-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RGBGQgXGkQ6uLYzvWBomYl6gRewMiLyH8yUMw6NhK9rO8xqiNLe1EpzlNnyC7ciF JwfNKpIWXmlGozuFipS6lg== 0001266454-06-000142.txt : 20060329 0001266454-06-000142.hdr.sgml : 20060329 20060329145648 ACCESSION NUMBER: 0001266454-06-000142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060329 DATE AS OF CHANGE: 20060329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY CAPITAL CORP /SC/ CENTRAL INDEX KEY: 0000832847 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 570866395 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18460 FILM NUMBER: 06718330 BUSINESS ADDRESS: STREET 1: 1402 C HIGHWAY 72 CITY: GREENWOOD STATE: SC ZIP: 29649 BUSINESS PHONE: 8649418200 MAIL ADDRESS: STREET 1: 1402 C HIGHWAY 72 CITY: GREENWOOD STATE: SC ZIP: 29649 FORMER COMPANY: FORMER CONFORMED NAME: GREENWOOD NATIONAL BANCORPORATION DATE OF NAME CHANGE: 19920703 10-K 1 ccc_10k-123105.htm ANNUAL REPORT Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005

Commission file number: 0-18460

COMMUNITY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)

South Carolina
57-0866395
(State or other jurisdiction of
incorporation or organization)
  
(I. R. S. Employer
Identification No. )
     
1402-C Highway 72 West
Greenwood, South Carolina
 
29649
(Address of principal executive offices)
  
(Zip Code)
 
Registrant’s telephone number, including area code: (864) 941-8200
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Name of Each Exchange
Title of Each Class
On Which Reported
 
None
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
Common Stock, par value $1.00 per share
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 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 [X] No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large Accelerated Filer [  ]     Accelerated Filer [  ]  Non-Accelerated Filer [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes [X] No

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2005 was approximately $73.4 million based upon the last sale price reported for such date on the American Stock Exchange, which was $22.15 per share.
 
The number of outstanding common shares of the registrant as of March 8, 2006, was 3,758,625.
 
Documents Incorporated By Reference: Portions of the Registrant’s Proxy Statement for its 2006 Annual Meeting of Shareholders are incorporated herein by reference in Part III.

TABLE OF CONTENTS

Item
   Page No. 
     
PART I
     
1.
3
1A.
11
1B.
15
2.
16
3.
16
4.
16
     
PART II
     
5.
  
 
16
6.
19
7.
20
7A.
38
8.
38
9.
38
9A.
38
9B.
40
     
PART III
     
10.
40
11.
40
12.
40
13.
40
14.
40
     
PART IV
     
15.
40
   
41
F-1
E-1
 
Advisory Note Regarding Forward-Looking Statements

A number of the presentations and disclosures in this Form 10-K that are not historical facts, including without limitation statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of us to be materially different from those expressed or implied by the forward-looking statements. Consequently, do not place undue reliance on them. Although we believe that our expectations of future performance are based on reasonable assumptions within the bounds of our knowledge of our business and operations, we have no assurance that actual results will not differ materially from our expectations. We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change. These cautionary statements expressly qualify all forward-looking statements attributable to us.

Factors that could cause actual results to differ from expectations include, among other things: (1) the challenges, costs, and complications associated with: (a) the continued development of our branches, and (b) compliance with the Sarbanes-Oxley Act of 2002, the rules promulgated thereunder, and the related rules promulgated by NASDAQ; (2) the potential that loan charge-offs may exceed the allowance for loan losses or that such allowance will be increased as a result of factors beyond our control; (3) our dependence on senior management; (4) competition from existing financial institutions operating in our market areas as well as the entry into such areas of new competitors with greater resources, broader branch networks, and more comprehensive services; (5) adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions); (6) changes in deposit rates, the net interest margin, and funding sources; (7) inflation, interest rate, market, and monetary fluctuations; (8) risks inherent in making loans including repayment risks and value of collateral; (9) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses; (10) fluctuations in consumer spending and saving habits; (11) the demand for our products and services; (12) technological changes; (13) the challenges and uncertainties in the implementation of our expansion and development strategies; (14) our ability to increase market share; (15) the adequacy of expense projections and estimates of impairment loss; (16) the impact of changes in accounting policies by the Securities and Exchange Commission; (17) unanticipated regulatory or judicial proceedings; (18) the potential negative effects of future legislation affecting financial institutions (including without limitation laws concerning taxes, banking, securities, and insurance); (19) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (20) the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet; (21) the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts; (22) other factors described in this report and in other reports we have filed with the Securities and Exchange Commission; and (23) our success at managing the risks involved in the foregoing.

PART I
 
ITEM 1. BUSINESS.
 
General
 
Community Capital Corporation is a bank holding company headquartered in Greenwood, South Carolina. We incorporated under the laws of the State of South Carolina on April 8, 1988 as a holding company for Greenwood National Bank, which opened in 1989.
 
We were formed principally in response to perceived opportunities resulting from takeovers of several South Carolina-based banks by large southeastern regional bank holding companies. In many cases, when these consolidations occur, local boards of directors are dissolved, and local management is relocated or terminated. We believe this situation creates favorable opportunities for new community banks with local management and local directors. Management believes that such banks can be successful in attracting individuals and small to medium-sized businesses as customers who wish to conduct business with a locally owned and managed institution that demonstrates an active interest in their business and personal financial affairs.
 
In 1994, we made the strategic decision to expand beyond the Greenwood County area by creating an organization of independently managed community banks that serve their respective local markets, but which share a common vision and benefit from the strength, resources and economies of a larger institution. In 1995, we opened Clemson Bank & Trust in Clemson, South Carolina. In 1997, we opened Community Bank & Trust in Barnwell, South Carolina, TheBank in Belton, South Carolina, and Mid State Bank in Newberry, South Carolina. During 2000, each of these five community banks operated as a wholly-owned subsidiary of the Company and engaged in a general commercial banking business, emphasizing the banking needs of individuals and small to medium-sized businesses in each bank’s primary service area. Each of the five community banks was a state chartered Federal Reserve member bank. On January 1, 2001, we merged the five community banks into one bank known as CapitalBank.
 
As of March 4, 2004, we were the survivor of a merger between us and Abbeville Capital Corporation, a South Carolina corporation and the holding company for The Bank of Abbeville, a South Carolina corporation. Immediately following the merger with Abbeville Capital Corporation, we merged The Bank of Abbeville with and into CapitalBank.
 
Market Areas
 
At December 31, 2005, CapitalBank had banking locations in Greenwood, Abbeville, Clemson, Calhoun Falls, Prosperity, Clinton, Belton, Greer, Greenville, Honea Path, Anderson, Newberry, and Saluda, South Carolina.
 
The following table sets forth certain information concerning CapitalBank at December 31, 2005:

   
Number of
Locations
  
Total
    Assets  
  
Total
    Loans   
  
Total
  Deposits
 
       
(Dollars in thousands)
  
CapitalBank
    
16
  
$
598,790
  
$
465,892
  
$
433,646
  

CapitalBank offers a full range of commercial banking services, including checking and savings accounts, NOW accounts, IRA accounts, HSA accounts and other savings and time deposits of various types ranging from money markets to long-term certificates of deposit. CapitalBank also offers a full range of consumer credit and short-term and intermediate-term commercial and personal loans. CapitalBank conducts residential mortgage loan origination activities pursuant to which mortgage loans are sold to investors in the secondary markets. CapitalBank does not retain servicing of such loans.
 
CapitalBank also offers trust and related fiduciary services. Discount securities brokerage services are available through a third-party brokerage service that has contracted with CapitalBank.
 
Lending Activities
 
General. Through CapitalBank, we offer a range of lending services, including real estate, consumer, and commercial loans, to individuals and small business and other organizations that are located in or conduct a substantial portion of their business in CapitalBank’s market areas. Our total loans at December 31, 2005, totaled $465.9 million, or 85.93% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, availability of funds, and government regulations. We have no foreign loans or loans for highly leveraged transactions.
 
Our primary focus has been on commercial and installment lending to individuals and small to medium-sized businesses in its market areas, as well as residential mortgage loans. These loans totaled approximately $235.6 million, and constituted approximately 50.57% of our loan portfolio, at December 31, 2005.
 
The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2005.
Loan Composition
 
(Dollars in thousands)
 
   
December 31, 
  
   
2005
  
2004
  
2003
  
2002
  
   2001
  
Commercial, financial and agricultural
    
8.20
%
  
10.62
%
  
9.57
%
  
10.42
%
  
13.26
%
Real estate:
                                
Construction
    
22.90
    
11.33
    
4.98
    
4.52
    
5.26
  
Mortgage:
                                
Residential
    
37.50
    
41.94
    
51.96
    
53.41
    
49.25
  
Commercial (1)
    
26.53
    
30.29
    
27.22
    
25.48
    
23.58
  
Consumer and other
    
4.87
    
5.82
    
6.28
    
6.17
    
8.65
  
Total loans
    
100.00
%
  
100.00
%
  
100.00
%
  
100.00
%
  
100.00
%
                                 
Total loans (dollars)
  
$
465,892
  
$
425,628
  
$
326,178
  
$
288,842
  
$
248,390
  
 
(1) The majority of these loans are made to operating businesses where real property has been taken as additional collateral.
 
Loan Approval. Certain credit risks are inherent in the loan making process. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. We attempt to minimize loan losses through various means and use standardized underwriting criteria. During 2005, these means included the use of policies and procedures that impose officer and customer lending limits and require loans in excess of certain limits to be approved by the Board of Directors of CapitalBank.
 
Loan Review. We have a continuous loan review process designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of reviewing all past due loans in their respective portfolios. CapitalBank establishes watch lists of potential problem loans.
 
Deposits
 
The principal sources of funds for CapitalBank are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, saving deposits, and certificates of deposit. Transaction accounts include checking and negotiable order of withdrawal (NOW) accounts that customers use for cash management and that provide CapitalBank with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable source of funding. The largest source of funds for CapitalBank is certificates of deposit. Primarily customers in CapitalBank’s market areas hold certificates of deposit less than $100,000. Senior management of CapitalBank sets deposit rates weekly. Management believes that the rates CapitalBank offers are competitive with other institutions in CapitalBank’s market areas.
 
Competition
 
CapitalBank generally competes with other financial institutions through the selection of banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. South Carolina law permits statewide branching by banks and savings institutions, and many financial institutions in the state have branch networks. Consequently, commercial banking in South Carolina is highly competitive. South Carolina law also permits interstate banking whereby out-of-state banks and bank holding companies are allowed to acquire and merge with South Carolina banks and bank holding companies, as long as the South Carolina State Board of Financial Institutions gives prior approval for the acquisition or merger. Many large banking organizations currently operate in the market areas of CapitalBank, several of which are controlled by out-of-state ownership. In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded powers and increased activity of thrift institutions in areas of banking that previously had been the sole domain of commercial banks. See “Government Supervision and Regulation.”
CapitalBank faces increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit unions, consumer finance companies, insurance companies and other institutions in CapitalBank’s market areas. Some of these competitors are not subject to the same degree of regulation and restriction imposed upon CapitalBank. Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than CapitalBank and offer certain services that CapitalBank does not currently provide. In addition, many of these competitors have numerous branch offices located throughout the extended market areas of CapitalBank that we believe may provide these competitors with an advantage in geographic convenience that CapitalBank does not have at present. Such competitors may also be in a position to make more effective use of media advertising, support services, and electronic technology than can CapitalBank.
 
Employees
 
Including the employees of CapitalBank, we currently have in the aggregate 180 full-time employees and 20 part-time employees.
 
Government Supervision and Regulation
 
General
 
We, along with CapitalBank, are subject to an extensive collection of state and federal banking laws and regulations that impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of our operations. These regulations are generally intended to provide protections for depositors and borrowers of CapitalBank, rather than for our shareholders. Each of the entities is also affected by government monetary policy and by regulatory measures affecting the banking industry in general. The actions of the Federal Reserve System affect the money supply and, in general, the lending abilities of CapitalBank because decisions relating to money supply increase or decrease the cost and availability of funds to the banks. Additionally, the Federal Reserve System regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in the reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.
 
The following discussion sets forth some of the regulatory requirements applicable to bank holding companies and banks and provides certain specific information related to CapitalBank and us. These summaries are qualified in their entirety by reference to the applicable statutes and regulations and are not intended to be an exhaustive description of the statutes or regulations applicable to our and CapitalBank’s business. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of all four entities.
 
Bank Holding Company Regulation Generally
 
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and the South Carolina Banking and Branching Efficiency Act of 1996, as amended. As a bank holding company subject to such Acts, we are required to register with the Board of Governors of the Federal Reserve System and the South Carolina State Board of Financial Institutions. We must also file with both agencies annual reports and other information regarding our respective business operations and those of CapitalBank. We are also subject to periodic examinations by these agencies. The regulatory requirements to which we are subject also set forth various conditions regarding the eligibility and qualifications of our directors and officers.
 
The Federal Reserve Board, pursuant to regulation and published policy statements, has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve Board policy, we may be required to provide financial support to a subsidiary bank at a time when, absent such Federal Reserve Board policy, we may not deem it advisable to provide such assistance. Under Federal Bank Holding Company Act of 1956, as amended, the Federal Reserve Board may also require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve Board’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
The Bank Holding Company Act also limits the types of businesses and operations in which a bank holding company and its subsidiaries, other than banking subsidiaries, may engage. In general, permissible activities are limited to the business of banking and activities found by the Federal Reserve Board to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve Board considers whether the performance of an activity can reasonably be expected to produce benefits to the public (such as greater convenience, increased competition, or gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). For example, the Federal Reserve Board has deemed permissible: making, acquiring, or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions by the bank holding company; and certain limited insurance underwriting activities.
 
Generally, bank holding companies must obtain prior approval of the Federal Reserve Board to engage in any new activity not previously approved by the Federal Reserve Board. However, despite prior approval, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or terminate its ownership or control of a subsidiary, when the Federal Reserve Board has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding company.
 
Interstate and Intrastate Banking and Branching
 
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in any state are permitted, with Federal Reserve Board approval, to acquire banking organizations in any other state. As such, all existing regional compacts and substantially all regional limitations on interstate acquisitions of banking organizations have been eliminated. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 also removed substantially all of the existing prohibitions on interstate branching by banks. A bank operating in any state is now entitled to establish one or more branches within any other state without, as formerly required, the establishment of a separate banking structure within the other state.
 
The South Carolina Banking and Branching Efficiency Act of 1996, as amended, permits the acquisition of South Carolina banks and bank holding companies by, and mergers with, out-of-state banks and bank holding companies with the prior approval of the South Carolina State Board of Financial Institutions. The South Carolina Banking and Branching Efficiency Act of 1996, as amended also permits South Carolina state banks, with prior approval of the South Carolina State Board of Financial Institutions, to operate branches outside the State of South Carolina.
 
Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the South Carolina Banking and Branching Efficiency Act of 1996 have the potential to increase the number of competitors in the marketplace of CapitalBank, we cannot predict the actual impact of such legislation on the competitive positions of such banks.
 
Gramm-Leach Bliley Act
 
The Gramm-Leach-Bliley Act (popularly referred to as the Financial Services Modernization Act of 1999 prior to enactment) became effective March 11, 2000. The Gramm-Leach-Bliley Act accomplished a variety of purposes, including facilitating the affiliation among banks, securities firms, and insurance companies and providing privacy protections for customers. Specifically, the Gramm-Leach-Bliley Act (a) amends the Banking Act of 1933 (the Glass-Steagall Act) to repeal the prohibitions against affiliation of any Federal Reserve member bank, such as CapitalBank, with an entity engaged principally in securities activities, and to repeal the prohibitions against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank; (b) amends the Federal Bank Holding Company Act of 1956, as amended, to permit bank holding companies to own shares in non-banking organizations whose activities have been determined by the Federal Reserve System to be permissible for bank holding companies; (c) creates a new type of bank, wholesale financial institutions (also referred to as “woofies”), that are regulated by the Federal Bank Holding Company Act of 1956, as amended, and are not able to accept insured deposits, potentially giving holding companies with woofies greater flexibility to engage in non-financial investments; (d) subject to specified exemptions, pre-empts state anti-affiliation laws restricting transactions among insured depository institutions, wholesale financial institutions, insurance concerns, and national banks; (e) amends the Federal Bank Holding Company Act of 1956, as amended, and the Federal Deposit Insurance Act to mandate public meetings concerning proposed large bank mergers and acquisitions; (f) amends the Electronic Fund Transfer Act to mandate certain fee disclosures related to electronic fund transfer services; and (g) imposes certain obligations on financial institutions to protect the privacy and confidentiality of customer nonpublic personal information, including the requirements that financial institutions establish standards for safeguards to protect privacy and confidentiality, provide the standards to customers at the time of establishing the customer relationship and annually during the continuation of the relationship, condition disclosure of the private information to nonaffiliated third parties on the giving of specific disclosures to consumers, and giving consumers the opportunity to prevent such disclosure to third parties.
Although the Gramm-Leach-Bliley Act has the potential to mix commerce and banking and increase our abilities to diversify into a variety of areas, we cannot predict the actual impact of such legislation on us.
 
Sarbanes-Oxley Act of 2002
 
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. It mandated sweeping reforms and implemented a number of requirements for public companies. Among the reforms and new requirements are the following:
 
·
Creation of the Public Company Accounting Oversight Board to oversee audits of public companies.
 
·
Implementation of a variety of requirements designed to ensure greater auditor independence, including the prohibition of certain services that auditors had traditionally provided to clients.
 
·
Implementation of a variety of requirements regarding audit committees, including that they be entirely independent; that they establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and that issuers disclose whether at least one member of the committee is a “financial expert.”
 
·
Requirement that changes in equity ownership by directors, officers, and 10% stockholders be reported more promptly, generally by the end of the second business day following the trade (subject to limited exceptions).
 
·
Requirement that CEOs and CFOs certify that the financial information in each annual and quarterly report fairly presents in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report, and establish and maintain internal controls designed to ensure discovery of material information.
 
·
Implementation of rules relating to disclosure of all material off-balance sheet transactions and obligations and regarding the presentation of pro-forma financial information in any press release or other public disclosure that was “non-GAAP.”
 
·
Requirement that issuers disclose whether they have adopted a code of ethics for senior executives and any waivers or changes in the code.
 
·
Requirement that CEOs and CFOs disgorge incentive compensation and profits from their sales of company securities after restatement of financial information.
 
·
Prohibition against directors and executive officers from transacting in company equity securities received in connection with employment during any pension fund blackout of such equity.
 
·
Requirement that SEC review each issuer’s periodic reports at least once every three years.
 
·
Acceleration of the time schedule during which Forms 10-K and 10-Q and 8-K must be filed for certain issuers and expansion of the items reportable under Form 8-K.
 
·
Issuance of new requirements regarding the obligations of attorneys to report evidence of a material violation of securities law or breach of fiduciary duty to the issuer’s chief legal counsel or chief executive officer and ultimately to the Board of Directors.
 
·
Adoption of new rules regarding statutes of limitation and penalties with respect to securities law violations.
Though the Sarbanes-Oxley Act will have a meaningful impact on our operations, we do not believe that we will be affected by Sarbanes-Oxley in ways that are materially different or more onerous than other public companies of similar size and nature.
 
FIRREA
 
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 established two insurance funds under the jurisdiction of the FDIC: the Savings Association Fund and the Bank Insurance Fund. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 also imposed, with certain exceptions, a “cross guaranty” on the part of commonly controlled depository institutions such as CapitalBank. Under this provision, if one depository institution subsidiary of a multi-bank holding company fails or requires FDIC assistance, the FDIC may assess a commonly controlled depository institution for the estimated losses suffered by the FDIC. The FDIC’s claim is junior to the claims of nonaffiliated depositors, holders of secured liabilities, general creditors, and subordinated creditors, but is superior to the claims of shareholders.
 
Limitations on Acquisitions of Common Stock
 
The federal Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company or bank unless the appropriate federal bank regulator has been given 60 days prior written notice of such proposed acquisition and within that time period such regulator has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. The acquisition of 25% or more of any class of voting securities constitutes the acquisition of control under the CBCA. In addition, under a rebuttal presumption established under the CBCA regulations, the acquisition of 10% or more of a class of voting stock of a bank holding company or a FDIC insured bank, with a class of securities registered under or subject to the requirements of Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control.
 
Any “company” would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of our outstanding common stock of, or such lesser number of shares as constitutes control. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company.
 
Bank Secrecy Act
 
The Bank Secrecy Act requires financial institutions to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax and regulatory matters, and to implement counter-money laundering programs and compliance procedures.
 
USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
 
Reserve Requirement
 
CapitalBank is a member of the Federal Deposit Insurance Corporation, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor through its Bank Insurance Fund. For this depositor protection, each bank pays a semi-annual statutory assessment and is subject to the rules and regulations of the Federal Deposit Insurance Corporation. The federal banking laws require all insured banks, including CapitalBank, to maintain reserves against their checking and transaction accounts (primarily checking accounts, NOW and Super NOW checking accounts). Because reserves must generally be maintained in cash or in non-interest bearing accounts, the effect of the reserve requirements is to increase the respective bank’s cost of funds.
Loan Restrictions
 
CapitalBank is also subject to Section 23A of the Federal Reserve Act, which places limits on the amount of loans or extensions of credit to, investments in or certain other transactions with affiliates. In addition, limits are placed on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Most of these loans and certain other transactions must be secured in prescribed amounts.
 
