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, 2009

Commission file number: 000-18460

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  [  ]  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 the definitions 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 [  ]      Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   [  ] Yes  [X] No

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2009, based on the closing price of the common stock as reported by The NASDAQ Global Market on such date, was approximately $19.2 million.  The registrant has no outstanding non-voting common equity.

The number of outstanding common shares of the registrant as of March 1, 2010, was 9,899,533.

Documents Incorporated By Reference:  Portions of the registrant’s Proxy Statement relating to its 2010 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	.	Business	3
1	A.	Risk Factors	17
1	B.	Unresolved Staff Comments	26
2	.	Properties	27
3	.	Legal Proceedings	27
4	.	Removed and Reserved	27
PART II
5	.	Market for Registrant’s Common Equity, Related Shareholders Matters and Issuer Purchases of Equity Securities
6	.	Selected Financial Data	28
7	.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
7	A.	Qualitative and Quantitative Disclosures About Market Risk	49
8	.	Financial Statements and Supplementary Data	49
9	.	Changes and Disagreements with Accountants on Accounting and Financial Disclosure	49
9	A.	Controls and Procedures	49
9	B.	Other Information	49
PART III
10	.	Directors, Executive Officers, and Corporate Governance	50
11	.	Executive Compensation	50
12	.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
13	.	Certain Relationships and Related Transactions, and Director Independence	50
14	.	Principal Accountant Fees and Services	50
PART IV
15	.	Exhibits and Financial Schedules	51
Signatures			52
Index to Consolidated Financial Statements			F-1
Exhibit Index			E-1

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PART I

ITEM 1. BUSINESS.

This report, including information included or incorporated by reference in this document, contains "forward-looking statements" within the meaning of within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  Forward-looking statements may relate to our financial condition, results of operation, plans, objectives, or future performance. Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “believe,” “continue,” “assume,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to those described below under Risk Factors and the following:

·   reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including, but not limited to, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

·   reduced earnings due to higher credit losses because our loans are concentrated by loan type, industry segment, borrower type, or location of the borrower or collateral;

·   high concentration of our real estate-based loans collateralized by real estate in a weak commercial real estate market;

·   adequacy of the level of our allowance for loan losses;

·   the rate of delinquencies and amounts of charge-offs;

·   challenges, costs and complications associated with the continued development of our branches;

·   changes in political conditions or the legislative or regulatory environment;

·   significant increases in competitive pressure in CapitalBank’s banking and financial services industries;

·   general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected, resulting in, among other things, a deterioration in credit quality;

·   adverse conditions in the stock market, the public debt market, and other capital markets;

·   changes occurring in business conditions and inflation;

·   changes in technology;

·   changes in monetary and tax policies;

·   the rates of loan growth;

·   adverse changes in asset quality and resulting credit risk-related losses and expenses;

·   loss of consumer confidence and economic disruptions resulting from terrorist activities;

·   changes in the securities markets; and

·   other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

These risks are exacerbated by the developments over the past two years in national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company.  During 2008 and 2009, the capital and credit markets experienced unprecedented levels of extended volatility and disruption.  There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

All forward-looking statements in this report are based on information available to us as of the date of this report.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved.  We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

General

Community Capital Corporation is a South Carolina corporation organized in 1988 to operate as a bank holding company pursuant to the Federal Bank Holding Company Act of 1956 and the South Carolina Banking and Branching Efficiency Act of 1996, and to own and control all of the capital stock of CapitalBank.  CapitalBank is a South Carolina state-chartered Federal Reserve member bank that provides banking services to consumers and small- to medium-sized businesses at 18 branches throughout South Carolina.  CapitalBank (formerly known as Greenwood National Bank) opened for business in 1989.

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As of March 4, 2004, we were the survivor of a merger between us and Abbeville Capital Corporation, a South Carolina corporation and the holding company for The Bank of Abbeville, a South Carolina corporation.  Immediately following the merger with Abbeville Capital Corporation, we merged The Bank of Abbeville into CapitalBank.

Market Areas

At December 31, 2009, CapitalBank operated 17 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.

The following table sets forth certain information concerning CapitalBank at December 31, 2009:

	Number of  Locations		Total  Assets		Total  Loans		Total  Deposits
			(Dollars in thousands)
CapitalBank		18	$	748,471	$	568,093	$	584,521

Banking Services

Through CapitalBank, we provide a full range of lending services, including real estate, consumer and commercial loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans. Our primary focus has been on real estate construction loans, commercial mortgage loans and residential mortgage loans. We complement our lending services with a full range of retail and commercial banking products and services, including checking, savings and money market accounts, certificates of deposit, credit card accounts, individual retirement accounts safe deposit accounts, money orders and electronic funds transfer services. Deposits in CapitalBank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is currently $250,000 for each non-retirement depositor and $250,000 for certain retirement-account depositors.  The FDIC’s temporary increase of coverage up to $250,000 from $100,000 for each non-retirement depositor expires on December 31, 2013.  CapitalBank is participating in the FDIC’s Temporary Liquidity Guarantee Program (discussed below in greater detail) which , in part, fully insures non-interest bearing transaction accounts.  In addition to our traditional banking services, we also offer customers trust and fiduciary services. We make discount securities brokerage services available through a third-party brokerage firm 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, 2009 totaled $567.2 million, or 82.6% 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 $509.1 million and constituted approximately 89.8% of our loan portfolio at December 31, 2009.

The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2009.

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Loan Composition

(Dollars in thousands)

	December 31,
	2009			2008			2007			2006			2005
Commercial, financial and agricultural		6.18	%		6.77	%		6.89	%		7.83	%		8.20	%
Real estate:
Construction		25.59			28.89			25.92			24.88			22.90
Mortgage:
Residential		37.85			36.61			39.13			39.08			37.50
Commercial (1)		26.33			24.52			24.00			24.07			26.53
Consumer and other		4.05			3.21			4.06			4.14			4.87
Total loans		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%
Total loans (dollars)	$	567,178		$	641,737		$	645,154		$	573,639		$	465,892
____________ (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.  We do not make any loans to any director or executive officer of CapitalBank unless the loan is approved by the Board of Directors of CapitalBank and is on terms not more favorable than would be available to a person not affiliated with 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.

Real Estate Mortgage Loans.  The principal component of our loan portfolio is loans secured by real estate mortgages.  We obtain a security interest in real estate whenever possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan.  At December 31, 2009, loans secured by first or second mortgages on real estate made up approximately 89.8% of our loan portfolio.

These loans will generally fall into one of four categories: commercial real estate loans, construction and development loans, residential real estate loans, or home equity loans.  Most of our real estate loans are secured by residential or commercial property.  Interest rates for all categories may be fixed or adjustable, and will more likely be fixed for shorter-term loans.  We generally charge an origination fee for each loan.  Other loan fees consist primarily of late charge fees.  Real estate loans are subject to the same general risks as other loans and are particularly sensitive to fluctuations in the value of real estate.  Fluctuations in the value of real estate, as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, credit-worthiness, and ability to repay the loan.

·   Commercial Real Estate Loans.  Commercial real estate loans generally have terms of five years or less, although payments may be structured on a longer amortization basis.  We evaluate each borrower on an individual basis and attempt to determine its business risks and credit profile.  We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 85%.  We generally require that debtor cash flow exceed 115% of monthly debt service obligations.  We typically review all of the personal financial statements of the principal owners and require their personal guarantees.  These reviews generally reveal secondary sources of payment and liquidity to support a loan request.

·   Construction and Development Real Estate Loans.  We offer adjustable and fixed rate residential and commercial construction loans to builders and developers and to consumers who wish to build their own home.  The term of construction and development loans generally is limited to eighteen months, although payments may be structured on a longer amortization basis.  Most loans will mature and require payment in full upon the sale of the property.  We believe that construction and development loans generally carry a higher degree of risk than long term financing of existing properties.  Repayment depends on the ultimate completion of the project and usually on the sale of the property.  Specific risks include:

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·   cost overruns;

·   mismanaged construction;

·   inferior or improper construction techniques;

·   economic changes or downturns during construction;

·   a downturn in the real estate market;

·   rising interest rates which may prevent sale of the property; and

·   failure to sell completed projects in a timely manner.

We attempt to reduce risk by obtaining personal guarantees where possible, and by keeping the loan-to-value ratio of the completed project below specified percentages.  We also may reduce risk by selling participations in larger loans to other institutions when possible.

·   Residential Real Estate Loans and Home Equity Loans.  We do not generally originate traditional long term residential mortgages, but we do issue traditional second mortgage residential real estate loans and home equity lines of credit.  Generally, we limit the loan-to-value ratio on our residential real estate loans to 80%.  We offer fixed and adjustable rate residential real estate loans with terms of up to 30 years.  We typically offer these fixed rate loans through a third party rather than originating and retaining these loans ourselves.  We typically originate and retain residential real estate loans only if they have adjustable rates.  We also offer home equity lines of credit.  Our underwriting criteria and the risks associated with home equity loans and lines of credit are generally the same as those for first mortgage loans.  Home equity lines of credit typically have terms of 15 years or less.  We generally limit the extension of credit to 90% of the available equity of each property, although we may extend up to 100% of the available equity.

Commercial Business Loans.  We make loans for commercial purposes in various lines of businesses.  Commercial loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or if they are secured, the value of the security may be difficult to assess and more likely to decrease than real estate.

Equipment loans typically will be made for a term of five years or less at fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment.  Generally, we limit the loan-to-value ratio on these loans to 80% or less.  Working capital loans typically have terms not exceeding one year and usually are secured by accounts receivable, inventory, or personal guarantees of the principals of the business.  For loans secured by accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash, and in other cases principal will typically be due at maturity.  Trade letters of credit, standby letters of credit, and foreign exchange will generally be handled through a correspondent bank as agent for CapitalBank.

Consumer Loans.  We make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit.  Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral.  Consumer rates are both fixed and variable, with terms negotiable.  Our installment loans typically amortize over periods up to 60 months.  We will offer consumer loans with a single maturity date when a specific source of repayment is available.  We typically require monthly payments of interest and a portion of the principal on our revolving loan products.  Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Deposit Services

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 “Supervision and Regulation.”

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CapitalBank faces increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit unions, consumer finance companies, insurance companies and other institutions in CapitalBank’s market areas.  Some of these competitors are not subject to the same degree of regulation and restriction imposed upon CapitalBank.  Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than CapitalBank and offer certain services that CapitalBank does not currently provide.  In addition, many of these competitors have numerous branch offices located throughout the extended market areas of CapitalBank that we believe may provide these competitors with an advantage in geographic convenience that CapitalBank does not have at present.  Such competitors may also be in a position to make more effective use of media advertising, support services, and electronic technology than can CapitalBank.

Employees

Including the employees of CapitalBank, we currently have in the aggregate 165 full-time employees and 13 part-time employees.

Corporate Information

Our corporate headquarters are located at 1402-C Highway 72 West, Greenwood, South Carolina, 29649, and our telephone number is (864) 941-8200. Our website is located at www.comcapcorp.com. The information on our website is not incorporated by reference into this report.

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that we file at the SEC's public reference facilities at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information regarding the public reference facilities. The SEC maintains a website, www.sec.gov, which contains reports, proxy statements and information statements and other information regarding registrants that file electronically with the SEC, including us. Our SEC filings are also available to the public from commercial document retrieval services.

You may also request a copy of our filings at no cost by writing to us at Community Capital Corporation, P. O. Box 218, Greenwood, South Carolina, 29648, Attention: Ms. Lee Lee M. Lee, Controller/Vice President of Investor Relations, or telephoning us at: (864) 941-8200.

SUPERVISION AND REGULATION

We, along with CapitalBank, are subject to extensive state and federal banking laws and regulations that impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of our operations.  These laws and regulations are generally intended to protect depositors, not shareholders.  The following summary is qualified by reference to the statutory and regulatory provisions discussed.  Changes in applicable laws or regulations may have a material effect on our business and prospects.  Our operations may be affected by legislative changes and the policies of various regulatory authorities.  We cannot predict the effect that fiscal or monetary policies, economic control, or new federal or state legislation may have on our business and earnings in the future.

The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations.  It is intended only to briefly summarize some material provisions.  Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of our entities.

Recent Regulatory Developments

The following is a summary of recently enacted laws and regulations that could materially impact our business, financial condition or results of operations.  This discussion should be read in conjunction with the remainder of the “Supervision and Regulation” section of this Annual Report on Form 10-K.

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Markets in the United States and elsewhere have experienced extreme volatility and disruption over the past two years.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry, due in part to falling home prices and increasing foreclosures and unemployment, have created strains on financial institutions.  Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.  In response to the challenges facing the financial services sector, several regulatory and governmental actions have been announced including:

·   The Emergency Economic Stabilization Act ("EESA"), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase troubled assets from banks, authorized the SEC to suspend the application of marked-to-market accounting, and raised the basic limit of FDIC deposit insurance from $100,000 to $250,000 through  December 31, 2013;

·   On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance;

·   On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Capital Purchase Program, that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable;

·   On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”), which seeks to strengthen confidence and encourage liquidity in the banking system.  The TLGP has two primary components that are available on a voluntary basis to financial institutions:

·   Guarantee of newly-issued senior unsecured debt; the guarantee would apply to new debt issued on or before October 31, 2009 and would provide protection until December 31, 2012; issuers electing to participate would pay a 75 basis point fee for the guarantee; and

·   Unlimited deposit insurance for non-interest bearing deposit transaction accounts; financial institutions electing to participate will pay a 10 basis point premium in addition to the insurance premiums paid for standard deposit insurance.

·   On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan, which earmarked $350 billion of the TARP funds authorized under EESA. Among other things, the Financial Stability Plan includes:

·   A capital assistance program that will invest in mandatory convertible preferred stock of certain qualifying institutions determined on a basis and through a process similar to the Capital Purchase Program;

·   A consumer and business lending initiative to fund new consumer loans, small business loans and commercial mortgage asset-backed securities issuances;

·   A new public-private investment fund that will leverage public and private capital with public financing to purchase up to $500 billion to $1 trillion of legacy “toxic assets” from financial institutions; and

·   Assistance for homeowners by providing up to $75 billion to reduce mortgage payments and interest rates and establishing loan modification guidelines for government and private programs.

·   On February 17, 2009, the American Recovery and Reinvestment Act (the “Recovery Act”) was signed into law in an effort to, among other things, create jobs and stimulate growth in the United States economy.  The Recovery Act specifies appropriations of approximately $787 billion for a wide range of Federal programs and will increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs.  The Recovery Act also reduces individual and corporate income tax collections and makes a variety of other changes to tax laws.  The Recovery Act also imposes certain limitations on compensation paid by participants in the U.S. Treasury's Troubled Asset Relief Program (“TARP”).

·   On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate plans, addressing two distinct asset groups:

·   The first plan is the Legacy Loan Program, which has a primary purpose to facilitate the sale of troubled mortgage loans by eligible institutions, including FDIC-insured federal or state banks and savings associations. Eligible assets are not strictly limited to loans; however, what constitutes an eligible asset will be determined by participating banks, their primary regulators, the FDIC and the U.S. Treasury.  Under the Legacy Loan Program, the FDIC has sold certain troubled assets out of an FDIC receivership in two separate transactions relating to the failed Illinois bank, Corus Bank, NA, and the failed Texas bank, Franklin Bank, S.S.B.  These transactions were completed in September 2009 and October 2009, respectively.

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·   The second plan is the Securities Program, which is administered by the U.S. Treasury and involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements.  The U.S. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine public-private investment fund managers.  As of December 31, 2009, public-private investment funds have completed initial and subsequent closings on approximately $6.2 billion of private sector equity capital, which was matched 100% by the U.S. Treasury representing $12.4 billion of total equity capital.  The U.S. Treasury has also provided $12.4 billion of debt capital, representing $24.8 billion of total purchasing power.  As of December 31, 2009, public-private investment funds have drawn-down approximately $4.3 billion of total capital which has been invested in certain non-agency residential mortgage-backed securities and commercial mortgage backed securities and cash equivalents pending investment.

·   On May 22, 2009, the FDIC levied a one-time special assessment on all banks due on September 30, 2009;

·   On November 12, 2009, the FDIC issued a final rule to require banks to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012 and to increase assessment rates effective on January 1, 2011; and

·   On February 2, 2010, the U.S. President called on the U.S. Congress to create a new Small Business Lending Fund.  Under this proposal, $30 billion in TARP funds would be transferred to a new program outside of TARP to support small business lending.  As proposed, only small- and medium-sized banks would qualify to participate in the program.

As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDIC’s deposit insurance fund, our deposit insurance costs increased significantly in 2009.  We have elected not to participate in the TARP Capital Purchase Program, but will consider participating in similar programs, if any, announced in the future.  Regardless of our lack of participation, governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

Community Capital Corporation

We own 100% of the outstanding capital stock of CapitalBank, and therefore we are considered to be a bank holding company under the federal Bank Holding Company Act of 1956 (the “Bank Holding Company Act”).  As a result, we are primarily subject to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve (the "Federal Reserve") under the Bank Holding Company Act and its regulations promulgated thereunder.  Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act of 1996.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in the following activities:

• banking or managing or controlling banks;

• furnishing services to or performing services for our subsidiaries; and

• any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

• factoring accounts receivable;

• making, acquiring, brokering or servicing loans and usual related activities;

• leasing personal or real property;

• operating a non-bank depository institution, such as a savings association;

• trust company functions;

• financial and investment advisory activities;

• conducting discount securities brokerage activities;

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• underwriting and dealing in government obligations and money market instruments;

• providing specified management consulting and counseling activities;

• performing selected data processing services and support services;

• acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

• performing selected insurance underwriting activities.

As a bank holding company we also can elect to be treated as a “financial holding company,” which would allow us to engage in a broader array of activities.  In summary, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.  We have not sought financial holding company status, but may elect such status in the future as our business matures.  If we were to elect financial holding company status, each insured depository institution we control would have to be well capitalized, well managed, and have at least a satisfactory rating under the Community Reinvestment Act (discussed below).

The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control.  In addition, and subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company.  Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of a bank holding company.  Following the relaxing of these restrictions by the Federal Reserve in September 2008, control will be rebuttably presumed to exist if a person acquires more than 33% of the total equity of a bank or bank holding company, of which it may own, control or have the power to vote not more than 15% of any class of voting securities.

