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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|X| Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2004 or

|_| Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [no fee required]

For the Transition Period from _________ to __________

Commission File Number 0-18460

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

South Carolina
(State or other jurisdiction of incorporation)		 57-0866395
(I.R.S. Employer Identification No.)

1402C Highway 72 West
Greenwood, SC 29649
(Address of principal executive
offices, including zip code)

(864) 941-8200
(Registrant’s telephone number, including area code)


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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES          NO  X  

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING YEAR

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES          NO      

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

3,834,078 shares of common stock, $1.00 par value, as of October 27, 2004


COMMUNITY CAPITAL CORPORATION

Index


PART I. FINANCIAL INFORMATION Page No.
 
Item 1 - Financial Statements (Unaudited)
 
      Condensed Consolidated Balance Sheets - September 30, 2004 and December 31, 2003 3 
 
      Condensed Consolidated Statements of Operations -
        Nine months ended September 30, 2004 and 2003 and three months ended September 30, 2004 and 2003 4 
 
      Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income -
        Nine months ended September 30, 2004 and 2003 5 
 
      Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2004 and 2003 6 
 
      Notes to Condensed Consolidated Financial Statements 7-12 
 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 13-20 
 
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 21 
 
Item 4 - Controls and Procedures 21-22 
 
PART II. OTHER INFORMATION
 
Item 2 - Issuer Repurchase Table 23 
 
Item 5 - Other Information 23 
 
Item 6 - Exhibits and Reports on Form 8-K 24-30 
 
      (a) Exhibits 26-30 
 
      (b) Reports on Form 8-K 24 


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COMMUNITY CAPITAL CORPORATION
Condensed Consolidated Balance Sheets

PART I. FINANCIAL STATEMENTS

Item 1. Financial Statements

September 30,
2004		 December 31,
2003
(Dollars in thousands) (Unaudited)
Assets            
Cash and cash equivalents:    
   Cash and due from banks     $ 12,289   $ 16,664  
   Interest-bearing deposit accounts       269     270  
         Total cash and cash equivalents       12,558     16,934  
Securities:    
   Securities available-for-sale       72,215     42,198  
   Securities held-to-maturity (estimated fair value of $508    
      at September 30, 2004 and $517 at December 31, 2003)       470     470  
   Nonmarketable equity securities       5,571     3,230  
         Total securities       78,256     45,898  
 
Loans held for sale       1,584     274  
 
Loans receivable       415,193     326,178  
Less allowance for loan losses       (5,720 )   (4,584 )
         Loans, net       409,473     321,594  
Premises and equipment, net       12,503     9,626  
Accrued interest receivable       2,182     1,627  
Intangible assets       11,236     3,646  
Cash surrender value of life insurance       12,628     10,794  
Other assets       2,443     2,366  
         Total assets     $ 542,863   $ 412,759  
 
Liabilities and Shareholders’ Equity    
Deposits:    
   Noninterest-bearing     $ 50,882   $ 36,204  
   Interest-bearing       337,991     278,069  
         Total deposits       388,873     314,273  
 
Federal funds purchased and securities sold    
   under agreements to repurchase       26,751     20,178  
Advances from the Federal Home Loan Bank       69,362     30,425  
Obligations under capital leases       228     361  
Accrued interest payable       746     508  
Other liabilities       2,426     1,481  
         Total liabilities       488,386     367,226  
 
Shareholders’ Equity    
Common stock, $1.00 par value; 10,000,000 shares authorized,    
   4,660,444 and 4,175,919 shares issued and outstanding    
   at September 30, 2004 and December 31, 2003, respectively       4,660     4,176  
Nonvested restricted stock; 9,444 shares at September 30, 2004       (201 )   -  
Capital surplus       45,744     37,375  
Accumulated other comprehensive income       913     869  
Retained earnings       15,555     12,791  
Treasury stock at cost; 816,466 and 702,522 shares at September 30, 2004    
   and December 31, 2003, respectively       (12,194 )   (9,678 )
         Total shareholders’ equity       54,477     45,533  
         Total liabilities and shareholders’ equity     $ 542,863   $ 412,759  


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COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Operations
(Unaudited)

(Dollars in thousands) Nine Months Ended
September 30,		 Three Months Ended
September 30,
2004 2003 2004 2003
Interest income:                    
   Loans, including fees     $ 16,269   $ 14,251   $ 5,791   $ 4,741  
   Investment securities:    
      Taxable       1,088     705     414     199  
      Tax-exempt       988     876     323     286  
      Nonmarketable equity securities       130     130     60     37  
   Other interest income       6     2     1     -  
         Total       18,481     15,964     6,589     5,263  
Interest expense:    
   Deposits       3,466     3,584     1,251     1,185  
   Federal Home Loan Bank advances       773     1,158     278     349  
   Other interest expense       364     285     182     54  
         Total       4,603     5,027     1,711     1,588  
Net interest income       13,878     10,937     4,878     3,675  
Provision for loan losses       900     243     350     100  
Net interest income after provision for loan losses       12,978     10,694     4,528     3,575  
Noninterest income:    
   Service charges on deposit accounts       1,993     1,756     726     600  
   Residential mortgage origination fees       635     1,028     137     468  
   Commissions from sales of mutual funds       196     143     48     73  
   Income from fiduciary activities       428     282     156     109  
   Gain on sales of nonmarketable equity securities       -     1,350     -     1,311  
   Gain on sales of securities available-for-sale       5     24     -     13  
    Gain (loss) on sale of fixed assets       (9 )   29     -     29  
    Other operating income       769     856     291     350  
         Total       4,017     5,468     1,358     2,953  
Noninterest expenses:    
   Salaries and employee benefits       6,532     5,288     2,178     1,849  
   Net occupancy expense       863     838     282     300  
   Amortization of intangible assets       371     259     135     88  
   Furniture and equipment expense       465     502     165     162  
   Other operating expenses       3,494     3,824     1,126     1,989  
         Total       11,725     10,711     3,886     4,388  
Income before income taxes       5,270     5,451     2,000     2,140  
Income tax provision       1,066     1,475     486     615  
Net income     $ 4,204   $ 3,976   $ 1,514   $ 1,525  
 
