COMMUNITY CAPITAL CORP /SC/ - 10-K Annual Report

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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, 2004
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 or organization)

57-0866395
(I. R. S. Employer
Identification No. )

1402-C Highway 72 West
Greenwood, South Carolina
(Address of principal executive offices)

29649
(Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange On Which Reported

Common Stock, par value $1.00 per share	American Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2004 was approximately $67.9 million based upon the last sale price reported for such date on the American Stock Exchange, which was $21.00 per share.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS.

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 REGISTRANTS

On March 8, 2005, the number of shares outstanding of the Registrant’s common stock, $1.00 par value, was 3,874,156.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement in connection with its 2005 Annual Meeting of Stockholders (Part III).

Advisory Note Regarding Forward-Looking Statements

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

Factors that could cause actual results to differ from expectations include, among other things: (1) the challenges, costs, and complications associated with: (a) the continued development of our branches, (b) the recent mergers between us and Abbeville Capital Corporation and between our wholly-owned subsidiary, CapitalBank, with the wholly-owned subsidiary of Abbeville Capital Corporation, The Bank of Abbeville, and (c) compliance with the Sarbanes-Oxley Act of 2002, the rules promulgated thereunder, and the related rules promulgated by the American Stock Exchange; (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, market, and monetary fluctuations; (8) risks inherent in making loans including repayment risks and value of collateral; (9) the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses; (10) fluctuations in consumer spending and saving habits; (11) the demand for our products and services; (12) technological changes; (13) the challenges and uncertainties in the implementation of our expansion and development strategies; (14) 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 we have filed with the Securities and Exchange Commission; and (23) our success at managing the risks involved in the foregoing.

PART I

Item 1. Business.

General

Community Capital Corporation is a bank holding company headquartered in Greenwood, South Carolina. We were incorporated under the laws of the State of South Carolina on April 8, 1988 as a holding company for Greenwood National Bank, which opened in 1989.

We were formed principally in response to perceived opportunities resulting from takeovers of several South Carolina-based banks by large southeastern regional bank holding companies. In many cases, when these consolidations occur, local boards of directors are dissolved, and local management is relocated or terminated. We believe this situation creates favorable opportunities for new community banks with local management and local directors. Management believes that such banks can be successful in attracting individuals and small to medium-sized businesses as customers who wish to conduct business with a locally owned and managed institution that demonstrates an active interest in their business and personal financial affairs.

In 1994, we made the strategic decision to expand beyond the Greenwood County area by creating an organization of independently managed community banks that serve their respective local markets, but which share a common vision and benefit from the strength, resources and economies of a larger institution. In 1995, we opened Clemson Bank & Trust in

Clemson, South Carolina. In 1997, we opened Community Bank & Trust in Barnwell, South Carolina, TheBank in Belton, South Carolina, and Mid State Bank in Newberry, South Carolina. During 2000, each of these five community banks operated as a wholly-owned subsidiary of the Company and engaged in a general commercial banking business, emphasizing the banking needs of individuals and small to medium-sized businesses in each bank’s primary service area. Each of the five community banks was a state chartered Federal Reserve member bank. On January 1, 2001, we merged the five community banks into one bank known as CapitalBank.

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

Market Areas

At December 31, 2004, CapitalBank had banking locations in Greenwood, Abbeville, Clemson, Calhoun Falls, Prosperity, Clinton, Belton, Greer, Greenville, Honea Path, Anderson, Newberry, and Saluda, South Carolina.

The following table sets forth certain information concerning CapitalBank at December 31, 2004:

	Number of Locations	Total Assets	Total Loans	Total Deposits
	(Dollars in thousands)
CapitalBank	15	$549,086	$425,628	$380,357

CapitalBank offers a full range of commercial banking services, including checking and savings accounts, NOW accounts, IRA accounts, and other savings and time deposits of various types ranging from money markets to long-term certificates of deposit. CapitalBank also offers a full range of consumer credit and short-term and intermediate-term commercial and personal loans. CapitalBank conducts residential mortgage loan origination activities pursuant to which mortgage loans are sold to investors in the secondary markets. CapitalBank does not retain servicing of such loans.

CapitalBank also offers trust and related fiduciary services. Discount securities brokerage services are available through a third-party brokerage service that has contracted with CapitalBank.

Lending Activities

General. Through CapitalBank, we offer a range of lending services, including real estate, consumer, and commercial loans, to individuals and small business and other organizations that are located in or conduct a substantial portion of their business in CapitalBank’s market areas. Our total loans at December 31, 2004, totaled $425.6 million, or 84.41% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, availability of funds, and government regulations. We have no foreign loans or loans for highly leveraged transactions.

Our primary focus has been on commercial and installment lending to individuals and small to medium-sized businesses in its market areas, as well as residential mortgage loans. These loans totaled approximately $276.4 million, and constituted approximately 64.94% of our loan portfolio, at December 31, 2004.

The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2004.

Loan Composition

(Dollars in thousands)

	December 31,
	2004		2003		2002		2001		2000

Commercial, financial and agricultural	12.34	%	9.57	%	10.42	%	13.26	%	18.54	%
Real estate:
Construction	4.36		4.98		4.52		5.26		7.27
Mortgage:
Residential	47.00		51.96		53.41		49.25		39.89
Commercial⁽¹⁾	30.71		27.22		25.48		23.58		21.45
Consumer and other	5.59		6.28		6.17		8.65		12.85
Total loans	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%


Total loans (dollars)	$425,628		$326,178		$288,842		$248,390		$280,506

⁽¹⁾	The majority of these loans are made to operating businesses where real property has been taken as additional collateral.

Loan Approval. Certain credit risks are inherent in the loan making process. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. We attempt to minimize loan losses through various means and use standardized underwriting criteria. During 2004, these means included the use of policies and procedures that impose officer and customer lending limits and require loans in excess of certain limits to be approved by the Board of Directors of CapitalBank.

Loan Review. We have a continuous loan review process designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of reviewing all past due loans in their respective portfolios. CapitalBank establishes watch lists of potential problem loans.

Deposits

The principal sources of funds for CapitalBank are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, saving deposits, and certificates of deposit. Transaction accounts include checking and negotiable order of withdrawal (NOW) accounts that customers use for cash management and that provide CapitalBank with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable source of funding. The largest source of funds for CapitalBank is certificates of deposit. Primarily customers in CapitalBank’s market areas hold certificates of deposit less than $100,000. Senior management of CapitalBank sets deposit rates weekly. Management believes that the rates CapitalBank offers are competitive with other institutions in CapitalBank’s market areas.

Competition

CapitalBank generally competes with other financial institutions through the selection of banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. South Carolina law permits statewide branching by banks and savings institutions, and many financial institutions in the state have branch networks. Consequently, commercial banking in South Carolina is highly competitive. South Carolina law also permits regional interstate banking whereby out-of-state banks and bank holding companies are allowed to acquire and merge with South Carolina banks and bank holding companies, as long as the South Carolina State Board of Financial Institutions gives prior approval for the acquisition or merger. Many large banking organizations currently operate in the market areas of CapitalBank, several of which are controlled by out-of-state ownership. In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded powers and increased activity of thrift institutions in areas of banking that previously had been the sole domain of commercial banks. See “Government Supervision and Regulation.”

CapitalBank faces increased competition from both federally-chartered and state-chartered financial and thrift institutions, as well as credit unions, consumer finance companies, insurance companies and other institutions in CapitalBank’s market areas. Some of these competitors are not subject to the same degree of regulation and restriction imposed upon

CapitalBank. Many of these competitors also have broader geographic markets and substantially greater resources and lending limits than CapitalBank and offer certain services that CapitalBank does not currently provide. In addition, many of these competitors have numerous branch offices located throughout the extended market areas of CapitalBank that we believe may provide these competitors with an advantage in geographic convenience that CapitalBank does not have at present. Such competitors may also be in a position to make more effective use of media advertising, support services, and electronic technology than can CapitalBank.

Employees

Including the employees of CapitalBank, we currently have in the aggregate 179 full-time employees and 12 part-time employees.

Government Supervision and Regulation

General

We, along with CapitalBank, are subject to an extensive collection of state and federal banking laws and regulations that impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of our operations. These regulations are generally intended to provide protections for depositors and borrowers of CapitalBank, rather than for our shareholders. Each of the entities is also affected by government monetary policy and by regulatory measures affecting the banking industry in general. The actions of the Federal Reserve System affect the money supply and, in general, the lending abilities of CapitalBank because decisions relating to money supply increase or decrease the cost and availability of funds to the banks. Additionally, the Federal Reserve System regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in the reserve requirements against bank deposits, and limitations on interest rates that banks may pay on time and savings deposits.

The following discussion sets forth some of the regulatory requirements applicable to bank holding companies and banks and provides certain specific information related to CapitalBank and us. These summaries are qualified in their entirety by reference to the applicable statutes and regulations and are not intended to be an exhaustive description of the statutes or regulations applicable to our and CapitalBank’s business. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of all four entities.

Bank Holding Company Regulation Generally

We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and the South Carolina Banking and Branching Efficiency Act of 1996, as amended. As a bank holding company subject to such Acts, we are required to register with the Board of Governors of the Federal Reserve System and the South Carolina State Board of Financial Institutions. We must also file with both agencies annual reports and other information regarding our respective business operations and those of CapitalBank. We are also subject to periodic examinations by these agencies. The regulatory requirements to which we are subject also set forth various conditions regarding the eligibility and qualifications of our directors and officers.

The Federal Reserve Board, pursuant to regulation and published policy statements, has maintained that a bank holding company must serve as a source of financial strength to its subsidiary banks. In adhering to the Federal Reserve Board policy, we may be required to provide financial support to a subsidiary bank at a time when, absent such Federal Reserve Board policy, we may not deem it advisable to provide such assistance. Under Federal Bank Holding Company Act of 1956, as amended, the Federal Reserve Board may also require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a bank, upon the Federal Reserve Board’s determination that the activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

The Bank Holding Company Act also limits the types of businesses and operations in which a bank holding company and its subsidiaries, other than banking subsidiaries, may engage. In general, permissible activities are limited to the business of banking and activities found by the Federal Reserve Board to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve Board considers whether the performance of an activity can reasonably be expected to produce benefits to the

public (such as greater convenience, increased competition, or gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices). For example, the Federal Reserve Board has deemed permissible: making, acquiring, or servicing loans; leasing personal property; providing certain investment or financial advice; performing certain data processing services; acting as agent or broker in selling credit life insurance and certain other types of insurance in connection with credit transactions by the bank holding company; and certain limited insurance underwriting activities.

Generally, bank holding companies must obtain prior approval of the Federal Reserve Board to engage in any new activity not previously approved by the Federal Reserve Board. However, despite prior approval, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or terminate its ownership or control of a subsidiary, when the Federal Reserve Board has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any bank subsidiary of that holding company.

Interstate and Intrastate Banking and Branching

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, eligible bank holding companies in any state are permitted, with Federal Reserve Board approval, to acquire banking organizations in any other state. As such, all existing regional compacts and substantially all regional limitations on interstate acquisitions of banking organizations have been eliminated. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 also removed substantially all of the existing prohibitions on interstate branching by banks. A bank operating in any state is now entitled to establish one or more branches within any other state without, as formerly required, the establishment of a separate banking structure within the other state.

The South Carolina Banking and Branching Efficiency Act of 1996, as amended, permits the acquisition of South Carolina banks and bank holding companies by, and mergers with, out-of-state banks and bank holding companies with the prior approval of the South Carolina State Board of Financial Institutions. The South Carolina Banking and Branching Efficiency Act of 1996, as amended also permits South Carolina state banks, with prior approval of the South Carolina State Board of Financial Institutions, to operate branches outside the State of South Carolina.

Although the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the South Carolina Banking and Branching Efficiency Act of 1996 have the potential to increase the number of competitors in the marketplace of CapitalBank, we cannot predict the actual impact of such legislation on the competitive positions of such banks.