CapitalBank is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in transactions (including extensions of credit) with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.
 
In addition, CapitalBank may not engage in certain “tie-in” or “tying” arrangements in connection with any extension of credit or the providing of any property or service. Tying is generally defined as any arrangement in which a bank requires a customer who wants one service, such as credit, to buy other products or services from the bank or its affiliates as a condition of receiving the first service.
 
Restrictions on the Payment of Dividends
 
We depend primarily on dividends from CapitalBank for cash flow to pay dividends to our shareholders. State and federal statutes and regulations limit the payment of dividends by CapitalBank, as well as the payment of dividends by us to our shareholders. For example, South Carolina state business corporation law requires that dividends may be paid only if such payment would not render the companies insolvent or unable to meet their obligations as they come due. Additionally, all dividends of the state subsidiary banks must be paid out of the respective undivided profits then on hand, after deducting expenses, including losses and bad debts. As a member of the Federal Reserve System, CapitalBank may not declare a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of their respective net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). CapitalBank must obtain the approval of the Federal Reserve Board if the total of all dividends declared by it in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. The payment of dividends also may be affected or limited by other federal and state regulatory restrictions and factors, such as the requirement to maintain adequate capital in accordance with other state and federal regulatory guidelines.
 
Capital Adequacy
 
The Federal Deposit Insurance Corporation Improvement Act required federal banking agencies to broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital and related requirements and to take such actions promptly in order to minimize losses to the Federal Deposit Insurance Corporation. In connection with this Act, federal banking agencies established capital measures (including both a leverage measure and a risk-based capital measure) and specified for each capital measure the levels at which depository institutions will be considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. If an institution becomes classified as undercapitalized, the appropriate federal banking agency will require the institution to submit an acceptable capital restoration plan and can suspend or greatly limit the institution’s ability to effect numerous actions including capital distributions, acquisitions of assets, the establishment of new branches, and the entry into new lines of business.
 
Specifically, bank regulators assign a risk weight to each category of assets based generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset balances to determine a “risk-weighted” asset base. The minimum ratio of total risk-based capital to risk-weighted assets is 8.0%. At least half of the risk-based capital must consist of Tier 1 capital, which is comprised of common equity, retained earnings, and certain types of preferred stock and excludes goodwill and various intangible assets. The remainder, or Tier 2 capital, may consist of a limited amount of subordinated debt, certain hybrid capital instruments, and other debt securities, preferred stock, and an allowance for loan losses not to exceed 1.25% of risk-weighted assets. The leverage ratio is a company’s Tier 1 capital divided by its adjusted total assets. The leverage ratio requires a 3.0% Tier 1 capital to adjusted average asset ratio for institutions with the highest regulatory rating of 1. All other institutions must maintain a leverage ratio of 4.0% to 5.0%.
As of December 31, 2005, CapitalBank and we exceeded our respective fully phased-in minimum requirements.
 
Other Regulations
 
Our status as a registered bank holding company under the Bank Holding Company Act does not exempt us from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. Each of the entities is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offer and sale of their respective securities. Interest and certain other charges collected or contracted for by the subsidiary banks are also subject to state usury laws and certain federal laws concerning interest rates.
 
The loan operations of CapitalBank are subject to certain federal laws applicable to credit transactions, such as: the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Community Reinvestment Act of 1977, requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; the Fair Housing Act, prohibiting discriminatory practices relative to real estate-related transactions, including the financing of housing; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
 
The deposit operations of CapitalBank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; the Truth in Savings Act, requiring depository institutions to disclose the terms of deposit accounts to consumers; and the Expedited Funds Availability Act, requiring financial institutions to make deposited funds available according to specified time schedules and to disclose funds.
 
Enforcement Authority
 
The Federal Reserve Board has enforcement authority over bank holding companies and non-banking subsidiaries to forestall activities that represent unsafe or unsound practices or constitute violations of law. It may exercise these powers by issuing cease-and-desist orders or through other actions. The Federal Reserve Board may also assess civil penalties against companies or individuals who violate the Bank Holding Company Act or related regulations in amounts up to $1 million for each day’s violation. The Federal Reserve Board can also require a bank holding company to divest ownership or control of a non-banking subsidiary or require such subsidiary to terminate its non-banking activities. Certain violations may also result in criminal penalties.
 
The Federal Deposit Insurance Corporation possesses comparable authority under the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation Improvement Act, and other statutes. In addition, the Federal Deposit Insurance Corporation can terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is in an unsafe and unsound condition to continue operations, or has violated any applicable law, regulation, rule, or order of, or condition imposed by, the appropriate supervisors.
 
ITEM 1A. RISK FACTORS.
 
Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods. 
We are geographically concentrated in the upstate region of South Carolina, and changes in local economic conditions impact our profitability. 
 
We operate primarily in the upstate region of South Carolina and substantially all our loan customers and most of our deposit and other customers live or have operations in that area of South Carolina. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in that region, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.
 
We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.
 
If our loan customers do not pay us as they have contracted to, we may experience losses.
 
Our principal revenue producing business is making loans. If our customers do not repay the loans, we will suffer losses. Even though we maintain an allowance for loan losses, the amount of the allowance may not be adequate to cover the losses we experience. We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless, there is risk that our credit evaluation will prove to be inaccurate due to changed circumstances or otherwise.
 
Fluctuations in interest rates could reduce our profitability. 
 
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 rate fluctuations are caused by many factors which, for the most part, are not under our direct control. For example, national monetary policy plays a significant role in the determination of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with our customers also impact the rates we collect on loans and the rates we pay on deposits.
 
As interest rates change, we expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, and our earnings may be negatively affected.
 
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 affect our earnings. A decline in the market value of our assets may limit our ability to borrow additional funds. As a result, we could be required to sell some of our loans and investments under adverse market conditions, upon terms that are not favorable to us, in order to maintain our liquidity. If those sales are made at prices lower than the amortized costs of the investments, we will incur losses.
 
Changes in interest rates can have differing effects on our volume of mortgage loans originated.

In periods of declining interest rates, demand for mortgage loans typically increases, particularly for mortgage loans related to refinancing of existing loans. The refinancing of existing loans currently comprises approximately 36.67% of our loan volume. In periods of rising interest rates, such as have occurred recently, demand for mortgage loans typically declines. Our income from our mortgage banking division would significantly decrease following a decline in demand for mortgage loans in South Carolina, which is the area in which we originate our mortgage loans.
The banking industry is highly competitive.

The banking industry in our market area is highly competitive. We compete with many different financial and financial service institutions, including:

•
other commercial and savings banks and savings and loan associations;
•
credit unions;
•
finance companies;
•
mortgage companies;
•
brokerage and investment banking firms; and
•
asset-based non-bank lenders.

A substantial number of the commercial banks in our market area are branches or subsidiaries of much larger organizations affiliated with statewide, regional, or national banking companies, and as a result may have greater resources and lower cost of funds. Additionally, we face competition from de novo community banks, including those with senior management who were previously with other local banks or those controlled by investor groups with strong local business and community ties. These competitors aggressively solicit customers within their market area by advertising through direct mail, the electronic media, and other means. Many of these competitors have been in business longer, and are substantially larger, than us. These competitors may offer services, such as international banking services, that we can offer only through correspondents, if at all. Additionally, larger competitors have greater capital resources and, consequently, higher lending limits.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
 
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the South Carolina community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of our Chief Executive Officer, William G. Stevens, who has expertise in community banking and experience in the markets we serve and have targeted for future expansion. We are also dependent upon a number of other key executives who are integral to implementing our business plan. The loss of the services of any one of our senior executive management team or other key executives could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our growth strategy will require future increases in capital that we may not be able to accomplish.

We are required by banking regulators to maintain various ratios of capital to assets. As our assets grow, we expect our capital ratios to decline unless we can increase our earnings or raise new capital sufficiently to keep pace with asset growth. If we are unable to limit a capital ratio decline by increasing our capital, we will have to restrict our asset growth as we approach the minimum required capital to asset ratios.

Provisions in our articles of incorporation and South Carolina law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price for our stock.

Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore of making the removal of incumbent management difficult. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions. In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.
We are subject to governmental regulation which could change and increase our cost of doing business or have an adverse effect on our business.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Our compliance with the requirements of these agencies is costly and may limit our growth and restrict certain of our activities, including, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and locations of offices. We are also subject to capitalization guidelines established by federal authorities and our failure to meet those guidelines could result, in an extreme case, in our bank’s being placed in receivership. Supervision, regulation and examination of banks and bank holding companies by financial institution regulatory agencies are intended for the protection of depositors and our other customers rather than the holders of our common stock.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business or 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.

Changes in accounting standards could impact reported earnings.
 
The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
 
We are susceptible to changes in monetary policy and other economic factors which may adversely affect our ability to operate profitably.

Changes in governmental, economic and monetary policies may affect the ability of our bank to attract deposits and make loans. The rates of interest payable on deposits and chargeable on loans are affected by governmental regulation and fiscal policy as well as by national, state and loan economic conditions. All of these matters are outside of our control and affect our ability to operate profitably.

The preparation of our financial statements requires the use of estimates that may vary from actual results.
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for credit losses. Due to the inherent nature of this estimate, we cannot provide absolute assurance that we will not significantly increase the allowance for credit losses that are significantly higher than the provided allowance. For more information on the sensitivity of this estimate, refer to the Critical Accounting Policies section.

We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business and we may not be able to obtain substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted.
 
We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations.

External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or “bird flu,” and resulting political and social turmoil could cause unforeseen damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be adversely affected.

Litigation Risk

From time to time, we are subject to claims and litigation from customers and other individuals. Whether such claims and legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of us and our products and services. Any financial liability or reputation damage could have a material adverse effect on our business and financial performance.

Even though our common stock is currently traded on the Nasdaq Stock Market’s National Market, it has less liquidity than the average stock quoted on a national securities exchange.

The trading volume in our common stock on the Nasdaq National Market has been relatively low when compared with larger companies listed on the Nasdaq National Market or the stock exchanges. As a result, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. We also cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of 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 future ability to raise capital through sales of our common stock. 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.

Our common stock is not insured, so you could lose your total investment.

Our common stock is not a deposit or savings account, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. Should our business fail, you could lose your total investment.

 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
There are no comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act that remain unresolved.
ITEM 2. PROPERTIES.
 
We operate out of an approximately 3,000 square foot building located on approximately one acre of land leased from a third party in Greenwood, South Carolina. At December 31, 2005, CapitalBank operated fifteen full service branches and one drive-thru facility in South Carolina, three of which are located in Greenwood, two of which are located in Abbeville, and one of which is located in each of Anderson, Newberry, Belton, Greenville, Greer, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls. Of CapitalBank’s branches, thirteen are located on land owned by CapitalBank, two are located on land owned by us and leased to CapitalBank, and one is located on land CapitalBank leases from one of our former directors. We believe that all of our properties are well maintained and are suitable for their respective present needs and operations.
 
ITEM 3. LEGAL PROCEEDINGS.
 
CapitalBank and we are parties to legal proceedings that have arisen in the ordinary course of our respective businesses. None of these proceedings is expected to have a material effect on our consolidated financial condition. 
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None.
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is traded publicly on the Nasdaq National Market under the symbol “CPBK” since January 27, 2006. Prior to that time, our common stock was listed for trading on the American Stock Exchange under the symbol “CYL”. The following table reflects the high and low sales price per share for our common stock reported on the American Stock Exchange for the periods indicated.

Year
  
    Quarter
  
High
  
Low
  
                     
2005
    
Fourth
  
$
23.99
  
$
21.70
  
     
Third
    
24.00
   
21.90
  
     
Second
    
23.42
   
20.90
  
     
First
    
24.00
   
22.75
  
                     
2004
    
Fourth
  
$
24.25
  
$
22.40
  
     
Third
    
23.40
   
19.30
  
     
Second
    
22.75
   
20.20
  
     
First
    
23.40
   
19.70
  
 
The closing price of our common shares as reported by Nasdaq on March 8, 2006 was $23.25 per share. As of March 8, 2006, there were 3,758,625 shares of our common stock outstanding held by approximately 1,490 shareholders of record. We did not sell any of our equity securities during fiscal year 2005 that were not registered under the Securities Act of 1933, as amended.
 
Until September 17, 2001, we had not declared or distributed any cash dividends to our shareholders since our organization in 1988. From and since that time, we have paid cash dividends to our shareholders on a quarterly basis. The following table reflects the declaration date, the payment date, and the payment amount of cash dividends per share for the two most recent fiscal years.
16

Year
  
Declaration Date
  
Payment Date
  
Payment Amount
             
2005
  
January 19
  
March 4
  
$0.15
   
April 20
  
June 3
  
$0.15
   
July 18
  
September 2
  
$0.15
   
October 19
  
December 2
  
$0.15
   
November 9
  
December 7
  
$0.15
             
2004
  
January 21
  
March 5
  
$0.12
   
April 22
  
June 4
  
$0.13
   
July 21
  
September 3
  
$0.13
   
October 20
  
December 3
  
$0.13
 
Our Board of Directors expects comparable dividends to be paid to our shareholders for the foreseeable future. Notwithstanding the foregoing, our future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Our ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to us. As a state bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay. In particular, CapitalBank may require approval of the South Carolina State Board of Financial Institutions prior to paying dividends to us. Furthermore, neither we nor CapitalBank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business. See “Government Supervision and Regulation — Restriction on the Payment of Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Form 10-K, and Note 17 to our accompanying financial statements.
 
Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2005, certain information relating to our compensation plans (including individual compensation arrangements) under which grants of options, restricted stock, or other rights to acquire our common stock may be granted from time to time.
 
Plan Category (1)
  
Number of shares of our common stock to be issued upon exercise of outstanding options, warrants, and rights
  
Weighted-average exercise price of outstanding options, warrants, and rights
  
Number of shares of our common stock remaining available for future issuance under equity compensation plans (excluding shares of our common stock reflected in column (a))
 
   
(a)
  
(b)
  
(c)
  
Equity compensation plans approved by security holders
    
174,630
  
 
$14.16
    
184,400
  
                     
Equity compensation plans not approved by security holders
    
-0-
  
 
$0
    
-0-
  
                     
Total
    
174,630
  
 
$14.16
    
184,400
  
 
(1) Disclosures are provided with respect to any compensation plan and individual compensation arrangement of us or of our subsidiaries or affiliates under which our common stock are authorized for issuance to employees or non-employees (such as directors, consultants, advisors, vendors, customers, suppliers, or lenders) in exchange for consideration in the form of goods or services as described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Issuer Purchases of Equity Securities
 
The following table provides information with respect to any purchase made by us or on our behalf or any “affiliated purchaser”, as defined in 17 C.F.R. § 240.10b-18(a)(3), of shares of any class of our equity securities that is registered by us pursuant to section 12 of the Exchange Act:
 
 
Period
  
 
Total Number of Shares Purchased
  
 
Average Price
Paid per Share 
  
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
  
Maximum Number (or Appropriate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs
                 
October 1, 2005 to October 31, 2005
  
35,150
  
$23.80
  
35,150
  
109,900
                 
November 1, 2005 to November 30, 2005
  
4,325
  
$23.38
  
4,325
  
105,575
                 
December 1, 2005 to December 31, 2005
  
2,480
  
$22.70
  
2,480
  
103,095
                 
Total
  
41,955
  
$23.69
  
41,955
  
103,095

 
ITEM 6. SELECTED FINANCIAL DATA
 
Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2005 are derived from our consolidated financial statements and other data. The selected consolidated financial data should be read in conjunction with our consolidated financial statements, including the accompanying notes, included elsewhere herein.
 
Year Ended December 31,
 
2005
  
2004
  
2003
  
2002
  
2001
  
(Dollars in thousands, except per share)
                      
Income Statement Data:
                               
Interest income
 
$
30,878
  
$
25,408
  
$
21,031
  
$
22,204
  
$
26,961
  
Interest expense
   
10,958
   
6,562
   
6,455
   
7,793
   
13,675
  
Net interest income
   
19,920
   
18,846
   
14,576
   
14,411
   
13,286
  
Provision for loan losses
   
825
   
1,200
   
479
   
773
   
1,920
  
Net interest income after provision
                               
for loan losses
   
19,095
   
17,646
   
14,097
   
13,638
   
11,366
  
Net securities gains
   
1,026
   
5
   
1,716
   
106
   
290
  
Noninterest income
   
6,301
   
5,602
   
5,385
   
4,433
   
9,824
  
Noninterest expense
   
16,849
   
15,854
   
14,533
   
11,892
   
15,102
  
Income before income taxes
   
9,573
   
7,399
   
6,665
   
6,285
   
6,378
  
Income tax expense
   
2,479
   
1,599
   
1,663
   
1,683
   
1,900
  
Net income
 
$
7,094
  
$
5,800
  
$
5,002
  
$
4,602
  
$
4,478
  
Balance Sheet Data:
                               
Assets
 
$
598,790
  
$
549,086
  
$
412,759
  
$
380,765
  
$
340,682
  
Earning assets
   
542,199
   
504,151
   
372,620
   
347,377
   
314,769
  
Securities (1)
   
75,887
   
77,596
   
45,898
   
55,812
   
62,806
  
Loans (2)
   
466,281
   
426,884
   
326,452
   
291,526
   
251,947
  
Allowance for loan losses
   
6,324
   
5,808
   
4,584
   
4,282
   
4,103
  
Deposits
   
433,646
   
380,357
   
314,273
   
276,561
   
258,330
  
Federal Home Loan Bank advances
   
57,225
   
66,325
   
30,425
   
31,140
   
31,270
  
Shareholders' equity
   
54,505
   
55,103
   
45,533
   
44,408
   
39,273
  
Per Share Data (3):
                               
Basic earnings per share
 
$
1.87
  
$
1.52
  
$
1.43
  
$
1.34
  
$
1.31
  
Diluted earnings per share
   
1.82
   
1.47
   
1.36
   
1.26
   
1.26
  
Book value (period end) (4)
   
14.63
   
14.39
   
13.11
   
12.71
   
11.66
  
Tangible book value (period end) (4)
   
11.70
   
11.49
   
12.06
   
11.57
   
10.37
  
Cash dividends per share
   
0.75
   
0.51
   
0.33
   
0.17
   
0.06
  
Performance Ratios:
                               
Return on average assets
   
1.24
%
  
1.13
%
  
1.35
%
  
1.28
%
  
1.19
%
Return on average equity
   
12.74
   
10.90
   
11.32
   
11.11
   
11.68
  
Net interest margin (5)
   
3.94
   
4.18
   
4.17
   
4.50
   
4.08
  
Efficiency (6)
   
63.17
   
63.38
   
64.28
   
61.45
   
72.71
  
Allowance for loan losses to loans
   
1.36
   
1.36
   
1.40
   
1.48
   
1.65
  
Net charge-offs to average loans
   
0.07
   
0.10
   
0.05
   
0.22
   
0.34
  
Nonperforming assets to period end loans (2)(7)
    
0.48
   
0.52
   
0.59
   
0.71
   
0.69
  
Capital and Liquidity Ratios:
                               
Average equity to average assets
   
9.77
   
10.38
   
11.17
   
11.71
   
10.22
  
Leverage (4.00% required minimum)
   
7.68
   
8.05
   
10.38
   
10.59
   
10.21
  
Tier 1 risk-based capital ratio
   
9.24
   
10.43
   
13.42
   
14.16
   
14.26
  
Total risk-based capital ratio
   
10.49
   
11.68
   
14.68
   
15.41
   
15.53
  
Average loans to average deposits
   
101.75
   
104.69
   
104.95
   
103.86
   
90.03
  
 
(1)
Securities held-to-maturity are stated at amortized cost, securities available-for-sale are stated at fair value, and nonmarketable equity securities are stated at cost.
(2)
Loans are stated before the allowance for loan losses and include loans held for sale.
(3)
All share and per-share data have been adjusted to reflect the 5% common stock dividends in September 1998, June 2000 and June 2001.
(4)
Excludes the effect of any outstanding stock options.
(5)
Tax equivalent net interest income divided by average earning assets.
(6)
Noninterest expense divided by the sum of tax equivalent net interest income and noninterest income, excluding gains and losses on sales of assets and the write-down of intangible assets related to the sale of those assets.
(7)
Nonperforming loans and nonperforming assets do not include loans past due 90 days or more that are still accruing interest.
Selected Financial Data - continued

(Dollars in thousands)
 
 2005 Quarter ended
  
2004 Quarter ended
  
except per share
 
Dec. 31
 
Sept. 30
 
June 30
 
Mar. 31
 
Dec. 31
 
Sept. 30
 
June 30
 
Mar. 31
 
Net interest income
 
$
5,175
  
$
5,101
  
$
4,906
  
$
4,738
  
$
4,968
  
$
4,878
  
$
4,792
  
$
4,208
  
Provision for loan losses
   
400
   
225
   
100
   
100
   
300
   
350
   
450
   
100
  
Noninterest income
   
2,467
   
1,643
   
1,721
   
1,496
   
1,582
   
1,358
   
1,471
   
1,196
  
Noninterest expense
   
4,030
   
4,264
   
4,490
   
4,065
   
4,121
   
3,886
   
4,142
   
3,705
  
Net income
   
2,292
   
1,640
   
1,629
   
1,533
   
1,596
   
1,514
   
1,416
   
1,274
  
Basic earnings per share
   
0.62
   
0.43
   
0.42
   
0.40
   
0.42
   
0.39
   
0.36
   
0.35
  
Diluted earnings per share
   
0.60
   
0.42
   
0.41
   
0.39
   
0.41
   
0.38
   
0.35
   
0.34
  
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the preceding “Selected Financial Data” and our Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report. The financial information provided below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report.