Source of Strength.  In accordance with Federal Reserve Board policy, we are expected to act as a source of financial strength to CapitalBank and to commit resources to support CapitalBank in circumstances in which we might not otherwise do so.  Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of a bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that divestiture may aid the depository institution’s financial condition.  Further, any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and certain other indebtedness of the subsidiary bank.  In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level would be assumed by the bankruptcy trustee and entitled to priority payment.

Capital Requirements.  The Federal Reserve Board imposes certain capital requirements on the bank holding company under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the same as those that apply to CapitalBank and are described below under “CapitalBank.”  Subject to our capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to CapitalBank, and these loans may be repaid from dividends paid from CapitalBank to us.  Our ability to pay dividends depends on CapitalBank's ability to pay dividends to us, which is subject to regulatory restrictions as described below in “CapitalBank – Dividends.”  We are also able to raise capital for contribution to CapitalBank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

South Carolina State Regulation.  As a South Carolina bank holding company under the South Carolina Banking and Branching Efficiency Act of 1996, we are subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions (the "S.C. Board").  We are not required to obtain the approval of the S.C. Board prior to acquiring the capital stock of a national bank, but we must notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior to engaging in the acquisition of a South Carolina state chartered bank or another South Carolina bank holding company.

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CapitalBank

CapitalBank operates as a state-chartered Federal Reserve member bank and is subject to the supervision and regulation of the South Carolina State Board of Financial Institutions and the Federal Reserve Board.  Deposits in CapitalBank are insured by the FDIC up to a maximum amount, which is currently $100,000 for each non-retirement depositor and $250,000 for certain retirement-account depositors.  However, the FDIC has increased the coverage up to $250,000 for each non-retirement depositor through December 31, 2013.  The S.C. Board and the Federal Reserve regulate or monitor virtually all areas of CapitalBank’s operations, including:

• security devices and procedures;

• adequacy of capitalization and loss reserves;

• loans;

• investments;

• borrowings;

• deposits;

• mergers;

• issuances of securities;

• payment of dividends;

• interest rates payable on deposits;

• interest rates or fees chargeable on loans;

• establishment of branches;

• corporate reorganizations;

• maintenance of books and records; and

• adequacy of staff training to carry on safe lending and deposit gathering practices.

The Federal Reserve requires that CapitalBank maintain specified ratios of capital to assets and imposes limitations on CapitalBank’s aggregate investment in real estate, bank premises, and furniture and fixtures.  Two categories of regulatory capital are used in calculating these ratios—Tier 1 capital and total capital.  Tier 1 capital generally includes common equity, retained earnings, a limited amount of qualifying preferred stock, and qualifying minority interests in consolidated subsidiaries, reduced by goodwill and certain other intangible assets, such as core deposit intangibles, and certain other assets.  Total capital generally consists of Tier 1 capital plus Tier 2 capital, which includes the allowance for loan losses, preferred stock that did not qualify as Tier 1 capital, certain types of subordinated debt and a limited amount of other items.

CapitalBank is required to calculate three ratios: the ratio of Tier 1 capital to risk-weighted assets, the ratio of total capital to risk-weighted assets, and the “leverage ratio,” which is the ratio of Tier 1 capital to average assets on a non-risk-adjusted basis. For the two ratios of capital to risk-weighted assets, certain assets, such as cash and U.S. Treasury securities, have a zero risk weighting. Others, such as commercial and consumer loans, have a 100% risk weighting. Some assets, notably purchase-money loans secured by first-liens on residential real property, are risk-weighted at 50%. Assets also include amounts that represent the potential funding of off-balance sheet obligations such as loan commitments and letters of credit. These potential assets are assigned to risk categories in the same manner as funded assets. The total assets in each category are multiplied by the appropriate risk weighting to determine risk-adjusted assets for the capital calculations.

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Prompt Corrective Action.  The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a “prompt corrective action” program in which every bank is placed in one of five regulatory categories, depending primarily on its regulatory capital levels.  The Federal Reserve and the other federal banking regulators are permitted to take increasingly severe action as a bank’s capital position or financial condition declines below the “Adequately Capitalized” level described below.  Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.  The Federal Reserve’s regulations set forth five capital categories, each with specific regulatory consequences.  The categories are:

Ÿ 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.

Ÿ 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 (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating system.

Ÿ 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 CAMELS rating system, a leverage capital ratio of less than 3%.

Ÿ 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%.

Ÿ 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 Federal Reserve determines, after notice and an opportunity for hearing, that CapitalBank is in an unsafe or unsound condition, the regulator is authorized to reclassify CapitalBank 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 CapitalBank is not well capitalized, it cannot accept brokered time deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interests paid on deposits of comparable size and maturity in CapitalBank’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 CapitalBank’s normal market area.  Moreover, if CapitalBank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the Federal Reserve that is subject to a limited performance guarantee by the Company.  CapitalBank 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 CapitalBank to become undercapitalized, it could not pay a management fee or dividend to the Company.

As of December 31, 2009, CapitalBank was deemed to be “well capitalized.”

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Standards for Safety and Soundness.     The Federal Deposit Insurance Act (“FDIA”) also requires the federal banking regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset growth. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits.  The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness to implement these required standards. These guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired.  Under the regulations, if the Federal Reserve determines that CapitalBank fails to meet any standards prescribed by the guidelines, the agency may require CapitalBank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the Federal Reserve.  The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Regulatory Examination.     The Federal Reserve requires CapitalBank to prepare annual reports on its financial condition and to conduct an annual audit of its financial affairs in compliance with its minimum standards and procedures.

All insured institutions must undergo regular on-site examinations by their appropriate banking agency.  The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate federal banking agency against each institution or affiliate as it deems necessary or appropriate.  Insured institutions are required to submit annual reports to the FDIC, their federal regulatory agency, and state supervisor when applicable.  The FDIC has developed a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution.  The federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to the following:

• internal controls;

• information systems and audit systems;

• loan documentation;

• credit underwriting;

• interest rate risk exposure; and

• asset quality.

Insurance of Accounts and Regulation by the FDIC.  CapitalBank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC.  The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the Savings Association Insurance Fund, which were merged effective March 31, 2006.  As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions.  It also may prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the insurance fund.  The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

On October 3, 2008, President George W. Bush signed the EESA of 2008, which temporarily raises the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor.  The temporary increase in deposit insurance coverage became effective immediately upon the President’s signature.  The legislation provides that the basic deposit insurance limit will return to $100,000 on December 31, 2013.

Under regulations effective January 1, 2007, the FDIC adopted a new risk-based premium system that provides for quarterly assessments based on an insured institution’s ranking in one of four risk categories based upon supervisory and capital evaluations.  For deposits held as of March 31, 2009, institutions were assessed at annual rates ranging from 12 to 50 basis points, depending on each institution’s risk of default as measured by regulatory capital ratios and other supervisory measures.  Effective April 1, 2009, assessments also took into account each institution's reliance on secured liabilities and brokered deposits.  This resulted in assessments ranging from 7 to 77.5 basis points.  In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution's total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits.  This special assessment was part of the FDIC's efforts to rebuild the Deposit Insurance Fund.

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.  In December 2009, we paid $ 4.9 million in prepaid risk-based assessments, which included $322,000  related to the fourth quarter of 2009 that would have been otherwise payable in the first quarter of 2010.  This amount is included in deposit insurance expense for 2009.  The remaining $ 4.6 million in prepaid deposit insurance is included prepaid expenses in the accompanying balance sheet as of December 31, 2009.  As a result, we incurred increased insurance costs during 2009 than in previous periods.

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FDIC insured institutions are required to pay a Financing Corporation assessment to fund the interest on bonds issued to resolve thrift failures in the 1980s.  For 2009, the Financing Corporation assessments equaled $72,000 for domestic deposits.  These assessments, which may be revised based upon the level of deposits, will continue until the bonds mature in the years 2017 through 2019.

The FDIC may terminate the deposit insurance of any insured depository institution, including CapitalBank, if it determines after a hearing that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the Federal Reserve.  It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital.  If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.  Management is not aware of any practice, condition or violation that might lead to termination of CapitalBank’s deposit insurance.

Transactions with Affiliates and Insiders. The Company is a legal entity separate and distinct from CapitalBank and its other subsidiaries.  Various legal limitations restrict CapitalBank from lending or otherwise supplying funds to the Company or its non-bank subsidiaries.  The Company and CapitalBank are subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W.  Section 23A of the Federal Reserve Act places limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates.  The aggregate of all covered transactions is limited in amount, as to any one affiliate, to 10% of CapitalBank’s capital and surplus and, as to all affiliates combined, to 20% of CapitalBank’s capital and surplus.  Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements.  CapitalBank is forbidden to purchase low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions 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 nonaffiliated companies.

Regulation W generally excludes all non-bank and non-savings association subsidiaries of banks from treatment as affiliates, except to the extent that the Federal Reserve Board decides to treat these subsidiaries as affiliates. The regulation also limits the amount of loans that can be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.

CapitalBank is also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests.  Such extensions of credit (i) must be made on substantially the same terms, including interest rates, and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features.

Dividends.  The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from CapitalBank.  Statutory and regulatory limitations apply to CapitalBank’s payment of dividends to the Company.  As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years.  A depository institution may not pay any dividend if payment would cause the institution to become undercapitalized or if it already is undercapitalized.  The Federal Reserve may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice.

Branching.  Under current South Carolina law, we may open branch offices throughout South Carolina with the prior approval of the S.C. Board.   In addition, with prior regulatory approval, CapitalBank will be able to acquire existing banking operations in South Carolina.  Furthermore, federal legislation has been passed that permits interstate branching by banks if allowed by state law, and interstate merging by banks.  However, South Carolina law, with limited exceptions, currently permits branching across state lines only through interstate mergers.

Anti-Tying Restrictions.  Under amendments to the Bank Holding Company Act and Federal Reserve regulations, a bank is prohibited from engaging in certain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer obtain or provide some additional credit, property, or services from or to the bank, the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.  Certain arrangements are permissible: a bank may offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products; and certain foreign transactions are exempt from the general rule.  A bank holding company or any bank affiliate also is subject to anti-tying requirements in connection with electronic benefit transfer services.

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Community Reinvestment Act.  The Community Reinvestment Act requires that the Federal Reserve evaluate the record of CapitalBank in meeting the credit needs of its local community, including low and moderate income neighborhoods.  These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.  Failure to adequately meet these criteria could impose additional requirements and limitations on CapitalBank.

Finance Subsidiaries. Under the Gramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposed by their respective banking regulators, national and state-chartered banks are permitted to form “financial subsidiaries” that may conduct financial or incidental activities, thereby permitting bank subsidiaries to engage in certain activities that previously were impermissible.  The GLBA imposes several safeguards and restrictions on financial subsidiaries, including that the parent bank’s equity investment in the financial subsidiary be deducted from the bank’s assets and tangible equity for purposes of calculating the bank’s capital adequacy.  In addition, the GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

Consumer Protection Regulations. Activities of CapitalBank are subject to a variety of statutes and regulations designed to protect consumers.  Interest and other charges collected or contracted for by CapitalBank are subject to state usury laws and federal laws concerning interest rates.  CapitalBank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

• the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer 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, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

• the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; 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; and

• 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.

Enforcement Powers.  CapitalBank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. These practices can include the failure of an institution to timely file required reports or the filing of false or misleading information or the submission of inaccurate reports.  Civil penalties may be as high as $1,000,000 a day for such violations.  Criminal penalties for some financial institution crimes have been increased to twenty years.  In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties.  Possible enforcement actions include the termination of deposit insurance.  Furthermore, banking agencies’ power to issue cease-and-desist orders were expanded.  Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss.  A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.

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Anti-Money Laundering.  Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. The Company and CapitalBank are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money laundering obligations have been substantially strengthened as a result of the USA Patriot Act, enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.

USA PATRIOT Act/Bank Secrecy Act.  The USA PATRIOT Act amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the U.S. Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.

Under the USA PATRIOT Act, the Federal Bureau of Investigation (the “FBI”) can send to the banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities.  CapitalBank can be requested to search its records for any relationships or transactions with persons on those lists.  If CapitalBank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the U.S., as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts.  If CapitalBank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI.  CapitalBank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications.  CapitalBank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files.  CapitalBank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Privacy and Credit Reporting.  Financial institutions are required to disclose their policies for collecting and protecting confidential information.  Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer.  Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.  It is CapitalBank’s policy not to disclose any personal information unless required by law.  The Federal Reserve and the federal banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information.  CapitalBank is subject to such standards, as well as standards for notifying consumers in the event of a security breach.

Like other lending institutions, CapitalBank utilizes credit bureau data in its underwriting activities.  Use of such data is regulated under the Federal Credit Reporting Act on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data.  The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) permits states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act.

Check 21.  The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.  Some of the major provisions include:

• allowing check truncation without making it mandatory;

• demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law;

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• legalizing substitutions for and replacements of paper checks without agreement from consumers;

• retaining in place the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place;

• requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and

• requiring the re-crediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

Effect of Governmental Monetary Policies.  Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The Federal Reserve Bank’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.  The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits.  It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Proposed Legislation and Regulatory Action.  Legislative and regulatory proposals regarding changes in banking, and the regulation of banks, federal savings institutions, and other financial institutions and bank and bank holding company powers are being considered by the executive branch of the federal government, Congress and various state governments. Certain of these proposals, if adopted, could significantly change the regulation or operations of banks and the financial services industry. New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions. On June 17, 2009, the U.S. Treasury released a white paper entitled “Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation” (the “Proposal”) which calls for sweeping regulatory and supervisory reforms for the entire financial sector and seeks to advance the following six key objectives: (i) promote robust supervision and regulation of financial firms, (ii) establish comprehensive supervision of financial markets, (iii) protect consumers and investors from financial abuse, (iv) provide the government with additional powers to monitor systemic risks, supervise and regulate financial products and markets, and to resolve firms that threaten financial stability, and (v) raise international regulatory standards and improve international cooperation.

The Proposal also includes the creation of a new federal agency designed to enforce consumer protection laws. The Consumer Financial Protection Agency (“CFPA”) would have authority to protect consumers of financial products and services and to regulate all providers (bank and non-bank) of such services. The CFPA would be authorized to adopt rules for all providers of consumer financial services, supervise and examine such institutions for compliance, and enforce compliance through orders, fines, and penalties. The rules of the CFPA would serve as a “floor” and individual states would be permitted to adopt and enforce stronger consumer protection laws. If adopted as proposed, we may become subject to multiple laws affecting its provision of loans and other credit services to consumers, which may substantially increase the cost of providing such services.

On February 2, 2010, the U.S. President called on the U.S. Congress to create a new Small Business Lending Fund.  Under this proposal, $30 billion in TARP funds would be transferred to a new program outside of TARP to support small business lending.  As proposed, only small- and medium-sized banks would qualify to participate in the program.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations, and competitive relationships of the nation’s financial institutions.  We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

ITEM 1A. RISK FACTORS.

Our business, financial condition, and results of operations could be harmed by any of the following risks, or other risks that have not been identified or which we believe are immaterial or unlikely.  Shareholders should carefully consider the risks described below in conjunction with other information in this Annual Report on Form 10-K and the information incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.  

The current economic environment has adversely affected our financial condition and results of operations.

There was significant disruption and volatility in the financial and capital markets during 2008 and 2009. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant and rapid deterioration in mortgage lending and related real estate markets. Continued declines in real estate values, high unemployment and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on our borrowers or their customers, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

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As a consequence of the difficult economic environment, we experienced a significant decrease in earnings resulting primarily from increased provisions for loan losses. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve in the near term, in which case we could continue to experience write-downs of assets, and could face capital and liquidity constraints or other business challenges. A further deterioration in economic conditions, particularly within our market areas, could result in the following consequences, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations:

— Loan delinquencies may further increase causing additional increases in our provision and allowance for loan losses.

— Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future charge-offs.

— Collateral for loans made by CapitalBank, especially real estate, may continue to decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.

— Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities and decreased demand for our products and services.

We have sustained losses from a decline in credit quality and may see further losses.

Our ability to generate earnings is significantly affected by our ability to properly originate, underwrite, and service loans.  We have sustained losses primarily because borrowers, guarantors, or related parties have failed to perform in accordance with the terms of their loans and we failed to detect or respond to deterioration in asset quality in a timely manner.  We could sustain additional losses for these reasons.  Problems with credit quality or asset quality could cause our interest income and net interest margin to decrease, which could adversely affect our business, financial condition, and results of operations.  We have recently identified credit deficiencies with respect to certain loans in our loan portfolio which are primarily related to the downturn in the residential housing industry.  As a result of the decline of the residential housing market, property values for this type of collateral have declined substantially.  In response to this determination, we increased our loan loss reserve throughout 2009 to a total loan loss reserve of $14.2 million at December 31, 2009 to address the risks inherent within our loan portfolio.  Recent developments, including further deterioration in the South Carolina real estate market as a whole, may cause management to adjust its opinion of the level of credit quality in our loan portfolio.  Such a determination may lead to an additional increase in our provisions for loan losses, which could also adversely affect our business, financial condition, and results of operations.

A significant portion of our loan portfolio could become under-collateralized due to the real estate market decline, which could have a material adverse effect on our asset quality, capital structure and profitability.

A significant portion of our loan portfolio is comprised of loans secured by either commercial real estate or single family homes that are under construction. As of December 31, 2009, $145.1 million, or 25.6% of our total loans, are classified as Real Estate Construction loans, $149.3 million, or 26.3% of our total loans are classified as Commercial Real Estate loans and $214.7 million, or 37.9% of our total loans, are classified as Mortgage Residential loans. Real Estate Construction loans represent the highest level of risk for the Company due to current real estate and other market conditions and represent 70.3% of our nonperforming loans. So far, other Commercial Real Estate loans have not been as severely impacted by the recent economic downturns. In our Commercial Real Estate loan portfolio, 73.3% of the loans cover owner-occupied real estate which has a lower risk element than non-owner occupied. Owner-occupied commercial real estate generally has a lower risk profile since business owners are obligated to repay the debt and, accordingly, the loan is not dependent on the liquidation of the collateral as the source of repayment. As of December 31, 2009, only 1.1% of the Company’s nonperforming loans are Commercial Real Estate loans. Our Mortgage Residential loans have continued to perform with only moderate increases in delinquencies. Delinquencies of 30 days and over were 8.6% as of December 31, 2009. Mortgage Residential loans past due 30 days or more were only 7.8% of total Mortgage Residential loans outstanding as of December 31, 2009. These Mortgage Residential loans represent 27.5% of our nonperforming loans.