Gramm-Leach Bliley Act

The Gramm-Leach-Bliley Act (popularly referred to as the Financial Services Modernization Act of 1999 prior to enactment) became effective March 11, 2000. The Gramm-Leach-Bliley Act accomplished a variety of purposes, including facilitating the affiliation among banks, securities firms, and insurance companies and providing privacy protections for customers. Specifically, the Gramm-Leach-Bliley Act (a) amends the Banking Act of 1933 (the Glass-Steagall Act) to repeal the prohibitions against affiliation of any Federal Reserve member bank, such as CapitalBank, with an entity engaged principally in securities activities, and to repeal the prohibitions against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank; (b) amends the Federal Bank Holding Company Act of 1956, as amended, to permit bank holding companies to own shares in non-banking organizations whose activities have been determined by the Federal Reserve System to be permissible for bank holding companies; (c) creates a new type of bank, wholesale financial institutions (also referred to as “woofies”), that are regulated by the Federal Bank Holding Company Act of 1956, as amended, and are not able to accept insured deposits, potentially giving holding companies with woofies greater flexibility to engage in non-financial investments; (d) subject to specified exemptions, pre-empts state anti-affiliation laws restricting transactions among insured depository institutions, wholesale financial institutions, insurance concerns, and national banks; (e) amends the Federal Bank Holding Company Act of 1956, as amended, and the Federal Deposit Insurance Act to mandate public meetings concerning proposed large bank mergers and acquisitions; (f) amends the Electronic Fund Transfer Act to mandate certain fee disclosures related to electronic fund transfer services; and (g) imposes certain obligations on financial institutions to protect the privacy and confidentiality of customer nonpublic personal information, including the requirements that financial institutions establish standards for safeguards to protect privacy and confidentiality, provide the standards to customers at the time of establishing the customer relationship and annually during the continuation of the relationship, condition disclosure of the private information to nonaffiliated third parties on the giving of specific disclosures to consumers, and giving consumers the opportunity to prevent such disclosure to third parties.

Although the Gramm-Leach-Bliley Act has the potential to mix commerce and banking and increase our abilities to diversify into a variety of areas, we cannot predict the actual impact of such legislation on us.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. It mandated sweeping reforms and implemented a number of requirements for public companies. Among the reforms and new requirements are the following:

•	Creation of the Public Company Accounting Oversight Board to oversee audits of public companies.

•	Implementation of a variety of requirements designed to ensure greater auditor independence, including the prohibition of certain services that auditors had traditionally provided to clients.

•

Implementation of a variety of requirements regarding audit committees, including that they be entirely independent; that they establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters; and that issuers disclose whether at least one member of the committee is a “financial expert.”

•	Requirement that changes in equity ownership by directors, officers, and 10% stockholders be reported more promptly, generally by the end of the second business day following the trade (subject to limited exceptions).

•

Requirement that CEOs and CFOs certify that the financial information in each annual and quarterly report fairly presents in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report, and establish and maintain internal controls designed to ensure discovery of material information.

•	Implementation of rules relating to disclosure of all material off-balance sheet transactions and obligations and regarding the presentation of pro-forma financial information in any press release or other public disclosure that was “non-GAAP.”

•	Requirement that issuers disclose whether they have adopted a code of ethics for senior executives and any waivers or changes in the code.

•	Requirement that CEOs and CFOs disgorge incentive compensation and profits from their sales of company securities after restatement of financial information.

•	Prohibition against directors and executive officers from transacting in company equity securities received in connection with employment during any pension fund blackout of such equity.

•	Requirement that SEC review each issuer’s periodic reports at least once every three years.

•	Acceleration of the time schedule during which Forms 10-K and 10-Q and 8-K must be filed for certain issuers and expansion of the items reportable under Form 8-K.

•	Issuance of new requirements regarding the obligations of attorneys to report evidence of a material violation of securities law or breach of fiduciary duty to the issuer’s chief legal counsel or chief executive officer and ultimately to the Board of Directors.

•	Adoption of new rules regarding statutes of limitation and penalties with respect to securities law violations.

Though the Sarbanes-Oxley Act will have a meaningful impact on our operations, we do not believe that we will be affected by Sarbanes-Oxley in ways that are materially different or more onerous than other public companies of similar size and nature.

FIRREA

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 established two insurance funds under the jurisdiction of the FDIC: the Savings Association Fund and the Bank Insurance Fund. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 also imposed, with certain exceptions, a “cross guaranty” on the part of commonly controlled depository institutions such as CapitalBank. Under this provision, if one depository institution subsidiary of a multi-bank holding company fails or requires FDIC assistance, the FDIC may assess a commonly controlled depository institution for the estimated losses suffered by the FDIC. The FDIC’s claim is junior to the claims of nonaffiliated depositors, holders of secured liabilities, general creditors, and subordinated creditors, but is superior to the claims of shareholders.

Limitations on Acquisitions of Common Stock

The federal Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company or bank unless the appropriate federal bank regulator has been given 60 days prior written notice of such proposed acquisition and within that time period such regulator has not issued a notice disapproving the proposed acquisition or extending for up to another 30 days the period during which such a disapproval may be issued. The acquisition of 25% or more of any class of voting securities constitutes the acquisition of control under the CBCA. In addition, under a rebuttal presumption established under the CBCA regulations, the acquisition of 10% or more of a class of voting stock of a bank holding company or a FDIC insured bank, with a class of securities registered under or subject to the requirements of Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute the acquisition of control.

Any “company” would be required to obtain the approval of the Federal Reserve under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of our outstanding common stock of, or such lesser number of shares as constitutes control. Such approval would be contingent upon, among other things, the acquirer registering as a bank holding company, divesting all impermissible holdings and ceasing any activities not permissible for a bank holding company.

Bank Secrecy Act

The Bank Secrecy Act requires financial institutions to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax and regulatory matters, and to implement counter-money laundering programs and compliance procedures.

USA Patriot Act of 2001

In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington D.C. which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Reserve Requirement

CapitalBank is a member of the Federal Deposit Insurance Corporation, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor through its Bank Insurance Fund. For this depositor protection, each bank pays a semi-annual statutory assessment and is subject to the rules and regulations of the Federal Deposit Insurance Corporation. The federal banking laws require all insured banks, including CapitalBank, to maintain reserves against their checking and transaction accounts (primarily checking accounts, NOW and Super NOW checking accounts). Because reserves must generally be maintained in cash or in non-interest bearing accounts, the effect of the reserve requirements is to increase the respective bank’s cost of funds.

Loan Restrictions

CapitalBank is also subject to Section 23A of the Federal Reserve Act, which places limits on the amount of loans or extensions of credit to, investments in or certain other transactions with affiliates. In addition, limits are placed on the amount of advances to third parties collateralized by the securities or obligations of affiliates. Most of these loans and certain other transactions must be secured in prescribed amounts.

CapitalBank is also subject to Section 23B of the Federal Reserve Act, which prohibits an institution from engaging in transactions (including extensions of credit) with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliates.

In addition, CapitalBank may not engage in certain “tie-in” or “tying” arrangements in connection with any extension of credit or the providing of any property or service. Tying is generally defined as any arrangement in which a bank requires a customer who wants one service, such as credit, to buy other products or services from the bank or its affiliates as a condition of receiving the first service.

Restrictions on the Payment of Dividends

We depend primarily on dividends from CapitalBank for cash flow to pay dividends to our shareholders. State and federal statutes and regulations limit the payment of dividends by CapitalBank, as well as the payment of dividends by us to our shareholders. For example, South Carolina state business corporation law requires that dividends may be paid only if such payment would not render the companies insolvent or unable to meet their obligations as they come due. Additionally, all dividends of the state subsidiary banks must be paid out of the respective undivided profits then on hand, after deducting expenses, including losses and bad debts. As a member of the Federal Reserve System, CapitalBank may not declare a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of their respective net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). CapitalBank must obtain the approval of the Federal Reserve Board if the total of all dividends declared by it in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. The payment of dividends also may be affected or limited by other federal and state regulatory restrictions and factors, such as the requirement to maintain adequate capital in accordance with other state and federal regulatory guidelines.

Capital Adequacy

The Federal Deposit Insurance Corporation Improvement Act required federal banking agencies to broaden the scope of regulatory corrective action taken with respect to depository institutions that do not meet minimum capital and related requirements and to take such actions promptly in order to minimize losses to the Federal Deposit Insurance Corporation. In connection with this Act, federal banking agencies established capital measures (including both a leverage measure and a risk-based capital measure) and specified for each capital measure the levels at which depository institutions will be considered well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. If an institution becomes classified as undercapitalized, the appropriate federal banking agency will require the institution to submit an acceptable capital restoration plan and can suspend or greatly limit the institution’s ability to effect numerous actions including capital distributions, acquisitions of assets, the establishment of new branches, and the entry into new lines of business.

Specifically, bank regulators assign a risk weight to each category of assets based generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset balances to determine a “risk-weighted” asset base. The minimum ratio of total risk-based capital to risk-weighted assets is 8.0%. At least half of the risk-based capital must consist of Tier 1 capital, which is comprised of common equity, retained earnings, and certain types of preferred stock and excludes goodwill and various intangible assets. The remainder, or Tier 2 capital, may consist of a limited amount of subordinated debt, certain hybrid capital instruments, and other debt securities, preferred stock, and an allowance for loan losses not to exceed 1.25% of risk-weighted assets. The leverage ratio is a company’s Tier 1 capital divided by its adjusted total assets. The leverage ratio requires a 3.0% Tier 1 capital to adjusted average asset ratio for institutions with the highest regulatory rating of 1. All other institutions must maintain a leverage ratio of 4.0% to 5.0%.

As of December 31, 2004, CapitalBank and we exceeded our respective fully phased-in minimum requirements.

Other Regulations

Our status as a registered bank holding company under the Bank Holding Company Act does not exempt us from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. Each of the entities is under the jurisdiction of the Securities and Exchange Commission and of state securities commissions for matters relating to the offer and sale of their respective securities. Interest and certain other charges collected or contracted for by the subsidiary banks are also subject to state usury laws and certain federal laws concerning interest rates.

The loan operations of CapitalBank are subject to certain federal laws applicable to credit transactions, such as: the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Community Reinvestment Act of 1977, requiring financial institutions to meet their obligations to provide for the total credit needs of the communities they serve, including investing their assets in loans to low- and moderate-income borrowers; the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies; the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; the Fair Housing Act, prohibiting discriminatory practices relative to real estate-related transactions, including the financing of housing; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of CapitalBank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; the Truth in Savings Act, requiring depository institutions to disclose the terms of deposit accounts to consumers; and the Expedited Funds Availability Act, requiring financial institutions to make deposited funds available according to specified time schedules and to disclose funds.

Enforcement Authority

The Federal Reserve Board has enforcement authority over bank holding companies and non-banking subsidiaries to forestall activities that represent unsafe or unsound practices or constitute violations of law. It may exercise these powers by issuing cease-and-desist orders or through other actions. The Federal Reserve Board may also assess civil penalties against companies or individuals who violate the Bank Holding Company Act or related regulations in amounts up to $1 million for each day’s violation. The Federal Reserve Board can also require a bank holding company to divest ownership or control of a non-banking subsidiary or require such subsidiary to terminate its non-banking activities. Certain violations may also result in criminal penalties.

The Federal Deposit Insurance Corporation possesses comparable authority under the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation Improvement Act, and other statutes. In addition, the Federal Deposit Insurance Corporation can terminate insurance of accounts, after notice and hearing, upon a finding that the insured institution is or has engaged in any unsafe or unsound practice that has not been corrected, is in an unsafe and unsound condition to continue operations, or has violated any applicable law, regulation, rule, or order of, or condition imposed by, the appropriate supervisors.

Item 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, 2004, CapitalBank operated fifteen full service branches in South Carolina, three of which are located in Greenwood and one of which is located in each of Abbeville, Anderson, Newberry, Belton, Greenville, Greer, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls. Of CapitalBank’s branches, eight are located on land owned by CapitalBank, two are located on land owned by us and leased to CapitalBank, one is located on land CapitalBank leases from one of our former directors, and two are located on land CapitalBank leases from a third party. We believe that all of our properties are well maintained and are suitable for their respective present needs and operations.

