~~of ~~reserved~~merchants ~~under~~to ~~our~~direct ~~charter.~~the Ifrouting weof ~~were~~debit tocard ~~raise capital~~transactions ~~through~~over anetworks ~~common~~of ~~stock~~their ~~offering~~choice. Finally, wemerchants ~~would~~will ~~likely~~be ~~need~~able to ~~increase~~set ~~our~~minimum ~~authorized~~dollar ~~common stock,~~amounts ~~which~~for ~~would~~the ~~require~~use ~~approval~~ of ~~our~~a ~~shareholders.~~credit Wecard ~~cannot~~and ~~assure~~provide ~~you~~discounts ~~that~~to ~~our~~consumers ~~shareholders would~~who ~~approve~~pay with various payment methods, such aas ~~request~~cash.

~~Liquidity~~Many ~~needs~~of ~~could~~the ~~adversely~~requirements of ~~affect~~the ~~our~~Dodd-Frank ~~results~~Act will be implemented over time, and most will be subject to regulations implemented over the course of ~~operations~~several years. Given the uncertainty surrounding the manner in which many of the Dodd-Frank Act’s provisions will be implemented by the various regulatory agencies and ~~financial~~through ~~condition~~regulations, the full extent of the impact on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.

We rely on dividends from the Bank as our primary source of funds. The primary source of funds of the Bank, are customer deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans which may be more difficult in economically challenging environments like those currently being experienced. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, customer confidence levels and the Bank’s financial strength, returns available to customers on alternative investments, our financial condition and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances and federal funds lines of credit from correspondent banks. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands. We may be required to continue to reduce our asset size, slow or discontinue capital expenditures or other investments or liquidate assets should such sources not be adequate.

We rely on dividends from our bank subsidiary as our primary source of liquidity and payment of these dividends is limited under Tennessee law.

Under Tennessee law, the amount of dividends that may be declared by the Bank in a year without approval of the Commissioner is limited to net income for that year combined with retained net income for the two preceding years. Because of the losses incurred by the Bank in 2009 and 2010, dividends from the Bank to us, including, if necessary, dividends to support our payment of interest on our subordinated debt and dividends on our preferred stock, including the preferred stock we issued to the U.S. Treasury, would have required prior approval by the Commissioner. During the fourth quarter of 2010, we elected to defer the interest payments on our subordinated debt and dividends on the preferred stock that we issued to the U.S. Treasury as disclosed in our third quarter 2010 Form 10-Q.

~~Our~~Statistical ~~ability~~Information ~~to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.~~

~~We,~~Certain ~~and~~statistical ~~the~~information ~~Bank,~~is ~~are~~found required to maintain certain capital levels established by banking regulations or specified by bank regulators or to which we have committed or agreed to maintain. We must also maintain adequate funding sources in ~~the~~Item 7, ~~normal~~“Management’s ~~course~~Discussion ~~of business to support our operations~~ and ~~fund~~Analysis ~~outstanding liabilities. Our ability to maintain capital levels, sources~~ of ~~funding~~Financial ~~and~~Condition ~~liquidity could be impacted by changes in the capital markets~~ and ~~deteriorating~~Results ~~economic~~of ~~and~~Operations” market conditions. Failure by the Bank to meet applicable capital guidelines (including those higher levels that the Bank has committed, or may commit in the future, to maintain) or to satisfy certain other regulatory requirements could subject the Bank to a variety of ~~enforcement~~this ~~remedies~~Annual ~~available~~Report ~~to the~~on ~~federal~~Form ~~regulatory authorities~~10-K.

We have increased levels of other real estate, primarily as a result of foreclosures, and we anticipate higher levels of foreclosed real estate expense.

As we have begun to resolve non-performing real estate loans, we have increased the level of foreclosed properties primarily those acquired from builders and from residential land developers. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments due to new appraisal values and gains or losses on disposition. As levels of other real estate increase and also as local real estate values decline these charges will likely increase, negatively affecting our results of operations.

Environmental liability associated with commercial lending could result in losses.

In the course of business, the Bank may acquire, through foreclosure, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we, or the Bank, might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our business, results of operations and financial condition.

Changes in interest rates could adversely affect our results of operations and financial condition.

Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Accordingly, changes in interest rates could decrease our net interest income. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affects our earnings.

National or state legislation or regulation may increase our expenses and reduce earnings.

Federal bank regulators are increasing regulatory scrutiny, and additional restrictions (including those originating from the Dodd-Frank Act) on financial institutions have been proposed or adopted and signed into law by the President, regulators and Congress. Changes in federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. Furthermore, financial institution regulatory agencies are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. These actions, whether formal or informal, could result in our, or the Bank, agreeing to limitations or to take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal commitments like those we and the Bank have made to our primary regulators, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

~~Competition~~ITEM ~~from~~1A. ~~financial~~RISK ~~institutions and other financial service providers may adversely affect our profitability~~FACTORS.

~~The banking business is highly competitive and we experience competition in each of our~~RISK ~~markets~~FACTORS from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other community banks and super-regional and national financial institutions that operate offices in our primary market areas and elsewhere.

~~Additionally,~~In weaddition ~~face~~to ~~competition~~the ~~from de novo community banks, including those with senior management who were previously affiliated with~~ other ~~local~~information orincluded ~~regional~~in ~~banks~~and orincorporated ~~those controlled~~ by ~~investor~~ ~~groups~~reference ~~with~~into ~~strong~~this ~~local~~document, ~~business and community ties. These de novo community banks may~~including ~~offer~~the ~~higher~~matters ~~deposit~~addressed ~~rates or lower cost loans~~ in an“Cautionary ~~effort~~Note toRegarding ~~attract~~Forward-Looking ~~our customers~~Statements,” ~~and~~you ~~may attempt~~should tocarefully ~~hire~~consider ~~our~~the ~~management~~following ~~and~~risk ~~employees~~factors.

WeOur ~~compete~~business ~~with~~is ~~these~~subject ~~other~~to ~~financial~~a ~~institutions~~variety ~~both~~of inrisks, ~~attracting~~including ~~deposits~~the risks described below as well as adverse business conditions and changes in ~~making~~regulations and the local, regional and national economic ~~loans~~environment. InThe ~~addition,~~risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to ~~attract~~be material may also impair our ~~customer~~business ~~base~~operations. You ~~from~~should carefully consider the risks described below, together with all other ~~existing~~information ~~financial~~in ~~institutions~~this report, including information contained in the “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and ~~from~~“Quantitative ~~new~~and ~~residents~~Qualitative Disclosures about Market Risk” sections. WeThis ~~expect~~report ~~competition~~contains toforward-looking ~~increase~~statements inthat ~~the~~involve ~~future~~risks asand auncertainties, ~~result~~including ofstatements ~~legislative~~about our future plans, ~~regulatory~~objectives, intentions and ~~technological~~expectations. ~~changes~~Many ~~and~~factors, ~~the~~including ~~continuing~~those ~~trend~~described ofbelow, ~~consolidation~~could cause actual results to differ materially from those discussed in forward-looking statements. If any of the ~~financial~~following risks actually occur, our business, ~~services~~financial ~~industry.~~condition ~~Our~~and ~~profitability~~results ~~depends~~of ~~upon~~operations could be adversely affected, and we may not be able to achieve our ~~continued~~goals. ~~ability~~Such events may cause actual results to ~~successfully~~differ ~~compete with~~materially anfrom ~~array~~expected ofand ~~financial~~historical ~~institutions~~results, inand the trading price of our common ~~market~~stock ~~areas~~could decline.

WeRisks ~~reported~~Relating ~~a material weakness in our internal control over financial reporting, and if we are unable~~ to ~~improve~~the ~~our~~Merger ~~internal controls, our financial results may not be accurately reported.~~

~~Management’s~~The ~~assessment~~merger ofhas ~~the~~been ~~effectiveness~~approved ofwithout ~~our~~your ~~internal control over financial reporting as of December 31, 2010 identified a material weakness in its internal control over financial reporting, as described in “Item 9A~~vote. Controls and Procedures.” This material weakness, or difficulties encountered in implementing new or improved controls or remediation, could prevent us from accurately reporting our financial results, result in material misstatements in our financial statements or cause us to fail to meet our reporting obligations. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common stock and market confidence in our reported financial information.

WeCBF ~~have~~owns aover ~~deferred~~90% of ~~tax~~the ~~asset~~common ~~and~~stock ~~cannot~~of ~~assure~~Green ~~you~~Bankshares, ~~that~~Inc.. itAccordingly, ~~will~~under beTennessee ~~fully~~law, ~~realized~~no vote of Green Bankshares’ Board of Directors or shareholders is required to complete the merger. As a result, the merger may be completed even if opposed by all of the Green Bankshares, Inc. shareholders unaffiliated with CBF.

WeNeither ~~had~~CBF ~~net~~nor ~~deferred~~Green ~~tax~~Bankshares, ~~assets (“DTA”) of $45~~Inc.~~7 million~~ ashas ofhired ~~December 31,~~anyone ~~2010~~to ~~and~~represent ~~established~~you aand ~~valuation~~we ~~allowance~~have ~~against our federal net deferred tax assets of $43.5 million. A valuation allowance is recognized for~~ a ~~net~~conflict ~~DTA if, based on the weight~~ of ~~available~~interest ~~evidence,~~in ~~it is more-likely-than-not that some portion or~~ the ~~entire DTA will not be realized~~merger. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified.

AsCBF aand ~~result of~~ the ~~increased credit losses, the~~ Company ~~entered~~have ~~into~~not ~~a three-year cumulative pre-tax loss position~~ (~~excluding~~1) negotiated the ~~goodwill~~merger ~~impairment charge recognized in the second quarter of~~at ~~2009)~~arm’s aslength ofor ~~June~~(2) ~~30,~~hired ~~2010.~~independent Apersons ~~cumulative~~to ~~loss~~negotiate ~~position is considered significant negative evidence in assessing~~ the ~~realizability~~terms of athe ~~deferred~~merger ~~tax~~for ~~asset~~you. ~~which~~Since isCBF ~~difficult~~initiated toand ~~overcome.~~structured ~~The Company’s estimate of~~ the ~~realization~~merger ofwithout ~~its~~negotiating ~~net~~with ~~DTA was based on~~ the ~~scheduled~~Company ~~reversal~~or ~~of deferred~~any ~~tax~~independent ~~liabilities~~person and ~~taxable~~CBF ~~income~~has ~~available~~an interest in ~~prior carry back years, and tax planning~~acquiring ~~strategies.~~your ~~Once~~shares ~~profitability~~at ~~has~~the ~~been~~lowest ~~restored~~possible ~~for~~price, aif ~~reasonable~~independent ~~time~~persons ~~and~~had ~~such~~been ~~profitability is considered sustainable~~hired, the ~~valuation~~terms ~~allowance would be reversed. Reversal~~ of the ~~valuation allowance~~merger ~~requires~~may ahave ~~great~~been ~~deal~~more offavorable ~~judgment~~to ~~and will be based on the circumstances that exist as of that future date~~you.

WeBecause ~~are~~there ~~subject~~is tocurrently ~~lawsuits~~no asmarket for CBF Class A common stock and a ~~result~~market offor ~~the~~CBF ~~losses~~Class A wecommon ~~incurred~~stock inmay not develop, you cannot be sure of the ~~third~~market ~~quarter~~value of ~~2010~~the merger consideration you will receive.

InUpon completion of the ~~third~~merger, ~~quarter~~each share of the ~~2010,~~Company’s wecommon ~~recognized~~stock ~~significant~~will ~~losses~~be asconverted into merger consideration consisting of 0.0915 of a ~~result~~share of ~~higher~~CBF’s ~~costs related~~Class A common stock. Prior to ~~loan~~the ~~charge-offs,~~initial ~~coupled~~public ~~with~~offering ~~losses~~of ~~incurred~~CBF’s onClass A ~~OREO~~common ~~resulting~~stock, ~~from~~which ~~sales~~is ~~completed~~expected to ~~and~~be ~~updated~~completed ~~property~~substantially ~~appraisals~~concurrently ~~received~~with ~~during~~the ~~that~~merger, ~~quarter.~~there Ashas abeen ~~result~~no established public market for CBF’s Class A common stock. An active, ~~various~~liquid ~~plaintiffs~~trading market for CBF’s Class A common stock may not develop or be sustained ~~filed~~following ~~class~~the ~~action~~initial ~~lawsuits~~public offering. If an active trading market does not develop, ~~which~~holders of CBF’s Class A common stock may have ~~subsequently~~difficulty ~~been~~selling ~~consolidated~~their ~~into~~shares ~~one~~at ~~class~~an ~~action,~~attractive ~~alleging~~price, ~~among~~or ~~other~~at ~~things,~~all. ~~disclosure~~CBF ~~violations~~has applied to have its Class A ~~regarding~~common ~~our~~stock ~~collateral~~listed ~~valuations~~on Nasdaq, but its application may not be approved. In addition, the ~~timing~~liquidity of ~~our~~any ~~impairment~~market ~~charges~~that ~~and~~may ~~our~~develop ~~accounting~~or ~~for loan~~the ~~charge-offs.~~price ~~The~~that ~~defense~~CBF’s ofstockholders ~~this~~may ~~matter~~obtain ~~has~~for ~~and~~their ~~will~~shares ~~continue~~of toClass A ~~entail~~common ~~considerable~~stock ~~cost~~cannot ~~and~~be predicted. The initial public offering price for CBF’s Class A common stock will be ~~time-consuming~~determined ~~for~~by ~~our~~negotiations ~~management.~~between ~~Unfavorable~~CBF, ~~outcomes~~its instockholders ~~this~~who ~~matter~~choose ~~could~~to ~~have~~sell ~~an adverse~~their ~~effect~~shares onin ~~our~~the ~~business,~~initial ~~financial~~public ~~condition,~~offering ~~results~~and the representative of ~~operations~~the underwriters and may ~~cash~~not ~~flows~~be indicative of prices that will prevail in the open market following the offering.

The outcome of CBF’s initial public offering will affect the market value of the consideration the Company’s shareholders will receive upon completion of the merger. Accordingly, you will not know or be able to calculate the market value of the merger consideration you would receive upon completion of the merger. There will be no adjustment to the exchange ratio for changes in the anticipated outcome of CBF’s initial public offering or changes in the market price of the Company’s common stock.

WeIf ~~rely~~CBF ~~heavily~~completes onthe merger without completing its initial public offering, the ~~services~~size of ~~key~~the outstanding ~~personnel~~public float of CBF’s Class A common stock will be low and the value and liquidity of CBF’s common stock may be adversely affected.

WeWhile ~~are~~the ~~dependent~~merger onis ~~certain~~expected ~~key~~to ~~officers~~be ~~who~~completed ~~have~~substantially ~~important~~concurrently ~~customer~~with ~~relationships~~CBF’s orinitial ~~are instrumental~~public tooffering, ~~our~~CBF ~~operations.~~controls ~~Changes~~when inthe ~~key~~merger ~~personnel~~will ~~and~~take ~~their~~place ~~responsibilities~~and ~~may~~there can be ~~disruptive~~ tono ~~our~~guarantee ~~business~~that ~~and~~CBF’s initial ~~could~~public ~~have~~offering awill ~~material~~occur ~~adverse~~substantially ~~effect~~concurrently onwith ~~our~~the ~~business,~~merger ~~financial condition~~or ~~and~~at ~~results of operations~~all. WeIf ~~believe~~the ~~that~~merger ~~our~~is ~~future~~completed ~~results~~and ~~will~~CBF’s ~~also~~initial ~~depend~~public inoffering ~~part upon~~is ~~our~~delayed ~~attracting~~or ~~and~~does ~~retaining~~not ~~highly~~occur, ~~skilled~~there ~~and~~will ~~qualified~~be ~~management~~fewer ~~and~~publicly ~~sales~~traded ~~and~~shares ~~marketing~~of CBF’s ~~personnel,~~Class A ~~particularly~~common instock ~~those~~outstanding ~~areas~~than ~~where~~if wethe ~~may~~initial ~~open~~public ~~new~~offering ~~branches.~~is ~~Competition~~completed ~~for~~as ~~such personnel~~anticipated isand, ~~intense~~as a result, the value and weliquidity ~~cannot~~of ~~assure~~CBF’s ~~you~~shares ~~that~~of weClass A ~~will~~common bestock ~~successful~~that you receive in ~~attracting~~the ~~or retaining~~merger ~~such~~may ~~personnel.~~be adversely affected.

On February 16, 2011, we announced that James E. Adams, our Chief Financial Officer, will be retiring on May 16, 2011 after the Annual Shareholders Meeting on May 12, 2011. We have commenced a search for a replacement for Mr. Adams, but there can be no assurance that we will have found a suitable replacement prior to that date.

The limitations on bonuses, retention awards, severance payments and incentive compensation contained in ARRA may adversely affect our ability to retain our highest performing employees.

For so long as any equity securities that we issued to the U.S. Treasury under the CPP remain outstanding, ARRA and regulations issued thereunder, including the IFR, severely restrict bonuses, retention awards, severance and change in control payments and other incentive compensation payable to our most highly compensated employees including our five senior executive officers. It is possible that we may be unable to create a compensation structure that permits us to retain such officers or other key employees or recruit additional employees, especially if we are competing against institutions that are not subject to the same restrictions. Failure to retain our key employees could materially adversely affect our business and results of operations.

We are subject to extensive regulation that could limit or restrict our activities.

We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by various federal and state agencies including the FRB, the FDIC and the TDFI. Our regulatory compliance is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our operations.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably.

The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and the Nasdaq Stock Market that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices. We expect that the Dodd-Frank Act will similarly result in increases in our compliance costs. As a result, we have experienced, and may continue to experience, greater compliance costs.

~~Our~~The ~~long-term~~shares ~~business~~of ~~strategy~~CBF ~~includes~~Class A ~~the~~common ~~continuation~~stock ofto ~~growth~~be ~~plans~~received by Green Bankshares, ~~and~~Inc. ~~our~~shareholders ~~financial~~as a ~~condition~~result ~~and~~of ~~results~~the ofmerger ~~operations~~will ~~could~~have bedifferent ~~affected~~rights ifthan ~~our~~the ~~long-term~~shares ~~business~~of ~~strategies~~Green ~~are~~Bankshares, ~~not effectively~~Inc. ~~executed~~common stock.

~~Although~~The ~~our~~rights associated ~~primary~~with ~~focus~~Green inBankshares, Inc. common stock are different from the ~~near~~rights ~~term~~associated ~~will~~with beCBF’s onClass A ~~strengthening~~common ~~our~~stock. ~~asset~~For ~~quality~~example, ~~and improving~~certain ~~our~~business ~~capital~~combinations ~~position~~between Green Bankshares, weInc. ~~intend~~and any holder of more than 10% Green Bankshares, ~~over~~Inc. common stock must be approved by holders of at least 80% of the ~~longer~~outstanding ~~term~~Green Bankshares, toInc. ~~continue~~common ~~pursuing~~stock as well as holders of at least a ~~growth~~majority of the shares not held by shareholder engaging in the transaction (these ~~strategy~~provisions ~~for~~do ~~our~~not ~~business~~apply ~~through~~to ~~acquisitions~~the ~~and~~merger debecause ~~novo~~the ~~branching~~merger was approved by all members of the Board of Directors of Green Bankshares, Inc.). ~~Our~~These ~~prospects~~provisions ~~must~~do benot apply to CBF shareholders. In addition, holders of at least 10% of Green Bankshares, ~~considered~~Inc.’ incommon ~~light~~stock may call a special meeting of ~~the~~Green ~~risks~~Bankshares, ~~expenses~~Inc. ~~and~~shareholders, ~~difficulties~~whereas ~~occasionally~~special ~~encountered~~meetings byof ~~financial services~~CBF ~~companies~~shareholders incan ~~growth~~only ~~stages~~be called by CBF’s Chairman, ~~which~~Chief ~~may~~Executive ~~include~~Officer ~~the~~or ~~following:~~ its Board of Directors.

