10-K 1 ccc_10k-123108.htm ANNUAL REPORT ccc_10k-123108.htm
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, 2008

Commission file number: 0-18460

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]     No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large accelerated filer [  ]                Accelerated filer [  ]                  Non-accelerated filer [X]               Smaller reporting company  [  ]
 
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 the common equity held by non-affiliates of the registrant as of June 30, 2008, based on the closing price of the common stock as reported by The NASDAQ Global Market on such date, was approximately $45.6 million.  The registrant has no outstanding non-voting common equity.
 
The number of outstanding common shares of the registrant as of March 13, 2009, was 4,516,790.
 
Documents Incorporated By Reference:  Portions of the registrant’s Proxy Statement relating to its 2009 Annual Meeting of Shareholders, to be filed subsequently, are incorporated herein by reference in Part III.
 
COMMUNITY CAPITAL CORPORATION

TABLE OF CONTENTS
 
Item
                                                                                                                                                                                                                               
 Page No.
PART I 
       
1
. 
3 
1
A. 
13 
1
B. 
20 
2
. 
20 
3
. 
20 
4
. 
20 
 
PART II 
       
5
. 
  
   
21 
6
. 
24 
7
. 
25 
7
A. 
45 
8
. 
46 
9
. 
46 
9
A. 
46 
9
B. 
47 
 
PART III 
       
10
. 
47 
11
. 
47 
12
. 
48 
13
. 
48 
14
. 
48 
 
PART IV 
       
15
. 
48 
   
49 
F-1 
E-1 
 
Advisory Note Regarding Forward-Looking Statements

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

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

PART I
 
ITEM 1.  BUSINESS.
 
General
 
Community Capital Corporation is a bank holding company headquartered in Greenwood, South Carolina.  We incorporated under the laws of the State of South Carolina on April 8, 1988 as a holding company for Greenwood National Bank, which opened in 1989.
 
We were formed principally in response to perceived opportunities resulting from takeovers of several South Carolina-based banks by large southeastern regional bank holding companies.  In many cases, when these consolidations occur, local boards of directors are dissolved, and local management is relocated or terminated.  We believe this situation creates favorable opportunities for new community banks with local management and local directors.  Management believes that such banks can be successful in attracting individuals and small to medium-sized businesses as customers who wish to conduct business with a locally owned and managed institution that demonstrates an active interest in their business and personal financial affairs.
 
In 1994, we made the strategic decision to expand beyond the Greenwood County area by creating an organization of independently managed community banks that serve their respective local markets, but which share a common vision and benefit from the strength, resources and economies of a larger institution.  In 1995, we opened Clemson Bank & Trust in Clemson, South Carolina.  In 1997, we opened Community Bank & Trust in Barnwell, South Carolina, TheBank in Belton, South Carolina, and Mid State Bank in Newberry, South Carolina.  During 2000, each of these five community banks operated as a wholly-owned subsidiary of the Company and engaged in a general commercial banking business, emphasizing the banking needs of individuals and small to medium-sized businesses in each bank’s primary service area.  Each of the five community banks was a state chartered Federal Reserve member bank.  On January 1, 2001, we merged the five community banks into one bank known as CapitalBank.
 
As of March 4, 2004, we were the survivor of a merger between us and Abbeville Capital Corporation, a South Carolina corporation and the holding company for The Bank of Abbeville, a South Carolina corporation.  Immediately following the merger with Abbeville Capital Corporation, we merged The Bank of Abbeville into CapitalBank.
 
Market Areas
 
At December 31, 2008, CapitalBank had banking locations in, Abbeville, Anderson, Belton, Calhoun Falls, Clemson, Clinton, Greenville, Greenwood, Greer, Honea Path, Newberry, Prosperity, and Saluda, South Carolina.
 
The following table sets forth certain information concerning CapitalBank at December 31, 2008:

   
Number of
 Locations
    
Total
 Assets
    
Total
 Loans
    
Total
 Deposits
  
         
(Dollars in thousands)
  
CapitalBank
    
18
      
$788,678
      
$642,696
      
$513,708
  

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, 2008, totaled $641.7 million, or 87.48% 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 real estate construction loans and commercial mortgage loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans.  These three loan types totaled approximately $577.7 million and constituted approximately 90.02% of our loan portfolio at December 31, 2008.
 
The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2008.
 
Loan Composition
 
(Dollars in thousands)
                                                                  
   
December 31,
  
   
2008
    
2007
    
2006
    
2005
    
2004
  
Commercial, financial and agricultural
     6.77 %     6.89 %     7.83 %     8.20 %     10.62 %
Real estate:
                                        
Construction
     28.89       25.92       24.88       22.90       11.33  
Mortgage:
                                        
Residential
     36.61       39.13       39.08       37.50       41.94  
Commercial (1)
     24.52       24.00       24.07       26.53       30.29  
Consumer and other
     3.21       4.06       4.14       4.87       5.82  
Total loans
     100.00 %     100.00 %     100.00 %     100.00 %     100.00 %
                                         
Total loans (dollars)
   $ 641,737     $ 645,154     $ 573,639     $ 465,892     $ 425,628  
                                         
(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.  These means included the use of policies and procedures that impose officer and customer lending limits and require loans in excess of certain limits to be approved by the Board of Directors of CapitalBank.
 
Loan Review.  We have a continuous loan review process designed to promote early identification of credit quality problems.  All loan officers are charged with the responsibility of reviewing all past due loans in their respective portfolios.  CapitalBank establishes watch lists of potential problem loans.
 
Deposits
 
The principal sources of funds for CapitalBank are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, saving deposits, and certificates of deposit.  Transaction accounts include checking and negotiable order of withdrawal (NOW) accounts that customers use for cash management and that provide CapitalBank with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds.  Time and savings accounts also provide a relatively stable source of funding.  The largest source of funds for CapitalBank is certificates of deposit.  Primarily customers in CapitalBank’s market areas hold certificates of deposit less than $100,000.  Senior management of CapitalBank sets deposit rates weekly.  Management believes that the rates CapitalBank offers are competitive with other institutions in CapitalBank’s market areas.
 
Competition
 
CapitalBank generally competes with other financial institutions through the selection of banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered.  South Carolina law permits statewide branching by banks and savings institutions, and many financial institutions in the state have branch networks.  Consequently, commercial banking in South Carolina is highly competitive.  South Carolina law also permits interstate banking whereby out-of-state banks and bank holding companies are allowed to acquire and merge with South Carolina banks and bank holding companies, as long as the South Carolina State Board of Financial Institutions gives prior approval for the acquisition or merger.  Many large banking organizations currently operate in the market areas of CapitalBank, several of which are controlled by out-of-state ownership.  In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded powers and increased activity of thrift institutions in areas of banking that previously had been the sole domain of commercial banks.  See “Government Supervision and Regulation.”
 
CapitalBank faces increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit unions, consumer finance companies, insurance companies and other institutions in CapitalBank’s market areas.  Some of these competitors are not subject to the same degree of regulation and restriction imposed upon CapitalBank.  Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than CapitalBank and offer certain services that CapitalBank does not currently provide.  In addition, many of these competitors have numerous branch offices located throughout the extended market areas of CapitalBank that we believe may provide these competitors with an advantage in geographic convenience that CapitalBank does not have at present.  Such competitors may also be in a position to make more effective use of media advertising, support services, and electronic technology than can CapitalBank.
 
Employees
 
Including the employees of CapitalBank, we currently have in the aggregate 182 full-time employees and 13 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.
 
The Bank Holding Company Act also limits the types of businesses and operations in which a bank holding company and its subsidiaries, other than banking subsidiaries, may engage.  In general, permissible activities are limited to the business of banking and activities found by the Federal Reserve Board to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto.  In determining whether a particular activity is permissible, the Federal Reserve Board considers whether the performance of an activity can reasonably be expected to produce benefits to the public (such as greater convenience, increased competition, or gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices).  For example, the Federal Reserve Board has deemed permissible:  making, acquiring, or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions by the bank holding company; and certain limited insurance underwriting activities.
 
Generally, bank holding companies must obtain prior approval of the Federal Reserve Board to engage in any new activity not previously approved by the Federal Reserve Board.  However, despite prior approval, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or terminate its ownership or control of a subsidiary, when the Federal Reserve Board has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding company.
 
Interstate and Intrastate Banking and Branching
 
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in any state are permitted, with Federal Reserve Board approval, to acquire banking organizations in any other state.  As such, all existing regional compacts and substantially all regional limitations on interstate acquisitions of banking organizations have been eliminated.  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 also removed substantially all of the existing prohibitions on interstate branching by banks.  A bank operating in any state is now entitled to establish one or more branches within any other state without, as formerly required, the establishment of a separate banking structure within the other state.
 
The South Carolina Banking and Branching Efficiency Act of 1996, as amended, permits the acquisition of South Carolina banks and bank holding companies by, and mergers with, out-of-state banks and bank holding companies with the prior approval of the South Carolina State Board of Financial Institutions.  The South Carolina Banking and Branching Efficiency Act of 1996, as amended also permits South Carolina state banks, with prior approval of the South Carolina State Board of Financial Institutions, to operate branches outside the State of South Carolina.
 
Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the South Carolina Banking and Branching Efficiency Act of 1996 have the potential to increase the number of competitors in the marketplace of CapitalBank, we cannot predict the actual impact of such legislation on the competitive positions of such banks.
 
Gramm-Leach Bliley Act
 
The Gramm-Leach-Bliley Act (popularly referred to as the Financial Services Modernization Act of 1999 prior to enactment) became effective March 11, 2000.  The Gramm-Leach-Bliley Act accomplished a variety of purposes, including facilitating the affiliation among banks, securities firms, and insurance companies and providing privacy protections for customers.  Specifically, the Gramm-Leach-Bliley Act (a) amends the Banking Act of 1933 (the Glass-Steagall Act) to repeal the prohibitions against affiliation of any Federal Reserve member bank, such as CapitalBank, with an entity engaged principally in securities activities, and to repeal the prohibitions against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank; (b) amends the Federal Bank Holding Company Act of 1956, as amended, to permit bank holding companies to own shares in non-banking organizations whose activities have been determined by the Federal Reserve System to be permissible for bank holding companies; (c) creates a new type of bank, wholesale financial institutions (also referred to as “woofies”), that are regulated by the Federal Bank Holding Company Act of 1956, as amended, and are not able to accept insured deposits, potentially giving holding companies with woofies greater flexibility to engage in non-financial investments; (d) subject to specified exemptions, pre-empts state anti-affiliation laws restricting transactions among insured depository institutions, wholesale financial institutions, insurance concerns, and national banks; (e) amends the Federal Bank Holding Company Act of 1956, as amended, and the Federal Deposit Insurance Act to mandate public meetings concerning proposed large bank mergers and acquisitions; (f) amends the Electronic Fund Transfer Act to mandate certain fee disclosures related to electronic fund transfer services; and (g) imposes certain obligations on financial institutions to protect the privacy and confidentiality of customer nonpublic personal information, including the requirements that financial institutions establish standards for safeguards to protect privacy and confidentiality, provide the standards to customers at the time of establishing the customer relationship and annually during the continuation of the relationship, condition disclosure of the private information to nonaffiliated  third parties on the giving of specific disclosures to consumers, and giving consumers the opportunity to prevent such disclosure to third parties.
 
Although the Gramm-Leach-Bliley Act has the potential to mix commerce and banking and increase our abilities to diversify into a variety of areas, we cannot predict the actual impact of such legislation on us.
 
Sarbanes-Oxley Act of 2002
 
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law.  It mandated sweeping reforms and implemented a number of requirements for public companies.  Among the reforms and new requirements are the following:
 
· 
Creation of the Public Company Accounting Oversight Board to oversee audits of public companies.
 
·
Implementation of a variety of requirements designed to ensure greater auditor independence, including the prohibition of certain services that auditors had traditionally provided to clients.
 
·
Implementation of a variety of requirements regarding audit committees, including that they be entirely independent; that they establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and that issuers disclose whether at least one member of the committee is a “financial expert.”
 
·
Requirement that changes in equity ownership by directors, officers, and 10% stockholders be reported more promptly, generally by the end of the second business day following the trade (subject to limited exceptions).
 
·
Requirement that CEOs and CFOs certify that the financial information in each annual and quarterly report fairly presents in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report, and establish and maintain internal controls designed to ensure discovery of material information.
 
·
Implementation of rules relating to disclosure of all material off-balance sheet transactions and obligations and regarding the presentation of pro-forma financial information in any press release or other public disclosure that was “non-GAAP.”
 
·
Requirement that issuers disclose whether they have adopted a code of ethics for senior executives and any waivers or changes in the code.
 
·
Requirement that CEOs and CFOs disgorge incentive compensation and profits from their sales of company securities after restatement of financial information.
 
·
Prohibition against directors and executive officers from transacting in company equity securities received in connection with employment during any pension fund blackout of such equity.
 
· 
Requirement that SEC reviews 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 had a meaningful impact on our operations, we do not believe that we have been affected by Sarbanes-Oxley in ways that are materially different or more onerous than other public companies of similar size and nature.
 
FIRREA
 
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 established two insurance funds under the jurisdiction of the FDIC: the Savings Association Fund and the Bank Insurance Fund.  The Financial Institutions Reform, Recovery and Enforcement Act of 1989 also imposed, with certain exceptions, a “cross guaranty” on the part of commonly controlled depository institutions such as CapitalBank.  Under this provision, if one depository institution subsidiary of a multi-bank holding company fails or requires FDIC assistance, the FDIC may assess a commonly controlled depository institution for the estimated losses suffered by the FDIC.  The FDIC’s claim is junior to the claims of nonaffiliated depositors, holders of secured liabilities, general creditors, and subordinated creditors, but is superior to the claims of shareholders.
 
Limitations on Acquisitions of Common Stock
 
The federal Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company or bank unless the appropriate federal bank regulator has been given 60 days prior written notice of such proposed acquisition and within that time period such regulator has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. The acquisition of 25% or more of any class of voting securities constitutes the acquisition of control under the CBCA. In addition, under a rebuttal presumption established under the CBCA regulations, the acquisition of 10% or more of a class of voting stock of a bank holding company or a FDIC insured bank, with a class of securities registered under or subject to the requirements of Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control.
 
Any “company” would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of our outstanding common stock of, or such lesser number of shares as constitutes control. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company.
 
Bank Secrecy Act
 
The Bank Secrecy Act requires financial institutions to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax and regulatory matters, and to implement counter-money laundering programs and compliance procedures.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
 
Reserve Requirement
 
The FDIC maintains a risk based assessment system for determining deposit insurance premiums. Four risk categories (I-IV), each subject to different premium rates, are established, based upon an institution’s status as well capitalized, adequately capitalized or undercapitalized, and the institution’s supervisory rating.  During 2008, all insured depository institutions paid deposit insurance premiums ranging between 5 and 7 basis points on an institution’s assessment base for institutions in risk category I (well capitalized institutions perceived as posing the least risk to the insurance fund), and 10, 28 and 40 basis points for institutions in risk categories II, III and IV.  The levels of rates are subject to periodic adjustment by the FDIC.  Depository institutions will also pay premiums for the increased coverage provided by the FDIC.

Commencing in 2009, the premium rates increased by 7 basis points in each category for the first quarter of 2009.  For the second quarter of 2009 and beyond, the FDIC has issued a final rule providing for further changes in rates, which introduces three adjustments that could be made to an institution’s initial base assessment rate: (1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) a potential increase for secured liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a potential increase for brokered deposits above a threshold amount other than those received through a deposit placement network on a reciprocal basis.  The schedule for base assessment rates and potential adjustment is set forth in the following table:

   
Risk
Category I
  
Risk
Category II
  
Risk
Category III
  
Risk
Category IV
  
Initial Base Assessment Rate
  
12-16
  
22
  
32
  
45
  
Unsecured Debt Adjustment
  
(5) - 0
  
(5) - 0
  
(5) - 0
  
(5) - 0
  
Secured Liability Adjustment
  
0 - 8
  
0 - 11
  
0 - 16
  
0 - 22.5
  
Brokered Deposit Adjustment
  
N/A
  
0 - 10
  
0 - 10
  
0 - 10
  
Total Base Assessment Rate
  
7 - 24
  
17 - 43
  
27 - 58
  
40 - 77.5
  
 
Additionally, CapitalBank has elected to participate in the FDIC program whereby noninterest bearing transaction account deposits will be insured without limitation through December 31, 2009.  The bank is required to pay an additional premium to the FDIC of 10 basis points on the amount of balances in noninterest bearing transaction accounts that exceed the existing deposit insurance limit of $250,000.