General
 
We serve as a bank holding company for CapitalBank. We formed CapitalBank on January 1, 2001 during a restructuring that consolidated our operations into a single subsidiary. CapitalBank operates fifteen branches throughout South Carolina. CapitalBank offers a full range of banking services, including a wealth management group featuring a wide array of financial services, with personalized attention, local decision making, and strong emphasis on the needs of individuals and small to medium-sized businesses.

We were formed in 1988 to serve as a holding company for Greenwood National Bank, which later changed its name to Greenwood Bank & Trust. In 1994 we made the decision to expand beyond Greenwood County by creating an organization of independent banks in four additional markets. In June 1995, we opened Clemson Bank & Trust in Clemson, South Carolina. In 1996 and 1997, we opened Community Bank & Trust, The Bank, and Mid State Bank. We formed a separate trust organization in 1997 known as Community Trust Company. During 1997 and 1998, we also acquired several Carolina First branches. In May 2000, we sold Community Trust Company. In July of 2000, we acquired a Carolina First branch and an Anchor Bank branch.

As discussed, on January 1, 2001, we merged the five subsidiary banks into one bank charter known as CapitalBank. We made the decision to restructure the organization into one bank in order to improve operational efficiencies, provide new opportunities for employees, and improve service to customers. Customers are able to receive the benefit of being able to transact business at any of CapitalBank’s branches, through the ATM network and through the internet banking products. Additionally, we believe that the new centralized credit function provides additional controlled decisions while streamlining the credit process. Centralized deposit pricing supports management’s strategy from market to market. We also believe that the name recognition has enhanced our business.

On January 29, 2001, CapitalBank announced that it had signed a definitive agreement with Enterprise Bank of South Carolina to sell CapitalBank’s five branch offices located in Barnwell, Blackville, Williston, Springfield and Salley, South Carolina. On May 14, 2001, CapitalBank sold the five branches, which had approximately $67.1 million in deposits.

On August 19, 2003, we signed a Letter of Interest to acquire Abbeville Capital Corporation, the holding company of The Bank of Abbeville. In October 2003, the Board of Directors of both companies approved a definitive agreement. The transaction closed in March 2004.
Results of Operations
 
Year ended December 31, 2005, compared with year ended December 31, 2004
 
Net interest income increased $1,074,000, or 5.70%, to $19.9 million in 2005 from $18.8 million in 2004. Average earning assets increased $55.3 million, or 11.90%, and average interest bearing liabilities increased $44.4 million, or 10.80%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.65% and 3.95%, respectively, in 2005 compared to 3.99% and 4.18% in 2004. Yields on earning assets increased from 5.59% in 2004 to 6.06% in 2005, and yields on interest-bearing liabilities increased from 1.60% in 2004 to 2.41% in 2005.

The provision for loan losses was $825,000 in 2005 compared to $1.2 million in 2004. Our allowance for loan losses was 1.36% of total loans outstanding at December 31, 2005. Our nonperforming loans totaled $2.1 million at December 31, 2005 compared to $2.1 million at December 31, 2004. Criticized and classified loans have increased from $13.2 million at December 31, 2004 to $13.4 million at December 31, 2005. Total loans increased $40.3 million during 2005.
 
We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2005 and 2004 under the heading “Noninterest Income and Expense” located in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Net income increased $1,294,000, or 22.31%, to $7.1 million in 2005 from $5.8 million in 2004. Basic earnings per share was $1.87 in 2005, compared to $1.52 in 2004. Diluted earnings per share was $1.82 in 2005, compared to $1.47 in 2004. Return on average assets during 2005 was 1.24% compared to 1.13% during 2004, and return on average equity was 12.74% during 2005 compared to 10.90% during 2004.

Year ended December 31, 2004, compared with year ended December 31, 2003
 
Net interest income increased $4,270,000, or 29.29%, to $18.8 million in 2004 from $14.6 million in 2003. Average earning assets increased $104.7 million, or 29.10%, and average interest bearing liabilities increased $97.5 million, or 31.10%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.99% and 4.18%, respectively, in 2004 compared to 3.91% and 4.17% in 2003. Yields on earning assets decreased from 5.97% in 2003 to 5.59% in 2004, and yields on interest-bearing liabilities decreased from 2.06% in 2003 to 1.60% in 2004.

The provision for loan losses was $1.2 million in 2004 compared to $479,000 in 2003. Our allowance for loan losses was 1.36% of total loans outstanding at December 31, 2004. Our nonperforming loans totaled $2.1 million at December 31, 2004 compared to $1.8 million at December 31, 2003. Criticized and classified loans have decreased from $14.2 million at December 31, 2003 to $13.2 million at December 31, 2004. Total loans increased $99.5 million during 2004, $35.8 million of which we acquired through the Abbeville merger.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2004 and 2003 under the heading “Noninterest Income and Expense” located in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Net income increased $798,000, or 15.95%, to $5.8 million in 2004 from $5.0 million in 2003. Basic earnings per share was $1.52 in 2004, compared to $1.43 in 2003. Diluted earnings per share was $1.47 in 2004, compared to $1.36 in 2003. Return on average assets during 2004 was 1.13% compared to 1.35% during 2003, and return on average equity was 10.90% during 2004 compared to 11.32% during 2003.
Net Interest Income

General. The largest component of our net income is our net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities and the degree of mismatch and the maturity and repricing characteristics of our interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents our net interest margin.

Average Balances, Income and Expenses, and Rates
 
Year ended December 31,
 
2005
  
 2004
  
 2003
  
 
  
Average
  
Income/
  
Yield/
  
Average
  
Income/
  
Yield/
  
Average
  
Income/
  
Yield/
  
(Dollars in thousands)
 
Balance
  
Expense
  
Rate
  
Balance
  
Expense
  
Rate
  
Balance
  
Expense
  
Rate
  
Assets:
                                      
Earning Assets:
                                                        
Loans(1)(3)
 
$
439,266
  
$
27,587
    
6.28
%
$
391,056
  
$
22,440
    
5.74
%
$
310,517
  
$
18,820
    
6.06
%
Securities, taxable(2)
   
42,853
   
1,768
   
4.13
   
38,267
   
1,473
   
3.85
   
20,670
   
908
   
4.39
  
Securities, nontaxable(2)(3)
   
29,046
   
1,825
   
6.28
   
29,608
   
1,857
   
6.27
   
24,147
   
1,604
   
6.64
  
Nonmarketable equity securities
   
5,762
   
239
   
4.15
   
4,737
   
185
   
3.91
   
4,058
   
140
   
3.45
  
Federal funds sold and other
   
2,793
   
95
   
3.40
   
771
   
7
   
0.91
   
368
   
-
   
-
  
Total earning assets
   
519,720
   
31,514
   
6.06
   
464,439
   
25,962
   
5.59
   
359,760
   
21,472
   
5.97
  
Cash and due from banks
   
14,642
           
15,125
           
11,119
           
Premises and equipment
   
13,092
           
11,881
           
9,655
           
Other assets
   
29,624
           
26,433
           
19,178
           
Allowance for loan losses
   
(5,921
)
          
(5,244
)
          
(4,330
)
          
Total assets
 
$
571,157
          
$
512,634
          
$
395,382
            
Liabilities:
                                                        
Interest-Bearing Liabilities:
                                                        
Interest-bearing transaction accounts
 
$
161,492
  
$
2,500
    
1.55
%
$
148,870
  
$
1,357
    
0.91
%
$
117,847
  
$
1,225
    
1.04
%
Savings deposits
   
39,484
   
621
   
1.57
   
35,933
   
460
   
1.28
   
28,965
   
552
   
1.91
  
Time deposits
   
174,675
   
5,262
   
3.01
   
142,552
   
3,003
   
2.11
   
115,476
   
2,950
   
2.55
  
Other short-term borrowings
   
23,842
   
679
   
2.85
   
36,324
   
509
   
1.40
   
19,341
   
268
   
1.39
  
Federal Home Loan Bank advances
   
55,956
   
1,892
   
3.38
   
47,190
   
1,204
   
2.55
   
31,370
   
1,400
   
4.46
  
Obligations under capital leases
   
83
   
10
   
12.05
   
272
   
29
   
10.66
   
615
   
60
   
9.76
  
Total interest-bearing liabilities
   
455,532
   
10,964
   
2.41
   
411,141
   
6,562
   
1.60
   
313,614
   
6,455
   
2.06
  
Demand deposits
   
56,061
           
46,172
           
33,574
           
Accrued interest and other liabilities
   
3,768
           
2,130
           
4,049
           
Shareholders' equity
   
55,796
           
53,191
           
44,145
           
Total liabilities and shareholders'
equity
 
$
571,157
          
$
512,634
          
$
395,382
            
Net interest spread
           
3.65
%
          
3.99
%
          
3.91
%
Net interest income
 
$
20,550
          
$
19,400
          
$
15,017
            
Net interest margin
           
3.95
%
          
4.18
%
          
4.17
%
 
(1)
The effect of loans in nonaccrual status and fees collected is not significant to the computations.  All loans and deposits are domestic.
(2)
Average investment securities exclude the valuation allowance on securities available-for-sale.
(3)
Fully tax-equivalent basis at 38% tax rate for nontaxable securities and loans.

Net Interest Income - continued

Average Balances, Income and Expenses, and Rates. The previous table sets forth, for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances throughout the periods indicated.

Analysis of Changes in Net Interest Income. The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income from 2005 to 2004 and 2004 to 2003.

Analysis of Changes in Net Interest Income

   
2005 Compared With 2004
  
 2004 Compared With 2003
  
   
Variance Due to
  
Variance Due to
  
(Dollars in thousands)
 
Volume(1)
  
Rate(1)
  
Total
  
Volume(1)
  
Rate(1)
  
Total
  
Earning Assets
                         
Loans
 
$
2,914
  
$
2,233
  
$
5,147
  
$
4,666
  
$
(1,046
)
$
3,620
  
Securities, taxable
   
185
   
110
   
295
   
689
   
(124
)
  
565
  
Securities, nontaxable
   
(35
)
  
3
   
(32
)
  
347
   
(94
)
  
253
  
Nonmarketable equity securities
   
42
   
12
   
54
   
25
   
20
   
45
  
Federal funds sold and other
   
43
   
45
   
88
   
-
   
7
   
7
  
Total interest income
   
3,149
   
2,403
   
5,552
   
5,727
   
(1,237
)
  
4,490
  
                                       
Interest-Bearing Liabilities
                                     
Interest-bearing deposits:
                                     
Interest-bearing transaction accounts
   
124
   
1,019
   
1,143
   
295
   
(163
)
  
132
  
Savings accounts
   
48
   
113
   
161
   
114
   
(206
)
  
(92
)
Time deposits
   
777
   
1,482
   
2,259
   
622
   
(569
)
  
53
  
Total interest-bearing deposits
   
949
   
2,614
   
3,563
   
1,031
   
(938
)
  
93
  
Other short-term borrowings
   
(220
)
  
390
   
170
   
-
   
241
   
241
  
Federal Home Loan Bank advances
   
250
   
438
   
688
   
543
   
(739
)
  
(196
)
Obligations under capital leases
   
(23
)
  
4
   
(19
)
  
(36
)
  
5
   
(31
)
Total interest expense
   
956
   
3,446
   
4,402
   
1,538
   
(1,431
)
  
107
  
Net interest income
 
$
2,193
  
$
(1,043
)
$
1,150
  
$
4,189
  
$
194
  
$
4,383
  
 
 
(1)
Volume-rate changes have been allocated to each category based on the percentage of the total change.

Interest Sensitivity. We monitor and manage the pricing and maturity of our assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on our net interest income. The principal monitoring technique we employ is the measurement of our interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.
Net Interest Income - continued

The following table sets forth our interest rate sensitivity at December 31, 2005.

 
                  
Greater
      
 
      
After One
  
After Three
      
Than One
      
 
  
Within
  
Through
  
Through
  
Within
  
Year or
      
December 31, 2005
 
One
  
Three
  
Twelve
  
One
  
Non-
      
(Dollars in thousands)
 
Month
  
Months
  
Months
  
Year
  
Sensitive
  
Total
  
Assets
                                     
Earning assets:
                                     
Loans(1)
 
$
162,728
  
$
6,485
  
$
51,657
  
$
220,870
  
$
243,283
  
$
464,153
  
Securities
   
303
   
301
   
-
   
604
   
75,283
   
75,887
  
Federal funds sold and other
   
31
   
-
   
-
   
31
   
-
   
31
  
Total earning assets
   
163,062
   
6,786
   
51,657
   
221,505
   
318,566
   
540,071
  
Liabilities
                                     
Interest-bearing liabilities
                                     
Interest-bearing deposits:
                                     
Demand deposits
   
164,057
   
-
   
-
   
164,057
   
-
   
164,057
  
Savings deposits
   
39,008
   
-
   
-
   
39,008
   
-
   
39,008
  
Time deposits
   
8,928
   
70,125
   
59,553
   
138,606
   
32,689
   
171,295
  
Total interest-bearing deposits
   
211,993
   
70,125
   
59,553
   
341,671
   
32,689
   
374,360
  
Other short-term borrowings
   
49,099
   
-
   
-
   
49,099
   
-
   
49,099
  
Federal Home Loan Bank advances
   
-
   
-
   
-
   
-
   
57,225
   
57,225
  
Total interest-bearing liabilities
   
261,092
   
70,125
   
59,553
   
390,770
   
89,914
   
480,684
  
Period gap
 
$
(98,030
)
$
(63,339
)
$
(7,896
)
$
(169,265
)
$
228,652
      
Cumulative gap
 
$
(98,030
)
$
(161,369
)
$
(169,265
)
$
(169,265
)
$
59,387
      
Ratio of cumulative gap to total earning assets
   
(18.15
)%
  
(29.88
)%
  
(31.34
)%
  
(31.34
)%
  
11.00
%
    
 
(1)
Excludes nonaccrual loans and includes loans held for sale.

The above table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each instrument’s ultimate maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing period due to contractual arrangements that give us the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date. Other short-term borrowings consist of federal funds purchased and securities sold under agreements to repurchase. Federal funds purchased are reflected at the earliest pricing interval because funds can be repriced daily. Securities sold under agreements to repurchase are reflected at the maturity date of each repurchase agreement that generally matures within one day. Advances from the Federal Home Loan Bank are reflected at their contractual maturity dates. Obligations under capital leases are reflected at each payment date.
Net Interest Income - continued

We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability sensitive. We are liability sensitive within the one year period. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, we believe a liability-sensitive gap position is not as indicative of our true interest sensitivity as it would be for an organization that depends to a greater extent on purchased funds to support earning assets. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

Provision and Allowance for Loan Losses
 
General. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, the Board of Directors reviews and approves the appropriate level for CapitalBank’s allowance for loan losses based upon our recommendations, the results of the internal monitoring and reporting system, analysis of economic conditions in its markets, and a review of historical statistical data for both us and other financial institutions.

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are made periodically to maintain the allowance at an appropriate level based on our analysis of the potential risk in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

Our allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, we monitor the overall portfolio quality through observable trends in delinquency, charge offs, and general and economic conditions in the service area. The adequacy of the allowance for loan losses and the effectiveness of our monitoring and analysis system are also reviewed periodically by the banking regulators.

Based on present information and an ongoing evaluation, we consider the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio. Our judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that we believe to be reasonable but that may or may not be valid. Thus, we have no assurance that charge offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. We do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an overall portfolio basis utilizing a risk grading system.

Provision and Allowance for Loan Losses - continued

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge offs and recoveries for each of the last five years.
 
Allowance for Loan Losses

Year Ended December 31,
                      
(Dollars in thousands)
 
2005
  
2004
  
2003
  
2002
  
2001
  
Total loans outstanding at end of year
 
$
465,892
  
$
425,628
  
$
326,178
  
$
288,842
  
$
248,390
  
Average loans outstanding
 
$
439,266
  
$
391,056
  
$
310,517
  
$
274,365
  
$
259,661
  
Balance of allowance for loan losses
                               
at beginning of period
 
$
5,808
  
$
4,584
  
$
4,282
  
$
4,103
  
$
3,060
  
Allowance for loan losses from acquisitions
   
-
   
432
   
-
   
-
   
-
 
Loan losses:
                               
Commercial and industrial
   
54
   
153
   
71
   
337
   
406
  
Real estate - mortgage
   
185
   
172
   
231
   
131
   
160
  
Consumer
   
155
   
252
   
163
   
255
   
409
  
Total loan losses
   
394
   
577
   
465
   
723
   
975
  
Recoveries of previous loan losses:
                               
Commercial and industrial
   
41
   
72
   
196
   
45
   
8
  
Real estate - mortgage
   
3
   
31
   
43
   
15
   
16
  
Consumer
   
41
   
66
   
49
   
69
   
74
  
Total recoveries
   
85
   
169
   
288
   
129
   
98
  
Net loan losses
   
309
   
408
   
177
   
594
   
877
  
Provision for loan losses
   
825
   
1,200
   
479
   
773
   
1,920
  
Balance of allowance for loan losses
                               
at end of period
 
$
6,324
  
$
5,808
  
$
4,584
  
$
4,282
  
$
4,103
  
Allowance for loan losses to period end loans
   
1.36
%
  
1.36
%
  
1.40
%
  
1.48
%
  
1.65
%
Net charge offs to average loans
   
0.07
%
  
0.10
%
  
0.05
%
  
0.22
%
  
0.34
%
 
Nonperforming Assets. The following table sets forth our nonperforming assets for the dates indicated.

Nonperforming Assets
 
 
    
December 31, 
  
(Dollars in thousands)
   
2005
    
2004
    
2003
    
2002
    
2001
  
Nonaccrual and impaired loans
 
$
2,128
  
$
2,104
  
$
1,816
  
$
1,893
  
$
1,567
  
Other real estate owned
   
93
   
98
   
101
   
150
   
148
  
Total nonperforming assets
 
$
2,221
  
$
2,202
  
$
1,917
  
$
2,043
  
$
1,715
  
Loans 90 days or more past due and
                               
still accruing interest
 
$
223
  
$
230
  
$
158
  
$
128
  
$
-
  
Nonperforming assets to period end loans
   
0.48
%
  
0.52
%
  
0.59
%
  
0.71
%
  
0.69
%
 
Provision and Allowance for Loan Losses - continued

Accrual of interest is discontinued on a loan when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest that has been accrued on the loan but remains unpaid is reversed and deducted from current earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, we may ultimately write-down or charge off of the principal balance of the loan that would necessitate additional charges to earnings. For all periods presented, the additional interest income, which would have been recognized into earnings if our nonaccrual loans had been current in accordance with their original terms, is immaterial.

Total nonperforming assets totaled $2.2 million at December 31, 2005 and December 31, 2004. This amount consists primarily of nonaccrual and impaired loans that totaled $2.1 million at December 31, 2005. Nonperforming assets were 0.48% of total loans at December 31, 2005. The allowance for loan losses to period end nonperforming assets was 284.74% at December 31, 2005.

Potential Problem Loans. At December 31, 2005, through our internal review mechanisms, we had identified $4.6 million of criticized loans and $8.8 million of classified loans. The results of this internal review process are the primary determining factor in our assessment of the adequacy of the allowance for loan losses.

Our criticized loans decreased from $6.8 million at December 31, 2004 to $4.6 million at December 31, 2005. Total classified loans increased from $6.4 million at December 31, 2004 to $8.8 million at December 31, 2005. We are committed to addressing potential problem loans.

Noninterest Income and Expense

Noninterest Income. Noninterest income increased $1.8 million, or 31.88%, to $7.4 million in 2005 from $5.6 million in 2004. The primary reason for the increase was due to the fact that we realized gains on the sales of nonmarketable equity securities of $1.1 million in 2005, compared to no gains in 2004. Gains on the sales of securities available for sale were $5,000 in 2004, compared to no gains in 2005. Service charges on deposit accounts increased $309,000, or 11.34% to $3.0 million in 2005, from $2.7 million in 2004. Residential mortgage origination fees increased $4,000, or 0.49% to $828,000 in 2005 from $824,000 in 2004. Income from fiduciary activities increased $280,000, or 45.09% to $901,000 in 2005 from $621,000 in 2004. This increase was a result of our successful efforts to expand assets under management in our wealth management group. Commissions on the sale of mutual funds decreased $98,000, or 35.51% to $178,000 in 2005 compared to $276,000 in 2004. Other operating income increased $104,000 or 9.01% to $1.3 million in 2005 from $1.2 million in 2004.
 
