Capital Bank Corporation (North Carolina) (CBKN)
Interview with:
B. Grant Yarber, President and CEO
Richard W. Edwards, CFO

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and Information on their
consumer and commercial products and services for small to medium size businesses at 21 banking offices in ten counties throughout North Carolina.

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Capital Bank offers a broad range of financial services focused on Service Worth Talking About with 21 community banking offices in ten counties throughout North Carolina

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Regional Banks

Capital Bank Corporation (North Carolina)

4901 Glenwood Avenue
Raleigh, NC 27612
Phone: 919-645-6400

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B. Grant Yarber
President and CEO

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Richard W. Edwards
Chief Financial Officer

Interview conducted by:
Lynn Fosse
Senior Editor
July 2004

B. Grant Yarber, President and CEO

Grant Yarber serves as President and Chief Executive Officer for Capital Bank Corporation and Capital Bank, overseeing the day-to-day operations of the bank. He had served previously as Chief Lending Officer and Chief Credit Officer of MountainBank in Hendersonville, NC. With more than 15 years of banking experience, Yarber has particular strength in lending and credit management. His background includes leadership positions with Bank of America, including Southeast Credit Manager and Regional Executive for Business Banking and Professional/Executive Banking for Missouri and Illinois. Grant and his wife Suzanne, son and daughter reside in Cary, NC.

Richard W. Edwards, Chief Financial Officer

Rick Edwards serves as Chief Financial Officer for Capital Bank Corporation and Capital Bank. In this position, Edwards is responsible for the financial activities of the company, including investment portfolio management, analyst relations and strategic planning. Edwards previously held senior accounting and financial positions with some of the country’s top banking institutions in the Southeast. Edwards spent eight years with Ernst & Young and held several management positions with Bank of America. He also has served as the Chief Financial Officer at a $1.4 billion savings bank, and later became the Chief Accounting Officer at National Commerce Financial Corporation before joining Capital Bank. Rick and his wife Karen, and two daughters live in Raleigh, NC.

Company Profile:
Capital Bank (NSDQ: CBKN) headquartered in Raleigh, North Carolina, is a wholly owned subsidiary of Capital Bank Corporation. The bank currently offers a broad range of financial services with 21 banking offices in ten counties throughout North Carolina. Using a foundation of a strong management team and an active board of directors, Capital Bank has experienced exceptional growth as a result of its “hometown banking” strategy and Service Worth Talking About. The bank achieved profitability in just its second full year of operation and remains profitable.

It is Capital Bank’s mission to be a performance driven, community focused, financial organization dedicated to providing exceptional value to: Their Customers - by being the best community bank in each market served, a locally focused financial institution which consistently delivers quality, personalized banking characterized by responsive, friendly, reliable service which surpasses customers’ expectations. Their Associates - by creating and maintaining a caring and supportive environment that inspires professional and personal growth, rewards performance, values teamwork and respects the individual. Their Shareholders - by optimizing long term return on their investment through exceptional internal growth, strategic acquisitions and exercising sound fiscal management. And Their Communities - by contributing to their economic vitality and quality of life through community-focused customer service and active civic involvement and leadership.

Capital Bank provides both consumer and commercial products and services, and has a great deal of experience working with small to medium size businesses. Loan requests are approved locally by Regional Presidents and senior bankers who know and understand their customers’ needs in each particular community. The company’s website is:

CEOCFOinterviews: Mr. Yarber, you have been at Capital Bank for about a year and you were recently named CEO. What attracted you initially?

Mr. Yarber: “I first started talking with Capital Bank early in 2003. I met with Buddy Keller, the chairman of the board, while I was at MountainBank. We began talking about the future of Capital Bank and my joining this organization. What attracted me as a banker is that we have the ability to run banks within a bank. Throughout North Carolina – in our Triangle, Triad, Sandhills and Western regions, we have regional bank presidents and executive officers who run their branches and have an unsurpassed understanding of their markets. That concept is important and it works. With the larger banks you send in your application to Tampa or Richmond, and a team of underwriters will underwrite it and get back to you with a decision after they scored it. Our associates actually sit down with the customer, and they understand the business and cash flow of the company, and they help underwrite the credit. We have a credit administrative function but it is collaborative. We can add value because the level of experience in our bankers compared to the larger banks is phenomenal. We typically hire banking industry veterans everywhere we go. Small businesses do not have CFOs, and we often serve in that role as their banker.”

CEOCFOinterviews: Mr. Edwards, please tell us how you came to Capital Bank and what attracted you?

Mr. Edwards: “I was excited to join Grant’s team here and help them grow the institution and add value for our shareholders. I think the mix of talents that Grant and Buddy Keller assembled is phenomenal in terms of a mix of community bankers - bankers that have been with larger institutions and smaller institutions, and have really seen both sides of the banking equation and can balance those two environments. They are two very different environments, and I think we have an opportunity to bring the best of both worlds to our shareholders and customers.”