Further, in late February 2009, the FDIC adopted an interim rule imposing a 20 basis point emergency special assessment on all banks on June 30, 2009. The assessment is to be collected on September 30, 2009. The interim rule would also permit the FDIC to impose an emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance.  As a result of competitive pressures for deposits, CapitalBank may not be able to adjust deposit rates to offset the cost of increased deposit insurance premiums.  In any event, CapitalBank will have to absorb the cost of the increased premiums until such time as it is able to reprice its time deposits.

Loan Restrictions
 
CapitalBank is also subject to Section 23A of the Federal Reserve Act, which places limits on the amount of loans or extensions of credit to, investments in or certain other transactions with affiliates.  In addition, limits are placed on the amount of advances to third parties collateralized by the securities or obligations of affiliates.  Most of these loans and certain other transactions must be secured in prescribed amounts.
 
CapitalBank is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in transactions (including extensions of credit) with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.
 
In addition, CapitalBank may not engage in certain “tie-in” or “tying” arrangements in connection with any extension of credit or the providing of any property or service.  Tying is generally defined as any arrangement in which a bank requires a customer who wants one service, such as credit, to buy other products or services from the bank or its affiliates as a condition of receiving the first service.
 
Restrictions on the Payment of Dividends
 
We depend primarily on dividends from CapitalBank for cash flow to pay dividends to our shareholders.  State and federal statutes and regulations limit the payment of dividends by CapitalBank, as well as the payment of dividends by us to our shareholders.  For example, South Carolina state business corporation law requires that dividends may be paid only if such payment would not render the companies insolvent or unable to meet their obligations as they come due.  Additionally, all dividends of the state subsidiary banks must be paid out of the respective undivided profits then on hand, after deducting expenses, including losses and bad debts.  As a member of the Federal Reserve System, CapitalBank may not declare a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of their respective net profits of the preceding two consecutive half-year periods (in the case of an annual dividend).  CapitalBank must obtain the approval of the Federal Reserve Board if the total of all dividends declared by it in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.  The payment of dividends also may be affected or limited by other federal and state regulatory restrictions and factors, such as the requirement to maintain adequate capital in accordance with other state and federal regulatory guidelines.
 
Capital Adequacy
 
As an insured depository institution, CapitalBank is required to comply with the capital requirements promulgated under the Federal Deposit Insurance Act and the Federal Reserve’s prompt corrective action regulations thereunder, which set forth five capital categories, each with specific regulatory consequences. Under these regulations, the categories are:

  •   Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a total capital ratio of 10% or greater, (ii) having a Tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

  •   Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a total capital ratio of 8% or greater, (ii) having a Tier 1 capital ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the CAMELS rating system.

  •   Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a total capital ratio of less than 8% or (ii) having a Tier 1 capital ratio of less than 4% or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a leverage capital ratio of less than 3%.

  •   Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a total capital ratio of less than 6% or (ii) having a Tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3%.

  •   Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.

If the appropriate federal banking regulator determines, after notice and an opportunity for hearing, that a bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If a bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, if a bank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the appropriate federal regulator that is subject to a limited performance guarantee by the bank. A bank also would become subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan.

Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the bank to become undercapitalized, it could not pay a management fee or dividend to us.

As of December 31, 2008, CapitalBank was considered “well capitalized”, pursuant to the above regulatory standards.

Other Regulations
 
Our status as a registered bank holding company under the Bank Holding Company Act does not exempt us from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.  Each of the entities is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offer and sale of their respective securities.  Interest and certain other charges collected or contracted for by the subsidiary banks are also subject to state usury laws and certain federal laws concerning interest rates.
 
The loan operations of CapitalBank are subject to certain federal laws applicable to credit transactions, such as:  the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Community Reinvestment Act of 1977, requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; the Fair Housing Act, prohibiting discriminatory practices relative to real estate-related transactions, including the financing of housing; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
 
The deposit operations of CapitalBank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; the Truth in Savings Act, requiring depository institutions to disclose the terms of deposit accounts to consumers; and the Expedited Funds Availability Act, requiring financial institutions to make deposited funds available according to specified time schedules and to disclose funds.
 
Enforcement Authority
 
The Federal Reserve Board has enforcement authority over bank holding companies and non-banking subsidiaries to forestall activities that represent unsafe or unsound practices or constitute violations of law.  It may exercise these powers by issuing cease-and-desist orders or through other actions.  The Federal Reserve Board may also assess civil penalties against companies or individuals who violate the Bank Holding Company Act or related regulations in amounts up to $1 million for each day’s violation.  The Federal Reserve Board can also require a bank holding company to divest ownership or control of a non-banking subsidiary or require such subsidiary to terminate its non-banking activities.  Certain violations may also result in criminal penalties.
 
The Federal Deposit Insurance Corporation possesses comparable authority under the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation Improvement Act, and other statutes.  In addition, the Federal Deposit Insurance Corporation can terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is in an unsafe and unsound condition to continue operations, or has violated any applicable law, regulation, rule, or order of, or condition imposed by, the appropriate supervisors.
 
ITEM 1A.  RISK FACTORS.
 
Investing in our common stock involves various risks which are particular to our company, our industry and our market area. Several risk factors regarding investing in our common stock are discussed below. This listing should not be considered as all-inclusive. If any of the following risks were to occur, we may not be able to conduct our business as currently planned and our financial condition or operating results could be negatively impacted. These matters could cause the trading price of our common stock to decline in future periods.

We are geographically concentrated in the upstate region of South Carolina, and changes in local economic conditions impact our profitability.

We operate primarily in the upstate region of South Carolina and substantially all our loan customers and most of our deposit and other customers live or have operations in that area of South Carolina. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in that region, along with the continued attraction of business ventures to the area. Our profitability is impacted by the changes in general economic conditions in this market. Additionally, unfavorable local or national economic conditions could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.

We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions (the “TARP Capital Purchase Program”). On October 14, 2008, the Federal Deposit Insurance Corporation announced the development of a guarantee program under the systemic risk exception to the Federal Deposit Act (“FDA”) pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial institutions (the “FDIC Temporary Liquidity Guarantee Program”). Most recently, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which contains a wide array of provisions aimed at stimulating the U.S. economy, was signed into law.  There can be no assurance, however, as to the actual impact that the EESA, ARRA and their implementing regulations, the FDIC programs, or any other governmental program will have on the financial markets. The failure of the EESA, ARRA, the FDIC, or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our common stock.

The impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their implementing regulations, and actions by the FDIC, cannot be predicted at this time.   The programs established or to be established under the EESA, ARRA and Troubled Asset Relief Program may have adverse effects upon us. We may face increased regulation of our industry. Compliance with such regulation may increase our costs and limit our ability to pursue business opportunities. Also, participation in specific programs may subject us to additional restrictions. For example, participation in the TARP Capital Purchase Program will limit (without the consent of the Department of Treasury) our ability to increase our dividend or to repurchase our common stock for so long as any securities issued under such program remain outstanding. It will also subject us to additional executive compensation restrictions. Similarly, programs established by the FDIC under the systemic risk exception of the FDA, whether we participate or not, may have an adverse effect on us. Participation in the FDIC Temporary Liquidity Guarantee Program likely will require the payment of additional insurance premiums to the FDIC. We may be required to pay significantly higher Federal Deposit Insurance Corporation premiums even if we do not participate in the FDIC Temporary Liquidity Guarantee Program because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The affects of participating or not participating in any such programs and the extent of our participation in such programs cannot reliably be determined at this time.

Our estimated allowance for loan losses may be inadequate and future increases in the allowance would reduce earnings.

We are exposed to the risk that our customers will be unable to repay their loans according to the contractual terms and that any collateral securing the payment of these loans will not be sufficient to ensure full repayment. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results and ability to meet obligations. The volatility and deterioration in markets may also increase our risk for credit losses. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe to be adequate based on a variety of factors including but not limited to: the risk characteristics of various classifications of loans, previous loan loss experience, specific loans that have loss potential, delinquency trends, estimated fair market value of the collateral, current economic conditions, the views of our regulators, and geographic and industry loan concentrations. If our evaluation is incorrect and borrower defaults cause losses that exceed our allowance for loan losses, our earnings could be significantly and adversely affected. No assurance can be given that the allowance will be adequate to cover loan losses inherent in our portfolio. We may experience losses in our loan portfolios or perceive adverse conditions and trends that may require us to significantly increase our allowance for loan losses in the future, a decision that would reduce earnings.

Recent negative developments in the financial industry and the credit markets may adversely affect our operations and results.

Negative developments in the global credit and securitization markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing into 2010. Loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Global securities markets, and bank holding company stock prices in particular, have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. As a result, significant new federal laws and regulations relating to financial institutions, including, without limitation, the Emergency Economic Stabilization Act of 2008 and the U.S. Treasury Department's Capital Purchase Program, have been adopted. Furthermore, the potential exists for additional federal or state laws and regulations regarding, among other matters, lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. We can provide no assurance regarding the manner in which any new laws and regulations will affect us.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.

A significant portion of our loan portfolio is secured by real estate. As of December 31, 2008, approximately 90.07% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The weakening of the real estate markets in our geographic footprint may result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from CapitalBank as our primary source of funds. The primary sources of funds of CapitalBank are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

We may incur losses if we are unable to successfully manage interest rate risk.

Our profitability will depend in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates.  However, we may pay above-market rates to attract deposits as we have done in some of our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business. We attempt to minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

Difficult market conditions have adversely affected our industry.

Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs, initially of asset-backed securities but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Our small to medium-sized business target market may have fewer financial resources to weather a downturn in the economy.

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than a year. Recently, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. To prepare us for these possibilities, we monitor the financial soundness of companies we deal with. However, there is no assurance that any such losses would not materially and adversely affect our results of operations.

We are exposed to the possibility that more prepayments may be made by customers to pay down loan balances, which could reduce our interest income and profitability.

Prepayment rates stem from consumer behavior, conditions in the housing and financial markets, general United States economic conditions, and the relative interest rates on fixed-rate and adjustable-rate loans. Therefore, changes in prepayment rates are difficult to predict. Recognition of deferred loan origination costs and premiums paid in originating these loans are normally recognized over the contractual life of each loan. As prepayments occur, the rate at which net deferred loan origination costs and premiums are expensed will accelerate. The effect of the acceleration of deferred costs and premium amortization may be mitigated by prepayment penalties paid by the borrower when the loan is paid in full within a certain period of time. If prepayment occurs after the period of time when the loan is subject to a prepayment penalty, the effect of the acceleration of premium and deferred cost amortization is no longer mitigated. We recognize premiums paid on mortgage-backed securities as an adjustment from interest income over the expected life of the security based on the rate of repayment of the securities. Acceleration of prepayments on the loans underlying a mortgage-backed security shortens the life of the security, increases the rate at which premiums are expensed and further reduces interest income. We may not be able to reinvest loan and security prepayments at rates comparable to the prepaid instrument particularly in a period of declining interest rates.

Negative public opinion surrounding our company and the financial institutions industry generally could damage our reputation and adversely impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding our company and the financial institutions industry generally, is inherent in our business. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

The banking industry is highly competitive.

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

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

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

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

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

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

We depend on the accuracy and completeness of information about clients and counterparties.

In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer's audited financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. Our financial condition and results of operations could be negatively impacted to the extent we incorrectly assess the creditworthiness of our borrowers, fail to detect or respond to deterioration in asset quality in a timely manner, or rely on financial statements that do not comply with GAAP or are materially misleading.

We are subject to governmental regulation which could change and increase our cost of doing business or have an adverse effect on our business.

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

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

Changes in accounting standards could impact reported earnings.

The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

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.

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.

Our stock price may be volatile, which could result in losses to our investors and litigation against us.

Our stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts' recommendations or projections, our announcement of developments related to our businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, concerns, irrational exuberance on the part of investors, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future, especially in the financial institutions sector of the economy, could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. We could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources from our normal business.

Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.

Our ability to pay cash dividends may be limited by regulatory restrictions, by CapitalBank’s ability to pay cash dividends to our holding company and by our need to maintain sufficient capital to support our operations. The ability of CapitalBank to pay cash dividends to our holding company is limited by its obligations to maintain sufficient capital and by other restrictions on their cash dividends that are applicable to South Carolina state banks and banks that are regulated by the FDIC. If CapitalBank is not permitted to pay cash dividends to our holding company, it is unlikely that we would be able to pay cash dividends on our common stock.

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, 2008, CapitalBank operated seventeen full service branches and one drive through facility in South Carolina, three of which are located in Greenwood, two of which are located in Abbeville, Anderson and Greer, and one of which is located in each of Newberry, Belton, Greenville, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls.  Of CapitalBank’s branches, fifteen 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 a third party.  We believe that all of our properties are well maintained and are suitable for their respective present needs and operations.
 
ITEM 3.  LEGAL PROCEEDINGS.
 
CapitalBank and we are parties to legal proceedings that have arisen in the ordinary course of our respective businesses.  None of these proceedings is expected to have a material effect on our consolidated financial condition.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None.
 
 
PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is traded publicly on the NASDAQ Global 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 NASDAQ Global Market for the periods indicated.  All prices have been adjusted to reflect the 15% stock dividend in 2007 distributed on November 16, 2007 to shareholders of record as of the close of business on November 2, 2007.
 
Year
Quarter
  
High
    
Low
  
2008
Fourth
   $ 11.00     $ 5.85  
 
Third
     11.99       9.05  
 
Second
     15.99       9.30  
 
First
     16.88       14.03  
                   
2007
Fourth
   $ 18.90     $ 14.36  
 
Third
     18.60       16.61  
 
Second
     18.34       16.16  
 
First
     18.69       18.33  
 
The closing price of our common shares as reported by the NASDAQ Global Market on March 13, 2009 was $5.81 per share.  As of March 13, 2009, there were 4,516,790 shares of our common stock outstanding held by approximately 1,425 shareholders of record.  We did not sell any of our equity securities during fiscal year 2008 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
       
2008
January 22
March 7
$0.15
 
April 16
June 6
$0.15
 
July 23
September 5
$0.15
 
October 22
December 5
$0.15
       
2007
January 18
March 2
$0.13
 
April 18
June 1
$0.13
 
July 18
September 7
$0.13
 
October 17
December 7
$0.15
 
Our future dividends are subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions.  Our ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to us.  As a state bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay.  In particular, CapitalBank may require approval of the South Carolina State Board of Financial Institutions prior to paying dividends to us.  Furthermore, neither we nor CapitalBank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business.  See “Government Supervision and Regulation - Restriction on the Payment of Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Form 10-K, and Note 17 to our accompanying financial statements.
 

Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2008, 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.  Share and per share amounts have been updated to reflect the 15% stock dividend in 2007.
 
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
51,721
$18.01
145,898
Equity compensation plans not approved by security holders
-
-
-
Total
51,721
$18.01
145,898

(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.


PERFORMANCE GRAPH

This Section is not soliciting material, is not deemed filed with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference in any filing of the company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

The following graph compares cumulative total shareholder return of our common stock with the NASDAQ composite and the SNL Bank and Thrift Index for the five-year period extending through December 31, 2008. Total shareholder return represents stock price changes and assumes the reinvestment of dividends.  The graph assumes the investment of $100 on December 31, 2003.