Item 3. Legal Proceedings.

CapitalBank and we are parties to legal proceedings that have arisen in the ordinary course of our respective businesses. None of these proceedings is expected to have a material effect on our consolidated financial condition.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

Our common stock is listed for trading on the American Stock Exchange under the symbol “CYL”. The following table reflects the high and low sales price per share for our common stock reported on the American Stock Exchange for the periods indicated.

Year	Quarter	High	Low

2004	Fourth	$ 24.25	$ 22.40
	Third	23.40	19.30
	Second	22.75	20.20
	First	23.40	19.70

2003	Fourth	$ 21.75	$ 18.96
	Third	20.30	16.05
	Second	16.25	14.05
	First	15.84	13.91

As of March 8, 2005, there were 3,874,156 shares of our common stock outstanding held by approximately 1,540 shareholders of record.

Until September 17, 2001, we had not declared or distributed any cash dividends to our shareholders since our organization in 1988. From and since that time, we have paid cash dividends to our shareholders on a quarterly basis. The following table reflects the declaration date, the payment date, and the payment amount of cash dividends per share for the two most recent fiscal years.

Year	Declaration Date	Payment Date	Payment Amount

2004	January 21	March 5	$0.12
	April 22	June 4	$0.13
	July 21	September 3	$0.13
	October 20	December 3	$0.13

2003	January 15	March 7	$0.06
	April 16	June 6	$0.06
	July 16	September 5	$0.09
	October 15	December 5	$0.12

Our Board of Directors expects comparable dividends to be paid to our shareholders for the foreseeable future. Notwithstanding the foregoing, our future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Our ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to us. As a state bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay. In particular, CapitalBank may require approval of the South Carolina State Board of Financial Institutions prior to paying dividends to us. Furthermore, neither we nor CapitalBank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business. See “Government Supervision and Regulation — Restriction on the Payment of Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Form 10-K, and Note 17 to our accompanying financial statements.

Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2004, 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	236,455	$12.93	215,000

Equity compensation plans not approved by security holders	-0-	$0	-0-

Total	236,455	$12.93	215,000

(1) Disclosures are provided with respect to any compensation plan and individual compensation arrangement of us or of our subsidiaries or affiliates under which our common stock are authorized for issuance to employees or non-employees (such as directors, consultants, advisors, vendors, customers, suppliers, or lenders) in exchange for consideration in the form of goods or services as described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation.

Issuer Purchases of Equity Securities

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

Period	(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

October 1, 2004 through October 31, 2004	10,400	$22.97	10,400	75,656

November 1, 2004 through November 30, 2004	5,700	$22.98	5,700	69,956

December 1, 2004 through December 31, 2004	-	-	-	69,956

Total	16,100	$22.97	16,100	69,956

Item 6. Selected Financial Data

Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2004 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,	2004			2003			2002			2001			2000
(Dollars in thousands, except per share)
Income Statement Data:
Interest income	$	25,408		$	21,031		$	22,204		$	26,961		$	29,722
Interest expense		6,562			6,455			7,793			13,675			16,636

Net interest income		18,846			14,576			14,411			13,286			13,086
Provision for loan losses		1,200			479			773			1,920			471

Net interest income after provision for loan losses		17,646			14,097			13,638			11,366			12,615
Net securities gains		5			1,716			106			290			-
Noninterest income		5,602			5,385			4,433			9,824			3,303
Noninterest expense		15,854			14,533			11,892			15,102			13,976

Income before income taxes		7,399			6,665			6,285			6,378			1,942
Income tax expense		1,599			1,663			1,683			1,900			290

Net income	$	5,800		$	5,002		$	4,602		$	4,478		$	1,652

Balance Sheet Data:
Assets	$	549,086		$	412,759		$	380,765		$	340,682		$	422,250
Earning assets		504,151			372,620			347,377			314,769			387,146
Securities ⁽¹⁾		77,596			45,898			55,812			62,806			106,041
Loans ⁽²⁾		426,884			326,452			291,526			251,947			280,506
Allowance for loan losses		5,808			4,584			4,282			4,103			3,060
Deposits		380,357			314,273			276,561			258,330			332,976
Federal Home Loan Bank advances		66,325			30,425			31,140			31,270			32,399
Shareholders’ equity		55,103			45,533			44,408			39,273			35,144
Per Share Data ⁽³⁾:
Basic earnings per share	$	1.52		$	1.43		$	1.34		$	1.31		$	0.48
Diluted earnings per share		1.47			1.36			1.26			1.26			0.48
Book value (period end) ⁽⁴⁾		14.39			13.11			12.71			11.66			10.79
Tangible book value (period end) ⁽⁴⁾		11.49			12.06			11.57			10.37			8.72
Cash dividends per share		0.51			0.33			0.17			0.06			-
Performance Ratios:
Return on average assets		1.13	%		1.35	%		1.28	%		1.19	%		0.41	%
Return on average equity		10.90			11.32			11.11			11.68			4.57
Net interest margin ⁽⁵⁾		4.18			4.17			4.50			4.08			3.83
Efficiency ⁽⁶⁾		63.38			64.28			61.45			72.71			81.75
Allowance for loan losses to loans		1.36			1.40			1.48			1.65			1.09
Net charge-offs to average loans		0.10			0.05			0.22			0.34			0.12
Nonperforming assets to period end loans ⁽²⁾⁽⁷⁾		0.52			0.59			0.71			0.69			0.25
Capital and Liquidity Ratios:
Average equity to average assets		10.38			11.17			11.71			10.22			9.07
Leverage (4.00% required minimum)		8.05			10.38			10.59			10.21			7.02
Tier 1 risk-based capital ratio		10.43			13.42			14.16			14.26			10.05
Total risk-based capital ratio		11.68			14.68			15.41			15.53			11.12
Average loans to average deposits		104.69			104.95			103.86			90.03			86.46

⁽¹⁾	Securities held-to-maturity are stated at amortized cost, securities available-for-sale are stated at fair value, and nonmarketable equity securities are stated at cost.

⁽²⁾	Loans are stated before the allowance for loan losses and include loans held for sale.

⁽³⁾	All share and per-share data have been adjusted to reflect the 5% common stock dividends in September 1998, June 2000 and June 2001.

⁽⁴⁾	Excludes the effect of any outstanding stock options.

⁽⁵⁾	Tax equivalent net interest income divided by average earning assets.

⁽⁶⁾	Noninterest expense divided by the sum of tax equivalent net interest income and noninterest income, excluding gains and losses on sales of assets and the write-down of intangible assets related to the sale of those assets.

⁽⁷⁾	Nonperforming loans and nonperforming assets do not include loans past due 90 days or more that are still accruing interest.

Selected Financial Data — continued

(Dollars in thousands)	2004 Quarter ended								2003 Quarter ended
except per share	Dec. 31		Sept. 30		June 30		Mar. 31		Dec. 31		Sept. 30		June 30		Mar. 31
Net interest income	$	4,968	$	4,878	$	4,792	$	4,208	$	3,639	$	3,675	$	3,701	$	3,561
Provision for loan losses		300		350		450		100		236		100		37		106
Noninterest income		1,582		1,358		1,471		1,196		1,633		2,953		1,316		1,199
Noninterest expense		4,121		3,886		4,142		3,705		3,822		4,388		3,249		3,074
Net income		1,596		1,514		1,416		1,274		1,026		1,525		1,251		1,200
Basic earnings per share		0.42		0.39		0.36		0.35		0.29		0.44		0.36		0.34
Diluted earnings per share		0.41		0.38		0.35		0.34		0.28		0.41		0.34		0.33

Basis of Presentation

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

General

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

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

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

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

On August 19, 2003, we signed a Letter of Interest to acquire Abbeville Capital Corporation, the holding company of The Bank of Abbeville. In October 2003, the Board of Directors of both companies approved a definitive agreement. The transaction closed in March 2004.

Results of Operations

Year ended December 31, 2004, compared with year ended December 31, 2003

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

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

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

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

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

Year ended December 31, 2003, compared with year ended December 31, 2002

Net interest income increased $165,000, or 1.14%, to $14.6 million in 2003 from $14.4 million in 2002. Average earning assets increased $27.9 million, or 8.43%, and average interest-bearing liabilities increased $25.3 million, or 8.76%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 3.91% and 4.17%, respectively, in 2003 compared to 4.14% and 4.50% in 2002. Yields on earning assets decreased from 6.84% in 2002 to 5.97% in 2003, and yields on interest-bearing liabilities decreased from 2.70% in 2002 to 2.06% in 2003.

The provision for loan losses was $479,000 in 2003 compared to $773,000 in 2002. Our allowance for loan losses was 1.40% of total loans outstanding at December 31, 2003. Our nonperforming loans totaled $1.8 million at December 31, 2003 compared to $1.9 million at December 31, 2002. Criticized and classified loans have increased from $12.8 million at December 31, 2002 to $14.2 million at December 31, 2003. Total loans increased $37.3 million during 2003.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2003 and 2002 under the heading “Noninterest Income and Expense” located in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Net income increased $400,000, or 8.69%, to $5.0 million in 2003 from $4.6 million in 2002. Basic earnings per share was $1.43 in 2003, compared to $1.34 in 2002. Diluted earnings per share was $1.36 in 2003, compared to $1.26 in 2002. Return on average assets during 2003 was 1.35% compared to 1.28% during 2002, and return on average equity was 11.32% during 2003 compared to 11.11% during 2002.

Net Interest Income

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

Average Balances, Income and Expenses, and Rates

Year ended December 31,	2004								2003								2002
(Dollars in thousands)	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets:
Earning Assets:
Loans⁽¹⁾⁽³⁾	$	391,056		$	22,440		5.74	%	$	310,517		$	18,820		6.06	%	$	274,365		$	19,338		7.05	%
Securities, taxable⁽²⁾		38,267			1,473		3.85			20,670			908		4.39			26,461			1,494		5.65
Securities, nontaxable⁽²⁾⁽³⁾		29,608			1,857		6.27			24,147			1,604		6.64			25,372			1,687		6.65
Nonmarketable equity securities		4,737			185		3.91			4,058			140		3.45			5,345			188		3.52
Federal funds sold and other		771			7		0.91			368			-		-			261			4		1.53

Total earning assets		464,439			25,962		5.59			359,760			21,472		5.97			331,804			22,711		6.84

Cash and due from banks		15,125								11,119								7,897
Premises and equipment		11,881								9,655								10,113
Other assets		26,433								19,178								13,529
Allowance for loan losses		(5,244	)							(4,330	)							(4,213	)

Total assets	$	512,634							$	395,382							$	359,130

Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction accounts	$	148,870		$	1,357		0.91	%	$	117,847		$	1,225		1.04	%	$	95,323		$	1,068		1.12	%
Savings deposits		35,933			460		1.28			28,965			552		1.91			27,840			745		2.68
Time deposits		142,552			3,003		2.11			115,476			2,950		2.55			113,946			3,605		3.16
Other short-term borrowings		36,324			509		1.40			19,341			268		1.39			19,217			344		1.79
Federal Home Loan Bank advances		47,190			1,204		2.55			31,370			1,400		4.46			31,198			1,947		6.24
Obligations under capital leases		272			29		10.66			615			60		9.76			836			84		10.05

Total interest-bearing liabilities		411,141			6,562		1.60			313,614			6,455		2.06			288,360			7,793		2.70

Demand deposits		46,172								33,574								27,044
Accrued interest and other liabilities		2,130								4,049								2,321
Shareholders’ equity		53,191								44,145								41,405

Total liabilities and shareholders’ equity	$	512,634							$	395,382							$	359,130

Net interest spread							3.99	%							3.91	%							4.14	%
Net interest income	$	19,400							$	15,017							$	14,918

Net interest margin							4.18	%							4.17	%							4.50	%

⁽¹⁾	The effect of loans in nonaccrual status and fees collected is not significant to the computations. All loans and deposits are domestic.