•Risks ~~Maintaining~~Relating ~~loan~~to ~~quality;~~the Company’s Banking Operations

•Continued ~~Maintaining~~or ~~adequate~~worsening ~~management~~general ~~personnel~~business and ~~information~~economic ~~systems~~conditions tocould ~~oversee~~have ~~such~~a ~~growth;~~material ~~and~~adverse effect on CBF’s business, financial position, results of operations and cash flows.

•Our ~~Maintaining~~business ~~adequate~~and ~~control~~operations are sensitive to general business and ~~compliance~~economic ~~functions~~conditions in the United States. If the U.S. economy is unable to steadily emerge from the recent recession that began in 2007 or we experience worsening economic conditions, such as a so-called “double-dip” recession, our growth and profitability could be adversely affected. Weak economic conditions may be characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors would be detrimental to our business. On August 5, 2011, Standard & Poor’s lowered the long-term sovereign credit rating of U.S. Government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect on financial markets and although we are unable to predict the longer-term impact on such markets and the participants therein, it may be material and adverse.

~~Operating~~In ~~Results:~~addition, ~~There~~significant isconcern noregarding ~~assurance~~the ~~that~~creditworthiness ~~existing~~of ~~offices~~some orof ~~future~~the ~~offices~~governments ~~will maintain~~in orEurope, ~~achieve~~most ~~deposit~~notably ~~levels~~Greece, ~~loan~~has contributed ~~balances~~to orvolatility ~~other~~in ~~operating~~financial ~~results~~markets ~~necessary~~in toEurope ~~avoid losses~~and orglobally, ~~produce~~and ~~profits.~~to ~~Our~~funding ~~growth~~pressures ~~and~~on desome ~~novo~~globally ~~branching~~active ~~strategy~~European ~~necessarily~~banks, ~~entails~~leading ~~growth~~to ~~in overhead~~greater ~~expenses~~investor asand iteconomic ~~routinely~~uncertainty ~~adds~~worldwide. ~~new~~A ~~offices~~failure ~~and~~to ~~staff.~~adequately ~~Our~~address ~~historical~~sovereign ~~results~~debt concerns ~~may~~in ~~not~~Europe ~~be indicative~~could ofhamper ~~future~~economic ~~results~~recovery or ~~results~~contribute ~~that~~to ~~may~~a bereturn ~~achieved~~to asrecessionary weeconomic ~~continue~~conditions toand ~~increase~~severe stress in the ~~number and~~financial ~~concentration~~markets, ofincluding ~~our~~in ~~branch~~the ~~offices~~United States.

~~Development~~Our ofbusiness ~~Offices:~~is ~~There~~also ~~are~~significantly ~~considerable~~affected ~~costs~~by ~~involved~~monetary inand ~~opening~~related ~~branches,~~policies ~~and~~of ~~new~~the ~~branches generally~~U.S. dofederal ~~not~~government, ~~generate~~its ~~sufficient~~agencies ~~revenues~~and government-sponsored toentities. ~~offset~~Changes ~~their~~in ~~costs~~any ~~until~~of ~~they~~these ~~have~~policies ~~been~~are ~~in operation~~influenced ~~for~~by atmacroeconomic ~~least~~conditions aand ~~year~~other orfactors ~~more.~~that ~~Accordingly,~~are beyond our decontrol, ~~novo~~are ~~branches~~difficult ~~may~~to bepredict ~~expected~~and ~~to negatively~~could ~~impact~~have ~~our~~a ~~earnings~~material ~~during~~adverse ~~this~~effect ~~period~~on ofour ~~time~~business, ~~until~~financial position, ~~the~~results ~~branches~~of ~~reach~~operations ~~certain economies~~and ofcash ~~scale~~flows.

~~Expansion~~The ~~into~~geographic ~~New~~concentration ~~Markets: Much~~ of our ~~growth~~markets ~~over~~in the ~~last~~southeastern ~~five~~region ~~years~~of ~~has been focused in~~ the ~~highly~~ ~~competitive Nashville, Knoxville and Clarksville metropolitan markets. The customer~~United ~~demographics~~States ~~and~~makes ~~financial~~our ~~services~~business ~~offerings~~highly insusceptible ~~these~~to ~~markets~~downturns ~~are unlike those found~~ in the ~~smaller,~~ ~~more~~local ~~rural~~economies ~~East Tennessee markets that we historically served. In the Nashville, Knoxville~~ and ~~Clarksville~~depressed banking markets, wewhich ~~face~~could ~~competition from a wide array of financial institutions. Our expansion efforts in these new markets may~~ be ~~impacted~~detrimental ~~if we are unable~~ to ~~meet~~our ~~customer demands or compete effectively with the~~ financial ~~institutions operating in these markets~~condition.

~~Regulatory~~Unlike ~~and~~larger ~~Economic~~financial ~~Factors:~~institutions ~~Our~~that ~~growth~~are ~~and~~more ~~expansion~~geographically ~~plans~~diversified, ~~may~~Capital beBank ~~adversely~~is ~~affected~~a byregional ~~a number~~banking franchise concentrated in the southeastern region of ~~regulatory~~the ~~and~~United ~~economic~~States. ~~developments~~Capital orBank operates ~~other~~branches ~~events~~located in Florida, North Carolina, South Carolina, Tennessee and Virginia. ~~Failure~~As toof ~~obtain~~December 31, ~~required regulatory~~2011, ~~approvals~~32% of Capital Bank’s loans were in Florida, ~~changes~~26% were in ~~laws~~North ~~and~~Carolina, ~~regulations~~12% orwere ~~other~~in ~~regulatory~~South ~~developments~~Carolina, ~~and~~29% ~~changes~~were in Tennessee and 1% was in ~~prevailing~~Virginia. A deterioration in local economic conditions in the loan market or ~~other~~in ~~unanticipated~~the ~~events~~residential, ~~may~~commercial ~~prevent~~or industrial real estate market could have a material adverse effect on the quality of Capital Bank’s portfolio, the demand for its products and services, the ability of borrowers to timely repay loans and the value of the collateral securing loans. In addition, if the population or income growth in the region is slower than projected, income levels, deposits and real estate development could be adversely ~~affect~~affected and could result in the curtailment of our ~~continued~~ expansion, growth and ~~expansion~~profitability. If any of these developments were to result in losses that materially and adversely affected Capital Bank’s capital, the Company and Capital Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital.

~~Failure~~We todepend ~~successfully~~on ~~address~~our ~~the~~executive ~~issues~~officers ~~identified~~and ~~above~~key ~~could~~personnel ~~have~~to acontinue ~~material~~the ~~adverse effect~~implementation onof ~~our~~its long-term business, ~~future~~strategy ~~prospects, financial condition or results of operations,~~ and could ~~adversely~~ ~~affect~~be ~~our~~harmed ~~ability~~by tothe ~~successfully~~loss ~~implement~~of ~~our~~their ~~longer term business strategy~~services.

We ~~may~~believe ~~face~~that ~~risks~~our ~~with~~continued ~~respect~~growth toand future ~~expansion~~success will depend in large part on the skills of our management team and its ability to motivate and retain these individuals and other key personnel. In particular, we rely on the leadership and experience in the banking industry of its Chief Executive Officer, R. Eugene Taylor. Mr. Taylor is the former Vice Chairman of Bank of America and has extensive experience executing and overseeing bank acquisitions, including NationsBank Corp.’s acquisition and integration of Bank of America, Maryland National Bank and Barnett Banks. The loss of service of Mr. Taylor or one or more of our other executive officers or key personnel could reduce our ability to successfully implement our

From time to time we may engage in additional de novo branch expansion as well as the acquisition of other financial institutions or parts of those institutions. We may also consider and enter into new lines of business or offer new products or services. Acquisitions and mergers involve a number of risks, including:

• the time and costs associated with identifying and evaluating potential acquisitions and merger partners;

• inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

• the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

• our ability to finance an acquisition and possible dilution to our existing shareholders;

• the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

• entry into new markets where we lack experience;

• the introduction of new products and services into our business;

• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

• the risk of loss of key employees and customers.

Welong-term ~~may~~business ~~incur~~strategy, ~~substantial~~our ~~costs~~business tocould ~~expand.~~suffer ~~There~~and ~~can~~the bevalue noof ~~assurance~~our ~~that~~and ~~integration~~CBF’s ~~efforts~~common stock ~~for~~could ~~any~~be ~~future~~materially ~~mergers~~adversely affected. Leadership changes will occur from time to time and we cannot predict whether significant resignations will occur or ~~acquisitions~~whether we or CBF will be ~~successful.~~able ~~Also,~~to werecruit ~~may~~additional ~~issue~~qualified ~~equity~~personnel. ~~securities,~~We believe our ~~including~~management ~~common~~team ~~stock~~possesses valuable knowledge about the banking industry and ~~securities~~that ~~convertible~~their knowledge and relationships would be very difficult to replicate. Although R. Eugene Taylor has entered into ~~shares~~an ofemployment ~~our~~agreement ~~common~~with ~~stock~~CBF inand ~~connection~~it is expected ~~with~~that, ~~future~~prior ~~acquisitions~~to the completion of the initial public offering, ~~which~~Christopher ~~could~~G. ~~cause~~Marshall, ~~ownership~~R. Bruce Singletary and ~~economic~~Kenneth ~~dilution~~A. toPosner ~~our~~will ~~shareholders. There~~have isentered nointo ~~assurance~~employment ~~that~~agreements with CBF, ~~following~~it ~~any~~is ~~future~~possible ~~mergers~~that they may not complete the term of their employment agreements or ~~acquisitions,~~renew ~~our~~them ~~integration~~upon ~~efforts~~expiration. Our success also depends on the experience of Capital Bank’s branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these ~~will~~key bepersonnel ~~successful~~could ornegatively weimpact our banking operations. The loss of key personnel, ~~after~~or ~~giving~~the ~~effect~~inability to recruit and retain qualified personnel in the ~~acquisition~~future, ~~will~~could ~~achieve~~have ~~profits~~an ~~comparable to~~adverse oreffect ~~better~~on ~~than~~ our ~~historical~~business, ~~experience.~~financial condition or operating results.

WeCapital ~~are~~Bank’s ~~subject~~loss tosharing ~~Tennessee~~agreements ~~anti-takeover~~impose ~~statutes~~restrictions ~~and~~on ~~certain~~the ~~charter~~operation ~~provisions~~of ~~which~~its ~~could decrease~~business; ~~our~~failure ~~chances~~to comply with the terms of ~~being~~the ~~acquired~~loss ~~even~~sharing ifagreements with the ~~acquisition~~FDIC isor other regulatory agreements or orders may result in ~~our~~significant ~~shareholders~~losses or regulatory sanctions, and Capital Bank is exposed to unrecoverable losses on the Failed Banks’ ~~best~~assets that it ~~interests~~acquired.

AsIn aJuly ~~Tennessee corporation~~2010, weCapital ~~are~~Bank ~~subject~~purchased tosubstantially ~~various~~all ~~legislative~~of ~~acts~~the ~~which~~assets ~~impose restrictions~~and onassumed ~~and~~all ~~require~~of ~~compliance~~the ~~with~~deposits ~~procedures~~and certain ~~designed~~other toliabilities ~~protect~~of ~~shareholders~~the ~~against unfair~~Failed orBanks ~~coercive~~in ~~mergers~~FDIC-assisted transactions, and ~~acquisitions.~~a ~~These~~material ~~statutes~~portion ~~may~~of ~~delay~~its orrevenue ~~prevent~~is ~~offers~~derived tofrom ~~acquire us~~such ~~and~~assets. ~~increase~~Certain of the ~~difficulty~~purchased ofassets ~~consummating~~are ~~any~~covered ~~such~~by ~~offers~~the loss sharing agreements with the FDIC, ~~even~~which ifprovide that the ~~acquisition~~FDIC will bear 80% of uslosses ~~would be~~on the covered loan assets acquired in ~~our~~the ~~shareholders’~~acquisition ~~best~~of ~~interests~~the Failed Banks. ~~Our~~Capital ~~amended~~Bank ~~and~~is ~~restated~~subject ~~charter~~to ~~also~~audit ~~contains~~by ~~provisions~~the FDIC at its discretion to ensure it is in compliance with the terms of these agreements. ~~which~~Capital Bank may ~~make~~experience itdifficulties ~~difficult~~in ~~for~~complying ~~another~~with ~~entity~~the torequirements ~~acquire~~of usthe ~~without~~loss sharing agreements, the ~~approval~~terms of awhich ~~majority~~are extensive and failure to comply with any of the ~~disinterested~~terms ~~directors~~could onresult ~~our~~in ~~board~~a specific asset or group of ~~directors.~~assets losing their loss sharing coverage.

The ~~success~~FDIC ~~and~~has ~~growth~~the ofright ~~our~~to ~~business~~refuse ~~will~~or ~~depend~~delay onpayment ~~our~~partially ~~ability~~or toin ~~adapt~~full tofor ~~technological~~such loan losses if Capital ~~changes~~Bank fails to comply with the terms of the loss sharing agreements, which are extensive. Additionally, the loss sharing agreements are limited in duration. Therefore, any losses that Capital Bank experiences after the terms of the loss sharing agreements have ended will not be recoverable from the FDIC, and would negatively impact net income.

~~The~~Capital ~~banking~~Bank’s ~~industry~~loss sharing ~~and~~agreements ~~the~~also ~~ability~~impose tolimitations ~~deliver~~on ~~financial~~how ~~services~~it ismanages ~~becoming~~loans ~~more~~covered ~~dependent on~~by ~~technological~~loss ~~advancement,~~sharing. ~~such~~For asexample, under the ~~ability~~loss tosharing ~~process~~agreements, ~~loan~~Capital ~~applications~~Bank ~~over~~is ~~the~~not ~~Internet, accept~~permitted ~~electronic~~to ~~signatures,~~sell ~~provide~~a ~~process~~covered ~~status~~loan ~~updates~~even ~~instantly~~if ~~and~~in ~~on-line~~the ~~banking capabilities~~ordinary ~~and~~course ~~other~~of ~~customer~~business ~~expected~~it ~~conveniences~~is determined that ~~are~~taking ~~cost~~such ~~efficient~~action towould ~~our~~be ~~business processes~~advantageous. AsThese ~~these~~restrictions ~~technologies~~could ~~are~~impair ~~improved~~Capital inBank’s ability to manage problem loans and extend the ~~future,~~amount weof ~~may,~~time inthat ~~order~~such toloans remain on its balance sheet and could negatively impact ~~competitive~~Capital Bank’s business, befinancial ~~required~~condition, toliquidity ~~make~~and ~~significant~~results ~~capital~~of ~~expenditures~~operations.

~~Even~~In ~~though~~addition ~~our~~to ~~common~~the ~~stock~~loss issharing agreements, ~~currently~~in ~~traded~~August on2010, ~~The~~Capital ~~Nasdaq~~Bank ~~Global~~entered ~~Select~~into ~~Market,~~an Operating Agreement with the ~~trading volume~~OCC (which we refer to as the “OCC Operating Agreement”), in ~~our~~connection ~~common~~with ~~stock~~the ~~has~~acquisition ~~been~~of ~~thin~~the Failed Banks. Capital Bank (and, with respect to certain provisions, the ~~sale~~Company and CBF) is also subject to an Order of ~~substantial~~the ~~amounts~~FDIC, dated July 16, 2010 (which we refer to as the “FDIC Order”) issued in connection with the FDIC’s approval of ~~our~~CBF’s ~~common~~deposit ~~stock~~insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the ~~public~~business ~~market~~and they restrict Capital Bank’s ability to pay dividends to CBF and the Company and to make changes to its capital structure. A failure by CBF or Capital Bank to comply with the requirements of the OCC Operating Agreement or the FDIC Order could ~~depress~~subject CBF to regulatory sanctions; and failure to comply, or the ~~price~~objection, or imposition of additional conditions, by the OCC or the FDIC, in connection with any materials or information submitted thereunder, could prevent CBF from executing our ~~common~~business ~~stock~~strategy and negatively impact its business, financial condition, liquidity and results of operations.

WeAny ~~cannot~~requested ~~say~~or ~~with~~required ~~any~~changes ~~certainty~~in ~~when~~how awe ~~more~~determine ~~active~~the ~~and~~impact ~~liquid trading market for our common stock will develop or be sustained. Because~~ of ~~this,~~loss ~~our~~share ~~shareholders~~accounting ~~may~~on ~~not~~its befinancial ~~able~~information tocould ~~sell~~have ~~their shares~~a atmaterial ~~the~~adverse ~~volumes,~~effect ~~prices,~~on orour ~~times~~reported ~~that they desire~~results.

WeA ~~cannot~~material ~~predict~~portion ~~the~~of ~~effect,~~our iffinancial ~~any,~~results ~~that~~is ~~future~~based ~~sales~~on ofloss ~~our~~share ~~common~~accounting, ~~stock~~which inis ~~the~~subject ~~market,~~to orassumptions and ~~availability~~judgments ofmade ~~shares~~by ofus, our ~~common~~accountants ~~stock~~and ~~for~~the ~~sale~~regulatory inagencies ~~the~~to ~~market,~~whom ~~will~~we ~~have~~report onsuch ~~the~~information. ~~market~~Loss ~~price~~share ~~of our~~accounting ~~common~~is ~~stock~~a complex accounting methodology. ~~We,~~If ~~therefore,~~these ~~can~~assumptions ~~give~~are noincorrect ~~assurance~~or ~~that~~the ~~sales~~accountants ofor ~~substantial~~the ~~amounts~~regulatory ofagencies ~~our~~to whom ~~common~~CBF ~~stock~~and inCapital ~~the~~Bank ~~market~~report require that management change or modify these assumptions, such change or ~~the~~modification ~~potential~~could ~~for~~have ~~large~~a ~~amounts~~material ofadverse ~~sales~~effect inon ~~the~~our ~~market~~financial condition, ~~would~~operations ~~not~~or previously reported results. As such, any financial ~~cause~~information generated through the ~~price~~use of ~~our~~loss ~~common~~share ~~stock~~accounting is subject to ~~decline~~modification or ~~impair~~change. ~~our~~Any ~~ability~~significant tomodification ~~raise~~or ~~capital~~change ~~through~~in ~~sales~~ such information could have a material adverse effect on our results of operations and our ~~common~~previously reported ~~stock~~results.

The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing common shareholders.

In order to maintain our capital at desired levels or required regulatory levels, or to fund future growth, our board of directors may decide from time to time to issue additional shares of common stock, preferred stock or securities convertible into, exchangeable for or representing rights to acquire shares of our common stock. The sale of these shares may significantly dilute our shareholders’ ownership interest and the per share book value of our common stock. New investors in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

Our ~~ability~~financial toinformation ~~declare~~reflects ~~and~~the ~~pay~~application ~~dividends~~of isthe ~~limited~~acquisition bymethod ~~law,~~of byaccounting. ~~commitments~~Any ~~we have made to our~~change ~~regulators~~in ~~and by~~ the ~~terms~~assumptions ofused ~~the~~in ~~Series A~~such ~~preferred~~methodology ~~stock~~could ~~that we~~ have ~~issued~~an toadverse ~~the~~effect ~~U.S. Treasury,~~on ~~and~~our weresults ~~may~~of ~~be unable to pay future dividends~~operations.