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With the recent real estate market downturn and slowing economic conditions, we are subject to increased lending risks in the form of loan defaults as a result of the high concentration of real estate lending in our loan portfolio. All of our markets have experienced a slowdown in residential real estate sales which has, in turn, increased residential lot and home inventory. The decrease in single-family home sales prices is symptomatic of the increases in inventory we have experienced across our markets. Excess residential lot and home inventory, combined with the limited availability of residential mortgage financing due to tighter credit underwriting standards, has resulted in downward pressure on residential values and increased marketing time for residential properties.

Our decisions regarding credit risk could be inaccurate and our allowance for loan losses may be inadequate, which would materially and adversely affect our business, financial condition, results of operations and future prospects.

Our loan customers may not repay their loans according to the terms of such loans, and the collateral securing the payment of those loans may be insufficient to assure repayment. We may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of the information available. In determining the size of the allowance, we rely on an analysis of our loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information.  Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including:

·   cost overruns;

·   declining property values;

·   mismanaged construction;

·   inferior or improper construction techniques;

·   economic changes or downturns during construction;

·   rising interest rates that may prevent sale of the property; and

·   failure to sell completed projects or units in a timely manner.

As we expand into new markets, our determination of the size of the allowance could be understated due to our lack of familiarity with market-specific factors.

Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the capital our regulators believe is appropriate in light of such risks. While we have reduced our problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.

If our assumptions are wrong, our current allowance may not be sufficient to cover our loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our allowance would materially decrease our net income. Our allowance for loan losses as of December 31, 2009, December 31, 2008, December 31, 2007, and December 31, 2006 was $14.2 million, $13.6 million, $6.8 million and $6.2 million, respectively.

During 2009, nonperforming assets increased  to $48.3 million, or 8.41% of period-end loans and other real estate, which was up from $31.9 million, or 4.94% at December 31, 2008. The increase reflects rapidly deteriorating economic conditions and growing weakness in the residential real estate sector across our markets since the first quarter of 2008. There can be no assurance that we will not experience further increases in nonperforming loans in the future.

As of December 31, 2009, 99.9% of our nonperforming loans were secured by real estate. In evaluating the adequacy of the allowance for loan losses, we obtained updated external appraisals on many of the properties underlying the nonperforming loans or performed internal valuations based on current market conditions. We recorded annualized net charge-offs, as a percentage of average loans, of 5.23% during 2009 compared with 0.38% during 2008.

In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory agencies could have a negative effect on our operating results.

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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, 2009, approximately 89.8% 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.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

FDIC insurance premiums have increased substantially in 2009 already and we expect to pay significantly higher FDIC premiums in the future. Market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised deposit insurance premiums. On May 22, 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, to be collected on September 30, 2009. Additional special assessments may be imposed by the FDIC for future periods. We participate in the FDIC’s TLGP for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP’s noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLGP, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLGP program upon depository institution holding companies, as well. These changes, along with the full utilization of our FDIC insurance assessment credit in early 2009, will cause the premiums and TLGP assessments charged by the FDIC to increase. These actions could significantly increase our noninterest expense in 2009 and for the foreseeable future.

Continuation of the economic downturn in the upstate region of South Carolina could reduce our customer base, our level of deposits, and demand for financial products such as loans.

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.  The current economic downturn has negatively affected the markets in which we operate and, in turn, the quality of our loan portfolio.  If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally remain unfavorable, our business may not succeed.  A continuation of the economic downturn or prolonged recession would likely result in the continued deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business.  Interest received on loans represented approximately 90.3% of our interest income for the year ended December 31, 2009.

If the economic downturn continues or a prolonged economic recession occurs in the economy as a whole, borrowers will be less likely to repay their loans as scheduled.  Moreover, in many cases the value of real estate or other collateral that secures our loans has been adversely affected by the economic conditions and could continue to be negatively affected.  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.

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

We target the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital borrowing capacity than larger entities.  If general economic conditions continue to negatively impact these businesses in the markets in which we operate, our business, financial condition, and results of operation may continue to be adversely affected.

Further disruptions in the global financial markets could adversely affect our results of operations and financial condition.

Since mid-2007, global financial markets have suffered substantial disruption, illiquidity and volatility. These circumstances resulted in significant government assistance to a number of major financial institutions. These events have significantly diminished overall confidence in the financial markets and in financial institutions and have increased the uncertainty we face in managing our business. If these disruptions continue or other disruptions in the financial markets or the global or our regional economic environment arise, they could have an adverse effect on our future results of operations and financial condition, including our liquidity position, and may affect our ability to access capital.

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

As described above under Supervision and Regulation, in response to the challenges facing the financial services sector, a number of regulatory and governmental actions have been enacted or announced.  There can be no assurance that these government actions will achieve their purpose.  The failure of the financial markets to stabilize, or a continuation or worsening of the current financial market conditions, could have a material adverse affect on our business, our financial condition, the financial condition of our customers, our common stock trading price, as well as our ability to access credit.  It could also result in declines in our investment portfolio which could be “other-than-temporary impairments.”

We cannot predict the effect on our operations of recent legislative and regulatory initiatives that were enacted in response to the ongoing financial crisis.

The U.S. federal, state and foreign governments have taken or are considering extraordinary actions in an attempt to deal with the worldwide financial crisis and the severe decline in the global economy. To the extent adopted, many of these actions have been in effect for only a limited time, and have produced limited or no relief to the capital, credit and real estate markets. There is no assurance that these actions or other actions under consideration will ultimately be successful.

In the United States, the federal government has adopted the Emergency Economic Stabilization Act of 2008 (enacted on October 3, 2008), or the EESA, the American Recovery and Reinvestment Act of 2009 (enacted on February 17, 2009), or the ARRA. With authority granted under these laws, the Treasury Department has proposed a financial stability plan that is intended to:

• provide for the government to invest additional capital into banks and otherwise facilitate bank capital formation;

• temporarily increase the limits on federal deposit insurance; and

• provide for various forms of economic stimulus, including to assist homeowners restructure and lower mortgage payments on qualifying loans.

In addition to the EESA and ARRA, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans. President Obama recently announced a proposal to reform the U.S. financial system. Among other things, the plan would create a new consumer protection agency and authorize greater powers for the Federal Reserve Board.

There can be no assurance that the financial stability plan proposed by the Treasury Department and the President’s proposals, or any other legislative or regulatory initiatives enacted or adopted in response to the ongoing economic crisis, will be effective at dealing with the ongoing economic crisis and improving economic conditions globally, nationally or in our markets or that the measures adopted will not have adverse consequences.

Additional valuation allowance of our deferred tax asset would negatively impact our net earnings or loss.

We calculate income taxes in accordance with ASC 740-10, which requires the use of the asset and liability method. In accordance with ASC 740-10, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. At December 31, 2009, our net deferred tax asset was $6.6 million. During 2009, we realized a valuation allowance in the amount of $380,000 for the parent company’s Net Operating Losses (“NOLs”).  Realization of a deferred tax asset requires us to exercise significant judgment and is inherently speculative because it requires the future occurrence of circumstances that cannot be predicted with certainty. If we, or our regulators, determine that an additional valuation allowance of our deferred tax asset is necessary, we would incur a charge to earnings.

Our holding company structure and regulations applicable to us can restrict our ability to provide liquidity to meet our obligations.

Our business operations and related generation of cash flow principally occur in our subsidiary, CapitalBank. Significant parts of our capital markets obligations, including dividends on trust preferred securities and the related debentures, are obligations of the Company. Historically, the Company has relied upon dividends from CapitalBank to fund these types of obligations. At the present time, the Company has limited resources in order to meet such obligations in the absence of payment of dividends from CapitalBank. These resources include a limited amount of cash on hand. In light of these circumstances, we may determine that it is necessary or appropriate to raise capital or seek other financing sources and/or take steps to reduce our cash payment obligations at the holding company level. If the Company is unable to raise additional capital or obtain other financing, the Company may not be able to meet its obligations when due.

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Liquidity risks could affect operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our funding sources include federal funds purchased, securities sold under repurchase agreements, non-core deposits, and short- and long-term debt. We are also members of the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank of Richmond, where we can obtain advances collateralized with eligible assets. We maintain a portfolio of securities that can be used as a secondary source of liquidity.

There are other sources of liquidity available to us or CapitalBank should they be needed, including our ability to acquire additional non-core deposits, the issuance and sale of debt securities, and the issuance and sale of securities in public or private transactions. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Our liquidity, on a parent only basis, is adversely affected by our current inability to receive dividends from CapitalBank without prior regulatory approval. Our ability to borrow could also be impaired by factors that are not specific to us, such as further disruption in the financial markets or negative views and expectations about our prospects or the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

We are required to maintain capital to meet regulatory requirements, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our regulatory requirements, would be adversely affected.

Both the Company and CapitalBank must meet regulatory capital requirements and maintain sufficient liquidity. We also face significant regulatory and other governmental risk as a financial institution. Our ability to raise additional capital, when and if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry and market condition, and governmental activities, many of which are outside our control, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

Our failure to remain “well capitalized” for bank regulatory purposes could affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operation and financial conditions, generally. Under FDIC rules, if CapitalBank ceases to be a “well capitalized” institution for bank regulatory purposes, its ability to accept brokered deposits may be restricted, and the interest rates that it pays may be restricted, both of which could substantially impair our liquidity.

Our cost of funds may increase as a result of general economic conditions, FDIC insurance assessments, interest rates and competitive pressures.

Our cost of funds may increase as a result of general economic conditions, FDIC insurance assessments, interest rates and competitive pressures. We have traditionally obtained funds principally through local deposits and we have a base of lower cost transaction deposits. Generally, we believe local deposits are a cheaper and more stable source of funds than other borrowings because interest rates paid for local deposits are typically lower than interest rates charged for borrowings from other institutional lenders and reflect a mix of transaction and time deposits, whereas brokered deposits typically are higher cost time deposits. Our costs of funds and our profitability and liquidity are likely to be adversely affected, if and to the extent we have to rely upon higher cost borrowings from other institutional lenders or brokers to fund loan demand or liquidity needs, and changes in our deposit mix and growth could adversely affect our profitability and the ability to expand our loan portfolio.

Our directors and executive officers own a significant portion of our common stock and can exert significant control over our business and corporate affairs.

Our directors and executive officers, as a group, beneficially owned approximately 16% of our outstanding common stock, as of December 31, 2009. As a result of their ownership, the directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

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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.

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.

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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.

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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.

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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.  In April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.  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.

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 FDIC 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.

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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, 2009, CapitalBank operated 17 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, 15 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.

In the ordinary course of operations, we may be a party to various legal proceedings from time to time.  We do not believe that there is any pending or threatened proceeding against us, which, if determined adversely, would have a material effect on our business, results of operations, or financial condition.

ITEM 4. (REMOVED AND RESERVED).

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock is traded publicly on the NASDAQ Global Market under the symbol “CPBK”.  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.  

Year	Quarter	High		Low
2009	Fourth	$	3.94	$	2.49
	Third		4.90		2.50
	Second		6.00		4.59
	First		8.49		4.45
2008	Fourth	$	11.00	$	5.85
	Third		11.99		9.05
	Second		15.99		9.30
	First		16.88		14.03

The closing price of our common shares as reported by the NASDAQ Global Market on March 1, 2010 was $2.85 per share.  As of March 1, 2010, there were 9,899,533 shares of our common stock outstanding held by approximately 1,544 shareholders of record.  We did not sell any of our equity securities during fiscal year 2009 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.  In April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.

Year	Declaration Date	Payment Date	Payment Amount
2009	January 28	March 6	$	0.15
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

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 S.C. Board 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 “Supervision and Regulation - CapitalBank Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Annual Report on Form 10-K, and Note 18 to our accompanying financial statements.

Our registration statement on Form S-1 (file no. 333-160430), which was declared effective on August 13, 2009, registered the issuance of  7,272,727 shares of common stock at $2.75 per share to be sold through a rights offering to our shareholders.  On September 21, 2009, we completed the rights offering to our shareholders and certain standby purchasers and issued 3,186,973 shares of common stock.   On September 24, 2009, we offered the remaining 4,085,754 shares not purchased in the rights offering to the public at $2.75 per share.   We completed the public offering on October 31, 2009.  We received net proceeds of $14.1 million after payment of expenses of approximately $679,000.

As of March 1, 2010, we used $13.5 million to capitalize our bank subsidiary, CapitalBank.  The remaining $600,000 is currently invested in a money market account at CapitalBank and will be used for other general corporate purposes.

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ITEM 6.    SELECTED FINANCIAL DATA

Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2009 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,	2009			2008			2007			2006			2005
(Dollars in thousands, except per share)
Income Statement Data:
Interest income	$	36,233		$	43,594		$	49,132		$	40,679		$	30,878
Interest expense		13,867			18,656			25,229			19,625			10,958
Net interest income		22,366			24,938			23,903			21,054			19,920
Provision for loan losses		32,800			9,300			1,025			1,140			825
Net interest income (loss) after provision for loan losses		(10,434	)		15,638			22,878			19,914			19,095
Net securities gains (losses)		224			98			(469	)		(61	)		1,026
Noninterest income		7,548			7,149			6,875			6,028			6,301
Noninterest expense		32,016			20,192			19,257			18,104			16,849
Income (loss) before income taxes		(34,678	)		2,693			10,027			7,777			9,573
Income tax expense (benefit)		(9,433	)		284			3,139			2,018			2,479
Net income (loss)	$	(25,245	)	$	2,409		$	6,888		$	5,759		$	7,094
Balance Sheet Data:
Assets	$	749,442		$	790,600		$	800,598		$	713,244		$	598,790
Earning assets		686,443			733,539			727,367			648,450			542,199
Securities (1)		79,172			89,858			81,315			73,949			75,887
Loans (2)		568,281			642,040			645,785			574,193			466,281
Allowance for loan losses		14,160			13,617			6,759			6,200			6,324
Deposits		583,483			513,601			520,072			486,956			433,646
Federal Home Loan Bank advances		95,400			161,185			135,525			105,625			57,225
Shareholders’ equity		53,757			64,957			64,847			58,926			54,505
Per Share Data: (3)
Basic earnings (loss) per share	$	(4.34	)	$	0.54		$	1.58		$	1.34		$	1.63
Diluted earnings (loss) per share		(4.34	)		0.54			1.56			1.31			1.58
Book value (period end) (4)		5.44			14.54			14.72			13.52			12.72
Tangible book value (period end) (4)		5.27			12.41			12.46			11.13			10.17
Cash dividends per share		0.15			0.60			0.54			0.52			0.50
Performance Ratios:
Return on average assets		(3.28	)%		0.30	%		0.91	%		0.87	%		1.24	%
Return on average equity		(40.26	)		3.69			11.09			10.05			12.74
Net interest margin (5)		3.18			3.48			3.52			3.59			3.95
Efficiency (6)		105.37			61.91			61.54			65.61			63.17
Allowance for loan losses to loans		2.50			2.12			1.05			1.08			1.36
Net charge-offs to average loans		5.23			0.38			0.08			0.24			0.07
Nonperforming assets to period end assets (7)		6.67			4.04			0.32			0.26			0.37
Capital and Liquidity Ratios:
Average equity to average assets		8.10			8.25			8.20			8.66			9.77
Leverage (4.00% required minimum)		8.21			8.44			8.33			8.46			7.68
Tier 1 risk-based capital ratio		10.88			10.43			10.05			10.03			9.24
Total risk-based capital ratio		12.15			11.69			11.10			11.09			10.49
Average loans to average deposits		112.23			124.85			120.46			110.96			101.75

____________

(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.

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Selected Financial Data - continued

(Dollars in thousands	2009 Quarter ended											2008 Quarter ended
except per share)	Dec. 31			Sept. 30			June 30			Mar. 31		Dec. 31		Sept. 30		June 30		Mar. 31
Net interest income	$	5,277		$	5,381		$	5,757		$	5,952	$	6,318	$	5,995	$	6,422	$	6,203
Provision for loan losses		1,000			24,000			5,800			2,000		3,700		1,100		2,500		2,000
Noninterest income		1,981			1,868			2,238			1,862		1,722		1,851		1,816		1,858
Noninterest expense		7,117			13,300			7,022			4,753		4,647		5,140		5,329		5,076
Net income (loss)		(1,382	)		(21,785	)		(2,941	)		863		5		1,196		427		781
Basic earnings (loss) per share		(0.15	)		(4.35	)		(0.66	)		0.19		0.00		0.27		0.10		0.18
Diluted earnings (loss) per share		(0.15	)		(4.35	)		(0.66	)		0.19		0.00		0.27		0.10		0.18

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 on Form 10-K.  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 on Form 10-K.

General

We are a South Carolina bank holding company headquartered in Greenwood, South Carolina with 18 banking offices located in 13 different cities throughout South Carolina. Since our formation in 1988, we have grown in our core markets through organic growth, and to expand our market presence from central South Carolina to the upstate region of South Carolina, we have made selective acquisitions and formed de novo banking operations.  We continuously evaluate our branch network to determine how to best serve our customers efficiently and to improve our profitability.

We operate a general commercial and retail banking business through our bank subsidiary, CapitalBank, which we also refer to as our Bank. We believe our commitment to quality and personalized banking services is a factor that contributes to our competitiveness and success. Through CapitalBank, we provide a full range of lending services, including real estate, consumer and commercial loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans. Our primary focus has been on real estate construction loans, commercial mortgage loans and residential mortgage loans. We complement our lending services with a full range of retail and commercial banking products and services, including checking, savings and money market accounts, certificates of deposit, credit card accounts, individual retirement accounts safe deposit accounts, money orders and electronic funds transfer services. In addition to our traditional banking services, we also offer customers trust and fiduciary services. We make discount securities brokerage services available through a third-party brokerage service that has contracted with CapitalBank.