 
Period Ending
 
12/31/03
  
12/31/04
  
12/31/05
  
12/31/06
  
12/31/07
  
12/31/08
Community Capital Corporation
100.00
  
124.66
  
118.15
  
113.12
  
97.62
  
50.07
NASDAQ Composite
100.00
  
108.59
  
110.08
  
120.56
  
132.39
  
78.72
SNL Bank and Thrift Index
100.00
  
111.98
  
113.74
  
132.90
  
101.34
  
58.28
 
 
ITEM 6.  SELECTED FINANCIAL DATA
 
Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2008 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,
  
2008
    
2007
    
2006
    
2005
    
2004
  
(Dollars in thousands, except per share)
                              
Income Statement Data:
                              
Interest income
   $ 43,594     $ 49,132     $ 40,679     $ 30,878     $ 25,408  
Interest expense
     18,656       25,229       19,625       10,958       6,562  
Net interest income
     24,938       23,903       21,054       19,920       18,846  
Provision for loan losses
     9,300       1,025       1,140       825       1,200  
Net interest income after provision for loan losses
     15,638       22,878       19,914       19,095       17,646  
Net securities gains (losses)
     98       (469 )     (61 )     1,026       5  
Noninterest income
     7,149       6,875       6,028       6,301       5,602  
Noninterest expense
     20,192       19,257       18,104       16,849       15,854  
Income before income taxes
     2,693       10,027       7,777       9,573       7,399  
Income tax expense
     284       3,139       2,018       2,479       1,599  
Net income
   $ 2,409     $ 6,888     $ 5,759     $ 7,094     $ 5,800  
Balance Sheet Data:
                                        
Assets
   $ 790,600     $ 800,598     $ 713,244     $ 598,790     $ 549,086  
Earning assets
     733,539       727,367       648,450       542,199       504,151  
Securities (1)
     89,858       81,315       73,949       75,887       77,596  
Loans (2)
     642,040       645,785       574,193       466,281       426,884  
Allowance for loan losses
     13,617       6,759       6,200       6,324       5,808  
Deposits
     513,601       520,072       486,956       433,646       380,357  
Federal Home Loan Bank advances
     161,185       135,525       105,625       57,225       66,325  
Shareholders’ equity
     64,957       64,847       58,926       54,505       55,103  
Per Share Data: (3)
                                        
Basic earnings per share
   $ 0.54     $ 1.58     $ 1.34     $ 1.63     $ 1.32  
Diluted earnings per share
     0.54       1.56       1.31       1.58       1.28  
Book value (period end) (4)
     14.42       14.72       13.52       12.72       12.51  
Tangible book value (period end) (4)
     12.30       12.46       11.13       10.17       9.99  
Cash dividends per share
     0.60       0.54       0.52       0.50       0.44  
Performance Ratios:
                                        
Return on average assets
     0.30 %     0.91 %     0.87 %     1.24 %     1.13 %
Return on average equity
     3.69       11.09       10.05       12.74       10.90  
Net interest margin (5)
     3.48       3.52       3.59       3.95       4.18  
Efficiency (6)
     61.91       61.54       65.61       63.17       63.38  
Allowance for loan losses to loans
     2.12       1.05       1.08       1.36       1.36  
Net charge-offs to average loans
     0.38       0.08       0.24       0.07       0.10  
Nonperforming assets to period end assets (7)
     4.04       0.32       0.26       0.37       0.40  
Capital and Liquidity Ratios:
                                        
Average equity to average assets
     8.25       8.20       8.66       9.77       10.38  
Leverage (4.00% required minimum)
     8.44       8.33       8.46       7.68       8.05  
Tier 1 risk-based capital ratio
     10.43       10.05       10.03       9.24       10.43  
Total risk-based capital ratio
     11.69       11.10       11.09       10.49       11.68  
Average loans to average deposits
     124.85       120.46       110.96       101.75       104.69  
(1)
Securities held-to-maturity are stated at amortized cost, securities available-for-sale are stated at fair value, and nonmarketable equity  securities are stated at cost.
(2)
Loans are stated before the allowance for loan losses and include loans held for sale.
(3)
All share and per-share data have been adjusted to reflect the 15% common stock dividend in November 2007.
(4)
Excludes the effect of any outstanding stock options.
(5)
Tax equivalent net interest income divided by average earning assets.
(6)
Noninterest expense divided by the sum of tax equivalent net interest income and noninterest income, excluding gains and losses on sales of assets and the write-down of intangible assets related to the sale of those assets.
(7)
Nonperforming loans and nonperforming assets do not include loans past due 90 days or more that are still accruing interest.

Selected Financial Data - continued
 
(Dollars in thousands)
  
2008 Quarter ended
    
2007 Quarter ended
  
except per share
  
Dec. 31
    
Sept. 30
    
June 30
    
Mar. 31
    
Dec. 31
    
Sept. 30
    
June 30
    
Mar. 31
  
Net interest income
   $ 6,318     $ 5,995     $ 6,422     $ 6,203     $ 6,324     $ 6,130     $ 5,901     $ 5,548  
Provision for loan losses
     3,700       1,100       2,500       2,000       400       300       125       200  
Noninterest income
     1,722       1,851       1,816       1,858       1,865       1,756       1,646       1,608  
Noninterest expense
     4,647       5,140       5,329       5,076       4,997       5,252       4,825       4,652  
Net income
     5       1,196       427       781       1,834       1,636       1,788       1,630  
Basic earnings per share
     0.00       0.27       0.10       0.17       0.42       0.37       0.41       0.37  
Diluted earnings per share
     0.00       0.27       0.10       0.17       0.41       0.36       0.40       0.37  
 
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 eighteen 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.

On June 15, 2006, the Company formed Community Capital Corporation Statutory Trust I (the “Trust”) for the purpose 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, 2008, 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, 2008, compared with year ended December 31, 2007
 
Net interest income increased $1,035,000, or 4.33%, to $24.9 million in 2008 from $23.9 million in 2007.  Average earning assets increased $37.5 million, or 5.41%, and average interest bearing liabilities increased $26.8 million, or 4.29%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.17% and 3.48%, respectively, in 2008 compared to 3.11% and 3.52% in 2007.  Yields on earning assets decreased from 7.16% in 2008 to 6.04% in 2008, and yields on interest-bearing liabilities decreased from 4.05% in 2007 to 2.87% in 2008.

The provision for loan losses was $9.3 million in 2008 compared to $1.0 million in 2007.  Our allowance for loan losses was 2.12% of total loans outstanding at December 31, 2008.  Our nonperforming loans totaled $27.1 million at December 31, 2008 compared to $2.4 million at December 31, 2007.  We also had $80.6 million in impaired loans at December 31, 2008, all of which were still accruing interest.  Criticized and classified loans have increased from $25.7 million at December 31, 2007 to $107.3 million at December 31, 2008.  We diligently monitor and manage our loan portfolio to identify problem loans at the earliest possible point.  As the economy deteriorated during 2007 and 2008, we aggressively rated any credits with signs of deterioration in quality leading to the increase in criticized and classified loans and heightened provision expense.  Total loans decreased $3.4 million during 2008, or 0.53%, to $641.7 million at December 31, 2008 from $65.4 million at December 31, 2007.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2008 and 2007 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 $4,479,000, or 65.03%, to $2.4 million in 2008 from $6.9 million in 2007.  Basic earnings per share was $0.54 in 2008, compared to $1.58 in 2007.  Diluted earnings per share was $0.54 in 2008, compared to $1.56 in 2007.  Return on average assets during 2008 was 0.30% compared to 0.91% during 2007, and return on average equity was 3.69% during 2008 compared to 11.09% during 2007.

Year ended December 31, 2007, compared with year ended December 31, 2006
 
Net interest income increased $2,849,000, or 13.53%, to $23.9 million in 2007 from $21.1 million in 2006.  Average earning assets increased $93.5 million, or 15.59%, and average interest bearing liabilities increased $88.4 million, or 16.51%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.11% and 3.52%, respectively, in 2007 compared to 3.20% and 3.59% in 2006.  Yields on earning assets increased from 6.86% in 2006 to 7.16% in 2007, and yields on interest-bearing liabilities increased from 3.67% in 2006 to 4.05% in 2007.

The provision for loan losses was $1.0 million in 2007 compared to $1.1 million in 2006.  Our allowance for loan losses was 1.05% of total loans outstanding at December 31, 2007.  Our nonperforming loans totaled $2.4 million at December 31, 2007 compared to $1.7 million at December 31, 2006.  Criticized and classified loans have increased from $12.6 million at December 31, 2006 to $25.7 million at December 31, 2007.  Total loans increased $71.5 million during 2007.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2008 and 2007 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 $1,129,000, or 19.60%, to $6.9 million in 2007 from $5.8 million in 2006.  Basic earnings per share was $1.58 in 2007, compared to $1.34 in 2006.  Diluted earnings per share was $1.56 in 2007, compared to $1.31 in 2006.  Return on average assets during 2007 was 0.91% compared to 0.87% during 2006, and return on average equity was 11.09% during 2007 compared to 10.05% during 2006.
 
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 2008, 2007 and 2006.  A review of these tables shows that our loans typically provide higher interest yields than do other types of interest-earning 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.


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,
  
2008
    
2007
    
2006
  
(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)
   $ 649,454     $ 39,754       6.12 %   $ 612,366       45,296       7.40 %   $ 522,521       37,309       7.14 %
Securities, taxable(2)
     41,906       2,189       5.22       44,444       2,119       4.77       43,211       1,796       4.16  
Securities, nontaxable(2)(3)
     29,289       1,772       6.05       27,285       1,671       6.12       27,440       1,701       6.20  
Nonmarketable equity
                                                                        
securities
     9,959       404       4.06       8,946       534       5.97       6,478       373       5.76  
Federal funds sold
                                                                        
and other
     350       6       1.71       402       21       5.22       250       14       5.60  
Total earning assets
     730,958       44,125       6.04       693,443       49,641       7.16       599,900       41,193       6.86  
Cash and due from banks
     15,571                       21,347                       21,592                  
Premises and equipment
     17,394                       15,857                       14,516                  
Other assets
     35,707                       33,224                       31,593                  
Allowance for loan losses
     (8,691 )                      (6,372 )                      (6,073 )                 
Total assets
   $ 790,939                     $ 757,499                     $ 661,528                  
Liabilities:
                                                                        
Interest-Bearing Liabilities:
                                                                        
Interest-bearing transaction
                                                                        
accounts
   $ 224,924       2,902       1.29 %   $ 219,044     $ 6,404       2.92 %   $ 181,060     $ 4,779       2.64 %
Savings deposits
     36,656       835       2.28       38,369       1,029       2.68       38,868       802       2.06  
Time deposits
     190,888       7,098       3.72       186,437       9,058       4.86       187,891       7,910       4.21  
Other short-term borrowings
     44,610       1,061       2.38       45,839       2,301       5.02       45,282       2,260       4.99  
Federal Home Loan Bank
                                                                        
advances
     142,936       6,034       4.22       123,562       5,709       4.62       76,435       3,479       4.55  
Junior subordinate debt
     10,310       726       7.04       10,310       728       7.06       5,649       395       6.99  
Total interest-bearing
                                                                        
liabilities
     650,324       18,656       2.87       623,561       25,229       4.05       535,185       19,625       3.67  
Demand deposits
     67,711                       64,489                       63,071                  
Accrued interest and other
                                                                        
liabilities
     7,643                       7,337                       5,975                  
Shareholders’ equity
     65,261                       62,112                       57,297                  
Total liabilities and
                                                                        
shareholders’ equity
   $ 790,939                     $ 757,499                     $ 661,528                  
Net interest spread
                     3.17 %                     3.11 %                     3.20 %
Net interest income
   $ 25,469                     $ 24,412                     $ 21,568                  
Net interest margin
                     3.48 %                     3.52 %                     3.59 %
 
(1)
The effect of loans in nonaccrual status and fees collected is not significant to the computations. All loans and deposits are domestic.
(2)
Average investment securities exclude the valuation allowance on securities available-for-sale.
(3)
Fully tax-equivalent basis at 38% tax rate for nontaxable securities and loans.


Net Interest Income - continued

Our tax-effected net interest spread and net interest margin were 3.17% and 3.48%, respectively, for the year ended December 31, 2008, compared to 3.11% and 3.52%, respectively, for the year ended December 31, 2007.  For the year ended December 31, 2008, earning assets averaged $731.1 million compared to $693.4 million for the year ended December 31, 2007.  Interest earning assets exceeded interest bearing liabilities by $80.6 million and $69.9 million for the years ended December 31, 2008, and 2007, respectively.

For the year ended December 31, 2008, our tax-effected net interest income, the major component of our net income, was $25.5 million compared to $24.4 million for the year ended December 31, 2007.  The average rate realized on interest-earning assets decreased to 6.04% at December 31, 2008, from 7.16% at December 31, 2007, while the average rate paid on interest-bearing liabilities decreased to 2.87% at December 31, 2008, from 4.05% at December 31, 2007.

Our tax-effected interest income for the year ended December 31, 2008 was $44.1 million, which consisted of $40.0 million on loans, $4.4 million on investments, and $6,000 on interest bearing deposits with correspondent banks.  Our tax-effected interest income for the year ended December 31, 2007 was $49.6 million, which consisted of $45.3 million on loans, $4.3 million on investments, and $21,000 on interest bearing deposits with correspondent banks.  Interest on loans for the years ended December 31, 2008 and 2007, represented 90.09% and 91.25%, respectively, of total interest income, while interest on investments and interest bearing deposits with correspondent banks for the years ended December 31, 2008 and 2007 represented 9.89% and 8.75%, 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 88.85% and 88.31% of average earning assets for the years ended December 31, 2008 and December 31, 2007, respectively.

Interest expense for the year ended December 31, 2008 was $18.7 million, which consisted of $10.8 million related to deposits and $7.9 million related to other borrowings.  Interest expense for the year ended December 31, 2007 was $25.2 million, which consisted of $16.5 million related to deposits and $8.7 million related to other borrowings.  Interest expense on deposits for the years ended December 31, 2008 and December 31, 2007 represented 58.08% and 65.48%, respectively, of total interest expense, while interest expense on borrowings for the years ended December 31, 2008 and December 31, 2007, represented 41.92% and 34.52%, respectively.  Average interest bearing deposits represented 69.58% and 71.18% of average interest bearing liabilities for the years ended December 31, 2008 and December 31, 2007, 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 2008 to 2007 and 2007 to 2006.

Net Interest Income - continued

Analysis of Changes in Net Interest Income
 
 
2008 Compared With 2007
  
2007 Compared With 2006
  
 
Variance Due to
  
Variance Due to
  
 (Dollars in thousands) 
Volume (1)
    
Rate (1)
    
Total
  
Volume (1)
    
Rate (1)
    
Total
  
Earning Assets 
                                    
Loans 
   $ 2,620     $ (8,162 )   $ (5,542 )   $ 6,606     $ 1,381     $ 7,987  
Securities, taxable 
     (125 )      195       70       52       271       323  
Securities, nontaxable 
     121       (20 )      101       (9 )      (2 )      (11 ) 
Nonmarketable equity securities 
     55       (185 )      (130 )      147       14       161  
Federal funds sold and other 
     (3 )      (12 )      (15 )      8       (1 )      7  
Total interest income 
     2,668       (8,184 )      (5,516 )      6,804       1,663       8,467  
 
Interest-Bearing Liabilities 
                                                
Interest-bearing deposits: 
                                                
Interest-bearing transaction accounts 
     168       (3,670 )      (3,502 )      1,074       551       1,625  
Savings accounts 
     (44 )      (150 )      (194 )      (10 )      237       227  
Time deposits 
     211       (2,171 )      (1,960 )      (61 )      1,209       1,148  
Total interest-bearing deposits 
     335       (5,991 )      (5,656 )      1,003       1,997       3,000  
Other short-term borrowings 
     (60 )      (1,180 )      (1,240 )      28       13       41  
Federal Home Loan Bank advances 
     845       (520 )      325       2,176       54       2,230  
Junior subordinate debt 
     -       (2 )      (2 )      333       -       333  
Total interest expense 
     1,120       (7,693 )      (6,573 )      3,540       2,064       5,604  
Net interest income 
   $ 1,548     $ (491 )   $ 1,057     $ 3,264     $ (401 )   $ 2,863  
 
 
(1)
Volume-rate changes have been allocated to each category based on the percentage of the total change.

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

Net Interest Income - continued

The following table sets forth our interest rate sensitivity at December 31, 2008.