WeAs ~~derive~~a result of CBF’s recent acquisition, of us, our ~~income~~financial ~~solely~~results ~~from~~are ~~dividends~~heavily oninfluenced by the ~~shares~~application of ~~common~~the ~~stock~~acquisition method of ~~the Bank~~accounting. The ~~Bank’s~~ ~~ability~~acquisition tomethod ~~declare~~of ~~and~~accounting ~~pay~~requires ~~dividends~~management to usmake isassumptions ~~limited~~regarding bythe ~~its~~assets purchased ~~obligations~~and toliabilities ~~maintain sufficient~~assumed ~~capital~~to ~~and~~determine bytheir ~~other~~fair ~~general~~market ~~restrictions~~value. onCapital ~~its~~Bank’s ~~dividends~~interest ~~that~~income, ~~are~~interest ~~applicable~~expense toand ~~banks that~~net ~~are~~interest ~~regulated~~margin by(which ~~the~~were ~~FDIC~~equal ~~and~~to ~~the~~$226.4 ~~TDFI~~million, $32.8 Inmillion ~~addition~~and 3.41%, ~~the~~respectively, ~~terms~~for of the ~~Series A~~year ~~preferred stock~~ended ~~impose~~December 31, ~~restrictions~~2011) onreflect ~~our~~the ~~ability~~impact toof ~~pay~~accretion ~~dividends~~of onthe ~~our~~fair ~~common~~value ~~stock~~adjustments ~~and~~made ~~we have informally committed~~ to the ~~FRB-Atlanta~~carrying ~~that~~amounts weof ~~will~~interest ~~not~~earning ~~pay~~assets ~~dividends~~and oninterest ~~our~~bearing ~~common~~liabilities orand ~~preferred~~Capital ~~stock without the FRB-Atlanta~~Bank’s ~~prior~~non-interest ~~approval~~income (which totaled $40.7 Onmillion as ~~November~~of December 931, ~~2010,~~2011) ~~following~~for ~~consultation~~periods ~~with~~subsequent to the ~~FRB-Atlanta,~~ weacquisitions ~~notified~~includes the ~~U.S.~~effects ~~Treasury~~of ~~that~~discount weaccretion ~~were~~and ~~suspending~~amortization of the ~~payment~~FDIC ofindemnification ~~regular~~asset. ~~quarterly cash~~In ~~dividends~~addition, onthe ~~preferred~~balances ~~stock~~of ~~that~~non-performing weassets ~~had~~were ~~issued~~significantly toreduced by the ~~U.S.~~adjustments ~~Treasury~~to fair value recorded in ~~the~~conjunction ~~CPP.~~with Wethe dorelevant ~~not know~~acquisition. ~~when~~If weour ~~will~~assumptions ~~receive~~are ~~permission~~incorrect ~~from~~or the ~~FRB-Atlanta~~regulatory agencies to ~~resume~~whom ~~paying~~we ~~dividends~~report onrequire ~~our~~that ~~common or~~we ~~preferred~~change ~~stock.~~or Wemodify ~~cannot~~its ~~assure~~assumptions, ~~our~~such ~~shareholders~~change ~~that~~or wemodification ~~will~~could have ~~declare~~a ormaterial ~~pay~~adverse ~~dividends~~effect on ~~shares~~ our financial condition or results of ~~our~~operations ~~common~~or ~~stock~~our inpreviously ~~the~~reported ~~future~~results.

~~Holders~~Our ofbusiness ~~our~~is highly ~~junior~~susceptible ~~subordinated debentures have rights that are senior~~ to ~~those~~credit ~~of our common and Series A preferred shareholders~~risk.

WeAs ~~had~~a ~~supported~~lender, ~~our~~Capital ~~previous~~Bank ~~growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. This financing vehicle~~ is no ~~longer~~exposed anto ~~attractive~~the ~~source~~risk ~~for~~that ~~funding~~its ~~acquisitions~~customers aswill abe ~~result of the changing characteristics~~unable ofto ~~trust~~repay ~~preferred securities and~~ their ~~limited~~loans ~~attributes~~according ~~towards~~to ~~qualifying~~their asterms ~~primary regulatory capital. At December 31, 2010, we had outstanding trust preferred securities~~ and ~~accompanying junior~~that ~~subordinated~~the ~~debentures~~collateral ~~totaling~~(if ~~$88.7 million.~~any) ~~Payments~~securing of the ~~principal~~payment ~~and~~of ~~interest~~their ~~on the~~loans ~~trust~~may ~~preferred~~not ~~securities~~be ofsufficient ~~these~~to ~~trusts~~assure ~~are~~repayment. ~~conditionally~~The ~~guaranteed~~risks byinherent ~~us.~~in ~~Further,~~making ~~the accompanying~~any ~~junior~~loan ~~subordinated~~include ~~debentures~~risks wewith ~~issued~~respect to the ~~trusts~~period ~~are~~of ~~senior~~time ~~to our shares of~~over ~~common~~which ~~stock and~~ the ~~Series A~~loan ~~preferred~~may ~~stock~~be ~~that~~repaid, werisks ~~issued~~relating to ~~the~~proper ~~U.S.~~loan ~~Treasury~~underwriting inand ~~the CPP. As a result~~guidelines, werisks ~~must~~resulting ~~make~~from ~~payments~~changes onin ~~the~~economic ~~junior~~and ~~subordinated~~industry ~~debentures~~conditions, ~~before~~risks ~~any~~inherent ~~dividends~~in ~~can~~dealing ~~be paid~~with onindividual ~~our~~borrowers ~~common stock or the Series A preferred stock~~ and, inrisks ~~the~~resulting ~~event~~from ofuncertainties ~~our bankruptcy,~~as ~~dissolution~~to ~~or liquidation,~~ the ~~holders~~future value of ~~the junior subordinated debentures must be satisfied before any distributions can be made on our common stock or Series A preferred stock~~collateral. WeThe ~~have~~credit ~~the right~~standards, toprocedures ~~defer~~and ~~distributions~~policies onthat ~~our~~Capital ~~junior~~Bank ~~subordinated~~has ~~debentures~~established ~~(and the related trust preferred securities)~~ for upborrowers ~~to five years, during which time no dividends~~ may benot ~~paid~~prevent onthe ~~our~~incurrence ~~common~~of ~~stock~~substantial ~~or our~~credit ~~Series A preferred stock~~losses.

AsAlthough ~~described~~Capital ~~above,~~Bank wedoes not have ~~informally~~a ~~committed~~long enough operating history to ~~the~~have ~~FRB-Atlanta~~restructured ~~that~~many weof ~~will~~its ~~not~~loans ~~pay~~for borrowers in financial ~~interest~~difficulty, onin the ~~subordinated~~future, ~~debentures~~it ~~without~~may ~~the~~restructure ~~prior~~originated ~~approval~~or ofacquired loans if Capital Bank believes the ~~FRB-Atlanta~~borrowers have a viable business plan to fully pay off all obligations. InHowever, ~~the~~for its originated loans, if interest rates or other terms are ~~fourth~~modified ~~quarter~~upon extension of ~~2010,~~credit ~~following~~or ~~consultation~~if ~~with~~terms ~~the~~of ~~FRB-Atlanta~~an existing loan are renewed in such a situation and a concession is granted, Capital Bank may be required to classify such action as a troubled debt restructuring (which we ~~notified~~refer to as a “TDR”). Capital Bank would classify loans as TDRs when certain modifications are made to the ~~trustees~~loan ~~with~~terms and concessions are granted to the borrowers due to their financial difficulty. Generally, these loans would be restructured to provide the borrower additional time to execute its business plan. With respect to ~~each~~restructured ~~series~~loans, Capital Bank may grant concessions by (1) reduction of ~~our~~the ~~subordinated~~stated ~~debentures,~~interest rate for the remaining original life of ~~our~~the ~~intent~~debt toor ~~defer~~(2) extension of the maturity date at a stated interest ~~payments~~rate on lower than the ~~subordinated~~current ~~debentures~~market ~~beginning~~rate for new debt with ~~the~~similar ~~interest~~risk. ~~payments~~In ~~due~~situations inwhere a TDR is unsuccessful and the ~~fourth~~borrower ~~quarter~~is unable to satisfy the terms of ~~2010.~~the restructured agreement, the loan would be placed on nonaccrual status and written down to the underlying collateral value.

~~The~~Recent ~~Series A~~economic ~~preferred~~and ~~stock~~market ~~impacts~~developments ~~net~~and the ~~income~~potential ~~available~~for continued economic disruption present considerable risks to ~~our~~CBF ~~common~~and ~~shareholders~~it is difficult to determine the depth and ~~our~~duration of the economic and financial market problems and the many ways in which they may impact CBF’s business in ~~earnings~~general. ~~per~~Any ~~share~~failure to manage such credit risks may materially adversely affect CBF’s business and its consolidated results of operations and financial condition.

~~As long as shares of our Series~~ A ~~preferred~~significant ~~stock~~portion are outstanding, no dividends may be paid on our common stock unless all dividends on the Series A preferred stock have been paid in full. Additionally, prior to December 23, 2011, unless we redeem the Series A preferred stock or the U.S. Treasury has transferred the Series A preferred stock to a third party, we are not permitted to pay cash dividends on our common stock in excess of ~~$0.13~~Capital ~~per quarter without the U.S. Treasury~~Bank’s ~~consent.~~ ~~The~~loan ~~dividends~~portfolio ~~declared~~is onsecured ~~shares~~by ofreal ~~our~~estate, ~~Series A preferred stock will reduce the net income available to common shareholders~~ and ~~our~~events ~~earnings~~that ~~per~~negatively ~~common~~impact ~~share. Additionally, warrants to purchase our common stock issued to~~ the ~~Treasury,~~real inestate ~~conjunction~~market ~~with~~could ~~the~~hurt ~~issuance~~its ~~of the Series A preferred stock, may be dilutive to our earnings per share~~business. ~~The shares of our Series A preferred stock will also receive preferential treatment in the event of our liquidation, dissolution or winding up.~~

A significant portion of Capital Bank’s loan portfolio is secured by real estate. As of December 31, 2011, approximately 86% of Capital Bank’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in Capital Bank’s primary market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on Capital Bank’s profitability and asset quality. If Capital Bank is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, its earnings and shareholders’ equity could be adversely affected.

~~Holders~~Additionally, ofrecent weakness in the ~~Series A~~secondary ~~preferred~~market ~~stock~~for residential lending could have ~~rights~~an adverse ~~that~~impact ~~are~~on ~~senior~~Capital toBank’s ~~those~~profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of ~~our~~most ~~common~~mortgage loans other than conforming Fannie Mae and Freddie ~~shareholders~~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, any future mortgage loan originations and gains on sale of mortgage loans. 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 charge-offs in future periods, which could adversely affect Capital Bank’s financial position and results of operations.

~~The~~Capital ~~Series A~~Bank’s ~~preferred~~construction ~~stock that we have issued to the U.S. Treasury is senior to our shares of common stock,~~ and ~~holders~~land ofdevelopment ~~the~~loans ~~Series A preferred stock have certain rights and preferences that~~ are ~~senior~~based toupon ~~holders~~estimates of ~~our~~costs ~~common stock. The Series A preferred stock will rank senior to our common stock~~ and ~~all other equity securities of ours designated as ranking junior to~~ the ~~Series A~~values ~~preferred stock. So long as any shares~~ of the ~~Series A preferred stock remain outstanding, unless~~ ~~all~~complete accrued and unpaid dividends on shares of the Series A preferred stock for all prior dividend periods have been paid or are contemporaneously declared and paid in full, no dividend whatsoever shall be paid or declared on our common stock or other junior stock, other than a dividend payable solely in common stockprojects. Prior to December 23, 2011, unless we redeem the Series A preferred stock or the U.S. Treasury has transferred the Series A preferred stock to a third party we and our subsidiaries also may not, with certain limited exceptions, purchase, redeem or otherwise acquire any shares of our common stock or other junior stock without the U.S. Treasury’s consent. During that three-year period, and thereafter, we and our subsidiaries may not purchase, redeem or otherwise acquire for consideration any shares of our common stock or other junior stock unless we have paid in full all accrued and unpaid dividends on the Series A preferred stock, other than in certain circumstances. Furthermore, the Series A preferred stock is entitled to a liquidation preference over shares of our common stock in the event of our liquidation, dissolution or winding up.

~~Holders~~While ofCapital ~~the~~Bank ~~Series A~~intends ~~preferred~~to ~~stock~~focus ~~may,~~on ~~under~~originating ~~certain~~loans ~~circumstances~~other than non-owner occupied commercial real estate loans, ~~have~~its ~~the~~portfolio ~~right~~includes construction and land development loans (which we refer to ~~elect two~~as ~~directors~~“C&D loans”) extended to ~~our~~builders ~~board~~and developers, primarily for the construction and/or development of ~~directors~~properties. These loans have been extended on a presold and speculative basis and they include loans for both residential and commercial purposes.

~~As described above~~In general, onC&D ~~November 9,~~lending ~~2010,~~involves weadditional ~~notified~~risks ~~the~~because ~~U.S. Treasury that we were suspending the payment~~ of ~~dividends on~~ the ~~Series A~~inherent ~~preferred~~difficulty ~~stock~~in ~~beginning~~estimating ~~with~~a ~~the~~property’s ~~dividend~~value ~~payment~~both ~~due~~before ~~in the~~and ~~fourth~~at ~~quarter~~completion of ~~2010. In~~ the ~~event~~project. ~~that~~Construction wecosts ~~fail~~may toexceed ~~pay~~original ~~dividends~~estimates onas ~~the~~a ~~Series A~~result ~~preferred stock for an aggregate~~ of ~~six~~increased materials, ~~quarterly~~labor ~~dividend periods~~ or ~~more~~other ~~(whether~~costs. orIn ~~not consecutive)~~addition, ~~the authorized~~because ~~number~~ of ~~directors~~current ~~then~~uncertainties ~~constituting~~in ~~our~~the ~~board~~residential ofand ~~directors~~commercial ~~will~~real beestate ~~increased~~markets, byproperty ~~two. Holders~~values ofhave ~~the~~become ~~Series A~~more ~~preferred~~difficult ~~stock,~~to ~~together~~determine ~~with~~than ~~the~~they ~~holders~~have ofbeen ~~any~~historically. ~~outstanding~~The ~~parity~~repayment ~~stock~~of ~~with~~construction ~~like~~and ~~voting~~land ~~rights,~~acquisition ~~referred~~and todevelopment asloans ~~voting~~is ~~parity~~often ~~stock~~dependent, ~~voting~~in aspart, aon ~~single~~the ~~class,~~ability ~~will~~of ~~be entitled~~the borrower to ~~elect~~sell or lease the ~~two~~property. ~~additional~~These ~~members~~loans ofalso ~~our~~require ~~board~~ongoing ofmonitoring. ~~directors~~In addition, ~~referred~~speculative toconstruction asloans ~~the~~to a ~~preferred~~residential ~~stock~~builder ~~directors,~~are atoften ~~the~~associated ~~next~~with ~~annual~~homes ~~meeting~~that ~~(or~~are atnot apresold ~~special~~and, ~~meeting~~thus, ~~called~~pose ~~for~~a ~~the purpose~~greater ofpotential ~~electing~~risk ~~the~~than ~~preferred~~construction ~~stock~~loans ~~directors prior~~ to ~~the~~individuals ~~next~~on ~~annual~~their ~~meeting)~~personal ~~and~~residences. atSlowing ~~each subsequent~~housing ~~annual~~sales ~~meeting~~have ~~until~~been ~~all~~a ~~accrued~~contributing ~~and~~factor ~~unpaid~~to ~~dividends~~an increase ~~for~~in ~~all~~non-performing ~~past~~loans ~~dividend~~as ~~periods~~well ~~have been~~as ~~paid~~an increase in ~~full~~delinquencies.

~~ITEM~~As 1Bof December 31, 2011, C&D loans totaled $509.3million ~~UNRESOLVED~~(or ~~STAFF~~12% ~~COMMENTS~~of Capital Bank’s total loan portfolio), of which $85.9 million was for construction and/or development of residential properties and $423.3 million was for construction/development of commercial properties. As of December 31, 2011, non-performing C&D loans covered under FDIC loss share agreements totaled $39.4 million and non-performing C&D loans not covered under FDIC loss share agreements totaled $94.9 million.

~~None~~Capital Bank’s non-owner occupied commercial real estate loans may be dependent on factors outside the control of its borrowers.

~~ITEM~~While 2Capital Bank intends to focus on originating loans other than non-owner occupied commercial real estate loans, in the acquisitions it acquired non-owner occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. ~~PROPERTIES~~These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. This may be adversely affected by changes in the economy or local market conditions. Non-owner occupied commercial real estate loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. In such cases, Capital Bank may be compelled to modify the terms of the loan or engage in other potentially expensive work-out techniques. If Capital Bank forecloses on a non-owner occupied commercial real estate loan, the holding period for the collateral typically is longer than a 1-4 family residential property because there are fewer potential purchasers of the collateral. Additionally, non-owner occupied commercial real estate loans generally have relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with Capital Bank’s residential or consumer loan portfolios.

AtAs of December 31, ~~2010~~2011, ~~the~~Capital ~~Company~~Bank’s ~~maintained~~non-owner aoccupied ~~main~~commercial ~~office~~real inestate ~~Greeneville,~~loans ~~Tennessee~~totaled in$903.9 ~~a building~~million it(or ~~owns,~~21% 65of ~~full-service~~its total ~~bank~~loan ~~branches~~portfolio). (As of ~~which~~December 31, 542011, ~~are~~non-performing ~~owned~~non-owner ~~premises~~occupied ~~and~~commercial 11real ~~are~~estate ~~leased premises)~~loans ~~and~~covered aunder ~~building~~FDIC ~~for~~loss ~~mortgage~~share ~~lending~~agreements ~~operations~~totaled ~~which~~$15.3 itmillion ~~owns.~~and Innon-performing ~~addition,~~non-owner ~~the~~occupied ~~Bank’s subsidiaries~~commercial ~~operate~~real ~~from~~estate ~~nine~~loans ~~separate~~not covered ~~locations,~~under ~~all~~FDIC ofloss ~~which~~share ~~are~~agreements ~~leased~~totaled $49. 5 million.

~~ITEM~~Repayment 3.of ~~LEGAL~~Capital ~~PROCEEDINGS~~Bank’s commercial business loans is dependent on the cash flows of borrowers, which may be unpredictable, and the collateral securing these loans may fluctuate in value.

OnCapital November 18, 2010 a shareholder of the Company filed a putative class action lawsuit (styled Bill Burgraff v. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:10-cv-00253) against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Tennessee in Greeneville, Tennessee on behalf of all persons that acquired shares of the CompanyBank’s ~~common~~ ~~stock~~business ~~between~~plan ~~January 19,~~focuses ~~2010~~on ~~and~~originating ~~November 9,~~different ~~2010.~~types ~~On January 18, 2011, a separate shareholder~~ of ~~the~~commercial ~~Company~~business ~~filed a putative class action lawsuit (styled Brian Molnar v~~loans. ~~Green Bankshares,~~Capital ~~Inc.,~~Bank etclassifies ~~al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:11-cv-00014) against~~ the ~~Company~~types ~~and certain~~ of ~~its~~commercial ~~current~~loans ~~and~~offered ~~former officers~~as inowner-occupied ~~the~~term ~~same~~real ~~court on behalf of all persons that acquired shares of the Company’s common~~estate ~~stock between January 19~~loans, ~~2010~~business ~~and~~lines ~~October 20,~~of ~~2010.~~credit ~~These lawsuits were filed following,~~ and ~~relate~~term toequipment ~~the drop in value of the Company’s common stock price after, the Company announced its third quarter performance results on October 20, 2010~~financing. ~~The Burgraff case also complains of the Company’s decision on November 9, 2010, to suspend payment of certain quarterly cash dividends.~~

~~The~~Commercial ~~plaintiffs~~business ~~allege~~lending ~~that~~involves ~~defendants~~risks ~~made~~that ~~false~~are ~~and/or~~different ~~misleading~~from ~~statements~~those orassociated ~~failed~~with tonon-owner occupied ~~disclose~~commercial ~~that~~real ~~the~~estate ~~Company~~lending. ~~was~~Capital ~~purportedly~~Bank’s ~~overvaluing~~commercial ~~collateral~~business ofloans ~~certain~~are ~~loans;~~primarily ~~failing~~underwritten ~~to timely~~based ~~take~~on ~~impairment~~the ~~charges~~cash flow of ~~these~~the ~~certain~~borrower ~~loans;~~and ~~failing~~secondarily toon ~~properly~~the ~~account~~underlying ~~for~~collateral, ~~loan charge-offs;~~including ~~lacking~~real ~~adequate~~estate. ~~internal~~The ~~and~~borrowers’ ~~financial~~cash ~~controls;~~flow may be unpredictable, and ~~providing~~collateral ~~false~~securing ~~and~~these ~~misleading financial~~loans ~~results~~may fluctuate in value. ~~The~~Some ~~plaintiffs~~of ~~have~~Capital ~~asserted~~Bank’s ~~federal~~commercial ~~securities~~business ~~laws~~loans ~~claims~~are ~~against~~collateralized ~~all defendants~~by ~~for~~equipment, ~~alleged~~inventory, ~~violations~~accounts ofreceivable ~~Section~~or ~~10(b)~~other ofbusiness ~~the~~assets, ~~Securities~~and ~~Exchange~~the ~~Act~~liquidation of collateral ~~1934~~in (the ~~“Exchange~~ ~~Act”)~~event ~~and~~of ~~Rule 10b-5~~default ~~promulgated~~is ~~thereunder.~~often ~~The~~an ~~plaintiffs~~insufficient ~~have~~source ~~also~~of ~~asserted~~repayment ~~control person~~because ~~liability~~accounts ~~claims~~receivable ~~against~~may ~~the~~be ~~individual~~uncollectible ~~defendants~~and ~~named~~inventories inmay ~~the~~be ~~complaints~~obsolete ~~pursuant~~or ~~to Section 20(a)~~ of ~~the~~limited ~~Exchange Act~~use.