Noninterest Income and Expense - continued
 
The following table sets forth, for the periods indicated, the principal components of noninterest income:
 
Noninterest Income
 
   
 Year Ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Service charges on deposit accounts
  
$
3,035
  
$
2,726
  
$
2,372
  
Residential mortgage origination fees
    
828
    
824
    
1,259
  
Gains on sales of securities available-for-sale
    
-
   
5
    
27
  
Gains on sales of nonmarketable equity securities
    
1,092
   
-
    
1,689
 
Commissions from sales of mutual funds
    
178
    
276
    
226
  
Income from fiduciary activities
    
901
    
621
    
394
  
Gain on sale of premises and equipment
    
101
    
-
    
29
  
Income from Bank Owned Life Insurance
    
641
    
598
    
488
  
Other income
    
617
    
556
    
617
  
Total noninterest income
  
$
7,393
  
$
5,606
  
$
7,101
  
 
Noninterest Expense. Noninterest expense increased $1,062,000, or 6.70%, to $16.9 million in 2005 from $15.9 million in 2004. The primary component of noninterest expense was salaries and employee benefits, which increased $849,000, or 9.57%, to $9.7 million in 2005 from $8.9 million in 2004. Net occupancy expense was $977,000 in 2005 compared to $853,000 in 2004, and furniture and equipment expense was $945,000 in 2005 compared to $958,000 in 2004. We realized a loss on the sale of fixed assets of $9,000 in 2004, compared to no losses in 2005. We also realized a loss on the sale of securities available for sale in the amount of $66,000 in 2005, compared to a gain of $5,000 in 2004. Total amortization of intangible assets increased $9,000, or 1.78%, to $515,000 in 2005 compared to $506,000 in 2004. Other operating expense increased $36,000, or 2.77% to $4.7 million in 2005 from $4.7 million in 2004. Our efficiency ratio was 63.17% in 2005 compared to 63.38% in 2004.

The following table sets forth, for the periods indicated, the primary components of noninterest expense:
 
Noninterest Expense

   
Year Ended December 31, 
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Salaries and employee benefits
  
$
9,723
  
$
8,874
  
$
7,118
  
Net occupancy expense
    
977
    
853
    
742
  
Furniture and equipment expense
    
945
    
958
    
1,117
  
Amortization of intangible assets
    
515
    
506
    
346
  
Director and committee fees
    
252
    
187
    
172
  
Data processing and supplies
    
670
    
568
    
483
  
Mortgage loan department expenses
    
119
    
113
    
190
  
Banking assessments
    
56
    
53
    
44
  
Professional fees and services
    
410
    
588
    
446
  
Postage and freight
    
432
    
398
    
309
  
Supplies
    
311
    
341
    
254
  
Telephone expenses
    
294
    
293
    
281
  
Federal Home Loan Bank prepayment penalties
    
-
    
-
    
1,093
 
Other
    
2,211
    
2,121
    
1,938
  
Total noninterest expense
  
$
16,915
  
$
15,853
  
$
14,533
  
Efficiency ratio
    
63.17
%
  
63.38
%
  
64.28
%
 
 
Noninterest Income and Expense - continued

Income Taxes. Our income tax expense was $2.5 million for 2005 and $1.6 million for 2004. Our effective tax rate was 25.90% and 21.61% in 2005 and 2004, respectively.

Earning Assets

Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher yields are the inherent credit and liquidity risks that we attempt to control and counterbalance. Loans averaged $439.3 million in 2005 compared to $391.1 million in 2004, an increase of $48.2 million, or 12.32%. At December 31, 2005, total loans were $465.9 million compared to $425.6 million at December 31, 2004. The following table sets forth the composition of the loan portfolio by category at the dates indicated and highlights our general emphasis on mortgage lending.

Composition of Loan Portfolio

December 31,
 
2005
 
2004
 
2003
 
2002
 
2001
  
 
  
 
  
Percent
 
 
  
Percent
 
 
  
Percent
 
 
  
Percent
 
 
  
Percent
  
(Dollars in
 
 
  
of
 
 
  
of
 
 
  
of
 
 
  
of
 
 
  
of
  
thousands)
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
 
Amount
 
Total
  
Commercial and industrial
 
$
38,180
    
8.20
%
$
45,222
    
10.62
%
$
31,214
    
9.57
%
$
 30,092
    
10.42
%
$
33,395
    
13.26
%
Real estate Construction
   
106,704
   
22.90
   
48,223
   
11.33
   
16,187
   
4.98
   
13,049
   
4.52
   
13,252
   
5.26
  
Mortgage - residential
   
174,698
   
37.50
   
178,495
   
41.94
   
169,492
   
51.95
   
154,257
   
53.41
   
124,091
   
49.25
  
Mortgage- nonresidential
   
123,603
   
26.53
   
128,937
   
30.29
   
88,797
   
27.22
   
73,610
   
25.48
   
59,417
   
23.58
  
Consumer and other
   
22,707
   
4.87
   
24,751
   
5.82
   
20,488
   
6.28
   
17,834
   
6.17
   
18,235
   
8.65
  
Total loans
   
465,892
   
100.00
%
  
425,628
   
100.00
%
  
326,178
   
100.00
%
  
288,842
   
100.00
%
  
248,390
   
100.00
%
Allowance for loan losses
   
(6,324
)
      
(5,808
)
      
(4,584
)
      
(4,282
)
      
(4,103
)
      
Net loans
 
$
459,568
      
$
419,820
      
$
321,594
      
$
284,560
      
$
244,287
        

The principal component of our loan portfolio is real estate mortgage loans. At December 31, 2005, this category totaled $298.3 million and represented 64.03% of the total loan portfolio, compared to $307.4 million, or 72.23%, at December 31, 2004.

In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. Financial institutions in our market areas typically obtain a security interest in real estate, whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.

Earning Assets - continued

Real estate construction loans increased $58.5 million, or 121.27%, to $106.7 million at December 31, 2005, from $48.2 million at December 31, 2004. Residential mortgage loans, which is the largest category of our loans, decreased $3.8 million, or 2.13%, to $174.7 million at December 31, 2005, from $178.5 million at December 31, 2004. Residential real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, decreased $5.3 million or 4.14%, to $123.6 million at December 31, 2005 from $128.9 million at December 31, 2004. The overall increase in real estate lending was attributable to the continued demand for residential and commercial real estate loans in our markets, and partially due to fact that we have hired an experienced real estate development lender in Greenville, South Carolina. CapitalBank has been able to compete favorably for residential mortgage loans with other financial institutions by offering fixed rate products having three and five year call provisions.

Commercial and industrial loans decreased $7.0 million, or 15.57%, to $38.2 million at December 31, 2005, from $45.2 million at December 31, 2004.

Consumer and other loans decreased $2.0 million, or 8.26%, to $22.7 million at December 31, 2005, from $24.7 million at December 31, 2004.

Our loan portfolio reflects the diversity of our markets. Our fifteen full service branches are located from the northern Midlands of South Carolina through the Upstate. Primary market areas include Abbeville, Anderson, Belton, Clemson, Clinton, Greenville, Greenwood, Newberry and Saluda. The economies of these markets are varied and represent different industries including medium and light manufacturing, higher education, regional health care, and distribution facilities. These areas are expected to remain stable with continual growth. The diversity of the economy creates opportunities for all types of lending. We do not engage in foreign lending.

The repayment of loans in the loan portfolio as they mature is also a source of our liquidity. The following table sets forth our loans maturing within specified intervals at December 31, 2005.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

       
 Over 
          
       
 One Year
          
December 31, 2005
  
 One Year
 
 Through
 
 Over Five
        
(Dollars in thousands)
  
 or Less
  
 Five Years
  
 Years
  
 Total
  
Commercial and industrial
  
$
20,220
  
$
17,037
  
$
923
  
$
38,180
  
Real estate
   
194,541
    
194,881
    
15,583
    
405,005
  
Consumer and other
    
6,037
    
13,206
    
3,464
    
22,707
  
   
$
220,798
  
$
225,124
  
$
19,970
  
$
465,892
  
Loans maturing after one year with:
                          
Fixed interest rates
                   
$
136,247
  
Floating interest rates
                      
108,847
  
                     
$
245,094
  

Earning Assets - continued

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.

Investment Securities. The investment securities portfolio is a significant component of our total earning assets. Total securities averaged $77.7 million in 2005, compared to $72.6 million in 2004. At December 31, 2005, the total securities portfolio was $75.9 million, a decrease of $1.7 million, or 2.19% over total securities of $77.6 million at December 31, 2004. Securities designated as available-for-sale totaled $70.2 million and were recorded at estimated fair value. Securities designated as held-to-maturity totaled $380,000 and were recorded at amortized cost. The securities portfolio also includes nonmarketable equity securities totaling $5.3 million which are carried at cost because they are not readily marketable or have no quoted market value. These include investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, and the stock of two unrelated financial institutions.

The following table sets forth the book value of the securities held by us at the dates indicated.

Book Value of Securities

December 31,
  
2005
  
2004
  
(Dollars in thousands)
          
U.S. Government agencies and corporations
  
$
15,106
  
$
23,181
  
State, county, and municipal securities
    
28,627
    
31,908
  
Other (trust preferred securities)
    
1,005
    
1,009
  
     
44,738
    
56,098
  
Mortgage-backed securities
    
25,874
    
15,446
  
Nonmarketable equity securities
    
5,275
    
6,052
  
Total securities
  
$
75,887
  
$
77,596
  

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2005.

Investment Securities Maturity Distribution and Yields

 
          
 After One But
  
 After Five But
          
December 31, 2005
 
 Within One Year
  
 Within Five Years
  
 Within Ten Years
  
 Over Ten Years
  
(Dollars in thousands)
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
U.S. Government agencies
 
$
-
    
-
%
$
15,106
    
3.70
%
$
-
    
-
%
$
-
    
-
%
Obligations of state and local governments(2)
   
301
   
5.77
   
5,033
    
8.95
   
12,104
   
6.77
    
12,195
   
6.81
  
Total securities(1)
 
$
301
    
5.77
 
$
20,139
    
5.01
 
$
12,104
    
6.77
  
$
12,195
    
6.81
  
 
(1)
Excludes mortgage-backed securities totaling $25.9 million with a yield of 4.19% and nonmarketable equity securities.
(2)
The yield on state and local governments is presented on a tax equivalent basis using a federal income tax rate of 34%.

Other attributes of the securities portfolio, including yields and maturities, are discussed above in “--Net Interest Income-- Interest Sensitivity.”

Earning Assets - continued

Short-Term Investments. Short-term investments, which consist primarily of federal funds sold and interest-bearing deposits with other banks, averaged $2.8 million in 2005, compared to $771,000 in 2004. At December 31, 2005, short-term investments totaled $31,000. These funds are a source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.

Deposits and Other Interest-Bearing Liabilities
 
Average interest-bearing liabilities increased $44.4 million, or 10.80%, to $455.5 million in 2005, from $411.1 million in 2004. Average interest-bearing deposits increased $48.3 million, or 14.75%, to $375.7 million in 2005, from $327.4 million in 2004.

Deposits. Average total deposits increased $58.2 million, or 15.58%, to $431.7 million during 2005, from $373.5 million during 2004. At December 31, 2005, total deposits were $433.6 million compared to $380.4 million a year earlier, an increase of 13.99%.

The following table sets forth the deposits by category at the dates indicated.

Deposits

December 31,
 
 2005
  
 2004
  
 2003
  
 2002
  
 2001
  
 
      
Percent
      
Percent
      
Percent
      
Percent
      
Percent
  
(Dollars in
     
of
      
of
      
of
      
of
      
of
  
thousands)
 
Amount
  
Deposits
  
Amount
  
Deposits
  
Amount
  
Deposits
  
Amount
  
Deposits
  
Amount
  
Deposits
  
Demand deposit accounts
 
$
59,286
    
13.67
%
$
45,504
    
11.96
%
$
36,204
    
11.52
%
$
29,422
    
10.64
%
$
25,083
    
9.70
%
NOW accounts
   
74,730
   
17.23
   
72,934
   
19.18
   
73,166
   
23.28
   
36,121
   
13.06
   
32,504
   
12.58
  
Money market accounts
   
89,327
   
20.60
   
82,872
   
21.79
   
64,796
   
20.62
   
66,295
   
23.97
   
61,863
   
23.95
  
Savings accounts
   
39,008
   
9.00
   
36,522
   
9.60
   
28,697
   
9.13
   
27,948
   
10.11
   
26,653
   
10.32
  
Time deposits less than $100,000
   
117,126
   
27.01
   
91,183
   
23.97
   
69,649
   
22.16
   
74,763
   
27.03
   
72,636
   
28.12
  
Time deposits of $100,000 or over
   
54,169
   
12.49
   
51,342
   
13.50
   
41,761
   
13.29
   
42,012
   
15.19
   
39,591
   
15.33
  
Total deposits
 
$
433,646
    
100.00
%
$
380,357
    
100.00
%
$
314,273
    
100.00
%
$
276,561
    
100.00
%
$
258,330
    
100.00
%

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits increased $50.5 million to $379.5 million at December 31, 2005. During a limited time in January 2005, CapitalBank offered a 13-month certificate of deposit special. The total dollars generated with the special were approximately $50,104,000.

Deposits, and particularly core deposits, have historically been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 107.53% at December 31, 2005, and 112.23% at the end of 2004. The maturity distribution of our time deposits of $100,000 or more at December 31, 2005 is set forth in the following table.

Deposits and Other Interest-Bearing Liabilities - continued
 
Maturities of Certificates of Deposit of $100,000 or More

       
 
  
After Six
          
   
Within
  
After Three
  
Through
  
After 
      
   
Three
  
Through Six
  
Twelve
  
Twelve
      
(Dollars in thousands)
  
Months
  
Months
  
Months
  
Months
  
Total
  
Certificates of deposit of $100,000 or more
  
$
26,834
  
$
9,282
  
$
8,685
  
$
9,368
  
$
54,169
  

Approximately 49.54% of our time deposits of $100,000 or more had scheduled maturities within three months and 66.67% had maturities within six months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets using large certificates of deposit obtained through brokers. These brokered deposits are generally expensive and are unreliable as long-term funding sources. Accordingly, we do not solicit brokered deposits.

Borrowed Funds. Borrowed funds consist of short-term borrowings and advances from the Federal Home Loan Bank. Short-term borrowings are primarily federal funds purchased from correspondent banks and securities sold under agreements to repurchase.

Average short-term borrowings were $23.8 million in 2005, a decrease of $12.5 million from $36.3 million in 2004. Federal funds purchased from correspondent banks averaged $5.2 million in 2005. At December 31, 2005, federal funds purchased totaled $28.0 million. Securities sold under agreements to repurchase averaged $18.6 million in 2005. At December 31, 2005, securities sold under agreements to repurchase totaled $21.1 million.

The following table summarizes the Company's short-term borrowings for the years ended December 31, 2005 and 2004. These borrowings consist of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank. Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by U.S. government agency securities. Advances from Federal Home Loan Bank mature at different periods as discussed in the footnotes to the financial statements and are secured by the Bank's one to four family residential mortgage loans, home equity lines and the Bank's investment in Federal Home Loan Bank stock.
 
   
 Year Ended December 31,
  
   
Maximum
      
Weighted
          
   
Outstanding
      
Average
      
Interest
  
   
at any
  
Average
  
Interest
  
Balance
  
Rate at
  
(Dollars in thousands)
  
Month End
  
Balance
  
Rate
  
 December 31,
  
 December 31,
  
2005
                                
Securities sold under agreements to repurchase
  
$
21,117
  
$
18,576
    
2.74
%
$
21,117
    
4.15
%
Advances from Federal Home Loan Bank
    
60,275
    
55,956
    
3.38
%
  
57,225
    
3.97
%
                                 
2004
                                
Securities sold under agreements to repurchase
  
$
15,304
  
$
12,724
    
0.85
%
$
13,859
    
1.92
%
Advances from Federal Home Loan Bank
    
69,350
    
47,190
    
2.55
%
  
66,325
    
2.71
%

Average Federal Home Loan Bank advances during 2005 were $56.0 million compared to $47.2 million during 2004, an increase of $8.8 million. Advances from the Federal Home Loan Bank are collateralized by one-to-four family residential mortgage loans, home equity lines and our investment in Federal Home Loan Bank stock. At December 31, 2005, borrowings from the Federal Home Loan Bank were $57.2 million compared to $66.3 million a year earlier. Although we expect to continue using short-term borrowing and Federal Home Loan Bank advances as secondary funding sources, core deposits will continue to be our primary funding source. Of the $57.2 million advances from the Federal Home Loan Bank outstanding at December 31, 2005, $5.4 million mature in 2008, $325,000 in 2009, $26.5 million in 2010, $10.0 million in 2013, and $15.0 million in 2015.

Capital

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Our Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain (loss) on available-for-sale securities, minus intangible assets. Our Tier 2 capital consists of the allowance for loan losses subject to certain limitations. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The holding company and CapitalBank are also required to maintain capital at a minimum level based on average total assets (as defined), which is known as the leverage ratio. Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

The holding company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2005, 2004, and 2003, as set forth in the following table.

Analysis of Capital

 
  
2005
  
2004
  
2003
  
Tier 1 capital
 
$
44,007
  
$
43,209
  
$
41,017
  
Tier 2 capital
   
5,959
   
5,186
   
3,829
  
Total qualifying capital
 
$
49,966
  
$
48,395
  
$
44,846
  
Risk-adjusted total assets
                   
(including off-balance-sheet exposures)
 
$
393,799
  
$
320,480
  
$
305,565
  
Tier 1 risk-based capital ratio
   
9.24
%
  
10.43
%
  
13.42
%
Total risk-based capital ratio
   
10.49
%
  
11.68
%
  
14.68
%
Tier 1 leverage ratio
   
7.68
%
  
8.05
%
  
10.38
%
 
 
  
Tier 1
  
Total
  
Tier 1
  
 
  
Risk-Based
  
Risk-Based
  
Leverage
  
CapitalBank's capital ratios at December 31, 2005 were:
   
9.17
%
  
10.43
%
  
7.63
%
 
Liquidity Management and Capital Resources

Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities we serve.

Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control.

Our loans-to-assets ratio increased from 2004 to 2005 and our loans-to-funds ratio decreased from 2004 to 2005. The loans-to-assets ratio at December 31, 2005 was 77.87% compared to 77.74% at December 31, 2004, and the loans-to-funds ratio at December 31, 2005 was 86.35% compared to 86.75% at December 31, 2004. The amount of advances from the Federal Home Loan Bank were approximately $57.2 million at December 31, 2005 compared to $66.3 million at December 31, 2004. We expect to continue using these advances as a source of funding. Additionally, we had approximately $34.2 million of unused lines of credit for federal funds purchases and $1.4
Liquidity Management and Capital Resources - continued

million of securities available-for-sale at December 31, 2005 as sources of liquidity. We also have the ability to receive an additional $92.4 million in advances under the term of our agreement with the Federal Home Loan Bank.

We depend on dividends from CapitalBank as our primary source of liquidity. The ability of CapitalBank to pay dividends is subject to general regulatory restrictions that may, but are not expected to, have a material impact on the liquidity available to us. We paid stock dividends in September 1998, June 2000, and May 2001 and may do so in the future. We have paid cash dividends on a quarterly basis since September 2001 and anticipate continuing to do so.
 
Critical Accounting Policies

Our accounting and financial reporting policies are in conformity with generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with such principals requires us to make estimates and assumptions that impact the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities during the reporting period, and the reported amounts of revenues and expenses during the reporting period. We, in conjunction with our independent auditors, have discussed the development and selection of the critical accounting estimates discussed herein with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the related disclosures herein.

Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial Statements contained in Item 8 herein. Of these significant accounting policies, we consider our policies regarding the accounting for the Allowance, pension plan, mortgage-servicing rights, accounting for past acquisitions, and income taxes, to be the most critical accounting policies due to the valuation techniques used and the sensitivity of these financial statement amounts to the methods, assumptions, and estimates underlying these balances. Accounting for these critical areas requires a significant degree of judgment that could be subject to revision as newer information becomes available. In order to determine our critical accounting policies, we consider whether the accounting estimate requires assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of financial condition, changes in financial condition, or results of operations.

The Allowance represents our estimate of probable losses inherent in the lending portfolio. See Provision and Allowance for Losses for additional discussion including factors impacting the Allowance and the methodology for analyzing the adequacy of the Allowance. This methodology relies upon our judgment. Our judgments is based on an assessment of various issues, including, but not limited to, the pace of loan growth, emerging portfolio concentrations, the risk management system relating to lending activities, entry into new markets, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions. We consider the year-end Allowance appropriate and adequate to cover probable losses in the loan portfolio. However, our judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the Allowance, thus adversely impacting the results of operations of the Company.
  