⁽²⁾	Average investment securities exclude the valuation allowance on securities available-for-sale.

⁽³⁾	Fully tax-equivalent basis at 38% tax rate for nontaxable securities and loans.

Net Interest Income – continued

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

Analysis of Changes in Net Interest Income. The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income from 2004 to 2003 and 2003 to 2002.

Analysis of Changes in Net Interest Income

	2004 Compared With 2003									2003 Compared With 2002
(Dollars in thousands)	Volume⁽¹⁾			Variance Due to Rate⁽¹⁾			Total			Volume⁽¹⁾			Variance Due to Rate⁽¹⁾			Total
Earning Assets
Loans	$	4,666		$	(1,046	)	$	3,620		$	2,375		$	(2,893	)	$	(518	)
Securities, taxable		689			(124	)		565			(291	)		(295	)		(586	)
Securities, nontaxable		347			(94	)		253			(81	)		(2	)		(83	)
Nonmarketable equity securities		25			20			45			(44	)		(4	)		(48	)
Federal funds sold and other		-			7			7			1			(5	)		(4	)

Total interest income		5,727			(1,237	)		4,490			1,960			(3,199	)		(1,239	)

Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts		295			(163	)		132			238			(81	)		157
Savings accounts		114			(206	)		(92	)		29			(222	)		(193	)
Time deposits		622			(569	)		53			47			(702	)		(655	)

Total interest-bearing deposits		1,031			(938	)		93			314			(1,005	)		(691	)
Other short-term borrowings		-			241			241			2			(78	)		(76	)
Federal Home Loan Bank advances		543			(739	)		(196	)		11			(558	)		(547	)
Obligations under capital leases		(36	)		5			(31	)		(22	)		(2	)		(24	)

Total interest expense		1,538			(1,431	)		107			305			(1,643	)		(1,338	)

Net interest income	$	4,189		$	194		$	4,383		$	1,655		$	(1,556	)	$	99

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

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

Net Interest Income – continued

The following table sets forth our interest rate sensitivity at December 31, 2004.

Interest Sensitivity Analysis

December 31, 2004 (Dollars in thousands)	Within One Month			After One Through Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year or Non- Sensitive			Total
Assets
Earning assets:
Loans⁽¹⁾	$	148,535		$	11,755		$	36,077		$	196,367		$	228,413		$	424,780
Securities		361			251			-			612			76,984			77,596
Federal funds sold and other		75			-			-			75			-			75

Total earning assets		148,971			12,006			36,077			197,054			305,397			502,451

Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits		155,806			-			-			155,806			-			155,806
Savings deposits		36,522			-			-			36,522			-			36,522
Time deposits		16,627			15,080			71,179			102,886			39,639			142,525

Total interest-bearing deposits		208,955			15,080			71,179			295,214			39,639			334,853
Other short-term borrowings		43,978			-			-			43,978			-			43,978
Federal Home Loan Bank advances		-			-			24,000			24,000			42,325			66,325
Obligations under capital leases		16			32			133			181			-			181

Total interest-bearing liabilities		252,949			15,112			95,312			363,373			81,964			445,337

Period gap	$	(103,978	)	$	(3,106	)	$	(59,235	)	$	(166,319	)	$	223,433

Cumulative gap	$	(103,978	)	$	(107,084	)	$	(166,319	)	$	(166,319	)	$	57,114

Ratio of cumulative gap to total
earning assets		(20.69)	%		(21.31	)%		(33.10	)%		(33.10	)%		(11.37	)%

⁽¹⁾	Excludes nonaccrual loans and includes loans held for sale.

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

Net Interest Income – continued

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

Provision and Allowance for Loan Losses

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

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

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

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

Provision and Allowance for Loan Losses – continued

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

Allowance for Loan Losses

Year Ended December 31, (Dollars in thousands)	2004			2003			2002			2001			2000
Total loans outstanding at end of year	$	425,628		$	326,178		$	288,842		$	248,390		$	280,506

Average loans outstanding	$	391,056		$	310,517		$	274,365		$	259,661		$	254,064

Balance of allowance for loan losses
at beginning of period	$	4,584		$	4,282		$	4,103		$	3,060		$	2,557
Allowance for loan losses from acquisitions		432			-			-			-			335
Loan losses:
Commercial and industrial		153			71			337			406			113
Real estate - mortgage		172			231			131			160			122
Consumer		252			163			255			409			305

Total loan losses		577			465			723			975			540

Recoveries of previous loan losses:
Commercial and industrial		72			196			45			8			73
Real estate - mortgage		31			43			15			16			14
Consumer		66			49			69			74			150

Total recoveries		169			288			129			98			237

Net loan losses		408			177			594			877			303
Provision for loan losses		1,200			479			773			1,920			471

Balance of allowance for loan losses
at end of period	$	5,808		$	4,584		$	4,282		$	4,103		$	3,060

Allowance for loan losses to period end loans		1.36	%		1.40	%		1.48	%		1.65	%		1.09	%
Net charge offs to average loans		0.10	%		0.05	%		0.22	%		0.34	%		0.12	%

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

Nonperforming Assets

	December 31,
(Dollars in thousands)	2004			2003			2002			2001			2000
Nonaccrual and impaired loans	$	2,104		$	1,816		$	1,893		$	1,567		$	637
Other real estate owned		98			101			150			148			58

Total nonperforming assets	$	2,202		$	1,917		$	2,043		$	1,715		$	695

Loans 90 days or more past due and
still accruing interest	$	230		$	158		$	128		$	-		$	164
Nonperforming assets to period end loans		0.52	%		0.59	%		0.71	%		0.69	%		0.25	%

Provision and Allowance for Loan Losses – continued

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

Total nonperforming assets increased to $2.2 million at December 31, 2004, from $1.9 million at December 31, 2003. This amount consists primarily of nonaccrual and impaired loans that totaled $2.1 million at December 31, 2004. Nonperforming assets were 0.52% of total loans at December 31, 2004. The allowance for loan losses to period end nonperforming assets was 263.76% at December 31, 2004.

Potential Problem Loans. At December 31, 2004, through our internal review mechanisms, we had identified $6.8 million of criticized loans and $6.4 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 $7.3 million at December 31, 2003 to $6.8 million at December 31, 2004. Total classified loans decreased from $6.9 million at December 31, 2003 to $6.4 million at December 31, 2004. The improvement was due to better borrower performance and/or enhanced collateral position. We are committed to addressing potential problem loans.

Noninterest Income and Expense

Noninterest Income. Noninterest income decreased $1.5 million, or 21.04%, to $5.6 million in 2004 from $7.1 million in 2003. The primary reason for the decrease was due to the fact that we realized gains on the sales of nonmarketable equity securities of $1.7 million in 2003, compared to no gains in 2004. Gains on the sales of securities available for sale were $5,000 in 2004 compared to $27,000 in 2003. We also realized a gain on the sale of fixed assets of $29,000 in 2003, compared to a loss of $9,000 in 2004. Service charges on deposit accounts increased $354,000, or 14.92% to $2.7 million in 2004, from $2.4 million in 2003. Residential mortgage origination fees decreased $435,000, or 34.55% to $824,000 in 2004 from $1.3 million in 2003. The decline in mortgage fees was a result of increased market rates which significantly reduced our volume of mortgage refinancings. Income from fiduciary activities increased $227,000, or 57.61% to $621,000 in 2004 from $394,000 in 2003. This increase was a result of our successful efforts to expand assets under management in our wealth management group. Commissions on the sale of mutual funds increased $50,000, or 22.12% to $276,000 in 2004 compared to $226,000 in 2003. Other operating income increased $49,000 or 4.43% to $1.2 million in 2004 from $1.1 million in 2003.

Noninterest Income and Expense – continued

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

Noninterest Income

	Year Ended December 31,
(Dollars in thousands)	2004		2003		2002
Service charges on deposit accounts	$	2,726	$	2,372	$	2,578
Residential mortgage origination fees		824		1,259		726
Gains on sales of securities available-for-sale		5		27		106
Gains on sales of nonmarketable equity securities		-		1,689		-
Commissions from sales of mutual funds		276		226		106
Income from fiduciary activities		621		394		281
Gain on sale of premises and equipment		-		29		-
Income from Bank Owned Life Insurance		598		488		206
Other income		557		617		536

Total noninterest income	$	5,607	$	7,101	$	4,539

Noninterest Expense. Noninterest expense increased $1.3 million, or 9.09%, to $15.9 million in 2004 from $14.5 million in 2003. The primary component of noninterest expense was salaries and employee benefits, which increased $1.8 million, or 24.67%, to $8.9 million in 2004 from $7.1 million in 2003. 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 was $853,000 in 2004 compared to $742,000 in 2003, and furniture and equipment expense was $958,000 in 2004 compared to $1.1 million in 2003. We realized a loss on the sale of fixed assets of $9,000 in 2004, compared to no losses in 2003. Total amortization of intangible assets increased $160,000, or 46.24%, to $506,000 in 2004 compared to $346,000 in 2003. This increase is due solely to the increase in core deposit intangibles related to the Abbeville merger. Other operating expense decreased $556,000, or 10.67% to $4.7 million in 2004 from $5.2 million in 2003. Our efficiency ratio was 63.38% in 2004 compared to 64.28% in 2003.

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

Noninterest Expense

	Year Ended December 31,
(Dollars in thousands)	2004			2003			2002
Salaries and employee benefits	$	8,874		$	7,118		$	6,418
Net occupancy expense		853			742			697
Furniture and equipment expense		958			1,117			1,050
Amortization of intangible assets		506			346			346
Director and committee fees		187			172			167
Data processing and supplies		568			483			578
Mortgage loan department expenses		113			190			122
Banking assessments		53			44			45
Professional fees and services		588			446			287
Postage and freight		398			309			205
Supplies		341			254			283
Telephone expenses		293			281			268
Federal Home Loan Bank prepayment penalties		-			1,093			-
Other		2,122			1,938			1,426

Total noninterest expense	$	15,854		$	14,533		$	11,892

Efficiency ratio		63.38	%		64.28	%		61.45	%

Noninterest Income and Expense – continued

Income Taxes. Our income tax expense was $1.6 million for 2004 and $1.7 million for 2003. Our effective tax rate was 21.61% and 24.95% in 2004 and 2003, respectively.

Earning Assets

Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher yields are the inherent credit and liquidity risks that we attempt to control and counterbalance. Loans averaged $391.1 million in 2004 compared to $310.5 million in 2003, an increase of $80.6 million, or 25.96%. At December 31, 2004, total loans were $425.6 million compared to $326.2 million at December 31, 2003. Of the $99.4 million increase in loans, $35.8 million were acquired through the merger with Abbeville. 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,	2004						2003						2002						2001						2000
(Dollars in thousands)	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	52,510			12.34	%	$	31,214			9.57	%	$	30,092			10.42	%	$	33,395			13.26	%	$	52,005			18.54	%
Real estate Construction		18,550			4.36			16,187			4.98			13,049			4.52			13,252			5.26			20,393			7.27
Mortgage - residential		200,059			47.00			169,492			51.96			154,257			53.41			124,091			49.25			111,897			39.89
Mortgage - nonresidential		130,701			30.71			88,797			27.22			73,610			25.48			59,417			23.58			60,159			21.45
Consumer and other		23,808			5.59			20,488			6.28			17,834			6.17			18,235			8.65			36,052			12.85

Total loans		425,628			100.00	%		326,178			100.00	%		288,842			100.00	%		248,390			100.00	%		280,506			100.00	%

Allowance for loan losses		(5,808	)					(4,584	)					(4,282	)					(4,103	)					(3,060	)

Net loans	$	419,820					$	321,594					$	284,560					$	244,287					$	277,446

The principal component of our loan portfolio is real estate mortgage loans. At December 31, 2004, this category totaled $330.8 million and represented 77.71% of the total loan portfolio, compared to $258.3 million, or 79.18%, at December 31, 2003.