Basic net income per share     $ 1.10   $ 1.14   $ 0.39   $ 0.44  
 
Diluted net income per share     $ 1.07   $ 1.08   $ 0.38   $ 0.41  


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COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
For the nine months ended September 30, 2004 and 2003
(Unaudited)

(Dollars in thousands) Common Stock   Nonvested
Restricted		   Capital   Retained   Accumulated
Other
Comprehensive		   Treasury    
  Shares   Amount   Stock   Surplus   Earnings   Income(Loss)   Stock   Total
Balance,                                    
December 31, 2002       3,860,790   $ 3,861   $ -   $ 34,754   $ 8,947   $ 989   $ (4,143 ) $ 44,408  
                                                     
Net income                               3,976                 3,976  
     
Other comprehensive    
   income, net of tax                                     (177 )         (177 )
Comprehensive income                                                 3,799  
Exercise of    
stock options       282,631     282           2,405                       2,687  
     
Purchase of treasury    
stock (371,580 shares)                                           (5,535 )   (5,535 )
     
$0.21 per share cash    
   Dividend                               (743 )               (743 )
Balance,    
September 30, 2003       4,143,421   $ 4,143   $ -   $ 37,159   $ 12,180   $ 812   $ (9,678 ) $ 44,616  
     
Balance,    
December 31, 2003       4,175,919   $ 4,176         $ 37,375   $ 12,791   $ 869   $ (9,678 ) $ 45,533  
                                                     
Net income                               4,204                 4,204  
     
Other comprehensive    
   income, net of tax                                     44           44  
Comprehensive income                                                 4,248  
Exercise of    
stock options       102,830     102           925                       1,027  
     
Abbeville Capital    
Corporation    
Merger Consideration       371,695     372           7,241                       7,613  
     
Purchase of treasury    
stock (113,944 shares)                                           (2,516 )   (2,516 )
     
Issue of Restricted    
Stock       10,000     10     (213 )   203                       -  
     
Amortization of    
deferred    
compensation on    
restricted stock                   12                             12  
     
$0.38 per share cash    
   Dividend                               (1,440 )               (1,440 )
Balance,    
September 30, 2004       4,660,444   $ 4,660   $ (201 ) $ 45,744   $ 15,555   $ 913   $ (12,194 ) $ 54,477  


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COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended
September 30,
(Dollars in thousands)

 2004
 2003
Cash flows from operating activities:            
   Net income     $ 4,204   $ 3,976  
   Adjustments to reconcile net income to net cash    
      provided by operating activities:    
         Depreciation       630     643  
         Provision for loan losses       900     243  
         Amortization of intangible assets       274     259  
         Amortization less accretion on investments       22     19  
         Amortization of deferred loan costs       290     222  
         Amortization of deferred compensation on restricted stock       12     -  
         Gains on sales of nonmarketable equity securities       -     (1,350 )
         Gains on sales of securities available-for-sale       (5 )   (24 )
         (Gain) Loss on sale of fixed assets       9     (29 )
         (Gain) Loss on sale of other real estate       33     50  
         Disbursements for mortgages held for sale       (27,080 )   (42,668 )
         Proceeds of sales of residential mortgages       25,770     42,377  
         (Increase) decrease in interest receivable       (555 )   229  
         Increase (decrease) in interest payable       238     (133 )
         (Increase) decrease in other assets       377     (1,224 )
         Decrease in other liabilities       (832 )   (177 )
            Net cash provided by operating activities       4,287     2,413  
Cash flows from investing activities:    
   Net increase in loans to customers       (53,835 )   (20,823 )
   Purchases of securities available-for-sale       (32,143 )   (9,025 )
   Proceeds from maturities of securities available-for-sale       345     12,385  
   Proceeds from sales of securities available-for-sale       18,777     4,543  
   Proceeds from sales of nonmarketable equity securities       493     3,358  
   Purchases of nonmarketable equity securities       (2,616 )   (635 )
   Proceeds from sales of premises and equipment       472     275  
   Proceeds from sales of other real estate       74     356  
   Purchases of premises and equipment       (3,009 )   (648 )
   Net assets acquired in bank acquisition       11,247     -  
            Net cash used by investing activities       (60,195 )   (10,214 )
Cash flows from financing activities:    
   Net increase in deposit accounts       21,926     25,139  
   Net decrease in federal funds purchased and repos       (3,309 )   (12,265 )
   Advances of Federal Home Loan Bank borrowings       44,000     21,900  
   Repayments of Federal Home Loan Bank borrowings       (8,156 )   (20,590 )
   Dividends paid       (1,440 )   (743 )
   Proceeds from exercise of stock options       1,027     2,687  
   Purchase of treasury stock       (2,516 )   (5,535 )
            Net cash provided by financing activities       51,532     10,593  
Net increase (decrease) in cash and cash equivalents       (4,376 )   2,792  
 
Cash and cash equivalents, beginning of period       16,934     9,687  
Cash and cash equivalents, end of period     $ 12,558   $ 12,479  


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COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 – Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures that would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of September 30, 2004 and for the interim periods ended September 30, 2004 and 2003 are unaudited and include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The financial information as of December 31, 2003 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in our 2003 Annual Report.