We have increased our market share through bank and branch acquisitions (the last of these acquisitions occurred in 2004). These acquisitions resulted in goodwill or other intangible assets, which are subject to periodic impairment tests in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” These tests, which we performed as of June 30, 2005 and 2004, use estimates in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. We test for goodwill impairment by determining the fair market value for each reporting unit and comparing it to the carrying amount. If the carrying amount exceeds its fair market value, the potential for impairment exists, and a second step of impairment testing is performed. In the second step, the implied fair market value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair market value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair market value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written-down to its fair market value. The valuations as of June 30, 2005 indicated that no impairment charge was required as of that date, and we are not aware of any reason that a material change will occur in the future.
Critical Accounting Policies - continued
 
We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets. Historically, our estimated income taxes have been materially correct, and we are not aware of any reason that a material change will occur in the future. See Note 19 of Notes to Consolidated Financial Statements contained in Item 8 herein that summarizes current period income tax expense as well as future tax liabilities associated with differences in the timing of expenses and income recognition for book and tax accounting purposes.
 
Non-GAAP Financial Information

This report contains financial information determined by methods other than in accordance with GAAP. We use these non-GAAP measures to analyze performance. Such disclosures include, but are not limited to, certain designated net interest income amounts presented on a tax-equivalent basis. We believe that the presentation of net interest income on a tax-equivalent basis aids in the comparability of net interest income arising from both taxable and tax-exempt sources. These disclosures should not be viewed as a substitute for GAAP measures, and furthermore, our non-GAAP measures may not necessarily be comparable to non-GAAP performance measures of other companies.
 
Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as our subsidiary and ours are primarily monetary in nature. Therefore, interest rates have a more significant effect on our performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

Impact of Off-Balance Sheet Instruments

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to a customer at predetermined interest rates as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual amount of the instrument. Because certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Standby letters of credit often expire without being used.

Impact of Off-Balance Sheet Instruments - continued

We use the same credit underwriting procedures for commitments to extend credit and standby letters of credit as we do for our on-balance sheet instruments. The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation. Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.

We are not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in liquidity needs or other commitments or that could significantly impact earnings.

Through its operations, CapitalBank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to CapitalBank’s customers at predetermined interest rates for a specified period of time. At December 31, 2005, CapitalBank had issued commitments to extend credit of $103.1 million and standby letters of credit of $1.2 million through various types of commercial lending arrangements. Approximately $76.2 million of these commitments to extend credit had variable rates. Our experience has been that a significant portion of these commitments often expire without being used.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2005.

       
After One
  
After Three
              
       
Through
  
Through
      
Greater
      
   
Within One
  
Three
  
Twelve
  
Within One
  
Than
      
(Dollars in thousands)
  
Month 
  
Months
  
Months
  
Year
  
One Year
  
Total
  
Unused commitments to extend credit
  
$
4,448
  
$
2,215
  
$
40,311
  
$
46,974
  
$
56,118
  
$
103,092
  
Standby letters of credit
    
262
    
383
    
536
    
1,181
    
35
    
1,216
  
Totals
  
$
4,710
  
$
2,598
  
$
40,847
  
$
48,155
  
$
56,153
  
$
104,308
  
 
The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plants, equipment and commercial and residential real estate.
 
Industry Developments

As more fully discussed under the heading “Government Supervision and Regulation” in Item 1 of this annual report, in November of 1999, the Gramm-Leach-Bliley Act, previously known as the Financial Services Modernization Act of 2000, was enacted. The Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may have the result of increasing the amount of competition that we face from larger institutions and other types of companies. We cannot predict the full effect that the Act will have on us.

From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. We cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect us.
 
Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2005.

(Dollars in thousands)
                      
   
Payment Due By Period
  
Contractual Obligations
  
Total
  
< 1 Year
  
1-3 Years
  
3-5 Years
  
> 5 Years
  
                       
Capital Lease
   $
-
  $
-
   $
-
   $
-
   $
-
  
Operating Leases
    
592
    
92
    
134
    
108
    
258
  
Other Long-Term Liabilities
    
57,225
    
-
    
5,400
    
26,825
    
25,000
  

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities. Management actively monitors and manages our interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations. The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net Interest Income” is incorporated herein by reference. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statements identified in Item 15 of this Report on Form 10-K are included herein beginning on page F-1.
 
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
Legislation and Securities Exchange Commission rules adopted in 2002 have significantly increased, and will continue to increase, the regulatory burdens on audit firms that audit the financial statements of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Consequently, many smaller audit firms are deciding to limit their audit practice to companies that are not subject to the 1934 Act. Tourville, Simpson & Caskey, L.L.P., which served as our principal independent accountant since our inception, is one such firm. Accordingly, effective January 2, 2003, Tourville, Simpson & Caskey, L.L.P. resigned as our principal independent public accountant. The Board of Directors, upon recommendation of the Audit Committee, engaged Elliott Davis, LLC on January 2, 2003 to audit financial statements for the year ended December 31, 2002 and for the year ending December 31, 2003. We have not consulted Elliott Davis, LLC regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

Tourville, Simpson & Caskey, L.L.P.’s reports on our financial statements for each of the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. We had no disagreements with Tourville, Simpson & Caskey, L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Tourville, Simpson & Caskey, L.L.P.’s satisfaction, would have caused it to make reference to the subject matter of the disagreement in its reports.

Tourville, Simpson & Caskey, L.L.P. dissolved upon the filing of a Notice of Dissolution with the South Carolina Secretary of State on December 31, 2002 and was therefore unable to issue its consent in connection with our registration statement on Form S-4 filed on December 2, 2003. To resolve this issue, Elliott Davis, LLC re-audited our consolidated financial statements for the years ended December 31, 2001 and 2000.
 
ITEM 9A. CONTROLS AND PROCEDURES.
 
Controls Evaluation and Related CEO and CFO Certifications. We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Annual Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
 
Attached as exhibits to this Annual Report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
 
Definition of Disclosure Controls. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.
Limitations on the Effectiveness of Controls. The company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
Scope of the Controls Evaluation. The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, the company’s implementation of the controls and the effect of the controls on the information generated for use in this Annual Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Annual Report on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by our finance personnel, as well as our independent auditors who evaluate them in connection with determining their auditing procedures related to their report on our annual financial statements and not to provide assurance on our controls. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.
 
Among other matters, we also considered whether our evaluation identified any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether the company had identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. This information was important both for the controls evaluation generally, and because item 5 in the certifications of the CEO and CFO requires that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are deficiencies in the design or operation of controls that could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Auditing literature defines “material weakness” as a particularly serious reportable condition in which the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such misstatements would not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to address other controls matters in the controls evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our ongoing procedures.

Conclusions. Based upon the controls evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, as of the end of the period covered by this Annual Report, our Disclosure Controls were effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared.
ITEM 9B. OTHER INFORMATION

None.
PART III
 
Information called for by PART III (Items 10, 11, 12, 13 and 14) of this Report on Form 10-K has been omitted as we intend to file with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2005 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement.
 
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
ITEM 11.   EXECUTIVE COMPENSATION.
 
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
PART IV
 
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(a)(1)-(2) Financial Statements and Schedules:
 
Our consolidated financial statements and schedules identified in the accompanying Index to Financial Statements at page F-1 herein are filed as part of this Report on Form 10-K.
 
(a)(3) Exhibits:
 
The accompanying Exhibit Index on page E-1 sets forth the exhibits that are filed as part of this Report on Form 10-K.
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Community Capital Corporation, has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
     
  COMMUNITY CAPITAL CORPORATION
 
 		  
 		  
 
Dated: March 29, 2006 By:   /s/ William G. Stevens
 
 
William G. Stevens
President and Chief Executive Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
 
Title
 
 
Date
         
/s/ William G. Stevens        
  
President, Chief Executive
  
March 29, 2006
William G. Stevens
 
  
Officer, and Director
 
    
/s/ R. Wesley Brewer                          
 
Chief Financial Officer, Executive
  
March 29, 2006
R. Wesley Brewer
  
Vice President, and Secretary
    
         
                     *                                      
 
Assistant Secretary and Director
  
March 29, 2006
Patricia C. Hartung
 
        
                     *                                      
 
Director
  
March 29, 2006
David P. Allred
 
        
                     *                                      
 
Director
  
March 29, 2006
Harold Clinkscales, Jr.
 
        
                     *                                      
 
Director
  
March 29, 2006
Wayne Q. Justesen, Jr.
 
        
                     *                                      
 
Director
  
March 29, 2006
B. Marshall Keys
 
        
                     *                                      
  
Director
  
March 29, 2006
Clinton C. Lemon, Jr.
 
        
                     *                                      
  
Director
  
March 29, 2006
Miles Loadholt
 
        
                     *                                      
  
Director
  
March 29, 2006
Thomas C. Lynch, Jr.
 
        
                     *                                      
  
Director
  
March 29, 2006
H. Edward Munnerlyn
 
        
                     *                                      
  
Director
  
March 29, 2006
George B. Park
 
        
 
         
                     *                                      
  
Director
  
March 29, 2006
George D. Rodgers
 
        
                     *                                      
  
Director
  
March 29, 2006
Charles J. Rogers
 
        
                     *                                      
  
Director
  
March 29, 2006
Lex D. Walters
 
        
*By: /s/ William G. Stevens
     
March 29, 2006
(William G. Stevens) (As
        
Attorney-in-Fact for each
        
of the persons indicated)
        
 
 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
COMMUNITY CAPITAL CORPORATION
 
Page No.
 
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-3
Consolidated Statements of Income
F-4
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7 to F-32

 


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors
Community Capital Corporation
Greenwood, South Carolina


We have audited the accompanying consolidated balance sheets of Community Capital Corporation as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Community Capital Corporation as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
 

Elliott Davis, LLC
Greenville, South Carolina
January 19, 2006

Consolidated Balance Sheets

 
  
 December 31,
  
(Dollars in thousands, except share information)
 
2005
  
2004
  
Assets:
          
Cash and cash equivalents:
              
Cash and due from banks
 
$
18,806
  
$
9,053
  
Interest-bearing deposit accounts
   
31
   
75
  
Total cash and cash equivalents
   
18,837
   
9,128
  
Investment securities:
              
Securities available-for-sale
   
70,232
   
71,119
  
Securities held-to-maturity (estimated fair value of $391 and $455 at December 31, 2005 and 2004)
   
380
   
425
  
Nonmarketable equity securities
   
5,275
   
6,052
  
Total investment securities
   
75,887
   
77,596
  
Loans held for sale
   
389
   
1,256
  
Loans receivable
   
465,892
   
425,628
  
Less allowance for loan losses
   
(6,324
)
  
(5,808
)
Loans, net
   
459,568
   
419,820
  
Premises and equipment, net
   
13,691
   
12,544
  
Accrued interest receivable
   
2,666
   
2,136
  
Intangible assets
   
10,918
   
11,107
  
Cash surrender value of life insurance
   
13,482
   
12,900
  
Other assets
   
3,352
   
2,599
  
Total assets
 
$
598,790
  
$
549,086
  
               
Liabilities:
              
Deposits:
              
Noninterest-bearing
 
$
59,286
  
$
45,504
  
Interest-bearing
   
374,360
   
334,853
  
Total deposits
   
433,646
   
380,357
  
Federal funds purchased and securities sold under agreements to repurchase
   
49,099
   
43,978
  
Advances from the Federal Home Loan Bank
   
57,225
   
66,325
  
Obligations under capital leases
   
-
   
181
  
Accrued interest payable
   
1,321
   
736
  
Other liabilities
   
2,993
   
2,406
  
Total liabilities
   
544,284
   
493,983
  
Commitments and contingencies - Notes 5, 12, and 16              
               
Shareholders' equity:
              
Common stock, $1.00 par value; 10,000,000 shares authorized; 4,751,301 and 4,660,944
shares issued and outstanding at December 31, 2005 and 2004, respectively
   
4,751
   
4,661
  
Nonvested restricted stock
   
(595
)
  
(183
)
Capital surplus
   
46,929
   
45,751
  
Accumulated other comprehensive income
   
(421
)
  
785
  
Retained earnings
   
20,893
   
16,653
  
Treasury stock, at cost (1,026,227 in 2005, and 832,566 shares in 2004)
   
(17,052
)
  
(12,564
)
Total shareholders' equity
   
54,505
   
55,103
  
Total liabilities and shareholders' equity
 
$
598,790
  
$
549,086
  

Consolidated Statements of Income

 
  
 For the years ended
  
 
  
 December 31,
  
(Dollars in thousands, except for per share data amounts)
 
2005
  
2004
  
2003
  
Interest income:
             
Loans, including fees
 
$
27,554
  
$
22,415
  
$
18,821
  
Investment securities:
                   
Taxable
   
1,683
   
1,472
   
908
  
Tax-exempt
   
1,306
   
1,329
   
1,162
  
Nonmarketable equity securities
   
239
   
185
   
140
  
Federal funds sold and other
   
96
   
7
   
-
  
Total interest income
   
30,878
   
25,408
   
21,031
  
                     
Interest expense:
                   
Deposits
   
8,376
   
4,816
   
4,727
  
Advances from the Federal Home Loan Bank
   
1,892
   
1,204
   
1,400
  
Federal funds purchased and securities sold under
                   
agreements to repurchase
   
680
    513    
268
  
Obligations under capital leases
   
10
   
29
   
60
  
Total interest expense
   
10,958
   
6,562
   
6,455
  
                     
Net interest income
   
19,920
   
18,846
   
14,576
  
Provision for loan losses
   
825
   
1,200
   
479
  
                     
Net interest income after provision for loan losses
   
19,095
   
17,646
   
14,097
  
                     
Noninterest income:
                   
Service charges on deposit accounts
   
3,035
   
2,726
   
2,372
  
Gain on sales of nonmarketable equity securities
   
1,092
   
-
   
1,689
  
Gain on sales of securities available-for-sale
   
-
   
5
   
27
  
Gain on sale of loans held for sale
   
828
   
824
   
1,259
  
Commissions from sales of mutual funds
   
178
   
276
   
226
  
Income from fiduciary activities
   
901
   
621
   
394
  
Gain on sale of premises and equipment
   
101
   
-
   
29
  
Other operating income
   
1,258
   
1,154
   
1,105
  
Total noninterest income
   
7,393
   
5,606
   
7,101
  
                     
Noninterest expenses:
                   
Salaries and employee benefits
   
9,723
    
 8,874
   
7,118
  
Net occupancy
   
977
   
853
   
742
  
Amortization of intangible assets
   
515
   
506
   
346
  
Furniture and equipment
   
945
   
958
   
1,117
  
Loss on sale of premises and equipment
   
-
   
9
   
-
  
Loss on sale of securities available-for-sale
   
66
   
-
   
-
  
Other operating expenses
   
4,689
   
4,653
   
5,210
  
Total noninterest expenses
   
16,915
   
15,853
   
14,533
  
                     
Income before income taxes
   
9,573
   
7,399
   
6,665
  
Income tax expense
   
2,479
   
1,599
   
1,663
  
                     
Net income
 
$
7,094
  
$
5,800
  
$
5,002
  
                     
Earnings per share:
                   
Basic earnings per share
 
$
1.87
 
$
1.52
  
$
1.43
  
Diluted earnings per share
 
$
1.82
  
$
1.47
  
$
1.36
  

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
For the years ended December 31, 2005, 2004, and 2003

                     Accumulated              
 
                  
other
              
 
                  
compre-
              
 
          
Nonvested
      
hensive
              
(Dollars in thousands,
 
 Common stock
  
restricted
  
Capital
  
income
  
Retained
  
Treasury
      
except share data)
 
Shares
  
Amount
  
stock
  
surplus
  
(loss)
  
earnings
  
stock
 
 Total
  
Balance, December 31, 2002
   
3,860,790
 
$
3,861
  
$
-
  
$
34,754
  
$
989
  
$
8,947
  
$
(4,143
)
 $ 44,408  
Net income
                       
5,002
       
5,002
  
Other comprehensive income, net of tax effects
                   
(120
)
          
(120
)
Comprehensive income
                               
4,882
  
Dividends paid ($0.33 per share)
                       
(1,158
)
      
(1,158
)
Stock options exercised
   
315,129
   
315
       
2,621
               
2,936
  
Purchase of treasury stock (334,647 shares)
   
 
    
 
    
 
    
 
    
 
    
 
    
(5,535
)
   (5,535 )
Balance, December 31, 2003
   
4,175,919
 
$
4,176
  
$
-
  
$
37,375
  
$
869
  
$
12,791
  
$
(9,678
)
 $ 45,533  
                                                   
Net income
                       
5,800
       
5,800
  
Other comprehensive income, net of tax effects
                   
(84
)
          
(84
)
Comprehensive income
                               
5,716
  
Abbeville Capital Corporation merger consideration
   
371,695
   
372
       
7,241
               
7,613
  
Dividends paid ($0.51 per share)
                       
(1,938
)
      
(1,938
)
Stock options exercised
   
103,330
   
103
       
932
               
1,035
  
Issuance of restricted stock
   
10,000
   
10
   
(213
)
  
203
               
-
  
Amortization of deferred compensation on restricted stock
           
30
                   
30
  
Purchase of treasury stock (130,044 shares)
   
 
    
 
    
 
    
 
    
 
    
 
    
(2,886
)
   (2,886 )
Balance, December 31, 2004
   
4,660,944
 
$
4,661
  
$
(183
)
$
45,751
  
$
785
  
$
16,653
  
$
(12,564
)
 $ 55,103  
                                                   
Net income
                       
7,094
       
7,094
  
Other comprehensive income, net of tax effects
                   
(1,206
)
          
(1,206
)
Comprehensive income
                               
5,888
  
Dividends paid ($0.75 per share)
                       
(2,854
)
      
(2,854
)
Stock options exercised
   
59,757
   
59
       
505
               
564
  
Issuance of restricted stock
   
30,600
   
31
   
(704
)
  
673
               
-
  
Amortization of deferred compensation on restricted stock
           
292
                   
292
  
Purchase of treasury stock (193,661 shares)
   
 
    
 
    
 
    
 
    
 
    
 
    
(4,488
)
   (4,488 )
Balance, December 31, 2005
   
4,751,301
 
$
4,751
  
$
(595
)
$
46,929
  
$
(421
)
$
20,893
  
$
(17,052
)
 $ 54,505  


Consolidated Statements of Cash Flows

 
  
 For the years ended
  
 
  
 December 31,
  
(Dollars in thousands)
 
2005
  
2004
  
2003
  
Cash flows from operating activities:
              
Net income
 
$
7,094
  
$
5,800
  
$
5,002
  
Adjustments to reconcile net income to net cash provided by operating activities:
                    
Depreciation and amortization
   
872
   
854
   
938
  
Writedown on disposal of equipment
   
-
   
-
   
151
  
Provision for loan losses
   
825
   
1,200
   
479
  
Deferred income tax benefit
   
(639
)
  
(456
)
  
(21
)
Amortization of intangible assets
   
516
   
403
   
346
  
Amortization of deferred compensation on restricted stock
   
292
   
30
   
-
  
Premium amortization less discount accretion on securities available-for-sale
   
11
   
31
   
20
  
Amortization of deferred loan costs and fees, net
   
932
   
377
   
-
  
Loss (gain) on sale of premises and equipment
   
(101
)
  
9
   
(29
)
Loss on sale of other real estate
   
64
   
42
   
50
  
Net (gain) loss on sales or calls of securities available-for-sale
   
66
   
(5
)
  
(27
)
Net gain on sales of nonmarketable equity securities
   
(1,092
)
  
-
   
(1,689
)
Proceeds of sales of residential mortgages
   
33,987
   
33,146
   
49,811
  
Disbursements for residential mortgages held-for-sale
   
(33,120
)
  
(34,128
)
  
(52,511
)
(Increase) decrease in interest receivable
   
(530
)
  
(509
)
  
280
  
Increase (decrease) in interest payable
   
585
   
228
   
(141
)
(Increase) decrease in other assets
   
(406
)
  
510
   
(367
)
Decrease in other liabilities
   
404
   
(898
)
  
(896
)
Net cash provided by operating activities
   
9,760
   
6,634
   
1,396
  
                     
Cash flows from investing activities:
                    
Net increase in loans made to customers
   
(41,776
)
  
(64,619
)
  
(32,805
)
Proceeds from sales of securities available-for-sale
   
9,628
   
8,683
   
4,544
  
Proceeds from calls and maturities of securities available-for-sale
   
7,932
   
11,331
   
16,679
  
Purchases of securities available-for-sale
   
(18,577
)
  
(32,143
)
  
(13,500
)
Proceeds from calls and maturities of securities held-to-maturity
   
45
   
45
   
80
  
Proceeds from sales of nonmarketable equity securities
   
2,674
   
645
   
3,670
  
Purchase of nonmarketable equity securities
   
(805
)
  
(3,249
)
  
(45
)
Purchase of premises and equipment
   
(2,461
)
  
(3,278
)
  
(1,016
)
Proceeds from sales of premises and equipment
   
543
   
476
   
275
  
Proceeds from sales of other real estate
   
212
   
94
   
401
  
Net assets acquired in bank acquisition
   
-
   
11,229
   
-
  
Net cash used by investing activities
   
(42,585
)
  
(70,786
)
  
(21,717
)
                     
Cash flows from financing activities:
                    
Net increase in demand and savings accounts
   
24,518
   
11,284
   
43,078
  
Net increase (decrease) in time deposits
   
28,772
   
2,126
   
(5,366
)
Net increase (decrease) in federal funds purchased and securities sold under
agreements to repurchase
   
5,121
   
13,918
   
(5,672
)
Proceeds from advances from the Federal Home Loan Bank
   
51,500
   
41,000
   
21,900
  
Repayments of advances from the Federal Home Loan Bank
   
(60,600
)
  
(8,193
)
  
(22,615
)
Dividends paid
   
(2,853
)
  
(1,938
)
  
(1,158
)
Proceeds from exercise of stock options
   
564
   
1,035
   
2,936
  
Purchase of treasury stock
   
(4,488
)
  
(2,886
)
  
(5,535
)
Net cash provided by financing activities
   
42,534
   
56,346
   
27,568
  
                     
Net increase (decrease) in cash and cash equivalents
   
9,709
   
(7,806
)
  
7,247
  
                     
Cash and cash equivalents, beginning of year
   
9,128
   
16,934
   
9,687
  
                     
Cash and cash equivalents, end of year
 
$
18,837
  
$
9,128
  
$
16,934
  
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Community Capital Corporation (the Company) serves as a bank holding company for CapitalBank (the Bank). CapitalBank operates sixteen branches throughout South Carolina. The Bank offers a full range of banking services, including a wealth management group featuring a wide array of financial services, with personalized attention, local decision making and strong emphasis on the needs of individuals and small to medium-sized businesses. As discussed in Note 2, the Company acquired Abbeville Capital Corporation and its subsidiary, The Bank of Abbeville on March 5, 2004.