Like most community banks, we derive the majority of our income from interest we receive on our loans and investments.  Our primary source of funds for making these loans and investments is our deposits, on which we pay interest.  Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income earned on our interest-earning assets, such as loans and investments, and the expense cost of our interest-bearing liabilities, such as deposits.  Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

We have included a number of tables to assist in our description of these measures.  For example, the “Average Balances” table shows the average balance during 2009 and 2008 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category.  A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio.  We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included a table to help explain this.  Finally, we have included a number of tables that provide detail about our investment securities, our loans, and our deposits and other borrowings.

There are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible.  We establish and maintain this allowance by charging a provision for loan losses against our operating earnings.  In the following section we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers.  We describe the various components of this non-interest income, as well as our non-interest expenses, in the following discussion.

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Markets in the United States and elsewhere have experienced extreme volatility and disruption for more than 24 months.  These circumstances have exerted significant downward pressure on prices of equity securities and virtually all other asset classes, and have resulted in substantially increased market volatility, severely constrained credit and capital markets, particularly for financial institutions, and an overall loss of investor confidence.  Loan portfolio performances have deteriorated at many institutions resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting their loans.  Dramatic slowdowns in the housing industry with falling home prices and increasing foreclosures and unemployment have created strains on financial institutions.  Many borrowers are now unable to repay their loans, and the collateral securing these loans has, in some cases, declined below the loan balance.  The following discussion and analysis describes our performance in this challenging economic environment.

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in this report.

Results of Operations

Year ended December 31, 2009, compared with year ended December 31, 2008

Net interest income decreased $2,572,000, or 10.31%, to $22.4 million in 2009 from $24.9 million in 2008.  Average earning assets decreased $14.7 million, or 2.02%, and average interest bearing liabilities decreased $45.5 million, or 7.00%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 2.83% and 3.18%, respectively, in 2009 compared to 3.17% and 3.48% in 2008.  Yields on earning assets decreased from 6.04% in 2008 to 5.12% in 2009, and yields on interest-bearing liabilities decreased from 2.87% in 2008 to 2.29% in 2009.

The provision for loan losses was $32.8 million in 2009 compared to $9.3 million in 2008.  Our allowance for loan losses was $14.2 million, which represented 2.50% of total loans outstanding at December 31, 2009.  Our nonperforming loans totaled $42.8 million at December 31, 2009 compared to $26.8 million at December 31, 2008.  We also had $72.0 million in impaired loans at December 31, 2009, $30.8 million of which were still accruing interest.  Criticized and classified loans have decreased from $107.3 million at December 31, 2008 to $83.6 million at December 31, 2009.  We diligently monitor and manage our loan portfolio to identify problem loans at the earliest possible point.  As the economy deteriorated during 2008 and 2009, we aggressively rated any credits with signs of deterioration in quality, which resulted in the increase in criticized and classified loans and heightened provision expense.  Total loans decreased $74.5 million during 2009, or 11.62%, to $567.2 million at December 31, 2009 from $641.7 million at December 31, 2008.

We incurred a goodwill impairment charge of $7.4 million in 2009, compared to no charges for the same period in 2008.  We reevaluated our goodwill impairment testing as of December 31, 2009.   Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of our testing indicated the need for this charge.  We realized an increase in FDIC banking assessments of $1.5 million, or 444.74%, to $1.9 million in 2009 from $342,000 in 2008.  The increase was primarily resulting from increases in FDIC insurance premiums and a one-time FDIC insurance assessment of $375,000, due to the recession of the U.S. economy and the recent failure of several unaffiliated FDIC-insured depository institutions.  We incurred one-time expenses of $896,000 during 2009 associated with the early termination of FHLB borrowings.  We incurred $3.2 million in expenses associated with write downs on other real estate owned during 2009, compared to $409,000 during 2008.  The increase is due to our increase in foreclosures and significant continued declines in fair values of real estate.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2009 and 2008 under the heading “Noninterest Income and Expense” located in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The combination of the above factors resulted in net losses of $25,245,000 for 2009, compared to net income of $2,409,000 for 2008, a decrease of $27,654,000.  Basic earnings (loss) per share was $(4.34) in 2009, compared to $0.54 in 2008.  Diluted earnings (loss) per share was $(4.34) in 2009, compared to $0.54 in 2008.  Return on average assets during 2009 was (3.28)% compared to 0.30% during 2008, and return on average equity was (40.26)% during 2009 compared to 3.69% during 2008.

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.

31

Net Interest Income - continued

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 2009 and 2008.  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.

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,	2009							2008
(Dollars in thousands)	Average Balance			Income/Expense		Yield/Rate		Average Balance			Income/Expense		Yield/Rate
Assets:
Earning Assets:
Loans(1)(3)	$	617,311		$	32,753	5.31	%	$	649,454			39,754	6.12	%
Securities, taxable(2)		46,768			2,254	4.82			41,906			2,189	5.22
Securities, nontaxable(2)(3)		23,806			1,461	6.14			29,289			1,772	6.05
Nonmarketable equity
securities		6,111			147	2.41			9,959			404	4.06
Federal funds sold
and other		22,224			51	0.23			350			6	1.71
Total earning assets		716,220			36,666	5.12			730,958			44,125	6.04
Cash and due from banks		11,187							15,571
Premises and equipment		16,682							17,394
Other assets		47,762							35,707
Allowance for loan losses		(17,186	)						(8,691	)
Total assets	$	774,665						$	790,939
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction
accounts	$	192,222			1,615	0.84	%	$	224,924		$	2,902	1.29	%
Savings deposits		40,125			655	1.63			36,656			835	2.28
Time deposits		218,675			5,624	2.57			190,888			7,098	3.72
Other short-term borrowings		17,901			57	0.32			44,610			1,061	2.38
Federal Home Loan Bank
advances		125,569			5,190	4.13			142,936			6,034	4.22
Junior subordinate debt		10,310			726	7.04			10,310			726	7.04
Total interest-bearing
liabilities		604,802			13,867	2.29			650,324			18,656	2.87
Demand deposits		99,013							67,711
Accrued interest and other
liabilities		8,139							7,643
Shareholders’ equity		62,711							65,261
Total liabilities and
shareholders’ equity	$	774,665						$	790,939
Net interest spread						2.83	%						3.17	%
Net interest income	$	22,799						$	25,469
Net interest margin						3.18	%						3.48	%

____________

(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.

32

Net Interest Income - continued

Our tax-effected net interest spread and net interest margin were 2.83% and 3.18%, respectively, for the year ended December 31, 2009, compared to 3.17% and 3.48%, respectively, for the year ended December 31, 2008.  The decline in net interest margin was primarily due to our increased level of nonaccrual loans and our desire to maintain cash liquidity.  For the year ended December 31, 2009, earning assets averaged $716.2 million compared to $731.0 million for the year ended December 31, 2008.  Interest earning assets exceeded interest bearing liabilities by $111.4 million and $80.6 million for the years ended December 31, 2009, and 2008, respectively.

For the year ended December 31, 2009, our tax-effected net interest income, the major component of our net income, was $22.8 million compared to $25.5 million for the year ended December 31, 2008.  The average rate realized on interest-earning assets decreased to 5.12% at December 31, 2009, from 6.04% at December 31, 2008, while the average rate paid on interest-bearing liabilities decreased to 2.29% at December 31, 2009, from 2.87% at December 31, 2008.

Our tax-effected interest income for the year ended December 31, 2009 was $36.7 million, which consisted of $32.8 million on loans, $3.9 million on investments, and $51,000 on interest bearing deposits with correspondent banks.  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.  Interest on loans for the years ended December 31, 2009 and 2008, represented 89.33% and 90.09%, respectively, of total interest income, while interest on investments and interest bearing deposits with correspondent banks for the years ended December 31, 2009 and 2008 represented 10.67% and 9.89%, 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 86.19% and 88.85% of average earning assets for the years ended December 31, 2009 and December 31, 2008, respectively.

Interest expense for the year ended December 31, 2009 was $13.9 million, which consisted of $7.9 million related to deposits and $6.0 million related to other borrowings.  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 on deposits for the years ended December 31, 2009 and December 31, 2008 represented 56.93% and 58.08%, respectively, of total interest expense, while interest expense on borrowings for the years ended December 31, 2009 and December 31, 2008, represented 43.07% and 41.92%, respectively.  Average interest bearing deposits represented 74.57% and 69.58% of average interest bearing liabilities for the years ended December 31, 2009 and December 31, 2008, 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 2009 to 2008.

Analysis of Changes in Net Interest Income

	2009 Compared With 2008										2008 Compared With 2007
	Variance Due to										Variance Due to
(Dollars in thousands)	Volume (1)				Rate (1)			Total			Volume (1)				Rate (1)			Total
Earning Assets
Loans		$	(1,897	)	$	(5,104	)	$	(7,001	)		$	2,620		$	(8,162	)	$	(5,542	)
Securities, taxable			242			(177	)		65				(125	)		195			70
Securities, nontaxable			(336	)		25			(311	)			121			(20	)		101
Nonmarketable equity securities			(125	)		(132	)		(257	)			55			(185	)		(130	)
Federal funds sold and other			54			(9	)		45				(3	)		(12	)		(15	)
Total interest income			(2,062	)		(5,397	)		(7,459	)			2,668			(8,184	)		(5,516	)
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts			(379)			(908	)		(1,287	)			168			(3,670	)		(3,502	)
Savings accounts			74			(254	)		(180	)			(44	)		(150	)		(194	)
Time deposits			931			(2,405	)		(1,474	)			211			(2,171	)		(1,960	)
Total interest-bearing deposits			626			(3,567	)		(2,941	)			335			(5,991	)		(5,656	)
Other short-term borrowings			(410	)		(594	)		(1,004	)			(60	)		(1,180	)		(1,240	)
Federal Home Loan Bank advances			(720	)		(124	)		(844	)			845			(520	)		325
Junior subordinate debt			-			-			-				-			(2	)		(2	)
Total interest expense			(504)			(4,285	)		(4,789	)			1,120			(7,693	)		(6,573	)
Net interest income		$	(1,558	)	$	(1,112	)	$	(2,670	)		$	1,548		$	(491	)	$	1,057

 __________

(1) Volume-rate changes have been allocated to each category based on the percentage of the total change.

33

Net Interest Income - continued

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.

The following table sets forth our interest rate sensitivity at December 31, 2009.

Interest Sensitivity Analysis

													Greater
				After One			After Three						Than One
	Within			Through			Through			Within			Year
December 31, 2009	One			Three			Twelve			One			or Non-
(Dollars in thousands)	Month			Months			Months			Year			Sensitive			Total
Assets
Earning assets:
Loans(1)	$	107,126		$	18,042		$	60,299		$	185,467		$	341,650		$	527,117
Securities		-			211			860			1,071			78,101			79,172
Federal funds sold and other		38,990			-			-			38,990			-			38,990
Total earning assets		146,116			18,253			61,159			225,528			419,751			645,279
Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits		190,613			-			-			190,613			-			190,613
Savings deposits		42,280			-			-			42,280			-			42,280
Time deposits		35,941			30,119			132,860			198,920			39,337			238,257
Total interest-bearing deposits		268,834			30,119			132,860			431,813			39,337			471,150
Other short-term borrowings		-			-			-			-			-			-
Federal Home Loan Bank advances		-			-			-			-			95,400			95,400
Junior subordinated debentures		-			-			-			-			10,310			10,310
Total interest-bearing liabilities		268,834			30,119			132,860			431,813			145,047			576,860
Period gap	$	(122,718	)	$	(11,866	)	$	(71,701	)	$	(206,285	)	$	274,704
Cumulative gap	$	(122,718	)	$	(134,584	)	$	(206,285	)	$	(206,285	)	$	68,419
Ratio of cumulative gap to total
earning assets		(19.02	%)		(20.86	%)		(31.97	%)		(31.97	%)		10.60	%

(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.

34

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 increase in the level of nonaccrual loans and the desire to maintain cash liquidity.  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.  The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio.  We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits.  The Board of Directors reviews and approves the appropriate level for CapitalBank’s allowance for loan losses quarterly based upon management’s recommendations, the results of the internal monitoring and reporting system, analysis of economic conditions in our 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 periodically made to maintain the allowance at an appropriate level based on our analysis of the potential risk in the loan portfolio.  Loan losses, which include write downs and charge offs, 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 overall portfolio quality through observable trends in delinquency, charge offs, and general and economic conditions in the service area.  Risks are inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

In developing our ASC 450-20 general reserve estimate, we have segmented the loan portfolio into 10 risk categories: consumer loans, home equity lines, overdraft protection lines, 1-4 residential loans, commercial loans, commercial real estate loans, cash secured loans, mortgages held for resale, government guaranteed portions of loans, and demand deposit account (“DDA”) overdrafts.  Loss experience on each of the risk categories is compiled over the previous three-year period.  From this segmentation, we have identified several homogeneous pools and applied the corresponding three-year loss factor for the reserve allocation.  The homogeneous pools we have identified include consumer installment loans, home equity lines of credit, overdraft protection lines, cash secured loans, mortgages held for resale, government guaranteed portions of loans, and DDA overdrafts in excess of 60 days.  The remaining segments of the loan portfolio, which include 1-4 residential loans, commercial loans, and commercial real estate loans, are analyzed with the entire loan portfolio for progressions through our risk rating system.  We then apply the results generated from the three-year historical loss migration analysis to each of these segments.  When a particular loan is identified as impaired, it is removed from the corresponding segment and individually analyzed and measured for specific reserve allocation.

Qualitative and environmental factors include external risk factors that we believe are representative of our overall lending environment.  We have identified the following factors in establishing a more comprehensive system of controls in which we can monitor the quality of the loan portfolio:

·   Portfolio risk

·   Loan policy, procedures and monitoring risk

·   National and local economic trends and conditions

·   Concentration risk

·   Acquisition and development loan portfolio risks

·   Impaired loan portfolio additional risks

35

Provision and Allowance for Loan Losses - continued

Certain problem loans are reviewed individually for impairment.  An impaired loan may not represent an expected loss; however a loan is considered 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.  In determining if a loan is impaired, the bank considers all non-accrual loans, loans whose terms are modified in a troubled debt restructuring, and any other loan that is individually evaluated and determined to be impaired based on risk ratings and loan amounts of certain segments of the bank’s loan portfolio.  If a loan is individually evaluated and identified as impaired, it is measured by using either the fair value of the collateral, less expected costs to sell, present value of expected future cash flows, discounted at the loans effective interest rate, or observable market price of the loan.  Management chooses a method on a loan-by-loan basis.  Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from those estimates.

Total provision expense for the year ended December 31, 2009 was $32.8 million, compared to $9.3 million for the year ended December 31, 2008. The increase in provision expense during 2009 was primarily due to the decrease in market valuations on nonaccrual and impaired loans.  Additionally, the increase in provision was due to the increase in net charge offs to $32.2 million for the year ended December 31, 2009 compared to $2.4 million for the year ended December 31, 2008.  The allowance for loan losses was 2.50% of total loans at December 31, 2009 compared to 2.12% at December 31, 2008.

Based on present information and an ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio.  However, underlying assumptions may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which was not known to management at the time of the issuance of the Company’s consolidated financial statements.  Therefore, management’s assumptions may or may not prove valid.  Thus, there can be 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, especially considering the overall weakness in the real estate market in our market areas.  Additionally, no assurance can be given that management’s ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus adversely impacting the Company’s business, financial condition, results of operations, and cash flows.

Please see our risk factors that appear in Part I – Item 1A – Risk Factors of this Annual Report on Form 10-K.

36

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

 (Dollars in thousands)

Year Ended December 31,	2009			2008			2007			2006			2005
Total loans outstanding at end of year	$	567,178		$	641,737		$	645,154		$	573,639		$	465,892
Average loans outstanding	$	617,311		$	649,454		$	612,366		$	522,521		$	439,266
Balance of allowance for loan losses
at beginning of period	$	13,617		$	6,759		$	6,200		$	6,324		$	5,808
Allowance for loan losses from acquisitions		-			-			-			-			-
Loan losses:
Commercial and industrial		312			122			65			500			54
Real estate - mortgage		31,915			2,356			344			811			185
Consumer		83			96			140			120			155
Total loan losses		32,310			2,574			549			1,431			394
Recoveries of previous loan losses:
Commercial and industrial		3			1			21			42			41
Real estate - mortgage		28			109			18			71			3
Consumer		22			22			44			54			41
Total recoveries		53			132			83			167			85
Net loan losses		32,257			2,442			466			1,264			309
Provision for loan losses		32,800			9,300			1,025			1,140			825
Balance of allowance for loan losses
at end of period	$	14,160		$	13,617		$	6,759		$	6,200		$	6,324
Allowance for loan losses to period end loans		2.50	%		2.12	%		1.05	%		1.08	%		1.36	%
Net charge offs to average loans		5.23	%		0.38	%		0.08	%		0.24	%		0.07	%

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

Nonperforming Assets

	December 31,
(Dollars in thousands)	2009			2008			2007			2006			2005
Nonaccrual loans	$	41,163		$	26,827		$	2,424		$	1,716		$	2,128
Other real estate owned		7,165			5,121			173			107			93
Total nonperforming assets	$	48,328		$	31,948		$	2,597		$	1,823		$	2,221
Loans 90 days or more past due and
still accruing interest	$	1,662		$	696		$	115		$	489		$	223
Impaired loans still accruing interest	$	30,793		$	80,599		$	-		$	-		$	-
Nonperforming assets to period end assets		6.45	%		4.04	%		0.32	%		0.26	%		0.37	%

 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 $48.3 million at December 31, 2009 and $31.9 million at December 31, 2008.  This amount consists primarily of nonaccrual loans that totaled $41.2 million and $26.8 million at December 31, 2009 and 2008, respectively.  Nonperforming assets were 8.52% of total loans at December 31, 2009.  The allowance for loan losses to period end nonperforming assets was 29.30% at December 31, 2009.  A significant portion, or 99.9%, of nonperforming loans at December 31, 2009 were secured by real estate.  We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses.  However, the recent downturn in the real estate market has resulted in increased loan delinquencies, defaults and foreclosures, and we believe that these trends are likely to continue.  In some cases, this downturn has resulted in a significant impairment to the value of the collateral used to secure these loans and the ability to sell the collateral upon foreclosure.  These conditions have adversely affected our loan portfolio.  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.  If real estate

37

Provision and Allowance for Loan Losses - continued

values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.  If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, this could materially reduce our profitability and adversely affect our financial condition.

