CAPITALSOUTH BANCORP CODE OF ETHICS I. OVERVIEW CapitalSouth Bancorp is committed to the highest standards in all aspects of its business. This Code of Ethics sets forth the guiding principles by which we operate our company and conduct our daily business with our shareholders, customers, vendors and with each other. It does not cover every issue that may arise, but it sets out basic principles to guide all our employees. These principles apply to all of the directors, officers and employees of CapitalSouth Bancorp and all of its subsidiaries (referred to in this Code as the "Company" or "CapitalSouth"). It is the responsibility of each supervisor to ensure that the employees under his or her supervision understand the laws and policies (including this Code) that apply to such employees, to apply such policies fairly and consistently, and to respond appropriately to any inquiries or reports of suspected violations. It is the responsibility of all directors, officers and employees to comply with this Code and all related policies. If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor how to handle the situation. This Code of Ethics is intended to provide guidance inside our Company for the conduct and awareness of potential issues so that we may consistently meet the highest financial industry standards. Those who violate the standards of this Code will be subject to disciplinary action, up to and including termination of employment. This Code of Ethics is administered by our senior management, in consultation, where appropriate, with the Company's Board of Directors. This Code of Ethics does not create any right for employees, customers or any third party to seek to enforce this Code of Ethics independently or base any claim on an alleged violation of this Code of Ethics. The sole redress under this Code of Ethics is for employees, officers and directors to follow the reporting mechanisms set for in Part III. No violation of this Code of Ethics shall be deemed in itself a violation of law or any applicable standard of care in the absence of an independent basis for such a finding; provided that the foregoing shall not restrict or impair in any manner the ability of the Company to take disciplinary measures, including discharge for cause, based on a violation of this Code of Ethics. There are no third party beneficiaries of this Code of Ethics; it is solely for the benefit of the Company and does not create any rights to continued employment or constitute an employment contract. If you are in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section III of this Code. II. PRINCIPLES Complying with Laws, Regulations, Policies and Procedures All directors, officers and employees of the Company are expected to understand, respect and comply with all of the laws, regulations, policies and procedures that apply to them in their position with the Company. It would be impossible to summarize here all the laws, rules and regulations with which the Company and its employees must comply; this Code refers to only a few of them. Any employee with questions about his or her obligations under applicable laws in the United States should seek advice from his or her supervisor. Conflicts of Interest All directors, officers and employees of the Company should be scrupulous in avoiding any action or interest that conflicts or gives the appearance of a conflict with the Company's interests. A "conflict of interest" exists whenever an individual's private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of CapitalSouth. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest may also arise when a director, officer or employee or a member of his or her family receives improper personal benefits as a result of his or her position with the Company, whether from a third party or from the Company. CapitalSouth employees are encouraged to utilize CapitalSouth's products and services, but this should generally be done on an arm's length basis. Transactions involving a conflict of interest are prohibited as a matter of Company policy unless requisite approval in accordance with this policy and applicable law is obtained. Conflicts of interest may not always be clear-cut, so if a question arises, an officer or employee should consult with higher levels of management. Any employee, officer or director who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in the Code of Conduct. Corporate Opportunity Directors, officers and employees owe a duty to CapitalSouth Bancorp to advance the Company's legitimate interests when a business opportunity arises. Directors, officers and employees may not (a) take for themselves personally opportunities that the Company might reasonably be expected to pursue for itself, unless such opportunity has been waived through appropriate authority; (b) use corporate property, information or position for personal gain; and (c) compete with the Company. Confidentiality Directors, officers and employees must maintain the confidentiality of confidential information entrusted to them by CapitalSouth Bancorp or its suppliers or customers, except when disclosure is specifically authorized or required by laws, regulations or legal proceedings or is reasonably necessary to advance the business interests of the company and is not otherwise prohibited by law or is made in accordance with procedures or agreements reasonably calculated to prevent inappropriate dissemination. Confidential information includes all non-public information that might be of use to competitors of CapitalSouth Bancorp or harmful to CapitalSouth Bancorp if disclosed. Confidential information also includes information that our customers have entrusted to us. Outside Employment CapitalSouth Bancorp expects each employee to be fully attentive to the interests of the Company at all times. Accordingly, no officer or employee of CapitalSouth Bancorp may engage in any activity, including outside employment, which places his or her interest, or the interests of other persons or groups, ahead of the best interests of the Company. Outside employment or other interests that could detract from an employee's work performance must be approved in advance by the employee's supervisor. Under no circumstances may an employee compete against CapitalSouth Bancorp. Fair Dealing We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. Wrongfully obtaining proprietary information, possessing or utilizing trade secret information that was obtained without the owner's consent or inducing such disclosures by past or present employees of other companies is prohibited. Each director, officer and employee is expected to deal fairly with the Company's customers, suppliers, competitors, officers and employees. