10-K

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, 2006

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:

Title of Each Class Name of Each Exchange 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, 2006 was approximately $70.2 million based upon the last sale price reported for such date on the Nasdaq National Market, which was $21.73 per share.

The number of outstanding common shares of the registrant as of March 7, 2007, was 3,823,255.

Documents Incorporated By Reference: Portions of the Registrant’s Proxy Statement for its 2007 Annual Meeting of Shareholders are incorporated herein by reference in Part III.

COMMUNITY CAPITAL CORPORATION

TABLE OF CONTENTS

Item		Page No.
	PART I
1.	Business	3
1A.	Risk Factors	11
1B.	Unresolved Staff Comments	15
2.	Properties	15
3.	Legal Proceedings	15
4.	Submission of Matters to a Vote of Security Holders	15
	PART II
5.	Market for Registrant’s Common Equity, Related Shareholders Matters and Issuer Purchases of Equity Securities	16
6.	Selected Financial Data	18
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
7A.	Qualitative and Quantitative Disclosures About Market Risk	39
8.	Financial Statements and Supplementary Data	39
9.	Changes and Disagreements with Accountants on Accounting and Financial Disclosure	40
9A.	Controls and Procedures	40
9B.	Other Information	41
	PART III
10.	Directors, Executive Officers, and Corporate Governance	41
11.	Executive Compensation	42
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
13.	Certain Relationships and Related Transactions, and Director Independence	42
14.	Principal Accountant Fees and Services	42
	PART IV
15.	Exhibits and Financial Schedules	42
Signatures		43
Index to Consolidated Financial Statements		F-1
Exhibit Index		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.

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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, 2006, 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, 2006:

	Number of Locations		Total Assets		Total Loans		Total Deposits
			(Dollars in thousands)
CapitalBank		17		$713,244		$573,639		$486,956

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, 2006, totaled $573.6 million, or 88.46% 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 three loan types totaled approximately $293.4 million, and constituted approximately 51.11% of our loan portfolio, at December 31, 2006.

The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2006.

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Loan Composition

(Dollars in thousands)

	December 31,
	2006			2005			2004			2003			2002
Commercial, financial and agricultural		7.83	%		8.20	%		10.62	%		9.57	%		10.42	%
Real estate:
Construction		24.88			22.90			11.33			4.98			4.52
Mortgage:
Residential		39.08			37.50			41.94			51.96			53.41
Commercial (1)		24.07			26.53			30.29			27.22			25.48
Consumer and other		4.14			4.87			5.82			6.28			6.17
Total loans		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%
Total loans (dollars)	$	573,639		$	465,892		$	425,628		$	326,178		$	288,842
(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 2006, 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.”

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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 193 full-time employees and 28 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 our 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 our 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 the 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.

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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.

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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.

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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.

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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, 2006, 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.

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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.

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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 17.62% 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.

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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.

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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.

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Even though our common stock is currently traded on the Nasdaq Stock Market’s Global 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 Global Market has been relatively low when compared with larger companies listed on the Nasdaq Global 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, 2006, CapitalBank operated sixteen 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 Anderson, and one of which is located in each of Newberry, Belton, Greenville, Greer, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls. Of CapitalBank’s branches, fourteen 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.

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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
2006		Fourth	$	21.50	$	20.44
		Third		22.39		20.20
		Second		24.49		21.08
		First		23.99		21.27
2005		Fourth	$	23.99	$	21.70
		Third		24.00		21.90
		Second		23.42		20.90
		First		24.00		22.75

The closing price of our common shares as reported by Nasdaq on March 7, 2007 was $20.32 per share. As of March 7, 2007, there were 3,823,255 shares of our common stock outstanding held by approximately 1,450 shareholders of record. We did not sell any of our equity securities during fiscal year 2006 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.

Year	Declaration Date		Payment Date		Payment Amount
2006		January 19		March 3	$	0.15
		April 19		June 2	$	0.15
		July 19		September 1	$	0.15
		October 18		December 1	$	0.15
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

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.

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Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2006, 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	123,775	$16.40	167,650
Equity compensation plans not approved by security holders	-0-	$0	-0-
Total	123,775	$16.40	167,650

(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.

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ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2006 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,	2006			2005			2004			2003			2002
(Dollars in thousands, except per share)
Income Statement Data:
Interest income	$	40,679		$	30,878		$	25,408		$	21,031		$	22,204
Interest expense		19,625			10,958			6,562			6,455			7,793
Net interest income		21,054			19,920			18,846			14,576			14,411
Provision for loan losses		1,140			825			1,200			479			773
Net interest income after provision for loan losses		19,914			19,095			17,646			14,097			13,638
Net securities gains(losses)		(61	)		1,026			5			1,716			106
Noninterest income		6,028			6,301			5,602			5,385			4,433
Noninterest expense		18,104			16,849			15,854			14,533			11,892
Income before income taxes		7,777			9,573			7,399			6,665			6,285
Income tax expense		2,018			2,479			1,599			1,663			1,683
Net income	$	5,759		$	7,094		$	5,800		$	5,002		$	4,602
Balance Sheet Data:
Assets	$	713,244		$	598,790		$	549,086		$	412,759		$	380,765
Earning assets		648,450			542,199			504,151			372,620			347,377
Securities (1)		73,949			75,887			77,596			45,898			55,812
Loans (2)		574,193			466,281			426,884			326,452			291,526
Allowance for loan losses		6,200			6,324			5,808			4,584			4,282
Deposits		486,956			433,646			380,357			314,273			276,561
Federal Home Loan Bank advances		105,625			57,225			66,325			30,425			31,140
Shareholders’ equity		58,926			54,505			55,103			45,533			44,408
Per Share Data:
Basic earnings per share	$	1.54		$	1.87		$	1.52		$	1.43		$	1.34
Diluted earnings per share		1.51			1.82			1.47			1.36			1.26
Book value (period end) (3)		15.55			14.63			14.39			13.11			12.71
Tangible book value (period end) (3)		12.80			11.70			11.49			12.06			11.57
Cash dividends per share		0.60			0.75			0.51			0.33			0.17
Performance Ratios:
Return on average assets		0.87	%		1.24	%		1.13	%		1.35	%		1.28	%
Return on average equity		10.05			12.74			10.90			11.32			11.11
Net interest margin (4)		3.59			3.95			4.18			4.17			4.50
Efficiency (5)		65.61			63.17			63.38			64.28			61.45
Allowance for loan losses to loans		1.08			1.36			1.36			1.40			1.48
Net charge-offs to average loans		0.24			0.07			0.10			0.05			0.22
Nonperforming assets to period end loans (2)(6)		0.32			0.48			0.52			0.59			0.71
Capital and Liquidity Ratios:
Average equity to average assets		8.66			9.77			10.38			11.17			11.71
Leverage (4.00% required minimum)		8.46			7.68			8.05			10.38			10.59
Tier 1 risk-based capital ratio		10.03			9.24			10.43			13.42			14.16
Total risk-based capital ratio		11.09			10.49			11.68			14.68			15.41
Average loans to average deposits		110.96			101.75			104.69			104.95			103.86

⁽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⁾ Excludes the effect of any outstanding stock options.

⁽⁴⁾ Tax equivalent net interest income divided by average earning assets.

⁽⁵⁾ 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.

⁽⁶⁾ Nonperforming loans and nonperforming assets do not include loans past due 90 days or more that are still accruing interest.

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Selected Financial Data - continued

(Dollars in thousands)	2006 Quarter ended								2005 Quarter ended
except per share	Dec. 31		Sept. 30		June 30		Mar. 31		Dec. 31		Sept. 30		June 30		Mar. 31
Net interest income	$	5,452	$	5,408	$	5,163	$	5,031	$	5,175	$	5,101	$	4,906	$	4,738
Provision for loan losses		340		650		150		-		400		225		100		100
Noninterest income		1,629		1,588		1,457		1,360		2,467		1,643		1,721		1,496
Noninterest expense		4,620		4,711		4,432		4,408		4,030		4,264		4,490		4,065
Net income		1,544		1,194		1,548		1,473		2,292		1,640		1,629		1,533
Basic earnings per share		0.41		0.32		0.41		0.40		0.62		0.43		0.42		0.40
Diluted earnings per share		0.40		0.31		0.41		0.39		0.60		0.42		0.41		0.39

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 seventeen 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.

19

On June 15, 2006, the Company formed Community Capital Corporation Statutory Trust I (the “Trust”) for the purposes of issuing trust preferred securities, which enable the Company to obtain Tier 1 capital on a consolidated basis for regulatory purposes. On June 15, 2006, the Company closed a private offering of $10,000,000 of floating rate preferred securities offered and sold by the Trust. The proceeds from such issuance together with the proceeds from a related issuance of common securities of the Trust purchased by the Company in the amount of $310,000, were invested by the Trust in floating rate Junior Subordinated Notes issued by the Company (the “Notes”) totaling $10.3 million. The Notes are due and payable on June 15, 2036 and may be redeemed by the Company after five years, and sooner in certain specific events, including in the event that certain circumstances render the Notes ineligible for treatment as Tier 1 capital, subject to prior approval by the Federal Reserve Board, if then required. The Notes presently qualify as Tier 1 capital for regulatory reporting. The sole assets of the Trust are the Notes. The company owns 100% of the common securities of the Trust. The Notes are unsecured and rank junior to all senior debt of the Company. For the year ended December 31, 2006, the floating rate preferred securities and the Notes has an annual interest rate of 7.04%. This interest rate is fixed until June 14, 2011, when the interest rate will adjust quarterly. After June 14, 2011, the interest rate will equal three-month LIBOR plus 1.55%.

Results of Operations

Year ended December 31, 2006, compared with year ended December 31, 2005

Net interest income increased $1,134,000, or 5.69%, to $21.1 million in 2006 from $19.9 million in 2005. Average earning assets increased $80.2 million, or 15.43%, and average interest bearing liabilities increased $79.7 million, or 17.51%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.20% and 3.59%, respectively, in 2006 compared to 3.65% and 3.95% in 2005. Yields on earning assets increased from 6.06% in 2005 to 6.87% in 2006, and yields on interest-bearing liabilities increased from 2.41% in 2005 to 3.67% in 2006.

The provision for loan losses was $1.1 million in 2006 compared to $825,000 in 2005. Our allowance for loan losses was 1.08% of total loans outstanding at December 31, 2006. Our nonperforming loans totaled $1.7 million at December 31, 2006 compared to $2.1 million at December 31, 2005. Criticized and classified loans have decreased from $13.4 million at December 31, 2005 to $12.6 million at December 31, 2006. Total loans increased $107.9 million during 2006.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2006 and 2005 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 decreased $1,335,000, or 18.82%, to $5.8 million in 2006 from $7.1 million in 2005. Basic earnings per share was $1.54 in 2006, compared to $1.87 in 2005. Diluted earnings per share was $1.51 in 2006, compared to $1.82 in 2005. Return on average assets during 2006 was 0.87% compared to 1.24% during 2005, and return on average equity was 10.05% during 2006 compared to 12.74% during 2005.