Potential Problem Loans.  At December 31, 2009, through our internal review mechanisms, we had identified $18.7 million of criticized loans and $64.8 million of classified loans.  The results of this internal review process are the primary determining factor in our assessment of the adequacy of the allowance for loan losses.

Our criticized loans decreased from $31.2 million at December 31, 2008 to $18.7 million at December 31, 2009.  Total classified loans decreased from $76.1 million at December 31, 2008 to $64.8 million at December 31, 2009.  The $23.8 million decrease in criticized and classified loans from December 31, 2008 to December 31, 2009 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 $525,000, or 7.24%, to $7.8 million in 2009 from $7.2 million in 2008. Service charges on deposit accounts decreased $179,000, or 7.18%, to $2.3 million in 2009 from $2.5 million in 2008.  Gains on sales of loans held for sale increased $311,000, or 27.30%, to $1.5 million in 2009 from $1.1 million in 2008.  Income from fiduciary activities decreased $102,000, or 5.91%, to $1.6 million in 2009 from $1.7 million in 2008.  The decrease is primarily a result of the decline in the market value of assets under management.  However, we have continued to increase the number of customer accounts during this period of significant market disruption.  Commissions on the sale of mutual funds increased $83,000, or 46.11%, to $263,000 in 2009 compared to $180,000 in 2008.  There were no gains on the sales of premises and equipment in 2009 compared to a gain of $6,000 in 2008.  Gains on the sales of securities available for sale were $224,000 in 2009 compared to $98,000 in 2008.  Other operating income increased $292,000, or 18.17%, to $1.9 million in 2009 from $1.6 million in 2008.

The following table sets forth, for the periods indicated, the principal components of noninterest income:

Noninterest Income

	Year ended December 31,
(Dollars in thousands)	2009		2008		2007
Service charges on deposit accounts	$	2,313	$	2,492	$	2,425
Gain on sale of loans held for sale		1,450		1,139		1,204
Commissions from sales of mutual funds		263		180		261
Income from fiduciary activities		1,623		1,725		1,590
Gain on sale of premises and equipment		-		6		15
Gain on sales securities available for sale		224		98		-
Income from Bank Owned Life Insurance		781		780		744
Other income		1,118		827		636
Total noninterest income	$	7,772	$	7,247	$	6,875

Noninterest Expense.  Noninterest expense increased $11.8 million, or 58.56%, to $32.0 million in 2009 from $20.2 million in 2008.  The primary component of noninterest expense was salaries and employee benefits, which decreased $464,000, or 4.28%, to $10.4 million in 2009 from $10.9 million in 2008.  Net occupancy expense was $1.3 million in 2009 compared to $1.3 million in 2008, and furniture and equipment expense was $875,000 in 2009 compared to $975,000 in 2008.  During 2009, we realized a loss on the sale of premises and equipment in the amount of $38,000, compared to a gain of $6,000 in 2008.  Total amortization of intangible assets decreased $22,000, or 4.89%, to $427,000 in 2009 compared to $449,000 in 2008.  We incurred a goodwill impairment charge of $7.4 million in 2009 compared to no charges for the same period in 2008.  We reevaluated our goodwill impairment testing as of December 31, 2009.   Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of our testing indicated the need for this charge.  We realized an increase in FDIC banking assessments of $1.5 million, or 444.74%, to $1.9 million in 2009 from $342,000 in 2008.  The increase was primarily resulting from increases in FDIC insurance premiums and a one-time FDIC insurance assessment of $375,000, due to the recession of the U.S. economy and the recent failure of several unaffiliated FDIC-insured depository institutions.  We incurred one-time expenses of $896,000 during 2009 associated with the early termination of FHLB borrowings.  We incurred $3.2 million in expenses associated with write downs on other real estate owned during 2009, compared to $233,000 during 2008.  The increase is due to our increase in foreclosures and significant continued declines in fair values of real estate.  Other operating expenses decreased $462,000 or 17.02%, to $2.3 million in 2009 from $2.7 million in 2008.  Effective July 1, 2009, we eliminated bank and holding company director fees, which has resulted in cost savings.  We intend to continue our efforts in controlling and eliminating noninterest expenses.  Our efficiency ratio was 105.37% in 2009 compared to 61.91% in 2008.

38

Noninterest Income and Expense - continued

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

Noninterest Expense

	Year Ended December 31,
(Dollars in thousands)	2009			2008			2007
Salaries and employee benefits	$	10,389		$	10,853		$	11,087
Net occupancy expense		1,298			1,316			1,162
Furniture and equipment expense		875			975			888
Amortization of intangible assets		427			449			470
Goodwill impairment		7,418			-			-
Director and committee fees		184			347			299
Data processing and supplies		1,608			1,568			1,340
Mortgage loan department expenses		307			246			212
FDIC banking assessments		1,863			342			58
Professional fees and services		461			457			501
Postage and freight		191			204			210
Supplies		242			310			309
Telephone expenses		323			353			370
Loss on sale of premises and equipment		38			-			-
Loss on securities available for sale		-			-			469
Write downs on other real estate owned		3,243			409			-
Prepayment penalties on FHLB borrowings		896			-			-
Other		2,253			2,363			2,351
Total noninterest expense	$	32,016		$	20,192		$	19,726
Efficiency ratio		105.37	%		61.91	%		61.54	%

 Income Taxes.  Our income tax benefit was $9.4 million for 2009 compared to income tax expense of $284,000 for 2008.  Our effective tax rate was 27.20% and 10.55% in 2009 and 2008, respectively.  The decline in the effective tax rate resulted from a lower percentage of pretax income being derived from tax free sources.

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 $617.3 million in 2009 compared to $649.5 million in 2008, a decrease of $32.2 million, or 4.95%.  At December 31, 2009, total loans were $567.2 million compared to $641.7 million at December 31, 2008.  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,	2009						2008						2007						2006						2005
(Dollars in				Percent						Percent						Percent						Percent						Percent
thousands)	Amount			of Total			Amount			of Total			Amount			of Total			Amount			of Total			Amount			of Total
Commercial
and industrial	$	35,082			6.18	%	$	43,442			6.77	%	$	44,467			6.89	%	$	44,910			7.83	%	$	38,180			8.20	%
Real estate
Construction		145,130			25.59			185,414			28.89			167,180			25.92			142,694			24.88			106,704			22.9
Mortgage -
residential		214,655			37.85			234,920			36.61			252,461			39.13			224,175			39.08			174,698			37.5
Mortgage-
nonresidential		149,325			26.33			157,367			24.52			154,834			24.00			138,071			24.07			123,603			26.53
Consumer and
other		22,986			4.05			20,594			3.21			26,212			4.06			23,789			4.14			22,707			4.87
Total loans		567,178			100.00	%		641,737			100.00	%		645,154			100.00	%		573,639			100.00	%		465,892			100.00	%
Allowance for
loan losses		(14,160	)					(13,617	)					(6,759	)					(6,200	)					(6,324	)
Net loans	$	553,018					$	628,120					$	638,395					$	567,439					$	459,568

39

Earning Assets - continued

The principal component of our loan portfolio is real estate mortgage loans.  At December 31, 2009, real estate mortgage loans, which consist of first and second mortgages on single or multi-family residential dwellings, loans secured by commercial and industrial real estate, and other loans secured by multi-family properties and farmland,  totaled $364.0 million and represented 64.18% of the total loan portfolio, compared to $392.3 million, or 61.13% of the loan portfolio, at December 31, 2008.

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.

Real estate construction loans decreased $40.3 million, or 21.73%, to $145.1 million at December 31, 2009, from $185.4 million at December 31, 2008.  Residential mortgage loans, which is the largest category of our loans, decreased $20.3 million, or 8.63%, to $214.7 million at December 31, 2009, from $234.9 million at December 31, 2008.  Residential real estate loans consist of first and second mortgages on single or multi-family residential dwellings.  Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, decreased $8.0 million or 5.11%, to $149.3 million at December 31, 2009 from $157.4 million at December 31, 2008.

Commercial and industrial loans decreased $8.4 million, or 19.24%, to $35.1 million at December 31, 2009, from $43.4 million at December 31, 2008.

Consumer and other loans increased $2.4 million, or 11.62%, to $23.0 million at December 31, 2009, from $20.6 million at December 31, 2008.

Our loan portfolio reflects the diversity of our markets.  Our 17 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.  Due to the current economic downturn, all contractual maturities may not parallel actual payoffs due to the inability of borrowers to repay their loans.  The following table sets forth our loans maturing within specified intervals at December 31, 2009.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

			Over
			One Year
December 31, 2009	One Year		Through		Over Five
(Dollars in thousands)	or Less		Five Years		Years		Total
Commercial and industrial	$	24,351	$	9,346	$	3,764	$	37,461
Real estate		197,244		267,892		56,890		522,026
Consumer and other		1,623		5,735		333		7,691
	$	223,218	$	282,973	$	60,987	$	567,178
Loans maturing after one year with:
Fixed interest rates							$	303,124
Floating interest rates								40,836
							$	343,960

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.

40

Earning Assets - continued

Investment Securities.  The investment securities portfolio is a significant component of our total earning assets.  Total securities averaged $76.7 million in 2009, compared to $81.1 million in 2008.  At December 31, 2009, the total securities portfolio was $79.2 million, a decrease of $10.7 million, or 11.89% over total securities of $89.9 million at December 31, 2008. Securities designated as available-for-sale totaled $68.8 million and were recorded at estimated fair value.  Securities designated as held-to-maturity totaled $160,000 and were recorded at amortized cost.  The securities portfolio also includes nonmarketable equity securities totaling $10.2 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 one unrelated financial institution.

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

Book Value of Securities
December 31,	2009		2008
(Dollars in thousands)
Government sponsored enterprises	$	13,087	$	29,216
Obligations of state and local governments		16,718		28,493
		29,805		57,709
Mortgage-backed securities		39,181		21,334
Nonmarketable equity securities		10,186		10,815
Total securities	$	79,172	$	89,858

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2009.

Investment Securities Maturity Distribution and Yields

						After One But					After Five But
December 31, 2009	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	$	-		-	%	$	3,033		5.22	%	$	10,054		4.85	$	-		-	%
Obligations of state and
local governments(2)		1,071		7.11			3,937		7.19			7,248		6.78		4,462		6.27
Total securities(1)	$	1,071				$	6,970				$	17,302			$	4,462

(1)   Excludes mortgage-backed securities totaling $39.2 million with a yield of 4.70% 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%.

We review our investment portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).  Factors considered in the review include, without limitation, estimated cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value.

If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or may recognize a portion in other comprehensive income.  The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

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 our cash held in our Federal Reserve correspondent account, federal funds sold and interest-bearing deposits with other banks, averaged $22.2 million in 2009, compared to $350,000 in 2008.  At December 31, 2009, short-term investments totaled $39.0 million, compared to $1.6 million at December 31, 2008.  The reason for the increase was primarily due to our desire to maintain more on-balance sheet liquidity and 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.

41

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities decreased $45.5 million, or 7.00%, to $604.8 million in 2009, from $650.3 million in 2008.  Average interest-bearing deposits decreased $1.4 million, or 0.32%, to $451.0 million in 2009, from $452.5 million in 2008.

Deposits.  Average total deposits increased $29.9 million, or 5.74%, to $550.0 million during 2009, from $520.2 million during 2008.  At December 31, 2009, total deposits were $583.5 million compared to $513.6 million a year earlier, a decrease of 13.61%.

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

Deposits

December 31,	2009				2008				2007				2006				2005
(Dollars in			Percent				Percent				Percent				Percent				Percent
thousands)	Amount		of Deposits		Amount		of Deposits		Amount		of Deposits		Amount		of Deposits		Amount		of Deposits
Demand deposit
accounts	$	112,333	19.25	%	$	73,663	14.34	%	$	62,175	11.96	%	$	63,733	13.09	%	$	59,286	13.67	%
NOW accounts		66,807	11.45			65,699	12.79			63,866	12.28			64,743	13.3			74,730	17.23
Money market
accounts		123,806	21.22			96,377	18.77			140,934	27.10			129,801	26.65			89,327	20.60
Savings accounts		42,280	7.25			37,430	7.29			36,117	6.94			38,791	7.97			39,008	9.00
Brokered deposits		27,200	4.66			49,828	9.70			38,744	7.45			-	-			-	-
Time deposits
less than
$100,000		125,800	21.56			115,705	22.53			111,619	21.46			124,739	25.61			117,126	27.01
Time deposits
of $100,000
or over		85,257	14.61			74,899	14.58			66,617	12.81			65,149	13.38			54,169	12.49
Total deposits	$	583,483	100.00	%	$	513,601	100.00	%	$	520,072	100.00	%	$	486,956	100.00	%	$	433,646	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 increased $82.2 million from $388.9 million at December 31, 2008 to $471.0 million at December 31, 2009.  The largest increase in our core deposits was in demand deposit accounts, which increased $38.7 million, or 52.50%, to $112.3 million at December 31, 2009 from $73.7 million at December 31, 2008.  Our non-interest bearing deposits have increased due to our successful rollout of significantly improved cash management services and the movement of funds from customer repurchase agreements to bank deposits taking advantage of unlimited deposit insurance.  Our money market accounts increased $27.4 million, or 28.46%, from $96.4 million at December 31, 2008 to $123.8 million at December 31, 2009.  

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 brokered deposits at December 31, 2009 totaled $27.2 million, which represented 4.66% of our entire deposit base.  All of our brokered deposits at December 31, 2009 were brokered time deposit accounts.  As of December 31, 2008, all of our brokered deposits were brokered money market accounts.  During 2009, we eliminated our brokered money market deposits and replaced them with longer-term brokered CDs.  While we do not anticipate that brokered CDs will be a material part of our funding base, we will continue to use this funding source as long as it provides a significantly lower cost of funds versus in-market deposits.

Our loan-to-deposit ratio was 97.21% at December 31, 2009, and 124.95% at the end of 2008.  The maturity distribution of our time deposits of $100,000 or more at December 31, 2009 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	$25,213	$2,661	$46,921	$10,462	$85,257

42

Deposits and Other Interest-Bearing Liabilities - continued

Approximately 32.69% of our time deposits of $100,000 or more had scheduled maturities within six months and 87.73% 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 $17.9 million in 2009, a decrease of $26.7 million from $44.6 million in 2008.  Federal Reserve Discount Window and Term Auction Facility (“TAF”) Borrowings averaged $15.4 million in 2009.  At December 31, 2009, we had no borrowings under our line with Federal Reserve.  Federal funds purchased from correspondent banks averaged $1.1 million in 2009.  At December 31, 2009, we had no federal funds purchased.  Securities sold under agreements to repurchase averaged $1.4 million in 2009.  At December 31, 2008, we had no securities sold under agreements to repurchase.

Average Federal Home Loan Bank advances during 2009 were $125.6 million compared to $142.9 million during 2008, a decrease of $17.3 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, 2009, borrowings from the Federal Home Loan Bank were $95.4 million compared to $161.2 million a year earlier.    During 2009, our cash levels increased as a result of growing our deposits.  We utilized the cash generated from deposit growth at relatively lower rates versus the Federal Home Loan Bank advances to prepay three advances totaling $25 million, effectively lowering our overall ongoing borrowing costs.  We incurred one-time expenses of $896,000 during 2009 associated with the early termination of FHLB borrowings.  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 $95.4 million advances from the Federal Home Loan Bank outstanding at December 31, 2009, $10.0 million mature 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 2009 were $10.3 million.

In January 2010, we announced the decision to defer future interest payments on our trust preferred subordinated debt for the foreseeable future to maintain cash levels at the parent company.

The following table summarizes our various sources of borrowed funds for the years ended December 31, 2009 and 2008. These borrowings consist of securities sold under agreements to repurchase, federal funds purchased, advances from the Federal Home Loan Bank, and junior subordinated debentures.  Securities sold under agreements to repurchase mature on a one to seven day basis.  These agreements are secured bygovernment-sponsored enterprise securities. Federal funds purchased are short-term borrowings from other financial institutions that mature daily.  Advances from Federal Home Loan Bank mature at different periods as discussed in the footnotes to the financial statements and are secured by CapitalBank’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.

43

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,
2009
Securities sold under agreements
to repurchase	$	3,377	$	1,377		0.10	%	$	-		N/A
Federal Reserve Discount Window/
Term Auction Facility		38,000		15,444		0.29	%		-		N/A
Federal funds purchased		26,886		1,080		1.06	%		-		N/A
Advances from Federal Home
Loan Bank		142,800		125,569		4.13	%		95,400		3.94	%
Junior subordinated debentures		10,310		10,310		7.04	%		10,310		7.04	%
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	%

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 Company and CapitalBank are also required to maintain capital at a minimum level based on average total assets, 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.

On September 21, 2009, we completed a rights offering to shareholders and standby purchasers.  Through the offering, we issued 3,186,973 shares of common stock, representing $8,252,000 in new capital, net of expenses, in connection with the rights offering.  The remaining 4,085,754 unsubscribed shares were offered to the public through October 30, 2009, at the subscription rate of $2.75 per share.  The Company raised an aggregate of $14,136,000,  net of expenses, in new capital in the rights offering, the public offering, and employee purchases through our 401k plan purchased through treasury shares, of which $5,002,000 was raised in the public offering.

Beginning in 2009, our 401(k) plan and Dividend Reinvestment and Stock Purchase Plan began to purchase shares from treasury versus the open market to generate additional capital.  In 2009, we  issued 353,843 shares of treasury stock to these plans for total proceeds of $1,012,000.  Of this amount, $940,000 were purchased as part of the capital raise noted above.

44

Capital - continued

The Company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2009, 2008, and 2007, as set forth in the following table.