Interest Sensitivity Analysis
 
         
After One
    
After Three
          
Greater
        
         
Through
    
Through
          
Than One
        
December 31, 2008
  
Within One
    
Three
    
Twelve
    
Within One
    
Year or Non-
        
(Dollars in thousands)
  
Month
    
Months
    
Months
    
Year
    
Sensitive
    
Total
  
Assets
                                    
Earning assets:                                                
Loans(1)
   $ 166,106     $ 16,998     $ 75,762     $ 258,866     $ 356,347     $ 615,213  
Securities
     -       401       719       1,120       88,738       89,858  
Federal funds sold and other
     1,642       -       -       1,642       -       1,642  
Total earning assets
     167,748       17,399       76,481       261,628       445,085       706,713  
Liabilities
                                                
Interest-bearing liabilities
                                                
 Interest-bearing deposits:
                                                
Demand deposits
     285,568       -       -       285,568       -       285,568  
Savings deposits
     37,430       -       -       37,430       -       37,430  
Time deposits
     30,850       43,647       103,173       177,670       12,933       190,603  
 Total interest-bearing deposits
     353,848       43,647       103,173       500,668       12,933       513,601  
Other short-term borrowings
     33,838       -       -       33,838       -       33,838  
Federal Home Loan Bank advances
     -       25       40,760       40,785       120,400       161,185  
Junior subordinated debentures
     -       -       -       -       10,310       10,310  
 Total interest-bearing liabilities
     387,686       43,672       143,933       575,291       143,643       718,934  
Period gap
   $ (219,938 )   $ (26,273 )   $ (67,452 )   $ (313,663 )   $ 301,442          
Cumulative gap
   $ (219,938 )   $ (246,211 )   $ (313,663 )   $ (313,663 )   $ (12,221 )        
Ratio of cumulative gap to total
                                                
earning assets
     (31.12 %)     (34.84 %)     (44.38 %)     (44.38 %)     (1.73 %)        
 
(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.

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, 2008 and 2007, is an expense related to the provision for loan losses of $9.3 and $1.0 million, respectively.  We also reported net charge offs of $2,442,000 and $466,000 for the years ended December 31, 2008 and 2007, respectively.  The net charge offs during 2008 represented 0.38% of the average outstanding loan portfolio for the year ended December 31, 2008, compared to 0.08% for the year ended December 31, 2007.  Of the $2.6 million in total charge offs during 2008, approximately $2.4 million were secured by real estate.  The allowance for loan losses as a percentage of gross loans was 2.12% at December 31, 2008 and 1.05% at December 31, 2007, while the percentage of nonperforming assets to gross loans was 4.98% and 0.40% at December 31, 2008 and 2007, respectively.  As economic conditions began to decline during the third and fourth quarter of 2007 and markets experienced declining real estate demand and real estate values, we simultaneously took certain measures to enhance our internal review and monitoring processes and procedures.  In doing so, we feel like we are in the position to identify potential credit risks early and implement timely action plans to minimize portfolio risks and potential loan losses.  As a result, we believe the current level of the allowance is adequate. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations. Such adjustments would be made in the relevant period and may be material to the Consolidated Financial Statements.

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) 
  
2008
    
2007
    
2006
    
2005
    
2004
  
Total loans outstanding at end of year 
   $ 641,737     $ 645,154     $ 573,639     $ 465,892     $ 425,628  
Average loans outstanding 
   $ 649,454     $ 612,366     $ 522,521     $ 439,266     $ 391,056  
Balance of allowance for loan losses
                                
at beginning of period 
   $ 6,759     $ 6,200     $ 6,324     $ 5,808     $ 4,584  
Allowance for loan losses from acquisitions 
     -       -       -       -       432  
Loan losses: 
                                        
Commercial and industrial 
     122       65       500       54       153  
Real estate - mortgage 
     2,356       344       811       185       172  
Consumer 
     96       140       120       155       252  
Total loan losses 
     2,574       549       1,431       394       577  
Recoveries of previous loan losses:
                                
Commercial and industrial 
     1       21       42       41       72  
Real estate - mortgage 
     109       18       71       3       31  
Consumer 
     22       44       54       41       66  
Total recoveries 
     132       83       167       85       169  
Net loan losses 
     2,442       466       1,264       309       408  
Provision for loan losses 
     9,300       1,025       1,140       825       1,200  
Balance of allowance for loan losses
                                
at end of period 
   $ 13,617     $ 6,759     $ 6,200     $ 6,324     $ 5,808  
Allowance for loan losses to period end loans 
     2.12 %      1.05 %      1.08 %      1.36 %      1.36 % 
Net charge offs to average loans 
     0.38 %      0.08 %      0.24 %      0.07 %      0.10 % 
 
Nonperforming Assets.  The following table sets forth our nonperforming assets for the dates indicated.

Nonperforming Assets
 
    December 31,   
(Dollars in thousands)
  
2008
    
2007
    
2006
    
2005
    
2004
  
Nonaccrual loans
   $ 26,827     $ 2,424     $ 1,716     $ 2,128     $ 2,104  
Other real estate owned
     5,121       173       107       93       98  
Total nonperforming assets
   $ 31,948     $ 2,597     $ 1,823     $ 2,221     $ 2,202  
Loans 90 days or more past due and
                                        
still accruing interest
   $ 696     $ 115     $ 489     $ 223     $ 230  
Impaired loans still accruing interest
   $ 80,599       -       -       -       -  
Nonperforming assets to period end assets
     4.04 %     0.32 %     0.26 %     0.37 %     0.40 %
 
 
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 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 $31.9 million at December 31, 2008 and $2.6 million at December 31, 2007.  This amount consists primarily of nonaccrual loans that totaled $26.8 million and $2.4 million at December 31, 2008 and December 31, 2007, respectively.  Nonperforming assets were 4.98% of total loans at December 31, 2008.  The allowance for loan losses to period end nonperforming assets was 42.62% at December 31, 2008.  We aggressively manage our non-performing loans by applying a conservative risk rating, appropriately writing down potential losses and consistently managing and reviewing these loans.

Potential Problem Loans.  At December 31, 2008, through our internal review mechanisms, we had identified $31.2 million of criticized loans and $76.1 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 $18.0 million at December 31, 2007 to $31.2 million at December 31, 2008.  Total classified loans increased from $7.7 million at December 31, 2007 to $76.1 million at December 31, 2008.  The $81.6 million increase in criticized and classified loans from December 31, 2007 to December 31, 2008 were primarily due to real estate development and single family construction loans, all of which are secured by real estate.  During 2008, we enhanced our internal review and monitoring processes and procedures to assist in identifying potential credit risks and implementation of action plans early on to minimize total portfolio risk and potential loan losses.

Noninterest Income and Expense

Noninterest Income.  Noninterest income increased $372,000, or 5.41%, to $7.2 million in 2008 from $6.9 million in 2007. Service charges on deposit accounts increased $67,000, or 2.76% to $2.5 million in 2008, from $2.4 million in 2007.  Residential mortgage origination fees decreased $65,000 or 5.40% to $1.1 million in 2008 from $1.2 million in 2007.  Income from fiduciary activities increased $135,000, or 8.49% to $1.7 million in 2008 from $1.6 million in 2007.  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 decreased $81,000, or 31.03% to $180,000 in 2008 compared to $261,000 in 2007.  Gains on the sales of premises and equipment were $6,000 in 2008, compared to $15,000 in 2007.  Gains on the sales of securities available for sale in the amount of $98,000 in 2008, compared to a loss of $469,000 in 2007.  Other operating income increased $227,000 or 16.45% to $1.6 million in 2007 from $1.4 million in 2007.

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)
  
2008
    
2007
    
2006
  
Service charges on deposit accounts
   $ 2,492     $ 2,425     $ 2,627  
Residential mortgage origination fees
     1,139       1,204       760  
Commissions from sales of mutual funds
     180       261       245  
Income from fiduciary activities
     1,725       1,590       1,177  
Gain on sale of premises and equipment
     6       15       2  
Income from Bank Owned Life Insurance
     780       744       661  
Other income
     925       636       556  
Total noninterest income
   $ 7,247     $ 6,875     $ 6,028  
 
Noninterest Expense.  Noninterest expense increased $466,000, or 2.36%, to $20.2 million in 2008 from $19.7 million in 2007.  The primary component of noninterest expense was salaries and employee benefits, which decreased $234,000, or 2.11%, to $10.9 million in 2008 from $11.1 million in 2007.  Net occupancy expense was $1.3 million in 2008 compared to $1.2 million in 2007, and furniture and equipment expense was $975,000 in 2008 compared to $888,000 in 2007.  During 2007, we realized a loss on the sale of securities available for sale in the amount of $469,000, compared to a gain of $98,000 in 2008.  Total amortization of intangible assets decreased $21,000, or 4.47%, to $449,000 in 2008 compared to $470,000 in 2007.  Our efficiency ratio was 61.91% in 2008 compared to 61.54% in 2007.

The following table sets forth, for the periods indicated, the primary components of noninterest expense:
 
Noninterest Expense
 
   
         Year Ended December 31,
  
 (Dollars in thousands) 
  
2008
    
2007
 
  
2006
  
   
 Salaries and employee benefits 
   $ 10,853     $ 11,087     $ 10,687  
 Net occupancy expense 
     1,316       1,162       1,113  
 Furniture and equipment expense 
     975       888       838  
 Amortization of intangible assets 
     449       470       492  
 Director and committee fees 
     347       299       274  
 Data processing and supplies 
     1,568       1,340       1,091  
 Mortgage loan department expenses 
     246       212       129  
 Banking assessments 
     342       58       57  
 Professional fees and services 
     457       501       351  
 Postage and freight 
     204       210       212  
 Supplies 
     310       309       289  
 Telephone expenses 
     353       370       351  
 Loss on securities available for sale 
     -       469       61  
 Other 
     2,772       2,351       2,220  
Total noninterest expense 
   $ 20,192     $ 19,726     $ 18,165  
 Efficiency ratio 
     61.91 %      61.54 %      65.61 % 
 
Noninterest Income and Expense - continued

Income Taxes.  Our income tax expense was $284,000 for 2008 and $3.1 million for 2007.  Our effective tax rate was 10.55% and 31.31% in 2008 and 2007, respectively.  The decline in the effective tax rate resulted from the higher percentage of tax free income of total pretax income.

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 $649.5 million in 2008 compared to $612.4 million in 2007, an increase of $37.1 million, or 6.06%.  At December 31, 2008, total loans were $641.7 million compared to $645.2 million at December 31, 2007.  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, 
  
2008
    
2007
    
2006
    
2005
    
2004
  
         
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 
   $ 43,442       6.77 %    $ 44,467       6.89 %     $ 44,910       7.83 %   $ 38,180       8.20 %   $ 45,222       10.62 % 
Real estate 
                                                                                
Construction 
     185,414       28.89       167,180       25.92       142,694       24.88       106,704       22.9       48,223       11.33  
Mortgage - 
                                                                                
residential 
     234,920       36.61       252,461       39.13       224,175       39.08       174,698       37.5       178,495       41.94  
Mortgage- 
                                                                                
nonresidential 
     157,367       24.52       154,834       24.00       138,071       24.07       123,603       26.53       128,937       30.29  
Consumer and 
                                                                                
other 
     20,594       3.21       26,212       4.06       23,789       4.14       22,707       4.87       24,751       5.82  
Total loans 
     641,737       100.00 %       645,154       100.00 %       573,639       100.00 %      465,892       100.00 %      425,628       100.00 % 
Allowance for 
                                                                                
loan losses 
     (13,617 )              (6,759 )              (6,200 )              (6,324 )              (5,808 )         
Net loans 
   $ 628,120             $ 638,395             $ 567,439          $ 459,568              $ 419,820          
 
The principal component of our loan portfolio is real estate mortgage loans.  At December 31, 2008, this category totaled $392.3 million and represented 61.13% of the total loan portfolio, compared to $407.3 million, or 63.13%, at December 31, 2007.

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

Earning Assets - continued

Real estate construction loans increased $18.2 million, or 10.89%, to $185.4 million at December 31, 2008, from $167.2 million at December 31, 2007.  Residential mortgage loans, which is the largest category of our loans, decreased $17.6 million, or 6.97%, to $234.9 million at December 31, 2008, from $252.5 million at December 31, 2007.  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 $2.6 million or 1.68%, to $157.4 million at December 31, 2008 from $154.8 million at December 31, 2007.

Commercial and industrial loans decreased $1.1 million, or 2.47%, to $43.4 million at December 31, 2008, from $44.5 million at December 31, 2007.

Consumer and other loans decreased $5.6 million, or 21.37%, to $20.6 million at December 31, 2008, from $26.2 million at December 31, 2007.

Our loan portfolio reflects the diversity of our markets.  Our seventeen full service branches and one stand-alone drive through 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, 2008.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
 
         
Over
              
         
One Year
              
December 31, 2008 
  
One Year
    
Through
    
Over Five 
        
(Dollars in thousands) 
  
or Less
    
Five Years 
    
Years
    
Total
  
Commercial and industrial 
   $ 35,864     $ 8,290     $ 4,046     $ 48,200  
Real estate 
     253,251       251,004       81,027       585,282  
Consumer and other 
     2,063       5,431       761       8,255  
                                 
    $ 291,178     $ 264,725     $ 85,834     $ 641,737  
Loans maturing after one year with:
                        
Fixed interest rates
                     $ 303,869  
Floating interest rates
                       46,690  
                                 
                            $ 350,559  
 
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.
 
 
Earning Assets - continued

Investment Securities.  The investment securities portfolio is a significant component of our total earning assets.  Total securities averaged $81.1 million in 2008, compared to $80.7 million in 2007.  At December 31, 2008, the total securities portfolio was $89.9 million, an increase of $8.0 million, or 9.84% over total securities of $81.3 million at December 31, 2007. Securities designated as available-for-sale totaled $78.8 million and were recorded at estimated fair value.  Securities designated as held-to-maturity totaled $215,000 and were recorded at amortized cost.  The securities portfolio also includes nonmarketable equity securities totaling $10.8 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, 
  
2008
    
2007
  
(Dollars in thousands)
        
Government sponsored enterprises 
   $ 29,216     $ 26,163  
Obligations of state and local governments 
     28,493       29,649  
      57,709       55,812  
Mortgage-backed securities 
     21,334       16,000  
Nonmarketable equity securities 
     10,815       9,503  
Total securities 
   $ 89,858     $ 81,315  
 
The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2008.

Investment Securities Maturity Distribution and Yields
 
               
After One But
    
After Five But
              
 December 31, 2008 
  
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 
     -       - %   $ 14,280       5.29 %     $ 14,936       5.09     $ -       - % 
Obligations of state and
                                                          
local governments(2) 
     1,121       6.22       4,450       6.93       14,696       6.87       8,226       6.05  
Total securities(1) 
     1,121             $ 18,730             $ 29,632             $ 8,226          
 
(1)   Excludes mortgage-backed securities totaling $21.3 million with a yield of 5.33% 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.”

Short-Term Investments.  Short-term investments, which consist primarily of federal funds sold and interest-bearing deposits with other banks, averaged $350,000 in 2008, compared to $402,000 in 2007.  At December 31, 2008, short-term investments totaled $1.6 million, compared to $267,000 at December 31, 2007.  The reason for the increase was primarily due to a change made effective in November 2008 by the Federal Reserve Bank to pay interest on balances held in our account, which resulted in changes to our daily funds management with the Federal Reserve Bank.  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 $26.7 million, or 4.28%, to $650.3 million in 2008, from $623.6 million in 2007.  Average interest-bearing deposits increased $8.6 million, or 1.94%, to $452.5 million in 2008, from $443.9 million in 2007.

Deposits.  Average total deposits increased $11.9 million, or 2.34%, to $520.2 million during 2008, from $508.3 million during 2007.  At December 31, 2008, total deposits were $513.6 million compared to $520.1 million a year earlier, a decrease of 1.25%.

The following table sets forth the deposits by category at the dates indicated.
 
Deposits
 
 December 31, 
  
2008
    
2007
    
2006
    
2005
    
2004
  
         
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 
   $ 73,663       14.34 %     $ 62,175       11.96 %   $ 63,733       13.09 %   $ 59,286       13.67 %    $ 45,504       11.96 % 
NOW accounts 
     65,699       12.79       63,866       12.28       64,743       13.3       74,730       17.23       72,934       19.18  
Money market 
                                                                                
accounts 
     96,377       18.77       140,934       27.10       129,801       26.65       89,327       20.60       82,872       21.79  
Savings accounts 
     37,430       7.29       36,117       6.94       38,791       7.97       39,008       9.00       36,522       9.60  
Brokered deposits 
     49,828       9.70       38,744       7.45       -       -       -       -       -       -  
Time deposits 
                                                                                
less than 
                                                                                
$100,000 
     115,705       22.53       111,619       21.46       124,739       25.61       117,126       27.01       91,183       23.97  
Time deposits 
                                                                                
of $100,000 
                                                                                
or over 
     74,899       14.58       66,617       12.81       65,149       13.38       54,169       12.49       51,342       13.50  
Total deposits 
   $ 513,601       100.00 %    $ 520,072       100.00 %    $ 486,956       100.00 %    $ 433,646       100.00 %      $ 380,357       100 .00 % 
 
Core deposits, which exclude brokered deposits and 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 decreased $25.8 million from $414.7 million at December 31, 2007 to $388.9 million at December 31, 2008.  The largest increase in our core deposits was in demand deposit accounts, which increased $11.5 million, or 18.48% to $49.8 million at December 31, 2008 from $140.9 million at December 31, 2007.  Our money market accounts decreased $44.6 million, or 31.62% from $140.9 million at December 31, 2007 to $96.4 million at December 31, 2008.  The decrease is primarily due to the significant decrease in interest rates we pay on these types of deposits.  Our brokered deposits at December 31, 2008 totaled $49.8 million, which represented 9.70% of our entire deposit base.  All of our brokered deposits at December 31, 2008 were brokered money market accounts.