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.

20

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.

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances” table shows the average balance of each category of our assets liabilities as well as the yield we earned or the rate we paid with respect to each category during 2006, 2005 and 2004. A review of these tables shows that our loans typically provide higher interest yields than do other types of interest-earniing assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. Finally, we have included various tables that provide detail about our investment securities, our loans, our deposits, and other borrowings.

21

Net Interest Income - continued

Average Balances, Income and Expenses, and Rates. The following 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.

Average Balances, Income and Expenses, and Rates

Year ended December 31,	2006								2005								2004
(Dollars in thousands)	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets:
Earning Assets:
Loans(1)(3)	$	522,521		$	37,309		7.14	%	$	439,266		$	27,587		6.28	%	$	391,056		$	22,440		5.74	%
Securities, taxable(2)		43,211			1,796		4.16			42,853			1,768		4.13			38,267			1,473		3.85
Securities, nontaxable(2)(3)		27,440			1,701		6.20			29,046			1,825		6.28			29,608			1,857		6.27
Nonmarketable equity
securities		6,478			373		5.76			5,762			239		4.15			4,737			185		3.91
Federal funds sold
and other		250			14		5.60			2,793			95		3.40			771			7		0.91
Total earning assets		599,900			41,193		6.87			519,720			31,514		6.06			464,439			25,962		5.59
Cash and due from banks		21,592								14,642								15,125
Premises and equipment		14,516								13,092								11,881
Other assets		31,593								29,624								26,433
Allowance for loan losses		(6,073	)							(5,921	)							(5,244	)
Total assets	$	661,528							$	571,157							$	512,634
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction
accounts	$	181,060		$	4,779		2.64	%	$	161,492		$	2,500		1.55	%	$	148,870		$	1,357		0.91	%
Savings deposits		38,868			802		2.06			39,484			621		1.57			35,933			460		1.28
Time deposits		187,891			7,910		4.21			174,675			5,262		3.01			142,552			3,003		2.11
Other short-term borrowings		45,282			2,260		4.99			23,842			679		2.85			36,324			509		1.40
Federal Home Loan Bank
advances		76,435			3,479		4.55			55,956			1,892		3.38			47,190			1,204		2.55
Junior subordinate debt		5,649			395		6.99
Obligations under capital
leases		-			-					83			10		12.05			272			29		10.66
Total interest-bearing
liabilities		535,185			19,625		3.67			455,532			10,964		2.41			411,141			6,562		1.60
Demand deposits		63,071								56,061								46,172
Accrued interest and other
liabilities		5,975								3,768								2,130
Shareholders’ equity		57,297								55,796								53,191
Total liabilities and
shareholders’ equity	$	661,528							$	571,157							$	512,634
Net interest spread							3.20	%							3.65	%							3.99	%
Net interest income	$	21,568							$	20,550							$	19,400
Net interest margin							3.59	%							3.95	%							4.18	%

⁽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.

22

Net Interest Income - continued

Our tax-effected net interest spread and net interest margin were 3.20% and 3.59%, respectively, for the year ended December 31, 2006, compared to 3.65% and 3.95%, respectively, for the year ended December 31, 2005. For the year ended December 31, 2006, earning assets averaged $599.9 million compared to $519.7 million for the year ended December 31, 2005. Interest earning assets exceeded interest bearing liabilities by $64.7 million and $64.2 million for the years ended December 31, 2006, and 2005, respectively. Our margin continues to be negatively impacted by the flat yield curve interest rate environment and our rapid asset generation which has caused us to rely, more than we have historically, on higher cost wholesale funds. We expect downward pressure on our margin to continue as long as the two conditions described above persist.

For the year ended December 31, 2006, our tax-effected net interest income, the major component of our net income, was $21.6 million compared to $20.6 million for the year ended December 31, 2005. The average rate realized on interest-earning assets increased to 6.87% at December 31, 2006, from 6.06% at December 31, 2005, while the average rate paid on interest-bearing liabilities increased to 3.67% at December 31, 2006, from 2.41% at December 31, 2005.

Our tax-effected interest income for the year ended December 31, 2006 was $41.2 million, which consisted of $37.3 million on loans, $3.9 million on investments, and $14,000 on interest bearing deposits with correspondent banks. Our tax-effected interest income for the year ended December 31, 2005 was $31.5 million, which consisted of $27.6 million on loans, $3.8 million on investments, and $95,000 on interest bearing deposits with correspondent banks. Interest on loans for the years ended December 31, 2006 and 2005, represented 90.57% and 87.62%, respectively, of total interest income, while interest on investments and interest bearing deposits with correspondent banks for the years ended December 31, 2006 and 2005 represented 9.43% and 12.38%, respectively, of total interest income. The high percentage of interest income from loans related to our strategy to maintain a significant portion of our assets in higher earning loans compared to lower yielding investments. Average loans represented 87.10% and 84.53% of average earning assets for the years ended December 31, 2006 and December 31, 2005, respectively.

Interest expense for the year ended December 31, 2006 was $19.6 million, which consisted of $13.5 million related to deposits and $6.1 million related to other borrowings. Interest expense for the year ended December 31, 2005 was $11.0 million, which consisted of $8.4 million related to deposits and $2.6 million related to other borrowings. Interest expense on deposits for the years ended December 31, 2006 and December 31, 2005 represented 68.88% and 76.36%, respectively, of total interest expense, while interest expense on borrowings for the years ended December 31, 2006 and December 31, 2005, represented 31.12% and 23.64%, respectively. Average interest bearing deposits represented 76.20% and 82.46% of average interest bearing liabilities for the years ended December 31, 2006 and December 31, 2005, respectively.

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 2006 to 2005 and 2005 to 2004.

23

Net Interest Income - continued

Analysis of Changes in Net Interest Income

	2006 Compared With 2005									2005 Compared With 2004
				Variance Due to									Variance Due to
(Dollars in thousands)	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
Earning Assets
Loans	$	5,645		$	4,077		$	9,722		$	2,914		$	2,233		$	5,147
Securities, taxable		15			13			28			185			110			295
Securities, nontaxable		(100	)		(24	)		(124	)		(35	)		3			(32	)
Nonmarketable equity securities		33			101			134			42			12			54
Federal funds sold and other		(119	)		38			(81	)		43			45			88
Total interest income		5,474			4,205			9,679			3,149			2,403			5,552
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts		334			1,949			2,283			124			1,019			1,143
Savings accounts		(10	)		191			181			48			113			161
Time deposits		423			2,225			2,648			777			1,482			2,259
Total interest-bearing deposits		747			4,365			5,112			949			2,614			3,563
Other short-term borrowings		861			720			1,581			(220	)		390			170
Federal Home Loan Bank advances		815			772			1,587			250			438			688
Junior subordinate debt		395			-			395			-			-			-
Obligations under capital leases		(5	)		(5	)		(10	)		(23	)		4			(19	)
Total interest expense		2,813			5,852			8,665			956			3,446			4,402
Net interest income	$	2,661		$	(1,647	)	$	1,014		$	2,193		$	(1,043	)	$	1,150

(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.

24

Net Interest Income - continued

The following table sets forth our interest rate sensitivity at December 31, 2006.

Interest Sensitivity Analysis

													Greater
				After One			After Three						Than One
	Within			Through			Through			Within			Year or
December 31, 2006	One			Three			Twelve			One			Non-
(Dollars in thousands)	Month			Months			Months			Year			Sensitive			Total
Assets
Earning assets:
Loans(1)	$	198,629		$	12,081		$	70,643		$	281,353		$	291,124		$	572,477
Securities		1,753			340			1,247			3,340			70,609			73,949
Federal funds sold and other		308			-			-			308			-			308
Total earning assets		200,690			12,421			71,890			285,001			361,733			646,734
Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits		194,544			-			-			194,544			-			194,544
Savings deposits		38,791			-			-			38,791			-			38,791
Time deposits		17,906			84,309			78,302			180,517			9,371			189,888
Total interest-bearing deposits		251,241			84,309			78,302			413,852			9,371			423,223
Other short-term borrowings		45,282			-			-			45,282			-			45,282
Federal Home Loan Bank advances		-			-			15,000			15,000			90,625			105,625
Junior subordinated debentures		-			-			-			-			10,310			10,310
Total interest-bearing liabilities		296,523			84,309			93,302			474,134			110,306			584,440
Period gap	$	(95,833	)	$	(71,888	)	$	(21,412	)	$	(189,133	)	$	251,427
Cumulative gap	$	(95,833	)	$	(167,721	)	$	(189,133	)	$	(189,133	)	$	62,294
Ratio of cumulative gap to total
earning assets		(14.82	)%		(25.93	)%		(29.24	)%		(29.24	)%		9.63	%

⁽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. Junior subordinated debentures are reflected at their contractual maturity date.

25

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. Our net interest margin continues to be negatively impacted by the flat yield curve interest rate environment and our rapid asset generation, which has caused us to rely, more than we have historically, on higher cost wholesale funds. 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.

Included in the statement of income for the years ended December 31, 2006, and 2005, is an expense related to the provision for loan losses of $1.1 million and $825,000, respectively. We also reported net charge offs of $1.3 million and $309,000 for the years ended December 31, 2006 and 2005, respectively. The net charge offs during 2006 represented 0.24% of the average outstanding loan portfolio for the year ended December 31, 2006, compared to 0.07% for the year ended December 31, 2005. Of the $1.4 million in total charge offs during 2006, approximately $1.0 million was comprised of five loans, four of which were secured by real estate. The increase in the allowance for the year ended December 31, 2006 over December 31, 2005, related to the increase of $107.7 million in total loans outstanding. The allowance for loan losses as a percentage of gross loans was 1.08% at December 31, 2006 and 1.36% at December 31, 2005, while the percentage of nonperforming assets to gross loans was 0.32% and 0.48% at December 31, 2006 and 2005, respectively. The allowance for loan losses as a percentage to loans has decreased from December 31, 2005 to December 31, 2006 as a result of placing more emphasis of focusing on historical portfolio performance in accordance with regulatory and accounting literature guidance thereby providing a more accurate forecast of probable future losses. As a result, we believe the current level of the allowance is adequate.