Note 2 – Acquisition

On March 5, 2004, we acquired 100 percent of the outstanding shares of Abbeville Capital Corporation, the parent company of The Bank of Abbeville. The Bank of Abbeville became a branch of CapitalBank, our wholly owned banking subsidiary. The acquisition allows us to expand strategically our operations into a contiguous market in which we presently have no full-service branch facilities. Additionally, we expect that over the twelve months period following the acquisition we will realize cost reductions due to achieving certain economies of scale.

The aggregate acquisition cost was $15,411,000, including $7,226,000 of cash, 371,695 shares of our common stock valued at $7,613,000 and direct acquisition – related costs of $573,000. The value of the 371,695 shares of common stock issued at $20.48 per share was determined based on the average closing price of our common shares over the three-day period before and after January 16, 2004 (the “measurement date”). The measurement date was determined pursuant to the provisions of the Emerging Issues Task Force Consensus 99-12, “Determination of the Measurement Date for the Market Price of Acquired Securities Issued in a Purchase Business Combination”, due to the application of a formula to determine the number of shares to be issued.

The primary intangible assets acquired in conjunction with the purchase of Abbeville Capital Corporation are core deposit intangible assets with an estimated useful life of approximately twelve years and goodwill. The transaction was a tax-free reorganization for federal income tax purposes and intangible assets are not deductible in determining taxable income.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed March 5, 2004. We obtained third party evaluations of certain intangible assets.

(Dollars in thousands)        
 
Cash and cash equivalents     $ 4,164  
Federal funds sold       14,291  
Investment securities       17,163  
Loans, net of allowance       35,335  
Premises and equipment       979  
Core deposit intangible asset       927  
Goodwill       6,937  
Other assets       2,336  
   Total assets acquired       82,132  
 
Deposits       52,674  
Advances from the Federal Home Loan Bank       3,091  
Other liabilities       10,956  
   Total liabilities assumed       66,721  
Net assets acquired     $ 15,411  


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COMMUNITY CAPITAL CORPORATION

Note 3 – Supplemental Cash Flow Information

Nine Months Ended
September 30,
(Dollars in thousands)

 2004
 2003
Cash paid during the period for:            
   Income taxes     $ 873   $ 1,051  
   Interest       4,365     5,160  
 
Noncash investing and financing activities:    
   Foreclosures on loans       -     487  

Note 4 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank of Atlanta to us were $69,362,000 as of September 30, 2004. Of this amount, the following have scheduled maturities greater than one year:

Maturing on
 Interest Rate
 Principal
(Dollars in thousands)
10/13/05     5.84% - fixed, callable 10/13/04     $ 3,000  
05/14/07     0.74% - adjustable on 11/15/04, callable 05/16/05       15,000  
09/05/08     3.03% - fixed, callable 12/06/04       5,400  
09/29/08     1.86% - fixed, callable 12/29/04       6,500  
02/02/09     4.95% - fixed       450  
03/17/10     5.92% - fixed, callable 12/17/04       5,000  
03/14/13     1.87% - adjustable on 12/14/04       10,000  
        $ 42,350  

Note 5 – Shareholders’ Equity

During the first nine months of 2004, there were 102,830 options exercised by our employees and directors with total proceeds of $1,027,000 at an average exercise price of $9.99. We issued 371,695 shares in connection with our merger with Abbeville Capital Corporation at a price of $20.48 for a total cost of $7,612,000. The value of the shares was determined based on the average closing price of our common shares over the three-day period before and after January 16, 2004 (the “measurement date”). The measurement date was determined pursuant to the provisions of the Emerging Issues Task Force Consensus 99-12, “Determination of the Measurement Date for the Market Price of Acquired Securities Issued in a Purchase Business Combination”, due to the application of a formula to determine the number of shares that we issued. On January 21, 2004, the Board of Directors declared a cash dividend of $0.12 per share, which was paid to shareholders on March 5, 2004. On April 21, 2004, the Board of Directors declared a cash dividend of $0.13 per share, which was paid on June 4, 2004. On July 21, 2004 the Board of Directors declared a cash dividend of $0.13 per share, which was paid on September 3, 2004. Total cash paid for cash dividends during the nine month period ended September 30, 2004 was $1,440,000. We issued 10,000 shares of restricted stock on August 24, 2004 at a price of $21.30 per share. The restricted shares will fully vest on August 24, 2007. Also, on July 22, 2004 we announced the continuation of our stock buyback program by authorizing an additional 200,000 shares for repurchase. As of September 30, 2004 we had purchased 113,944 shares with total proceeds of $2,516,000 at an average price of $22.12 per share.