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 124.95% at December 31, 2008, and 124.05% at the end of 2007.  The maturity distribution of our time deposits of $100,000 or more at December 31, 2008 is set forth in the following table.

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
  
Month 
  
Total
Certificates of deposit of 
                  
$100,000 or more 
$
31,787
$
14,138
$
23,913
$
5,061
$
74,899
 
 
Deposits and Other Interest-Bearing Liabilities - continued
 
Approximately 61.31% of our time deposits of $100,000 or more had scheduled maturities within six months and 93.24% 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.

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 $44.6 million in 2008, a decrease of $1.2 million from $45.8 million in 2007.  Federal funds purchased from correspondent banks averaged $30.5 million in 2008.  At December 31, 2008, federal funds purchased totaled $24.1 million.  Securities sold under agreements to repurchase averaged $14.1 million in 2008.  At December 31, 2008, securities sold under agreements to repurchase totaled $9.7 million.

Average Federal Home Loan Bank advances during 2008 were $142.9 million compared to $123.6 million during 2007 an increase of $19.3 million.  Advances from the Federal Home Loan Bank are collateralized by one-to-four family residential mortgage loans, multi-family residential loans, home equity lines and commercial real estate loans.  At December 31, 2008, borrowings from the Federal Home Loan Bank were $161.2 million compared to $135.5 million a year earlier.  Although we expect to continue using short-term borrowings and Federal Home Loan Bank advances as secondary funding sources, core deposits will continue to be our primary funding source.  Of the $161.2 million advances from the Federal Home Loan Bank outstanding at December 31, 2008, $40.8 million mature in 2009, $15.0 million in 2010, $20.0 million in 2011, $35.0 million in 2012, $5.4 million in 2013, $25.0 million in 2015, and $20.0 million in 2017.

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 have shown the funds due to the Trust as $10.3 million in junior subordinated debentures.  Average junior subordinated debentures during 2008 were $10.3 million.

The following table summarizes our various sources of borrowed funds for the years ended December 31, 2008 and 2007. 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 by government-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 and commercial real estate loans.  The junior subordinated debentures mature on June 15, 2036.
 
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,
  
2008 
                              
Securities sold under agreements
                        
   to repurchase 
   $ 16,383     $ 14,103       1.72 %    $ 9,695       0.25 % 
Federal funds purchased 
     56,251       30,507       2.70 %      24,143       1.00 % 
Advances from Federal Home
                                  
   Loan Bank 
     161,185       142,936       4.22 %      161,185       3.65 % 
Junior subordinated debentures 
     10,310       10,310       7.04 %      10,310       7.04 % 
                                         
                                         
2007 
                                        
Securities sold under agreements
                                
   to repurchase 
   $ 22,134     $ 19,108       4.61 %    $ 14,561       4.18 % 
Federal funds purchased 
     47,705       26,731       5.35 %      47,705       4.44 % 
Advances from Federal Home
                                  
   Loan Bank 
     135,525       123,562       4.62 %      135,525       4.51 % 
Junior subordinated debentures 
     10,310       10,310       7.06 %      10,310       7.06 % 
 
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 holding company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2008, 2007, and 2006, as set forth in the following table.
 
Analysis of Capital 
                  
 (Dollars in thousands) 
  
2008
    
2007
    
2006
  
                   
Tier 1 capital 
   $ 64,451     $ 64,404     $ 58,768  
Tier 2 capital 
     7,915       6,759       6,200  
Total qualifying capital 
   $ 73,366     $ 71,163     $ 64,968  
Risk-adjusted total assets
                  
     (including off-balance-sheet exposures) 
   $ 627,523     $ 640,916     $ 585,825  

 
41
Capital - continued
 
   
2008
    
2007
    
2006
  
Tier 1 risk-based capital ratio 
     10.43%       10.05%       10.03%  
Total risk-based capital ratio 
     11.69%       11.10%       11.09%  
Tier 1 leverage ratio 
     8.44%       8.33%       8.46%  
                         
   
 Tier 1
    
 Total
    
Tier 1
  
   
Risk-Based
    
Risk-Based
    
Leverage
  
CapitalBank’s capital ratios at December 31, 2008 were: 
     10.14%       11.40%       8.18%  
 
 
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 slightly from 2007 to 2008 and our loans-to-funds ratio increased from 2007 to 2008. The loans-to-assets ratio at December 31, 2008 was 81.17% compared to 80.58% at December 31, 2007, and the loans-to-funds ratio at December 31, 2008 was 90.56% compared to 89.87% at December 31, 2007.  The amount of advances from the Federal Home Loan Bank were approximately $161.2 million at December 31, 2008 compared to $135.5 million at December 31, 2007.  We expect to continue using these advances as a source of funding.  During 2008, we formally established a line with the Federal Reserve Bank’s Discount Window.  At December 31, 2008, we had no borrowings outstanding and had the ability to receive $116.6 million in funds under the terms of our agreement with the Federal Reserve Bank.  Additionally, we had approximately $28.8 million of unused lines of credit for federal funds purchases and $17.4 of securities available-for-sale at December 31, 2008 as sources of liquidity.  We also have the ability to receive an additional $36.0 million in advances under the terms 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, May 2001, and November 2007 and may do so in the future.  We have paid cash dividends on a quarterly basis since September 2001.
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.
 
Critical Accounting Policies – continued

The Allowance represents our estimate of probable losses inherent in the lending portfolio. See Provision and Allowance for Losses for additional discussion including factors impacting the Allowance and the methodology for analyzing the adequacy of the Allowance. This methodology relies upon our judgment. Our judgments is based on an assessment of various issues, including, but not limited to, the pace of loan growth, emerging portfolio concentrations, the risk management system relating to lending activities, entry into new markets, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions. We consider the year-end Allowance appropriate and adequate to cover probable losses in the loan portfolio. However, our judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the Allowance, thus adversely impacting the results of operations of the Company.
  
We have increased our market share through bank and branch acquisitions (the last of these acquisitions occurred in 2004). These acquisitions resulted in goodwill or other intangible assets, which are subject to periodic impairment tests in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” These tests, which we performed as of June 30, 2008 and 2007, 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, 2008 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.

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, 2008, CapitalBank had issued commitments to extend credit of $88.9 million and standby letters of credit of $3.3 million through various types of commercial lending arrangements.  Approximately $72.3 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, 2008.
 
         
After One
    
After Three
                    
         
Through
    
Through
          
Greater
        
   
Within One
    
Three
    
Twelve
    
Within One
    
Than
        
(Dollars in thousands) 
  
Month
    
Months
    
Months
    
Year
    
One Year
    
Total
  
Unused commitments to
                                
   extend credit 
   $ 4,775     $ 4,171     $ 27,628     $ 36,574     $ 52,350     $ 88,924  
Standby letters of credit 
     144       1,324       1,674       3,142                197       3,339  
Totals 
   $ 4,919     $ 5,495     $ 29,302     $ 39,716     $ 52,547     $ 92,263  
 
The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the borrower.  Collateral varies but may include accounts receivable, inventory, property, plants, equipment and commercial and residential real estate.
 
Industry Developments
 
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions (the “TARP Capital Purchase Program”). On October 14, 2008, the Federal Deposit Insurance Corporation announced the development of a guarantee program under the systemic risk exception to the Federal Deposit Act (“FDA”) pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial institutions (the “FDIC Temporary Liquidity Guarantee Program”). Most recently, on February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which contains a wide array of provisions aimed at stimulating the U.S. economy, was signed into law.  There can be no assurance, however, as to the actual impact that the EESA, ARRA and their implementing regulations, the FDIC programs, or any other governmental program will have on the financial markets.

Additionally, from time to time various additional bills may be 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, 2008.
 
   
Payments Due by Period
  
         
After One
    
After Three
              
         
Through
    
Through
    
Greater
        
   
Within One
    
Three
    
   Five
    
Than
        
(Dollars in thousands) 
  
Year
    
Years
    
Years
    
Five Years
    
Total
  
Operating lease obligations 
   $ 101     $ 128     $ 102     $ 130     $ 461  
Repurchase agreements 
     9,695       -       -       -       9,695  
FHLB advances 
     40,785       35,000       40,400       45,000       161,185  
Junior subordinated debentures 
     -       -       -       10,310       10,310  
Totals 
   $ 50,581     $ 35,128     $ 40,502     $ 55,440     $ 181,651  
 
ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Market risk is the risk of loss from adverse changes in market prices and rates.  Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities.  Management actively monitors and manages our interest rate risk exposure.  In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations.  The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Interest Income” is incorporated herein by reference.  Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The financial statements identified in Item 15 of this Report on Form 10-K are included herein beginning on page F-1.
 
ITEM 9.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND    FINANCIAL DISCLOSURE.
 
ITEM 9A.  CONTROLS AND PROCEDURES.
 
Management's Annual Report on Internal Control Over Financial Reporting.  Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f).  A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2007 based on the criteria established in a report entitled “Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, the Company’s management has evaluated and concluded that the Company's internal control over financial reporting was effective as of December 31, 2008.

The Company is continuously seeking to improve the efficiency and effectiveness of its operations and of its internal controls. This results in modifications to its processes throughout the Company. However, there has been no change in its internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. The Company's registered public accounting firm was not required to issue an attestation on its internal controls over financial reporting pursuant to temporary rules of the Securities and Exchange Commission.

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

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

ITEM 9B.  OTHER INFORMATION

None.
 
PART III
 
Information called for by PART III (Items 10, 11, 12, 13 and 14) of this Report on Form 10-K has been omitted as we intend to file with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2007 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.
 
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
 
ITEM 11. 
EXECUTIVE COMPENSATION.
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
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.
 
 
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 18, 2009  
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 18, 2009 
William G. Stevens 
  
Officer, and Director 
       
/s/ R. Wesley Brewer 
  
Chief Financial Officer, Executive 
March 18, 2009 
R. Wesley Brewer 
  
Vice President, and Secretary 
       
* 
  
Chair 
March 18, 2009 
Patricia C. Hartung 
  
       
* 
  
Director 
March 18, 2009 
Harold Clinkscales, Jr. 
       
* 
  
Director 
March 18, 2009 
Wayne Q. Justesen, Jr. 
       
* 
  
Director 
March 18, 2009 
B. Marshall Keys 
  
       
* 
  
Director 
March 18, 2009 
Clinton C. Lemon, Jr. 
       
* 
  
Director 
March 18, 2009 
Miles Loadholt 
  
       
* 
  
Director 
March 18, 2009 
Thomas C. Lynch, Jr. 
       
* 
  
Director 
March 18, 2009 
H. Edward Munnerlyn 
       
* 
  
Director 
March 18, 2009 
George B. Park 
  
 
 
 
       
* 
  
Director 
March 18, 2009 
George D. Rodgers 
  
 
     
* 
  
Director 
March 18, 2009 
Lex D. Walters 
  
       
       
*By: /s/ William G. Stevens 
March 18, 2009 
   (William G. Stevens) (As 
   Attorney-in-Fact for each 
   of the persons indicated) 
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
COMMUNITY CAPITAL CORPORATION
 
 
Page No. 
   
Report of Independent Registered Public Accounting Firm 
F-2 
Consolidated Balance Sheets 
F-3 
Consolidated Statements of Income 
F-4 
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income 
F-5 
Consolidated Statements of Cash Flows 
F-6 
Notes to Consolidated Financial Statements 
F-7 to F-31 
 
 
 
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, 2008 and 2007, 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, 2008.  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 financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Community Capital Corporation and subsidiary as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 included in the accompanying management’s evaluation of internal control over financial reporting and, accordingly, we do not express an opinion thereon.


/s/ Elliott Davis, LLC
Greenville, South Carolina
March 12, 2009

Community Capital Corporation
Consolidated Balance Sheets
 
   
   December 31,
  
(Dollars in thousands, shares are not in dollars) 
  
2008
    
2007
  
Assets: 
            
Cash and cash equivalents:
        
Cash and due from banks 
   $ 11,970     $ 29,142  
Interest-bearing deposit accounts 
     1,642       267  
 
               
Total cash and cash equivalents 
     13,612       29,409  
Investment securities:
          
Securities available-for-sale 
     78,828       71,542  
Securities held-to-maturity (estimated fair value of
  
$225 and $290 at December 31, 2008 and 2007, respectively) 
     215       270  
Nonmarketable equity securities 
     10,815       9,503  
Total investment securities 
     89,858       81,315  
Loans held for sale 
     303       631  
Loans receivable 
     641,737       645,154  
Less allowance for loan losses 
     (13,617 )      (6,759 ) 
Loans, net 
     628,120       638,395  
Premises and equipment, net 
     17,243       16,729  
Accrued interest receivable 
     3,724       4,412  
Intangible assets 
     9,507       9,956  
Cash surrender value of life insurance 
     15,996       15,293  
Other assets 
     12,237       4,458  
Total assets 
   $ 790,600     $ 800,598  
                 
Liabilities: 
                
Deposits: 
                
Noninterest-bearing 
   $ 73,663     $ 62,175  
Interest-bearing 
     439,938       457,897  
                 
Total deposits 
     513,601       520,072  
Federal funds purchased and securities sold under
        
agreements to repurchase 
     33,838       62,266  
Advances from the Federal Home Loan Bank 
     161,185       135,525  
Accrued interest payable 
     1,802       3,134  
Junior subordinated debentures 
     10,310       10,310  
Other liabilities 
     4,907       4,444  
Total liabilities 
     725,643       735,751  
Commitments and contingencies - Notes 4, 12, and 16
  
                 
Shareholders’ equity:
          
Common stock, $1.00 par value; 10,000,000 shares authorized;
  
5,666,760 and 5,603,570 shares issued at
        
December 31, 2008 and 2007, respectively 
     5,667       5,604  
Nonvested restricted stock 
     (445 )      (443 ) 
Capital surplus 
     62,405       61,600  
Accumulated other comprehensive income 
     527       485  
Retained earnings 
     14,218       15,016  
Treasury stock, at cost (1,199,470 shares in 2008 and 2007) 
     (17,415 )      (17,415 ) 
                 
Total shareholders’ equity 
     64,957       64,847  
Total liabilities and shareholders’ equity 
   $ 790,600     $ 800,598  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
Community Capital Corporation
Consolidated Statements of Income
 
   
For the years ended
  
   
December 31,
  
(Dollars in thousands, except for per share data amounts) 
  
2008
    
2007
    
2006
  
Interest income: 
                  
Loans, including fees 
   $ 39,710     $ 45,247     $ 37,277  
Investment securities:
                  
Taxable 
     2,189       2,119       1,796  
Tax-exempt 
     1,285       1,211       1,219  
Nonmarketable equity securities 
     404       534       373  
Federal funds sold and other 
     6       21       14  
                         
Total interest income 
     43,594       49,132       40,679  
                         
Interest expense: 
                        
Deposits 
     10,835       16,491       13,491  
Advances from the Federal Home Loan Bank 
     6,034       5,709       3,479  
Federal funds purchased and securities sold under
          
agreements to repurchase 
     1,061       2,310       2,253  
Other 
     726       719       402  
Total interest expense 
     18,656       25,229       19,625  
                         
Net interest income 
     24,938       23,903       21,054  
Provision for loan losses 
     9,300       1,025       1,140  
                         
Net interest income after provision for loan losses 
     15,638       22,878       19,914  
                         
Noninterest income: 
                        
Service charges on deposit accounts 
     2,492       2,425       2,627  
Gain on sales of securities available-for-sale 
     98       -       -  
Gain on sale of loans held for sale 
     1,139       1,204       760  
Commissions from sales of mutual funds 
     180       261       245  
Income from fiduciary activities 
     1,725       1,590       1,177  
Gain on sale of premises and equipment 
     6       15       2  
Other operating income 
     1,607       1,380       1,217  
Total noninterest income 
     7,247       6,875       6,028  
                         