26

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)	2006			2005			2004			2003			2002
Total loans outstanding at end of year	$	573,639		$	465,892		$	425,628		$	326,178		$	288,842
Average loans outstanding	$	522,521		$	439,266		$	391,056		$	310,517		$	274,365
Balance of allowance for loan losses
at beginning of period	$	6,324		$	5,808		$	4,584		$	4,282		$	4,103
Allowance for loan losses from acquisitions		-			-			432			-			-
Loan losses:
Commercial and industrial		500			54			153			71			337
Real estate - mortgage		811			185			172			231			131
Consumer		120			155			252			163			255
Total loan losses		1,431			394			577			465			723
Recoveries of previous loan losses:
Commercial and industrial		42			41			72			196			45
Real estate - mortgage		71			3			31			43			15
Consumer		54			41			66			49			69
Total recoveries		167			85			169			288			129
Net loan losses		1,264			309			408			177			594
Provision for loan losses		1,140			825			1,200			479			773
Balance of allowance for loan losses
at end of period	$	6,200		$	6,324		$	5,808		$	4,584		$	4,282
Allowance for loan losses to period end loans		1.08	%		1.36	%		1.36	%		1.40	%		1.48	%
Net charge offs to average loans		0.24	%		0.07	%		0.10	%		0.05	%		0.22	%

Nonperforming Assets. The following table sets forth our nonperforming assets for the dates indicated.

Nonperforming Assets
	December 31,
(Dollars in thousands)	2006			2005			2004			2003			2002
Nonaccrual and impaired loans	$	1,716		$	2,128		$	2,104		$	1,816		$	1,893
Other real estate owned		107			93			98			101			150
Total nonperforming assets	$	1,823		$	2,221		$	2,202		$	1,917		$	2,043
Loans 90 days or more past due and
still accruing interest	$	489		$	223		$	230		$	158		$	128
Nonperforming assets to period end loans		0.32	%		0.48	%		0.52	%		0.59	%		0.71	%

27

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 $1.8 million at December 31, 2006 and $2.2 million at December 31, 2005. This amount consists primarily of nonaccrual and impaired loans that totaled $1.7 million and $2.1 million at December 31, 2006 and December 31, 2005, respectively. Nonperforming assets were 0.32% of total loans at December 31, 2006. The allowance for loan losses to period end nonperforming assets was 340.10% at December 31, 2006.

Potential Problem Loans. At December 31, 2006, through our internal review mechanisms, we had identified $6.0 million of criticized loans and $6.6 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 increased from $4.6 million at December 31, 2005 to $6.0 million at December 31, 2006. Total classified loans decreased from $8.8 million at December 31, 2005 to $6.6 million at December 31, 2006. We are committed to addressing potential problem loans.

Noninterest Income and Expense

Noninterest Income. Noninterest income decreased $1.4 million, or 18.46%, to $6.0 million in 2006 from $7.4 million in 2005. The primary reason for the decrease was due to the fact that we realized gains on the sales of marketable equity securities of $1.1 million in 2005, compared to no gains in 2006. Gains on the sales of premises and equipment were $2,000 in 2006, compared to $101,000 in 2005. The gain in 2005 was primarily a result of the sale of a parcel of land in Anderson, South Carolina. Service charges on deposit accounts decreased $408,000, or 13.44% to $2.6 million in 2006, from $3.0 million in 2005. The decrease is mainly due to a reduction in customer non-sufficient funds (“NSF”) transactions. Residential mortgage origination fees decreased $68,000, or 8.21% to $760,000 in 2006 from $828,000 in 2005. The primary reason for the decrease in secondary mortgage fees is that we have expanded our mortgage loan product offerings and are maintaining these loans in house with the exception of the 30-year mortgage loans. Income from fiduciary activities increased $276,000, or 30.63% to $1.2 million in 2006 from $901,000 in 2005. This increase was a result of our continuing successful efforts to expand assets under management in our wealth management group. Commissions on the sale of mutual funds increased $67,000, or 37.64% to $245,000 in 2006 compared to $178,000 in 2005. Other operating income decreased $41,000 or 3.26% to $1.2 million in 2006 from $1.3 million in 2005.

28

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)	2006		2005		2004
Service charges on deposit accounts	$	2,627	$	3,035	$	2,726
Residential mortgage origination fees		760		828		824
Gains on sales of securities available-for-sale		-		-		5
Gains on sales of nonmarketable equity securities		-		1,092		-
Commissions from sales of mutual funds		245		178		276
Income from fiduciary activities		1,177		901		621
Gain on sale of premises and equipment		2		101		-
Income from Bank Owned Life Insurance		661		641		598
Other income		556		617		556
Total noninterest income	$	6,028	$	7,393	$	5,606

Noninterest Expense. Noninterest expense increased $1.3 million, or 7.39%, to $18.2 million in 2006 from $16.9 million in 2005. The primary component of noninterest expense was salaries and employee benefits, which increased $964,000, or 9.91%, to $10.7 million in 2006 from $9.7 million in 2005. The increase is mainly due to the addition of staff as a result of the opening of a new branch in April, 2006, increased health insurance costs, and annual salary increases. Net occupancy expense was $1.1 million in 2006 compared to $977,000 in 2005, and furniture and equipment expense was $838,000 in 2006 compared to $945,000 in 2005. We realized a loss on the sale of securities available for sale in the amount of $61,000 in 2006, compared to a loss of $66,000 in 2005. Total amortization of intangible assets decreased $23,000, or 4.47%, to $492,000 in 2006 compared to $515,000 in 2005. Our efficiency ratio was 65.61% in 2006 compared to 63.17% in 2005.

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

Noninterest Expense
	Year Ended December 31,
(Dollars in thousands)	2006			2005			2004
Salaries and employee benefits	$	10,687		$	9,723		$	8,874
Net occupancy expense		1,113			977			853
Furniture and equipment expense		838			945			958
Amortization of intangible assets		492			515			506
Director and committee fees		274			252			187
Data processing and supplies		1,091			670			568
Mortgage loan department expenses		129			119			113
Banking assessments		57			56			53
Professional fees and services		351			410			588
Postage and freight		212			432			398
Supplies		289			311			341
Telephone expenses		351			294			293
Loss on securities available for sale		61			66			-
Other		2,220			2,145			2,121
Total noninterest expense	$	18,165		$	16,915		$	15,853
Efficiency ratio		65.61	%		63.17	%		63.38	%

29

Noninterest Income and Expense - continued

Income Taxes. Our income tax expense was $2.0 million for 2006 and $2.5 million for 2005. Our effective tax rate was 25.95% and 25.90% in 2006 and 2005, 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 $522.5 million in 2006 compared to $439.3 million in 2005, an increase of $83.2 million, or 18.94%. At December 31, 2006, total loans were $573.6 million compared to $465.9 million at December 31, 2005. 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,	2006						2005						2004						2003						2002
				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	$	44,910			7.83	%	$	38,180			8.20	%	$	45,222			10.62	%	$	31,214			9.57	%	$	30,092			10.42	%
Real estate
Construction		142,694			24.88	%		106,704			22.90			48,223			11.33			16,187			4.98			13,049			4.52
Mortgage -
residential		224,175			39.08	%		174,698			37.50			178,495			41.94			169,492			51.95			154,257			53.41
Mortgage-
nonresidential		138,071			24.07	%		123,603			26.53			128,937			30.29			88,797			27.22			73,610			25.48
Consumer and
other		23,789			4.14	%		22,707			4.87			24,751			5.82			20,488			6.28			17,834			6.17
Total loans		573,639			100.00	%		465,892			100.00	%		425,628			100.00	%		326,178			100.00	%		288,842			100.00	%
Allowance for
loan losses		(6,200	)					(6,324	)					(5,808	)					(4,584	)					(4,282	)
Net loans	$	567,439					$	459,568					$	419,820					$	321,594					$	284,560

The principal component of our loan portfolio is real estate mortgage loans. At December 31, 2006, this category totaled $362.2 million and represented 63.15% of the total loan portfolio, compared to $298.3 million, or 64.03%, at December 31, 2005.

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.

30

Earning Assets - continued

Real estate construction loans increased $36.0 million, or 33.73%, to $142.7 million at December 31, 2006, from $106.7 million at December 31, 2005. Residential mortgage loans, which is the largest category of our loans, increased $49.5 million, or 28.32%, to $224.2 million at December 31, 2006, from $174.7 million at December 31, 2005. 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, increased $14.5 million or 11.71%, to $138.1 million at December 31, 2006 from $123.6 million at December 31, 2005. The overall increase in real estate lending was attributable to the continued demand for residential and commercial real estate loans in our markets. 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 increased $6.7 million, or 17.63%, to $44.9 million at December 31, 2006, from $38.2 million at December 31, 2005.

Consumer and other loans increased $1.1 million, or 4.77%, to $23.8 million at December 31, 2006, from $22.7 million at December 31, 2005.

Our loan portfolio reflects the diversity of our markets. Our sixteen full service branches and one stand-alone drive thru 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, 2006.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

			Over
			One Year
December 31, 2006	One Year		Through		Over Five
(Dollars in thousands)	or Less		Five Years		Years		Total
Commercial and industrial	$	18,715	$	22,847	$	1,187	$	42,749
Real estate		158,636		225,666		124,984		509,286
Consumer and other		7,076		9,768		4,760		21,604
	$	184,427	$	258,281	$	130,931	$	573,639
Loans maturing after one year with:
Fixed interest rates							$	272,287
Floating interest rates								116,925
							$	389,212

31

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 $77.1 million in 2006, compared to $77.7 million in 2005. At December 31, 2006, the total securities portfolio was $73.9 million, a decrease of $1.9 million, or 2.55% over total securities of $75.9 million at December 31, 2005. Securities designated as available-for-sale totaled $65.5 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 $8.1 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, Community Capital Corporation Statutory Trust I, 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,	2006		2005
(Dollars in thousands)
Government sponsored enterprises	$	17,243	$	15,106
State, county, and municipal securities		27,635		28,627
Other (trust preferred securities)		-		1,005
		44,878		44,738
Mortgage-backed securities		20,998		25,874
Nonmarketable equity securities		8,073		5,275
Total securities	$	73,949	$	75,887

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2006.

Investment Securities Maturity Distribution and Yields

						After One But					After Five But
December 31, 2006	Within One Year					Within Five Years					Within Ten Years					Over Ten Years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Government sponsored enterprises	$	2,744		3.87	%	$	12,030		3.95	%	$	2,468		5.55	%	$	-		-	%
Obligations of state and
local governments(2)		341		6.09			5,932		6.58			14,912		6.74			6,451		6.56
Total securities(1)	$	3,085				$	17,962				$	17,380				$	6,451

⁽¹⁾Excludes mortgage-backed securities totaling $21.0 million with a yield of 4.33% 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.”