The accounting and reporting policies of the Company reflect industry practices and conform to generally accepted accounting principles in all material respects. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and income and expenses for the period. Actual results could differ significantly from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, including valuation allowances for impaired loans, the carrying amount of real estate acquired in connection with foreclosures or in satisfaction of loans, and the assumptions used in computing the fair value of stock options granted and the pro forma disclosures required by Statement of Financial Accounting Standards (SFAS) No. 123, “Share Based Payment.” Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change materially in the near term.

Securities Available-for-sale - Securities available-for-sale by the Company are carried at amortized cost and adjusted to estimated fair value by recording the aggregate unrealized gain or loss in a valuation account. Management does not actively trade securities classified as available-for-sale. Reductions in fair value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis in the security. Generally, amortization of premiums and accretion of discounts are charged or credited to earnings on a straight-line basis over the life of the securities. The adjusted cost basis of securities available-for-sale is determined by specific identification and is used in computing the gain or loss from a sales transaction.

Securities Held-To-Maturity - Securities held-to-maturity are those securities which management has the intent and the Company has the ability to hold until maturity. Securities held-to-maturity are carried at cost and adjusted for amortization of premiums and accretion of discounts, both computed by the straight-line method. Reductions in fair value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security.

Nonmarketable Equity Securities - Nonmarketable equity securities include the costs of the Company’s investments in the stock of the Federal Reserve Bank and the Federal Home Loan Bank. The stocks have no quoted market value and no ready market exists. Investment in Federal Reserve Bank stock is required for state-chartered member banks. Investment in Federal Home Loan Bank stock is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to secure the borrowings. At December 31, 2005 and 2004, the investment in Federal Reserve Bank stock was $1,476,150 and $1,476,150, respectively. At December 31, 2005 and 2004, the investment in Federal Home Loan Bank stock was $3,672,700 and $3,949,700, respectively.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Nonmarketable Equity Securities (continued) - The Company has invested in the stock of several unrelated financial institutions. The Company owns less than five percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable. At December 31, 2005 and 2004, the investments in the stock of the unrelated financial institutions, at cost was $126,464. During 2003, the Company sold its investments in three financial institutions and recorded a gain on these sales of $1,689,000. The Company also invested in a financial services company that offers internet banking. At December 31, 2004, the Company’s investment in the stock of this institution was $500,000. During 2005, the Company sold its investment in this company and recorded a gain on the sale of $1,092,000.

Loans receivable - Loans are recorded at their unpaid principal balance. Direct loan origination costs and loan origination fees are deferred and amortized over the lives of the loans as an adjustment to yield. Unamortized net deferred loan costs included in loans at December 31, 2005 and 2004 were $133,203 and $109,665, respectively.

Loans are defined as impaired when “based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.” All loans are subject to this criteria except for: “smaller-balance homogeneous loans that are collectively evaluated for impairment” and loans “measured at fair value or at the lower of cost or fair value.” The Company considers its consumer installment portfolio, credit cards, and home equity lines as meeting this criteria. Therefore, the real estate and commercial loan portfolios are primarily subject to possible impairment.

Impaired loans are measured based on the present value of discounted expected cash flows. When it is determined that a loan is impaired, a direct charge to bad debt expense is made for the difference between the net present value of expected future cash flows based on the contractual rate and the Company’s recorded investment in the related loan. The corresponding entry is to a related valuation account. Interest is discontinued on impaired loans when management determines that a borrower may be unable to meet payments as they become due.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected. At December 31, 2005 and 2004, the Company had no impaired loans that were material to the consolidated financial statements.

Interest income is computed using the simple interest method and is recorded in the period earned. When serious doubt exists as to the collectibility of a loan or a loan is contractually 90 days past due, the accrual of interest income is generally discontinued unless the estimated net realizable value of the collateral is sufficient to assure collection of the principal balance and accrued interest. When interest accruals are discontinued, unpaid accrued interest is reversed and charged against current year income.

Allowance for Loan Losses - Management provides for losses on loans through specific and general charges to operations and credits such charges to the allowance for loan losses. Specific provision for losses is determined for identified loans based upon estimates of the excess of the loan’s carrying value over the net realizable value of the underlying collateral. General provision for loan losses is estimated by management based upon factors including industry loss experience for similar lending categories, actual loss experience, delinquency trends, as well as prevailing and anticipated economic conditions. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. Delinquent loans are charged against the allowance at the time they are determined to be uncollectible. Recoveries are added to the allowance.

Residential Mortgages Held For Sale - The Company’s mortgage activities are comprised of accepting residential mortgage loan applications, qualifying borrowers to standards established by investors, funding residential mortgages and selling mortgages to investors under pre-existing commitments. Funded residential mortgages held temporarily for sale to investors are recorded at the lower of cost or market value. Application and origination fees collected by the Company are recognized as income upon sale to the investor.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation. Gain or loss on retirement of premises and equipment is recognized in the statements of income when incurred. Expenditures for maintenance and repairs are charged to expense; betterments and improvements are capitalized. Depreciation charges are computed principally on the straight-line method over the estimated useful lives as follows: building and improvements - 40 years; furniture, fixtures and equipment - 3 to 15 years.

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the lower of cost (principal balance at the date of foreclosure) or fair value minus estimated costs to sell. Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains and losses on disposal are included in other expenses.

Intangible Assets - Intangible assets consist of goodwill and core deposit premiums resulting from the Company’s acquisitions. The core deposit premiums are being amortized over twelve to fifteen years using the straight-line method. Goodwill is being evaluated for impairment on an annual basis in accordance with SFAS No. 147, “Acquisitions of Certain Financial Institutions.”

Income Taxes - The income tax provision is the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between the financial accounting and tax bases of certain assets and liabilities, principally the allowance for loan losses and depreciable premises and equipment.

Advertising Expense - Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of $158,276, $153,886, and $146,263 were included in the Company's results of operations for 2005, 2004, and 2003, respectively.

Stock-Based Compensation - The Company has a stock-based employee compensation plan which is further described in Note 14. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.
 
   
 Year ended December 31, 
  
(Dollars in thousands,
except for per share data)
    
2005 
    
2004 
    
2003 
  
Net income, as reported
  
$
7,094
  
$
5,800
  
$
5,002
  
Deduct: Total stock-based employee
                    
compensation expense determined
                    
under fair value based method
                    
for all awards, net of related tax effects
    
-
   
95
    
101
  
Pro forma net income
  
$
7,094
  
$
5,705
  
$
4,901
  
Earnings per share:
                    
Basic - as reported
  
$
1.87
  
$
1.52
  
$
1.43
  
Basic - pro forma
  
$
1.87
  
$
1.50
  
$
1.40
  
Diluted - as reported
  
$
1.82
  
$
1.47
  
$
1.36
  
Diluted - pro forma
  
$
1.82
  
$
1.45
  
$
1.33
  
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Cash Flow Information - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from depository institutions, interest-bearing deposit accounts, and federal funds sold. Generally, federal funds are sold for one-day periods.

The following summarizes supplemental cash flow information:

   
 Year ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Cash paid for interest
  
$
10,373
  
$
6,333
  
$
6,596
  
Cash paid for income taxes
    
2,832
    
1,673
    
1,947
  
Supplemental noncash investing and financing activities:
                    
Foreclosures on loans
    
271
    
133
    
402
  
Stock issued in connection with Bank of Abbeville acquisition
    
-
   
7,612
    
-
 
Change in unrealized gain or loss on securities available-for sale, net of tax
    
(1,206
)
  
(84
)
  
(120
)

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes throughout South Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Per-Share Data - Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding for the period. Diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued using the treasury stock method.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Comprehensive Income - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other changes in comprehensive income and related tax effects are as follows:

   
 Year ended December 31, 
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Unrealized holding gains (losses) on available-for-sale securities
  
$
(1,892
)
$
(122
)
$
(155
)
Reclassification adjustment for (gains) losses realized in income
    
66
    
(5
)
  
(27
)
Net unrealized gains (losses) on securities
    
(1,826
)
  
(127
)
  
(182
)
Tax effect
    
620
    
43
    
62
  
Net-of-tax amount
  
$
(1,206
)
$
(84
)
$
(120
)
 
Common Stock Owned by the Employee Stock Ownership Plan (ESOP) - ESOP purchases and redemptions of the Company’s common stock are at estimated fair value. Dividends on ESOP shares are charged to retained earnings. All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share.

Off-Balance-Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

Recent Accounting Pronouncements - In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosures related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning as of the first annual reporting period beginning after December 15, 2005. SFAS No. 123(R) allows for adoption using either the modified prospective or modified retrospective methods. The Company anticipates using the modified prospective method when this statement is adopted in the first quarter of 2006. The Company has evaluated the impact upon adoption of SFAS No. 123(R) and has concluded that the adoption will not have a material impact on financial position or results of operations upon adoption.

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance issued Staff Accounting Bulletin (“SAB”) No.107 to provide guidance regarding the application of SFAS No.123(R). SAB No. 107 provides interpretive guidance related to the interaction between SFAS No.123(R) and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB No. 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to SFAS No.123(R).

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29.” The standard is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and eliminates the exception under ABP Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153 is not expected to have a material impact on the Company's financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable, in which case the changes should be applied to the latest practicable date presented. SFAS No. 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In March 2004, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and it also provides guidance on quantitative and qualitative disclosures. The disclosure requirements in paragraph 21 of this Issue were effective for annual financial statements for fiscal years ending after December 15, 2003 and were adopted by the Company effective December 31, 2003. The recognition and measurement guidance in paragraphs 6-20 of this Issue was to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004, but was delayed by FASB action in October 2004 through the issuance of a proposed FASB Staff Position (“FSP”) on the issue. In July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1—“The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” This final guidance eliminated paragraphs10-18 of EITF-03-1 (paragraphs 19-20 have no material impact on the financial position or results of operations of the Company) and will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The Company has evaluated the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has concluded that the adoption will not have a material impact on financial position and results of operations upon adoption.

In December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products that May Give Rise to a Concentration of Credit Risk.” The disclosure guidance in this FSP is effective for interim and annual periods ending after December 19, 2005. The FSP states that the terms of certain loan products may increase a reporting entity's exposure to credit risk and thereby may result in a concentration of credit risk as that term is used in SFAS No. 107, either as an individual product type or as a group of products with similar features. SFAS No. 107 requires disclosures about each significant concentration, including “information about the (shared) activity, region, or economic characteristic that identifies the concentration.” The FSP suggests possible shared characteristics on which significant concentrations may be determined which include, but are not limited to: borrowers subject to significant payment increases, loans with terms that permit negative amortization and loans with high loan-to-value ratios. This FSP requires entities to provide the disclosures required by SFAS No. 107 for loan products that are determined to represent a concentration of credit risk in accordance with the guidance of this FSP for all periods presented. The Company adopted this disclosure standard effective December 31, 2005.

Other accounting standards that have been issued or proposed by the Public Company Accounting Oversight Board (PCAOB) or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators' judgments based on information available to them at the time of their examination.

Reclassifications - Certain captions and amounts in the 2004 and 2003 financial statements were reclassified to conform with the 2005 presentation.

Accounting for Transfers of Financial Assets - A sale is recognized when the Company relinquishes control over a financial asset and is compensated for such asset. The difference between the net proceeds received and the carrying amount of the financial asset being sold or securitized is recognized as a gain or loss on the sale.

NOTE 2 - ACQUISITION

On March 5, 2004, the Company acquired 100 percent of the outstanding shares of Abbeville Capital Corporation, the parent company of The Bank of Abbeville. The Bank of Abbeville became a branch of CapitalBank, a wholly-owned banking subsidiary of the Company. The impact of the acquisition on the Company’s results of operations are included in the consolidated statement of income since the acquisition date of March 5, 2004. The acquisition allows the Company to strategically expand its operations into a contiguous market in which it presently has no full-service branch facilities. Additionally, the Company expects that over a relatively short period of time it will realize cost reductions due to achieving certain economies of scale.

The aggregate acquisition cost was $15,411,000, including $7,226,000 of cash, 371,693 shares of the Company's common stock valued at $7,612,000 and direct acquisition - related costs of $573,000. The value of the 371,693 shares of common stock issued at $20.48 per share was determined based on the average closing price of the Company's common shares over the three-day period before and after January 16, 2004 (the "measurement date"). The measurement date was determined pursuant to the provisions of the Emerging Issues Task Force Consensus 99-12, "Determination of the Measurement Date for the Market Price of Securities Issued in a Purchase Business Combination", due to the application of a formula to determine the number of shares issued by the Company.

The primary intangible assets acquired in conjunction with the purchase of Abbeville Capital Corporation are core deposit intangible assets with an estimated useful life of approximately twelve years and goodwill. The transaction was a tax free reorganization for federal income taxes.

NOTE 2 - ACQUISITION - continued

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed March 5, 2004.

 
(Dollars in thousands)
      
Cash and cash equivalents
  
$
4,164
  
Federal funds sold
    
14,291
  
Investment securities
    
17,163
  
Loans, net of allowance
    
35,335
  
Premises and equipment
    
979
  
Core deposit intangible asset
    
927
  
Goodwill
    
7,051
  
Other assets
    
2,336
  
Total assets acquired
    
82,246
  
Deposits
    
52,674
  
Advances from the Federal Home Loan Bank
    
3,091
  
Other liabilities
    
10,956
  
Total liabilities assumed
    
66,721
  
Net assets acquired
  
$
15,525
  
 
The following table presents the results of operations as though the business combination had been completed as of the beginning of the year.

   
December 31,
  
(Dollars in thousands, except per share)
  
2004
  
2003
  
           
Interest and noninterest income
  
$
31,751
  
$
32,651
  
               
Net income (1)
    
6,496
    
5,927
  
               
Earnings per share
              
Basic earnings per share
    
1.85
    
1.70
  
Diluted earnings per share
    
1.51
    
1.45
  
 
(1)
Amount excludes one-time acquisition-related costs of $573,000.

NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS

The Company is required to maintain average reserve balances computed as a percentage of deposits. At December 31, 2005 and 2004, the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.


NOTE 4 - INVESTMENT SECURITIES

Securities available-for-sale at December 31, 2005 and 2004 consisted of the following:

   
Amortized
  
Gross Unrealized
  
Estimated
  
(Dollars in thousands)
  
Cost
  
Gains
  
Losses
  
Fair Value
  
December 31, 2005
                  
U.S. Government agencies and corporations
  
$
15,475
  
$
-
  
$
369
  
$
15,106
  
Obligations of state and local governments
    
27,443
    
819
    
15
    
28,247
  
Obligations of corporations
    
1,000
    
5
    
-
   
1,005
  
     
43,918
    
824
    
384
    
44,358
  
Mortgage-backed securities
    
26,648
    
33
    
807
    
25,874
  
Total
  
$
70,566
  
$
857
  
$
1,191
  
$
70,232
  
                           
December 31, 2004
                          
U.S. Government agencies and corporations
  
$
23,204
  
$
47
  
$
70
  
$
23,181
  
Obligations of state and local governments
    
29,870
    
1,619
    
6
    
31,483
  
Obligations of corporations
    
1,000
    
9
    
-
   
1,009
  
     
54,074
    
1,675
    
76
    
55,673
  
Mortgage-backed securities
    
15,494
    
80
    
128
    
15,446
  
Total
  
$
69,568
  
$
1,755
  
$
204
  
$
71,119
  
 
Securities held-to-maturity as of December 31, 2005 and 2004 consisted of the following:
 
                           
 
    
Amortized
    
 Gross Unrealized
    
Estimated
  
(Dollars in thousands)
    
Cost
    
Gains
    
Losses
    
Fair Value
  
Obligations of state and local governments
  
$
380
  
$
11
  
$
-
  
$
391
  
                           
December 31, 2004
                          
Obligations of state and local governments
  
$
425
  
$
30
  
$
-
  
$
455
  
 
The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005.

Securities Available-for-Sale

   
Less than
  
Twelve months
          
   
twelve months
  
or more
  
Total 
  
       
Unrealized
      
Unrealized
      
Unrealized
  
(Dollars in thousands)
  
Fair value
  
losses
  
Fair value
  
losses
  
Fair value
  
losses
  
U.S. government agencies and corporations
  
$
9,780
  
$
211
  
$
5,327
  
$
158
  
$
15,107
  
$
369
  
Obligations of state and local governments
    
1,267
    
15
    
-
    
-
   
1,267
    
15
  
Mortgage-backed securities
    
14,537
    
355
    
10,153
    
452
    
24,690
    
807
  
                                       
Total
  
$
25,584
  
$
581
  
$
15,480
  
$
610
  
$
41,064
  
$
1,191
  
 
NOTE 4 - INVESTMENT SECURITIES - continued

Securities classified as available-for-sale are recorded at fair market value. Approximately 51.22% of the unrealized losses, or eight individual securities, consisted of securities in a continuous loss position for twelve months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

The following table summarizes the maturities of securities available-for-sale and held-to-maturity as of December 31, 2005, based on the contractual maturities. Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

   
 Securities
  
Securities
  
   
 Available-For-Sale
  
Held-To-Maturity
  
   
 Amortized
  
Estimated
  
Amortized
  
Estimated
  
(Dollars in thousands)
  
Cost
  
Fair Value
  
Cost
  
Fair Value
  
Due in one year or less
  
$
300
  
$
301
  
$
-
  
$
-
  
Due after one year but within five years
    
20,395
    
20,139
    
-
   
-
 
Due after five years but within ten years
    
11,326
    
11,724
    
380
    
391
  
Due after ten years
    
11,897
    
12,195
    
-
   
-
 
     
43,918
    
44,359
    
380
    
391
  
Mortgage-backed securities
    
26,648
    
25,873
    
-
   
-
 
Total
  
$
70,566
  
$
70,232
  
$
380
  
$
391
  
 
Proceeds from sales of securities available-for-sale during 2005, 2004, and 2003 were $9,628,000, $8,683,000, and $4,544,000, respectively, resulting in gross realized losses of $66,000 in 2005 and gross realized gains of $5,000 and $27,000 in 2004 and 2003, respectively. There were no sales of securities held-to-maturity in 2005, 2004, or 2003.

At December 31, 2005 and 2004, securities having amortized costs of approximately $69,433,000 and $69,087,000, respectively, and estimated fair values of $68,828,000 and $70,759,000, respectively, were pledged as collateral for short-term borrowings, to secure public and trust deposits, and for other purposes as required and permitted by law.

As noted in Note 1, the Company has nonmarketable equity securities consisting of investments in several financial institutions. These investments totaled $5,275,000 and $6,052,000 at December 31, 2005 and 2004, respectively. During 2005, 2004, and 2003, the Company recorded gains on the sale of nonmarketable equity securities of $1,092,000, $0, and $1,689,000, respectively.

NOTE 5 - LOANS RECEIVABLE

Loans receivable are summarized as follows:

   
December 31, 
  
(Dollars in thousands)
  
2005
  
2004
  
Commercial and industrial
  
$
38,180
  
$
45,222
  
Real estate - construction
    
106,704
    
48,223
  
Real estate - mortgage and commercial
    
257,038
    
268,383
  
Home equity
    
41,259
    
39,297
  
Consumer - installment
    
21,066
    
22,912
  
Consumer - credit card and checking
    
1,645
    
1,591
  
Total gross loans
  
$
465,892
  
$
425,628
  
 
NOTE 5 - LOANS RECEIVABLE - continued

At December 31, 2005 and 2004, the Company had sold participations in loans aggregating $2,451,000 and $5,123,000, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.