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing. The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. All directors, officers and employees shall comply with the Bank Bribery Act and Conflicts of Interest Policy adopted by each of CapitalSouth Bank and Capital Bank. Company Funds and Property All directors, officers and employees should protect the Company's assets and ensure their efficient use. All Company assets should be used for legitimate business purposes. Each employee is personally accountable for Company funds and property over which he or she has control. No Company funds or other property shall be used for any unlawful purpose, such as to secure special privileges or benefits through the payment of bribes or other illegal payments. Financial Statements and Other Records All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. No false, artificial or deceptive entries may be made in the Company's books and records for any reason. The Company's accounting controls and procedures are prescribed by Company policies. All employees must adhere to the Company's systems of internal accounting and controls, and cooperate with the Company's internal and independent auditors monitoring of the Company's compliance with these internal controls. Our Chief Executive Officer and all our senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by CapitalSouth with the SEC. Accordingly, it is the responsibility of those officers to bring to the attention of the person or persons preparing our periodic reports any material information of which he or she may become aware that affects the disclosures in our public filings. All of our employees, officers and directors shall promptly bring to the attention of the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect our ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in our financial reporting, disclosures or internal controls. Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to email, internal memos and formal reports. Records should always be retained or destroyed according to the Company's record retention policies. Safety and Health Workplace safety and health are paramount concerns and are conditions of employment at the Company. Employees must adhere to applicable health and safety laws and regulations and all related Company policies designed to ensure safe working conditions. Employees are responsible for working safely and are expected to participate actively in training and in identifying and alerting management to potential hazards and unsafe practices. Discrimination and Harassment CapitalSouth is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics and unwelcome sexual advances. Securities and Insider Trading The Company is committed to complying with all federal and state securities laws and regulations. These laws, along with the rules of the Nasdaq Stock Market, impose certain obligations on publicly-held companies and the persons associated with them. It is important that Company employees in no way compromise the position of the Company with the disclosure ("leaking" or "tipping") of non-public information to outsiders or to other employees who do not require the information in the performance of their duties. No employee with knowledge of non-public information should use the information for his or her own benefit. This means that no employee of the Company may trade in Company securities when he or she has knowledge of material inside information. "Material" information is any information that an investor might consider important in deciding whether to buy, sell or hold securities. Examples include financial results, financial forecasts, possible mergers or acquisitions, or major litigation developments. Information is considered to be "non-public" unless it has been adequately disclosed to the public via public filings with securities regulatory authorities or widely-disclosed press releases. III. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR Reporting Illegal or Unethical Behavior Employees, officers and directors who suspect or know of violations of this Code or illegal or unethical business or workplace conduct, including any actual or apparent conflicts of interest, by employees, officers or directors have an obligation to contact their supervisor or superiors. If the individuals to whom such information is conveyed are not responsive, or if there is reason to believe that reporting to such individuals is inappropriate in particular cases, then the employee, officer or director may contact the Chief Financial Officer of the Company. Such communications will be kept confidential to the extent feasible. If the employee is still not satisfied with the response, the employee may contact the Audit Committee of the Board of Directors of the Company. If concerns or complaints require confidentiality, then this confidentiality will be protected to the extent feasible, subject to applicable law. Employees are expected to cooperate in internal investigations of misconduct. Accounting Complaints The Company's policy is to comply with all applicable financial reporting and accounting regulations. If any director, officer or employee of the Company has unresolved concerns or complaints regarding questionable accounting or auditing matters of the Company, then he or she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to the Company's Audit Committee. Subject to its legal duties, the Audit Committee and the Board will treat such submissions confidentially. Such submissions may be directed to the attention of the Audit Committee, or any director who is a member of the Audit Committee, at the Company's principal executive offices. Non - Retaliation The Company prohibits retaliation of any kind against individuals who have made good faith reports or complaints of violations of this Code or other known or suspected illegal or unethical conduct. IV. Amendment, Modification and Waiver This Code may be amended or modified by the Board of Directors of CapitalSouth Bancorp. Waivers of this Code may only be granted for executive officers or directors on the recommendation of the Board of Directors or a committee of the Board with specific delegated authority. Waivers for executive officers or directors will be disclosed to shareholders to the extent required by the Securities Exchange Act of 1934 and the rules thereunder and the applicable rules of the Nasdaq Stock Market.