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COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 6 – Stock-Based Compensation

We have a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. We grant stock options and restricted stock to eligible employees. The stock option awards are generally for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. We recognize compensation expense related to our restricted stock grants based on the fair value of the shares awarded on the date that the shares are awarded. The fair value of the grants are amortized over the vesting period. The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Nine Months Ended
September 30,
(Dollars in thousands, except for per share data)

 2004
2003
Net income, as reported     $ 4,204   $ 3,976  
Deduct: Total stock-based employee    
   compensation expense determined    
   under fair value based method    
   for all awards, net of related tax effects       (65 )   (113 )
Pro forma net income     $ 4,139   $ 3,863  
Earnings per share:    
   Basic - as reported     $ 1.10   $ 1.14  
   Basic - pro forma     $ 1.09   $ 1.10  
   Diluted - as reported     $ 1.07   $ 1.08  
   Diluted - pro forma     $ 1.05   $ 1.05  


Three Months Ended
September 30,
(Dollars in thousands, except for per share data)

 2004
2003
Net income, as reported     $ 1,514   $ 1,525  
Deduct: Total stock-based employee    
   compensation expense determined    
   under fair value based method    
   for all awards, net of related tax effects       (23 )   (31 )
Pro forma net income     $ 1,491   $ 1,494  
Earnings per share:    
   Basic - as reported     $ 0.39   $ 0.44  
   Basic - pro forma     $ 0.38   $ 0.43  
   Diluted - as reported     $ 0.38   $ 0.41  
   Diluted - pro forma     $ 0.37   $ 0.40  


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COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7 – Earnings Per Share

A reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share are as follows:

Nine Months Ended September 30, 2004
(Dollars in thousands, except per share)

 Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Basic earnings per share                
   Income available to common shareholders     $ 4,204     3,813,251   $ 1.10  
Effect of dilutive securities    
   Stock options       -     115,714  
   Unvested restricted stock       -     1,307  
Diluted earnings per share    
   Income available to common shareholders    
      plus assumed conversions     $ 4,204     3,930,272   $ 1.07  

Nine Months Ended September 30, 2003
(Dollars in thousands, except per share)

 Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Basic earnings per share    
   Income available to common shareholders     $ 3,976     3,499,320   $ 1.14  
Effect of dilutive securities    
   Stock options       -     188,054  
Diluted earnings per share    
   Income available to common shareholders    
      plus assumed conversions     $ 3,976     3,687,374   $ 1.08  

Three Months Ended September 30, 2004
(Dollars in thousands, except per share)

 Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Basic earnings per share    
   Income available to common shareholders     $ 1,514     3,909,053   $ 0.39  
Effect of dilutive securities    
   Stock options       -     98,112  
   Unvested restricted stock       -     3,892  
Diluted earnings per share    
   Income available to common shareholders    
      plus assumed conversions     $ 1,514     4,011,057   $ 0.38  


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COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 7 – Earnings Per Share – continued

Three Months Ended September 30, 2003
(Dollars in thousands, except per share)

 Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Basic earnings per share    
   Income available to common shareholders     $ 1,525     3,503,909   $ 0.44  
Effect of dilutive securities    
   Stock options       -     180,686  
Diluted earnings per share    
   Income available to common shareholders    
      plus assumed conversions     $ 1,525     3,684,595   $ 0.41  

Note 8 – Comprehensive Income

The amounts of other comprehensive income included in equity along with the related tax effects are as follows:

Nine Months Ended September 30, 2004
(Dollars in thousands)

 Pre-tax
Amount
(Expense)
Benefit
Net-of-tax
Amount
Unrealized gains (losses) on securities:    
   Unrealized holding gains (losses) arising    
      during the period     $ 73   $ (26 ) $ 47  
   Less reclassification adjustment for gains    
      realized in net income       (5 )   2     (3 )
Net unrealized gains (losses) on securities       68     (24 )   44  
Other comprehensive income     $ 68   $ (24 ) $ 44  

Nine Months Ended September 30, 2003
(Dollars in thousands)

 Pre-tax
Amount
(Expense)
Benefit
Net-of-tax
Amount
Unrealized gains (losses) on securities:    
   Unrealized holding gains (losses) arising    
      during the period     $ 1,105   $ (348 ) $ 757  
   Less reclassification adjustment for gains    
      realized in net income       (1,374 )   440     (934 )
Net unrealized gains (losses) on securities       (269 )   92     (177 )
Other comprehensive income     $ (269 ) $ 92   $ (177 )


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COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 8 – Comprehensive Income – continued

Three Months Ended September 30, 2004
(Dollars in thousands)

 Pre-tax
Amount
(Expense)
Benefit
Net-of-tax
Amount
Unrealized gains (losses) on securities    
   Unrealized holding gains (losses) arising    
      during the period     $ 1,833   $ (624 ) $ 1,209  
   Less reclassification adjustment for gains    
      realized in net income       -     -     -  
Net unrealized gains (losses) on securities       1,833     (624 )   1,209  
Other comprehensive income     $ 1,833   $ (624 ) $ 1,209  

Three Months Ended September 30, 2003
(Dollars in thousands)

 Pre-tax
Amount
(Expense)
Benefit
Net-of-tax
Amount
Unrealized gains (losses) on securities    
   Unrealized holding gains (losses) arising    
      during the period     $ (228 ) $ (72 ) $ 156  
   Less reclassification adjustment for gains    
      realized in net income       (1,327 )   427     (900 )
Net unrealized gains (losses) on securities       (1,099 )   355     (744 )
Other comprehensive income     $ (1,099 ) $ 355   $ (744 )


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Table of Contents

COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our financial condition as of September 30, 2004 compared to December 31, 2003 and the results of operations for the nine and three months ended September 30, 2004 compared to the nine and three months ended September 30, 2003. These comments should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes appearing in this report.