Noninterest expenses:
                  
Salaries and employee benefits 
     10,853       11,087       10,687  
Net occupancy 
     1,316       1,162       1,113  
Amortization of intangible assets 
     449       470       492  
Furniture and equipment 
     975       888       838  
Loss on sale of securities available-for-sale 
     -       469       61  
Other operating expenses 
     6,599       5,650       4,974  
Total noninterest expenses 
     20,192       19,726       18,165  
                         
Income before income taxes 
     2,693       10,027       7,777  
Income tax expense 
     284       3,139       2,018  
                         
Net income 
   $ 2,409     $ 6,888     $ 5,759  
Earnings per share:1 
                        
Basic earnings per share 
   $ 0.54     $ 1.58     $ 1.34  
Diluted earnings per share 
   $ 0.54     $ 1.56     $ 1.31  
 
The accompanying notes are an integral part of these consolidated financial statements.
1 Restated to reflect 15% stock dividend in 2007.
Community Capital Corporation
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
For the years ended December 31, 2008, 2007, and 2006
 
                           
Accumulated
                    
                           
other
                    
               
Nonvested
          
compre-
                    
(Dollars in thousands, 
  
Common stock
    
restricted
    
Capital
    
hensive
    
Retained
    
Treasury
        
except for per share amounts) 
  
Shares
    
Amount
    
stock
    
surplus
    
income (loss)
    
earnings
    
stock
    
Total
  
Balance, December 31, 2005 
     4,751,311     $ 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 ($0.52
                                     (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  
Net income
                                       6,888               6,888  
Other comprehensive income,
                                                        
net of tax effects
                               754                       754  
Comprehensive income
                                                     7,642  
Dividends paid ($0.54
                                     (2,386 )              (2,386 ) 
per share)
                                                          
Stock options exercised 
     37,125       37               440                               477  
Issuance of restricted stock 
     21,300       21       (443 )      422                               -  
Amortization of deferred
                                                        
compensation on restricted
                                                        
stock 
                     491                                       491  
Forfeitures of restricted stock 
     (3,105 )      (3 )      67       (66 )              6               4  
15% stock dividend 
     730,423       731               13,133               (13,878 )              (14 ) 
Purchase of treasury stock
                                                        
(15,000 shares)
                                                 (293 )      (293 ) 
Balance, December 31, 2007 
     5,603,570     $ 5,604     $ (443 )   $ 61,600     $ 485     $ 15,016     $ (17,415 )   $ 64,847  
Net income
                                       2,409               2,409  
Other comprehensive income,
                                                        
net of tax effects
                               42                       42  
Comprehensive income
                                                     2,451  
Cumulative change in
                                                        
accounting principle
                                       (530 )              (530 ) 
Dividends paid ($0.60
                                     (2,679 )              (2,679 ) 
per share)
                                                          
Stock options exercised 
     37,605       37               430                               467  
Issuance of restricted stock 
     26,800       27       (422 )      395                               -  
Amortization of deferred
                                                        
compensation on restricted
                                                        
stock 
                     406                                       406  
Forfeitures of restricted stock 
     (1,215 )      (1 )      14       (20 )              2               (5 ) 
Balance, December 31, 2008 
     5,666,760     $ 5,667     $ (445 )   $ 62,405     $ 527     $ 14,218     $ (17,415 )   $ 64,957  
 
The accompanying notes are an integral part of these consolidated financial statements.
 

Community Capital Corporation
Consolidated Statements of Cash Flows
 
   
For the years ended
  
   
December 31,
  
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
Cash flows from operating activities:
            
Net income 
   $ 2,409     $ 6,888     $ 5,759  
Adjustments to reconcile net income to net cash
                
provided by operating activities:
                
Depreciation and amortization 
     1,047       947       890  
Provision for loan losses 
     9,300       1,025       1,140  
Deferred income tax benefit (expense) 
     (467 )      427       (1,071 ) 
Amortization of intangible assets 
     449       470       492  
Amortization of deferred compensation on restricted stock 
     406       491       419  
Cumulative change in accounting principle 
     (529 )      -       -  
Premium amortization less discount accretion
                
on securities available-for-sale 
     8       56       8  
Amortization of deferred loan costs and fees, net 
     1,244       1,452       981  
Write down of other real estate 
     409       -       181  
Gain on sale of premises and equipment 
     (6 )      (15 )      (2 ) 
Net loss on sale of other real estate 
     194       6       21  
Net (gain) loss on sales or calls of securities available-for-sale 
     (98 )      469       61  
Proceeds of loans held for sale 
     20,704       31,742       26,016  
Disbursements for loans held for sale 
     (20,376 )      (31,819 )      (26,181 ) 
(Increase) decrease in interest receivable 
     688       (458 )      (1,288 ) 
Increase (decrease)in interest payable 
     (1,322 )      448       1,365  
Increase in other assets 
     (3,105 )      (1,510 )      (1,149 ) 
Increase in other liabilities 
     463       989       464  
Net cash provided by operating activities 
     11,418       11,609       8,105  
                         
Cash flows from investing activities:
                
Net increase in loans made to customers 
     (6,705 )      (73,865 )      (110,380 ) 
Proceeds from sales of securities available-for-sale 
     980       17,218       2,924  
Proceeds from calls and maturities of securities available-for-sale 
     17,042       12,134       10,217  
Purchases of securities available-for-sale 
     (25,154 )      (34,780 )      (8,244 ) 
Proceeds from calls and maturities of securities held-to-maturity 
     55       110       -  
Proceeds from sales of nonmarketable equity securities 
     7,520       1,036       1,350  
Purchase of nonmarketable equity securities 
     (8,832 )      (2,466 )      (4,148 ) 
Purchase of premises and equipment 
     (1,628 )      (2,247 )      (2,660 ) 
Proceeds from sales of premises and equipment 
     73       15       34  
Proceeds from sales of other real estate 
     885       387       145  
                         
Net cash used by investing activities 
     (15,764 )      (82,458 )      (110,762 ) 
                         
Cash flows from financing activities:
                
Net increase in demand and savings accounts 
     (18,839 )      44,768       34,718  
Net increase (decrease) in time deposits 
     12,368       (11,652 )      18,592  
Net increase (decrease) in federal funds purchased and securities
          
sold under agreements to repurchase 
     (28,428 )      16,984       (3,817 ) 
Proceeds from advances from the Federal Home Loan Bank 
     210,240       108,000       171,900  
Repayments of advances from the Federal Home Loan Bank 
     (184,580 )      (78,100 )      (123,500 ) 
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 
     (2,679 )      (2,400 )      (2,266 ) 
Proceeds from exercise of stock options 
     467       477       427  
Purchase of treasury stock 
     -       (293 )      (70 ) 
Net cash provided (used) by financing activities 
     (11,451 )      77,784       106,294  
Net increase (decrease) in cash and cash equivalents 
     (15,797 )      6,935       3,637  
Cash and cash equivalents, beginning of year 
     29,409       22,474       18,837  
                         
Cash and cash equivalents, end of year 
   $ 13,612     $ 29,409     $ 22,474  
 
The accompanying notes are an integral part of these consolidated financial statements.

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 eighteen 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.

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, 2008 and 2007, the investment in Federal Reserve Bank stock was $1,686,300.  At December 31, 2008 and 2007, the investment in Federal Home Loan Bank stock was $8,692,300 and $7,380,300, respectively.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Nonmarketable Equity Securities (continued) - The Company has invested in the stock of several unrelated financial institutions.  The Company owns less than five percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable.  At December 31, 2008 and 2007, the investments in the stock of the unrelated financial institutions, at cost, was $126,464.  Also included in nonmarketable equity securities is the investment in the Community Capital Corporation Statutory Trust I which totaled $310,000 at December 31, 2008 and 2007.

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, 2008 and 2007 were $169,294 and $29,136, 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, 2008 and 2007, the Company had impaired loans of approximately $107,426,000 and $2,424,000.

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.
 
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.

In 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.”  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Accordingly, the Company adopted FIN 48 effective January 1, 2007.  The adoption of FIN 48 did not have an impact on the Company’s consolidated financial position.

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 $285,073, $316,338 and $425,831 were included in the Company's results of operations for 2008, 2007, and 2006, 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.


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
 
Cash Flow Information - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  Cash equivalents include amounts due from depository institutions, interest-bearing deposit accounts, and federal funds sold.  Generally, federal funds are sold for one-day periods.

The following summarizes supplemental cash flow information:
 
   
Year ended December 31,
        
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
 Cash paid for interest 
   $ 19,988     $ 24,781     $ 18,259  
 Cash paid for income taxes 
     3,286       3,603       3,028  
 Supplemental noncash investing and financing activities: 
                        
    Foreclosures on loans 
     6,436       432       388  
 Change in unrealized gain (loss) on securities available- 
                        
for sale, net of tax 
     42       754       152  
 
Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

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

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

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

Per-Share Data - Basic earnings per share is computed by dividing net income by the weighted-average number of shares outstanding for the period.  Diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued using the treasury stock method.  Share and per-share data have been restated to reflect the 15% stock dividend issued in November 2007.

 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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

The components of other changes in comprehensive income and related tax effects are as follows:
 
                   
   
Year ended December 31,
  
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
Unrealized holding gains (losses) on 
                  
available-for-sale securities 
   $ 162     $ 674     $ 169  
Reclassification adjustment for (gains) losses 
                        
 realized in income 
     (98 )      469       61  
Net unrealized gains (losses) on securities 
     64       1,143       230  
   
Tax effect 
     (22 )      (389       (78 ) 
     Net-of-tax amount 
   $ 42     $ 754     $ 152  
 

 
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 – The following is a summary of recent authoritative pronouncements:

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

Also, in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

the interests of the parent and its noncontrolling interests. SFAS 160 was effective for the Company on January 1, 2009.  SFAS 160 had no impact on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS 161”).  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, thereby improving the transparency of financial reporting.  It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure is intended to convey the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 was effective for the Company on January 1, 2009 and will result in additional disclosures if the Company enters into any material derivative or hedging activities.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,” (“FSP 140-3”).  This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset.  This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under SFAS 140.  FSP 140-3 was effective for the Company on January 1, 2009.  The adoption of FSP 140-3 had no impact on the Company’s financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”).  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting principles.  This FSP was effective for the Company on January 1, 2009 and had no material impact on the Company’s financial position, results of operations or cash flows.

In May, 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS 162”).  SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  SFAS 162 is effective November 15, 2008.  The FASB has stated that it does not expect SFAS 162 will result in a change in current practice. The application of SFAS 162 had no effect on the Company’s financial position, results of operations or cash flows.

SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an Interpretation of FASB Statement No. 60,” (“SFAS 163”) was issued by the FASB in May, 2008 to alleviate diversity in accounting for financial guarantee insurance contracts.  SFAS 163 requires an insurance enterprise to recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation.  The Statement also modifies premium revenue and claim liabilities recognition and measurement.  SFAS 163 is effective for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years with the exception of disclosures related to the insurance enterprise’s risk-management activities which are effective for the first period (including interim periods) beginning after issuance of this Statement.  Except for those disclosures, earlier application is not permitted.  The adoption of this Statement had no material effect on the Company’s financial position, results of operations or cash flows.

The FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”). The Staff Position specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  FSP APB 14-1 provides guidance for initial

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

and subsequent measurement as well as derecognition provisions.  The Staff Position was effective as of January 1, 2009 and had no material effect on the Company’s financial position, results of operations or cash flows.

In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”).  The Staff Position provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be included in the earnings per share computation.  FSP EITF 03-6-1 was effective January 1, 2009 and had no effect on the Company’s financial position, results of operations, earnings per share or cash flows.

FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”) was issued September 2008, effective for reporting periods (annual or interim) ending after November 15, 2008.  FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives to disclose the nature of the credit derivative, the maximum potential amount of future payments, fair value of the derivative, and the nature of any recourse provisions.  Disclosures must be made for entire hybrid instruments that have embedded credit derivatives.  The Staff Position also amends FASB Interpretation No. (“FIN”) 45 to require disclosure of the current status of the payment/performance risk of the credit derivative guarantee.  If an entity utilizes internal groupings as a basis for the risk, how the groupings are determined must be disclosed as well as how the risk is managed.  The Staff Position encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption.  After initial adoption, comparative disclosures are required only for subsequent periods.  FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required disclosures should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008.  The adoption of this Staff Position had no material effect on the Company’s financial position, results of operations or cash flows.

The SEC’s Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on fair value accounting.  The Press Release includes guidance on the use of management’s internal assumptions and the use of “market” quotes.  It also reiterates the factors in SEC Staff Accounting Bulletin (“SAB”) Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value.

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements” (see Note 23) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active.  The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP was effective for the quarter ended September 30, 2008. The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of December 31, 2008 as discussed in Note 23.

FSP SFAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” (“FSP SFAS 140-4 and FIN 46(R)-8”) was issued in December 2008 to require public entities to disclose additional information about transfers of financial assets and to require public enterprises to provide additional disclosures about their involvement with variable interest entities.  The FSP also requires certain disclosures for public enterprises that are sponsors and servicers of qualifying special purpose entities.  The FSP is effective for the first reporting period ending after December 15, 2008.  This FSP had no material impact on the financial position of the Company.

 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

FSP SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”) issued in December 2008, provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan to provide the users of financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets.  The Staff Position also requires a nonpublic entity, as defined in SFAS 132, to disclose net periodic benefit cost for each period for which a statement of income is presented.  FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009.  The Staff Position will require the Company to provide additional disclosures related it to its benefit plans.

FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EIFT Issue No. 99-20,” (“FSP EITF 99-20-1”) was issued in January 2009.  Prior to the Staff Position, other-than-temporary impairment was determined by using either EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security.  EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the Staff Position amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment.  The Staff Position is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively.  Retroactive application is not permitted.  Management has reviewed the Company’s security portfolio and evaluated the portfolio for any other-than-temporary impairments as discussed in Note 3.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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 value of policies on certain officers of the bank.

Reclassifications - Certain captions and amounts in the 2007 and 2006 financial statements were reclassified to conform with the 2008 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, 2008 and 2007, 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, 2008 and 2007 consisted of the following:
 
                         
   
Amortized
    
Gross Unrealized
    
Estimated
  
(Dollars in thousands) 
  
Cost
    
Gains
    
Losses
    
Fair Value
  
December 31, 2008 
                        
Government-sponsored enterprises 
   $ 28,425     $ 791     $ -     $ 29,216  
Obligations of state and local governments 
              28,533       280       535       28,278  
               56,958       1,071       535       57,494  
Mortgage-backed securities 
              20,917       464       47       21,334  
       Total 
   $ 77,875     $ 1,535     $ 582     $ 78,828  
   
December 31, 2007 
                                
Government-sponsored enterprises 
   $ 25,686     $ 477     $ -     $ 26,163  
Obligations of state and local governments 
              28,931       458       10       29,379  
               54,617       935       10       55,542  
Mortgage-backed securities 
              15,988       99       87       16,000  
       Total 
   $ 70,605     $ 1,034     $ 97     $ 71,542  

Securities held-to-maturity as of December 31, 2008 and 2007 consisted of the following:
 
   
Amortized
    
Gross Unrealized
    
Estimated
  
(Dollars in thousands) 
  
Cost
    
Gains
    
Losses
    
Fair Value
  
December 31, 2008 
                        
Obligations of state and local governments 
   $ 215     $ 10     $ -     $ 225  
                                 
December 31, 2007 
                                
Obligations of state and local governments 
   $ 270     $ 20     $  -     $ 290  
 
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, 2008.

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
  
Obligations of state and local
   $ 8,996     $ 535     $ -     $ -     $ 8,996     $ 535  
governments 
                                                
Mortgage-backed securities 
     5,075       43       497       4       5,572       47  
                                                 
     Total 
   $ 14,071     $ 578     $ 497     $ 4     $ 14,568     $ 582  
 
 
NOTE 3 - INVESTMENT SECURITIES - continued

Securities classified as available-for-sale are recorded at fair market value.  Approximately 3.41% of the unrealized losses, or one individual security, consisted of securities in a continuous loss position for twelve months or more.  The Company has the ability and intent to hold this security until such time as the value recovers or the security matures.  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, 2008, 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 
   $ 1,115     $ 1,121     $ -     $ -  
Due after one year but within five years 
     18,118       18,505       215       225  
Due after five years but within ten years 
     28,964       29,631       -       -  
Due after ten years 
     8,761       8,237       -       -  
      56,958       57,494       215       225  
Mortgage-backed securities 
     20,917       21,334       -       -  
   
       Total 
   $ 77,875     $ 78,828     $ 215     $ 225  
 

Proceeds from sales of securities available-for-sale during 2008, 2007, and 2006 were $980,000, $17,218,000 and $2,924,000, respectively, resulting in gross realized gains of $98,000 in 2008 and gross realized losses of $469,000 and $61,000 in 2007 and 2006, respectively.  There were no sales of securities held-to-maturity in 2008, 2007, or 2006.