32

Earning Assets - continued

Short-Term Investments. Short-term investments, which consist primarily of federal funds sold and interest-bearing deposits with other banks, averaged $250,000 in 2006, compared to $2.8 million in 2005. At December 31, 2006, short-term investments totaled $308,000. 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 $79.7 million, or 17.49%, to $535.2 million in 2006, from $455.5 million in 2005. Average interest-bearing deposits increased $32.1 million, or 8.54%, to $407.8 million in 2006, from $375.7 million in 2005.

Deposits. Average total deposits increased $39.2 million, or 9.08%, to $470.9 million during 2006, from $431.7 million during 2005. At December 31, 2006, total deposits were $487.0 million compared to $433.6 million a year earlier, an increase of 12.32%.

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

Deposits

December 31,	2006					2005					2004					2003					2002
			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	$	63,733		13.09	%	$	59,286		13.67	%	$	45,504		11.96	%	$	36,204		11.52	%	$	29,422		10.64	%
NOW accounts		64,743		13.30			74,730		17.23			72,934		19.18			73,166		23.28			36,121		13.06
Money market
accounts		129,801		26.65			89,327		20.60			82,872		21.79			64,796		20.62			66,295		23.97
Savings accounts		38,791		7.97			39,008		9.00			36,522		9.60			28,697		9.13			27,948		10.11
Time deposits
less than
$100,000		124,739		25.61			117,126		27.01			91,183		23.97			69,649		22.16			74,763		27.03
Time deposits
of $100,000
or over		65,149		13.38			54,169		12.49			51,342		13.50			41,761		13.29			42,012		15.19
Total deposits	$	486,956		100.00	%	$	433,646		100.00	%	$	380,357		100.00	%	$	314,273		100.00	%	$	276,561		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 $42.3 million to $421.8 million at December 31, 2006. The largest increase in our core deposits was in money market accounts, which increased $40.5 million, or 45.31% to $129.8 million at December 31, 2006 from $89.3 million at December 31, 2005. This increase was primarily attributable to the increase in our Wall Street money market accounts which as of December 31, 2006 paid a premium rate of Wall Street Prime rate less 3.50%.

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 117.91% at December 31, 2006, and 107.53% at the end of 2005. The maturity distribution of our time deposits of $100,000 or more at December 31, 2006 is set forth in the following table.

33

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	$	6,492	$	30,046	$	25,721	$	2,890	$	65,149

Approximately 56.08% of our time deposits of $100,000 or more had scheduled maturities within six months and 95.56% had maturities within twelve 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, advances from the Federal Home Loan Bank, junior subordinated debentures and our correspondent bank line of credit. Short-term borrowings are primarily federal funds purchased from correspondent banks and securities sold under agreements to repurchase.

Average short-term borrowings were $45.3 million in 2006, an increase of $21.5 million from $23.8 million in 2005. Federal funds purchased from correspondent banks averaged $27.4 million in 2006. At December 31, 2006, federal funds purchased totaled $27.0 million. Securities sold under agreements to repurchase averaged $17.9 million in 2006. At December 31, 2006, securities sold under agreements to repurchase totaled $18.3 million.

Average Federal Home Loan Bank advances during 2006 were $76.4 million compared to $56.0 million during 2005, an increase of $20.4 million. Advances from the Federal Home Loan Bank are collateralized by one-to-four family residential mortgage loans, home equity lines, commercial real estate loans, and our investment in Federal Home Loan Bank stock. At December 31, 2006, borrowings from the Federal Home Loan Bank were $105.6 million compared to $57.2 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 $105.6 million advances from the Federal Home Loan Bank outstanding at December 31, 2006, $15.0 million mature in 2007, $5.4 million in 2008, $25.2 million in 2009, $5.0 million in 2010, $30.0 million in 2011, $15.0 million in 2015, and $10.0 million in 2016. On June 15, 2006, Community Capital Corporation Statutory Trust I (a non-consolidated subsidiary) issued $10 million in trust preferred securities with a maturity of June 15, 2036. The rate is fixed at 7.04% until June 14, 2011, at which point the rate adjusts quarterly to the three-month LIBOR plus 1.55%, and can be called without penalty beginning on June 15, 2011. We received from the Trust the $10 million proceeds from the issuance of the securities and the $310,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $10.3 million junior subordinated debentures. Average junior subordinated debentures during 2006 were $5.6 million. Average balances on our correspondent bank line of credit during 2006 were $102,000.

The following table summarizes our various sources of borrowed funds for the years ended December 31, 2006 and 2005. These borrowings consist of securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank, and junior subordinated debentures. Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured bygovernment-sponsored enterprise securities. Federal funds purchased are short-term borrowings from other financial institutions that mature daily. 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, commercial real estate loans and the Bank's investment in Federal Home Loan Bank stock. The junior subordinated debentures mature on June 15, 2036. Our correspondent bank line of credit matures on February 6, 2007. We have pledged all of the stock of the Bank as collateral for this line of credit.

34

Deposits and Other Interest-Bearing Liabilities- continued

	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,
2006
Securities sold under agreements
to repurchase	$	24,110	$	17,885		4.44	%	$	18,329		5.15	%
Federal funds purchased		40,966		27,396		5.32	%		26,953		5.47	%
Advances from Federal Home
Loan Bank		105,625		76,435		4.55	%		105,625		4.61	%
Junior subordinated debentures		10,310		5,649		6.99	%		10,310		6.99	%
Correspondent bank line of credit		2,000		102		6.72	%		-		7.10	%
2005
Securities sold under agreements
to repurchase	$	21,117	$	18,576		2.74	%	$	21,117		4.15	%
Federal funds purchased		27,982		5,266		3.21	%		27,982		4.44	%
Advances from Federal Home
Loan Bank		60,275		55,956		3.38	%		57,225		3.97	%

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. To provide the additional capital needed to support our bank’s growth in assets in 2006, we issued $10.3 million in junior subordinated debentures in connection with our trust preferred securities offering. The company also has a $10.0 million line of credit that could be utilized to provide additional capital for the bank if deemed necessary.

The holding company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2006, 2005, and 2004, as set forth in the following table.

Analysis of Capital

(Dollars in thousands)	2006			2005			2004
Tier 1 capital	$	58,768		$	44,007		$	43,209
Tier 2 capital		6,200			5,959			5,186
Total qualifying capital	$	64,968		$	49,966		$	48,395
Risk-adjusted total assets
(including off-balance-sheet exposures)	$	459,125		$	393,799		$	320,480
Tier 1 risk-based capital ratio		10.03	%		9.24	%		10.43	%
Total risk-based capital ratio		11.09	%		10.49	%		11.68	%
Tier 1 leverage ratio		8.46	%		7.68	%		8.05	%

35

Capital - continued

	Tier 1			Total			Tier 1
	Risk-Based			Risk-Based			Leverage
CapitalBank’s capital ratios at December 31, 2006 were:		9.31	%		10.37	%		7.85	%

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 2005 to 2006 and our loans-to-funds ratio increased from 2005 to 2006. The loans-to-assets ratio at December 31, 2006 was 80.50% compared to 77.87% at December 31, 2005, and the loans-to-funds ratio at December 31, 2006 was 90.02% compared to 86.35% at December 31, 2005. The amount of advances from the Federal Home Loan Bank were approximately $105.6 million at December 31, 2006 compared to $57.2 million at December 31, 2005. We expect to continue using these advances as a source of funding. Additionally, we had approximately $44.8 million of unused lines of credit for federal funds purchases and $3.0 million of securities available-for-sale at December 31, 2006 as sources of liquidity. We have $10.0 million available in a revolving line of credit with another bank. We also have the ability to receive an additional $72.3 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, benefit plans, 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

36

Critical Accounting Policies - continued

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, 2006 and 2005, 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, 2006 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.

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.

37

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.

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, 2006, CapitalBank had issued commitments to extend credit of $146.8 million and standby letters of credit of $2.0 million through various types of commercial lending arrangements. Approximately $101.7 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, 2006.

			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	$	7,687	$	6,516	$	32,030	$	46,233	$	100,604	$	146,837
Standby letters of credit		1		450		1,402		1,853		178		2,031
Totals	$	7,688	$	6,966	$	33,432	$	48,086	$	100,782	$	148,868

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.

38

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

We utilize a variety of short-term and long-term borrowings to supplement our supply of lendable funds, to assist in meeting deposit withdrawal requirements, and to fund growth of interest-earning assets in excess of traditional deposit growth. Repurchase agreements, Federal Home Loan Bank Advances, and junior subordinate debentures serve as our primary sources of such funds.

Obligations under noncancelable operating lease agreements are payable over several years with the longest obligation expiring in 2016. We do not feel that any existing noncancelable operating lease agreements are likely to materially impact our financial condition or results of operations in an adverse way. Contractual obligations relative to these agreements are noted in the table below. Option periods that we have not yet exercised are not included in this analysis as they do not represent contractual obligations until exercised.

The following table provides payments due by period for obligations under borrowings and operating lease obligations as of December 31, 2006.

			After One		After Three
			Through		Through		Greater
	Within One		Three		Five		Than
(Dollars in thousands)	Year		Years		Years		Five Years		Total
Operating lease obligations	$	115	$	123	$	106	$	228	$	572
Repurchase agreements		18,329		-		-		-		18,329
FHLB advances		15,100		30,525		35,000		25,000		105,625
Junior subordinated debentures		-		-		-		10,310		10,310
Totals	$	33,544	$	30,648	$	35,106	$	35,538	$	134,836

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.

39

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 ended December 31, 2003, and every year since then. 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.

40

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, 2006 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, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

41

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, AND DIRECTOR INDEPENDENCE.

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.