Results of Operations

Net Interest Income

For the nine months ended September 30, 2004, net interest income, the major component of our net income, was $13,878,000 compared to $10,937,000 for the same period of 2003, an increase of $2,941,000 or 26.89%. For the three months ended September 30, 2004, net interest income was $4,878,000 compared to $3,675,000 for the same period of 2003, an increase of $1,203,000 or 32.73%. The average rate realized on interest-earning assets decreased to 5.58% from 6.10%, while the average rate paid on interest-bearing liabilities decreased to 1.53% from 2.15% for the nine month periods ended September 30, 2004 and 2003, respectively.

The tax-effected net interest spread and net interest margin were 4.05% and 4.22%, respectively, for the nine-month period ended September 30, 2004, compared to 3.95% and 4.22% for the nine month period ended September 30, 2003.

Provision and Allowance for Loan Losses

The provision for loan losses is the charge to operating earnings that management believes is necessary to maintain the allowance for loan losses at an adequate level. For the nine months ended September 30, 2004, the provision charged to expense was $900,000, as compared to $243,000 for the same period in 2003. The increase in provision expense was primarily due to funding for loan growth of $53.2 million during the first nine months of 2004, exclusive of loans acquired through the merger with Abbeville Capital Corporation. For the quarter ended September 30, 2004 and 2003 the provision charged to expense was $350,000 and $100,000, respectively. Our nonperforming loans totaled $2,273,000 at September 30, 2004 compared to $1,682,000 at September 30, 2003. Criticized and classified loans have increased from $11,874,000 at September 30, 2003 to $14,759,000 at September 30, 2004. The allowance for loan losses was 1.38% of total loans at September 30, 2004, as compared to 1.42% at September 30, 2003.

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. We maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which we believe to be reasonable, but which may not prove to be accurate. Thus, charge-offs in future periods could exceed the allowance for loan losses, or substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease of our net income and, possibly, our capital. Based on present information, we believe the allowance for loan losses is adequate at September 30, 2004 to meet presently known and inherent risks in the loan portfolio.

Noninterest Income

Total noninterest income for the nine months ended September 30, 2004 was $4,017,000, a decrease of $1,451,000, or 26.54% compared to $5,468,000 for the nine months ended September 30, 2003. Total noninterest income for the quarter ended September 30, 2004 decreased $1,595,000, or 54.01% to $1,358,000, compared to $2,953,000 at September 30, 2003.

Service charge income increased $237,000, or 13.50% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 and $126,000, or 21.00% from the three months ended September 30, 2003 to the three months September 30, 2004. Residential mortgage origination fees decreased $393,000, or 38.23% from $1,028,000 to $635,000 for the nine months ended September 30, 2004, compared to the nine months ended September 30, 2003 and decreased $331,000, or 70.73% from $468,000 to $137,000 for the three months ended September 30, 2004, compared to the three months ended September 30, 2003.


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

The income from fiduciary activities increased $146,000, or 51.77% from the nine month period ended September 30, 2003 to the nine month period ended September 30, 2004, and $47,000, or 43.12% from the three month period ended September 30, 2003 to the three month period ended September 30, 2004. Commissions from the sales of mutual funds increased $53,000, or 37.06% from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 and decreased $25,000, or 34.25% for the three months ended September 30, 2003 to the three months ended September 30, 2004. We realized a gain on the sale of nonmarketable equity securities of $1,350,000 for the nine months ended September 30, 2003, $1,311,000 of which was realized in the third quarter of 2003, compared to no gains for the same period in 2004. Gains on sales of securities available for sale for the nine months ended September 30, 2004 were $5,000 compared to $24,000 for the nine months ended September 30, 2003. We realized a loss on the sale of fixed assets of $9,000 during the nine months ended September 30, 2004, compared to a gain of $29,000 for the same period in 2003. Other operating income decreased $87,000 from the nine months ended September 30, 2003 to the nine months ended September 30, 2004 and $59,000 from the three months ended September 30, 2003 to the three months ended September 30, 2004. Included in other operating income for the three and nine months ended September 30, 2003 was $109,000 that was paid to us resulting from MetLife’s acquisition of General American Life Insurance Company, a mutual company, and by virtue of our ownership of General American policies, we received a pro rata portion of the purchase price of the mutual company.

Noninterest Expense

Total noninterest expense for the first nine months of 2004 was $11,725,000, an increase of $1,014,000, or 9.47%, when compared to the first nine months of 2003. For the quarter ended September 30, 2004, noninterest expense was $3,886,000, a decrease of $502,000, or 11.44%, over the comparable period of 2003.

The primary component of noninterest expense is salaries and benefits, which were $6,532,000 and $5,288,000 for the nine months ended September 30, 2004 and 2003, respectively and $2,178,000 and $1,849,000 for the three months ending September 30, 2004 and 2003, respectively. The increases are partially due to staff increases from the opening of a new branch in Greer, South Carolina, which opened in July, 2004, and the increased staff in connection with our merger with Abbeville Capital Corporation. Net occupancy expense increased $25,000 for the nine month period ending September 30, 2004, an increase of 2.98% over the related period in 2003, and decreased $18,000, or 6.00% for the three months ending September 30, 2004 compared to the same period in 2003. The amortization of intangible assets increased $112,000, or 43.24% to $371,000 from the nine month period ended September 30, 2003 to the nine month period ended 2004, and $47,000, or 53.41% from the three month period ended September 30, 2003 to the three months ended September 30, 2004. This increase is due solely to the increase in core deposit intangibles related to the Abbeville merger. Other operating expenses were $3,494,000 for the nine months ended September 30, 2004, as compared to $3,824,000 for the same period in 2003, a decrease of $330,000, or 8.63%, and were $1,126,000 for the three months ended September 30, 2004 as compared to $1,989,000 for the three months ended September 30, 2003, a decrease of $863,000, or 43.39%. We realized a loss of $786,000 due to the early extinguishment of Federal Home Loan Bank debt in the third quarter of 2003, and also realized a loss of $224,000 for the write-off of a lease obligation due to a software conversion during the third quarter of 2003.