~~The~~As ~~two~~of ~~cases~~December 31, ~~were~~2011, ~~consolidated~~Capital onBank’s ~~February 4,~~commercial ~~2011~~business loans totaled $1.4 ~~Plaintiffs~~billion ~~have~~(or ~~60 days~~32% ~~from~~of ~~that~~its ~~date~~total loan portfolio). Of ~~within~~this ~~which~~amount, to$902.8 ~~file~~million anwas ~~amended~~secured by owner-occupied real estate and ~~consolidated~~$465.8 ~~complaint~~million was secured by business assets. OnAs ~~February~~of December 1131, 2011, ~~the~~non-performing ~~Court appointed~~commercial ~~movant~~business ~~Jeffrey~~loans ~~Blomgren~~covered asunder ~~lead~~FDIC ~~plaintiff~~loss share agreements totaled $29.8 million and non-performing commercial business loans not covered under FDIC loss share agreements totaled $67.7 million.

~~The~~Capital Bank’s ~~Company~~allowance for loan losses and ~~the~~fair ~~individual~~value ~~named~~adjustments ~~defendants~~may ~~collectively~~prove ~~intend~~to be insufficient to ~~vigorously~~absorb ~~defend themselves~~losses ~~against~~for ~~these~~loans ~~allegations~~that it originates.

~~The~~Lending ~~Company~~money ~~and~~is ~~its~~a ~~subsidiaries~~substantial ~~are~~part ~~subject~~of toCapital ~~claims~~Bank’s business and ~~suits~~each ~~arising~~loan incarries ~~the~~a ~~ordinary course~~certain ofrisk ~~business.~~that Init ~~the~~will ~~opinion~~not ofbe ~~management,~~repaid ~~the~~in ~~ultimate~~accordance ~~resolution~~with ofits ~~these~~terms ~~pending~~or ~~claims and~~that ~~legal~~any ~~proceedings~~underlying collateral will not be ~~have~~sufficient ato ~~material~~assure ~~adverse~~repayment. ~~effect~~This onrisk ~~the~~is ~~Company’s~~affected ~~results~~by, ~~of operations.~~ among other things:

~~ITEM~~• 4.cash ~~REMOVED~~flow ~~AND~~of ~~RESERVED~~the borrower and/or the project being financed;

•

the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

•

the duration of the loan;

•

the discount on the loan at the time of acquisition;

•

the credit history of a particular borrower; and

•

changes in economic and industry conditions.

Non-performing loans covered under loss share agreements with the FDIC totaled $124.2 million, and Non-performing loans not covered under loss share agreements with the FDIC totaled $258.3 million as of December 31, 2011. Capital Bank maintains an allowance for loan losses with respect to loans it originates, which is a reserve established through a provision for loan losses charged to expense, which management believes is appropriate to provide for probable losses in Capital Bank’s loan portfolio. The amount of this allowance is determined by Capital Bank’s management team through periodic reviews. As of December 31, 2011, the allowance on loans covered by loss share agreements with the FDIC was $11.8 million, and the allowance on loans not covered by loss share agreements with the FDIC was $22.9 million. As of December 31, 2011, the ratio of Capital Bank’s allowance for loan losses to non-performing loans covered by loss share agreements with the FDIC was 9.5% and the ratio of its allowance for loan losses to non-performing loans not covered by loss share agreements with the FDIC was 8.9%.

The application of the acquisition method of accounting to CBF’s completed acquisitions impacted Capital Bank’s allowance for loan losses. Under the acquisition method of accounting, all loans were recorded in financial statements at their fair value at the time of their acquisition and the related allowance for loan loss was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into consideration estimated credit quality. Capital Bank may in the future determine that the estimates of fair value are too high, in which case Capital Bank would provide for additional loan losses associated with the acquired loans. As of December 31, 2011, the allowance for loan losses on purchased credit-impaired loan pools totaled $26.3 million, of which $11.8 million was related to loan pools covered by loss share agreements with the FDIC and $14.5 million was related to loan pools not covered by loss share agreements with the FDIC.

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires Capital Bank to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans that Capital Bank originates, identification of additional problem loans originated by Capital Bank and other factors, both within and outside of management’s control, may require an increase in the allowance for loan losses. If current trends in the real estate markets continue, Capital Bank’s management expects that it will continue to experience increased delinquencies and credit losses, particularly with respect to construction, land development and land loans. In addition, bank regulatory agencies periodically review Capital Bank’s allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, Capital Bank will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital and may have a material adverse effect on Capital Bank’s financial condition and results of operations.

~~PART~~Capital IIBank continues to hold and acquire other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.

~~ITEM~~Capital 5Bank forecloses on and take title to the real estate serving as collateral for many of its loans as part of its business. ~~MARKET~~Real ~~FOR~~estate ~~REGISTRANT~~owned by Capital Bank and not used in the ordinary course of its operations is referred to as “other real estate owned” or “OREO” property. At December 31, 2011, Capital Bank had $168.8 million of OREO. Increased OREO balances have led to greater expenses as costs are incurred to manage and dispose of the properties. Capital Bank’Ss ~~COMMON~~management ~~EQUITY~~expects that its earnings will continue to be negatively affected by various expenses associated with OREO, ~~RELATED~~including ~~STOCKHOLDER~~personnel ~~MATTERS~~costs, ~~AND~~insurance ~~ISSUER~~and ~~PURCHASES~~taxes, OFcompletion ~~EQUITY~~and ~~SECURITIES~~repair costs, valuation adjustments and other expenses associated with property ownership, as well as by the funding costs associated with assets that are tied up in OREO. Any further decrease in real estate market prices may lead to additional OREO write-downs, with a corresponding expense in Capital Bank’s statement of operations. Capital Bank’s management evaluates OREO properties periodically and writes down the carrying value of the properties if the results of such evaluations require it. The expenses associated with OREO and any further property write-downs could have a material adverse effect on Capital Bank’s financial condition and results of operations.

OnCapital ~~February 28,~~Bank ~~2011,~~is ~~Green~~subject ~~Bankshares had 13,188,896 shares of common stock outstanding.~~to ~~The~~environmental ~~Company’s~~liability ~~shares~~risk ~~are~~associated ~~traded~~with onlending ~~The Nasdaq Global Select Market, under the symbol “GRNB”~~activities. As of February 28, 2011, the Company estimates that it had approximately 5,200 shareholders, including approximately 2,600 shareholders of record and approximately 2,600 beneficial owners holding shares in nominee or “street” name.

~~The~~A ~~following~~significant ~~table~~portion ~~shows~~of Capital Bank’s loan portfolio is secured by real property. During the ~~high~~ordinary ~~and~~course ~~low~~of ~~sales~~business, ~~price~~Capital Bank may foreclose on and ~~closing~~take ~~price~~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, Capital Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require Capital Bank to incur substantial expenses to address unknown liabilities and may materially reduce the ~~Company~~affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect ~~common~~to ~~stock~~existing aslaws ~~reported~~may byincrease ~~The~~Capital ~~Nasdaq~~Bank’s ~~Global~~exposure ~~Select~~to ~~Market~~environmental ~~for~~liability. ~~2010~~Although Capital Bank has policies and ~~2009~~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 ~~table~~remediation ~~also~~costs ~~sets forth~~and ~~the~~any ~~dividends~~other ~~per~~financial ~~share~~liabilities ~~paid~~associated ~~each~~with ~~quarter~~an ~~during~~environmental ~~2010~~hazard could have a material adverse effect on Capital Bank’s financial condition and ~~2009~~results of operations.

	High/Low Sales Price		Closing		Dividends Paid
	During Quarter		Price		Per Share
2010:
First quarter	$	9.48 / 3.52	$	8.16	$	—
Second quarter		15.04 / 7.96		12.77		—
Third quarter		13.11 / 6.58		6.79		—
Fourth quarter		7.73 / 2.39		3.20		—
					$	—
2009:
First quarter	$	14.71 / 4.51	$	8.80	$	0.13
Second quarter		9.73 / 4.14		4.48		—
Third quarter		6.83 / 3.25		5.00		—
Fourth quarter		5.48 / 3.51		3.55		—
					$	0.13

Delinquencies and defaults in residential mortgages have increased, creating a backlog in courts and an increase in industry scrutiny by regulators, as well as resulting in proposed new laws and regulations governing foreclosures. Such laws and regulations might restrict or delay Capital Bank’s ability to foreclose and collect payments for single family residential loans under the loss sharing agreements.

~~Holders~~Recent oflaws delay the ~~Company’s~~initiation ~~common stock are entitled to receive dividends when, as and if~~or ~~declared~~completion byof ~~the~~foreclosure ~~Company’s~~proceedings ~~board~~on ofspecified ~~directors~~types ~~out~~ of ~~funds~~residential ~~legally~~mortgage ~~available~~loans (some for ~~dividends. Historically,~~a ~~the~~limited ~~Company~~period ~~has~~of ~~paid quarterly cash dividends on its common stock. On June 2~~time), ~~2009 the~~or ~~Company~~otherwise ~~announced~~limit ~~that due to~~ the ~~uncertain~~ability ~~nature~~ of ~~the~~residential ~~current~~loan ~~economic~~servicers ~~environment~~to ~~that~~take ~~it was~~actions ~~suspending~~that ~~the~~may ~~payment~~be ofessential ~~cash dividends~~ to ~~common shareholders in order to prudently~~ preserve ~~capital~~ ~~levels. In~~ the ~~fourth~~value ~~quarter~~ of ~~2010, the Company informally committed to the FRB-Atlanta~~ ~~that it would not pay dividends on its common or preferred stock without~~ the ~~prior~~mortgage ~~approval~~loans. ofAny ~~the FRB-Atlanta.~~such ~~The~~limitations ~~Company’s~~are ~~ability~~likely to ~~pay~~cause ~~dividends~~delayed toor ~~its~~reduced ~~shareholders~~collections infrom ~~the~~mortgagors ~~future~~and ~~will~~generally ~~depend on~~increased ~~its~~servicing ~~earnings~~costs. ~~and~~As ~~financial~~a ~~condition,~~servicer ~~liquidity~~of ~~and~~mortgage ~~capital requirements~~loans, ~~the~~any ~~general~~restriction ~~economic and~~on ~~regulatory~~Capital ~~climate, the Company~~Bank’s ability to ~~service~~foreclose ~~any~~on ~~equity or debt obligations senior to~~a ~~its common stock~~loan, ~~including~~any ~~its~~requirement ~~outstanding~~that ~~trust~~the ~~preferred~~Bank ~~securities~~forego ~~and~~a ~~accompanying~~portion ~~junior subordinated~~of ~~debentures, and other factors deemed relevant by~~ the ~~Company’s~~amount ~~board~~otherwise ofdue ~~directors.~~on ~~In addition,~~a inloan ~~order~~or toany ~~pay~~requirement ~~dividends~~that ~~to shareholders,~~ the ~~Company~~Bank ~~must~~modify ~~receive~~any ~~cash~~original ~~dividends~~loan ~~from the~~terms ~~Bank.~~will Asin asome ~~result,~~instances ~~the~~require ~~Company’s~~Capital ~~ability~~Bank to ~~pay~~advance ~~future~~principal, ~~dividends~~interest, ~~will~~tax ~~depend~~and ~~upon~~insurance payments, ~~the~~which ~~earnings of~~may ~~the~~negatively ~~Bank,~~impact its business, financial condition, liquidity and ~~its~~results ~~need~~of ~~for funds~~operations.

In addition, for the single family residential loans covered by the loss sharing agreements, Capital Bank cannot collect loss share payments until it liquidates the properties securing those loans. These loss share payments could be delayed by an extended foreclosure process, including delays resulting from a court backlog, local or national foreclosure moratoriums or other delays, and these delays could have a material adverse effect on Capital Bank’s results of operations.

Like other financial services institutions, Capital Bank’s asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by the Bank.

Like other financial services institutions, Capital Bank has asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and cost of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.

~~Moreover,~~Capital ~~there~~Bank’s ~~are~~earnings aand ~~number~~cash offlows ~~federal~~largely ~~and~~depend ~~state~~upon ~~banking~~the ~~policies~~level ~~and~~of ~~regulations~~its ~~that~~net ~~restrict~~interest ~~the~~income, ~~Bank’s~~which ~~ability~~is tothe ~~pay~~difference ~~dividends~~between to the ~~Company~~interest ~~and~~income ~~the~~it ~~Company’s~~earns ~~ability~~on toloans, ~~pay dividends~~investments toand ~~its~~other ~~shareholders.~~interest Inearning ~~particular~~assets, ~~because~~and the ~~Bank~~interest isit apays ~~depository~~on ~~institution~~interest ~~and~~bearing ~~its deposits are insured by the FDIC~~liabilities, itsuch ~~may~~as ~~not~~deposits ~~pay~~and ~~dividends~~borrowings. orBecause ~~distribute~~different ~~capital~~types of assets ifand itliabilities ismay ~~in default~~react ondifferently ~~any~~and ~~assessment~~at ~~due~~different times to ~~the~~market ~~FDIC.~~interest Inrate ~~addition~~changes, ~~the~~changes ~~Tennessee~~in ~~Banking~~interest ~~Act~~rates ~~prohibits~~can ~~the Bank~~increase ~~from~~or ~~declaring~~decrease ~~dividends~~Capital inBank’s ~~excess of~~ net interest income. ~~for~~When ~~the~~interest-bearing ~~calendar~~liabilities ~~year~~mature inor ~~which the dividend~~reprice ismore ~~declared~~quickly ~~plus~~than ~~retained~~interest ~~net~~earning ~~income~~assets ~~for~~in ~~the~~a ~~preceding~~period, ~~two~~an ~~years~~increase ~~without~~in ~~the~~interest ~~approval~~rates ofcould ~~the Commissioner~~reduce ofnet ~~the~~interest ~~Tennessee Department of Financial Institutions~~income. ~~Because~~Similarly, ofwhen ~~the~~interest ~~losses~~earning ~~incurred by~~assets ~~the~~mature ~~Bank~~or inreprice ~~2010~~more ~~and 2009~~quickly, ~~the~~and ~~Bank~~because ~~will need to receive~~ the ~~approval~~magnitude of ~~the~~repricing ~~Commissioner~~ of ~~the~~interest earning ~~TDFI~~assets ~~before~~is ifoften ~~pays~~greater ~~dividends~~than tointerest ~~the~~bearing ~~Company. Also~~liabilities, ~~the~~falling ~~Bank~~interest isrates ~~subject~~could toreduce ~~regulations~~net ~~which impose~~interest ~~certain minimum regulatory capital and minimum state law earnings requirements that affect the amount of cash available for distribution to the Company~~income.

~~In addition~~Additionally, asan ~~long~~increase ~~as shares of Series A preferred stock are outstanding, no dividends may be paid on our common stock unless all dividends on the Series A preferred stock have been paid~~ in ~~full~~ ~~and~~interest inrates ~~no event~~ may, ~~dividends~~among onother ~~our~~things, ~~common~~reduce ~~stock exceed $0.13 per quarter without~~ the ~~consent of~~demand ~~the U.S. Treasury~~ for ~~the~~loans ~~first~~and ~~three~~Capital ~~years~~Bank’s ~~following~~ability ~~our sale of Series A preferred stock~~ to ~~the~~originate ~~U.S.~~loans ~~Treasury.~~and ~~Lastly,~~decrease ~~under~~loan ~~Federal~~repayment ~~Reserve policy~~rates, ~~the~~while ~~Company is required to maintain adequate regulatory capital, is expected to serve as~~ a ~~source~~decrease ofin ~~financial strength to~~ the ~~Bank~~general ~~and to~~level ~~commit~~of ~~resources~~interest torates ~~support the Bank. These policies and regulations~~ may ~~have~~adversely ~~the~~affect ~~effect of reducing or eliminating~~ the ~~amount~~fair value of ~~dividends that~~ the ~~Company~~Bank’s ~~can~~financial ~~declare~~assets and ~~pay~~liabilities toand its ~~shareholders~~ inability ~~the~~to ~~future.~~realize ~~For~~gains ~~information regarding restrictions~~ on the ~~payment~~sale of assets. ~~dividends~~A bydecrease ~~the~~in ~~Bank to~~ the ~~Company,~~general ~~see “Management’s~~level ~~Discussion and Analysis~~ of ~~Financial~~interest ~~Condition~~rates ~~and~~may ~~Results~~affect ~~of Operations — Liquidity and~~ Capital ~~Resources”~~Bank ~~and~~through, ~~“Business~~among —other ~~Regulation~~things, ~~Supervision~~increased ~~and~~prepayments ~~Governmental~~on ~~Policy~~its ~~— Dividends”~~loan inand ~~this~~mortgage-backed ~~Annual~~securities ~~Report.~~portfolios ~~See~~and ~~also~~increased ~~Note~~competition 12for ~~of Notes of Consolidated Financial Statements~~deposits.

~~The~~Accordingly, ~~Company~~changes ~~made~~in nothe ~~repurchases~~level of market interest rates affect Capital Bank’s net yield on interest earning assets, loan origination volume, loan and mortgage-backed securities portfolios and its ~~common~~overall ~~stock~~results. Changes in interest rates may also have a significant impact on any future mortgage loan origination revenues. Historically, there has been an inverse correlation between the demand for mortgage loans and interest rates. Mortgage origination volume and revenues usually decline during periods of rising or high interest rates and increase during periods of declining or low interest rates. Changes in interest rates also have a significant impact on the ~~quarter~~carrying ~~ended~~value ~~December 31~~of a significant percentage of the assets on Capital Bank’s balance sheet. Interest rates are highly sensitive to many factors beyond the Bank’s management’s control, ~~2010~~including general economic conditions and policies of various governmental and regulatory agencies, particularly the Board of Governors of the Federal Reserve System (which we refer to as the “Federal Reserve”). Capital Bank’s management cannot predict the nature and timing of the Federal Reserve’s interest rate policies or other changes in monetary policies and economic conditions, which could negatively impact the Bank’s financial performance.

Capital Bank has benefited in recent periods from a favorable interest rate environment, but management believes that this environment cannot be sustained indefinitely and interest rates would be expected to rise as the economy recovers. A strengthening U.S. economy would be expected to cause the Board of Governors of the Federal Reserve to increase short-term interest rates, which would increase Capital Bank’s borrowing costs.