The Bank accepts residential mortgage loan applications and fund loans of qualified borrowers (see Note 1). Funded loans are sold without recourse to investors under the terms of pre-existing commitments. The Company does not sell residential mortgages having market or interest rate risk. The Company does not service residential mortgage loans for the benefit of others.

At December 31, 2005 and 2004, the Company had pledged approximately $100,821,000 and $146,931,000, respectively, of loans on residential real estate as collateral for advances from the Federal Home Loan Bank (see Note 10).

An analysis of the allowance for loan losses for the years ended December 31, 2005, 2004, and 2003, is as follows:

(Dollars in thousands)
  
2005
  
2004
  
2003
  
Balance, beginning of year
  
$
5,808
  
$
4,584
  
$
4,282
  
Allowance acquired through acquisition
    
-
   
432
    
-
  
Provision charged to operations
    
825
    
1,200
    
479
  
Recoveries on loans previously charged-off
    
85
    
169
    
288
  
Loans charged-off
    
(394
)
  
(577
)
  
(465
)
Balance, end of year
  
$
6,324
  
$
5,808
  
$
4,584
  
 
At December 31, 2005 and 2004, the Company had impaired loans of approximately $2,128,000 and $2,099,000. Valuation allowances for credit losses on impaired loans totaled $311,000 and $435,000 for the years ended December 31, 2005 and 2004, respectively. Interest income on impaired loans totaled $23,000 and $20,000 for the years ended December 31, 2005 and 2004, respectively and was measured using the cash basis. Average investment in impaired loans was $2,466,000 and $2,094,000 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005, there were no nonaccrual loans for which impairment had not been recognized. At December 31, 2004, the Company had nonaccrual loans of approximately $5,000 for which impairment had not been recognized. The Company had loans contractually past due 90 days or more and still accruing interest totaling $223,000 and $230,000 at December 31, 2005 and 2004, respectively.

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk. These financial instruments are commitments to extend credit, commitments under credit card arrangements and letters of credit and have elements of risk in excess of the amount recognized in the balance sheet. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.

At December 31, 2005 and 2004, the Company had unfunded commitments, including standby letters of credit, of $104,308,000 and $69,570,000, of which $6,846,000 and $10,215,000, respectively, were unsecured. At December 31, 2005, the Company was not committed to lend additional funds to borrowers having loans in nonaccrual status. The fair value of any potential liabilities associated with standby letters of credit is insignificant.

NOTE 5 - LOANS RECEIVABLE - continued

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions. Various recourse agreements exist, ranging from forty-five days to twelve months. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since none of the loans sold have ever been returned to the Company, the total loans sold with limited recourse amount does not necessarily represent future cash requirements. The Company uses the same credit policies in making loans held for sale as it does for on-balance-sheet instruments. Total loans sold with limited recourse in 2005 and 2004 was $46,002,000 and $44,257,000, respectively.

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

   
December 31, 
  
(Dollars in thousands)
  
2005
  
2004
  
Land
  
$
3,269
  
$
3,110
  
Building and land improvements
    
10,371
    
9,439
  
Furniture and equipment
    
7,323
    
6,827
  
Total
    
20,963
    
19,376
  
Less, accumulated depreciation
    
(7,272
)
  
(6,832
)
Premises and equipment, net
  
$
13,691
  
$
12,544
  
 
Depreciation and amortization expense was approximately $872,000, $854,000 and 938,000 for the years ended December 31, 2005, 2004 and 2003, respectively.


NOTE 7 - INTANGIBLE ASSETS

Intangible assets, net of accumulated amortization are summarized as follows:

   
December 31, 
  
(Dollars in thousands)
    
2005
   
2004
 
Core deposit premium, net
  
$
3,500
  
$
4,015
  
Goodwill
    
7,419
    
7,092
  
   
$
10,919
  
$
11,107
  
 
In accordance with SFAS No. 147, the Company evaluates its goodwill on an annual basis. The evaluations were performed in June of 2005 and 2004. At the time of the evaluations, the Company determined that no impairment existed. Therefore, there was no amortization of goodwill for the years ended December 31, 2005 or 2004. Amortization expense related to the core deposit premium was $515,000, $506,000, and $346,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

NOTE 8 - DEPOSITS

The following is a summary of deposit accounts:

   
December 31,        
  
(Dollars in thousands)
  
2005
  
2004
  
Noninterest-bearing demand deposits
  
$
59,286
  
$
45,504
  
Interest-bearing demand deposits
    
74,729
    
72,934
  
Money market accounts
    
89,327
    
82,872
  
Savings
    
39,008
    
36,522
  
Certificates of deposit and other time deposits
    
171,296
    
142,525
  
Total deposits
  
$
433,646
  
$
380,357
  
 
At December 31, 2005 and 2004, certificates of deposit of $100,000 or more totaled approximately $54,169,000 and $51,342,000, respectively. Interest expense on these deposits was approximately $1,768,000, $1,217,000 and $1,074,000 in 2005, 2004 and 2003, respectively.

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2005 were as follows:

(Dollars in thousands)
      
Maturing in
  
Amount
  
       
2006
  
$
138,609
  
2007
    
29,412
  
2008
    
2,885
  
2009
    
373
  
2010 and thereafter
    
17
  
Total
  
$
171,296
  
 
NOTE 9 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day. At December 31, 2005 and 2004, the securities sold under agreements to repurchase totaled $21,117,000, and $13,859,000, respectively. At December 31, 2005 and 2004, the amortized costs of securities pledged to collateralize the repurchase agreements were $21,707,000 and $14,830,000, respectively, and estimated fair values were $21,053,000 and $15,049,000, respectively. The securities underlying the agreements are held by a third-party custodian. At December 31, 2005 and 2004, federal funds purchased were $27,982,000 and $30,119,000, respectively.

NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank consisted of the following:

(Dollars in thousands)
  
 
  
 December 31,
  
Description
  
Interest Rate
  
2005
  
2004
  
Advances maturing:
              
May 2, 2005
    
2.44%, floating
  
$
-
  
$
21,000
  
October 13, 2005
    
5.84, fixed
    
-
    
3,000
  
May 14, 2007
    
1.78, fixed
    
-
    
15,000
  
September 5, 2008
    
3.03, fixed
    
5,400
    
5,400
  
September 29, 2008
    
1.86, fixed
    
-
    
6,500
  
February 2, 2009
    
4.95, fixed
    
325
    
425
  
March 17, 2010
    
5.92, fixed
    
5,000
    
5,000
  
March 14, 2013
    
4.49, floating
    
10,000
    
10,000
  
May 19, 2010
    
3.87, floating
    
15,000
    
-
  
September 29, 2010
    
4.02, floating
    
6,500
    
-
  
June 3, 2015
    
3.36, fixed
    
15,000
    
-
  
                     
         
$
57,225
  
$
66,325
  
 
Scheduled principal reductions of Federal Home Loan Bank advances are as follows:

(Dollars in thousands)
  
Amount
  
2006
  
$
100
  
2007
    
100
  
2008
    
5,500
  
2009
    
25
  
2010 and thereafter
    
51,500
  
Total
  
$
57,225
  
 
As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $63,256,000 and home equity lines of credit aggregating $37,565,000 (see Note 5) at December 31, 2005. In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.


NOTE 11 - SHAREHOLDERS’ EQUITY

The Board of Directors has approved stock repurchase plans whereby the Company could repurchase up to $16,900,000 of its outstanding shares of common stock. As of December 31, 2005, the Company had purchased approximately 1,026,000 shares under the plans (and prior plans), at an average cost of $16.64.

The Board of Directors may issue up to 2,000,000 shares of a special class of stock, par value $1.00 per share, the rights and preferences of which are to be designated at issuance. At December 31, 2005 and 2004, no shares of the undesignated stock had been issued or were outstanding.

NOTE 12 - LEASES

The Bank occupies and uses office space, land and equipment under operating leases with initial terms expiring on various dates through 2016. The lease agreements generally provide that the Bank is responsible for ongoing costs of repairs and maintenance, insurance and real estate taxes. The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental expenses under operating leases were $108,460, $115,020 and $126,200 for the years ended December 31, 2005, 2004 and 2003, respectively. Minimum lease commitments under noncancelable operating leases are as follows:

(Dollars in thousands)
  
Amount
  
2006
  
$
92
  
2007
    
72
  
2008
    
62
  
2009
    
55
  
2010 and thereafter
    
311
  
Total
  
$
592
  
 
The cost of renewals is not included in the above.

NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 100%. Tier 1 capital of the Company and the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.

The Company and the Bank are also required to maintain capital at a minimum level based on average assets (as defined), which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

As of the most recent regulatory examination, the Bank was deemed well-capitalized under the regulatory framework for prompt corrective action. To be categorized well capitalized, the Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events that management believes have changed the Bank’s categories.

NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS - continued

The following tables summarize the capital ratios and the regulatory minimum requirements of the Company and the Bank at December 31, 2005 and 2004.

 
                  
 To Be Well-
  
 
                  
 Capitalized Under
  
 
          
 For Capital
  
 Prompt Corrective
  
 
  
 Actual
  
 Adequacy Purposes
  
 Action Provisions
  
(Dollars in thousands)
 
Amount
  
Ratio
  
Amount
  
Ratio
  
Amount
  
Ratio
  
                           
December 31, 2005
                                      
The Company
                                      
Total capital (to risk-weighted assets)
 
$
49,966
    
10.49
%
$
38,109
    
8.00
%
$
-
    
N/A
  
Tier 1 capital (to risk-weighted assets)
   
44,007
   
9.24
   
19,055
   
4.00
   
-
   
N/A
  
Tier 1 capital (to average assets)
   
44,007
   
7.68
   
22,920
   
4.00
   
-
   
N/A
  
                                       
CapitalBank
                                      
Total capital (to risk-weighted assets)
 
$
49,630
    
10.43
%
$
38,082
    
8.00
%
$
47,602
    
10.00
%
Tier 1 capital (to risk-weighted assets)
   
43,675
   
9.17
   
19,041
   
4.00
   
28,562
   
6.00
  
Tier 1 capital (to average assets)
   
43,675
   
7.63
   
22,885
   
4.00
   
28,607
   
5.00
  
                                       
December 31, 2004
                                      
The Company
                                      
Total capital (to risk-weighted assets)
 
$
48,395
    
11.68
%
$
33,141
    
8.00
%
$
-
    
N/A
  
Tier 1 capital (to risk-weighted assets)
   
43,209
   
10.43
   
16,571
   
4.00
   
-
   
N/A
  
Tier 1 capital (to average assets)
   
43,209
   
8.05
   
21,480
   
4.00
   
-
   
N/A
  
                                       
CapitalBank
                                      
Total capital (to risk-weighted assets)
 
$
47,076
    
11.41
%
$
33,017
    
8.00
%
$
41,271
    
10.00
%
Tier 1 capital (to risk-weighted assets)
   
41,910
   
10.15
   
16,509
   
4.00
   
24,763
   
6.00
  
Tier 1 capital (to average assets)
   
41,910
   
7.82
   
21,448
   
4.00
   
26,810
   
5.00
  
 
NOTE 14 - STOCK COMPENSATION PLANS

On May 19, 2004, the Company terminated its 1997 Stock Incentive Plan and replaced it with the 2004 Equity Incentive Plan. Outstanding options issued under any former Plans will be honored in accordance with the terms and conditions in effect at the time they were granted, except that they are not subject to reissuance. At December 31, 2005, there were 174,630 options outstanding that had been issued under the Plans.

In calculating the pro forma disclosures, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants:

 
2004
  
2003
Dividend yield
1.61%
  
2.29%
Expected volatility
8.77%
 
9.86%
Risk-free interest rate
3.28%
  
3.98%
Expected life
5 years
  
5 years
 
There were no stock options granted in 2005. The weighted-average fair value of options, calculated using the Black-Scholes option-pricing model, granted during 2004 and 2003 is $2.35 and $1.69, respectively.
NOTE 14 - STOCK COMPENSATION PLANS - continued

A summary of the status of the Company’s stock option plans as of December 31, 2005, 2004, and 2003 and changes during the years ended on those dates is presented below:

   
 2005
  
2004
  
2003
  
       
Weighted-
      
Weighted-
      
Weighted-
  
       
Average
      
Average
      
Average
  
       
Exercise
      
Exercise
      
Exercise
  
 
  
Shares
  
Price
  
Shares
  
Price
  
Shares
  
Price
  
Outstanding at beginning of year
    
236,455
  
$
12.93
    
288,145
  
$
10.37
    
548,852
  
$
9.34
  
Granted
    
-
   
-
   
57,050
    
20.58
    
73,000
    
14.46
  
Exercised
    
59,757
    
9.44
    
103,330
    
12.66
    
315,129
    
9.33
  
Cancelled
    
2,068
    
10.63
    
5,410
    
12.74
    
18,578
    
13.70
  
                                       
Outstanding at end of year
    
174,630
    
14.16
    
236,455
    
12.93
    
288,145
    
10.37
  
 
Options exercisable at December 31, 2005, 2004, and 2003 were 174,630, 179,405 and 215,645, respectively.

The following table summarizes information about the stock options outstanding under the Company’s plans at December 31, 2005:

   
 
      
Weighted 
  
         
Average 
  
   
Options
  
Remaining
  
Exercise
  
Range of Exercise Prices
  
Outstanding
  
Life (years)
  
Price
  
Exercisable:
                    
$7.71 to $12.50
    
78,105
    
0.81
  
$
9.93
  
$14.10 to $15.00
    
46,500
    
2.03
    
14.32
  
$15.65 to $22.40
    
50,025
    
3.07
    
20.61
  
Total exercisable
    
174,630
              
 
The 2004 Equity Incentive Plan provides for the granting of statutory incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as nonstatutory stock options, stock appreciation rights, or restricted stock of up to 225,000 shares of the Company’s common stock, to officers, employees, and directors of the Company. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, the Company’s Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock options may not be less than the fair value of a share of common stock on the date the option is granted. The per-share exercise price of nonqualified stock options may not be less than 50% of the fair value of a share on the effective date of grant. Any options that expire unexercised or are canceled become available for reissuance. No awards may be made on or after May 19, 2014. During 2005 and 2004, the Company issued 30,600 and 10,000 shares, respectively, of restricted stock pursuant to the 2004 Equity Incentive Plan. The shares cliff vest in three years and are fully vested on January 21, 2008 and August 24, 2007, respectively. The weighted-average fair value of restricted stock issued during 2005 and 2004 was $23.00 and $21.30, respectively. Compensation cost associated with the issuances was $292,000 and $30,000 for the years ended December 31, 2005 and 2004, respectively. At December 31, 2005, the Company had 184,400 stock awards available for grant under the 2004 Equity Incentive Plan.

NOTE 15 - RELATED PARTY TRANSACTIONS

Certain parties (primarily certain directors and executive officers, their immediate families and business interests) were loan customers and had other transactions in the normal course of business with the Company. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than normal risk of collectability. Total loans and commitments outstanding to related parties at December 31, 2005, 2004, and 2003 were $17,099,000, $17,760,000 and $11,270,000, respectively. During 2005, $3,027,000 of new loans were made to related parties and repayments totaled $3,688,000. During 2004, $10,659,000 of new loans were made to related parties and payments totaled $4,168,000. During 2003, $4,192,000 of new loans were made to related parties and repayments totaled $2,626,000.

The Company purchases various types of insurance from agencies that are owned by two directors. Amounts paid for insurance premiums were $197,451, $77,042 and $122,000 in 2005, 2004, and 2003, respectively.


NOTE 16 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. In addition, the Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of the Company.


NOTE 17 - RESTRICTION ON SUBSIDIARY DIVIDENDS

The ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds in the form of cash dividends, loans, or advances to the Company. Dividends are payable only from the retained earnings of the Bank. At December 31, 2005, retained earnings of the bank was $5,364,000.
 
NOTE 18 - EARNINGS PER-SHARE

Earnings per share - basic is computed by dividing net income by the weighted-average number of common shares outstanding. Earnings per share - diluted is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.

   
Year ended December 31,
  
(Dollars in thousands, except share data)
  
2005
  
2004
  
2003
  
Basic earnings per share:
                    
Net income available to common shareholders
  
$
7,094
  
$
5,800
  
$
5,002
  
Average basic common shares outstanding
    
3,800,027
    
3,815,934
    
3,488,853
  
Basic earnings per share
  
$
1.87
  
$
1.52
  
$
1.43
  
                     
Diluted earnings per share:
                    
Net income available to common shareholders
  
$
7,094
  
$
5,800
  
$
5,002
  
Average common shares outstanding - basic
    
3,800,027
    
3,815,934
    
3,488,853
  
Incremental shares from assumed conversions:
                    
Restricted Stock
    
30,741
    
6,814
    
-
 
Stock options
    
78,983
    
113,610
    
183,653
  
Average diluted common shares outstanding
    
3,909,751
    
3,936,358
    
3,672,506
  
Diluted earnings per share
  
$
1.82
  
$
1.47
  
$
1.36
  
 
The above computation of diluted earnings per share for the years ended December 2004 and 2003 does not include the following options that were outstanding at year-end since their exercise price was greater than the average market price of the common shares:
 
   
2004
  
2003
  
Number of options
    
12,000
    
2,000
  
Weighted-average of these options
             
outstanding during the year
    
9,902
    
293
  
Weighted-average exercise price
  
$
22.40
  
$
19.33
  
 
NOTE 19 - INCOME TAXES

Income tax expense consisted of the following:

   
 Year ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Currently payable:
                    
Federal
  
$
2,629
  
$
1,841
  
$
1,677
  
State
    
260
    
251
    
240
  
Total current
    
2,889
    
2,092
    
1,917
  
Deferred income tax provision (benefit)
    
(1,030
)
  
(536
)
  
(315
)
Income tax expense
  
$
1,859
  
$
1,556
  
$
1,602
  
Income tax expense (benefit) is allocated as follows:
                    
To continuing operations
  
$
2,479
  
$
1,599
  
$
1,663
  
To shareholders’ equity
    
(620
)
  
(43
)
  
(61
)
Income tax expense
  
$
1,859
  
$
1,556
  
$
1,602
  
                     
 
The gross amounts of deferred tax assets and deferred tax liabilities were as follows:

   
December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
Deferred tax assets:
          
Allowance for loan losses
  
$
1,965
  
$
1,736
  
Net operating loss carryforward - state
    
136
    
74
  
Deferred compensation
    
553
    
454
  
Nonaccrual of interest
    
64
    
83
  
Other real estate owned
    
9
    
35
  
Loans fees and costs
    
45
    
37
  
Director fees
    
27
    
17
  
Restricted stock
    
118
    
-
 
Available-for-sale securities
    
235
    
-
 
Deferred revenue
    
107
    
-
 
Total deferred tax assets
    
3,259
    
2,436
  
               
Deferred tax liabilities:
              
Accumulated depreciation
    
139
    
149
  
Available-for-sale securities
    
-
    
440
  
Loans fees and costs
    
-
    
-
 
Federal Home Loan Bank stock dividends
    
16
    
16
  
Investment property
    
2
    
2
  
Merger related, net
    
119
   
124
  
Core deposit intangibles
    
204
    
-
  
Prepaids
    
44
    
-
  
Total deferred tax liabilities
    
524
    
731
  
Net deferred tax asset recognized
  
$
2,735
  
$
1,705
  
 
Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. Management has determined that it is more likely than not that the entire deferred tax asset at December 31, 2005 will be realized, and accordingly, has not established a valuation allowance. Net deferred tax assets are included in other assets.
 
NOTE 19 - INCOME TAXES - continued

A reconciliation of the income tax provision and the amount computed by applying the Federal statutory rate of 34% to income before income taxes follows:

   
 Year ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Income tax at the statutory rate
  
$
3,254
  
$
2,516
  
$
2,266
  
State income tax, net of federal income tax benefit
    
197
    
173
    
158
  
Tax-exempt interest income
    
(493
)
  
(492
)
  
(415
)
Disallowed interest expense
    
48
    
32
    
35
  
Stock option compensation
    
(181
)
  
(306
)
  
(417
)
Increase in cash surrender value of life insurance
    
(198
)
  
(203
)
  
(165
)
Other, net
    
(148
)
  
(121
)
  
201
  
Income tax expense
  
$
2,479
  
$
1,599
  
$
1,663
  
 
NOTE 20 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

   
 Year ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Banking and ATM supplies
  
$
530
  
$
564
  
$
491
  
Directors’ fees
    
252
    
187
    
172
  
Mortgage loan department expenses
    
119
    
113
    
190
  
Data processing and supplies
    
670
    
568
    
483
  
Postage and freight
    
432
    
398
    
309
  
Professional fees
    
410
    
598
    
446
  
Telephone expenses
    
294
    
293
    
281
  
Prepayment penalty for FHLB advances
    
-
    
-
   
1,093
  
Other
    
1,982
    
1,932
    
1,745
  
Total
  
$
4,689
  
$
4,653
  
$
5,210
  
 
NOTE 21 - RETIREMENT AND BENEFIT PLANS

The Company sponsors a voluntary nonleveraged employee stock ownership plan (ESOP) as part of a 401(k) savings plan covering substantially all full-time employees. The Company matches 75 cents per dollar, up to a maximum of 6% of employee compensation. Company contributions to the savings plan were $297,000, $277,000 and $213,000 in 2005, 2004, and 2003, respectively. The Company’s policy is to fund amounts approved by the Board of Directors. At December 31, 2005 and 2004, the savings plan owned 169,427 and 161,426 shares of the Company’s common stock purchased at an average cost of $17.74 and $17.45 per share, respectively, adjusted for the effects of stock dividends. The estimated value of shares held at December 31, 2005 and 2004 was $3,741,000 and $3,890,000, respectively.