Income Taxes

For the nine months ended September 30, 2004 and 2003, the effective income tax rate was 20.23% and 27.06%, respectively, and the income tax provision was $1,066,000 and $1,475,000, respectively. For the quarter ended September 30, 2004, the effective tax rate was 24.30% compared to 28.74% for the second quarter of 2003. The decline in the effective tax rate was a result of a deduction taken for a large number of disqualifying dispositions of incentive stock options and the exercise of nonqualified stock options during 2004.

Net Income

The combination of the above factors resulted in net income of $4,204,000 for the nine months ended September 30, 2004 compared to $3,976,000 for the comparable period in 2003, an increase of 5.73%. For the quarter ended September 30, 2004, net income was $1,514,000, a decrease of $11,000, or 0.72% when compared to the same quarter of 2003.


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

Assets and Liabilities

During the first nine months of 2004, total assets increased $130,104,000, or 31.52%, when compared to December 31, 2003. Included in the increase was $82,132,000 in assets that we acquired relative to the merger with Abbeville Capital Corporation. We experienced an increase of $89,015,000, or 27.29% in the loan area during the first nine months of 2004. Included in the increase in loans was $35,767,000 that we acquired from Abbeville. Total deposits increased $74,600,000, or 23.74%, to $388,873,000 at September 30, 2004. Of the increase, $52,674,000 was acquired through the Abbeville merger. Total federal funds purchased and repurchase agreements increased $6,573,000 from $20,178,000 at December 31, 2003 to $26,751,000 at September 30, 2004, an increase of 32.58%. The increase in repurchase agreements was due to the merger with Abbeville. Advances from the Federal Home Loan Bank increased $38,937,000, or 127.98% from $30,425,000 at December 31, 2003 to $69,362,000 at September 30, 2004. The increase in borrowings was utilized to fund loan growth and to pay off other short term obligations.

Investment Securities

Investment securities increased $32,358,000, or 70.50% to $78,256,000 at September 30, 2004. Included in this increase was $17,163,000 in securities that we acquired relative to the merger with Abbeville Capital Corporation. The increase was attributable to increases in securities available-for-sale and nonmarketable equity securities.

Loans

Loans receivable increased $89,015,000, or 27.29%, from $326,178,000 at December 31, 2003 to $415,193,000 at September 30, 2004. Included in the increase is $35,767,000 in loans that we acquired through the Abbeville merger. The largest increase was in real estate mortgage and commercial loans, which increased $50,750,000, or 21.68%, to $284,803,000 at September 30, 2004. Commercial and agricultural loans increased $22,964,000, or 73.57% to $54,178,000 at September 30, 2004. Consumer installment loans increased $3,724,000, or 19.54%, to $22,780,000 at September 30, 2004 and home equity loans increased $11,310,000, or 46.67% to $35,546,000 at September 30, 2004. Balances within the major loan receivable categories as of September 30, 2004 and December 31, 2003 are as follows:

(Dollars in thousands)

 September 30,
2004
 December 31,
2003
Commercial and agricultural     $ 54,178   $ 31,214  
Real estate - construction       16,276     16,187  
Real estate - mortgage and commercial       284,803     234,053  
Home equity       35,546     24,236  
Consumer, installment       22,780     19,056  
Consumer, credit card and checking       1,610     1,432  
      $ 415,193   $ 326,178  


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

Risk Elements in the Loan Portfolio

The following is a summary of risk elements in the loan portfolio:

September 30,
(Dollars in thousands)

 2004
 2003
Loans:            
   Nonaccrual loans     $ 2,034   $ 1,343  
   Accruing loans more than 90 days past due       239     339  
      $ 2,273   $ 1,682  

Loans identified by the internal review mechanism, including nonaccrual loans and accruing loans more than 90 days past due:

September 30,
(Dollars in thousands)

 2004
 2003
Criticized     $ 8,457   $ 5,195  
Classified       6,302     6,679  

Of the $8,457,000 in criticized loans at September 30, 2004, 85.59% were secured by first real estate mortgages and less than one percent was unsecured. Of the $6,302,000 in classified loans, 81.41% were secured by first real estate mortgages and 0.96% was unsecured.

Activity in the Allowance for Loan Losses is as follows:

September 30,
(Dollars in thousands)

 2004
 2003
Balance, January 1,     $ 4,584   $ 4,282  
Allowance acquired through acquisition       432     -  
Provision for loan losses for the period       900     243  
Chargeoffs       (282 )   (409 )
Recoveries       86     256  
Balance, end of period     $ 5,720   $ 4,372  
Gross loans outstanding, end of period     $ 415,193   $ 308,884  
Allowance for loan losses to loans outstanding       1.38 %   1.42 %

Premises and Equipment

Our purchases of fixed assets during the first nine months of 2004 totaled $3,009,000. The increase is mainly attributable to the costs associated with our new branch in Greer which opened in July 2004, and our new branch in Greenville, which we anticipate will open in the first quarter of 2005. We also assumed $979,000 in fixed assets as a result of the merger with Abbeville, $269,000 of which were disposed due to no longer being in use. Total fixed assets, net of depreciation, increased $2,877,000 during the first nine months of 2004.