The fair value of Capital Bank’s investment securities can fluctuate due to market conditions out of management’s control.

As of December 31, 2011, approximately 94% of Capital Bank’s investment securities portfolio was comprised of U.S. government agency and sponsored enterprises obligations, U.S. government agency and sponsored enterprises mortgage-backed securities and securities of municipalities. As of December 31, 2011, the fair value of Capital Bank’s investment securities portfolio was approximately $827.4 million. Factors beyond Capital Bank’s control can significantly influence the fair value of securities in its portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the credit markets. In addition, Capital Bank has historically taken a conservative investment posture, concentrating on government issuances of short duration. In the future, Capital Bank may seek to increase yields through more aggressive investment strategies, which may include a greater percentage of corporate issuances and structured credit products. Any of these mentioned factors, among others, could cause other-than-temporary impairments in future periods and result in a realized loss, which could have a material adverse effect on Capital Bank’s business. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers and the performance of the underlying collateral, Capital Bank may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on its financial condition and results of operations.

Capital Bank has a significant deferred tax asset that may not be fully realized in the future.

Capital Bank’s net deferred tax asset totaled $164.2 million as of December 31, 2011. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If Capital Bank’s estimates and assumptions about future taxable income are not accurate, the value of its deferred tax asset may not be recoverable and may result in a valuation allowance that would impact the Bank’s earnings.

~~ITEM~~Recent 6.market ~~SELECTED~~disruptions ~~FINANCIAL~~have ~~DATA~~caused increased liquidity risks and, if Capital Bank is unable to maintain sufficient liquidity, it may not be able to meet the cash flow requirements of its depositors and borrowers.

	2010			2009			2008			2007(1)			2006
	(in thousands, except per share data, ratios and percentages)
Total interest income	$	120,864		$	138,456		$	170,516		$	176,626		$	117,357
Total interest expense		37,271			57,931			75,491			81,973			45,400
Net interest income		83,593			80,525			95,025			94,653			71,957
Provision for loan losses		(71,107	)		(50,246	)		(52,810	)		(14,483	)		(5,507	)
Net interest income after provision for loan losses		12,486			30,279			42,215			80,170			66,450
Noninterest income		32,544			31,578			33,614			27,602			20,710
Noninterest expense		(110,815	)		(229,587	)		(85,837	)		(69,252	)		(52,708	)
Income (loss) before income taxes		(65,785	)		(167,730	)		(10,008	)		38,520			34,452
Income tax (expense) benefit		(14,910	)		17,036			4,648			(14,146	)		(13,190	)
Net income (loss)		(80,695	)		(150,694	)		(5,360	)		24,374			21,262
Preferred stock dividend and accretion of discount on warrants		(5,001	)		(4,982	)		(92	)		—			—
Net income (loss) available to common shareholders	$	(85,696	)	$	(155,676	)	$	(5,452	)	$	24,374		$	21,262
Per Share Data:
Net income (loss) available to common shareholders, basic	$	(6.54	)	$	(11.91	)	$	(0.42	)	$	2.07		$	2.17
Net income (loss) available to common shareholders, assuming dilution	$	(6.54	)	$	(11.91	)	$	(0.42	)	$	2.07		$	2.14
Net income (loss) available to common shareholders, assuming dilution adjusted for goodwill impairment charge(7)	$	(6.54	)	$	(1.40	)	$	(0.42	)	$	2.07		$	2.14
Dividends declared	$	0.00		$	0.13		$	0.52		$	0.68		$	0.64
Common book value(2)(7)	$	5.75		$	12.15		$	24.09		$	24.94		$	18.80
Tangible common book value(3)(7)	$	5.23		$	11.44		$	12.23		$	12.73		$	14.87
Financial Condition Data:
Assets	$	2,406,040		$	2,619,139		$	2,944,671		$	2,947,741		$	1,772,654
Loans, net of unearned interest	$	1,745,378		$	2,043,807		$	2,223,390		$	2,356,376		$	1,539,629
Cash and investments	$	504,559		$	378,785		$	410,344		$	314,615		$	91,997
Federal funds sold	$	4,856		$	3,793		$	5,263		$	—		$	25,983
Deposits	$	1,976,854		$	2,084,096		$	2,184,147		$	1,986,793		$	1,332,505
FHLB advances and notes payable	$	158,653		$	171,999		$	229,349		$	318,690		$	177,571
Subordinated debentures	$	88,662		$	88,662		$	88,662		$	88,662		$	13,403
Federal funds purchased and repurchase agreements	$	19,413		$	24,449		$	35,302		$	194,525		$	42,165
Shareholders’ equity	$	143,897		$	226,769		$	381,231		$	322,477		$	184,471
Common shareholders’ equity(2)(7)	$	75,776		$	160,034		$	315,885		$	322,477		$	184,471
Tangible common shareholders’ equity(3)(7)	$	69,025		$	150,699		$	160,411		$	164,650		$	145,931
Tangible shareholders’ equity(4)(7)	$	137,146		$	217,434		$	225,757		$	164,650		$	145,931
Selected Ratios:
Interest rate spread		3.79	%		3.19	%		3.48	%		3.83	%		4.32	%
Net interest margin(6)		3.86	%		3.34	%		3.70	%		4.25	%		4.77	%
Total tangible equity to tangible assets(4)(5)(7)		5.72	%		8.33	%		8.09	%		5.90	%		8.42	%
Tangible common equity to tangible assets(3)(5)(7)		2.88	%		5.77	%		5.75	%		5.90	%		8.42	%
Return on average assets		(3.41	%)		(5.59	%)		(0.18	%)		0.98	%		1.28	%
Return on average equity		(38.56	%)		(50.44	%)		(1.64	%)		8.96	%		11.91	%
Return on average common equity(2)(7)		(55.35	%)		(64.25	%)		(1.65	%)		8.96	%		11.91	%
Return on average common tangible equity(3)(7)		(58.32	%)		(96.77	%)		(3.14	%)		15.41	%		15.25	%
Average equity to average assets		8.85	%		11.09	%		11.24	%		10.91	%		10.78	%
Dividend payout ratio		N/M			N/M			N/M			32.85	%		29.49	%
Ratio of nonperforming assets to total assets		8.56	%		5.07	%		2.61	%		1.25	%		0.29	%
Ratio of allowance for loan losses to nonperforming loans		45.83	%		66.39	%		155.28	%		106.34	%		635.93	%
Ratio of allowance for loan losses to total loans, net of unearned income loans		3.83	%		2.45	%		2.20	%		1.45	%		1.45	%

The recent disruption and illiquidity in the credit markets have generally made potential funding sources more difficult to access, less reliable and more expensive. Capital Bank’s liquidity is generally used to make loans and to repay deposit liabilities as they become due or are demanded by customers, and further deterioration in the credit markets or a prolonged period without improvement of market liquidity could present significant challenges in the management of Capital Bank’s liquidity and could adversely affect its business, results of operations and prospects. For example, if as a result of a sudden decline in depositor confidence resulting from negative market conditions, a substantial number of bank customers tried to withdraw their bank deposits simultaneously, Capital Bank’s reserves may not be able to cover the withdrawals.

1		Information for the 2007 fiscal year includes the operations of CVBG, with which the Company merged on May 18, 2007.
2		Common shareholders’ equity is shareholders’ equity less preferred stock.

Furthermore, an inability to increase Capital Bank’s deposit base at all or at attractive rates would impede its ability to fund the Bank’s continued growth, which could have an adverse effect on the Bank’s business, results of operations and financial condition. Collateralized borrowings such as advances from the FHLB are an important potential source of liquidity. Capital Bank’s borrowing capacity is generally dependent on the value of the collateral pledged to the FHLB. An adverse regulatory change could reduce Capital Bank’s borrowing capacity or eliminate certain types of collateral and could otherwise modify or even eliminate the Bank’s access to FHLB advances, Federal Fund line borrowings and discount window advances. Liquidity may also be adversely impacted by bank supervisory and regulatory authorities mandating changes in the composition of Capital Bank’s balance sheet to asset classes that are less liquid. Any such change or termination may have an adverse effect on Capital Bank’s liquidity.

Capital Bank’s access to other funding sources could be impaired by factors that are not specific to the Bank, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets. Capital Bank may need to incur additional debt in the future to achieve its business objectives, in connection with future acquisitions or for other reasons. Any borrowings, if sought, may not be available to Capital Bank or, if available, may not be on favorable terms. Without sufficient liquidity, Capital Bank may not be able to meet the cash flow requirements of its depositors and borrowers, which could have a material adverse effect on the Bank’s financial condition and results of operations.

Capital Bank may not be able to retain or develop a strong core deposit base or other low-cost funding sources.

Capital Bank expects to depend on checking, savings and money market deposit account balances and other forms of customer deposits as its primary source of funding for the Bank’s lending activities. Capital Bank’s future growth will largely depend on its ability to retain and grow a strong deposit base. Because 43% of Capital Bank’s deposits as of December 31, 2011 were time deposits, it may prove harder to maintain and grow the Bank’s deposit base than would otherwise be the case. Capital Bank is also working to transition certain of its customers to lower cost traditional banking services as higher cost funding sources, such as high interest certificates of deposit, mature. There may be competitive pressures to pay higher interest rates on deposits, which could increase funding costs and compress net interest margins. Customers may not transition to lower yielding savings or investment products or continue their business with Capital Bank, which could adversely affect its operations. In addition, with recent concerns about bank failures, customers have become concerned about the extent to which their deposits are insured by the FDIC, particularly customers that may maintain deposits in excess of insured limits. Customers may withdraw deposits in an effort to ensure that the amount that they have on deposit with Capital Bank is fully insured and may place them in other institutions or make investments that are perceived as being more secure. Further, even if Capital Bank is able to grow and maintain its deposit base, the account and deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments (or similar products at other institutions that may provide a higher rate of return), Capital Bank could lose a relatively low cost source of funds, increasing its funding costs and reducing the Bank’s net interest income and net income. Additionally, any such loss of funds could result in lower loan originations, which could materially negatively impact Capital Bank’s growth strategy and results of operations.

Capital Bank operates in a highly competitive industry and faces significant competition from other financial institutions and financial services providers, which may decrease its growth or profits.

Consumer and commercial banking is highly competitive. Capital Bank’s market contains not only a large number of community and regional banks, but also a significant presence of the country’s largest commercial banks. Capital Bank competes with other state and national financial institutions as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, Capital Bank competes with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in Capital Bank’s markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors with greater resources may possess an advantage by being capable of maintaining numerous banking locations in more convenient sites, operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed Internet platform.

3		Tangible common shareholders’ equity is shareholders’ equity less goodwill, other intangible assets and preferred stock.
4		Tangible shareholders’ equity is shareholders’ equity less goodwill and other intangible assets.
5		Tangible assets is total assets less goodwill and other intangible assets.
6		Net interest margin is the net yield on interest earning assets and is the difference between the Fully Taxable Equivalent yield earned on interest-earning assets less the effective cost of supporting liabilities.
7		Please refer to the “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” section following “Selected Financial Data” for more information, including a reconciliation of this non-GAAP financial measure.

The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect Capital Bank’s ability to market its products and services. Also, technology has lowered barriers to entry and made it possible for banks to compete in Capital Bank’s market without a retail footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Many of Capital Bank’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for certain products and services than Capital Bank can.

Capital Bank’s ability to compete successfully depends on a number of factors, including:

•

the ability to develop, maintain and build upon long-term customer relationships based on quality service and high ethical standards;

•

the ability to attract and retain qualified employees to operate the Bank’s business effectively;

•

the ability to expand the Bank’s market position;

•

the scope, relevance and pricing of products and services offered to meet customer needs and demands;

•

the rate at which the Bank introduces new products and services relative to its competitors;

•

customer satisfaction with the Bank’s level of service; and

•

industry and general economic trends.

Failure to perform in any of these areas could significantly weaken Capital Bank’s competitive position, which could adversely affect its growth and profitability, which, in turn, could harm the Bank’s business, financial condition and results of operations.

Capital Bank may be adversely affected by the soundness of other financial institutions

Capital Bank’s ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.

Capital Bank is subject to losses due to the errors or fraudulent behavior of employees or third parties.

Capital Bank is exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical recordkeeping errors and transactional errors. Capital Bank’s business is dependent on its employees as well as third-party service providers to process a large number of increasingly complex transactions. Capital Bank could be materially adversely affected if one of its employees causes a significant operational breakdown or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates the Bank’s operations or systems. When Capital Bank originates loans, it relies upon information supplied by loan applicants and third parties, including the information contained in the loan application, property appraisal and title information, if applicable, and employment and income documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior to loan funding, Capital Bank generally bears the risk of loss associated with the misrepresentation. Any of these occurrences could result in a diminished ability of Capital Bank to operate its business, potential liability to customers, reputational damage and regulatory intervention, which could negatively impact the Bank’s business, financial condition and results of operations.

Capital Bank is dependent on its information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have an adverse effect on the Bank’s financial condition and results of operations.

Capital Bank’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems and third-party servicers. Capital Bank outsources many of its major systems, such

as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt the Bank’s operations. Because Capital Bank’s information technology and telecommunications systems interface with and depend on third-party systems, the Bank could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of Capital Bank’s ability to process new and renewal loans, gather deposits and provide customer service, compromise the Bank’s ability to operate effectively, damage its reputation, result in a loss of customer business and/or subject the Bank to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on the Bank’s financial condition and results of operations.

In addition, Capital Bank provides its customers the ability to bank remotely, including online over the Internet. The secure transmission of confidential information is a critical element of remote banking. Capital Bank’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches. Capital Bank may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that Capital Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in Capital Bank’s systems and could adversely affect its reputation, results of operations and ability to attract and maintain customers and businesses. In addition, a security breach could also subject Capital Bank to additional regulatory scrutiny, expose the Bank to civil litigation and possible financial liability and cause reputational damage.

Hurricanes or other adverse weather events would negatively affect Capital Bank’s local economies or disrupt its operations, which would have an adverse effect on the Bank’s business or results of operations.

Capital Bank’s market areas in the southeastern region of the United States are susceptible to natural disasters, such as hurricanes, tornadoes, tropical storms, other severe weather events and related flooding and wind damage, and manmade disasters, such as the 2010 oil spill in the Gulf of Mexico. Capital Bank’s market areas in Tennessee are susceptible to natural disasters, such as tornadoes and floods. These natural disasters could negatively impact regional economic conditions, cause a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by Capital Bank, damage its banking facilities and offices and negatively impact the Bank’s growth strategy. Such weather events can disrupt operations, result in damage to properties and negatively affect the local economies in the markets where Capital Bank operates. The Bank’s management cannot predict whether or to what extent damage that may be caused by future hurricanes or tornadoes will affect Capital Bank’s operations or the economies in its current or future market areas, but such weather events could negatively impact economic conditions in these regions and result in a decline in local loan demand and loan originations, a decline in the value or destruction of properties securing Capital Bank’s loans and an increase in delinquencies, foreclosures or loan losses. Capital Bank’s business or results of operations may be adversely affected by these and other negative effects of natural or manmade disasters.

Risks Relating to Capital Bank’s Growth Strategy

Capital Bank may not be able to effectively manage its growth.

Capital Bank’s future operating results depend to a large extent on its ability to successfully manage its rapid growth. Capital Bank’s rapid growth has placed, and it may continue to place, significant demands on its operations and management. Whether through additional acquisitions or organic growth, Capital Bank’s current plan to expand its business is dependent upon:

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the ability of its officers and other key employees to continue to implement and improve its operational, credit, financial, management and other internal risk controls and processes and its reporting systems and procedures in order to manage a growing number of client relationships;

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to scale its technology platform;

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to integrate its acquisitions and develop consistent policies throughout the various businesses; and

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to manage a growing number of client relationships.

Capital Bank may not successfully implement improvements to, or integrate, its management information and control systems, procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, Capital Bank’s controls and procedures must be able to accommodate an increase in expected

loan volume and the infrastructure that comes with new branches and banks. Thus, Capital Bank’s growth strategy may divert management from its existing businesses and may require the Bank to incur additional expenditures to expand its administrative and operational infrastructure and, if Capital Bank is unable to effectively manage and grow its banking franchise, its business and the Bank’s consolidated results of operations and financial condition could be materially and adversely impacted. In addition, if Capital Bank is unable to manage future expansion in its operations, the Bank may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth, any one of which could adversely affect Capital Bank’s business.

Many of Capital Bank’s new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict its growth.

Capital Bank intends to complement and expand its business by pursuing strategic acquisitions of banks and other financial institutions. Generally, any acquisition of target financial institutions or assets by CBF or Capital Bank will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on such applications of approval, federal banking regulators consider, among other factors:

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the effect of the acquisition on competition;

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the financial condition and future prospects of the applicant and the banks involved;

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the managerial resources of the applicant and the banks involved;

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the convenience and needs of the community, including the record of performance under the Community Reinvestment Act (which we refer to as the “CRA”); and

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the effectiveness of the applicant in combating money laundering activities.

Such regulators could deny an application based on the above criteria or other considerations or the regulatory approvals may not be granted on terms that are acceptable to CBF or Capital Bank. For example, Capital Bank could be required to sell branches as a condition to receiving regulatory approvals, and such a condition may not be acceptable to CBF or Capital Bank or may reduce the benefit of any acquisition.

The success of future transactions will depend on CBF’s ability to successfully identify and consummate transactions with target financial institutions that meet its investment criteria. Because of the significant competition for acquisition opportunities and the limited number of potential targets, CBF may not be able to successfully consummate acquisitions necessary to grow its business.

The success of future transactions will depend on CBF’s ability to successfully identify and consummate transactions with target financial institutions that meet its investment criteria. There are significant risks associated with CBF’s ability to identify and successfully consummate transactions with target financial institutions. There are a limited number of acquisition opportunities, and CBF expects to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and effecting acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater technical, human and other resources than CBF and Capital Bank do, and CBF’s financial resources will be relatively limited when contrasted with those of many of these competitors. These organizations may be able to achieve greater cost savings through consolidating operations than CBF could. CBF’s ability to compete in acquiring certain sizable target institutions will be limited by its available financial resources. These inherent competitive limitations give others an advantage in pursuing the acquisition of certain target financial institutions. In addition, increased competition may drive up the prices for the types of acquisitions CBF intends to target, which would make the identification and successful consummation of acquisition opportunities more difficult. Competitors may be willing to pay more for target financial institutions than CBF believes are justified, which could result in CBF having to pay more for target financial institutions than it prefers or to forego target financial institutions. As a result of the foregoing, CBF may be unable to successfully identify and consummate future transactions to grow its business on commercially attractive terms, or at all.

Because the institutions CBF intends to acquire may have distressed assets, CBF may not be able to realize the value it predicts from these assets or make sufficient provision for future losses in the value of, or accurately estimate the future write-downs taken in respect of, these assets.

Delinquencies and losses in the loan portfolios and other assets of financial institutions that CBF acquires may exceed its initial forecasts developed during the due diligence investigation prior to acquiring those institutions. Even if CBF conducts extensive due diligence on an entity it decides to acquire, this diligence may not reveal all material issues that may affect a particular entity. The diligence process in FDIC-assisted transactions is also expedited due to the short acquisition timeline that

is typical for these depository institutions. If, during the diligence process, CBF fails to identify issues specific to an entity or the environment in which the entity operates, CBF may be forced to later write down or write off assets, restructure its operations, or incur impairment or other charges that could result in other reporting losses. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions CBF acquires and of CBF as a whole. If any of the foregoing adverse events occur with respect to one subsidiary, they may adversely affect other of CBF’s subsidiaries or the CBF as a whole. Current economic conditions have created an uncertain environment with respect to asset valuations and there is no certainty that CBF will be able to sell assets of target institutions if it determines it would be in its best interests to do so. The institutions CBF will target may have substantial amounts of asset classes for which there is currently limited or no marketability.