At December 31, 2008 and 2007, securities having amortized costs of approximately $78,090,000 and $70,226,000, respectively, and estimated fair values of $79,053,000 and $71,177,000, 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 $10,815,000 and $9,503,000 at December 31, 2008 and 2007, respectively. During 2008 and 2007, the Company recorded no gains on the sale of nonmarketable equity securities.

NOTE 4 - LOANS RECEIVABLE

Loans receivable are summarized as follows:
 
   
December 31,
  
(Dollars in thousands) 
  
2008
    
2007
  
Commercial and industrial 
   $ 43,442     $ 44,467  
Real estate - construction 
     185,414       167,180  
Real estate - mortgage and commercial 
     344,457       364,667  
Home equity 
     47,830       42,628  
Consumer - installment 
     19,073       24,706  
Consumer - credit card and checking 
     1,521       1,506  
Total gross loans 
   $ 641,737     $ 645,154  
 

 
 
NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2008 and 2007, the Company had sold participations in loans aggregating $3,549,000 and $833,000, 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 funds 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, 2008 and 2007, the Company had pledged approximately $220,211,475 and $210,807,000, respectively, of loans on residential and commercial real estate as collateral for advances from the Federal Home Loan Bank (see Note 9).

An analysis of the allowance for loan losses for the years ended December 31, 2008, 2007, and 2006, is as follows:
 
                   
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
Balance, beginning of year 
   $ 6,759     $ 6,200     $ 6,324  
Provision charged to operations 
     9,300       1,025       1,140  
Recoveries on loans previously charged-off 
     132       83       167  
Loans charged-off 
     (2,574 )      (549 )      (1,431 ) 
Balance, end of year 
   $ 13,617     $ 6,759     $ 6,200  
 
 
At December 31, 2008 and 2007, the Company had impaired loans of approximately $107,426,000 and $2,424,000, respectively.  Valuation allowances for credit losses on impaired loans totaled $6,196,000 and $124,000 for the years ended December 31, 2008 and 2007, respectively.  As of December 31, 2008, $23,067,000 had a specific allowance of $6,196,000.  As of December 31, 2007, $2,424,000 had a specific allowance of $124,000.  Impaired loans totaling $84,359,000 had a specific allowance of zero as of December 31, 2008.  Interest income on impaired loans totaled $4,543,000 for the year ended December 31, 2008, $2,913,000 of which was measured using the cash basis and $1,630,000 was capitalized.  Interest income on impaired loans totaled $69,000 for the year ended December 31, 2007, all of which was measured using the cash basis.  Average investment in impaired loans was $102,864,000 and $2,606,000 for the years ended December 31, 2008 and 2007, respectively.  At December 31, 2008, 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 $696,000 and $115,000 at December 31, 2008 and 2007, 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, 2008 and 2007, the Company had unfunded commitments, including standby letters of credit, of $92,594,000 and $114,031,000, of which $8,655,000 and $7,756,000, respectively, were unsecured.  The fair value of any potential liabilities associated with standby letters of credit is insignificant.

NOTE 4 - LOANS RECEIVABLE - continued

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions.  Various recourse agreements exist, ranging from forty-five days to twelve months.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan.  Since none of the loans sold have ever been returned to the Company, the total loans sold with limited recourse amount does not necessarily represent future cash requirements.  The Company uses the same credit policies in making loans held for sale as it does for on-balance-sheet instruments.  Total loans sold with limited recourse in 2008 and 2007 was $55,016,000 and $62,205,000, respectively.

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:
 
   
December 31,
  
 (Dollars in thousands) 
  
2008
    
2007
  
 Land
   $ 4,440     $ 4,445  
 Building and land improvements 
     13,527       12,520  
 Furniture and equipment 
     9,309       8,756  
       Total 
     27,276       25,721  
 Less, accumulated depreciation 
     (10,033 )      (8,992 ) 
       Premises and equipment, net 
   $ 17,243     $ 16,729  

Depreciation and amortization expense was approximately $1,047,000, $947,000 and $890,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

NOTE 6 - INTANGIBLE ASSETS
 
Intangible assets, net of accumulated amortization are summarized as follows:
 
   
December 31,
  
 (Dollars in thousands) 
  
2008
    
2007
  
 Core deposit premium, net 
   $ 2,088     $ 2,537  
 Goodwill 
     7,419        7,419  
    $ 9,507     $ 9,956  
 
 
In accordance with SFAS No. 147, the Company evaluates its goodwill on an annual basis.  The evaluations were performed in June of 2008 and 2007.  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, 2008 or 2007.  Amortization expense related to the core deposit premium was $449,000, $470,000 and $492,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
 
 
NOTE 7 - DEPOSITS
 
The following is a summary of deposit accounts:
 
   
December 31,
  
 (Dollars in thousands) 
  
2008
    
2007
  
 Noninterest-bearing demand deposits 
   $ 73,663     $ 62,175  
 Interest-bearing demand deposits 
     65,699       63,866  
 Money market accounts 
     96,377       140,934  
 Brokered deposits 
     49,828       38,744  
 Savings 
     37,430       36,117  
 Certificates of deposit and other time deposits 
     190,604       178,236  
Total deposits 
   $ 513,601     $ 520,072  
 
 
At December 31, 2008 and 2007, certificates of deposit of $100,000 or more totaled approximately $74,898,000 and $66,617,000, respectively.  Interest expense on these deposits was approximately $3,012,000, $3,481,000 and $2,786,000 in 2008, 2007 and 2006, respectively.

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2008 were as follows:
 
(Dollars in thousands) 
      
Maturing in 
  
Amount
  
   
   2009 
   $ 177,688  
   2010 
     10,080  
   2011 
     2,823  
   2012 
     13  
   2013 and thereafter 
     -  
   Total 
   $ 190,604  
 
 
NOTE 8 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWING

The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day. At December 31, 2008 and 2007, the securities sold under agreements to repurchase totaled $9,695,000 and $14,561,000, respectively.  At December 31, 2008 and 2007, the amortized costs of securities pledged to collateralize the repurchase agreements were $10,286,000 and $17,368,000, respectively, and estimated fair values were $10,507,000 and $17,711,000, respectively.  The securities underlying the agreements are held by a third-party custodian.  At December 31, 2008 and 2007, federal funds purchased were $24,143,000 and $47,705,000, respectively.

During 2008, the Company established a borrowing line with the Federal Reserve Bank’s discount window.  Through this agreement, the Company has the ability to borrow up to $116,600,000.  At December 31, 2008, the Company has pledged certain types of commercial, construction and land loans totaling $159,800,000 as collateral to secure borrowings on this line.  As of December 31, 2008, there were no outstanding borrowings on this line.
 
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 
  
2008
    
2007
  
   
Advances maturing: 
              
   
     March 5, 2008 
5.16, fixed 
   $ -     $ 5,400  
     October 31, 2008 
4.40, floating 
     -       10,000  
     February 2, 2009 
4.95, fixed 
     25       125  
     July 13, 2009 
5.21, fixed 
     5,000       5,000  
     July 13, 2009 
5.03, fixed 
     10,000       10,000  
     November 6, 2009 
0.46, floating 
     25,760       -  
     February 26, 2010 
4.77, fixed 
     10,000       10,000  
     March 17, 2010 
5.92, fixed 
     5,000       5,000  
     March 28, 2011 
4.68, fixed 
     10,000       10,000  
     December 7, 2011 
4.12, fixed 
     10,000       10,000  
     February 9, 2012 
4.61, fixed 
     10,000       10,000  
     March 1, 2012 
4.32, fixed 
     10,000       10,000  
     May 18, 2012 
4.62, fixed 
     5,000       5,000  
     June 14, 2012 
4.94, fixed 
     10,000       10,000  
     March 5, 2013 
1.94, fixed 
     5,400       -  
     January 16, 2015 
2.77, fixed 
     10,000       -  
     June 3, 2015 
3.36, fixed 
     15,000       15,000  
     February 2, 2017 
4.31, fixed 
     10,000       10,000  
     May 18, 2017 
4.15, fixed 
     10,000       10,000  
   
      $ 161,185     $ 135,525  

Scheduled principal reductions of Federal Home Loan Bank advances are as follows:
 
(Dollars in thousands) 
  
Amount
  
   
       2009 
   $ 40,785  
       2010 
     15,000  
       2011 
     20,000  
       2012 
     35,000  
       2013 and thereafter 
     50,400  
   
Total 
   $ 161,185  

As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $116,953,000, multi-family residential loans aggregating $6,887,000, home equity lines of credit aggregating $46,600,365, and commercial real estate loans aggregating $49,770,785 (see Note 4) at December 31, 2008.  In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.

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 Company declared a 15% stock dividend for shareholders of record on November 2, 2007.  Amounts equal to the estimated fair value of the additional shares issued have been charged to retained earnings and credited to common stock and capital surplus.  Dividends representing fractional shares were paid in cash.  Net income per share, average shares outstanding, treasury shares, employee stock ownership plan shares, and stock option plan shares have been adjusted to reflect the stock distribution for all periods presented.

The Board of Directors has approved stock repurchase plans whereby the Company could repurchase up to $19,100,000 of its outstanding shares of common stock.  As of December 31, 2008, the Company had purchased approximately 1,044,000 shares under the plans (and prior plans), at an average cost of $16.68.

The Board of Directors may issue up to 2,300,000 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, 2008 and 2007, 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 $124,759, $137,131 and $119,832 for the years ended December 31, 2008, 2007 and 2006, respectively.  Minimum lease commitments under noncancelable operating leases are as follows:
 
(Dollars in thousands) 
  
Amount
  
   
       2009 
   $ 101  
       2010 
     76  
       2011 
     52  
       2012 
     52  
       2013 and thereafter 
     180  
           Total 
   $ 461  

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.
 
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, 2008 and 2007.
 
                           
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, 2008 
                                    
The Company 
                                    
   Total capital (to risk-weighted assets) 
   $ 73,366       11.69 %    $ 50,202       8.00 %      -       N/A  
   Tier 1 capital (to risk-weighted assets) 
     65,451       10.43       25,101       4.00       -       N/A  
   Tier 1 capital (to average assets) 
     65,451       8.44       31,019       4.00       -       N/A  
 
CapitalBank 
                                                
   Total capital (to risk-weighted assets) 
   $ 71,316       11.40 %    $ 50,047       8.00 %    $ 62,559       10.00 % 
   Tier 1 capital (to risk-weighted assets) 
     63,425       10.14       25,023       4.00       37,535       6.00  
   Tier 1 capital (to average assets) 
     63,425       8.18       31,020       4.00       38,775       5.00  
 
December 31, 2007 
                                                
The Company 
                                                
   Total capital (to risk-weighted assets) 
   $ 71,163       11.10 %    $ 51,273       8.00 %      -       N/A  
   Tier 1 capital (to risk-weighted assets) 
     64,404       10.05       25,637       4.00       -       N/A  
   Tier 1 capital (to average assets) 
     64,404       8.33       30,911       4.00       -       N/A  
 
CapitalBank 
                                                
   Total capital (to risk-weighted assets) 
   $ 69,373       10.85 %    $ 51,150       8.00 %    $ 63,937       10.00 % 
   Tier 1 capital (to risk-weighted assets) 
     62,614       9.79       25,575       4.00       38,362       6.00    
   Tier 1 capital (to average assets) 
     62,614       8.11       30,868       4.00       38,585       5.00  


 
NOTE 14 - STOCK COMPENSATION PLANS

On May 19, 2004, the Company terminated its 1997 Stock Incentive Plan and replaced it with the 2004 Equity Incentive Plan.  Outstanding options issued under any former Plans will be honored in accordance with the terms and conditions in effect at the time they were granted, except that they are not subject to reissuance.  At December 31, 2008, there were 51,721 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 258,750 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.

There were no stock options granted in 2008, 2007 or 2006.

A summary of the status of the Company’s stock option plans as of December 31, 2008, 2007, and 2006 and changes during the years ended on those dates is presented below:
 
   
2008
    
2007
    
2006
  
         
Weighted-
          
Weighted-
        
 
Weighted-
  
         
Average
          
Average
          
Average
  
         
Exercise
          
Exercise
          
Exercise
  
   
Shares
    
Price
    
Shares
    
Price
    
Shares
    
Price
  
   
Outstanding at beginning of year 
     91,339     $ 15.62       142,341     $ 14.26       200,824     $ 12.31  
Granted 
     -       -       -       -       -       -  
Exercised 
     37,605       12.43       42,435       11.24       57,242       7.44  
Cancelled 
     2,013       13.68       8,567       14.79       1,241       12.88  
   
Outstanding at end of year 
     51,721       18.01       91,339       15.62       142,341       14.26  
 

 
Options exercisable at December 31, 2008, 2007, and 2006 were 51,721, 91,339 and 142,341, respectively.

There were no in-the-money options outstanding and exercisable at December 31, 2008.

The following table summarizes information about the stock options outstanding under the Company’s plans at December 31, 2008:
 
 
Options
Remaining
Range of Exercise Prices
Outstanding
Life (years)
Exercisable:
    
$
17.48
 37,921                  0.04
$
19.48
 13,800                  0.17
Total exercisable
 51,721  

During 2008 and 2007, the Company issued 26,800 and 24,495 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, 2010 and 2009, respectively.  The weighted-average fair value of restricted stock issued during 2008 and 2007 was $15.73 and $18.10, respectively.  Compensation cost associated with the issuances was $406,000, $491,000 and $419,000 for the years ended December 31, 2008, 2007 and 2006, respectively.  Forfeitures totaled $14,000 and $67,000 for the years ended December 31, 2008 and 2007, respectively.  At December 31, 2008, the Company had 145,898 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, 2008, 2007, and 2006 were $19,960,000, $18,976,000 and $17,175,000, respectively.  During 2008, $8,049,000 of new loans were made to related parties and repayments totaled $7,065,000.  During 2007, $4,793,000 of new loans were made to related parties and payments totaled $2,992,000.

The Company purchases various types of insurance from agencies that are owned by two directors.  Amounts paid for insurance premiums were $97,997, $86,894 and $175,867 in 2008, 2007, and 2006, 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, 2008, retained earnings of the bank was $16,703,000.
 
NOTE 18 - EARNINGS PER-SHARE

Earnings per share - basic is computed by dividing net income by the weighted-average number of common shares outstanding. Earnings per share - diluted is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method.
 