CEOCFOinterviews: Will you give us a brief history of how Capital Bank got where it is today?

Mr. Yarber: “The bank was founded by Buddy Keller, Oscar Keller, Bill Burkhardt, Robert Jones and several other board members back in 1997. They started out with a few branches in Sanford and Raleigh, 10 million dollars in loans and 23 million dollars in deposits. A couple years later, they purchased Home Savings Bank in Siler City, and in 2000, purchased five branches in Oxford, Woodland, Warrenton and Seaboard in the northern part of the state. In March 2002, Capital Bank completed a merger with Community Savings Bank in Burlington, and in December 2002, another merger with High Street Banking in the western part of the state with branches in Asheville and Hickory.”

CEOCFOinterviews: Do you expect to continue in that same mode?

Mr. Yarber: “We expect to grow both de novo through profitability and through the markets where we are currently doing business, and in the future, I would not rule out any acquisitions. We are concentrating on the footprint where we are now and perhaps toward the coast. We’re not going to go out and just buy other banks to add to the balance sheet. We are going to be looking strategically at what will be profitable, what will be good markets for us, and where we can make a difference. We opened in Greensboro in May, de novo. We are opening up in Wake Forest, de novo. We are opening a third office in Ashville this summer, de novo. We will be moving to another office in the Cary area within the next twelve months. Where we are doing business now, the Triangle and Sandhills (Lee and Chatham Counties) regions are very strong, the strongest part of the state, and that is where we’ll see a lot of growth.”

CEOCFOinterviews: Will you give us a sense of the areas where you are active and do you see any voids in your locations?

Mr. Yarber: “The Triangle region (Raleigh, Cary, Wake Forest) has medium size cities with a lot of professionals and small businesses, which is certainly our target. If you travel Interstate 40 West across the state, you’ll pass our Triad region branches in Burlington and Greensboro, and then find Capital Bank in Hickory and Asheville in our Western region. The Triangle area has always been a good market for us; our Sandhills branches (covering Sanford, Lee and Chatham Counties) have all been good for us. The only place where we are not located, and where we think we could make a difference, is along the coast. I don’t think there is much value to be added by another bank in Charlotte. That does not mean that we would not look at the areas outside of Charlotte.”

CEOCFOinterviews: How do you break down in terms of commercial and consumer and would you like to see the mix change?

Mr. Yarber: “We do want to increase the amount of commercial lending, and we want to increase deposits. As we grow our branch network, we are targeting both consumers and small businesses, which you can call commercial. Our niche is small to medium size businesses. We are building branches now, and obviously, you do that more for the consumers and for core deposits.”

Mr. Edwards: “One of the hard things in the small business environment is determinimg what are you doing for that owner/entrepreneur - business or personal, it’s all one and the same to them. I think this is a segment of the market where community banking adds a lot of value and makes sense to the owner/operator of a small business.”

CEOCFOinterviews: Will you give us a concrete example of what a customer would get at Capital Bank that they would not get somewhere else?

Mr. Yarber: “When you walk into a Capital Bank branch, the level of energy is that four or five people are going to say hello and welcome you. And if you have been there before, they are going to know your name. You are not going to have to wait in line; you are going to be helped immediately. You will not have to wait four, five or ten minutes. Our associates in every branch are experienced, they understand our systems, and they know their customers’ moms, dads and kids. I want to read a comment or two from our customer survey. Here is one from the Cameron Village office: “Excellent bank to deal with, excellent people and wonderful people, teller line most friendly. I have waited at least three years for Becky Tanner to get back to Cameron Village. Now she is here with her wonderful staff and I am happy.” When customers can name the branch manager and they are thrilled to have them in their town, that means a great deal. Here is one from Six Forks: “I have never dealt with a bank like Six Forks; truly remarkable, excellent! I bank at the Six Forks location and am extremely happy with the service I receive from Pat Thibault, Paula and the rest of staff; they make banking there a true pleasure.” This is not something you can express in a brochure; it’s about the people, and the only way that we can differentiate ourselves as a community bank is through service.”

CEOCFOinterviews: Will you tell us about community involvement for the bank?

Mr. Yarber: “The regional president in the Triad is on the school board in Burlington. Our associates in the western part of the state are very active in the Chamber and The United Way, and the same is true for here in the Triangle. We are also involved with the Boy Scouts and Boys & Girls clubs in every region. In addition, we are careful that we lend in all areas of the community. We do low income housing, we are into real estate development, and we participate in business loans across the state - not only because it is the right thing to do, but because it is profitable.”

CEOCFOinterviews: How do you attract new business?