The success of future transactions will depend on CBF’s ability to successfully combine the target financial institution’s business with CBF’s existing banking business and, if CBF experiences difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

The success of future transactions will depend, in part, on CBF’s ability to successfully combine the target financial institution’s business with its existing banking business. As with any acquisition involving financial institutions, there may be business disruptions that result in the loss of customers or cause customers to remove their accounts and move their business to competing banking institutions. It is possible that the integration process could result in additional expenses in connection with the integration processes and the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect Capital Bank’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Integration efforts, including integration of the target financial institution’s systems into Capital Bank’s systems may divert the Bank’s management’s attention and resources, and CBF may be unable to develop, or experience prolonged delays in the development of, the systems necessary to operate its acquired banks, such as a financial reporting platform or a human resources reporting platform call center. If CBF experiences difficulties with the integration process, the anticipated benefits of any future transaction may not be realized fully or at all or may take longer to realize than expected. Additionally, CBF and Capital Bank may be unable to recognize synergies, operating efficiencies and/or expected benefits within expected timeframes within expected cost projections, or at all. CBF may also not be able to preserve the goodwill of the acquired financial institution.

Projected operating results for entities to be acquired by CBF may be inaccurate and may vary significantly from actual results.

CBF will generally establish the pricing of transactions and the capital structure of entities to be acquired on the basis of financial projections for such entities. In general, projected operating results will be based primarily on management judgments. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed and the projected results may vary significantly from actual results. General economic, political and market conditions, which are not predictable, can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with CBF’s acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect Capital Bank’s business and CBF’s consolidated results of operations and financial condition.

Changes in accounting standards may affect how we report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (which we refer to as the “FASB”) or other regulatory authorities change the financial accounting and reporting standards that govern the preparation of financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in us restating prior period financial statements.

Risks Relating to the Regulation of Capital Bank’s Industry

Capital Bank operates in a highly regulated industry and the laws and regulations that govern its operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in them or Capital Bank’s failure to comply with them, may adversely affect us.

Capital Bank is subject to extensive regulation and supervision that govern almost all aspects of its operations. Intended to protect customers, depositors, consumers, deposit insurance funds and the stability of the U.S. financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the Company and Capital Bank’s business activities, limit the dividend or distributions that Capital Bank or the Company can pay, restrict the ability of institutions to guarantee Capital Bank’s debt and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in the Bank’s capital than generally accepted accounting principles. Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose additional compliance costs. Capital Bank is currently facing increased regulation and supervision of the industry as a result of the financial crisis in the banking and financial markets. Such additional regulation and supervision may increase Capital Bank’s costs and limit its ability to pursue business opportunities. Further, the Company, CBF or Capital Bank’s failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject the Bank to restrictions on its business activities, fines and other penalties, any of which could adversely affect its results of operations, capital base and the price of CBF’s or the Company’s securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect Capital Bank’s business and financial condition.

Capital Bank is periodically subject to examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, the Bank may be required to make adjustments to its business that could adversely affect it.

Federal and state banking agencies periodically conduct examinations of Capital Bank’s business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity sensitivity to market risk or other aspects of any of Capital Bank’s operations has become unsatisfactory, or that the Bank or its management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Capital Bank’s capital, to restrict its growth, to change the asset composition of its portfolio or balance sheet, to assess civil monetary penalties against its officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate its deposit insurance. If Capital Bank becomes subject to such regulatory actions, its business, results of operations and reputation may be negatively impacted.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material effect on Capital Bank’s operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of the Dodd-Frank Act on Capital Bank’s business are:

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changes to regulatory capital requirements;

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exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from Tier 1 capital;

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creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for bank and non-bank providers of consumer financial products);

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potential limitations on federal preemption;

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changes to deposit insurance assessments;

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regulation of debit interchange fees the Bank earns;

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changes in retail banking regulations, including potential limitations on certain fees the Bank may charge; and

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changes in regulation of consumer mortgage loan origination and risk retention.

In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain principal positions in financial instruments.

Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, will require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will not be clear until implementation. The changes resulting from the Dodd-Frank Act may impact the profitability of Capital Bank’s business activities, require changes to certain of its business practices, impose upon the Bank more stringent capital, liquidity and leverage requirements or otherwise adversely affect Capital Bank’s business. These changes may also require Capital Bank to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact Capital Bank’s results of operations and financial condition. While management cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on Capital Bank or the Company, these changes could be materially adverse to the Company, Capital Bank and CBF.

The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules is uncertain.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III increases the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital, to be phased in over time until fully phased in by January 1, 2019.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. In particular, bank holding companies, many of which have long relied on trust preferred securities as a component of their regulatory capital, will no longer be permitted to count trust preferred securities toward their Tier 1 capital. While the Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict how any new standards will ultimately be applied to the Company, CBF and Capital Bank.

The FDIC’s restoration plan and the related increased assessment rate could adversely affect Capital Bank’s earnings.

The FDIC insures deposits at FDIC-insured depository institutions, such as Capital Bank, up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. Market developments have significantly depleted the deposit insurance fund of the FDIC (which we refer to as the “DIF”) and reduced the ratio of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC has increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special assessments or increases in deposit insurance premiums. Capital Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional bank or financial institution failures, Capital Bank may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect results of operations, including by reducing Capital Bank’s profitability or limiting its ability to pursue certain business opportunities.

Capital Bank is subject to federal and state and fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, Consumer Financial Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to Capital Bank’s performance under the fair lending laws and regulations could adversely impact the Bank’s rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact Capital Bank’s reputation, business, financial condition and results of operations.

Capital Bank faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (which we refer to as “OFAC”). If Capital Bank’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that CBF has already acquired or may acquire in the future are deficient, Capital Bank would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans, which would negatively impact its business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for Capital Bank.

Federal, state and local consumer lending laws may restrict Capital Bank’s ability to originate certain mortgage loans or increase the Bank’s risk of liability with respect to such loans and could increase its cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is Capital Bank’s policy not to make predatory loans, but these laws create the potential for liability with respect to the Bank’s lending and loan investment activities. They increase Capital Bank’s cost of doing business and, ultimately, may prevent the Bank from making certain loans and cause it to reduce the average percentage rate or the points and fees on loans that it does make.

The Federal Reserve may require the Company or CBF and its other subsidiaries to commit capital resources to support Capital Bank.

The Federal Reserve, which examines the Company and CBF, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, the Company or CBF could be required to provide financial assistance to Capital Bank if it experiences financial distress.

A capital injection may be required at times when the Company or CBF do not have the resources to provide it, and therefore the Company or CBF may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations and prospects.

Stockholders may be deemed to be acting in concert or otherwise in control of Capital Bank, which could impose prior approval requirements and result in adverse regulatory consequences for such holders.

The Company and CBF are bank holding companies regulated by the Federal Reserve. Accordingly, acquisition of control of CBF or the Company (or a bank subsidiary) requires prior regulatory notice or approval. With certain limited exceptions, federal regulations prohibit potential investors from, directly or indirectly, acquiring ownership or control of, or the power to vote, more than 10% (more than 5% if the acquirer is a bank holding company) of any class of our voting securities, or obtaining the ability to control in any manner the election of a majority of directors or otherwise exercising a controlling influence over CBF or Capital Bank’s management or policies, without prior notice or application to, and approval of, the Federal Reserve under the Change in Bank Control Act or the Bank Holding Company Act of 1956, as amended (which we refer to as the “BHCA”). Any bank holding company or foreign bank with a U.S. presence also is required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain more than 5% of the Company or CBF’s outstanding voting securities.

In addition to regulatory approvals, any stockholder deemed to “control” the Company or CBF for purposes of the BHCA would become subject to investment and activity restrictions and ongoing regulation and supervision. Any entity owning 25% or more of any class of the Company or CBF’s voting securities, or a lesser percentage if such holder or group otherwise exercises a “controlling influence” over the Company or CBF, may be subject to regulation as a “bank holding company” in accordance with the BHCA. In addition, such a holder may be required to divest 5% or more of the voting securities of investments that may be deemed incompatible with bank holding company status, such as an investment in a company engaged in non-financial activities.

Regulatory determination of “control” of a depository institution or holding company is based on all of the relevant facts and circumstances. In certain instances, stockholders may be determined to be “acting in concert” and their shares aggregated for purposes of determining control for purposes of the Change in Bank Control Act. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. How this definition is applied in individual circumstances can vary among the various federal bank regulatory agencies and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert, including whether:

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stockholders are commonly controlled or managed;

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stockholders are parties to an oral or written agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding company;

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the holders each own stock in a bank and are also management officials, controlling stockholders, partners or trustees of another company; or

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both a holder and a controlling stockholder, partner, trustee or management official of the holder own equity in the bank or bank holding company.

The Company’s or CBF’s common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for purposes of determining whether those holders have control of a bank or bank holding company for Change in Bank Control Act purposes. Because the control regulations under the Change in Bank Control Act and the BHCA are complex, potential investors should seek advice from qualified banking counsel before making an investment in the Company’s common stock.

Risks Related to CBF’s Common Stock Proposed to be Issued in the merger

The market price of CBF’s Class A common stock could decline due to the large number of outstanding shares of its common stock eligible for future sale.

Sales of substantial amounts of CBF’s Class A common stock in the public market following the initial public offering or in future offerings, or the perception that these sales could occur, could cause the market price of CBF’s Class A common stock to decline. These sales could also make it more difficult for CBF to sell equity or equity-related securities in the future, at a time and place that CBF deems appropriate.

In addition, CBF intends to file a registration statement on Form S-8 under the Securities Act to register additional shares of Class A common stock for issuance under CBF’s 2010 Equity Incentive Plan. CBF may issue all of these shares without any action or approval by CBF’s stockholders and these shares once issued (including upon exercise of outstanding options) will be

available for sale into the public market subject to the restrictions described above, if applicable to the holder. Any shares issued in connection with acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by investors who acquire CBF’s shares in the merger.

If shares of CBF’s Class B non-voting common stock are converted into shares of Class A common stock, your voting power subsequent to the merger will be diluted.

Generally, holders of CBF’s Class B non-voting common stock have no voting power and have no right to participate in any meeting of stockholders or to have notice thereof. However, holders of Class B non-voting common stock that are converted into Class A common stock will have all the voting rights of the other holders of Class A common stock. Class B non-voting common stock is not convertible in the hands of the initial holder. However, a transferee unaffiliated with the initial holder that receives Class B non-voting common stock subsequent to transfer permitted by CBF’s certificate of incorporation may elect to convert each share of Class B non-voting common stock into one share of Class A common stock. Subsequent to the merger, upon conversion of any Class B non-voting common stock, your voting power will be diluted in proportion to the decrease in your ownership of the total outstanding Class A common stock.

The market price of CBF’s Class A common stock may be volatile, which could cause the value of an investment in CBF’s Class A common stock to decline.

The market price of CBF’s Class A common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

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general market conditions;

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domestic and international economic factors unrelated to CBF or Capital Bank’s performance;

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actual or anticipated fluctuations in CBF or Capital Bank’s quarterly operating results;

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changes in or failure to meet publicly disclosed expectations as to CBF or Capital Bank’s future financial performance;

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downgrades in securities analysts’ estimates of CBF or Capital Bank’s financial performance or lack of research and reports by industry analysts;

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changes in market valuations or earnings of similar companies;

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any future sales of CBF’s common stock or other securities; and

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additions or departures of key personnel.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of CBF’s Class A common stock. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against the Company or CBF could result in substantial costs, divert management’s attention and resources and harm our business or results of operations. For example, we are currently operating in, and have benefited from, a protracted period of historically low interest rates that will not be sustained indefinitely, and future fluctuations in interest rates could cause an increase in volatility of the market price of CBF’s Class A common stock.

CBF and the Company do not currently intend to pay dividends on shares of their common stock in the foreseeable future and the ability to pay dividends will be subject to restrictions under applicable banking laws and regulations.

CBF and the Company do not currently intend to pay cash dividends on their common stock in the foreseeable future. The payment of cash dividends in the future will be dependent upon various factors, including earnings, if any, cash balances, capital requirements and general financial condition. The payment of any dividends will be within the discretion of the then-existing Board of Directors. It is the present intention of the Boards of Directors of the Company and CBF to retain all earnings, if any, for use in business operations in the foreseeable future and, accordingly, the Boards of Directors do not currently anticipate declaring any dividends. Because CBF and the Company do not expect to pay cash dividends on their common stock for some time, any gains on an investment in CBF’s Class A common stock will be limited to the appreciation, if any, of the market value of the Class A common stock.

Banks and bank holding companies are subject to certain regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. The payment of dividends by CBF and the Company depending on their financial condition could be deemed an unsafe or unsound practice. The ability to pay dividends will directly depend on the ability of Capital Bank to pay dividends to us, which in turn will be restricted by the requirement that it maintains an adequate level of capital in accordance with requirements of its regulators and, in the future, can be expected to be further influenced by regulatory policies and capital guidelines. In addition, on August 24, 2010, Capital Bank entered into the OCC Operating Agreement that may restrict Capital Bank’s ability to pay dividends to us, to make changes to its capital structure and to make certain other business decisions.

Certain provisions of CBF’s certificate of incorporation and the loss sharing agreements may have anti-takeover effects, which could limit the price investors might be willing to pay in the future for CBF’s common stock and could entrench management. In addition, Delaware law may inhibit takeovers of CBF and could limit CBF’s ability to engage in certain strategic transactions its Board of Directors believes would be in the best interests of stockholders.

CBF’s certificate of incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the ability of CBF’s Board of Directors to designate the terms of and issue new series of preferred stock, which may make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for CBF’s securities, including its Class A common stock.

The loss sharing agreements with the FDIC require that Capital Bank receive prior FDIC consent, which may be withheld by the FDIC in its sole discretion, prior to CBF, Capital Bank or the Company’s stockholders engaging in certain transactions. If any such transaction is completed without prior FDIC consent, the FDIC would have the right to discontinue the relevant loss sharing arrangement. Among other things, prior FDIC consent is required for (1) a merger or consolidation of CBF or its bank subsidiary with or into another company if CBF’s stockholders will own less than 66.66% of the combined company, (2) the sale of all or substantially all of the assets of any of CBF’s bank subsidiary and (3) a sale of shares by a stockholder, or a group of related stockholders, that will effect a change in control of Capital Bank, as determined by the FDIC with reference to the standards set forth in the Change in Bank Control Act (generally, the acquisition of between 10% and 25% of any class of CBF’s voting securities where the presumption of control is not rebutted, or the acquisition by any person, acting directly or indirectly or through or in concert with one or more persons, of 25% or more of any class of CBF’s voting securities). If CBF or any stockholder desired to enter into any such transaction, the FDIC may not grant its consent in a timely manner, without conditions, or at all. If one of these transactions were to occur without prior FDIC consent and the FDIC withdrew its loss share protection, there could be a material adverse effect on Capital Bank’s financial condition, results of operations and cash flows. In addition, statutes, regulations and policies that govern bank holding companies, including the BHCA, may restrict CBF’s ability to enter into certain transactions.

CBF is also subject to anti-takeover provisions under Delaware law. CBF has not opted out of Section 203 of the Delaware General Corporation Law (which we refer to as the “DGCL”), which, subject to certain exceptions, prohibits a public Delaware corporation from engaging in a business combination (as defined in such section) with an “interested stockholder” (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder, unless (1) prior to such time the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (2) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (3) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.

Risks Related to Our Common Stock

CBF is a controlling shareholder and may have interests that differ from the interests of our other shareholders.

Upon completion of the CBF Investment, CBF owned approximately 90% of the Company’s outstanding voting power. As a result, CBF will be able to control the election of our directors, determine our corporate and management policies and determine the outcome of any corporate transaction or other matter submitted to our shareholders for approval. Such transactions may include mergers and acquisitions (including the contemplated potential merger of the Company with and into CBF), sales of all or some of the Company’s assets (including sales of such assets to CBF and/or CBF’s other subsidiaries) or purchases of assets from CBF and/or CBF’s other subsidiaries, and other significant corporate transactions.

Five of our seven directors, our Chief Executive Officer, our Chief Financial Officer, and our Chief Risk Officer are affiliated with CBF. CBF also has sufficient voting power to amend our organizational documents. The interests of CBF may differ from those of our other shareholders, and it may take actions that advance its interests to the detriment of our other shareholders. Additionally, CBF is in the business of making investments in or acquiring financial institutions and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. CBF may also pursue, for its own account, acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

This concentration of ownership could also have the effect of delaying, deferring or preventing a change in our control or impeding a merger or consolidation, takeover or other business combination that could be favorable to the other holders of our common stock, and the trading prices of our common stock may be adversely affected by the absence or reduction of a takeover premium in the trading price.

As a controlled company, we are exempt from certain Nasdaq corporate governance requirements.

The Company’s common stock is currently listed on the Nasdaq Global Select Market. The Nasdaq generally requires a majority of directors to be independent and requires independent director oversight over the nominating and executive compensation functions. However, under the rules applicable to the Nasdaq, if another company owns more than 50% of the voting power of a listed company, that company is considered a “controlled company” and exempt from rules relating to independence of the board of directors and the compensation and nominating committees. The Company is a controlled company because CBF beneficially owns more than 50% of the Company’s outstanding voting stock. Accordingly, the Company is exempt from certain corporate governance requirements and its shareholders may not have all the protections that these rules are intended to provide.

We may choose to voluntarily delist our common stock from Nasdaq or cease to be a reporting issuer under SEC rules.

We may choose to, or our majority shareholder CBF may cause us to, voluntarily delist from the Nasdaq Global Select Market. If we were to delist from Nasdaq, we may or may not list ourselves on another exchange, and may or may not be required to continue to file periodic and current reports and other information as a reporting issuer under SEC rules. A delisting of our common stock could negatively impact shareholders by reducing the liquidity and market price of our common stock, reducing information available about the Company on an ongoing basis and potentially reducing the number of investors willing to hold or acquire our common stock. In addition, if we were to delist from Nasdaq, we would no longer be subject to any of the corporate governance rules applicable to Nasdaq listed companies. See also “—As a controlled company, we are exempt from certain Nasdaq corporate governance requirements.”

Future issuance or sales of our common stock or other securities will dilute the ownership interests of our existing shareholders and could depress the market price of our common stock.

In order to maintain our capital at desired levels or required regulatory levels, or to fund future growth, the Company Board may decide from time to time to issue additional shares of common stock, preferred stock or securities convertible into, exchangeable for or representing rights to acquire shares of our common stock. The sale of these shares may significantly dilute our shareholders’ ownership interest and the per share book value of our common stock. New investors in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders.

Resales of our common stock or other securities in the public market may cause the market price of our common stock to fall.

Sales of a substantial number of shares of our common stock in the public market by our shareholders (including CBF), or the perception that such sales are likely to occur, could cause the market price of our common stock to decline. Pursuant to the CBF Investment we have agreed to provide customary registration rights for the shares of common stock issued to CBF and CBF can exercise those rights in order to sell additional shares of our common stock at its discretion. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.

Market conditions and other factors may affect the value of our common stock.

The trading price of the shares of our common stock will depend on many factors, which may change from time to time, including the factors substantially similar to those identified above under “—The market price of CBF’s Class A common stock may be volatile, which could cause the value of an investment in CBF’s Class A common stock to decline.”

The trading volume in our common stock has been low and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.

Our common stock is thinly traded. The average daily trading volume of our shares on The Nasdaq Global Select Market during 2011 was approximately 48,413 shares. Thinly traded stock can be more volatile than stock trading in an

active public market. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire.

We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.

Holders of our junior subordinated debentures have rights that are senior to those of our common stockholders.