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

Earning Assets – continued

Real estate construction loans increased $2.4 million, or 14.60%, to $18.6 million at December 31, 2004, from $16.2 million at December 31, 2003. Residential mortgage loans, which is the largest category of our loans, increased $30.6 million, or 18.03%, to $200.1 million at December 31, 2004, from $169.5 million at December 31, 2003. Residential real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, increased $41.9 million or 47.19%, to $130.7 million at December 31, 2004 from $88.8 million at December 31, 2003. The overall increase in real estate lending was attributable to the continued demand for residential and commercial real estate loans in our markets, and partially due to the loans acquired through the Abbeville merger. CapitalBank has been able to compete favorably for residential mortgage loans with other financial institutions by offering fixed rate products having three and five year call provisions.

Commercial and industrial loans increased $21.3 million, or 68.23%, to $52.5 million at December 31, 2004, from $31.2 million at December 31, 2003.

Consumer and other loans increased $3.3 million, or 16.20%, to $23.8 million at December 31, 2004, from $20.5 million at December 31, 2003.

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

The repayment of loans in the loan portfolio as they mature is also a source of our liquidity. The following table sets forth our loans maturing within specified intervals at December 31, 2004.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

December 31, 2004 (Dollars in thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
Commercial and industrial	$	13,036	$	37,316	$	2,158	$	52,510
Real estate		84,415		213,413		51,482		349,310
Consumer and other		4,236		15,633		3,939		23,808

	$	101,687	$	266,362	$	57,579	$	425,628


Loans maturing after one year with:
Fixed interest rates							$	226,717
Floating interest rates								97,224

							$	323,941

Earning Assets – continued

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

Investment Securities. The investment securities portfolio is a significant component of our total earning assets. Total securities averaged $72.6 million in 2004, compared to $48.9 million in 2003 and $57.2 million in 2002. At December 31, 2004, the total securities portfolio was $77.6 million, an increase of $31.7 million, or 69.06% over total securities of $45.9 million at December 31, 2003. Of the $31.7 million increase, $17.2 million was due to securities acquired through the Abbeville merger. Securities designated as available-for-sale totaled $71.1million and were recorded at estimated fair value. Securities designated as held-to-maturity totaled $425,000 and were recorded at amortized cost. The securities portfolio also includes nonmarketable equity securities totaling $6.1 million which are carried at cost because they are not readily marketable or have no quoted market value. These include investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, the stock of two unrelated financial institutions, and the stock of a financial services company that offers internet banking.

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

Book Value of Securities

December 31, (Dollars in thousands)	2004		2003
U.S. Government agencies and corporations	$	23,181	$	10,192
State, county, and municipal securities		31,908		24,746
Other (trust preferred securities)		1,009		761

		56,098		35,699
Mortgage-backed securities		15,446		6,969
Nonmarketable equity securities		6,052		3,230

Total securities	$	77,596	$	45,898

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2004.

Investment Securities Maturity Distribution and Yields

December 31, 2004	Within One Year					After One But Within Five Years					After Five But Within Ten Years					Over Ten Years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Government agencies	$	-		-	%	$	19,449		3.67	%	$	3,732		4.43	%	$	-		-	%
Obligations of state and local governments⁽²⁾		251		6.13			3,822		5.93			11,020		6.74			17,824		6.76

Total securities⁽¹⁾	$	251		6.13		$	23,271		4.02		$	14,752		6.13		$	17,824		6.76

⁽¹⁾	Excludes mortgage-backed securities totaling $15.5 million with a yield of 3.85% and nonmarketable equity securities.

⁽²⁾	The yield on state and local governments is presented on a tax equivalent basis using a federal income tax rate of 34%.

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

Earning Assets – continued

Short-Term Investments. Short-term investments, which consist primarily of federal funds sold and interest-bearing deposits with other banks, averaged $771,000 in 2004, compared to $368,000 in 2003 and $261,000 in 2002. At December 31, 2004, short-term investments totaled $75,000. These funds are a source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities increased $97.5 million, or 31.10%, to $411.1 million in 2004, from $313.6 million in 2003. Average interest-bearing deposits increased $65.1 million, or 24.81%, to $327.4 million in 2004, from $262.3 million in 2003.

Deposits. Average total deposits increased $77.6 million, or 26.22%, to $373.5 million during 2004, from $295.9 million during 2003. At December 31, 2004, total deposits were $380.4 million compared to $314.3 million a year earlier, an increase of 21.03%. Included in the increase is $52.7 million that we acquired through our merger with Abbeville.

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

Deposits

December 31,	2004					2003					2002					2001					2000
(Dollars in thousands)	Amount		Percent of Deposits			Amount		Percent of Deposits			Amount		Percent of Deposits			Amount		Percent of Deposits			Amount		Percent of Deposits
Demand deposit accounts	$	45,504		11.96	%	$	36,204		11.52	%	$	29,422		10.64	%	$	25,083		9.70	%	$	32,197		9.67	%
NOW accounts		72,934		19.18			73,166		23.28			36,121		13.06			32,504		12.58			53,959		16.20
Money market accounts		82,872		21.79			64,796		20.62			66,295		23.97			61,863		23.95			55,007		16.52
Savings accounts		36,522		9.60			28,697		9.13			27,948		10.11			26,653		10.32			30,543		9.17
Time deposits less than $100,000		91,183		23.97			69,649		22.16			74,763		27.03			72,636		28.12			114,454		34.38
Time deposits of $100,000 or over		51,342		13.50			41,761		13.29			42,012		15.19			39,591		15.33			46,826		14.06

Total deposits	$	380,357		100.00	%	$	314,273		100.00	%	$	276,561		100.00	%	$	258,330		100.00	%	$	332,986		100.00	%

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits increased $56.5 million to $329.0 million at December 31, 2004. During a limited time during the fourth quarter of 2004, CapitalBank offered a special money market account. These accounts required balances of a minimum of $10,000 and paid interest of prime minus 200 basis points. Of the $56.5 million increase in our core deposits, approximately $31.0 million was attributable to the special money market product.

Deposits, and particularly core deposits, have historically been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was 112.23% at December 31, 2004, and 103.88% at the end of 2003. The maturity distribution of our time deposits of $100,000 or more at December 31, 2004 is set forth in the following table.

Deposits and Other Interest-Bearing Liabilities – continued

Maturities of Certificates of Deposit of $100,000 or More

(Dollars in thousands)			Within Three Months			After Three Through Six Months			After Six Through Twelve Months			After Twelve Months			Total
Certificates of deposit of $100,000 or more			$	14,259		$	12,456		$	13,387		$	11,240		$	51,342

Approximately 27.77% of our time deposits of $100,000 or more had scheduled maturities within three months and 52.03% had maturities within six months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets using large certificates of deposit obtained through brokers. These brokered deposits are generally expensive and are unreliable as long-term funding sources. Accordingly, we do not solicit brokered deposits.

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

Average short-term borrowings were $36.3 million in 2004, an increase of $17.0 million from 2003. Federal funds purchased from correspondent banks averaged $23.6 million in 2004. At December 31, 2004, federal funds purchased totaled $30.1 million. Securities sold under agreements to repurchase averaged $12.7 million in 2004. At December 31, 2004, securities sold under agreements to repurchase totaled $13.9 million.

The following table summarizes the Company’s short-term borrowings for the years ended December 31, 2004 and 2003. These borrowings consist of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank. Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by U.S. government agency securities. Advances from Federal Home Loan Bank mature at different periods as discussed in the footnotes to the financial statements and are secured by the Bank’s one to four family residential mortgage loans, home equity lines and the Bank’s investment in Federal Home Loan Bank stock.

	Year Ended December 31,
(Dollars in thousands)	Maximum Outstanding at any Month End		Average Balance		Weighted Average Interest Rate		Balance December 31,		Interest Rate at December 31,
2004
Securities sold under agreements to repurchase	$	15,304	$	12,724		0.85%	$	13,859		1.92%
Advances from Federal Home Loan Bank		69,350		47,190		2.55%		66,325		2.71%

2003
Securities sold under agreements to repurchase	$	6,190	$	4,798		0.71%	$	5,326		1.10%
Advances from Federal Home Loan Bank		32,450		31,370		4.60%		30,425		2.95%

Average Federal Home Loan Bank advances during 2004 were $47.2 million compared to $31.4 million during 2003, an increase of $15.8 million. Advances from the Federal Home Loan Bank are collateralized by one-to-four family residential mortgage loans, home equity lines and our investment in Federal Home Loan Bank stock. At December 31, 2004, borrowings from the Federal Home Loan Bank were $66.3 million compared to $30.4 million a year earlier. Although we expect to continue using short-term borrowing and Federal Home Loan Bank advances as secondary funding sources, core deposits will continue to be our primary funding source. Of the $66.3 million advances from the Federal Home Loan Bank outstanding at December 31, 2004, $24.0 million mature in 2005, $15.0 million in 2007, $11.9 million in 2008, $425,000 in 2009, $5.0 million in 2010, and $10.0 million in 2013.

Capital

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

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

The holding company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2004, 2003, and 2002, as set forth in the following table.

Analysis of Capital

	2004			2003			2002
Tier 1 capital	$	43,209		$	41,017		$	39,427
Tier 2 capital		5,186			3,829			3,490

Total qualifying capital	$	48,395		$	44,846		$	42,917

Risk-adjusted total assets
(including off-balance-sheet exposures)	$	320,480		$	305,565		$	278,430


Tier 1 risk-based capital ratio		10.43	%		13.42	%		14.16	%
Total risk-based capital ratio		11.68	%		14.68	%		15.41	%
Tier 1 leverage ratio		8.05	%		10.38	%		10.59	%

			Tier 1 Risk-Based			Total Risk-Based			Tier 1 Leverage
CapitalBank’s capital ratios at December 31, 2004 were:				10.15	%		11.41	%		7.82	%

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 and loans-to-funds ratio decreased from 2003 to 2004. The loans-to-assets ratio at December 31, 2004 was 77.74% compared to 79.09% at December 31, 2003, and the loans-to-funds ratio at December 31, 2004 was 86.75% compared to 89.47% at December 31, 2003. The amount of advances from the Federal Home Loan Bank were approximately $66.3 million at December 31, 2004 compared to $30.4 million at December 31, 2003. We expect to continue using these advances as a source of funding. Additionally, we had approximately $32.9 million of unused lines of credit for federal funds purchases and $361,000 of securities available-for-sale at December 31, 2004 as sources of liquidity. We also have the ability to receive an additional $70.7 million in advances under the term of our agreement with the Federal Home Loan Bank.

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

Critical Accounting Policies

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

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

The Allowance represents our estimate of probable losses inherent in the lending portfolio. See Provision and Allowance for Losses for additional discussion including factors impacting the Allowance and the methodology for analyzing the adequacy of the Allowance. This methodology relies upon our judgment. Our judgments is based on an assessment of various issues, including, but not limited to, the pace of loan growth, emerging portfolio concentrations, the risk management system relating to lending activities, entry into new markets, new product

offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions. We consider the year-end Allowance appropriate and adequate to cover probable losses in the loan portfolio. However, our judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the Allowance, thus adversely impacting the results of operations of the Company.

We have increased our market share through bank and branch acquisitions (the last of these acquisitions occurred in 2004). These acquisitions resulted in goodwill or other intangible assets, which are subject to periodic impairment tests in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” These tests, which we performed as of June 30, 2004 and 2003, use estimates in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. We test for goodwill impairment by determining the fair market value for each reporting unit and comparing it to the carrying amount. If the carrying amount exceeds its fair market value, the potential for impairment exists, and a second step of impairment testing is performed. In the second step, the implied fair market value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair market value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair market value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written-down to its fair market value. The valuations as of June 30, 2004 indicated that no impairment charge was required as of that date, and we are not aware of any reason that a material change will occur in the future.

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets. Historically, our estimated income taxes have been materially correct, and we are not aware of any reason that a material change will occur in the future. See Note 19 of Notes to Consolidated Financial Statements contained in Item 8 herein that summarizes current period income tax expense as well as future tax liabilities associated with differences in the timing of expenses and income recognition for book and tax accounting purposes.