										To Be Well-
					For Capital					Capitalized Under
					Adequacy					Prompt Corrective
	Actual				Purposes					Action Provisions
(Dollars in thousands)	Amount Ratio				Amount		Ratio			Amount		Ratio
December 31, 2009
The Company
Total capital (to risk-weighted assets)	$	68,300	12.15	%	$	44,976		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		61,185	10.88			22,488		4.00			-		N/A
Tier 1 capital (to average assets)		61,185	8.31			29,447		4.00			-		N/A
CapitalBank
Total capital (to risk-weighted assets)	$	66,656	11.88	%	$	44,886		8.00	%	$	56,108		10.00	%
Tier 1 capital (to risk-weighted assets)		59,554	10.61			22,443		4.00			33,665		6.00
Tier 1 capital (to average assets)		59,554	8.10			29,404		4.00			36,756		5.00
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

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 decreased from 2008 to 2009 and our loans-to-funds ratio decreased from 2008 to 2009. The loans-to-assets ratio at December 31, 2009 was 75.68% compared to 81.17% at December 31, 2008, and the loans-to-funds ratio at December 31, 2009 was 83.55% compared to 90.56% at December 31, 2008.  The amount of advances from the Federal Home Loan Bank were approximately $95.4 million at December 31, 2009 compared to $161.2 million at December 31, 2008.  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, 2009, we had no borrowings outstanding and had the ability to receive $21.0 million in funds under the terms of our agreement with the Federal Reserve Bank.  Additionally, we had approximately $15 million of unused lines of credit for federal funds purchases and $40.4 million of securities available-for-sale at December 31, 2009 as sources of liquidity.  We also have the ability to receive an additional $23.6 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 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 paid cash dividends on a quarterly basis from the third quarter of 2001 through the first quarter of 2009.  In April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.  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.

45

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

The Allowance for Loan Losses 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 are 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 believe the accounting for Other Real Estate Owned (“OREO”) is a critical accounting policy that requires judgments and estimates used in preparation of our consolidated financial statements.  OREO is initially recorded at fair value, less any costs to sell.  If the fair value, less cost to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses.  If the fair value, less cost to sell, of the OREO decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs.  When the OREO is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.  Financed sales of OREO are accounted for in accordance with ASC 360-20, Real Estate Sales.

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 20 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.

46

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and CapitalBank 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, 2009, CapitalBank had issued commitments to extend credit of $66.9 million and standby letters of credit of $2.5 million through various types of commercial lending arrangements.  Approximately $50.5 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, 2009.

			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	$	4,964	$	3,142	$	23,138	$	31,244	$	35,689	$	66,933
Standby letters of credit		161		816		1,498		2,475		43		2,518
Totals	$	5,125	$	3,958	$	24,636	$	33,719	$	35,732	$	69,451

The Bank evaluates each customer’s credit worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by CapitalBank 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.

47

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements identified in Item 15 of this Annual 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.

None.

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, 2009 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, 2009.

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 SEC.

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 SEC’s rules and forms.  Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, 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 GAAP.  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 chief executive officer and chief financial officer, 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.

48

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 chief executive officer and chief financial officer, 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 chief executive officer and chief financial officer requires that the chief executive officer and chief financial officer 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 chief executive officer and chief financial officer 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 chief executive officer and chief financial officer, particularly during the period when our periodic reports are being prepared.

ITEM 9B. OTHER INFORMATION

None.

49

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 26, 2010.

ITEM 11.  EXECUTIVE COMPENSATION.

The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 26, 2010.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2009, certain information relating to our compensation plans (including individual compensation arrangements) under which grants of options, restricted stock, or other rights to acquire our common stock may be granted from time to time.

Plan Category (1)	Number of shares of our common stock to be issued upon exercise of outstanding options, warrants, and rights	Weighted-average exercise price of outstanding options, warrants, and rights	Number of shares of our common stock remaining available for future issuance under equity compensation plans (excluding shares of our common stock reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	-	-	97,098
Equity compensation plans not approved by security holders	-	-	-
Total	-	-	97,098

(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.

The additional information required by Item 12 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 26, 2010.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 26, 2010.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 26, 2010.

50

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 Annual 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 Annual Report on Form 10-K.

51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Community Capital Corporation, has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COMMUNITY CAPITAL CORPORATION
Dated: March 19, 2010	By:	/s/ William G.  Stevens
		William G.  Stevens President and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William G. Stevens, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

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 19, 2010
William G. Stevens	Officer, and Director
/s/ R. Wesley Brewer	Chief Financial Officer, Executive	March 19, 2010
R. Wesley Brewer	Vice President, and Secretary
/s/ Patricia C. Hartung	Chair	March 19, 2010
Patricia C. Hartung
/s/ Harold Clinkscales, Jr.	Director	March 19, 2010
Harold Clinkscales, Jr.
/s/ Wayne Q. Justesen, Jr.	Director	March 19, 2010
Wayne Q. Justesen, Jr.
/s/ B. Marshall Keys	Director	March 19, 2010
B. Marshall Keys
/s/ Clinton C. Lemon, Jr.	Director	March 19, 2010
Clinton C. Lemon, Jr.
/s/ Miles Loadholt	Director	March 19, 2010
Miles Loadholt
/s/ H. Edward Munnerlyn	Director	March 19, 2010
H. Edward Munnerlyn
/s/ George B. Park	Director	March 19, 2010
George B. Park

52

/s/ George D. Rodgers	Director	March 19, 2010
George D. Rodgers
/s/ Stephen G. Skiba	Director	March 19, 2010
Stephen G. Skiba
/s/ Lex D. Walters	Director	March 19, 2010
Lex D. Walters

 53

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 (Loss)	F-4
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7 to F-29

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Community Capital Corporation

Greenwood, South Carolina

We have audited the accompanying consolidated balance sheets of Community Capital Corporation and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income (loss), changes in shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2009.  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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assessment about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 included in the accompanying management’s evaluation of internal control over financial reporting and, accordingly, we do not express an opinion thereon.

Greenville, South Carolina

March 19, 2010

F-2

Community Capital Corporation

Consolidated Balance Sheets

	December 31,
	2009			2008
(Dollars in thousands, shares are not in dollars)
Assets:
Cash and cash equivalents:
Cash and due from banks		10,141			11,970
Interest-bearing deposit accounts		38,990			1,642
Total cash and cash equivalents		49,131			13,612
Investment securities:
Securities available-for-sale		68,826			78,828
Securities held-to-maturity (estimated fair value of
$170 and $225 at December 31, 2009 and 2008, respectively)		160			215
Nonmarketable equity securities		10,186			10,815
Total investment securities		79,172			89,858
Loans held for sale		1,103			303
Loans receivable		567,178			641,737
Less allowance for loan losses		(14,160	)		(13,617	)
Loans, net		553,018			628,120
Other real estate owned		7,165			5,121
Premises and equipment, net		16,150			17,243
Accrued interest receivable		3,046			3,724
Prepaid expenses		4,873			438
Intangible assets		1,663			9,507
Cash surrender value of life insurance		16,689			15,996
Deferred tax asset		6,622			6,228
Income tax receivable		9,634			-
Other assets		1,176			450
Total assets	$	749,442		$	790,600
Liabilities:
Deposits:
Noninterest-bearing	$	112,333		$	73,663
Interest-bearing		471,150			439,938
Total deposits		583,483			513,601
Federal funds purchased and securities sold under
agreements to repurchase		-			33,838
Advances from the Federal Home Loan Bank		95,400			161,185
Accrued interest payable		1,337			1,802
Junior subordinated debentures		10,310			10,310
Other liabilities		5,155			4,907
Total liabilities		695,685			725,643
Commitments and contingencies - Notes 4, 13, and 17
Shareholders’ equity:
Common stock, $1.00 par value; 20,000,000 shares authorized;
10,721,450 and 5,666,760 shares issued at
December 31, 2009 and 2008, respectively		10,721			5,667
Nonvested restricted stock		(364	)		(445	)
Capital surplus		70,598			62,405
Accumulated other comprehensive income		909			527
Retained earnings (deficit)		(15,830	)		14,218
Treasury stock, at cost (845,627 and 1,199,470 shares in 2009 and 2008,		(12,277	)		(17,415	)
respectively )
Total shareholders’ equity		53,757			64,957
Total liabilities and shareholders’ equity	$	749,442		$	790,600

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

F-3

Community Capital Corporation

Consolidated Statements of Income (Loss)

	For the years ended
	December 31,
(Dollars in thousands, except for per share data amounts)	2009			2008		2007
Interest income:
Loans, including fees	$	32,722		$	39,710	$	45,247
Investment securities:
Taxable		2,254			2,189		2,119
Tax-exempt		1,059			1,285		1,211
Nonmarketable equity securities		147			404		534
Federal funds sold and other		51			6		21
Total interest income		36,233			43,594		49,132
Interest expense:
Deposits		7,894			10,835		16,491
Advances from the Federal Home Loan Bank		5,190			6,034		5,709
Federal funds purchased and securities sold under
agreements to repurchase		57			1,061		2,310
Other		726			726		719
Total interest expense		13,867			18,656		25,229
Net interest income		22,366			24,938		23,903
Provision for loan losses		32,800			9,300		1,025
Net interest income (loss) after provision for loan losses		(10,434	)		15,638		22,878
Noninterest income:
Service charges on deposit accounts		2,313			2,492		2,425
Income from fiduciary activities		1,623			1,725		1,590
Commissions from sales of mutual funds		263			180		261
Gain on sales of securities available-for-sale		224			98		-
Gain on sale of loans held for sale		1,450			1,139		1,204
Gain on sale of premises and equipment		-			6		15
Other operating income		1,899			1,607		1,380
Total noninterest income		7,772			7,247		6,875
Noninterest expenses:
Salaries and employee benefits		10,389			10,853		11,087
Goodwill impairment		7,418			-		-
Net occupancy		1,298			1,316		1,162
Furniture and equipment		875			975		888
Amortization of intangible assets		427			449		470
Loss on sale of securities available-for-sale		-			-		469
Loss on sale of fixed assets		38			-		-
FDIC banking assessments		1,863			342		58
FHLB prepayment penalties		896			-		-
Write downs on other real estate owned		3,243			409		-
Other operating expenses		5,569			5,848		5,592
Total noninterest expenses		32,016			20,192		19,726
Income (loss) before income taxes		(34,678	)		2,693		10,027
Income tax expense (benefit)		(9,433	)		284		3,139
Net income(loss)	$	(25,245	)	$	2,409	$	6,888
Earnings (loss) per share:
Basic earnings (loss) per share	$	(4.34	)	$	0.54	$	1.58
Diluted earnings (loss) per share	$	(4.34	)	$	0.54	$	1.56

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

F-4

Community Capital Corporation

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)

For the years ended December 31, 2009, 2008, and 2007

													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, 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
Net loss																	(25,245	)					(25,245	)
Other comprehensive income,
net of tax effects														382									382
Comprehensive loss																							(24,863	)
Redemption of treasury shares																	(4,126	)		5,138			1,012
(353,843 shares)
Dividends paid ($0.15																	(677	)					(677	)
per share)
Rights offering issuance, net		5,005,890			5,006						8,081												13,087
Reduction of tax benefit for											(136	)											(136	)
vesting restricted stock
Issuance of restricted stock		49,500			49			(304	)		255												-
Amortization of deferred
compensation on restricted
stock								381															381
Forfeitures of restricted stock		(700	)		(1	)		4			(7	)											(4	)
Balance, December 31, 2009		10,721,450		$	10,721		$	(364	)	$	70,598		$	909		$	(15,830	)	$	(12,277	)	$	53,757

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

F-5

 Community Capital Corporation

Consolidated Statements of Cash Flows

	For the years ended
	December 31,
(Dollars in thousands)	2009			2008			2007
Cash flows from operating activities:
Net income(loss)	$	(25,245	)	$	2,409		$	6,888
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		1,064			1,047			947
Provision for loan losses		32,800			9,300			1,025
Deferred income tax benefit (expense)		(727	)		(467	)		427
Amortization of intangible assets		426			449			470
Amortization of deferred compensation on restricted stock		381			406			491
Cumulative change in accounting principle		-			(530	)		-
Premium amortization less discount accretion
on securities available-for-sale		29			8			56
Amortization of deferred loan costs and fees, net		976			1,244			1,452
Write down of other real estate		3,243			409			-
Net (gain) loss on sale of premises and equipment		38			(6	)		(15	)
Net loss on sale of other real estate		104			194			6
Net (gain) loss on sales or calls of securities available-for-sale		(224	)		(98	)		469
Loss on write-off of nonmarketable equity securities		82			-			-
Goodwill impairment		7,418			-			-
Proceeds of loans held for sale		40,555			20,704			31,742
Disbursements for loans held for sale		(41,355	)		(20,376	)		(31,819	)
(Increase) decrease in interest receivable		678			688			(458	)
Increase in income tax receivable		(9,634	)		-			-
Increase (decrease)in interest payable		(465	)		(1,322	)		448
Increase in other assets		(5,887	)		(3,105	)		(1,510	)
Increase in other liabilities		248			464			990
Net cash provided by operating activities		4,505			11,418			11,609
Cash flows from investing activities:
Net (increase) decrease in loans made to customers		28,316			(6,705	)		(73,865	)
Proceeds from sales of securities available-for-sale		22,431			980			17,218
Proceeds from calls and maturities of securities available-for-sale		26,908			17,042			12,134
Purchases of securities available-for-sale		(38,563	)		(25,154	)		(34,780	)
Proceeds from calls and maturities of securities held-to-maturity		55			55			110
Proceeds from sales of nonmarketable equity securities		2,332			7,520			1,036
Purchase of nonmarketable equity securities		(1,785	)		(8,832	)		(2,466	)
Purchase of premises and equipment		(190	)		(1,628	)		(2,247	)
Proceeds from sales of premises and equipment		210			73			15
Proceeds from sales of other real estate		7,619			885			387
Net cash (used) provided by investing activities		47,333			(15,764	)		(82,458	)
Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts		22,229			(18,839	)		44,768
Net increase (decrease) in time deposits		47,653			12,368			(11,652	)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase		(33,838	)		(28,428	)		16,984
Proceeds from advances from the Federal Home Loan Bank		39,700			210,240			108,000
Repayments of advances from the Federal Home Loan Bank		(105,485	)		(184,580	)		(78,100	)
Dividends paid		(677	)		(2,679	)		(2,400	)
Proceeds from rights offering		13,087			-			-
Proceeds from exercise of stock options		-			467			477
Sales (purchases) of treasury stock		1,012			-			(293	)
Net cash provided (used) by financing activities		(16,319	)		(11,451	)		77,784
Net increase (decrease) in cash and cash equivalents		35,519			(15,797	)		6,935
Cash and cash equivalents, beginning of year		13,612			29,409			22,474
Cash and cash equivalents, end of year	$	49,131		$	13,612		$	29,409

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

F-6

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Community Capital Corporation (the Company) serves as a bank holding company for CapitalBank (the Bank).  CapitalBank operates 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, deferred tax positions, and the assumptions used in computing the fair value of stock options granted.  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, 2009 and 2008, the investment in Federal Reserve Bank stock was $1,686,300.  At December 31, 2009 and 2008, the investment in Federal Home Loan Bank stock was $8,145,500 and $8,692,300, respectively.  Upon request, the stock may be sold back to the Federal Home Loan Bank, at cost.  Due to regulatory restrictions the Federal Home Loan Bank is under, such stock redemptions have been indefinitely put on hold.

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, 2009 and 2008, the investments in the stock of the unrelated financial institutions, at cost, was $44,600 and $126,464, respectively.  During 2009, the Company recorded an other-than-temporary-impairment (“OTTI”) charge in the amount of $81,864 for its investment in Community Financial Services, Inc.  Also included in nonmarketable equity securities is the investment in the Community Capital Corporation Statutory Trust I which totaled $310,000 at December 31, 2009 and 2008.

F-7

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

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, 2009 and 2008 were $276,884 and $169,294, 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 current appraisal values or based on the present value of discounted expected cash flows.  When it is determined that a loan is impaired, a direct charge to provision for loan losses 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, 2009 and 2008, the Company had impaired loans of approximately $71,956,000 and $107,426,000, respectively.

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.

Loans 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.

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 evaluated for impairment annually.  During 2009, if was determined that the value of the recorded goodwill was impaired and accordingly the balance was written off as an impairment expense in the amount of $7,418,000.

F-8

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

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.

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow.  Therefore, no reserves for uncertain income tax positions have been recorded.

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 $56,715, $285,073 and $316,338 were included in the Company's results of operations for 2009, 2008, and 2007, respectively.

Stock-Based Compensation – The Company accounts for stock options and warrants in accordance with generally accepted accounting principles.  Compensation expense is recognized as salaries and benefits in the statement of operations.  Any share issued as a result of exercise will be issued from common shares authorized as discussed in Note 15.  The Company did not issue any stock options during the fiscal years ended December 31, 2009 and 2008.

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)	2009		2008		2007
Cash paid for interest	$	14,332	$	19,988	$	24,781
Cash paid for income taxes		990		3,286		3,603
Supplemental noncash investing and financing activities:
Foreclosures on loans		12,906		6,242		432
Change in unrealized gain (loss) on securities available-
for sale, net of tax		382		42		754

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.

F-9

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

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

Comprehensive Income (Loss) - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income (loss).  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 (loss), are components of comprehensive income (loss).

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

	Year ended December 31,
(Dollars in thousands)	2009			2008			2007
Unrealized holding gains on
available-for-sale securities	$	803		$	162		$	674
Reclassification adjustment for (gains) losses
realized in income		(224	)		(98	)		469
Net unrealized gains on securities		579			64			1,143
Tax effect		(197	)		(22	)		(389	)
Net-of-tax amount	$	382		$	42		$	754

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 June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which restructured generally accepted accounting principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritave nongovernmental GAAP.  The guidance is presented in a topically organized structure referred to as the FASB Accounting Standareds Codification (“ASC”). The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included is considered nonauthoritative.

The FASB issued new accounting guidance on accounting for transfers of financial assets in June 2009.  The guidance limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement.  The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.  The concept of a qualifying special-purpose entity is no longer applicable.  The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the guidance to have any impact on the Company’s financial statements.  The ASC was amended in December, 2009, to include this guidance.

Guidance was issued in June 2009 requiring a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest that should be included in consolidated financial statements.  A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance, making it the primary beneficiary.  Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard.  This guidance amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certain exceptions that were previously available.  This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required for periods after the effective date.  The Company does not expect the guidance to have any impact on the Company’s financial position.  An update was issued in December, 2009, to include this guidance in the ASC.