42

SIGNATURES

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 26, 2007	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 26, 2007
William G. Stevens	Officer, and Director
/s/ R. Wesley Brewer	Chief Financial Officer, Executive	March 26, 2007
R. Wesley Brewer	Vice President, and Secretary
*	Chair	March 26, 2007
Patricia C. Hartung
*	Director	March 26, 2007
Harold Clinkscales, Jr.
*	Director	March 26, 2007
Wayne Q. Justesen, Jr.
*	Director	March 26, 2007
B. Marshall Keys
*	Director	March 26, 2007
Clinton C. Lemon, Jr.
*	Director	March 26, 2007
Miles Loadholt
*	Director	March 26, 2007
Thomas C. Lynch, Jr.
*	Director	March 26, 2007
H. Edward Munnerlyn
*	Director	March 26, 2007
George B. Park

43

*	Director	March 26, 2007
George D. Rodgers
*	Director	March 26, 2007
Lex D. Walters
*By: /s/ William G. Stevens		March 26, 2007
(William G. Stevens) (As
Attorney-in-Fact for each
of the persons indicated)

44

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-31

F-1

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 and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 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 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 and subsidiary as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Elliott Davis, LLC

Greenville, South Carolina

March 22, 2007

F-2

Community Capital Corporation

Consolidated Balance Sheets

	December 31,
(Dollars in thousands, shares are not in dollars)	2006			2005
Assets:
Cash and cash equivalents:
Cash and due from banks	$	22,167		$	18,806
Interest-bearing deposit accounts		308			31
Total cash and cash equivalents		22,474			18,837
Investment securities:
Securities available-for-sale		65,496			70,232
Securities held-to-maturity (estimated fair value of
$388 and $391 at December 31, 2006 and 2005)		380			380
Nonmarketable equity securities		8,073			5,275
Total investment securities		73,949			75,887
Loans held for sale		554			389
Loans receivable		573,639			465,892
Less allowance for loan losses		(6,200	)		(6,324	)
Loans, net		567,439			459,568
Premises and equipment, net		15,429			13,691
Accrued interest receivable		3,954			2,666
Intangible assets		10,427			10,918
Cash surrender value of life insurance		14,617			13,482
Other assets		4,401			3,352
Total assets	$	713,244		$	598,790
Liabilities:
Deposits:
Noninterest-bearing	$	63,733		$	59,286
Interest-bearing		423,223			374,360
Total deposits		486,956			433,646
Federal funds purchased and securities sold under
agreements to repurchase		45,282			49,099
Advances from the Federal Home Loan Bank		105,625			57,225
Accrued interest payable		2,686			1,321
Junior subordinated debentures		10,310			-
Other liabilities		3,459			2,993
Total liabilities		654,318			544,284
Commitments and contingencies - Notes 4, 12, and 16
Shareholders’ equity:
Common stock, $1.00 par value; 10,000,000 shares authorized;
4,817,827 and 4,751,301 shares issued and outstanding at
December 31, 2006 and 2005, respectively		4,818			4,751
Nonvested restricted stock		(558	)		(595	)
Capital surplus		47,671			46,929
Accumulated other comprehensive income		(269	)		(421	)
Retained earnings		24,386			20,893
Treasury stock, at cost (1,029,322 shares in 2006, and 1,026,227 shares in 2005)		(17,122	)		(17,052	)
Total shareholders’ equity		58,926			54,505
Total liabilities and shareholders’ equity	$	713,244		$	598,790

The accompanying notes are an integral part of these consolidated financial statements.

F-3

Community Capital Corporation

Consolidated Statements of Income

	For the years ended
	December 31,
(Dollars in thousands, except for per share data amounts)	2006		2005		2004
Interest income:
Loans, including fees	$	37,277	$	27,554	$	22,415
Investment securities:
Taxable		1,796		1,683		1,472
Tax-exempt		1,219		1,306		1,329
Nonmarketable equity securities		373		239		185
Federal funds sold and other		14		96		7
Total interest income		40,679		30,878		25,408
Interest expense:
Deposits		13,491		8,376		4,816
Advances from the Federal Home Loan Bank		3,479		1,892		1,204
Federal funds purchased and securities sold under
agreements to repurchase		2,253		680		513
Obligations under capital leases		-		10		29
Other		402		-		-
Total interest expense		19,625		10,958		6,562
Net interest income		21,054		19,920		18,846
Provision for loan losses		1,140		825		1,200
Net interest income after provision for loan losses		19,914		19,095		17,646
Noninterest income:
Service charges on deposit accounts		2,627		3,035		2,726
Gain on sales of nonmarketable equity securities		-		1,092		-
Gain on sales of securities available-for-sale		-		-		5
Gain on sale of loans held for sale		760		828		824
Commissions from sales of mutual funds		245		178		276
Income from fiduciary activities		1,177		901		621
Gain on sale of premises and equipment		2		101		-
Other operating income		1,217		1,258		1,154
Total noninterest income		6,028		7,393		5,606
Noninterest expenses:
Salaries and employee benefits		10,687		9,723		8,874
Net occupancy		1,113		977		853
Amortization of intangible assets		492		515		506
Furniture and equipment		838		945		958
Loss on sale of premises and equipment		-		-		9
Loss on sale of securities available-for-sale		61		66		-
Other operating expenses		4,974		4,689		4,653
Total noninterest expenses		18,165		16,915		15,853
Income before income taxes		7,777		9,573		7,399
Income tax expense		2,018		2,479		1,599
Net income	$	5,759	$	7,094	$	5,800
Earnings per share:
Basic earnings per share	$	1.54	$	1.87	$	1.52
Diluted earnings per share	$	1.51	$	1.82	$	1.47

The accompanying notes are an integral part of these consolidated financial statements.

F-4

Community Capital Corporation

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income

For the years ended December 31, 2006, 2005, and 2004

												Accumulated
												other
												compre-
						Nonvested						hensive
(Dollars in thousands,	Common stock					restricted			Capital			income			Retained			Treasury
except for per share amounts)	Shares			Amount		stock			surplus			loss)			earnings			stock			Total
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
Net income																5,759						5,759
Other comprehensive income,
net of tax effects													152									152
Comprehensive income																						5,911
Dividends paid ($0.60																(2,266	)					(2,266	)
per share)
Stock options exercised		49,766			50					377												427
Issuance of restricted stock		17,350			17		(396	)		379												-
Amortization of deferred
compensation on restricted
stock							419															419
Forfeitures of restricted stock		(600	)				14			(14	)											-
Purchase of treasury stock
(3,095 shares)																			(70	)		(70	)
Balance, December 31, 2006		4,817,827		$	4,818	$	(558	)	$	47,671		$	(269	)	$	24,386		$	(17,122	)	$	58,926

The accompanying notes are an integral part of these consolidated financial statements.

F-5

Community Capital Corporation

Consolidated Statements of Cash Flows

	For the years ended
	December 31,
(Dollars in thousands)	2006			2005			2004
Cash flows from operating activities:
Net income	$	5,759		$	7,094		$	5,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		890			872			854
Provision for loan losses		1,140			825			1,200
Deferred income tax benefit		(1,071	)		(639	)		(456	)
Amortization of intangible assets		491			516			403
Amortization of deferred compensation on restricted stock		419			292			30
Premium amortization less discount accretion
on securities available-for-sale		8			11			31
Amortization of deferred loan costs and fees, net		981			932			377
Write down of other real estate		181			-			-
Loss (gain) on sale of premises and equipment		(2	)		(101	)		9
Net loss on sale of other real estate		21			64			42
Net (gain) loss on sales or calls of securities available-for-sale		61			66			(5	)
Net gain on sales of nonmarketable equity securities		-			(1,092	)		-
Proceeds of loans held for sale		26,016			33,987			33,146
Disbursements for loans held for sale		(26,181	)		(33,120	)		(34,128	)
Increase in interest receivable		(1,288	)		(530	)		(509	)
Increase in interest payable		1,365			585			228
(Increase) decrease in other assets		(1,149	)		(406	)		510
Increase (decrease) in other liabilities		464			404			(898	)
Net cash provided by operating activities		8,105			9,760			6,634
Cash flows from investing activities:
Net increase in loans made to customers		(110,380	)		(41,776	)		(64,619	)
Proceeds from sales of securities available-for-sale		2,924			9,628			8,683
Proceeds from calls and maturities of securities available-for-sale		10,217			7,932			11,331
Purchases of securities available-for-sale		(8,244	)		(18,577	)		(32,143	)
Proceeds from calls and maturities of securities held-to-maturity		-			45			45
Proceeds from sales of nonmarketable equity securities		1,350			2,674			645
Purchase of nonmarketable equity securities		(4,148	)		(805	)		(3,249	)
Purchase of premises and equipment		(2,660	)		(2,461	)		(3,278	)
Proceeds from sales of premises and equipment		34			543			476
Proceeds from sales of other real estate		145			212			94
Net assets acquired in bank acquisition		-			-			11,229
Net cash used by investing activities		(110,762	)		(42,585	)		(70,786	)
Cash flows from financing activities:
Net increase in demand and savings accounts		34,718			24,519			11,284
Net increase in time deposits		18,592			28,772			2,126
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase		(3,817	)		5,121			13,918
Proceeds from advances from the Federal Home Loan Bank		171,900			51,500			41,000
Repayments of advances from the Federal Home Loan Bank		(123,500	)		(60,600	)		(8,193	)
Proceeds from advances of other short term borrowings		2,000			-			-
Repayments of advances of other short term borrowings		(2,000	)		-			-
Proceeds from the issuance of junior subordinated debentures		10,310			-			-
Dividends paid		(2,266	)		(2,854	)		(1,938	)
Proceeds from exercise of stock options		427			564			1,035
Purchase of treasury stock		(70	)		(4,488	)		(2,886	)
Net cash provided by financing activities		106,294			42,534			56,346
Net increase (decrease) in cash and cash equivalents		3,637			9,709			(7,806	)
Cash and cash equivalents, beginning of year		18,837			9,128			16,934
Cash and cash equivalents, end of year	$	22,474		$	18,837		$	9,128

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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 seventeen 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(R), “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 held 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, 2006 and 2005, the investment in Federal Reserve Bank stock was $1,686,100 and $1,476,150, respectively. At December 31, 2006 and 2005, the investment in Federal Home Loan Bank stock was $5,950,800 and $3,672,700, respectively.

F-7

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, 2006 and 2005, the investments in the stock of the unrelated financial institutions, at cost, was $126,464. The Company also invested in a financial services company that offers internet banking. During 2005, the Company sold its investment in this company and recorded a gain on the sale of $1,092,000. Also included in nonmarketable equity securities is the investment in the Community Capital Corporation Statutory Trust I which totaled $310,000 at December 31, 2006.

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, 2006 and 2005 were $283,348 and $133,203, 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, 2006 and 2005, the Company had impaired loans of approximately $1,716,000 and $2,128,000.

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.

F-8

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 Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“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 $425,831, $158,276 and $153,886 were included in the Company's results of operations for 2006, 2005, and 2004, respectively.

Stock-Based Compensation - The Company has a stock-based employee compensation plan which is further described in Note 14. On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R), Share-based Payment, to account for compensation costs under its stock option plans. The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) (“APB 25”). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equals the market price on the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized.