Non-GAAP Financial Information

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

Impact of Inflation

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

Impact of Off-Balance Sheet Instruments

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

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

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

Through its operations, CapitalBank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to CapitalBank’s customers at predetermined interest rates for a specified period of time. At December 31, 2004, CapitalBank had issued commitments to extend credit of $67.7 million and standby letters of credit of $1.9 million through various types of commercial lending arrangements. Approximately $55.2 million of these commitments to extend credit had variable rates. Our experience has been that a significant portion of these commitments often expire without being used.

Impact of Off-Balance Sheet Instruments – continued

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, 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	$	3,468	$	2,332	$	17,828	$	23,628	$	44,072	$	67,700
Standby letters of credit		762		80		754		1,596		274		1,870

Totals	$	4,230	$	2,412	$	18,582	$	25,224	$	44,346	$	69,570

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

Industry Developments

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

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

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2004:

Dollars in thousands	Payment Due By Period
Contractual Obligations	Total	< 1 Year	1-3 Years	3-5 Years	> 5 Years

Capital Lease	$253	$253	-	-	-
Operating Leases	$130	$87	$43	-	-
Other Long-Term Liabilities	$66,325	$24,000	$15,000	$12,325	$15,000

Risk Factors

Changes in interest rates could adversely affect our results of operations and financial condition.

Like most banks, CapitalBank’s earnings depend substantially on “rate differentials,” which are the differences between the rates it earns on loans, securities, and other earning assets, and the interest rates it pays on deposits and other borrowings. These rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. Frequently, the maturities of assets and liabilities are not balanced, and an increase or decrease in interest rates could have a material adverse effect on our net interest margin, results of operations, and financial condition.

Changes in interest rates can have differing effects on our volume of mortgage loans originated.

In periods of declining interest rates, such as have occurred recently, demand for mortgage loans typically increases, particularly for mortgage loans related to refinancing of existing loans. The refinancing of existing loans currently comprises approximately 57% of our loan volume. In periods of rising interest rates, demand for mortgage loans typically declines. Our income from our mortgage banking division would significantly decrease following a decline in demand for mortgage loans in South Carolina, which is the area in which we originate our mortgage loans.

We could sustain losses if our asset quality declines.

Our earnings are significantly affected by our ability to properly originate, underwrite, and service loans. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could materially adversely affect our results of operations and financial condition.

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.

Changes in economic conditions could adversely affect our results of operation and financial condition.

Our profitability depends on the profitability of our bank subsidiary, whose operating results and asset quality may be significantly affected by national and local economic conditions. We make loans primarily to borrowers who are located in South Carolina and secure these loans in substantial part with real estate collateral located in the area. We are subject to adverse changes in general economic conditions in the United States such as inflation, recession, and high levels of unemployment, consumer credit, and bankruptcies. We are also subject to unfavorable changes in economic conditions affecting our markets that may have a material adverse effect on our results of operations and financial condition. Such changes could result from numerous factors beyond our control, including a reduction in real estate values, business closings or layoffs, inclement weather, natural disasters, and adverse trends or events affecting various industry groups such as agriculture, real estate and real estate development, and construction.

While our asset quality ratios have not been significantly impacted by the prevailing economic slowdown in the national and local economies, we have seen an increase in bankruptcy filings, layoff announcements, and business closings in our market area. Considerable uncertainty continues regarding the economy and the potential for adverse effects from the continued threat of terrorism and other geo-political events. Therefore, there can be no assurance that a continuation or worsening of this slowdown will not ultimately have an adverse impact on our borrowers or our financial condition and results of operation.

We rely heavily on the services of key personnel.

We depend on the services of William G. Stevens, our President and Chief Executive Officer. The loss of the services of Mr. Stevens could have a material adverse effect on our results of operations and financial condition. We are also dependent on a number of other key officers who have important customer relationships or are instrumental to our operations. The loss of these individuals could have a material adverse effect on our results of operations and financial condition.

We could be adversely affected by government regulation.

We are subject to extensive government regulation and supervision under various state and federal laws, rules, and regulations, including rules and regulations of the Board of Governors of the Federal Reserve, the FDIC, and the South Carolina State Board of Financial Institutions. These laws and regulations are designed primarily to protect depositors, borrowers, and the Bank Insurance Fund of the FDIC and to further certain social policies. Consequently, they may impose limitations on us that may not be in our shareholders’ best interests. We have a class of stock registered with the Securities and Exchange Commission under Section 12(b) of the Securities Exchange Act of 1934 and are therefore subject to extensive regulation by the Securities and Exchange Commission. Recently adopted federal securities laws and regulations have significantly increased the time and expense burdens on companies, like us, that are required to make periodic filings with the Securities and Exchange Commission. Many of the recently adopted rules have not yet gone fully into effect and the time and expense burdens are expected to increase. Such increased burdens could adversely affect our profitability. We are subject to changes in federal and state laws, regulations, governmental policies, capital requirements, and accounting principles. The effects of any such potential changes cannot be predicted, but they could have a material adverse effect on our results of operations and financial condition.

A lack of acquisition history could cause us to have difficulty in integrating Abbeville Capital into our operations.

The merger between us and Abbeville Capital Corporation as of March 4, 2004 was the first acquisition of another banking institution by us in our history. Thus, anticipating all of the challenges that will be presented by the integration of another banking institution into our operations may be more difficult. The successful integration of the management and staff, as well as the technical operations such as reporting systems and data processing, will be important to the future operations of the combined entity that will result from the merger. Substantial difficulties could be encountered, including the following:

•

the loss of key employees and customers;

•

the disruption of operations and business;

•

possible inconsistencies in standards, control procedures, and policies;

•

unexpected problems with costs, operations, personnel, technology, and credit; and

•

problems with the assimilation of new operations, sites, and personnel, which could divert resources from regular banking operations.

Item 7A. 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 our interest rate risk exposure. In addition to other risks that we manage in the normal course of business, such as credit quality and liquidity, management considers interest rate risk to be a significant market risk that could potentially have a material effect on our financial condition and results of operations. The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Interest Income” is incorporated herein by reference. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of our business activities.

Item 8. Financial Statements and Supplementary Data.

The financial statements identified in Item 15 of this Report on Form 10-K are included herein beginning on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Legislation and Securities Exchange Commission rules adopted in 2002 have significantly increased, and will continue to increase, the regulatory burdens on audit firms that audit the financial statements of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Consequently, many smaller audit firms are deciding to limit their audit practice to companies that are not subject to the 1934 Act. Tourville, Simpson & Caskey, L.L.P., which served as our principal independent accountant since our inception, is one such firm. Accordingly, effective January 2, 2003, Tourville, Simpson & Caskey, L.L.P. resigned as our principal independent public accountant. The Board of Directors, upon recommendation of the Audit Committee, engaged Elliott Davis, LLC on January 2, 2003 to audit financial statements for the year ended December 31, 2002 and for the year ending December 31, 2003. We have not consulted Elliott Davis, LLC regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

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

Tourville, Simpson & Caskey, L.L.P. dissolved upon the filing of a Notice of Dissolution with the South Carolina Secretary of State on December 31, 2002 and was therefore unable to issue its consent in connection with our registration statement on Form S-4 filed on December 2, 2003. To resolve this issue, Elliott Davis, LLC re-audited our consolidated financial statements for the years ended December 31, 2001 and 2000.

Item 9A. Controls and Procedures

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

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

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

Limitations on the Effectiveness of Controls. The company’s management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute,

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

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

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

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

PART III

Information called for by PART III (Items 10, 11, 12 and 13) of this Report on Form 10-K has been omitted as we intend to file with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2004 a definitive Proxy Statement pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934. Such information will be set forth in such Proxy Statement.

Item 10.

Directors and Executive Officers of the Registrant.

Item 11.

Executive Compensation.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13.

Certain Relationships and Related Transactions.

Item 14.

Principal Accountant Fees and Services.

PART IV

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1)-(2) Financial Statements and Schedules:

Our consolidated financial statements and schedules identified in the accompanying Index to Financial Statements at page F-1 herein are filed as part of this Report on Form 10-K.

(a)(3)

Exhibits:

The accompanying Exhibit Index on page E-1 sets forth the exhibits that are filed as part of this Report on Form 10-K.

(b)

Reports on Form 8-K:

Date Filed or Furnished	Item	Description
January 19, 2005	7.01, 9.01	We issued a press release announcing the financial results for the quarter ended December 31, 2004.

(c)

Financial Statement Schedules:

None.

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 28, 2005

By:

/s/ William G. Stevens

William G. Stevens
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this amendment to the report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

/s/ William G. Stevens

William G. Stevens

President, Chief Executive
Officer, and Director

March 28, 2005

/s/ R. Wesley Brewer

R. Wesley Brewer

Chief Financial Officer, Executive
Vice President, and Secretary

March 28, 2005

Patricia C. Hartung

Assistant Secretary and Director

March 16, 2005

David P. Allred

Director

March 16, 2005

Harold Clinkscales, Jr.

Director

March 16, 2005

Wayne Q. Justesen, Jr.

Director

March 16, 2005

B. Marshall Keys

Director

March 16, 2005

Clinton C. Lemon, Jr.

Director

March 16, 2005

Miles Loadholt

Director

March 16, 2005

Thomas C. Lynch, Jr.

Director

March 16, 2005

H. Edward Munnerlyn

Director

March 16, 2005

George B. Park

Director

March 16, 2005

George D. Rodgers

Director

March 16, 2005

Charles J. Rogers

Director

March 16, 2005

Joseph L. Savitz, Jr.

Director

March 16, 2005

Thomas E. Skelton

Director

March 16, 2005

Lex D. Walters

Director

March 16, 2005

*By: /s/ William G. Stevens

(William G. Stevens) (As
Attorney-in-Fact for each
of the persons indicated)

March 28, 2005

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY CAPITAL CORPORATION

Page No.

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Income	F-4
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7 to F-32

AND ITS

EMPLOYEE STOCK OWNERSHIP PLAN WITH 401(K) PROVISIONS

Report of Independent Registered Public Accounting Firm	F-33
Statements of Net Assets Available for Benefits	F-34
Statement of Changes in Net Assets Available for Benefits	F-35
Notes to Financial Statements	F-36 to F-39
Item 4i, Schedule H - Schedule of Assets (Held at End of Year)	F-40

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 as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Community Capital Corporation as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

Elliott Davis, LLC
Greenville, South Carolina
January 13, 2005

F-2

Consolidated Balance Sheets

	December 31,
(Dollars in thousands, except share information)	2004			2003
Assets:
Cash and cash equivalents:
Cash and due from banks	$	9,053		$	16,664
Interest-bearing deposit accounts		75			270

Total cash and cash equivalents		9,128			16,934

Investment securities:
Securities available-for-sale		71,119			42,198
Securities held-to-maturity (estimated fair value of
$455 and $517 at December 31, 2004 and 2003)		425			470
Nonmarketable equity securities		6,052			3,230

Total investment securities		77,596			45,898

Loans held for sale		1,256			274
Loans receivable		425,628			326,178
Less allowance for loan losses		(5,808	)		(4,584	)

Loans, net		419,820			321,594
Premises and equipment, net		12,544			9,626
Accrued interest receivable		2,136			1,627
Intangible assets		11,107			3,646
Cash surrender value of life insurance		12,900			10,794
Other assets		2,599			2,366

Total assets	$	549,086		$	412,759

Liabilities:
Deposits:
Noninterest-bearing	$	45,504		$	36,204
Interest-bearing		334,853			278,069

Total deposits		380,357			314,273

Federal funds purchased and securities sold under
agreements to repurchase		43,978			20,178
Advances from the Federal Home Loan Bank		66,325			30,425
Obligations under capital leases		181			361
Accrued interest payable		736			508
Other liabilities		2,406			1,481