The Company had an Incentive Plan for 2004 which provided incentive pay for outstanding accomplishments of officers and employees of the Company. Cash awards were based upon various performance measures including earnings per share growth and asset growth. Incentive payments accrued at December 31, 2005 and 2004 totaled $630,000 and $475,000, respectively.

The Company has an Executive Supplemental Compensation Plan that provides certain officers with salary continuation benefits upon retirement. The plan also provides for benefits in the event of early retirement, death, or substantial change of control of the Company. In connection with, but not directly related to, the Executive Supplemental Compensation Plan, life insurance contracts were purchased on the officers. No insurance premiums were paid in the years ended December 31, 2005, 2004, or 2003.
 
NOTE 21 - RETIREMENT AND BENEFIT PLANS - continued

During 1999, certain officers opted out of the Executive Supplemental Compensation Plan. Under a new agreement, split-dollar life insurance policies were obtained on the lives of these officers. The officers are entitled to all of the benefits of these policies, with the exception of the premiums paid by the Company. There was no expense associated with this plan in 2005, 2004, or 2003. No insurance premiums were paid on the plan during 2005 or 2004.

In 2002, the Company purchased Bank Owned Life Insurance (BOLI) Policies on certain key officers of the Company. Earnings on such policies will be used to offset expenses associated with retirement benefits for these officers. There were no premiums paid on the policies during the years ended December 31, 2005, 2004 or 2003. The policies increased their cash values by $415,000 and $341,000 during 2005 and 2004, respectively. Cash values at December 31, 2005 and 2004 were $10,335,000 and $9,920,000, respectively.

NOTE 22 - UNUSED LINES OF CREDIT

As of December 31, 2005, the subsidiary bank had unused lines of credit to purchase federal funds from unrelated banks totaling $34,231,000. These lines of credit are available on a one to thirty day basis for general corporate purposes. The lenders have reserved the right not to renew their respective lines. The Bank also has a line of credit to borrow funds from the Federal Home Loan Bank up to 25% of the Bank’s total assets which provided total availability of $149,610,000 at December 31, 2005. As of December 31, 2005, the Bank had borrowed $57,225,000 on this line.

NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks and Interest-Bearing Deposit Accounts - The carrying amount is a reasonable estimate of fair value.

Investment Securities - The fair values of securities held-to-maturity are based on quoted market prices or dealer quotes. For securities available-for-sale, fair value equals the carrying amount which is the quoted market price. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.

Nonmarketable Equity Securities - Cost is a reasonable estimate of fair value for nonmarketable equity securities because no quoted market prices are available and the securities are not readily marketable. The carrying amount is adjusted for any permanent declines in value.

Loans Receivable - For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk and credit card receivables, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to the borrowers with similar credit ratings and for the same remaining maturities.

Cash Surrender Value of Life Insurance - The carrying amount is a reasonable estimate of fair value.

Accrued Interest Receivable and Payable - The carrying value of these instruments is a reasonable estimate of fair value.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

Deposits - The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase - The carrying amount is a reasonable estimate of fair value because these instruments typically have terms of one day.

Advances from the Federal Home Loan Bank - The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently. The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank.

Off-Balance-Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

The carrying values and estimated fair values of the Company’s financial instruments are as follows:

   
 December 31,
  
   
 2005
  
2004
  
   
Carrying
  
Estimated
  
Carrying
  
Estimated
  
(Dollars in thousands)
  
Amount
  
Fair Value
  
Amount
  
FairValue
  
Financial Assets:
                          
Cash and due from banks
  
$
18,806
  
$
18,806
  
$
9,053
  
$
9,053
  
Interest-bearing deposit accounts
    
31
    
31
    
75
    
75
  
Securities available-for-sale
    
70,232
    
70,232
    
71,119
    
71,119
  
Securities held-to-maturity
    
380
    
391
    
425
    
455
  
Nonmarketable equity securities
    
5,275
    
5,275
    
6,052
    
6,052
  
Cash surrender value of life insurance
    
13,482
    
13,482
    
12,900
    
12,900
  
Loans and loans held for sale
    
465,892
    
459,447
    
426,884
    
421,432
  
Accrued interest receivable
    
2,666
    
2,666
    
2,136
    
2,136
  
                           
Financial Liabilities:
                          
Demand deposit, interest bearing
                          
transaction, and savings accounts
  
$
262,350
  
$
262,350
  
$
237,832
  
$
237,832
  
Certificates of deposit and other time deposits
    
171,296
    
172,084
    
142,525
    
142,835
  
Federal funds purchased and securities
                          
sold under agreements to repurchases
    
49,099
    
49,099
    
43,978
    
43,978
  
Advances from the Federal Home Loan Bank
    
57,225
    
57,489
    
66,325
    
65,766
  
Accrued interest payable
    
1,321
    
1,321
    
736
    
736
  
 
NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY)
 
Condensed financial statements for Community Capital Corporation (Parent Company Only) follow:
 
Condensed Balance Sheets
 
   
 December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
Assets
              
Cash and cash equivalents
  
$
63
  
$
46
  
Investment in banking subsidiary
    
54,154
    
53,782
  
Nonmarketable equity securities
    
-
    
500
  
Premises and equipment, net
    
1,005
    
1,048
  
Other assets
    
595
    
1,114
  
Total assets
  
$
55,817
  
$
56,490
  
               
Liabilities and Shareholders’ Equity
              
Notes payable to subsidiary
  
$
1,043
  
$
1,094
  
Other liabilities
    
269
    
293
  
Total liabilities
    
1,312
    
1,387
  
Common stock
    
4,751
    
4,661
  
Nonvested restricted stock
    
(595
)
  
(183
)
Capital surplus
    
46,929
    
45,751
  
Retained earnings
    
20,893
    
16,653
  
Accumulated other comprehensive income (expense)
    
(421
)
  
785
  
Treasury stock
    
(17,052
)
  
(12,564
)
Total shareholders’ equity
    
54,505
    
55,103
  
Total liabilities and shareholders’ equity
  
$
55,817
  
$
56,490
  
 
Condensed Statements of Income

   
For the years ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Income:
              
Dividend income from subsidiary
  
$
5,050
  
$
10,850
  
$
650
  
Dividend income from equity securities
    
-
    
-
   
14
  
Net gain on sale of nonmarketable equity securities
    
1,092
    
-
   
467
  
Other interest income
    
10
    
7
    
17
  
Other income
    
3
    
8
    
246
  
Total income
    
6,155
    
10,865
    
1,394
  
                     
Expenses:
                    
Salaries
    
304
    
43
    
16
  
Net occupancy expense
    
(75
)
  
(34
)
  
132
  
Furniture and equipment expense
    
36
    
65
    
70
  
Interest expense
    
70
    
54
    
70
  
Other operating expenses
    
334
    
417
    
394
  
Total expense
    
669
    
545
    
682
  
Income before income taxes and equity in undistributed
                    
earnings of subsidiary
    
5,486
    
10,320
    
712
  
Income tax expense (benefit)
    
31
    
501
    
186
  
Income before equity in undistributed earnings of subsidiary
    
5,517
    
10,821
    
898
  
Equity in undistributed earnings and (losses) of subsidiary
    
1,577
    
(5,021
)
  
4,104
  
Net income
  
$
7,094
  
$
5,800
  
$
5,002
  
                     
 
 
NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY) - continued

Condensed Statements of Cash Flows

   
For the years ended December 31,
  
(Dollars in thousands)
  
2005
  
2004
  
2003
  
Operating activities:
              
Net income
  
$
7,094
  
$
5,800
  
$
5,002
  
Adjustments to reconcile net income to net cash
                    
provided by operating activities:
                    
Equity in undistributed (earnings) losses of banking subsidiary
    
(1,577
)
  
5,021
    
(4,104
)
Depreciation and amortization expense
    
77
    
110
    
174
  
Amortization of deferred compensation on restricted stock
    
292
    
30
    
-
 
Deferred taxes
    
100
    
(740
)
  
(451
)
Gain on sale of nonmarketable equity securities
    
(1,092
)
  
-
   
(467
)
Loss on sale of fixed assets
    
-
   
9
    
-
 
Increase (decrease) in other liabilities
    
(24
)
  
27
    
(96
)
Decrease in other assets
    
417
    
436
    
472
  
Net cash provided by operating activities
    
5,287
    
10,693
    
530
  
                     
Investing activities:
                    
Purchase of premises and equipment
    
(34
)
  
(10
)
  
(9
)
Proceeds from sales of premises and equipment
    
-
   
385
    
-
 
Proceeds from sales on nonmarketable equity securities
    
1,592
    
-
   
1,287
  
Net assets acquired in bank acquisition
    
-
   
11,229
    
-
 
Transfer of assets to Bank
    
-
   
(18,455
)
  
-
 
Net cash provided (used) by investing activities
    
1,558
    
(6,851
)
  
1,278
  
                     
Financing activities:
                    
Dividends paid
    
(2,853
)
  
(1,936
)
  
(1,158
)
Proceeds from exercise of stock options
    
564
    
1,035
    
2,936
  
Repayments on borrowings from subsidiary
    
(51
)
  
(118
)
  
(765
)
Purchase of treasury stock
    
(4,488
)
  
(2,886
)
  
(5,535
)
Net cash used by financing activities
    
(6,828
)
  
(3,905
)
  
(4,522
)
                     
Net increase (decrease) in cash and cash equivalents
    
17
    
(63
)
  
(2,714
)
                     
Cash and cash equivalents, beginning of year
    
46
    
109
    
2,823
  
                     
Cash and cash equivalents, end of year
  
$
63
  
$
46
  
$
109
  
                     
Supplemental noncash investing activities:
                    
Stock issued in connection with Bank of
                    
Abbeville acquisition
  
$
-
  
$
7,612
  
$
-
  
                     
Transfer net assets acquired in Bank of
                    
Abbeville acquisition to Bank
    
-
   
(2,942
)
  
-
 
 
NOTE 25 - QUARTERLY DATA (UNAUDITED)

   
 December 31,
  
   
 2005
  
2004 
  
(Dollars in thousands
  
Fourth
  
Third
  
Second
  
First
  
Fourth
  
Third
  
Second
  
First
  
except per share)
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
Quarter
  
 Quarter
  
Interest income
  
$
8,347
  
$
7,942
  
$
7,501
  
$
7,088
  
$
6,927
  
$
6,589
  
$
6,280
  
$
5,612
  
Interest expense
    
3,172
    
2,841
    
2,595
    
2,350
    
1,959
    
1,711
    
1,488
    
1,404
  
                                                   
Net interest income
    
5,175
    
5,101
    
4,906
    
4,738
    
4,968
    
4,878
    
4,792
    
4,208
  
                                                   
Provision for loan losses
    
400
    
225
    
100
    
100
    
300
    
350
    
450
    
100
  
                                                   
Net interest income after
                                                  
provision for loan losses
    
4,775
    
4,876
    
4,806
    
4,638
    
4,668
    
4,528
    
4,342
    
4,108
  
Noninterest income
    
2,467
    
1,643
    
1,721
    
1,496
    
1,582
    
1,358
    
1,471
    
1,196
  
Noninterest expenses
    
4,030
    
4,264
    
4,490
    
4,065
    
4,121
    
3,886
    
4,142
    
3,705
  
                                                   
Income before taxes
    
3,212
    
2,255
    
2,037
    
2,069
    
2,129
    
2,000
    
1,671
    
1,599
  
Income tax expense
    
920
    
615
    
408
    
536
    
533
    
486
    
255
    
325
  
                                                   
Net income
  
$
2,292
  
$
1,640
  
$
1,629
  
$
1,533
  
$
1,596
  
$
1,514
  
$
1,416
  
$
1,274
  
                                                   
Earnings per share:
                                                  
Basic
    
0.62
    
0.43
    
0.42
    
0.40
    
0.42
    
0.39
    
0.36
    
0.35
  
Diluted
    
0.60
    
0.42
    
0.41
    
0.39
    
0.41
    
0.38
    
0.35
    
0.34
  
 

 
Exhibit
Number
Description
 
2.11
  
Merger Agreement dated as of October 15, 2003 between Community Capital Corporation and Abbeville Capital Corporation
3.12
  
Articles of Incorporation of Registrant
3.22
  
Articles of Amendment to Articles of Incorporation of Registrant (re: Change of Name)
3.33
  
Amended and Restated Bylaws of Registrant
4.14
  
Form of Common Stock Certificate. (The rights of security holders of the Registrant are set forth in the Registrant’s Articles of Incorporation and Bylaws included as Exhibits 3.1 through 3.3.)
10.32
 
*Registrant’s Executive Supplemental Income Plan (Summary) and form of Executive Supplemental Income Agreement
10.42
 
*Registrant’s Management Incentive Compensation Plans (Summary)
10.64
  
Lease Agreement With Options dated June 11, 1996 between Robert C. Coleman and the Registrant
10.185
 
*1997 Stock Incentive Plan, as amended
10.216
*Salary Continuation Agreement between CapitalBank and William G. Stevens dated October 17, 2002
10.226
*Salary Continuation Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002
10.236
*Split Dollar Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002
10.246
*Salary Continuation Agreement between CapitalBank and Helen A. Austin dated October 17, 2002
10.256
*Split Dollar Agreement between CapitalBank and Helen A. Austin dated October 17, 2002
10.266
*Salary Continuation Agreement between CapitalBank and James A. Lollis dated October 17, 2002
10.276
*Split Dollar Agreement between CapitalBank and James A. Lollis dated October 17, 2002
10.286
*Salary Continuation between CapitalBank and Taylor T. Stokes dated October 17, 2002
10.296
*Split Dollar Agreement CapitalBank and Taylor T. Stokes dated October 17, 2002
10.306
*Salary Continuation Agreement between CapitalBank and Walter G. Stevens dated October 17, 2002
10.316
*Split Dollar Agreement between CapitalBank and Walter G. Stevens dated October 17, 2002
10.326
*Salary Continuation Agreement between CapitalBank and Sonja Hazel Hughes dated October 17, 2002
10.336
*Salary Continuation Agreement between CapitalBank and Steve O. White dated October 17, 2002
10.377
Marketing Agreement dated May 21, 2003, by and between CapitalBank and Benefit Coordinators, Inc.
10.395
*Split Dollar Agreement between CapitalBank and William G. Stevens dated December 31, 2003
10.405
*Split Dollar Agreement between CapitalBank and Steve O. White dated December 31, 2003
10.448
*Restricted Stock Agreement
10.459
*2004 Equity Incentive Plan
10.4610
Banking Support Services Master Agreement between CapitalBank and First-Citizens Bank & Trust Company dated June 15, 2005
10.4811
Share Repurchase Agreement between Community Capital Corporation and FIG Partners, LLC dated August 18, 2005
10.4912
*First Amendment to Salary Continuation Agreement between CapitalBank and Steve O. White dated January 10, 2006
145
Code of Ethics
21.113
  
Subsidiaries of the Registrant
23.1
  
Consent of Elliott Davis, LLC
24.1
Directors’ Powers of Attorney 

31.1
Rule 13a-14(a)/15d-14(a) Certification by William G. Stevens
31.2
Rule 13a-14(a)/15d-14(a) Certification by R. Wesley Brewer
32
Section 1350 Certifications
 
1
Incorporated by reference to Appendix A of the Proxy Statement/Prospectus filed in connection with the Registrant’s Registration Statement on Form S-4 on December 2, 2003 (File No. 333-110870).
2
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Registration Statement on Form S-4 on December 2, 2003 (File No. 333-110870).
3
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 8-K on August 3, 2004.
4
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Registration Statement on Form S-2 initially filed on December 20, 1996 (File No. 333-18457).
5
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-K for the fiscal year ended December 31, 2003 and filed on March 26, 2004.
6
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-Q for the quarter ended September 30, 2002 and filed on November 13, 2002.
7
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on May 22, 2003.
8
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and filed on November 9, 2004.
9
Incorporated by reference to Appendix A of Amendment No. 1 to the Registrant’s Proxy Statement filed on April 26, 2004.
10
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on June 20, 2005.
11
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on August 18, 2005.
12
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on January 11, 2006.
13
Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-K for the fiscal year ended December 31, 2001 and filed on March 28, 2002.

 
* Management contract or compensation plan or arrangement.
 
 
 
E-2
 EX-23.1 2 ccc_10k-ex2301.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

Board of Directors
Community Capital Corporation
 
We consent to the incorporation by reference in Community Capital Corporation's Registration Statement on Form S-3 (No. 333-66402), relating to the registration of up to 500,000 shares of its common stock for issuance pursuant to the Community Capital Corporation Dividend Reinvestment Plan, of our report dated January 19, 2006, which is included in Community Capital Corporation's Annual Report on Form 10-K as of December 31, 2005 and 2004 and for each of the years in the three year period ended December 31, 2005.
 

/s/ Elliott Davis, LLC
Greenville, South Carolina
March 28, 2006

 EX-24.1 3 ccc_10k-ex2401.htm POWERS OF ATTORNEY Powers of Attorney

EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, her true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as her own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ Patricia C. Hartung  
Print Name: Patricia C. Hartung
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ David P. Allred, M.D.
Print Name: David P. Allred, M.D.
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:   /s/ Harold Clinkscales Jr.
Print Name: Harold Clinkscales, Jr.
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ B. Marshall Keys
Print Name: B. Marshall Keys
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ Wayne Q. Justesen Jr.
Print Name: Wayne Q. Justesen, Jr.
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature: /s/ Clinton C. Lemon Jr.
Print Name: Clinton C. Lemon, Jr.
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ Miles Loadholt
Print Name: Miles Loadholt
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature: /s/ Thomas C. Lynch Jr.
Print Name: Thomas C. Lynch, Jr.
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ H. Edward Munnerlyn 
Print Name: H. Edward Munnerlyn
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature: /s/ Geroge B. Park
Print Name: George B. Park
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature: /s/ George D. Rodgers
Print Name: George D. Rodgers
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature: /s/ Charles J. Rogers 
Print Name: Charles J. Rogers
 
 
 
 
EXHIBIT 24.1
 
POWER OF ATTORNEY
 
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, an officer and/or director of COMMUNITY CAPITAL CORPORATION, a South Carolina corporation (hereinafter referred to as the “Company”), does hereby constitute and appoint William G. Stevens, with full power of substitution, his true and lawful attorney and agent, to do any and all acts and things and to execute any and all instruments which said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended (the “Act”), and any rules, regulations and requirements of the Securities and Exchange Commission (the “Commission”) in respect thereof, in connection with the filing under the Act of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended December 31, 2005, including all amendments thereto (the “Form 10-K”), and including specifically, but without limiting the generality of the foregoing, the power and authority to sign for and on behalf of the undersigned the name of the undersigned as officer and/or director of the Company to the Form 10-K filed with the Commission and to any instrument or document filed as a part of, as an exhibit to, or in connection with said Form 10-K; and the undersigned does hereby ratify and confirm as his own act and deed all that said attorney and agent shall do or cause to be done by virtue hereof.
 
IN WITNESS WHEREOF, the undersigned has subscribed these presents, this 15th day of March, 2006.
 
Signature:  /s/ Lex D. Walters, Ph.D. 
Print Name: Lex D. Walters, Ph.D.
 
 
 EX-31.1 4 ccc_10k-ex3101.htm CERTIFICATION Certification
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, William G. Stevens, certify that:

1.
I have reviewed this annual report on Form 10-K of Community Capital Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.
 
Date: March 28, 2006
/s/ William G. Stevens 
William G. Stevens
President & Chief Executive Officer
 
 
 EX-31.2 5 ccc_10k-ex3102.htm CERTIFICATION Certification
 
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, R. Wesley Brewer, certify that:

1.
I have reviewed this annual report on Form 10-K of Community Capital Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
 
a)
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
c)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls.
 
Date: March 28, 2006
/s/ R. Wesley Brewer
R. Wesley Brewer
Chief Financial Officer, Executive Vice President,
and Secretary
 
 
 EX-32 6 ccc_10k-ex32.htm CERTIFICATION Certification
EXHIBIT 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


Each of the undersigned hereby certifies, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Community Capital Corporation (“CCC”), that, to his knowledge, the Annual Report of CCC on Form 10-K for the period ended December 31, 2005, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of CCC. This written statement is being furnished to the Securities and Exchange Commission as an exhibit to such Form 10-K. A signed original of this statement has been provided to CCC and will be retained by CCC and furnished to the Securities and Exchange Commission or its staff upon request.


March 28, 2006
/s/ William G. Stevens
William G. Stevens
President and Chief Executive Officer


/s/ R. Wesley Brewer   
R. Wesley Brewer
Chief Financial Officer, Executive Vice President,
and Secretary
 
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