In adopting SFAS No. 123(R), the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

F-9

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

(Dollars in thousands,	Year ended December 31,
except for per share data)	2006		2005		2004
Net income, as reported	$	5,759	$	7,094	$	5,800
Add: Stock based compensation expense included
in reported net income, net of related tax effects		-		-		-
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects		-		-		95
Pro forma net income	$	5,759	$	7,094	$	5,705
Earnings per share:
Basic - as reported	$	1.54	$	1.87	$	1.52
Basic - pro forma	$	1.54	$	1.87	$	1.50
Diluted - as reported	$	1.51	$	1.82	$	1.47
Diluted - pro forma	$	1.51	$	1.82	$	1.45

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)	2006		2005			2004
Cash paid for interest	$	18,259	$	10,373		$	6,333
Cash paid for income taxes		3,028		2,832			1,673
Supplemental noncash investing and financing activities:
Foreclosures on loans		388		271			133
Stock issued in connection with Bank of Abbeville acquisition		-		-			7,612
Change in unrealized gain (loss) on securities available-
for sale, net of tax		152		(1,206	)		(84	)

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

F-10

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

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.

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)	2006			2005			2004
Unrealized holding gains (losses) on
available-for-sale securities	$	169		$	(1,892	)	$	(122	)
Reclassification adjustment for (gains) losses
realized in income		61			66			(5	)
Net unrealized gains (losses) on securities		230			(1,826	)		(127	)
Tax effect		(78	)		620			43
Net-of-tax amount	$	152		$	(1,206	)	$	(84	)

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 February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial

F-11

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This Statement amends FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The company is currently analyzing the effects of FIN 48 on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”(“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS 158 is effective for publicly−held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company does not have a defined benefit pension plan. Therefore, SFAS 158 will not impact the Company’s financial position, results of operations or cash flows.

F-12

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

In September, 2006, The FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions”, or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967”. EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company is currently analyzing the effect of adoption of EITF 06-4 on its financial position, results of operations and cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,“Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.”  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract.  EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006.  The Company does not believe the adoption of EITF 06-5 will have a material impact on its financial position, results of operations or cash flows.

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for the Company on January 1, 2008. Earlier adoption is permitted in 2007 if the Company also elects to apply the provisions of SFAS 157, “Fair Value Measurement.” The Company is currently analyzing the fair value option provided under SFAS 159.

F-13

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

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.

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.

Cash surrender value of life insurance - Cash surrender value of life insurance policies represents the cash calue of policies on certain officers of the bank.

Reclassifications - Certain captions and amounts in the 2005 and 2004 financial statements were reclassified to conform with the 2006 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 - 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, 2006 and 2005, the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.

NOTE 3 - INVESTMENT SECURITIES

Securities available-for-sale at December 31, 2006 and 2005 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2006
Government-sponsored enterprises	$	17,447	$	11	$	215	$	17,243
Obligations of state and local governments		26,637		625		7		27,255
Obligations of corporations		-		-		-		-
		44,084		636		222		44,498
Mortgage-backed securities		21,565		18		585		20,998
Total	$	65,649	$	654	$	807	$	65,496
December 31, 2005
Government-sponsored enterprises	$	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

F-14

NOTE 3 - INVESTMENT SECURITIES - continued

Securities held-to-maturity as of December 31, 2006 and 2005 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2006
Obligations of state and local governments	$	380	$	8	$	-	$	388
December 31, 2005
Obligations of state and local governments	$	380	$	11	$	-	$	391

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, 2006.

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
Government-sponsored	$	2,494	$	3	$	12,280	$	212	$	14,774	$	215
enterprises
Obligations of state and local		-		-		776		7		776		7
governments
Mortgage-backed securities		940		-		19,125		585		20,065		585
Total	$	3,434	$	3	$	32,181	$	804	$	35,615	$	807

Securities classified as available-for-sale are recorded at fair market value. Approximately 59.48% of the unrealized losses, or thirty 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, 2006, 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	$	3,089	$	3,085	$	-	$	-
Due after one year but within five years		17,717		17,582		380		388
Due after five years but within ten years		16,947		17,380		-		-
Due after ten years		6,331		6,451		-		-
		44,084		44,498		380		388
Mortgage-backed securities		21,565		20,998		-		-
Total	$	65,649	$	65,496	$	380	$	388

F-15

NOTE 3 - INVESTMENT SECURITIES - continued

Proceeds from sales of securities available-for-sale during 2006, 2005, and 2004 were $2,924,000, $9,628,000, and $8,683,000, respectively, resulting in gross realized losses of $61,000 and $66,000 in 2006 and 2005, respectively, and gross realized gains of $5,000 in 2004. There were no sales of securities held-to-maturity in 2006, 2005, or 2004.

At December 31, 2006 and 2005, securities having amortized costs of approximately $62,818,000 and $69,433,000, respectively, and estimated fair values of $62,454,000 and $68,828,000, 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 $8,073,000 and $5,275,000 at December 31, 2006 and 2005, respectively. During 2006, 2005, and 2004, the Company recorded gains on the sale of nonmarketable equity securities of $0, $1,092,000, and $0, respectively.

NOTE 4 - LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
(Dollars in thousands)	2006		2005
Commercial and industrial	$	44,910	$	38,180
Real estate - construction		142,694		106,704
Real estate - mortgage and commercial		321,440		257,038
Home equity		40,805		41,259
Consumer - installment		22,092		21,066
Consumer - credit card and checking		1,698		1,645
Total gross loans	$	573,639	$	465,892

At December 31, 2006 and 2005, the Company had sold participations in loans aggregating $6,429,000 and $2,451,000, 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, 2006 and 2005, the Company had pledged approximately $203,832,000 and $100,821,000, respectively, of loans on residential and commercial 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, 2006, 2005, and 2004, is as follows:

(Dollars in thousands)	2006			2005			2004
Balance, beginning of year	$	6,324		$	5,808		$	4,584
Allowance acquired through acquisition		-			-			432
Provision charged to operations		1,140			825			1,200
Recoveries on loans previously charged-off		167			85			169
Loans charged-off		(1,431	)		(394	)		(577	)
Balance, end of year	$	6,200		$	6,324		$	5,808

F-16

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2006 and 2005, the Company had impaired loans of approximately $1,716,000 and $2,128,000. Valuation allowances for credit losses on impaired loans totaled $84,426 and $311,000 for the years ended December 31, 2006 and 2005, respectively. Interest income on impaired loans totaled $41,142 and $23,000 for the years ended December 31, 2006 and 2005, respectively and was measured using the cash basis. Average investment in impaired loans was $2,615,000 and $2,466,000 for the years ended December 31, 2006 and 2005, respectively. At December 31, 2006, there were no nonaccrual loans for which impairment had not been recognized. The Company had loans contractually past due 90 days or more and still accruing interest totaling $489,000 and $223,000 at December 31, 2006 and 2005, 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, 2006 and 2005, the Company had unfunded commitments, including standby letters of credit, of $148,868,000 and $104,308,000, of which $6,379,000 and $6,846,000, respectively, were unsecured. At December 31, 2006, 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.

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 2006 and 2005 was $44,848,000 and $46,002,000, respectively.

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	December 31,
(Dollars in thousands)	2006			2005
Land	$	4,220		$	3,269
Building and land improvements		11,207			10,371
Furniture and equipment		8,120			7,323
Total		23,547			20,963
Less, accumulated depreciation		(8,118	)		(7,272	)
Premises and equipment, net	$	15,429		$	13,691

Depreciation and amortization expense was approximately $890,000, $872,000 and $854,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

F-17

NOTE 6 - INTANGIBLE ASSETS

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

	December 31,
(Dollars in thousands)	2006		2005
Core deposit premium, net	$	3,008	$	3,500
Goodwill		7,419		7,419
	$	10,427	$	10,919

In accordance with SFAS No. 147, the Company evaluates its goodwill on an annual basis. The evaluations were performed in June of 2006 and 2005. 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, 2006 or 2005. Amortization expense related to the core deposit premium was $492,000, $515,000 and $506,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

NOTE 7 - DEPOSITS

The following is a summary of deposit accounts:

	December 31,
(Dollars in thousands)	2006		2005
Noninterest-bearing demand deposits	$	63,733	$	59,286
Interest-bearing demand deposits		64,743		74,729
Money market accounts		129,801		89,327
Savings		38,791		39,008
Certificates of deposit and other time deposits		189,888		171,296
Total deposits	$	486,956	$	433,646

At December 31, 2006 and 2005, certificates of deposit of $100,000 or more totaled approximately $65,149,000 and $54,169,000, respectively. Interest expense on these deposits was approximately $2,786,000, $1,768,000 and $1,217,000 in 2006, 2005 and 2004, respectively.

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2006 were as follows:

(Dollars in thousands)
Maturing in		Amount
2007	$	180,522
2008		8,146
2009		1,190
2010		16
2011 and thereafter		14
Total	$	189,888

F-18

NOTE 8 - 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, 2006 and 2005, the securities sold under agreements to repurchase totaled $18,329,000, and $21,117,000, respectively. At December 31, 2006 and 2005, the amortized costs of securities pledged to collateralize the repurchase agreements were $18,918,000 and $21,707,000, respectively, and estimated fair values were $19,248,000 and $21,053,000, respectively. The securities underlying the agreements are held by a third-party custodian. At December 31, 2006 and 2005, federal funds purchased were $26,953,000 and $27,982,000, respectively.

NOTE 9 - 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		2006		2005
Advances maturing:
May 18, 2007		5.44%, floating	$	15,000	$	-
March 5, 2008		5.16, floating		5,400		-
September 5, 2008		3.03, fixed		-		5,400
February 2, 2009		4.95, fixed		225		325
July 13, 2009		5.21, fixed		5,000		-
July 13, 2009		5.03, fixed		10,000		-
November 9, 2009		4.57, fixed		10,000		-
March 17, 2010		5.92, fixed		5,000		5,000
May 19, 2010		3.87, floating		-		15,000
September 29, 2010		4.02, floating		-		6,500
March 14, 2011		4.63, fixed		10,000		-
March 28, 2011		4.68, fixed		10,000		-
December 7, 2011		4.12, fixed		10,000		-
March 14, 2013		4.49, floating		-		10,000
June 3, 2015		3.36, fixed		15,000		15,000
November 2, 2016		3.98, fixed		10,000		-
			$	105,625	$	57,225

Scheduled principal reductions of Federal Home Loan Bank advances are as follows:

(Dollars in thousands)	Amount
2007	$	15,100
2008		5,500
2009		25,025
2010		5,000
2011 and thereafter		55,000
Total	$	105,625

As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $120,303,000, home equity lines of credit aggregating $34,860,000, and commercial real estate loans aggregating $48,669,000 (see Note 5) at December 31, 2006. In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.