Total liabilities		493,983			367,226

Commitments and contingencies - Notes 5, 12, and 16

Shareholders’ equity:
Common stock, $1.00 par value; 10,000,000 shares authorized;
4,660,944 and 4,175,919 shares issued and outstanding at
December 31, 2004 and 2003, respectively		4,661			4,176
Nonvested restricted stock		(183	)		-
Capital surplus		45,751			37,375
Accumulated other comprehensive income		785			869
Retained earnings		16,653			12,791
Treasury stock, at cost (832,566 in 2004, and 702,522 shares in 2003)		(12,564	)		(9,678	)

Total shareholders’ equity		55,103			45,533

Total liabilities and shareholders’ equity	$	549,086		$	412,759

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

F-3

Consolidated Statements of Income

	For the years ended December 31,
(Dollars in thousands, except for per share data amounts)	2004		2003		2002
Interest income:
Loans, including fees	$	22,415	$	18,821	$	19,296
Investment securities:
Taxable		1,472		908		1,494
Tax-exempt		1,329		1,162		1,222
Nonmarketable equity securities		185		140		188
Federal funds sold and other		7		-		4

Total interest income		25,408		21,031		22,204

Interest expense:
Deposits		4,816		4,727		5,418
Advances from the Federal Home Loan Bank		1,204		1,400		1,947
Federal funds purchased and securities sold under
agreements to repurchase		513		268		344
Obligations under capital leases		29		60		84

Total interest expense		6,562		6,455		7,793

Net interest income		18,846		14,576		14,411
Provision for loan losses		1,200		479		773

Net interest income after provision for loan losses		17,646		14,097		13,638

Noninterest income:
Service charges on deposit accounts		2,726		2,372		2,578
Gain on sales of nonmarketable equity securities		-		1,689		-
Gain on sales of securities available-for-sale		5		27		106
Gain on sale of loans held for sale		824		1,259		726
Commissions from sales of mutual funds		276		226		106
Income from fiduciary activities		621		394		281
Gain on sale of premises and equipment		-		29		-
Other operating income		1,154		1,105		742

Total noninterest income		5,606		7,101		4,539

Noninterest expenses:
Salaries and employee benefits		8,874		7,118		6,418
Net occupancy		853		742		697
Amortization of intangible assets		506		346		346
Furniture and equipment		958		1,117		1,050
Loss on sale of premises and equipment		9		-		-
Other operating expenses		4,653		5,210		3,381

Total noninterest expenses		15,853		14,533		11,892

Income before income taxes		7,399		6,665		6,285
Income tax expense		1,599		1,663		1,683

Net income	$	5,800	$	5,002	$	4,602

Earnings per share:
Basic earnings per share	$	1.52	$	1.43	$	1.34

Diluted earnings per share	$	1.47	$	1.36	$	1.26

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

F-4

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income
For the years ended December 31, 2004, 2003, and 2002

(Dollars in thousands,	Common stock				Nonvested restricted			Capital		Accumulated other compre- hensive			Retained			Treasury
except share data)	Shares		Amount		stock			surplus		income (loss)			earnings			stock			Total

Balance, December 31, 2001		3,559,309	$	3,559	$	-		$	32,548	$	168		$	4,933		$	(1,935	)	$	39,273

Net income														4,602						4,602

Other comprehensive income,
net of tax effects											821									821

Comprehensive income																				5,423

Dividends paid ($0.17
per share)														(588	)					(588	)

Stock options exercised		301,481		302					2,206											2,508

Purchase of treasury stock
(178,851 shares)																	(2,208	)		(2,208	)

Balance, December 31, 2002		3,860,790		3,861		-			34,754		989			8,947			(4,143	)		44,408

Net income														5,002						5,002

Other comprehensive income,
net of tax effects											(120	)								(120	)

Comprehensive income																				4,882

Dividends paid ($0.33
per share)														(1,158	)					(1,158	)

Stock options exercised		315,129		315					2,621											2,936

Purchase of treasury stock
(334,647 shares)																	(5,535	)		(5,535	)

Balance, December 31, 2003		4,175,919		4,176		-			37,375		869			12,791			(9,678	)		45,533

Net income														5,800						5,800

Other comprehensive income,
net of tax effects											(84	)								(84	)

Comprehensive income																				51,249

Abbeville Capital Corporation
merger consideration		371,695		372					7,241											7,613

Dividends paid ($0.51
per share)														(1,938	)					(1,938	)

Stock options exercised		103,330		103					932											1,035

Issuance of restricted stock		10,000		10		(213	)		203											-

Amortization of deferred
compensation on restricted
stock						30														30

Purchase of treasury stock
(130,044 shares)																	(2,886	)		(2,886	)

Balance, December 31, 2004		4,660,944	$	4,661	$	(183	)	$	45,751	$	785		$	16,653		$	(12,564	)	$	55,103

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

F-5

Consolidated Statements of Cash Flows

	For the years ended December 31,
(Dollars in thousands)	2004			2003			2002
Cash flows from operating activities:
Net income	$	5,800		$	5,002		$	4,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		854			938			1,101
Writedown on disposal of equipment		-			151			-
Provision for loan losses		1,200			479			773
Deferred income tax provision (benefit)		(456	)		(21	)		562
Amortization of intangible assets		403			346			346
Amortization of deferred compensation on restricted stock		30			-			-
Premium amortization less discount accretion
on securities available-for-sale		31			20			38
Amortization of deferred loan costs and fees, net		377			-			2
Loss (gain) on sale of premises and equipment		9			(29	)		-
Loss on sale of other real estate		42			50			90
Net gain on sales or calls of securities available-for-sale		(5	)		(27	)		(106	)
Net gain on sales of nonmarketable equity securities		-			(1,689	)		-
Proceeds of sales of residential mortgages		33,146			49,811			28,375
Disbursements for residential mortgages held-for-sale		(34,128	)		(52,511	)		(27,365	)
(Increase) decrease in interest receivable		(509	)		280			101
Increase (decrease) in interest payable		228			(141	)		(403	)
(Increase) decrease in other assets		510			(367	)		(1,319	)
Decrease in other liabilities		(898	)		(896	)		(1,136	)

Net cash provided by operating activities		6,634			1,396			5,661

Cash flows from investing activities:
Net increase in loans made to customers		(64,619	)		(32,805	)		(41,671	)
Proceeds from sales of securities available-for-sale		8,683			4,544			5,147
Proceeds from calls and maturities of securities available-for-sale		11,331			16,679			13,650
Purchases of securities available-for-sale		(32,143	)		(13,500	)		(10,730	)
Proceeds from calls and maturities of securities held-to-maturity		45			80			-
Proceeds from sales of nonmarketable equity securities		645			3,670			239
Purchase of nonmarketable equity securities		(3,249	)		(45	)		-
Purchase of premises and equipment		(3,278	)		(1,016	)		(573	)
Proceeds from sales of premises and equipment		476			275			157
Proceeds from sales of other real estate		94			401			394
Investment in life insurance contacts		-			-			(8,077	)
Net assets acquired in bank acquisition		11,229			-			-

Net cash used by investing activities		(70,786	)		(21,717	)		(41,464	)

Cash flows from financing activities:
Net increase in demand and savings accounts		11,284			43,078			13,683
Net increase (decrease) in time deposits		2,126			(5,366	)		4,548
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase		13,918			(5,672	)		18,386
Proceeds from advances from the Federal Home Loan Bank		41,000			21,900			-
Repayments of advances from the Federal Home Loan Bank		(8,193	)		(22,615	)		(130	)
Dividends paid		(1,938	)		(1,158	)		(588	)
Proceeds from exercise of stock options		1,035			2,936			2,508
Purchase of treasury stock		(2,886	)		(5,535	)		(2,208	)

Net cash provided by financing activities		56,346			27,568			36,199

Net increase (decrease) in cash and cash equivalents		(7,806	)		7,247			396
Cash and cash equivalents, beginning of year		16,934			9,687			9,291

Cash and cash equivalents, end of year	$	9,128		$	16,934		$	9,687

The accompanying notes are an integral part of the 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 fifteen branches throughout South Carolina. The Bank offers a full range of banking services, including a wealth management group featuring a wide array of financial services, with personalized attention, local decision making and strong emphasis on the needs of individuals and small to medium-sized businesses. As discussed in Note 2, the Company acquired Abbeville Capital Corporation and its subsidiary, The Bank of Abbeville on March 5, 2004.

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

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

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

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

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

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

Nonmarketable Equity Securities – Nonmarketable equity securities include the costs of the Company’s investments in the stock of the Federal Reserve Bank and the Federal Home Loan Bank. The stocks have no quoted market value and no ready market exists. Investment in Federal Reserve Bank stock is required for state-chartered member banks. Investment in Federal Home Loan Bank stock is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to secure the borrowings. At December 31, 2004 and 2003, the investment in Federal Reserve Bank stock was $1,476,150 and $1,037,150, respectively. At December 31, 2004 and 2003, the investment in Federal Home Loan Bank stock was $3,949,700 and $1,622,500, respectively.

F-7

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Nonmarketable Equity Securities (continued) – The Company has invested in the stock of several unrelated financial institutions. The Company owns less than five percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable. At December 31, 2004 and 2003, the investments in the stock of the unrelated financial institutions, at cost, were $126,464 and $70,225, respectively. During 2003, the Company sold its investments in three financial institutions and recorded a gain on these sales of $1,689,000. The Company also invested in a financial services company that offers internet banking. The Company’s investment in the stock of this institution was $500,000 at December 31, 2004 and 2003.

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 fees included in loans at December 31, 2004 were $109,665 and unamortized net deferred loan costs included in loans at December 31, 2003 were $136,478.

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

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

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected. At December 31, 2004 and 2003, the Company had no impaired loans that were material to the consolidated financial statements.

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

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

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

F-8

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

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

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

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

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

Advertising Expense – Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of $153,886, $146,263, and $90,682 were included in the Company’s results of operations for 2004, 2003, and 2002, respectively.

Stock-Based Compensation – The Company has a stock-based employee compensation plan which is further described in Note 14. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

(Dollars in thousands,	Year ended December 31,
except for per share data)	2004		2003		2002
Net income, as reported	$	5,800	$	5,002	$	4,602
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects		95		101		301

Pro forma net income	$	5,705	$	4,901	$	4,301

Earnings per share:
Basic - as reported	$	1.52	$	1.43	$	1.34

Basic - pro forma	$	1.50	$	1.40	$	1.25

Diluted - as reported	$	1.47	$	1.36	$	1.26

Diluted - pro forma	$	1.45	$	1.33	$	1.18

F-9

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

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

The following summarizes supplemental cash flow information:

	Year ended December 31,
(Dollars in thousands)	2004			2003			2002
Cash paid for interest	$	6,333		$	6,596		$	8,196
Cash paid for income taxes		1,673			1,947			3,404
Supplemental noncash investing and financing activities:
Foreclosures on loans		133			402			486
Stock issued in connection with Bank of Abbeville acquisition		7,612			-			-
Change in unrealized gain or loss on securities available-
for sale, net of tax		(84	)		(120	)		821

Concentrations of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, securities, federal funds sold and amounts due from banks. Management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions. Although the Company’s loan portfolio is diversified, a substantial portion of its borrowers’ ability to honor the terms of their loans is dependent on business and economic conditions in the upstate region of South Carolina. Management does not believe credit risk is associated with obligations of the United States, its agencies or its corporations. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. By policy, time deposits are limited to amounts insured by the Federal Deposit Insurance Corporation. Management believes credit risk associated with correspondent accounts is not significant.

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

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

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

	Year ended December 31,
(Dollars in thousands)	2004			2003			2002
Unrealized holding gains (losses) on
available-for-sale securities	$	(122	)	$	(155	)	$	1,350
Reclassification adjustment for gains
realized in income		(5	)		(27	)		(106	)

Net unrealized gains (losses) on securities		(127	)		(182	)		1,244
Tax effect		43			62			(423	)

Net-of-tax amount	$	(84	)	$	(120	)	$	821

F-10

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Common Stock Owned by the Employee Stock Ownership Plan (ESOP) – ESOP purchases and redemptions of the Company’s common stock are at estimated fair value. Dividends on ESOP shares are charged to retained earnings. All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share.