We have supported our continued growth through the issuance of trust preferred securities from special purpose trusts and accompanying junior subordinated debentures. At December 31, 2011, we had outstanding trust preferred securities and accompanying junior subordinated debentures with face values totaling $88.7 million. Payments of the principal and interest on the trust preferred securities of these special purpose trusts are conditionally guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the special purpose trusts are senior to our shares of common stock. As a result, we must make payments on the junior subordinated debentures before any dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied before any distributions can be made on our common stock. We have the right to defer distributions on our junior subordinated debentures (and the related trust preferred securities) for up to five years, during which time no dividends may be paid on our common stock.

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, our shareholders may lose some or all of their investment in our common stock.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

We did not receive any written comments during 2011 from the Commission staff regarding our periodic and current reports under the Act that remain unresolved from any prior period.

ITEM 2.

PROPERTIES.

The information set forth on page 13 of Item 1, “Business — Facilities and Real Estate” is incorporated herein by reference.

ITEM 3.

LEGAL PROCEEDINGS.

On November 18, 2010, a shareholder of the Company filed a putative class action lawsuit (styled Bill Burgraff v. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:10-cv-00253) against the Company and certain of its current and former officers in the United States District Court for the Eastern District of Tennessee in Greeneville, Tennessee on behalf of all persons that acquired shares of Company common stock between January 19, 2010 and November 9, 2010. On January 18, 2011, a separate shareholder of the Company filed a putative class action lawsuit (styled Brian Molnar v. Green Bankshares, Inc., et al., U.S. District Court, Eastern District of Tennessee, Northeastern Division, Case No. 2:11-cv-00014) against the Company and certain of its current and former officers in the same court on behalf of all persons that acquired shares of Company common stock between January 19, 2010 and October 20, 2010. These lawsuits were filed following, and relate to the drop in value of the Company’s common stock price after, the Company announced its third quarter performance results on October 20, 2010. The plaintiffs allege that defendants made false and/or misleading statements or failed to disclose that the Company was purportedly overvaluing collateral of certain loans; failing to timely take impairment charges of these certain loans; failing to properly account for loan charge-offs; lacking adequate internal and financial controls; and providing false and misleading financial results. The plaintiffs have asserted federal securities laws claims against all defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. The plaintiffs have also asserted control person liability claims against the individual defendants named in the complaints pursuant to Section 20(a) of the Exchange Act. The two cases were consolidated on February 4, 2011. On February 11, 2011, the Court appointed movant Jeffrey Blomgren as lead plaintiff. On May 3, 2011, the plaintiff filed an amended and consolidated complaint alleging a class period of January 19, 2010 to November 9, 2010. On July 11, 2011, Defendants filed a motion to dismiss the consolidated amended complaint. We and the individual named by the defendants collectively intend to vigorously defend themselves against these allegations.

On May 12, 2011, a stockholder of the Company filed a putative class action lawsuit (styled Betty Smith v. Green Bankshares, Inc., et al., Case No. 11-625-III, Davidson County, Tennessee, Chancery Court) against the Company, GreenBank, the Company Board and CBF on behalf of all persons holding common stock of the Company. This lawsuit was filed following our public announcement on May 5, 2011 of our entering into an investment agreement with CBF and relates to the investment in the Company by CBF. The complaint alleges that the individual defendants breached their fiduciary duties to the Company by accepting a sale price for the shares to be sold to us that was unfair to stockholders of the Company. The complaint also alleges that CBF, the Company and GreenBank aided and abetted these breaches of fiduciary duty. It seeks an injunction and/or rescission of the Green Bankshares investment and fees and expenses in an unspecified amount.

On May 25 and June 16, 2011, two other stockholders of the Company filed similar putative class action lawsuits (styled Mark McClinton v. Green Bankshares, Inc,. et al., Case No. 11-CV-284kt, Greene County Circuit Court, Greeneville, Tennessee and Thomas Cook v. Green Bankshares, Inc. et al., Case No. 2:11-cv-00176, Greenville Division, E.D. Tenn., respectively) against the Company, the Company Board and CBF on behalf of all persons holding common stock of the Company. The complaints similarly allege that the individual defendants breached their fiduciary duties to the Company by agreeing to sell shares to us at a price unfair to stockholders of the Company. The complaints also allege that CBF and the Company aided and abetted these breaches of fiduciary duty. In addition, the Cook complaint further alleges that the proxy statement filed with the SEC by the Company in connection with the transaction was issued with material omissions and misleading statements. Both claims seek an injunction and/or rescission of the CBF Investment and fees and expenses in an unspecified amount.

On July 6, 2011, another shareholder of the Company filed a lawsuit (styled Barbara N. Ballard v. Stephen M. Rownd, et al., Civil Action No. 2:11-cv-00201, E.D. Tenn.) against Green Bankshares, its Board of Directors and CBF asserting an individual claim that alleges that the individual defendants violated the securities laws by issuing a preliminary proxy statement that contains alleged material misstatements and omissions. The complaint also alleges a class action claim on behalf of all persons holding the Green Bankshares common stock against the individual defendants for breach of fiduciary duty based on these same alleged material misstatements and omissions. The complaint also alleges that Green Bankshares and CBF aided and abetted the breaches of fiduciary duty. It seeks an injunction and/or rescission of the CBF Investment and fees and expenses in an unspecified amount.

On July 26, 2011, the parties to the above-referenced class action lawsuits commenced in 2011 (other than the Molnar case) reached an agreement in principle to resolve these lawsuits on the basis of the inclusion of certain additional disclosures regarding the CBF Investment proxy statement filed with the SEC on the same date. The proposed settlement is subject to, among other things, court approval. On February 3, 2012, the court in the Smith action entered a final order resolving all claims and, on February 15, 2012, the Cook action was dismissed by the court with prejudice.

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any such legal proceeding the resolution of which we believe would have a material adverse effect on our business, operating results, financial condition or cash flow.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

On April 5, 2012, Green Bankshares, Inc. had 133,160,384 shares of common stock outstanding, of which 119,900,000 are owned by CBF. The Company’s shares are traded on The Nasdaq Global Select Market, under the symbol “GRNB”. As of March 23, 2012, Green Bankshares, Inc. has 2527 registered shareholders and 84 brokers for 2,611 holders of its common stock.

The following table shows the high and low sales price and closing price for the Company’s common stock as reported by The Nasdaq Global Select Market for 2011 and 2010.


	High/Low Sales Price During Quarter		Closing Price		Dividends Paid Per Share
2011:
First quarter	$	3.89 /2.51	$	2.79	$	—
Second quarter		3.30 /1.99		2.62		—
Third quarter		2.90 / 1.20		1.26		—
Fourth quarter		1.68 / 1.05		1.21		—
					$	—

2010:
First quarter	$	9.48 /3.52	$	8.16	$	—
Second quarter		15.04 /7.96		12.77		—
Third quarter		13.11 /6.58		6.79		—
Fourth quarter		7.73 / 2.39		3.20		—
					$	—

We do not currently intend to pay dividends on shares of our common stock in the foreseeable future and our ability to pay dividends will be subject to restrictions under applicable banking laws and regulations. The payment of cash dividends in the future will be dependent upon various factors, including our earnings, if any, cash balances, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our then-existing Board of Directors. It is the present intention of our Board of Directors to retain all earnings, if any, for use in our business operations in the foreseeable future and, accordingly, our Board of Directors does not currently anticipate declaring any dividends. Because we do not expect to pay cash dividends on our common stock for some time, any gains on an investment in our common stock will be limited to the appreciation, if any, of the market value of our common stock.

Banks and bank holding companies are subject to certain regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business. The payment of dividends by us depending on our financial condition could be deemed an unsafe or unsound practice. Our ability to pay dividends will directly depend on the ability of our subsidiary bank to pay dividends to us, which in turn will be restricted by the requirement that it maintains an adequate level of capital in accordance with requirements of its regulators and, in the future, can be expected to be further influenced by regulatory policies and capital guidelines.

In addition, in August 2010, Capital Bank entered into an Operating Agreement with the OCC (which we refer to as the “OCC Operating Agreement”), in connection with CBF’s acquisition of the Failed Banks. Capital Bank (and, with respect to certain provisions, the Company) is also subject to the FDIC Order issued in connection with the FDIC’s approval of CBF’s deposit insurance applications for the Failed Banks. The OCC Operating Agreement and the FDIC Order require that Capital Bank maintain various financial and capital ratios and require prior regulatory notice and consent to take certain actions in connection with operating the business and may restrict Capital Bank’s ability to pay dividends to its owners, including CBF and the Company, and to make changes to its capital structure.

The Company made no repurchases of its common stock during the quarter ended December 31, 2011.

ITEM 6.

SELECTED FINANCIAL DATA.


	Successor
	Company			Predecessor Company
	Sept 8 - Dec 31			Jan 1 - Sept 7
	2011			2011			2010			2009			2008			2007⁽¹⁾
				(in thousands, except per share data, ratios and percentages)
Total interest income	$	—		$	71,180		$	120,864		$	138,456		$	170,516		$	176,626
Total interest expense		977			18,404			37,271			57,931			75,491			81,973

Net interest income		(977	)		52,776			83,593			80,525			95,025			94,653
Provision for loan losses		—			(43,742	)		(71,107	)		(50,246	)		(52,810	)		(14,483	)

Net interest income after provision for loan losses		(977	)		9,034			12,486			30,279			42,215			80,170
Noninterest income		3,465			27,803			32,544			31,578			33,614			27,602
Noninterest expense		(282	)		(77,382	)		(110,815	)		(229,587	)		(85,837	)		(69,252	)

Income (loss) before income taxes		2,206			(40,545	)		(65,785	)		(167,730	)		(10,008	)		38,520
Income tax provision (benefit)		(441	)		974			14,910			(17,036	)		(4,648	)		14,146

Net income (loss)		2,647			(41,519	)		(80,695	)		(150,694	)		(5,360	)		24,374
Preferred stock dividend and accretion of discount on warrants		—			3,409			(5,001	)		(4,982	)		(92	)		—
Gain on retirement of Series A preferred allocated to common stockholders		—			11,188			—			—			—			—

Net income (loss) available to common shareholders	$	2,647		$	(33,740	)	$	(85,696	)	$	(155,676	)	$	(5,452	)	$	24,374

Per Share Data:
Net income (loss), basic	$	0.02		$	(2.57	)	$	(6.54	)	$	(11.91	)	$	(0.42	)	$	2.07
Net income (loss), assuming dilution		0.02			(2.57	)		(6.54	)		(11.91	)		(0.42	)		2.07
Net income (loss), assuming dilution adjusted for goodwill impairment charge⁽⁷⁾		0.02			(2.57	)		(6.54	)		(1.40	)		(0.42	)		2.07
Dividends declared		—			—			—			0.13			0.52			0.68
Common book value⁽²⁾⁽⁷⁾		1.95			N/A			5.75			12.15			24.09			24.94
Tangible common book value⁽³⁾⁽⁷⁾		1.63			N/A			5.23			11.44			12.23			12.73

Financial Condition Data:
Assets	$	321,238			N/A		$	2,406,040		$	2,619,139		$	2,944,671		$	2,947,741
Loans, net of unearned interest		—			N/A			1,745,378			2,043,807			2,223,390			2,356,376
Cash and investments		317,434			N/A			509,415			378,785			410,344			314,615
Federal funds sold		—			N/A			4,856			3,793			5,263		$	—
Deposits		—			N/A			1,976,854			2,084,096			2,184,147			1,986,793
FHLB advances and notes payable		—			N/A			158,653			171,999			229,349			318,690
Subordinated debentures		45,180			N/A			88,662			88,662			88,662			88,662
Federal funds purchased and repurchase agreements		—			N/A			19,413			24,449			35,302			194,525
Shareholders’ equity		260,049			N/A			143,897			226,769			381,231			322,477
Common shareholders’ equity⁽²⁾⁽⁷⁾		260,049			N/A			75,776			160,034			315,885			322,477
Tangible common shareholders’ equity⁽³⁾⁽⁷⁾		216,810			N/A			69,025			150,699			160,411			164,650
Tangible shareholders’ equity⁽⁴⁾⁽⁷⁾		216,810			N/A			137,146			217,434			225,757			164,650

Selected Ratios:
Interest rate spread		N/A			3.87	%		3.79	%		3.19	%		3.48	%		3.83	%
Net interest margin⁽⁶⁾		N/A			3.86	%		3.86	%		3.34	%		3.70	%		4.25	%
Total tangible equity to tangible assets^(4)(5)(7)		77.99	%		N/A			5.72	%		8.33	%		8.09	%		5.90	%
Tangible common equity to tangible assets^(3)(5)(7)		77.99	%		N/A			2.88	%		5.77	%		5.75	%		5.90	%
Return on average assets		2.76	%		N/A			-3.41	%		-5.59	%		-0.18	%		0.98	%
Return on average equity		3.24	%		N/A			-38.56	%		-50.44	%		-1.64	%		8.96	%
Return on average common equity⁽²⁾⁽⁷⁾		3.24	%		N/A			-55.35	%		-64.25	%		-1.65	%		8.96	%
Return on average common tangible equity⁽³⁾⁽⁷⁾		3.87	%		N/A			-58.32	%		-96.77	%		-3.14	%		15.41	%
Average equity to average assets		85.08	%		N/A			8.85	%		11.09	%		11.24	%		10.91	%
Dividend payout ratio		N/A			N/A			N/M			N/M			N/M			32.85	%
Ratio of nonperforming assets to total assets		N/A			N/A			8.56	%		5.07	%		2.61	%		1.25	%
Ratio of allowance for loan losses to nonperforming loans		N/A			N/A			45.83	%		66.39	%		155.28	%		106.34	%
Ratio of allowance for loan losses to total loans, net of unearned income loans		N/A			N/A			3.83	%		2.45	%		2.20	%		1.45	%

¹	Information for the 2007 fiscal year includes the operations of CVBG, with which the Company merged on May 18, 2007.

²	Common shareholders’ equity is shareholders’ equity less preferred stock.

³	Tangible common shareholders’ equity is shareholders’ equity less goodwill, other intangible assets and preferred stock.

⁴	Tangible shareholders’ equity is shareholders’ equity less goodwill and other intangible assets.

⁵	Tangible assets is total assets less goodwill and other intangible assets.

⁶	Net interest margin is the net yield on interest earning assets and is the difference between the Fully Taxable Equivalent yield earned on interest-earning assets less the effective cost of supporting liabilities.

⁷	Please refer to the “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” section following “Selected Financial Data” for more information, including a reconciliation of this non-GAAP financial measure.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Certain financial information included in the selected financial data is determined by methods other than in accordance with accounting principles generally accepted within the United States (“GAAP”). These non-GAAP financial measures are “net income (loss) per share assuming dilution adjusted for goodwill impairment charge,” “common shareholders’ equity,” “tangible assets,” “tangible shareholders’ equity,” “tangible common book value per share,” “tangible common shareholders’ equity,” “return on average common equity,” and “return on average common tangible equity.” The Company’s management, the entire financial services sector, bank stock analysts, and bank regulators use these non-GAAP measures in their analysis of the Company’s performance.

• “Net income (loss) per share ~~available to common shareholders~~ assuming dilution adjusted for goodwill impairment charge” is defined as net income (loss) ~~per share~~ available to common shareholders reduced by goodwill impairment charge, net of tax.

•	“Common shareholders’ equity” is shareholders’ equity less preferred stock.

•	“Tangible assets” are total assets less goodwill and other intangible assets.

•	“Tangible shareholders’ equity” is shareholders’ equity less goodwill and other intangible assets.

•

“Tangible common book value per share” is defined as total equity reduced by recorded goodwill, other intangible assets and preferred stock divided by total common shares outstanding. This measure discloses changes from period-to-period in book value per share exclusive of changes in intangible assets and preferred stock. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing the tangible assets of a company. Companies utilizing purchase accounting in a business combination, as required by GAAP, must record goodwill related to such transactions.

•	“Tangible common shareholders’ equity” is shareholders’ equity less goodwill, other intangible assets and preferred stock.

•	“Return on average common equity” is defined as net income (loss) available to common shareholders’ for the period divided by average equity reduced by average preferred stock.

•	“Return on average common tangible equity” is defined as net income (loss) available to common shareholders’ for the period divided by average equity reduced by average goodwill, other intangible assets and preferred stock.

~~These~~54 disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.

These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other companies. The following reconciliation table provides a more detailed analysis of these non-GAAP performance measures:

	At and for the Fiscal Years Ended December 31,
	Successor
	2010			2009			2008			2007			2006
	Company			Predecessor Company
Total shareholders’ equity	$	143,897		$	226,769		$	381,231		$	322,477		$	184,471
	Sept 8 - Dec 31			Jan 1 - Sept 7			At and for the Fiscal Years Ended December 31,
Less: Preferred stock		(68,121	)		(66,735	)		(65,346	)		—			—
	2011			2011			2010			2009			2008			2007
Common shareholders’ equity	$	75,776		$	160,034		$	315,855		$	322,477		$	184,471
Total shareholders’equity	$	260,049			N/A		$	143,897		$	226,769		$	381,231		$	322,477
Total shareholders’ equity	$	143,897		$	226,769		$	381,231		$	322,477		$	184,471
Less: Preferred stock		—			N/A			(68,121	)		(66,735	)		(65,346	)		—
Less:
Common shareholders’equity	$	260,049			N/A		$	75,776		$	160,034		$	315,855		$	322,477
Goodwill		—			—			(143,389	)		(143,140	)		(31,327	)
Total shareholders’equity	$	260,049			N/A		$	143,897		$	226,769		$	381,231		$	322,477
Core Deposit and other intangibles		(6,751	)		(9,335	)		(12,085	)		(14,687	)		(7,213	)
Less:
Preferred stock		(68,121	)		(66,735	)		(65,346	)		—			—
Goodwill		38,131			N/A			—			—			(143,389	)		(143,140	)
Tangible common shareholders’ equity	$	69,025		$	150,699		$	160,411		$	164,650		$	145,931
Core Deposit and other intangibles		5,108			N/A			(6,751	)		(9,335	)		(12,085	)		(14,687	)
Total shareholders’ equity	$	143,897		$	226,769		$	381,231		$	322,477		$	184,471
Preferred stock		—			N/A			(68,121	)		(66,735	)		(65,346	)		—
Less:
Tangible common shareholders’equity	$	216,810			N/A		$	69,025		$	150,699		$	160,411		$	164,650
Goodwill		—			—			(143,389	)		(143,140	)		(31,327	)
Total shareholders’equity	$	260,049			N/A		$	143,897		$	226,769		$	381,231		$	322,477
Core Deposit and other intangibles		(6,751	)		(9,335	)		(12,085	)		(14,687	)		(7,213	)
Less:
Tangible shareholders’ equity	$	137,146		$	217,434		$	225,757		$	164,650		$	145,931
Goodwill		38,131			N/A			—			—			(143,389	)		(143,140	)
Total assets	$	2,406,040		$	2,619,139		$	2,944,671		$	2,947,741		$	1,772,654
Core Deposit and other intangibles		5,108			N/A			(6,751	)		(9,335	)		(12,085	)		(14,687	)
Less:
Tangible shareholders’equity	$	216,810			N/A		$	137,146		$	217,434		$	225,757		$	164,650
Goodwill		—			—			(143,389	)		(143,140	)		(31,327	)
Total assets	$	321,238			N/A		$	2,406,040		$	2,619,139		$	2,944,671		$	2,947,741
Core Deposit and other intangibles		(6,751	)		(9,335	)		(12,085	)		(14,687	)		(7,213	)
Less:
Tangible assets	$	2,399,289		$	2,609,804		$	2,789,197		$	2,789,914		$	1,734,114
Goodwill		38,131			N/A			—			—			(143,389	)		(143,140	)
Common book value per share	$	5.75		$	12.15		$	24.09		$	24.94		$	18.80
Core Deposit and other intangibles		5,108			N/A			(6,751	)		(9,335	)		(12,085	)		(14,687	)
Effect of intangible assets	$	(0.52	)	$	(0.71	)	$	(11.86	)	$	(12.21	)	$	(3.93	)
Tangible assets	$	277,999			N/A		$	2,399,289		$	2,609,804		$	2,789,197		$	2,789,914
Tangible common book value per share	$	5.23		$	11.44		$	12.23		$	12.73		$	14.87
Common book value per share		1.95			N/A		$	5.75		$	12.15		$	24.09		$	24.94
Return on average common equity		(55.35	%)		(64.25	%)		(1.65	%)		8.96	%		11.91	%
Effect of intangible assets		(.32	)		N/A		$	(0.52	)	$	(0.71	)	$	(11.86	)	$	(12.21	)
Effect of intangible assets		(2.97	%)		(32.52	%)		(1.49	%)		6.45	%		3.34	%
Tangible common book value per share		1.63			N/A		$	5.23		$	11.44		$	12.23		$	12.73
Return on average common tangible equity		(58.32	%)		(96.77	%)		(3.14	%)		15.41	%		15.25	%
Return on average common equity		3.24	%		N/A			-55.35	%		-64.25	%		-1.65	%		8.96	%
Effect of intangible assets		0.63	%		N/A			-2.97	%		-32.52	%		-1.49	%		6.45	%
Return on average common tangible equity		3.87	%		N/A			-58.32	%		-96.77	%		-3.14	%		15.41	%

38In the table above, note that tangible shareholders’ equity and tangible assets are adjusted for the Company’s pro rata share of intangible assets of Capital Bank,N.A.