F-19

NOTE 10 - JUNIOR SUBORDINATED DEBENTURES

On June 15, 2006, Community Capital Corporation Statutory Trust I (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities with a maturity of June 15, 2036. The rate is fixed at 7.04% until June 14, 2011, at which point the rate adjusts quarterly to the three-month LIBOR plus 1.55%, and can be called without penalty beginning on June 15, 2011. In accordance with the revised FIN 46, the Trust has not been consolidated in these financial statements. The Company received from the Trust the $10,000,000 proceeds from the issuance of the securities and the $310,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $10,310,000 junior subordinated debentures.

The current regulatory rules allow certain amounts of junior subordinated debentures to be included in the calculation of regulatory capital of the Bank.

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, 2006, the Company had purchased approximately 1,029,000 shares under the plans (and prior plans), at an average cost of $16.66.

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, 2006 and 2005, 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 $93,832, $108,460 and $115,020 for the years ended December 31, 2006, 2005 and 2004, respectively. Minimum lease commitments under noncancelable operating leases are as follows:

(Dollars in thousands)	Amount
2007	$	115
2008		65
2009		58
2010		56
2011 and thereafter		278
Total	$	572

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.

F-20

NOTE 13 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS - continued

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.

The following tables summarize the capital ratios and the regulatory minimum requirements of the Company and the Bank at December 31, 2006 and 2005.

											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, 2006
The Company
Total capital (to risk-weighted assets)	$	64,968		11.09	%		46,884		8.00	%	$	-		N/A
Tier 1 capital (to risk-weighted assets)		58,768		10.03			23,442		4.00			-		N/A
Tier 1 capital (to average assets)		58,768		8.46			27,775		4.00			-		N/A
CapitalBank
Total capital (to risk-weighted assets)	$	60,659		10.37	%	$	46,785		8.00	%	$	58,482		10.00	%
Tier 1 capital (to risk-weighted assets)		54,459		9.31			23,393		4.00			35,089		6.00
Tier 1 capital (to average assets)		54,459		7.85			27,745		4.00			34,681		5.00
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

F-21

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, 2006, there were 123,775 options outstanding that had been issued under the Plans.

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.

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
Dividend yield		1.61%
Expected volatility		8.77%
Risk-free interest rate		3.28%
Expected life		5 years

There were no stock options granted in 2006 or 2005. The weighted-average fair value of options, calculated using the Black-Scholes option-pricing model, granted during 2004 is $2.35.

A summary of the status of the Company’s stock option plans as of December 31, 2006, 2005, and 2004 and changes during the years ended on those dates is presented below:

	2006				2005				2004
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year		174,630	$	14.16		236,455	$	12.93		288,145	$	10.37
Granted		-		-		-		-		57,050		20.58
Exercised		49,776		8.56		59,757		9.44		103,330		12.66
Cancelled		1,079		14.81		2,068		10.63		5,410		12.74
Outstanding at end of year		123,775		16.40		174,630		14.16		236,455		12.93

Options exercisable at December 31, 2006, 2005, and 2004 were 123,775, 174,630 and 179,405, respectively.

The aggregate intrinsive value (the difference between the Company’s closing stock price on the last trading day of 2006 and the exercise price, multiplied by the number of in-the-money options) for options outstanding and exercisable at December 31, 2006 amounted to $538,807. This amount represents what would have been received by the option holders had all option holders exercised their options on December 31, 2006. This amount changes based on changes in the fair market value of the Company’s stock.

F-22

NOTE 14 - STOCK COMPENSATION PLANS - continued

The following table summarizes information about the stock options outstanding under the Company’s plans at December 31, 2006:

					Weighted
					Average
	Options		Remaining		Exercise
Range of Exercise Prices	Outstanding		Life (years)		Price
Exercisable:
$12.50 to $14.10		29,550		0.23	$	12.55
$14.30 to $15.65		45,500		1.05		14.34
$20.10 to $22.40		48,725		2.07		20.67
Total exercisable		123,775

During 2006 and 2005, the Company issued 17,350 and 30,600 shares, respectively, of restricted stock pursuant to the 2004 Equity Incentive Plan. The shares cliff vest in three years and are fully vested on February 1, 2009 and January 21, 2008, respectively. The weighted-average fair value of restricted stock issued during 2006 and 2005 was $22.85 and $23.00, respectively. Compensation cost associated with the issuances was $419,000, $292,000 and $30,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Forfeitures totaled $14,000 for the year ended December 31, 2006. There were no restricted stock forfeitures for the years ended December 31, 2005 or 2004. At December 31, 2006, the Company had 167,650 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, 2006, 2005, and 2004 were $16,425,000, $17,099,000 and $17,760,000, respectively. During 2006, $613,000 of new loans were made to related parties and repayments totaled $1,287,000. During 2005, $3,027,000 of new loans were made to related parties and payments totaled $3,688,000. During 2004, $10,659,000 of new loans were made to related parties and repayments totaled $4,168,000.

The Company purchases various types of insurance from agencies that are owned by two directors. Amounts paid for insurance premiums were $175,867, $197,451 and $77,042 in 2006, 2005, and 2004, 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, 2006, retained earnings of the bank was $8,655,000.

F-23

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 per share data)		2006		2005		2004
Basic earnings per share:
Net income available to common shareholders	$	5,759	$	7,094	$	5,800
Average basic common shares outstanding		3,738,573		3,800,027		3,815,934
Basic earnings per share	$	1.54	$	1.87	$	1.52
Diluted earnings per share:
Net income available to common shareholders	$	5,759	$	7,094	$	5,800
Average common shares outstanding - basic		3,738,573		3,800,027		3,815,934
Incremental shares from assumed conversions:
Restricted Stock		31,892		30,741		6,814
Stock options		41,272		78,983		113,610
Average diluted common shares outstanding		3,811,737		3,909,751		3,936,358
Diluted earnings per share	$	1.51	$	1.82	$	1.47

The above computation of diluted earnings per share 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:

	2006		2005		2004
Number of options		12,000		N/A		12,000
Weighted-average of these options
outstanding during the year		12,000		N/A		9,902
Weighted-average exercise price	$	22.40		N/A	$	22.40

F-24

NOTE 19 - INCOME TAXES

Income tax expense consisted of the following:

	Year ended December 31,
(Dollars in thousands)		2006			2005			2004
Currently payable:
Federal	$	2,777		$	2,629		$	1,841
State		(274	)		260			251
Total current		2,503			2,889			2,092
Deferred income tax provision (benefit)		(407	)		(1,030	)		(536	)
Income tax expense	$	2,096		$	1,859		$	1,556
Income tax expense (benefit) is allocated as follows:
To continuing operations	$	2,018		$	2,479		$	1,599
To shareholders’ equity		78			(620	)		(43	)
Income tax expense	$	2,096		$	1,859		$	1,556

The gross amounts of deferred tax assets and deferred tax liabilities were as follows:

	December 31,
(Dollars in thousands)		2006		2005
Deferred tax assets:
Allowance for loan losses	$	2,002	$	1,965
Net operating loss carryforward - state		172		136
Deferred compensation		690		553
Nonaccrual of interest		39		64
Other real estate owned		61		9
Loans fees and costs		96		45
Director fees		43		27
Restricted stock		274		118
Available-for-sale securities		151		235
Deferred revenue		82		107
Total deferred tax assets		3,610		3,259
Deferred tax liabilities:
Accumulated depreciation		136		139
Federal Home Loan Bank stock dividends		16		16
Investment property		-		2
Merger related, net		96		119
Core deposit intangibles		154		204
Prepaids		66		44
Total deferred tax liabilities		468		524
Net deferred tax asset recognized	$	3,142	$	2,735

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, 2006 will be realized, and accordingly, has not established a valuation allowance. Net deferred tax assets are included in other assets.

F-25

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)	2006			2005			2004
Income tax at the statutory rate	$	2,644		$	3,254		$	2,516
State income tax, net of federal income tax benefit		184			197			173
Tax-exempt interest income		(460	)		(493	)		(492	)
Disallowed interest expense		73			48			32
Stock option compensation		(167	)		(181	)		(306	)
Increase in cash surrender value of life insurance		(203	)		(198	)		(203	)
Other, net		(53	)		(148	)		(121	)
Income tax expense	$	2,018		$	2,479		$	1,599

NOTE 20 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

	Year ended December 31,
(Dollars in thousands)	2006		2005		2004
Banking and ATM supplies	$	427	$	530	$	564
Directors’ fees		274		252		187
Mortgage loan department expenses		129		119		113
Data processing and supplies		1,091		670		568
Postage and freight		212		432		398
Professional fees		351		410		598
Telephone expenses		351		294		293
Other		2,139		1,982		1,932
Total	$	4,974	$	4,689	$	4,653

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 $408,000, $297,000 and $277,000 in 2006, 2005, and 2004, respectively. The Company’s policy is to fund amounts approved by the Board of Directors. At December 31, 2006 and 2005, the savings plan owned 170,688 and 169,427 shares of the Company’s common stock purchased at an average cost of $18.66 and $17.74 per share, respectively. The estimated value of shares held at December 31, 2006 and 2005 was $3,513,000 and $3,741,000, 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, 2006 and 2005 totaled $375,000 and $630,000, 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, 2006, 2005, or 2004.

F-26

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. In 2002 upon the purchase of Bank Owned Life Insurance (BOLI) Policies as described below, these officers forfeited any benefits associated with these policies and as a result these policies are in essence key man policies. 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 2006, 2005, or 2004. No insurance premiums were paid on the plan during 2006 or 2005. The policies increased their cash values by $735,000 and $195,000 during 2006 and 2005, respectively. Cash values at December 31, 2006 and 2005 were $3,882,000 and $3,147,000, respectively. The significant increase in cash value in 2006 over 2005 was the result of the extinguishment of debt against the same policies.

In 2002, the Company purchased 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, 2006, 2005, or 2004. The policies increased their cash values by $400,000 and $415,000 during 2006 and 2005, respectively. Cash values at December 31, 2006 and 2005 were $10,735,000 and $10,335,000, respectively.

NOTE 22 - UNUSED LINES OF CREDIT

As of December 31, 2006, the subsidiary bank had unused lines of credit to purchase federal funds from unrelated banks totaling $44,801,000. 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 $72,325,000 at December 31, 2006. As of December 31, 2006, the Bank had borrowed $105,625,000 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.

F-27

NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

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.

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.

Junior Subordinated Debentures - The carrying value of junior subordinated debentures is a reasonable estimate of fair value since the debentures were issued at a floating rate.