   
Year ended December 31,
  
(Dollars in thousands, except per share data) 
  
2008
    
2007
    
2006
  
Basic earnings per share: 
                  
Net income available to common shareholders 
   $ 2,409     $ 6,888     $ 5,759  
Average basic common shares outstanding 
     4,427,379       4,371,345       4,299,359  
Basic earnings per share 
   $ 0.54     $ 1.58     $ 1.34  
Diluted earnings per share: 
                        
Net income available to common shareholders 
   $ 2,409     $ 6,888     $ 5,759  
Average common shares outstanding - basic 
     4,427,379       4,371,345       4,299,359  
Incremental shares from assumed conversions: 
                        
   Restricted Stock 
     36,884       16,234       36,676  
   Stock options 
     -       34,733       47,463  
Average diluted common shares outstanding 
     4,464,263       4,422,312       4,383,498  
Diluted earnings per share 
   $ 0.54     $ 1.56     $ 1.31  

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:
 
 
 
2008
    
2007
    
2006
  
Number of options 
     51,721       13,800       13,800  
Weighted-average of these options 
                        
outstanding during the year 
     53,674       13,800       13,800  
Weighted-average exercise price 
   $ 18.01     $ 19.48     $ 19.48  
 

 
NOTE 19 - INCOME TAXES

Income tax expense consisted of the following:
 
   
Year ended December 31,
  
 (Dollars in thousands) 
  
2008
    
2007
    
2006
  
 Currently payable: 
                  
     Federal 
   $ 3,024     $ 3,460     $ 2,224  
     State 
     139       346       279  
         Total current 
     3,163       3,806       2,503  
 Deferred income tax provision (benefit) 
     (2,857 )      (266 )      (407 ) 
 Income tax expense 
   $ 306     $ 3,540     $ 2,096  
 Income tax expense (benefit) is allocated as follows: 
                        
     To continuing operations 
   $ 284     $ 3,139     $ 2,018  
     To shareholders’ equity 
     22       401       78  
 
         Income tax expense 
   $ 306     $ 3,540     $ 2,096  
 
The gross amounts of deferred tax assets and deferred tax liabilities were as follows:
 
           
December 31,
  
 (Dollars in thousands) 
          
2008
    
2007
  
 Deferred tax assets: 
                        
     Allowance for loan losses 
           $ 4,630     $ 2,298  
     Net operating loss carryforward - state 
             298       251  
     Deferred compensation 
             1,022       840  
     Nonaccrual of interest 
             491       85  
     Other real estate owned 
             159       61  
     Loans fees and costs 
             -       10  
     Director fees 
             89       58  
     Restricted stock 
             281       378  
     Available-for-sale securities 
                     -  
     Deferred revenue 
             44       64  
 
         Total deferred tax assets 
             7,014       4,045  
 Deferred tax liabilities: 
                        
     Accumulated depreciation 
             221       131  
     Federal Home Loan Bank stock dividends 
             16       16  
     Available-for-sale securities 
             272       250  
     Merger related, net 
             52       71  
     Core deposit intangibles 
             77       112  
     Loans fees and costs 
             58       -  
     Prepaids 
             53       57  
         Total deferred tax liabilities 
             749       637  
 
         Net deferred tax asset recognized 
           $ 6,265     $ 3,408  
 
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, 2008 will be realized, and accordingly, has not established a valuation allowance.  Net deferred tax assets are included in other assets.
 
NOTE 19 - INCOME TAXES - continued

A reconciliation of the income tax provision and the amount computed by applying the Federal statutory rate of 34% to income before income taxes follows:
 
   
Year ended December 31,
  
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
Income tax at the statutory rate 
   $ 916     $ 3,409     $ 2,644  
State income tax, net of federal income tax benefit 
     92       228       184  
Tax-exempt interest income 
     (491 )      (473 )      (460 ) 
Disallowed interest expense 
     49       66       73  
Stock option compensation 
     -       (22 )      (167 ) 
Increase in cash surrender value of life insurance 
     (203 )      (230 )      (203 ) 
Other, net 
     (79 )      161       (53 ) 
Income tax expense 
   $ 284     $ 3,139     $ 2,018  

The company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with FIN 48.

NOTE 20 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:
 
   
Year ended December 31,
  
   (Dollars in thousands) 
  
2008
    
2007
    
2006
  
 Banking and ATM supplies 
   $ 547     $ 476     $ 427  
 Directors’ fees 
     347       299       274  
 Mortgage loan department expenses 
     246       212       129  
 Data processing and supplies 
     1,568       1,340       1,091  
 Postage and freight 
     204       210       212  
 Professional fees 
     457       501       351  
 Telephone expenses 
     353       370       351  
 Other 
     2,877       2,242       2,139  
         Total 
   $ 6,599     $ 5,650     $ 4,974  

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 $360,000, $304,000 and $408,000 in 2008, 2007, and 2006, respectively.  The Company’s policy is to fund amounts approved by the Board of Directors.  At December 31, 2008 and 2007, the savings plan owned 237,972 and 211,289 shares of the Company’s common stock purchased at an average cost of $15.84 and $16.32 per share, respectively. The estimated value of shares held at December 31, 2008 and 2007 was $1,721,000 and $3,165,000, 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.  No incentive payments were accrued at December 31, 2008.  Incentive payments totaling $795,000 were accrued as of December 31, 2007.

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, 2008, 2007, or 2006.
 
NOTE 21 - RETIREMENT AND BENEFIT PLANS - continued

In September 2006, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Agreements” (“EITF 06-4”), which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods.  The liability should be recognized based on the substantive agreement with the employee.  EITF 06-4 was effective beginning January 1, 2008, and was applied as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The impact to the company upon adoption of EITF 06-4 was a reduction in retained earnings and an increase in other liabilities of $529,000.

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 2008, 2007, or 2006.  No insurance premiums were paid on the plan during  2008, 2007 or 2006.  The policies increased their cash values by $267,000 and $255,000 during 2008 and 2007, respectively.  Cash values at December 31, 2008 and 2007 were $4,405,000 and $4,137,000, respectively.

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, 2008, 2007, or 2006.  The policies increased their cash values by $435,000 and $421,000 during 2008 and 2007, respectively.  Cash values at December 31, 2008 and 2007 were $11,591,000 and $11,156,000, respectively.

NOTE 22 - UNUSED LINES OF CREDIT

As of December 31, 2008, the subsidiary bank had unused lines of credit to purchase federal funds from unrelated banks totaling $28,791,000.  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 $197,166,000 at December 31, 2008.  As of December 31, 2008, the Bank had borrowed $161,185,000 on this line.  As of December 31, 2008, the Bank also has a line of credit through the Federal Reserve Bank’s Discount Window in the amount of $116,635,000.  There were no outstanding borrowings on this line at December 31, 2008.

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

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.

NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

The carrying values and estimated fair values of the Company’s financial instruments are as follows:
 
   
December 31,
  
   
2008
    
2007
  
   
Carrying
    
Estimated
    
Carrying
    
Estimated
  
(Dollars in thousands) 
  
Amount
    
Fair Value
    
Amount
    
Fair Value
  
   
Financial Assets: 
                        
   Cash and due from banks 
   $ 11,970     $ 11,970     $ 29,142     $ 29,142  
   Interest-bearing deposit accounts 
     1,642       1,642       267       267  
   Securities available-for-sale 
     78,828       78,828       71,542       71,542  
   Securities held-to-maturity 
     215       225       270       290  
   Nonmarketable equity securities 
     10,815       10,815       9,503       9,503  
   Cash surrender value of life insurance 
     15,996       15,996       15,293       15,293  
   Loans and loans held for sale 
     642,040       658,309       645,785       642,612  
   Accrued interest receivable 
     3,724       3,724       4,412       4,412  
   
Financial Liabilities: 
                                
   Demand deposit, interest bearing 
                                
transaction, and savings accounts 
   $ 322,997     $ 322,998     $ 341,836     $ 341,836  
   Certificates of deposit and other time deposits 
     190,604       193,606       178,236       179,832  
   Federal funds purchased and securities 
                                
    sold under agreements to repurchase 
     33,838       33,838       62,266       62,266  
   Advances from the Federal Home Loan Bank 
     161,185       150,771       135,525       132,097  
   Junior subordinated debentures 
     10,310       10,310       10,310       10,310  
   Accrued interest payable 
     1,802       1,802       3,134       3,134  
 
 
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
   
Level 2
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
   
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.
 
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2008:
 
   
Quoted market price
    
Significant other
    
Significant
  
   
in active markets
    
observable inputs
    
unobservable inputs
  
(Dollars in thousands) 
  
(Level 1)
    
(Level 2)
    
(Level 3)
  
Available-for-sale investment securities 
   $ -     $ 78,828     $ -  
Mortgage loans held for sale 
     -       303       -  
Total 
   $ -     $ 79,131     $ -  
 
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued
 
The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at December 31, 2008 was $107,426,000.  The Company has no assets or liabilities whose fair values are measured on a nonrecurring basis using level 1 or level 3 inputs.

FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis.  In addition, as a result of the economic turmoil in the financial markets and banking industry, the FASB is reviewing the fair value pricing aspects of SFAS 157 and may review some aspect of the standard.
 
 
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) 
  
2008
    
2007
  
Assets 
            
     Cash and cash equivalents 
   $ 152     $ 613  
     Investment in banking subsidiary 
     73,441       73,036  
     Nonmarketable equity securities 
     310       310  
     Premises and equipment, net 
     1,172       1,178  
     Other assets 
     1,412       1,392  
         Total assets 
   $ 76,487     $ 76,529  
 
Liabilities and Shareholders’ Equity 
                
     Notes payable to subsidiary 
   $ 959     $ 993  
     Junior subordinated debentures 
     10,310       10,310  
     Other liabilities 
     261       379  
         Total liabilities 
     11,530       11,682  
     Common stock 
     5,667       5,604  
     Nonvested restricted stock 
     (445 )      (443 ) 
     Capital surplus 
     62,405       61,600  
     Retained earnings 
     14,218       15,016  
     Accumulated other comprehensive expense 
     527       485  
     Treasury stock 
     (17,415 )      (17,415 ) 
         Total shareholders’ equity 
     64,957       64,847  
         Total liabilities and shareholders’ equity 
   $ 76,487     $ 76,529  

Condensed Statements of Income
 
   
For the years ended December 31,
  
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
Income: 
                  
     Dividend income from subsidiary 
   $ 2,200     $ -     $ 2,900  
     Dividend income from equity securities 
     22       22       11  
     Other interest income 
     10       112       120  
     Other income 
     1       4       4  
Total income 
     2,233       138       3,035  
 
Expenses: 
                        
     Salaries 
     405       498       429  
     Net occupancy expense 
     (210 )      (203 )      (105 ) 
     Furniture and equipment expense 
     7       6       5  
     Interest expense 
     779       814       485  
     Other operating expenses 
     195       375       288  
Total expense 
     1,176       1,490       1,102  
Income (loss) before income taxes and equity in undistributed 
                        
earnings of subsidiary 
     1,057       (1,352 )      1,933  
 
Income tax expense (benefit) 
     (460 )      (555 )      (534 ) 
 
Income (loss) before equity in undistributed earnings of subsidiary 
     1,517       (797 )      2,467  
Equity in undistributed earnings of subsidiary 
     892       7,685       3,292  
 
Net income 
   $ 2,409     $ 6,888     $ 5,759  
 
 
NOTE 24 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY) - continued

Condensed Statements of Cash Flows
 
   
For the years ended December 31,
  
(Dollars in thousands) 
  
2008
    
2007
    
2006
  
 
Operating activities: 
                  
     Net income 
   $ 2,409     $ 6,888     $ 5,759  
     Adjustments to reconcile net income to net cash 
                        
provided by operating activities: 
                        
     Equity in undistributed earnings of banking subsidiary 
     (892 )      (7,685 )      (3,292 ) 
     Depreciation and amortization expense 
     35       36       45  
     Amortization of deferred compensation on restricted stock 
     401       491       419  
     Deferred taxes 
     (44 )      (189 )      362  
     Increase (decrease) in other liabilities 
     (119 )      23       80  
     (Increase) decrease in other assets 
     24       20       (978 ) 
             Net cash provided (used) by operating activities 
     1,814       (416 )      2,395  
 
Investing activities: 
                        
     Purchase of premises and equipment 
     (29 )      (51 )      (203 ) 
     Purchases of nonmarketable equity securities 
     -       -       (310 ) 
     Investment in Bank subsidiary 
     -       -       (7,000 ) 
             Net cash provided (used) by investing activities 
     (29 )      (51 )      (7,513 ) 
 
Financing activities: 
                        
     Dividends paid 
     (2,679 )      (2,400 )      (2,266 ) 
     Proceeds from exercise of stock options 
     467       477       427  
     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 
     (34 )      (11 )      (39 ) 
     Purchase of treasury stock 
     -       (293 )      (70 ) 
 
             Net cash provided (used) by financing activities 
     (2,246 )      (2,227 )      8,362  
Net increase (decrease) in cash and cash equivalents 
     (461 )      (2,694 )      3,244  
 
Cash and cash equivalents, beginning of year 
     613       3,307       63  
 
Cash and cash equivalents, end of year 
   $ 152     $ 613     $ 3,307  
 

 
NOTE 25 - QUARTERLY DATA (UNAUDITED)
 
   
December 31,
  
 
  
2008
    
2007
  
                                                 
   
Fourth
    
Third
    
Second
    
First 
     Fourth     Third     Second     First  
(Dollars in thousands except per share)
  
Quarter
    
Quarter
    
Quarter
    
Quarter
     Quarter     Quarter     Quarter     Quarter  
Interest income    $ 10,562     $ 10,406     $ 10,944     $ 11,682     $ 12,746     $ 12,695     $ 12,216     $ 11,475  
                                                                 
Interest expense
     4,064       4,411       4,522       5,659       6,422       6,565       6,315       5,927  
                                                                 
Net interest income 
     6,318       5,995       6,422       6,203       6,324       6,130       5,901       5,548  
                                                                 
Provision for loan losses 
     3,700       1,100       2,500       2,000       400       300       125       200  
                                                                 
Net interest income after 
                                                                
   provision for loan losses 
     2,618       4,895       3,922       4,203       5,924       5,830       5,776       5,348  
Noninterest income 
     1,722       1,851       1,816       1,858       1,865       1,756       1,646       1,608  
Noninterest expenses 
     4,647       5,140       5,329       5,076       4,997       5,252       4,825       4,652  
                                                                 
Income before taxes 
     (307 )      1,606       409       985       2,792       2,334       2,597       2,304  
Income tax expense 
     (312 )      410       (18 )      204       958       698       809       674  
                                                                 
Net income 
   $ 5     $ 1,196     $ 427     $ 781     $ 1,834     $ 1,636     $ 1,788     $ 1,630  
                                                                 
Earnings per share: 
                                                                
   Basic 
   $ 0.00     $ 0.27     $ 0.1     $ 0.17     $ 0.42     $ 0.37     $ 0.41     $ 0.37  
   Diluted 
   $ 0.00     $ 0.27     $ 0.1     $ 0.17     $ 0.41     $ 0.36     $ 0.40     $ 0.37  

 
 
Exhibit
Number
Description
 
2.11
Merger Agreement dated as of October 15, 2003 between Community Capital Corporation and Abbeville Capital Corporation
3.12
Articles of Incorporation of Registrant
3.22
Articles of Amendment to Articles of Incorporation of Registrant (re: Change of Name)
3.33
Amended and Restated Bylaws of Registrant dated November 28, 2007
3.44
First Amendment to Amended and Restated Bylaws of Registrant dated March 19, 2008
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
 
 
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.
10.5215
*CapitalBank Director Deferred Fee Agreement Dated August 12, 2003 for Wayne Q. Justesen
10.5315
*First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 12, 2003 for Wayne Q. Justesen
10.5415
*CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters
10.5515
*First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters
10.5615
*CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt
10.5715
*First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt
10.5815
*CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys
10.5915
*First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys
10.6016
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Helen A. Austin
10.6116
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Sonja Hazel Hughes
10.6216
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Ralph W. Brewer
10.6316
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for William G. Stevens
10.6416
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for James A. Lollis
10.6516
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Walter G. Stevens
10.6616
*First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Taylor T. Stokes
10.6716
*Second Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 and Amended January 10, 2006 for Steve O. White
10.6816
*CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for Thomas D. Sherard, Jr.
10.6916
*First Amendment to the CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for Thomas D. Sherard, Jr.
10.7016
*CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for C. William Knapp, Jr.
10.7116
*First Amendment to the CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for C. William Knapp, Jr.
10.7216
*CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for Patricia P. Howie
10.7316
*First Amendment to the CapitalBank (fka The Bank of Abbeville) Salary Continuation Agreement Dated October 7, 2003 for Patricia P. Howie
10.7416
*CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Tony Lawton
10.7516
*First Amendment to the CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Tony Lawton
10.7616
*CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Elaine Crawford
10.7716
*First Amendment to the CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Elaine Crawford
10.7816
*CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Chase Christopher
10.7916
*First Amendment to the CapitalBank Salary Continuation Agreement Dated June 1, 2004 for Chase Christopher
10.8016
*First Amendment to the CapitalBank Salary Continuation Agreement Dated December 14, 2006 for Cindy A. Pugh
10.8116
*Employment Agreement by and between Community Capital Corporation and William G. Stevens dated March 3, 2008
 
 
 
10.8216
*Employment Agreement by and between Community Capital Corporation and R. Wesley Brewer dated March 3, 2008
10.8317
*First Amendment to CapitalBank Split Dollar Agreement for Steve O. White dated December 31, 2008
147
Code of Ethics
21.118
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 November 28, 2007.
4
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on  March 20, 2008.
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 Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on January 3, 2008.
16
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on March 4, 2008.
17
Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on January 5, 2009.
18
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-3