Mr. Yarber: “It is very simple, through our people. We don’t need a great deal of advertising, and I don’t think we have to. We can’t spend the multi-million budget as large banks do, and it is through word of mouth, from our existing customers, that we add new customers. We do call on small and medium size businesses through our commercial loan officers. Our branch managers are very often out every week talking to the businesses in their communities.”

CEOCFOinterviews: Are many of your customers taking advantage of a variety of your services, and how do you get them to use more?

Mr. Yarber: “It is very important as a community bank that if we do a loan, we have the deposit relationship; that is how we fund our bank. We are able to track what our customers have with us, and we target that list on a monthly basis. If they have one product or service with us, we are calling to get the others. We do loans, and some merchant bankcards, but we are not selling insurance, or that sort of thing. We are targeting the core set of banking products and services. The vast majority of our loan customers have their deposit relationship with us as well.”

CEOCFOinterviews: Are there any services you are not offering that you think you need to or that you are looking into?

Mr. Edwards: “We are always looking at where we need to be expanding our business and taking care of the customers we have. Our challenge as a company is, given our size, we do not have vast resources to be able to develop new products and services. We are looking at how we can add value in terms of joint ventures and partnerships or affiliations with different types of companies to allow us to better serve our customers.”

Mr. Yarber: “I would look at investment services as being the piece that we anticipate doing in the near future. We would do a partnership with a firm where we get a portion of the revenue. I do not anticipate that we would get into the insurance business; we are going to be bankers and that means loans, deposits, and investments. I think that the philosophy that our board started out with is try not to be all things to all people. We are not going to be Wal-Mart; we are going to provide that high level of service, and we are going to be excellent at what we do.”

CEOCFOinterviews: How has the bank weathered the interest rate scenario and how do you prepare for what everyone knows will have to be an increase at some point?

Mr. Edwards: “We have weathered the storm reasonably well. I think being a newer banking institution, more of our deposits tend to be in certificates of deposit relationships vs. core transactional type of accounts, and as a result, our interest expense on the deposit side tends to be a little higher than a more established institution. How we have tried to work around interest rates is by positioning the balance sheet to be liquid in nature and more variable in nature on the lending side with a lot of prime based loans. We are not trying to take a lot of interest rate risk on our balance sheet. We have a block of core long term funding that the bank locked into several years ago and obviously, in the last two years of declining interest rates, it has a higher cost than we would like. We would be open to see interest rates rise and be able to deploy those borrowed funds into higher yielding assets. Overall, Grant’s and my focus is to expand our net interest margin, and we are pleased that we seemed to have turned the corner in that aspect and have grown the net interest margin back in the last three quarters.”

Mr. Yarber: “One of the ways we have worked on that is through core deposit growth. It is very important that we focus on core deposit growth as we move forward. We’ve seen margin improvement over the last three quarters, we anticipate as interest rates rise that we will benefit, and we believe our balance sheet is positioned correctly for the future.”

CEOCFOinterviews: Why should potential investors be interested and what should they know that they might not realize when they first look at the company?

Mr. Yarber: “Capital Bank is a good investment and that’s why I’m here. I think we have one of the best franchises in the Southeast. We have excellent bankers in our markets, and they’re all taking care of customers. We are growing and have shown that we can weather through the storms and come out on top. The Triad and certain parts of North Carolina have been hit by manufacturing job declines, and we have still prevailed and done well. Long term, I believe the Triangle is one of the best areas of the country for small and medium size businesses. It is one of the best places to live and work. We still have people moving in from all over the country for the quality of life here. The same thing is true in the western part of the state. We have a management team that is diverse in talent and is strongly committed to the long term success of the bank and to a good return for our shareholders.”

CEOCFOinterviews: What are the challenges going forward for the bank and how are you ready?

Mr. Yarber: “With any community bank it’s going to be growing core deposits and going after that share of the consumer and small business wallet; that’s a challenge. There are regulatory requirements, and all public companies are facing increased audits and increased expense of just doing business day in and day out. I feel very passionate about our ability to tackle all of the challenges and grow this institution. I don’t think there is any challenge out there that we cannot meet and really have an excellent return for our shareholders over the short and long run. I also believe there is intrinsic value in the way we do business. It is very customer centric, very community focused, and there is a huge need for that in the financial services industry. With everyone growing to a gargantuan size, it seems that people that are making decisions are farther and farther away from their customers. We will remain focused on a close relationship with our customers, and that will lead to our long term success.”

CEOCFOinterviews: In closing, what would you like readers to remember about Capital Bank?

Mr. Edwards: “I think the company is at a very exciting position in its life cycle. We talked about how the company grew to its current size, a lot of that growth through acquisition. We had a trying time last summer, and we seemed to have come out of that a better company and more focused on customer needs and what we need to do to continue being successful.”


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