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,
	2006				2005
	Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Amount		Fair Value		Amount		FairValue
Financial Assets:
Cash and due from banks	$	22,167	$	22,167	$	18,806	$	18,806
Interest-bearing deposit accounts		308		308		31		31
Securities available-for-sale		65,496		65,496		70,232		70,232
Securities held-to-maturity		380		388		380		391
Nonmarketable equity securities		8,073		8,073		5,275		5,275
Cash surrender value of life insurance		14,617		14,617		13,482		13,482
Loans and loans held for sale		574,193		564,351		466,281		459,447
Accrued interest receivable		3,954		3,954		2,666		2,666
Financial Liabilities:
Demand deposit, interest bearing
transaction, and savings accounts	$	297,068	$	297,068	$	262,350	$	262,350
Certificates of deposit and other time deposits		189,888		191,043		171,296		172,084
Federal funds purchased and securities
sold under agreements to repurchases		45,282		45,282		49,099		49,099
Advances from the Federal Home Loan Bank		105,625		105,794		57,225		57,489
Junior subordinated debentures		10,310		10,310		-		-
Accrued interest payable		2,686		2,686		1,321		1,321

F-28

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)	2006			2005
Assets
Cash and cash equivalents	$	3,307		$	63
Investment in banking subsidiary		64,597			54,154
Nonmarketable equity securities		310			-
Premises and equipment, net		1,163			1,005
Other assets		1,223			595
Total assets	$	70,600		$	55,817
Liabilities and Shareholders’ Equity
Notes payable to subsidiary	$	1,004		$	1,043
Junior subordinated debentures		10,310			-
Other liabilities		360			269
Total liabilities		11,674			1,312
Common stock		4,818			4,751
Nonvested restricted stock		(558	)		(595	)
Capital surplus		47,671			46,929
Retained earnings		24,386			20,893
Accumulated other comprehensive expense		(269	)		(421	)
Treasury stock		(17,122	)		(17,052	)
Total shareholders’ equity		58,926			54,505
Total liabilities and shareholders’ equity	$	70,600		$	55,817

Condensed Statements of Income

	For the years ended December 31,
(Dollars in thousands)	2006			2005			2004
Income:
Dividend income from subsidiary	$	2,900		$	5,050		$	10,850
Dividend income from equity securities		11			-			-
Net gain on sale of nonmarketable equity securities		-			1,092			-
Other interest income		120			10			7
Other income		4			3			8
Total income		3,035			6,155			10,865
Expenses:
Salaries		429			304			43
Net occupancy expense		(105	)		(75	)		(34	)
Furniture and equipment expense		5			36			65
Interest expense		485			70			54
Other operating expenses		288			334			417
Total expense		1,102			669			545
Income (loss) before income taxes and equity in undistributed
earnings of subsidiary		1,933			5,486			10,320
Income tax expense (benefit)		534			31			501
Income before equity in undistributed earnings of subsidiary		2,467			5,517			10,821
Equity in undistributed earnings and (losses) of subsidiary		3,292			1,577			(5,021	)
Net income	$	5,759		$	7,094		$	5,800

F-29

NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY) - continued

Condensed Statements of Cash Flows

	For the years ended December 31,
(Dollars in thousands)	2006			2005			2004
Operating activities:
Net income	$	5,759		$	7,094		$	5,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (earnings) losses of banking subsidiary		(3,292	)		(1,577	)		5,021
Depreciation and amortization expense		45			77			110
Amortization of deferred compensation on restricted stock		419			292			30
Deferred taxes		362			100			(740	)
Gain on sale of nonmarketable equity securities		-			(1,092	)		-
Loss on sale of fixed assets		-			-			9
Increase (decrease) in other liabilities		80			(24	)		27
(Increase) decrease in other assets		(978	)		417			436
Net cash provided by operating activities		2,395			5,287			10,693
Investing activities:
Purchase of premises and equipment		(203	)		(34	)		(10	)
Proceeds from sales of premises and equipment		-			-			385
Proceeds from sales on nonmarketable equity securities		-			1,592			-
Purchases of nonmarketable equity securities		(310	)		-			-
Net assets acquired in bank acquisition		-			-			11,229
Investment in Bank subsidiary		(7,000	)		-			-
Transfer of assets to Bank		-			-			(18,455	)
Net cash provided (used) by investing activities		(7,513	)		1,558			(6,851	)
Financing activities:
Dividends paid		(2,266	)		(2,853	)		(1,936	)
Proceeds from exercise of stock options		427			564			1,035
Proceeds from junior subordinated debentures		10,310
Proceeds of long term debt		2,700			-			-
Repayment of long term debt		(2,700	)		-			-
Repayments on borrowings from subsidiary		(39	)		(51	)		(118	)
Purchase of treasury stock		(70	)		(4,488	)		(2,886	)
Net cash provided (used) by financing activities		8,362			(6,828	)		(3,905	)
Net increase (decrease) in cash and cash equivalents		3,244			17			(63	)
Cash and cash equivalents, beginning of year		63			46			109
Cash and cash equivalents, end of year	$	3,307		$	63		$	46

F-30

NOTE 25 - QUARTERLY DATA (UNAUDITED)

	December 31,
	2006								2005
(Dollars in thousands	Fourth		Third		Second		First		Fourth		Third		Second		First
except per share)	Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter		Quarter
Interest income	$	11,248	$	10,696	$	9,847	$	8,888	$	8,347	$	7,942	$	7,501	$	7,088
Interest expense		5,796		5,288		4,684		3,857		3,172		2,841		2,595		2,350
Net interest income		5,452		5,408		5,163		5,031		5,175		5,101		4,906		4,738
Provision for loan losses		340		650		150		-		400		225		100		100
Net interest income after
provision for loan losses		5,112		4,758		5,013		5,031		4,775		4,876		4,806		4,638
Noninterest income		1,629		1,588		1,457		1,360		2,467		1,643		1,721		1,496
Noninterest expenses		4,620		4,711		4,432		4,408		4,030		4,264		4,490		4,065
Income before taxes		2,121		1,635		2,038		1,983		3,212		2,255		2,037		2,069
Income tax expense		577		441		490		510		920		615		408		536
Net income	$	1,544	$	1,194	$	1,548	$	1,473	$	2,292	$	1,640	$	1,629	$	1,533
Earnings per share:
Basic	$	0.41	$	0.32	$	0.41	$	0.40	$	0.62	$	0.43	$	0.42	$	0.40
Diluted	$	0.40	$	0.31	$	0.41	$	0.39	$	0.60	$	0.42	$	0.41	$	0.39

F-31

EXHIBIT INDEX

Exhibit

Number Description

2.1¹ Merger Agreement dated as of October 15, 2003 between Community CapitalCorporation 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

3.4⁴ First Amendment to Amended and Restated Bylaws dated October 18, 2006

4.1⁵ 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.)

4.2⁶ Indenture dated as of June 15, 2006, between Community Capital Corporation and Wilmington Trust Company, as Trustee

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)

10.6⁵ Lease Agreement With Options dated June 11, 1996 between Robert C. Coleman and the Registrant

10.18⁷ *1997 Stock Incentive Plan, as amended

10.21⁸ *Salary Continuation Agreement between CapitalBank and William G. Stevens dated October 17, 2002

10.22⁸ *Salary Continuation Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002

10.23⁸ *Split Dollar Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002

10.24⁸ *Salary Continuation Agreement between CapitalBank and Helen A. Austin dated October 17, 2002

10.25⁸ *Split Dollar Agreement between CapitalBank and Helen A. Austin dated October 17, 2002

10.26⁸ *Salary Continuation Agreement between CapitalBank and James A. Lollis dated October 17, 2002

10.27⁸ *Split Dollar Agreement between CapitalBank and James A. Lollis dated October 17, 2002

10.28⁸ *Salary Continuation between CapitalBank and Taylor T. Stokes dated October 17, 2002

10.29⁸ *Split Dollar Agreement CapitalBank and Taylor T. Stokes dated October 17, 2002

10.30⁸ *Salary Continuation Agreement between CapitalBank and Walter G. Stevens dated October 17, 2002

10.31⁸ *Split Dollar Agreement between CapitalBank and Walter G. Stevens dated October 17, 2002

10.32⁸ *Salary Continuation Agreement between CapitalBank and Sonja Hazel Hughes dated October 17, 2002

10.33⁸ *Salary Continuation Agreement between CapitalBank and Steve O. White dated October 17, 2002

10.37⁹ Marketing Agreement dated May 21, 2003, by and between CapitalBank and Benefit Coordinators, Inc.

10.39⁷ *Split Dollar Agreement between CapitalBank and William G. Stevens dated December 31, 2003

10.40⁷ *Split Dollar Agreement between CapitalBank and Steve O. White dated December 31, 2003

10.44¹⁰ *Restricted Stock Agreement

10.45¹¹ *2004 Equity Incentive Plan

10.46¹² Banking Support Services Master Agreement between CapitalBank and First-Citizens Bank & Trust Company dated June 15, 2005

10.48¹³ Share Repurchase Agreement between Community Capital Corporation and FIG Partners, LLC dated August 18, 2005

10.49¹⁴ *First Amendment to Salary Continuation Agreement between CapitalBank and Steve O. White dated January 10, 2006

E-1

10.50⁶ Amended and Restated Declaration of Trust dated as of June 15, 2006, among Community Capital Corporation, as sponsor, Wilmington Trust Company, as Delaware trustee, Wilmington Trust Company, as institutional trustee, and Mary Beth Ginn, Heather N. Price and R. Wesley Brewer, as administrators

10.51⁶ Guarantee Agreement dated as of June 15, 2006, between Community Capital Corporation, as guarantor, and Wilmington Trust Company, as guarantee trustee.

14⁷ Code of Ethics

21.1¹⁵ 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 Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on October 19, 2006.

⁵ 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).

⁶ Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on June 16, 2006.

_⁷ 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.

_⁸ 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.

_⁹ Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on May 22, 2003.

_¹⁰ 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.

_¹¹ Incorporated by reference to Appendix A of Amendment No. 1 to the Registrant’s Proxy Statement filed on April 26, 2004.

_¹² Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on June 20, 2005.

_¹³ Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on August 18, 2005.

_¹⁴ Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on January 11, 2006.

_¹⁵ 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

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 March 23, 2007, which is included in Community Capital Corporation's Annual Report on Form 10-K as of December 31, 2006 and 2005 and for the three years ended December 31, 2006.

s/Elliott Davis, LLC

Greenville, South Carolina

March 26, 2007

EX-31.1

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-15(e) and 15d-15(e) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 2006 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 officers 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 functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting 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 over financial reporting.

Date: March 26, 2007 /s/ William G. Stevens

William G. Stevens

President & Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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-15(e) and 15d-15(e) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 2006 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 officers 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 functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting 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 over financial reporting.

Date: March 26, 2007 /s/ R. Wesley Brewer

R. Wesley Brewer

Chief Financial Officer, Executive Vice President, and Secretary

EX-32

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, 2006, 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 26, 2007 /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