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

Deposits

Total deposits increased $74,600,000, or 23.74%, from $314,273,000 at December 31, 2003 to $388,873,000 at September 30, 2004. Included in the increase is $52,674,000 that we acquired through our merger with Abbeville. Expressed in percentages, noninterest-bearing deposits increased 40.54% from $36,204,000 at December 31, 2003 to $50,882,000 at September 30, 2004. Interest-bearing deposits increased 21.55% from $278,069,000 at December 31, 2003 to $337,991,000 at September 30, 2004.

Balances within the major deposit categories as of September 30, 2004 and December 31, 2003 are as follows:

September 30,
(Dollars in thousands)

 2004
 2003
Noninterest-bearing demand deposits     $ 50,882   $ 36,204  
Interest-bearing demand deposits       87,691     73,166  
Money market accounts       63,897     64,796  
Savings deposits       37,482     28,697  
Certificates of deposit       148,921     111,410  
      $ 388,873   $ 314,273  

Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank of Atlanta to us were $69,362,000 as of September 30, 2004. Of this amount, the following have scheduled maturities greater than one year:

Maturing on
 Interest Rate
 Principal
(Dollars in thousands)
10/13/05     5.84% - fixed, callable 10/13/04     $ 3,000  
05/14/07     0.74% - adjustable on 11/15/04, callable 05/16/05       15,000  
09/05/08     3.03% - fixed, callable 12/06/04       5,400  
09/29/08     1.86% - fixed, callable 12/29/04       6,500  
02/02/09     4.95% - fixed       450  
03/17/10     5.92% - fixed, callable 12/17/04       5,000  
03/14/13     1.87% - adjustable on 12/14/04       10,000  
        $ 42,350  

Capital

Quantitative measures established by the federal banking agencies to ensure capital adequacy require us to maintain minimum ratios 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 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 regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

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

The following table summarizes capital ratios and the regulatory minimum requirements at September 30, 2004:

Tier 1
Risk-based
 Total
Risk-based
 Tier 1
Leverage
Actual ratio:                
   Community Capital Corporation       10.39%   11.65%   7.97%
   CapitalBank       10.08%   11.33%   7.72%
Regulatory minimums:    
   For capital adequacy purposes       4.00%   8.00%   4.00%
   To be well-capitalized under prompt action provisions       6.00%   10.00%   5.00%


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Table of Contents

COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

Liquidity and Capital Resources

Shareholders’ equity was increased by the $1,027,000 proceeds from the exercise of stock options and net income of $4,204,000. Total equity was also increased by the $7,613,000 in stock issued in connection with our merger with Abbeville Capital Corporation. Due to changes in the market rates of interest, the fair value of our securities available-for-sale increased, which had the effect of increasing shareholders’ equity by $44,000 net of the deferred taxes for the nine months ended September 30, 2004 when compared to December 31, 2003. Total equity was reduced by cash dividends paid during the nine months ended September 30, 2004 which totaled $1,440,000, and also by the $2,516,000 paid for treasury stock during the nine months ended September 30, 2004.

For the near term, maturities and sales of securities available-for-sale are expected to be a source of liquidity as we deploy these funds into loans to achieve the desired mix of assets and liabilities. We also expect to build our deposit base. Advances from the Federal Home Loan Bank and the Bankers Bank will also continue to serve as a funding source, at least for the near future. We have the ability to receive an additional $63.6 million in advances under the terms of our agreement with the Federal Home Loan Bank. Short-term borrowings by CapitalBank are not expected to be a primary source of liquidity for the near term; however, we have approximately $49.1 million of unused lines of credit to purchase federal funds.

Off-Balance Sheet Risk

Through the operations of CapitalBank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2004, we had issued commitments to extend credit of $70,803,000 and standby letters of credit of $1,810,000 through various types of commercial lending arrangements. Approximately $56,166,000 million of these commitments to extend credit had variable rates.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2004.

(Dollars in thousands) Within
One
Month		 After One
Through
Three
Months		 After Three
Through
Twelve
Months		 Within
One
Year		 Greater
Than
One Year		 Total
Unused commitments to extend credit     $ 2,491   $ 2,519   $ 19,670   $ 24,680   $ 46,123   $ 70,803  
Standby letters of credit       692     197     133     1,022     788     1,810  
      Total     $ 3,183   $ 2,716   $ 19,803   $ 25,702   $ 46,911   $ 72,613  

We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2003 as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

To account for our acquisition of Abbeville Capital Corporation, and in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we used the purchase method of accounting. Under this method, we are required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal, or other valuation techniques. These estimates also include the establishment of various accruals for planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions resulted in goodwill and the acquisition of other intangible assets, the finite lived intangible asset, a core deposit intangible. Both are subject to periodic impairment tests.

We test for goodwill impairment by determining the fair value for each reporting unit and comparing it to the carrying amount. If the carrying amount exceeds its fair value, the potential for impairment exists, and a second step of impairment testing will be performed. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its fair value.

We also believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

Recently Issued Accounting Standards

No recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us have occurred during the quarter ending September 30, 2004, other than the items described below.

In November 2003, the Emerging Issues Task Force (“EITF”) reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but for which other-than-temporary impairment has not been recognized. Accordingly EITF issued EITF No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance determining the amount of impairment and additional quantitative and qualitative disclosures. The guidance for determining the amount of impairment was scheduled to be effective for periods ending after June 15, 2004, but has been delayed indefinitely pending implementation guidance by the FASB. The disclosure provisions of EITF No. 03-1 were effective for fiscal years ending after December 15, 2003. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Company’s financial position or results of operations.