F-10

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued

In October, 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance.  At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in capital.  Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs.  The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement.  The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009.   The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allow the shareholder to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid.  The amendment states that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance.  The amendment is effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.

Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes.  The amendment provides that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity.  The guidance does not apply to a decrease in ownership in transactions related to sales of in substance real estate or conveyances of oil and gas mineral rights.  The update is effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.

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 2008 and 2007 financial statements were reclassified to conform with the 2009 presentation.  Such reclassifications had no effect on net income or shareholders’ equity.

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.

F-11

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, 2009 and 2008, 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, 2009 and 2008 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2009
Government-sponsored enterprises	$	12,996	$	91	$	-	$	13,087
Obligations of state and local governments		16,167		391		-		16,558
		29,163		482		-		29,645
Mortgage-backed securities		38,174		1,063		56		39,181
Total	$	67,337	$	1,545	$	56	$	68,826
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

Securities held-to-maturity as of December 31, 2009 and 2008 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2009
Obligations of state and local governments	$	160	$	10	$	-	$	170
December 31, 2008
Obligations of state and local governments	$	215	$	10	$	-	$	225

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, 2009.

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
December 31, 2009
Mortgage-backed securities	$	3,515	$	56	$	-	$	-	$	3,515	$	56
Total	$	3,515	$	56	$	-	$	-	$	3,515	$	56
December 31, 2008
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

F-12

NOTE 3 - INVESTMENT SECURITIES - continued

Securities classified as available-for-sale are recorded at fair market value.   The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of its amortized cost.  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 Company did not have any securities in a continuous loss position for twelve months or more.

The following table summarizes the maturities of securities available-for-sale and held-to-maturity as of December 31, 2009, 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	$	1,065		$	1,071	$	-		$	-
Due after one year but within five years		6,719			6,810		160			170
Due after five years but within ten years		17,060			17,302		-			-
Due after ten years		4,319			4,462		-			-
		29,163			29,645		160			170
Mortgage-backed securities		38,174			39,181		-			-
Total	$	67,337		$	68,826	$	160		$	170

Proceeds from sales of securities available-for-sale during 2009, 2008, and 2007 were $22,431,000, $980,000 and $17,218,000, respectively, resulting in gross realized gains of $224,000 and $98,000 in 2009 and 2008, respectively and gross realized losses of $469,000 in 2007.  There were no sales of securities held-to-maturity in 2009, 2008, or 2007.

At December 31, 2009 and 2008, securities having amortized costs of approximately $36,317,000 and $78,090,000, respectively, and estimated fair values of $37,224,000 and $79,053,000, 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.

The Company reviews its investment portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether  there is any indication of OTTI.  Factors considered in the review include estimated cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value.

If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or may recognize a portion in other comprehensive income.

As noted in Note 1, the Company has nonmarketable equity securities consisting of investments in several financial institutions.  These investments totaled $10,186,000 and $10,815,000 at December 31, 2009 and 2008, respectively. During 2009, the company recorded OTTI of $82,000 on its investment in Community Financial Services, Inc. stock.  During 2008 and 2007, there were no sales of nonmarketable equity securities, nor any losses related to OTTI.

NOTE 4 - LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
(Dollars in thousands)	2009		2008
Commercial and industrial	$	35,082	$	43,442
Real estate - construction		145,130		185,414
Real estate - mortgage and commercial		316,571		344,457
Home equity		47,409		47,830
Consumer - installment		21,564		19,073
Consumer - credit card and checking		1,422		1,521
Total gross loans	$	567,178	$	641,737

F-13

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2009 and 2008, the Company had sold participations in loans aggregating $4,240,000 and $3,549,000, 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, 2009 and 2008, the Company had pledged approximately $119,028,000 and $220,211,000, respectively, of loans on residential and commercial real estate as collateral for advances from the Federal Home Loan Bank (see Note 10).

An analysis of the allowance for loan losses for the years ended December 31, 2009, 2008, and 2007, is as follows:

(Dollars in thousands)	2009			2008			2007
Balance, beginning of year	$	13,617		$	6,759		$	6,200
Provision charged to operations		32,800			9,300			1,025
Recoveries on loans previously charged-off		53			132			83
Loans charged-off		(32,310	)		(2,574	)		(549	)
Balance, end of year	$	14,160		$	13,617		$	6,759

The Company charged off $31,354,000 during 2009 related to impaired loans.

The following is a summary of information relating to impaired and nonaccrual loans at December 31:

(Dollars in thousands)	2009		2008
Loans:
Nonaccrual loans	$	41,163	$	26,827
Other impaired loans*	$	30,793	$	80,599
Accruing loans more than 90 days past due	$	1,662	$	696
(Dollars in thousands)		2009		2008
Impaired loans without a valuation allowance	$	71,295	$	84,359
Impaired loans with a valuation allowance		661		23,067
Total impaired loans	$	71,956	$	107,426
Valuation allowance related to impaired loans	$	181	$	6,196
(Dollars in thousands)		2009		2008
Average investment in impaired loans	$	97,790	$	102,864
Interest income recognized on impaired loans	$	2,540	$	4,543
Interest income recognized on a cash basis on impaired loans	$	1,706	$	2,913

* Other impaired loans consist of loans for which regular payments are still received; however some uncertainty exists as to whether or not the full contractual amounts will be collected in accordance with the terms of the loan agreement.

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.

F-14

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2009 and 2008, the Company had unfunded commitments, including standby letters of credit, of $69,451,000 and $92,594,000, of which $8,015,000 and $8,655,000, respectively, were unsecured.  The fair value of any potential liabilities associated with standby letters of credit is insignificant.

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions.  Various recourse agreements exist, ranging from thirty 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 2009 and 2008 was $67,857,000 and $55,016,000, respectively.

NOTE 5 – OTHER REAL ESTATE OWNED

The Bank possessed $7,165,000 and $5,121,000 in other real estate owned at December 31, 2009 and 2008, respectively.  During the years ended December 31, 2009 and 2008, the bank transferred $12,906,000 and $6,242,000 into other real estate owned.

Transactions in other real estate owned for the years ended December 31, 2009 and 2008 are summarized below:

	December 31,
(Dollars in thousands)	2009			2008
Balance, beginning of year	$	5,121		$	173
Additions		12,906			6,242
Sales		(7,619	)		(885	)
Write downs		(3,243	)		(409	)
Balance, end of year	$	7,165		$	5,121

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	December 31,
(Dollars in thousands)	2009			2008
Land	$	4,333		$	4,440
Building and land improvements		13,155			13,527
Furniture and equipment		8,823			9,309
Total		26,311			27,276
Less, accumulated depreciation		(10,161	)		(10,033	)
Premises and equipment, net	$	16,150		$	17,243

Depreciation and amortization expense was approximately $1,064,000, $1,047,000 and $947,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 7 - INTANGIBLE ASSETS

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

	December 31,
(Dollars in thousands)	2009		2008
Core deposit premium, net	$	1,663	$	2,089
Goodwill		-		7,418
	$	1,663	$	9,507

Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired.  Goodwill impairment testing is performed annually or more frequently if events or circumstances indicate possible impairment.  An impairment loss is recorded to the extent that the carrying value of goodwill exceeds its implied fair value.

F-15

NOTE 7 - INTANGIBLE ASSETS - continued

The Company evaluated its goodwill as of December 31, 2009.   Given the substantial decline in the Company's common stock price, declining operating results and reduced projected results, asset quality trends, market comparables and the current economic climate of  the banking industry, the results of the analysis  indicated that the Company’s goodwill was fully impaired.  As a result, the Company recorded a $7,418,000 goodwill impairment charge.

Amortization expense related to the core deposit premium was $426,000, $449,000 and $470,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

NOTE 8 – DEPOSITS

The following is a summary of deposit accounts:

	December 31,
(Dollars in thousands)	2009		2008
Noninterest-bearing demand deposits	$	112,333	$	73,663
Interest-bearing demand deposits		66,807		65,699
Money market accounts		123,806		96,377
Brokered deposits		27,200		49,828
Savings		42,280		37,430
Certificates of deposit and other time deposits		211,057		190,604
Total deposits	$	583,483	$	513,601

At December 31, 2009 and 2008, certificates of deposit of $100,000 or more totaled approximately $85,257,000 and $74,898,000, respectively.  Interest expense on these deposits was approximately $2,127,000, $3,012,000 and $3,481,000 in 2009, 2008 and 2007, respectively.

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2009 were as follows:

(Dollars in thousands)
Maturing in	Amount
2010	$	183,535
2011		27,001
2012		456
2013		12
2014 and thereafter		53
Total	$	211,057

NOTE 9 - 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, 2009, there were no balances outstanding associated with these agreements.  At December 31, 2008, the securities sold under agreements to repurchase totaled $9,695,000.  At December 31, 2008, the amortized costs of securities pledged to collateralize the repurchase agreements were $10,286,000, and estimated fair values were $10,507,000.  The securities underlying the agreements are held by a third-party custodian.  At December 31, 2008, federal funds purchased were $24,143,000.

The Company has a borrowing line with the Federal Reserve Bank’s discount window.  Through this agreement, the Company had the ability to borrow up to $20,987,000 and $116,600,000 as of December 31, 2009 and 2008, respectively.  At December 31, 2009 and 2008, the Company has pledged certain types of commercial, construction and land loans totaling $38,413,000 and $159,800,000, respectively, as collateral to secure borrowings on this line.  As of December 31, 2009 and 2008, there were no outstanding borrowings on this line.

F-16

NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

(Dollars in thousands)		December 31,
Description	Interest Rate	2009		2008
Advances maturing:
February 2, 2009	4.95, fixed	$	-	$	25
July 13, 2009	5.21, fixed		-		5,000
July 13, 2009	5.03, fixed		-		10,000
November 6, 2009	0.46, floating		-		25,760
February 26, 2010	4.77, fixed		-		10,000
March 17, 2010	5.92, fixed		-		5,000
March 28, 2011	4.68, fixed		-		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		5,400
January 16, 2015	2.77, fixed		10,000		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
		$	95,400	$	161,185

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

(Dollars in thousands)	Amount
2010	$	-
2011		10,000
2012		35,000
2013		5,400
2014 and thereafter		45,000
Total	$	95,400

As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $72,624,000, multi-family residential loans aggregating $3,121,000, home equity lines of credit aggregating $18,077,000, and commercial real estate loans aggregating $25,204,000 (see Note 4) at December 31, 2009.  In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.  The company incurred prepayment penalties totaling $896,000 during 2009.  No prepayment penalties were incurred during 2008 or 2007.

NOTE 11 – 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.

On January 29, 2010, the Company announced they had decided to defer future interest payments on trust preferred subordinated debt for the foreseeable future to maintain cash levels at the parent company.

F-17

NOTE 12 - 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.

On September 21, 2009, the Company completed its rights offering to shareholders and standby purchasers.  The Company issued 3,186,973 shares of common stock, representing $8,252,000 in new capital, net of expenses, in connection with the rights offering.  The remaining 4,085,754 unsubscribed shares were offered to the public through October 30, 2009, at the subscription rate of $2.75 per share.  The Company raised an aggregate of $14,136,000, net of expenses, in new capital in the rights offering, the public offering, and employee purchases through our 401k plan purchased through treasury shares, of which $5,002,000 was raised in the public offering.

Beginning in 2009, the Company’s 401(k) plan and Dividend Reinvestment and Stock Purchase Plan began to purchase shares from treasury versus the open market to generate additional capital for the Company.  In 2009, the Company issued 353,843 shares of treasury stock to these plans for total proceeds of $1,012,000.  Of this amount, $940,000 were purchased as part of the capital raise noted above.

On January 21, 2009, the Board of Directors declared a cash dividend of $0.15 per share, which was paid to shareholders on March 6, 2009.  Total cash paid for dividends during 2009 was $677,000, all of which was paid in the first quarter.  On April 21, 2009, the Board of Directors voted to suspend the payment of the quarterly cash dividend on the Company’s common stock as a prudent means of capital preservation in light of current economic conditions.

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, 2009, the Company had purchased approximately 1,044,000 shares under the plans (and prior plans), at an average cost of $14.52.

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, 2009 and 2008, no shares of the undesignated stock had been issued or were outstanding.

NOTE 13 - 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 $100,890, $125,159 and $137,131 for the years ended December 31, 2009, 2008 and 2007, respectively.  Minimum lease commitments under noncancelable operating leases are as follows:

(Dollars in thousands)	Amount
2010	$	76,465
2011		52,281
2012		52,281
2013		49,781
2014 and thereafter		128,600
Total	$	359,408

The cost of renewals is not included in the above.

NOTE 14 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS

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

F-18

NOTE 14 - 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, 2009 and 2008.

										To Be Well-
					For Capital					Capitalized Under
					Adequacy					Prompt Corrective
	Actual				Purposes					Action Provisions
(Dollars in thousands)	Amount Ratio				Amount		Ratio			Amount		Ratio
December 31, 2009
The Company
Total capital (to risk-weighted assets)	$	68,300	12.15	%	$	44,976		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		61,185	10.88			22,488		4.00			-		N/A
Tier 1 capital (to average assets)		61,185	8.31			29,447		4.00			-		N/A
CapitalBank
Total capital (to risk-weighted assets)	$	66,656	11.88	%	$	44,886		8.00	%	$	56,108		10.00	%
Tier 1 capital (to risk-weighted assets)		59,554	10.61			22,443		4.00			33,665		6.00
Tier 1 capital (to average assets)		59,554	8.10			29,404		4.00			36,756		5.00
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

F-19

NOTE 15 - STOCK COMPENSATION 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.  As of December 31, 2009, there were no options outstanding under the plan.

A summary of the status of the Company’s stock option plans as of December 31, 2009, 2008, and 2007 and changes during the years ended on those dates is presented below:

	2009				2008				2007
			Weighted-				Weighted-				Weighted-
			Average				Average				Average
			Exercise				Exercise				Exercise
	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year		51,721	$	18.01		91,339	$	15.62		142,341	$	14.26
Granted		-		-		-		-		-		-
Exercised		-		-		37,605		12.43		42,435		11.24
Cancelled		51,721		18.01		2,013		13.68		8,567		14.79
Outstanding at end of year		-		-		51,721		18.01		91,339		15.62

During 2009 and 2008, the Company issued 49,500 and 26,800 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, 2012 and 2011, respectively.  The weighted-average fair value of restricted stock issued during 2009 and 2008 was $6.14 and $15.73, respectively.  Compensation cost associated with the issuances was $381,000, $406,000 and $491,000 for the years ended December 31, 2009, 2008 and 2007, respectively.  Forfeitures totaled $4,000 and $14,000 for the years ended December 31, 2009 and 2008, respectively.  At December 31, 2009, the Company had 97,098 stock awards available for grant under the 2004 Equity Incentive Plan.

NOTE 16 - 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, 2009 and 2008 were $14,886,000 and $19,960,000, respectively.  During 2009, $2,693,000 of new loans were made to related parties and repayments totaled $7,767,000.  During 2008, $8,049,000 of new loans were made to related parties and payments totaled $7,065,000.

The Company purchases various types of insurance from agencies that are owned by two directors.  Amounts paid for insurance premiums were $67,110, $97,997 and $86,894 in 2009, 2008, and 2007, respectively.

NOTE 17 - 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 18 - 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, 2009, retained earnings of the Bank was $3,736,000.

F-20

NOTE 19 - EARNINGS (LOSS) PER SHARE

Earnings (loss) per share - basic is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Earnings (loss) per share - diluted is computed by dividing net income (loss) 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)	2009		2008		2007
Basic earnings (loss) per share:
Net income (loss)	$	(25,245)	$	2,409	$	6,888
Average basic common shares outstanding		5,820,045		4,427,379		4,371,345
Basic earnings (loss) per share	$	(4.34)	$	0.54	$	1.58
Diluted earnings (loss) per share:
Net income (loss)	$	(25,245)	$	2,409	$	6,888
Average common shares outstanding - basic		5,820,045		4,427,379		4,371,345
Incremental shares from assumed conversions:
Unvested restricted stock		58,039		36,884		16,234
Stock options		-		-		34,733
Average diluted common shares outstanding		5,878,084		4,464,263		4,422,312
Diluted earnings (loss) per share	$	(4.34)	$	0.54	$	1.56

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:

	2009		2008		2007
Number of options		-		51,721		13,800
Weighted-average of these options
outstanding during the year		NA		53,674		13,800
Weighted-average exercise price	$	NA	$	18.01	$	19.48

NOTE 20 - INCOME TAXES

Income tax expense consisted of the following:

	Year ended December 31,
(Dollars in thousands)	2009			2008			2007
Currently payable (receivable):
Federal	$	(8,879	)	$	3,024		$	3,460
State		-			139			346
Total current		(8,879	)		3,163			3,806
Deferred income tax provision (benefit)		(357	)		(2,857	)		(266	)
Income tax expense (benefit)	$	(9,236)		$	306		$	3,540
Income tax expense (benefit) is allocated as follows:
To continuing operations	$	(9,433	)	$	284		$	3,139
To shareholders’ equity		197			22			401
Income tax expense	$	(9,236	)	$	306		$	3,540

F-21

NOTE 20 - INCOME TAXES - continued

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

	December 31,
(Dollars in thousands)	2009			2008
Deferred tax assets:
Allowance for loan losses	$	4,815		$	4,630
Net operating loss carryforward - state		321			298
Deferred compensation		1,229			1,022
Nonaccrual of interest		706			491
Other real estate owned		421			159
Loss on worthless equity securities		28			-
Director fees		102			89
Restricted stock		284			281
Charitable contributions		36			-
Deferred revenue		24			44
Gross deferred tax assets		7,966			7,014
Valuation allowance		(380	)		-
Net deferred tax assets		7,586			7,014
Deferred tax liabilities:
Accumulated depreciation		256			221
Federal Home Loan Bank stock dividends		16			16
Available-for-sale securities		469			272
Merger related, net		38			52
Core deposit intangibles		49			77
Loans fees and costs		94			58
Prepaids		42			53
Total deferred tax liabilities		964			749
Net deferred tax asset recognized	$	6,622		$	6,265

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 the South Carolina deferred tax asset of the Holding Company will not be realized, and accordingly, has established a valuation allowance for this portion of the deferred tax asset.