The table below presents computations and other financial information excluding the goodwill impairment charge that the Company incurred in 2009. The goodwill impairment charge is included in the financial results presented in accordance with GAAP. The Company believes that the exclusion of the goodwill impairment in expressing net operating income (loss), operating expenses and earnings (loss) per diluted share data provides a more meaningful base for period to period comparisons which will assist investors in analyzing the operating results of the Company. The Company utilizes these non-GAAP financial measures to compare the operating performance with comparable periods in prior years and with internally prepared projections. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Company has policies in place to address goodwill impairment from other normal operating expenses to ensure that the Company’s operating results are properly reflected for period to period comparisons.

	For the Fiscal Years Ended December 31,
	Successor
	2010			2009			2008			2007			2006
	Company			Predecessor Company
Total non-interest expense	$	110,815		$	229,587		$	85,837		$	69,252		$	52,708
	Sept 8 - Dec 31			Jan 1 - Sept 7			At and for the Fiscal Years Ended December 31,
Goodwill impairment charge		—			(143,389	)		—			—			—
	2011			2011			2010			2009			2008			2007
Operating expenses	$	110,815		$	86,198		$	85,837		$	69,252		$	52,708
Total non-interest expense	$	282		$	77,382		$	110,815		$	229,587		$	85,837		$	69,252
Net income (loss) available to common shareholders	$	(85,696	)	$	(155,676	)	$	(5,452	)	$	24,374		$	21,262
Goodwill impairment charge		—			—			—			(143,389	)		—			—
Goodwill impairment charge, net of tax of $5,975		—			137,414			—			—			—
Operating expenses	$	282		$	77,382		$	110,815		$	86,198		$	85,837		$	69,252
Net operating income (loss) available to common shareholders	$	(85,696	)	$	(18,262	)	$	(5,452	)	$	24,374		$	21,262
Net income (loss) available to common shareholders	$	2,647		$	(33,740	)	$	(85,696	)	$	(155,676	)	$	(5,452	)	$	24,374
Per Diluted Share:
Goodwill impairment charge, net of tax of $5,975		—			—			—			137,414			—			—
Net income (loss) available to common shareholders	$	(6.54	)	$	(11.91	)	$	(0.42	)	$	2.07		$	2.14
Net operating income (loss)	$	2,647		$	(33,740	)	$	(85,696	)	$	(18,262	)	$	(5,452	)	$	24,374
Goodwill impairment charge, net of tax of $5,975		—			10.51			—			—			—
Per Diluted Share:
Net operating income (loss)	$	(6.54	)	$	(1.40	)	$	(0.42	)	$	2.07		$	2.14
Net income (loss) available to common shareholders	$	0.02		$	(2.57	)	$	(6.54	)	$	(11.91	)	$	(0.42	)	$	2.07
Goodwill impairment charge, net of tax of $5,975		—			—			—			10.51			—			—
Net operating income (loss)	$	0.02		$	(2.57	)	$	(6.54	)	$	(1.40	)	$	(0.42	)	$	2.07

39 56

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

~~The~~Headquartered in ~~Company~~Greeneville, ~~reported a net loss available to common shareholders of $85~~Tennessee,~~696~~ ~~for~~Green ~~the full year 2010 compared with a net loss available to common shareholders of $155~~Bankshares,~~676~~ ~~for the full year 2009~~Inc. ~~The~~ ~~loss for~~ (the ~~year 2010 was primarily attributable to an increase in credit costs~~“Company”), ~~including both~~is a ~~higher~~financial ~~loan~~services ~~loss~~company ~~provision and elevated costs associated~~ with the disposition and revaluation of OREO related assets along with the effects of the continued weaknesses in the economy through 2010. This weakness was manifested primarily in the Company’s residential real estate construction and development portfolio. As a ~~result,~~34% ~~the~~equity ~~Company’s~~method ~~provision~~investment ~~for loan losses for the full year 2010 remained elevated at $71,107 compared to $50,246~~ in ~~2009~~Capital ~~and~~Bank ~~$52~~NA,~~810~~ ~~in 2008.~~a ~~Additionally,~~national ~~Other~~banking ~~Real~~association ~~Estate Owned (“OREO”) charges totaled $29,895 in 2010 compared~~ with ~~$8,156~~ ~~for~~approximately ~~2009 and~~ $~~7,028 in 2008~~6.5 Asbillion ~~the economy~~ in ~~the~~total ~~Company’s~~assets ~~market areas continued to~~and ~~struggle~~143 ~~to improve during 2010, net loan charge~~full-~~offs~~service ~~rose~~banking tooffices ~~$54,438~~throughout ~~in 2010 compared with net loan charge-offs of $48~~Florida,~~896~~ inNorth ~~2009 and $38~~Carolina,~~110~~ inSouth ~~2008. On a diluted per share basis~~Carolina, ~~the~~Tennessee net operating loss available to common shareholders in 2010 was $6.54 compared with a net operating loss in 2009, excluding the goodwill impairment charge, of $1.40 (please see “ITEM 6 — GAAP Reconciliation and ~~Management Explanations of Non-GAAP Financial Measures” above for more information) and a net operating loss available to common shareholders of $0~~Virginia.42 for 2008. The net loss available to common shareholders on a diluted per share basis for 2010 was $6.54 and including the goodwill impairment charge, on a diluted per share basis the net loss available to common shareholders for 2009 was $11.91 compared with a net loss available to common shareholders of $0.42 for 2008.

~~Net~~Capital ~~interest~~Bank ~~income for 2010 was $83,593 compared with $80,525 in 2009 including the impact of~~Financial ~~interest reversals of $2,965 in 2010 and $2,606 in 2009~~Corp. ~~Despite~~Investment the decline in average earning assets, the improvement in net interest income was due to the Company experiencing the benefit of interest rate floors built into loan agreements beginning in 2009 plus the re-pricing of interest bearing liabilities in a lower market interest rate environment in 2010. As a result, the Company experienced a widening in its net interest margin from 3.34% in 2009 to 3.86% in 2010. Noninterest income improved modestly from $31,578 in 2009 to $32,544 in 2010 principally as a result of higher fee income generated from the sales of annuity and investment products. Operating expenses for 2010 totaled $110,815 in 2010 compared with $229,587 in 2009, or $86,198, excluding the goodwill impairment charge of $143,389 (please see “ITEM 6 — GAAP Reconciliation and Management Explanations of Non-GAAP Financial Measures” above for more information). The increase in operating expenses of $24,617 (excluding the goodwill impairment charge taken in 2009 of $143,389) was principally driven by the increased costs associated with the losses incurred on the revaluations and dispositions of OREO related assets.

On September 7, 2011, the Company completed the issuance and sale of 119.9 million shares of its common stock to CBF for approximately $217 million in consideration. CBF is a bank holding company formed with the goal of creating a regional banking franchise in the southeastern region of the United States through organic growth and acquisition of other banks, including failed, underperforming and undercapitalized banks. CBF is the controlling owner of Capital Bank, NA. In connection with the CBF Investment, all of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and related warrants to purchase shares of the Company’s common stock issued to the U.S. Treasury through the TARP were purchased by CBF directly from the Treasury. The Series A Preferred Stock and the related warrant were retired on September 7, 2011 and are no longer outstanding.

Because of the controlling proportion of voting securities in the Company acquired by CBF, the CBF Investment is considered an acquisition for accounting purposes and requires the application and push down of the acquisition method of accounting. The accounting guidance for acquisition accounting requires that the assets acquired and liabilities assumed be recorded at their respective fair values as of the acquisition date. Any purchase price in excess of the net assets acquired is recorded as goodwill.

The most significant fair value adjustments resulting from the application of the acquisition method of accounting were made to loans. Accounting guidance requires that all loans held by the Company on the Transaction Date be recorded at their fair value. The fair value of these acquired loans takes into account both the differences in loan interest rates and market rates and any deterioration in their credit quality. Because concerns about the probability of receiving the full amount of the contractual payments from the borrowers was considered in estimating the fair value of the loans, stating the loans at their fair value results in no allowance for loan loss being provided for these loans as of the Transaction Date. As of September 7, 2011, certain loans had evidence of credit deterioration since origination, and it was probable that not all contractually required principal and interest payments would be collected. Such loans identified at the time of the acquisition were accounted for using the measurement provision for purchased credit-impaired (“PCI”) loans, according to the FASB Accounting Standards Codification (“ASC”) 310-30. The special accounting for PCI loans not only requires that they are recorded at fair value at the date of acquisition and that any related allowance for loan and lease losses is not permitted to be carried forward past the Transaction Date, but it also governs how interest income will be recognized on these loans and how any further deterioration in credit quality after the Transaction Date will be recognized and reported.

GreenBank Merger with Capital Bank, NA

On September 7, 2011, GreenBank, which was formerly a wholly-owned subsidiary of the Company, merged with and into Capital Bank, NA, a national banking association and subsidiary of TIB Financial Corp., Capital Bank Corp., and CBF, with Capital Bank, NA as the surviving entity. CBF is the owner of approximately 90% of the Company’s common stock, approximately 83% of Capital Bank Corp’s common stock and approximately 94% of TIB Financial’s common stock.

The Company began to account for its ownership in Capital Bank, NA under the equity method of accounting and the assets and liabilities of the Bank were de-consolidated from the Company’s balance sheet.

Potential Merger of Green Bankshares, Inc. and Capital Bank Financial Corp.

On September 8, 2011, CBF’s Board of Directors approved and adopted a plan of merger which provides for the merger of Green Bankshares, Inc. with and into CBF, with CBF continuing as the surviving entity. In the merger, each share of Green Bankshares, Inc. common stock issued and outstanding immediately prior to the completion of the merger, except for certain shares held by CBF or Green Bankshares, Inc., will be

converted into the right to receive .0915 of a share of CBF Class A common stock. No fractional share of Class A common stock will be issued in connection with the merger, and holders of Green Bankshares, Inc. common stock will be entitled to receive cash in lieu thereof. Since CBF currently owns more than 90% of the common stock of Green Bankshares, Inc., under Delaware and Tennessee law, no vote of our stockholders is required to complete the merger. CBF will determine when and if the merger will ultimately take place.

Presentation

All dollar amounts reported or discussed in Item 7 of this Annual Report on Form 10-K are shown in thousands, except per share amounts. Financial results for the period from September 8, 2011 through December 31, 2011 were significantly impacted by the controlling investment in the Company by CBF. As a result of the CBF Investment, CBF now owners 90% of the voting securities of the Company and followed the acquisition method of accounting and applied “acquisition accounting.” Acquisition accounting requires that the assets purchased, the liabilities assumed, and non-controlling interests all be reported in the acquirer’s financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets were identified and a fair value was determined as required by the accounting guidance for business combinations. Accounting guidance also allows the application of “push down accounting,” whereby the adjustments of assets and liabilities to fair value and the resultant goodwill are shown in the financial statements of the acquiree. The Company is still in the process of completing its fair value analysis of assets and liabilities, and final fair value adjustments may differ from the preliminary estimates recorded to date. Balances and activity in the Company’s consolidated financial statements prior to the CBF Investment have been labeled with “Predecessor Company” while balances and activity subsequent to the CBF Investment have been labeled with “Successor Company.”

Due to the difference in lengths of reporting periods and the Bank Merger discussed above and the resulting deconsolidation of GreenBank on September 7, 2011, the operating results for 2011 only include the results of GreenBank for approximately 8 months and therefore are generally not comparable to the operations in prior years.

Performance Overview

The Successor Company reported net income of $2.6 million, or $0.02 per diluted share, for the period subsequent to the CBF investment of September 8, 2011 through December 31, 2011. Earnings primary reflect the Company’s equity method income in Capital Bank, NA, partially offset by interest expense interest on trust preferred securities.

The Predecessor Company reported a net loss available to common shareholders of $33.7 million, or $2.57 per diluted share, for the period prior to the CBF investment from January 1, 2011 through September 7, 2011. The loss was primarily attributable to credit costs which remained elevated, including both the $43.7 million loan loss provision and $24.8 million in foreclosed asset related expenses associated with the disposition and revaluation of OREO related assets. Net loan charge-offs were $38.8 million for the period from January 1, 2011 through September 7, 2011. Partially offsetting elevated credit costs was a gain of $11.2 million as a result of the redemption of the company series A preferred stock.

The Predecessor Company reported a net loss of $85.7 million or $(6.54) per diluted share for 2010 and a net loss of $18.3 million or $(1.40) per diluted share for 2009, excluding a $137,414 goodwill impairment charge, net of tax of $5,975. The net loss available to common shareholders on a diluted per share basis for 2009 was $11.91 including the goodwill impairment. The loss reported for 2010 was primarily due to a $71.1 million provision for loan losses and $35.4 million in foreclosed asset related expenses. The loss reported for 2009 was due primarily to a $50.2 million provision for loan losses and $12.5 million in foreclosed asset related expenses. Net loan charge-offs were $54.4 million for 2010 and $48.9 million for 2009.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

~~Management~~58 continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on current and projected economic conditions, historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the then existing set of facts and circumstances. Actual results could differ from those estimates made by management.

The Company believes its critical accounting policies and estimates include the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts, including OREO. Based on management’s calculation, an allowance of $66,830, or 3.83%, of total loans, net of unearned interest was an adequate estimate of losses inherent in the loan portfolio as of December 31, 2010. This estimate resulted in a provision for loan losses on the income statement of $71,107 during 2010. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected. For further discussion of the allowance for loan losses and a detailed description of the methodology management uses in determining the adequacy of the allowance, see “ITEM 1. Business — Lending Activities — Allowance for Loan Losses” located above, and “Changes in Results of Operations — Provision for Loan Losses” located below.

~~The~~Financial ~~consolidated~~results ~~financial~~for ~~statements~~2011 ~~include~~were ~~certain~~significantly ~~accounting~~impacted ~~and~~by ~~disclosures~~the ~~that~~controlling ~~require management~~investment toin ~~make~~the Company ~~estimates~~by ~~about fair values~~CBF. ~~Estimates~~The ofCompany ~~fair~~elected ~~value~~to ~~are~~apply ~~used~~push-down ~~in the~~ accounting ~~for~~. ~~securities available for sale~~Accordingly, ~~loans~~the ~~held~~Company’s ~~for sale, goodwill, other intangible~~ assets, ~~OREO~~ and ~~acquisition~~ ~~purchase~~liabilities ~~accounting~~were ~~adjustments.~~adjusted ~~Estimates~~to ofestimated fair values ~~are~~at ~~used~~the inCBF ~~disclosures regarding~~Investment ~~securities held to maturity~~date, ~~stock~~resulting ~~compensation,~~in ~~commitments,~~elimination ~~and~~of the ~~fair~~allowance ~~values~~for ofloan ~~financial instruments~~losses. The ~~Fair~~Company ~~values~~is ~~are estimated~~still ~~using~~in ~~relevant~~the ~~market~~process ~~information~~of ~~and~~completing ~~other~~its ~~assumptions~~fair ~~such~~value asanalysis ~~interest~~of ~~rates,~~assets ~~credit risk~~and liabilities, ~~prepayments~~ and ~~other~~final ~~factors. The~~ fair ~~values~~value ofadjustments ~~financial~~may ~~instruments~~differ ~~are~~from ~~subject~~the ~~to change~~preliminary asestimates ~~influenced~~recorded byto ~~market conditions~~date.

~~The~~Due ~~Company~~to ~~believes~~ its ~~critical~~ownership ~~accounting~~level ~~policies~~ and ~~estimates~~significant ~~also~~influence, ~~include~~ the ~~valuation of~~Company’s ~~the~~investment ~~allowance~~in ~~for~~Capital ~~the~~Bank, ~~net~~NA ~~DTA.~~is Arecorded ~~valuation~~as ~~allowance~~an isequity-method investment ~~recognized~~in ~~for~~that aentity. ~~net~~As ~~DTA~~of ifDecember 31, ~~based~~2011, on the ~~weight~~Company’s ofinvestment ~~available~~in ~~evidence~~Capital Bank, itNA istotaled ~~more-likely-than-not~~$315.3 ~~that~~million, ~~some~~representing ~~portion or~~ the ~~entire~~Company’s ~~DTA will~~primary ~~not be realized~~asset. The ~~ultimate~~investment ~~realization~~reflected ofthe ~~deferred~~Company’s ~~tax~~34% ~~assets~~pro israta ~~dependent~~ownership ~~upon the~~of ~~generation~~Capital ofBank, ~~future~~NA’s ~~taxable~~total ~~income~~shareholders’ ~~during~~equity ~~the~~as ~~periods~~a inresult ~~which~~of ~~those~~the ~~temporary~~Bank ~~differences become deductible~~Merger. In ~~making~~periods ~~such~~subsequent ~~judgments,~~to ~~significant~~the ~~weight~~Merger, isthe ~~given~~Company towill ~~evidence~~adjust ~~that~~this ~~can~~equity ~~be objectively~~investment ~~verified.~~balance Asbased aon ~~result~~its ofequity ~~the~~in ~~increased~~Capital ~~credit losses~~Bank, ~~the~~NA’s ~~Company~~net ~~entered~~income ~~into a~~and ~~three-year~~comprehensive ~~cumulative~~income. ~~pre-tax~~In ~~loss~~connection ~~position~~with ~~(excluding~~ the ~~goodwill~~Bank ~~impairment~~Merger, ~~charge~~assets ~~recognized~~and ~~in the~~liabilities ~~first quarter~~ of ~~2009)~~GreenBank aswere ofde-consolidated ~~December 31,~~from ~~2010.~~the ACompany’s ~~cumulative~~balance ~~loss~~sheet ~~position~~resulting isin ~~considered~~ a significant ~~negative~~decrease ~~evidence~~ in ~~assessing~~total ~~the~~assets ~~realizability~~and oftotal aliabilities ~~deferred~~of ~~tax~~the ~~asset~~Company ~~which~~in isthe ~~difficult~~third toquarter ~~overcome~~of 2011.

~~The~~Management ~~Company’s~~continually ~~estimate~~evaluates of the ~~realization~~Company’s ofaccounting ~~its~~policies ~~net~~and ~~DTA~~estimates ~~was~~it ~~based~~uses onto prepare the ~~scheduled~~consolidated ~~reversal of~~financial ~~deferred~~statements. ~~tax~~In ~~liabilities and taxable income available in prior carry back years~~general, ~~and tax planning strategies. Based on~~ management’s ~~calculation,~~estimates aare ~~valuation~~based ~~allowance~~on ofhistorical ~~$43~~experience,

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