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COMMUNITY CAPITAL CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

In March 2004, the FASB issued an exposure draft on “Share-Based Payment”. The proposed Statement addresses the accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and generally would require instead that such transactions be accounted for using a fair-value-based method. This Statement, if approved, was scheduled to be effective for awards that are granted, modified, or settled in fiscal years beginning after a) December 15, 2004 for public entities and nonpublic entities that used the fair-value-based method of accounting under the original provisions of Statement 123 for recognition or pro forma disclosure purposes and b) December 15, 2005 for all other nonpublic entities. On October 16, 2004, the FASB delayed the effective date of this proposal by six months and anticipates it will be effective for by the third quarter of 2005. Retrospective application of this Statement is not permitted. The adoption of this Statement, if approved, could have an impact on the Company’s financial position or results of operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Regulatory Matters

We are not aware of any current recommendations by regulatory authorities, which, if they were to be implemented, would have a material effect on liquidity, capital resources, or operations.

Advisory Note Regarding Forward-Looking Statements

Certain of the statements contained in this report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forwarding-looking statements give our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. Any or all of our forward-looking statements here or in other publications may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual results may vary materially, and there are no guarantees about the performance of our stock.

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


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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises principally from interest rate risk inherent in our lending, deposit, and borrowing activities. Management actively monitors and manages its interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations. The information contained in Item 2 in the section captioned “Provision and Allowance for Loan Losses” is incorporated herein by reference. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.

The primary objective of asset and liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the next twelve months. At September 30, 2004, on a cumulative basis through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by $189,246,000. This liability-sensitive position is largely attributable to short-term certificates of deposit, money market accounts and NOW accounts, which totaled $309,307,000 at September 30, 2004.

Item 4. Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications. We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as exhibits to this Quarterly Report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls. Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.

Limitations on the Effectiveness of Controls. The company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.


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Item 4. Controls and Procedures – continued

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 Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Annual Report on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by our finance personnel, as well as our independent auditors who evaluate them in connection with determining their auditing procedures related to their report on our annual financial statements and not to provide assurance on our controls. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary. Our intent is to maintain the Disclosure Controls as dynamic systems that change as conditions warrant.

Among other matters, we also considered whether our evaluation identified any “significant deficiencies” or “material weaknesses” in our internal control over financial reporting, and whether the company had identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. This information was important both for the controls evaluation generally, and because item 5 in the certifications of the CEO and CFO requires that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors. In the professional auditing literature, “significant deficiencies” are referred to as “reportable conditions,” which are deficiencies in the design or operation of controls that could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Auditing literature defines “material weakness” as a particularly serious reportable condition in which the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such misstatements would not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to address other controls matters in the controls evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our ongoing procedures.

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


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PART II - OTHER INFORMATION

Items 1, 3 and 4 of Part II are not applicable.

Item 2. Issuer Repurchaser Table

The following table provides information with respect to any purchase made by us or on our behalf or any “affiliated purchaser”, as defined in 17 C.F.R. § 240.10b-18(a)(3), of shares of any class of our equity securities that is registered by us pursuant to section 12 of the Exchange Act:

Period (a) Total number of
shares purchased		 (b) Average price
paid per share		 (c) Total number of
shares purchased as
part of publicly
announced plans or
programs		 (d) Maximum number
(or appropriate dollar
value) of shares that
may yet be purchased
under the plans or
programs
July 1, 2004 through July 31, 2004 - - - 200,000
August 1, 2004 through August 31, 2004 1,100 $20.75 1,100 198,900
September 1, 2004 through September 30, 2004 112,844 $22.10 112,844 86,056
Total 113,944 $22.09 113,944 86,056

Item 5. Other Information

On January 21, 2004 we declared a cash dividend on each outstanding share of our common stock, par value $1.00 per share, in the amount of $0.12 per share of common stock, which dividend was paid on March 5, 2004 to holders of record as of the close of business on February 13, 2004.

On April 21, 2004 we declared a cash dividend on each outstanding share of our common stock, par value $1.00 per share, in the amount of $0.13 per share of common stock, which dividend was paid on June 4, 2004, to holders of record as of the close of business on May 14, 2004.

On July 21, 2004 we declared a cash dividend on each outstanding share of our common stock, par value $1.00 per share, in the amount of $0.13 per share of common stock, which was paid on September 3, 2004, to holders of record as of the close of business on August 13, 2004.


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PART II. OTHER INFORMATION – continued

Item 6. Exhibits And Reports on Form 8-K

(a) Exhibit 10.44 Form of Restricted Stock Agreement.*

  Exhibit 31.1 Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  Exhibit 31.2 Certificate of Principal Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  * Denotes management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K.

Date Filed or
Furnished		 Item Number Description
July 21, 2004 12 Reporting earnings for the period ended June 30, 2004
July 23, 2004 5 Announcing our stock buyback program
August 3, 2004 5 Announcing our amended and restated bylaws
August 12, 2004 5 Announcing an agreement for a stock buyback program contemplating Rule 10b5-1 of the Securities and Exchange Act of 1934
September 7, 2004 8.01, 9.01 Announcing the redemption of 100,000 shares of our common stock in a private transaction.
October 20, 2004 2.02, 7.01, 9.01 Reporting earnings for the period ended September 30, 2004


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  By: /s/ William G. Stevens  
    William G. Stevens
President & Chief Executive Officer


Date: November 9, 2004 By: /s/ R. Wesley Brewer  
    R. Wesley Brewer
Chief Financial Officer





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