A federal net operating loss (“NOL”) of $25,795,000 was created in 2009.  This entire NOL will be carried back to generate tax refunds of previous taxes paid of approximately $8,770,000.  In addition, refunds of current year estimated payments of $864,000 will be requested.  The total refunds of $9,634,000 have been recorded as income tax receivable in the Company’s Cnsolidated Balance Sheet.

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)	2009			2008			2007
Income tax at the statutory rate	$	(11,791	)	$	916		$	3,409
State income tax, net of federal income tax benefit		(23	)		92			228
Tax-exempt interest income		(403	)		(491	)		(473	)
Disallowed interest expense		30			49			66
Goodwill		2,522			-			-
Increase in cash surrender value of life insurance		(201	)		(203	)		(230	)
Other, net		53			(79	)		139
Valuation allowance		380			-			-
Income tax expense (benefit)	$	(9,433	)	$	284		$	3,139

The Company has 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.

F-22

NOTE 21 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

	Year ended December 31,
(Dollars in thousands)	2009		2008		2007
Banking and ATM supplies	$	451	$	547	$	476
Directors’ fees		184		347		299
Mortgage loan department expenses		307		246		212
Data processing and supplies		1,608		1,568		1,340
Postage and freight		191		204		210
Professional fees		461		457		501
Telephone expenses		323		353		370
Other		2,044		2,126		2,184
Total	$	5,569	$	5,848	$	5,592

NOTE 22 - 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 $312,000, $360,000 and $304,000 in 2009, 2008, and 2007, respectively.  The Company’s policy is to fund amounts approved by the Board of Directors.  At December 31, 2009 and 2008, the savings plan owned 722,610 and 237,972 shares of the Company’s common stock purchased at an average cost of $7.11 and $15.84 per share, respectively. The estimated value of shares held at December 31, 2009 and 2008 was $2,096,000 and $1,721,000, respectively.

The Company has an Executive Supplemental Compensation Plan that provides certain officers with salary continuation benefits upon retirement.  The plan also provides for benefits in the event of early retirement, death, or substantial change of control of the Company.  In connection with, but not directly related to, the Executive Supplemental Compensation Plan, life insurance contracts were purchased on the officers.  No insurance premiums were paid in the years ended December 31, 2009, 2008, or 2007.

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” (“FASB ASC 715-60”), 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.  ASC 715-60 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 one-time impact to the company upon adoption of ASC 715-60 was a reduction in retained earnings and an increase in other liabilities of $529,000 during 2008.

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 Company is the sole owner of the policies and has the right to exercise all incidents of ownership.  The Company  is the direct beneficiary of an amount of death proceeds equity to the greater of  a) the cash surrender value of the policy, b) the aggregate premiums paid on the policy by the Company less any outstanding indebtedness to the insurer, or c) the total death proceeds less the split dollar amount.  The split dollar amount is 50 percent of the difference between the total policy death proceeds and the policy cash surrender value at the date of the Executive’s death.   There was no expense associated with this plan in 2009, 2008, or 2007.  No insurance premiums were paid on the plan during 2009, 2008 or 2007.  The policies increased their cash values by $249,000 and $267,000 during 2009 and 2008, respectively.  Cash values at December 31, 2009 and 2008 were $4,654,000 and $4,405,000, 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, 2009, 2008, or 2007.  The policies increased their cash values by $444,000 and $435,000 during 2009 and 2008, respectively.  Cash values at December 31, 2009 and 2008 were $12,035,000 and $11,591,000, respectively.

F-23

NOTE 23 - UNUSED LINES OF CREDIT

As of December 31, 2009, the subsidiary bank had an unused line of credit to purchase federal funds from an unrelated bank totaling $15,000,000.  This line of credit is available on a one to thirty day basis for general corporate purposes. The lender has reserved the right not to renew their respective line.  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 $119,028,000 at December 31, 2009.  As of December 31, 2009, the Bank had borrowed $95,400,000 on this line.  As of December 31, 2009, the Bank also has a line of credit through the Federal Reserve Bank’s Discount Window in the amount of $20,988,000.  There were no outstanding borrowings on this line at December 31, 2009.

NOTE 24 - 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 and Loans Held for Sale- 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 fair value of junior subordinated debentures is based on market prices of comparable securities.

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.

F-24

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

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

	December 31,
	2009				2008
	Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and due from banks	$	10,141	$	10,141	$	11,970	$	11,970
Interest-bearing deposit accounts		38,990		38,990		1,642		1,642
Securities available-for-sale		68,826		68,826		78,828		78,828
Securities held-to-maturity		160		170		215		225
Nonmarketable equity securities		10,186		10,186		10,815		10,815
Cash surrender value of life insurance		16,689		16,689		15,996		15,996
Loans and loans held for sale		568,281		562,072		642,040		658,309
Accrued interest receivable		3,046		3,046		3,724		3,724
Financial Liabilities:
Demand deposit, interest bearing
transaction, and savings accounts	$	345,226	$	345,226	$	322,997	$	322,997
Certificates of deposit and other time deposits		238,257		240,729		190,604		193,606
Federal funds purchased and securities
sold under agreements to repurchase		-		-		33,838		33,838
Advances from the Federal Home Loan Bank		95,400		90,478		161,185		150,771
Junior subordinated debentures		10,310		10,740		10,310		10,608
Accrued interest payable		1,337		1,337		1,802		1,802

Accounting standards require disclosure that establishes a framework for measuring fair value, and requires disclosure about fair value measurements for all assets and liabilities that are measured and reported on a fair value basis.  The objective is to enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.  Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

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.

In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to fair value measurement.  At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

F-25

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy.

December 31, 2009	Quoted market price in active markets		Significant other observable inputs		Significant unobservable inputs
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Available-for-sale investment securities	$	-	$	68,826	$	-
Lloans held for sale		-		1,103		-
Total	$	-	$	69,929	$	-
December 31, 2008
(Dollars in thousands)
Available-for-sale investment securities	$	-	$	78,828	$	-
Loans held for sale		-		303		-
Total	$	-	$	79,131	$	-

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy (as described above) for which a nonrecurring change in fair value has been recorded during the year.

December 31, 2009	Quoted market price in active markets		Significant other observable inputs		Significant unobservable inputs
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Intangible assets	$	-	$	-	$	1,663
Other real estate owned		-		7,165		-
Impaired loans		-		66,735		5,221
Total	$	-	$	73,900	$	6,884
December 31, 2008
(Dollars in thousands)
Intangible assets	$	-	$	-	$	2,089
Goodwill		-		-		7,418
Other real estate owned		-		5,121		-
Impaired loans		-		89,690		17,736
Total	$	-	$	94,811	$	27,243

The table below presents reconciliation for all Level 3 assets and liabilities measured on a nonrecurring basis during 2009 and 2008.

(Dollars in thousands)	Goodwill			Intangible Assets			Impaired Loans
Balance, December 31, 2007	$	7,418		$	2,538		$	-
Amortization of core deposit premium		-			(449	)		-
Impaired loans measured with present value of cash flows		-			-			17,736
Balance, December 31, 2008	$	7,418		$	2,089		$	17,736
Amortization of core deposit premium		-			(426	)		-
OTTI writedown on goodwill		(7,418	)		-			-
Change in impaired loans measured with present value of cash flows		-			-			(12,515	)
Balance, December 31, 2009	$	-		$	1,663		$	5,221

F-26

NOTE 25 - 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)	2009			2008
Assets
Cash and cash equivalents	$	990		$	152
Investment in banking subsidiary		62,126			73,441
Nonmarketable equity securities		310			310
Premises and equipment, net		1,145			1,172
Other assets		575			1,412
Total assets	$	65,146		$	76,487
Liabilities and Shareholders’ Equity
Notes payable to subsidiary	$	918		$	959
Junior subordinated debentures		10,310			10,310
Other liabilities		161			261
Total liabilities		11,389			11,530
Common stock		10,721			5,667
Nonvested restricted stock		(364	)		(445	)
Capital surplus		70,598			62,405
Retained earnings (deficit)		(15,830	)		14,218
Accumulated other comprehensive expense		909			527
Treasury stock		(12,277	)		(17,415	)
Total shareholders’ equity		53,757			64,957
Total liabilities and shareholders’ equity	$	65,146		$	76,487

Condensed Statements of Income (Loss)

	For the years ended December 31,
(Dollars in thousands)	2009			2008			2007
Income:
Dividend income from subsidiary	$	1,081		$	2,200		$	-
Dividend income from equity securities		22			22			22
Other interest income		108			10			112
Other income		-			1			4
Total income		1,211			2,233			138
Expenses:
Salaries		380			405			498
Net occupancy expense		(226	)		(210	)		(203	)
Furniture and equipment expense		6			7			6
Interest expense		759			779			814
Goodwill impairment		20			-			-
Other operating expenses		116			195			375
Total expense		1,055			1,176			1,490
Income (loss) before income taxes and equity in undistributed
earnings of subsidiary		156			1,057			(1,352	)
Income tax expense (benefit)		(9	)		(460	)		(555	)
Income (loss) before equity in undistributed earnings of subsidiary		165			1,517			(797	)
Equity in undistributed earnings (loss) of subsidiary		(25,410	)		892			7,685
Net income(loss)	$	(25,245	)	$	2,409		$	6,888

F-27

NOTE 25 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY) - continued

Condensed Statements of Cash Flows

	For the years ended December 31,
(Dollars in thousands)	2009			2008			2007
Operating activities:
Net income (loss)	$	(25,245	)	$	2,409		$	6,888
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed earnings (loss) of banking subsidiary		25,410			(892	)		(7,685	)
Depreciation and amortization expense		34			35			36
Amortization of deferred compensation on restricted stock		381			406			491
Deferred tax benefit (expense)		681			(44	)		(189	)
Increase (decrease) in other liabilities		(100	)		(119	)		23
Decrease in other assets		16			19			20
Net cash provided (used) by operating activities		1,177			1,814			(416	)
Investing activities:
Purchase of premises and equipment		(7	)		(29	)		(51	)
Purchases of nonmarketable equity securities		-			-			-
Investment in Bank subsidiary		(13,713	)		-			-
Net cash provided (used) by investing activities		(13,720	)		(29	)		(51	)
Financing activities:
Dividends paid		(677	)		(2,679	)		(2,400	)
Proceeds from exercise of stock options		-			467			477
Proceeds from rights offering		13,087			-			-
Repayments on borrowings from subsidiary		(41	)		(34	)		(11	)
(Purchases) sales of treasury stock		1,012			-			(293	)
Net cash provided (used) by financing activities		13,381			(2,246	)		(2,227	)
Net increase (decrease) in cash and cash equivalents		838			(461	)		(2,694	)
Cash and cash equivalents, beginning of year		152			613			3,307
Cash and cash equivalents, end of year	$	990		$	152		$	613

F-28

NOTE 26 - QUARTERLY DATA (UNAUDITED)

	December 31,
	2009											2008
(Dollars in thousands	Fourth			Third			Second			First		Fourth			Third		Second			First
except per share)	Quarter			Quarter			Quarter			Quarter		Quarter			Quarter		Quarter			Quarter
Interest income	$	8,502		$	9,026		$	9,239		$	9,466	$	10,382		$	10,406	$	10,944		$	11,682
Interest expense		3,225			3,645			3,482			3,514		4,064			4,411		4,522			5,659
Net interest income		5,277			5,381			5,757			5,952		6,318			5,995		6,422			6,023
Provision for loan losses		1,000			24,000			5,800			2,000		3,700			1,100		2,500			2,000
Net interest income (loss) after
provision for loan losses		4,277			(18,619	)		(43	)		3,952		2,618			4,895		3,922			4,023
Noninterest income		1,981			1,868			2,238			1,862		1,722			1,851		1,816			1,858
Noninterest expenses		7,117			13,300			7,022			4,753		4,647			5,140		5,329			5,076
Income (loss) before taxes		(859	)		(30,051	)		(4,827	)		1,059		(307	)		1,606		409			805
Income tax expense (benefit)		523			(8,266	)		(1,886	)		196		(312	)		410		(18	)		204
Net income (loss)	$	(1,382	)	$	(21,785	)	$	(2,941	)	$	863	$	5		$	1,196	$	427		$	601
Earnings (loss) per share:
Basic	$	(0.15	)	$	(4.35	)	$	(0.66	)	$	0.19	$	0.00		$	0.27	$	0.10		$	0.17
Diluted	$	(0.15	)	$	(4.35	)	$	(0.66	)	$	0.19	$	0.00		$	0.27	$	0.10		$	0.17

NOTE 27 – SUBSEQUENT EVENTS

In preparing these financial statements, subsequent events were evaluated through the time the financial statements were issued.  Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the Securities and Exchange Commission.  In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the financial statements or disclosed in the notes to the financial statements.

F-29

EXHIBIT INDEX

Exhibit
Number	Description
3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-4 filed on December 2, 2003, File No. 333-110870).
3.2	Articles of Amendment to Articles of Incorporation (re: Change of Name) (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form S-4 filed on December 2, 2003, File No. 333-110870).
3.3	Articles of Amendment to Articles of Incorporation (Re: Authorized Shares of Common Stock), effective August 7, 2009 (incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed on August 7, 2009).
3.4	Amended and Restated Bylaws dated November 28, 2007 (incorporated by reference to Exhibit 3.3 of the Company’s Form 8-K filed on November 28, 2007).
3.5	First Amendment to Amended and Restated Bylaws dated March 19, 2008 (incorporated by reference to Exhibit 3.4 of the Company’s Form 8-K filed on March 20, 2008).
4.1	Form of Common Stock Certificate (the rights of security holders of the Company are set forth in the Company’s Articles of Incorporation and Bylaws included as Exhibits 3.1 through 3.5) (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-2 initially filed on December 20, 1996, File No.  333-18457).
4.2	Indenture dated as of June 15, 2006, between the Company and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.2 of the Company’s Form 8-K filed on June 16, 2006).
10.1	Executive Supplemental Income Plan (Summary) and form of Executive Supplemental Income Agreement (incorporated by reference to Exhibit 10.3 of the Company’s Registration Statement on Form S-4 filed on December 2, 2003, File No. 333-110870).*
10.2	Management Incentive Compensation Plans (Summary) (incorporated by reference to Exhibit 10.4 of the Company’s Registration Statement on Form S-4 filed on December 2, 2003, File No. 333-110870).*
10.3	Lease Agreement With Options dated June 11, 1996 between Robert C.  Coleman and the Company (incorporated by reference to Exhibit 10.6 of the Company’s Registration Statement on Form S-2 initially filed on December 20, 1996, File No.  333-18457
10.4	Salary Continuation Agreement between CapitalBank and William G. Stevens dated October 17, 2002 (incorporated by reference to Exhibit 10.21 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed on November 13, 2002).*
10.5	Salary Continuation Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002 (incorporated by reference to Exhibit 10.22 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed on November 13, 2002).*
10.6	Split Dollar Agreement between CapitalBank and Ralph W. Brewer dated October 17, 2002 (incorporated by reference to Exhibit 10.23 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed on November 13, 2002).*
10.7	Split Dollar Agreement between CapitalBank and William G. Stevens dated December 31, 2003 (incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form10-K for the fiscal year ended December 31, 2003 filed on March 26, 2004).*
10.8	Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.44 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 filed on November 9, 2004).*
10.9	2004 Equity Incentive Plan (incorporated by reference to Appendix A of Amendment No. 1 to the Company’s Proxy Statement filed on April 26, 2004).*
10.10	Banking Support Services Master Agreement between CapitalBank and First-Citizens Bank & Trust Company dated June 15, 2005 (incorporated by reference to Exhibit 10.46 of the Company’s Form 8-K filed on June 20, 2005).
10.11	Amended and Restated Declaration of Trust dated as of June 15, 2006, among the Company, 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 (incorporated by reference to Exhibit 10.50 of the Company’s Form 8-K filed on June 16, 2006).
10.12	Guarantee Agreement dated as of June 15, 2006, between the Company, as guarantor, and Wilmington Trust Company, as guarantee trustee (incorporated by reference to Exhibit 10.51 of the Company’s Form 8-K filed on June 16, 2006).
10.13	CapitalBank Director Deferred Fee Agreement Dated August 12, 2003 for Wayne Q. Justesen (incorporated by reference to Exhibit 10.52 of the Company’s Form 8-K filed on January 3, 2008).*
10.14	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 12, 2003 for Wayne Q. Justesen (incorporated by reference to Exhibit 10.53 of the Company’s Form 8-K filed on January 3, 2008).*
10.15	CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters (incorporated by reference to Exhibit 10.54 of the Company’s Form 8-K filed on January 3, 2008).*

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10.16	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters (incorporated by reference to Exhibit 10.55 of the Company’s Form 8-K filed on January 3, 2008).*
10.17	CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt (incorporated by reference to Exhibit 10.56 of the Company’s Form 8-K filed on January 3, 2008).*
10.18	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt (incorporated by reference to Exhibit 10.57 of the Company’s Form 8-K filed on January 3, 2008).*
10.19	CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys (incorporated by reference to Exhibit 10.58 of the Company’s Form 8-K filed on January 3, 2008).*
10.20	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys (incorporated by reference to Exhibit 10.59 of the Company’s Form 8-K filed on January 3, 2008).*
10.21	First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Ralph W. Brewer (incorporated by reference to Exhibit 10.62 of the Company’s Form 8-K filed on March 4, 2008).*
10.22	First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for William G. Stevens (incorporated by reference to Exhibit 10.63 of the Company’s Form 8-K filed on March 4, 2008).*
10.23	Employment Agreement by and between Community Capital Corporation and William G. Stevens dated March 3, 2008 (incorporated by reference to Exhibit 10.81 of the Company’s Form 8-K filed on March 4, 2008).*
10.24	Employment Agreement by and between Community Capital Corporation and R. Wesley Brewer dated March 3, 2008 (incorporated by reference to Exhibit 10.82 of the Company’s Form 8-K filed on March 4, 2008).*
10.25	Community Capital Stock Ownership Plan (With Code Section 401(k) Provisions) dated as of December 20, 2001, as amended (incorporated by reference to Exhibit 10.84 of the Company's Amendment No. 1 to Form S-8 filed on April 16, 2009).*
14.1	Code of Ethics (incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed on March 26, 2004).
21.1	Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002).
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

* Management contract or compensation plan or arrangement.

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