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

Recent Accounting Pronouncements – In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FASB Interpretation (“FIN”) No. 45, and amends certain other existing pronouncements. The pronouncement was generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the financial condition or operating results of the Company.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer’s equity, or settlement by issuing equity, previously classified as equity, as liabilities or assets in some circumstances. SFAS No. 150 was generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities which are subject to the provisions of SFAS No. 150 for the first fiscal period beginning after December 15, 2003. The adoption of SFAS No. 150 did not have any impact on the financial condition or operating results of the Company.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions”. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Accounting Principles Board (“APB”) Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. APB Opinion No. 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The adoption of this statement is not expected to have a material impact on the financial condition or operating results of the Company.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective beginning as of the first interim or annual reporting period beginning after June 15, 2005. The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flows.

F-11

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

Recent Accounting Pronouncements (continued) – In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN No. 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and warranties that it has issued. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee. The initial recognition requirements of FIN No. 45 were effective for guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have any impact on the Company’s financial position or results of operations.

In December 2003, the FASB issued FIN No. 46 (revised), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), which addresses consolidation by business enterprises of variable interest entities. FIN No. 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. FIN No. 46(R) also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN No. 46(R) provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46(R) applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to the Company’s existing variable interest entities in the first reporting period ending after March 15, 2004. Certain of the disclosure requirements applied to all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46(R) did not have any impact on the Company’s financial position or results of operations.

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 the 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 on quantitative and qualitative disclosures. The disclosure requirements of EITF No. 03-1 are effective for annual financial statements for fiscal years ending after June 15, 2004. The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed FASB Staff Position (“FSP”), FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1”. The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under the measurement and recognition requirements of EITF No. 03-1. The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Company’s financial position or results of operations.

In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 105, “Application of Accounting Principles to Loan commitments”, to inform registrants of the Staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The Company adopted the provisions of SAB No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have a material impact on the Company’s financial condition or results of operations.

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

F-12

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – continued

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

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

Reclassifications – Certain captions and amounts in the 2003 and 2002 financial statements were reclassified to conform with the 2004 presentation.

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

NOTE 2 – ACQUISITION

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

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

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

F-13

NOTE 2 – ACQUISITION – continued

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

(Dollars in thousands)

Cash and cash equivalents	$	4,164
Federal funds sold		14,291
Investment securities		17,163
Loans, net of allowance		35,335
Premises and equipment		979
Core deposit intangible asset		927
Goodwill		7,039
Other assets		2,336

Total assets acquired		82,234

Deposits		52,674
Advances from the Federal Home Loan Bank		3,091
Other liabilities		10,956

Total liabilities assumed		66,721

Net assets acquired	$	15,513

The following table presents the results of operations as though the business combination had been completed as of the beginning of the year.

Pro Forma Information

	Year ended December 31,
(Dollars in thousands, except per share)	2004		2003
Interest and noninterest income	$	31,751	$	32,651
Net income ⁽¹⁾		6,496		5,927

Earnings per share
Basic earnings per share		1.85		1.70
Diluted earnings per share		1.51		1.45

⁽¹⁾

Amount excludes one-time acquisition-related costs of $573,000.

NOTE 3 – RESTRICTIONS ON CASH AND DUE FROM BANKS

The Company is required to maintain average reserve balances computed as a percentage of deposits. At December 31, 2004 and 2003, the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.

F-14

NOTE 4 – INVESTMENT SECURITIES

Securities available-for-sale at December 31, 2004 and 2003 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2004
U.S. Government agencies and corporations	$	23,204	$	47	$	70	$	23,181
Obligations of state and local governments		29,870		1,619		6		31,483
Obligations of corporations		1,000		9		-		1,009

		54,074		1,675		76		55,673
Mortgage-backed securities		15,494		80		128		15,446

Total	$	69,568	$	1,755	$	204	$	71,119

December 31, 2003
U.S. Government agencies and corporations	$	10,211	$	9	$	28	$	10,192
Obligations of state and local governments		23,061		1,215		-		24,276
Obligations of corporations		750		11		-		761

		34,022		1,235		28		35,229
Mortgage-backed securities		6,860		136		27		6,969

Total	$	40,882	$	1,371	$	55	$	42,198

Securities held-to-maturity as of December 31, 2004 and 2003 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2004
Obligations of state and local governments	$	425	$	30	$	-	$	455

December 31, 2003
Obligations of state and local governments	$	470	$	47	$	-	$	517

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, 2004.

Securities Available-for-Sale

	Less than twelve months				Twelve months or more				Total

(Dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses

U.S. government agencies and corporations	$	10,409	$	70	$	-	$	-	$	10,409	$	70
Obligations of state and local governments		464		6		-		-		464		6
Mortgage-backed securities		11,890		110		1,230		18		13,120		128

Total	$	22,763	$	186	$	1,230	$	18	$	23,993	$	204

F-15

NOTE 4 – INVESTMENT SECURITIES – continued

The following table summarizes the maturities of securities available-for-sale and held-to-maturity as of December 31, 2004, 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 Available-For-Sale				Securities Held-To-Maturity

(Dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value

Due in one year or less	$	250	$	251	$	-	$	-
Due after one year but within five years		23,115		23,271		-		-
Due after five years but within ten years		13,767		14,327		425		455
Due after ten years		16,942		17,824		-		-

		54,074		55,673		425		455
Mortgage-backed securities		15,494		15,446		-		-

Total	$	69,568	$	71,119	$	425	$	455

Proceeds from sales of securities available-for-sale during 2004, 2003, and 2002 were $8,683,000, $4,544,000, and $5,147,000, respectively, resulting in gross realized losses of $5,000 in 2004 and gross realized gains of $27,000 and $106,000 in 2003 and 2002, respectively. There were no sales of securities held-to-maturity in 2004, 2003, or 2002.

At December 31, 2004 and 2003, securities having amortized costs of approximately $69,087,000 and $40,641,000, respectively, and estimated fair values of $70,759,000 and $42,075,000, respectively, were pledged as collateral for short-term borrowings, to secure public and trust deposits, and for other purposes as required and permitted by law.

As noted in Note 1, the Company has nonmarketable equity securities consisting of investments in several financial institutions. These investments totaled $126,464 and $70,225 at December 31, 2004 and 2003, respectively.

NOTE 5 – LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,

(Dollars in thousands)	2004		2003

Commercial and industrial	$	52,510	$	31,214
Real estate - construction		18,550		16,187
Real estate - mortgage and commercial		293,328		234,053
Home equity		37,421		24,236
Consumer - installment		21,746		19,056
Consumer - credit card and checking		2,073		1,432

Total gross loans	$	425,628	$	326,178

At December 31, 2004 and 2003, the Company had sold participations in loans aggregating $5,123,000 and $4,584,000, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.

The Bank accepts residential mortgage loan applications and fund loans of qualified borrowers (see Note 1). Funded loans are sold with limited 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.

F-16

NOTE 5 – LOANS RECEIVABLE – continued

At December 31, 2004 and 2003, the Company had pledged approximately $146,931,000 and $98,870,000, respectively, of loans on residential real estate as collateral for advances from the Federal Home Loan Bank (see Note 9).

An analysis of the allowance for loan losses for the years ended December 31, 2004, 2003, and 2002, is as follows:

(Dollars in thousands)	2004			2003			2002
Balance, beginning of year	$	4,584		$	4,282		$	4,103
Allowance acquired through acquisition		432			-			-
Provision charged to operations		1,200			479			773
Recoveries on loans previously charged-off		169			288			129
Loans charged-off		(577	)		(465	)		(723	)

Balance, end of year	$	5,808		$	4,584		$	4,282

At December 31, 2004, the Company had impaired loans of approximately $2,099,000. Valuation allowances for credit losses on impaired loans totaled $435,000 for the year ended December 31, 2004. Interest income on impaired loans totaled $20,000 for the year ended December 31, 2004 and was measured using the cash basis. Average investment in impaired loans was $2,094,000 for the year ended December 31, 2004. There were no impaired loans as of December 31, 2003.

At December 31, 2004 and 2003, the Company had nonaccrual loans of approximately $5,000 and $1,816,000, respectively, for which impairment had not been recognized. The Company had loans contractually past due 90 days or more and still accruing interest totaling $230,000 and $158,000 at December 31, 2004 and 2003, respectively.

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

At December 31, 2004 and 2003, the Company had unfunded commitments, including standby letters of credit, of $69,570,000 and $49,407,000, of which $10,215,000 and $7,650,000, respectively, were unsecured. At December 31, 2004, the Company was not committed to lend additional funds to borrowers having loans in nonaccrual status. The fair value of any potential liabilities associated with standby letters of credit is insignificant.

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

F-17

NOTE 6 – PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	December 31,
(Dollars in thousands)	2004			2003
Land	$	3,110		$	1,875
Building and land improvements		9,439			7,633
Furniture and equipment		6,827			6,163

Total		19,376			15,671
Less, accumulated depreciation		(6,832	)		(6,045	)

Premises and equipment, net	$	12,544		$	9,626

Depreciation and amortization expense was approximately $854,000, $938,000 and $1,101,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE 7 - INTANGIBLE ASSETS

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

	December 31,
(Dollars in thousands)	2004		2003
Core deposit premium, net	$	4,015	$	3,593
Goodwill		7,092		53

	$	11,107	$	3,646

In accordance with SFAS No. 147, the Company evaluates its goodwill on an annual basis. Evaluations of goodwill were performed in June 2004 and 2003. As a result of the evaluations, the Company determined that no impairment existed; therefore, there was no amortization of goodwill for the years ended December 31, 2004 or 2003. Amortization expense related to the core deposit premium was $506,000 for the year ended December 31, 2004 and $346,000 for the years ended December 31, 2003 and 2002, respectively.

NOTE 8 – DEPOSITS

The following is a summary of deposit accounts:

	December 31,
(Dollars in thousands)	2004		2003
Noninterest-bearing demand deposits	$	45,504	$	36,204
Interest-bearing demand deposits		72,934		73,166
Money market accounts		82,872		64,796
Savings		36,522		28,697
Certificates of deposit and other time deposits		142,525		111,410

Total deposits	$	380,357	$	314,273

At December 31, 2004 and 2003, certificates of deposit of $100,000 or more totaled approximately $51,342,000 and $41,761,000, respectively. Interest expense on these deposits was approximately $1,217,000, $1,074,000 and $1,259,000 in 2004, 2003 and 2002, respectively.

F-18

NOTE 8 – DEPOSITS – continued

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2004 were as follows:

(Dollars in thousands) Maturing in	Amount
2005	$	102,954
2006		18,366
2007		21,169
2008		3
2009		33

Total	$	142,525

NOTE 9 – FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day. At December 31, 2004 and 2003, the securities sold under agreements to repurchase totaled $13,859,000 and $5,326,000, respectively. At December 31, 2004 and 2003, the amortized costs of securities pledged to collateralize the repurchase agreements were $14,830,000 and $4,729,000, respectively, and estimated fair values were $15,049,000 and $4,841,000, respectively. The securities underlying the agreements are held by a third-party custodian. At December 31, 2004 and 2003, federal funds purchased were $30,119,000 and $14,852,000, respectively.

NOTE 10 – ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

(Dollars in thousands)		December 31,
Description	Interest Rate	2004		2003
Advances maturing:

May 2, 2005	2.44%, floating	$	21,000	$	-
October 13, 2005	5.84, fixed		3,000		3,000
May 14, 2007	1.78, fixed		15,000		-
September 5, 2008	3.03, fixed		5,400		5,400
September 29, 2008	1.86, fixed		6,500		6,500
February 2, 2009	4.95, fixed		425		525
March 17, 2010	5.92, fixed		5,000		5,000
March 14, 2013	2.48, floating		10,000		10,000

		$	66,325	$	30,425

The Federal Home Loan Bank has also issued Irrevocable Letters of Credit to the Company totaling $10,000,000 to secure deposits in the name of the State of South Carolina. The Letters expire at various dates throughout 2005 and renew automatically for one year periods unless FHLB provides written notice to cancel. The Company has not drawn funds on these lines as of December 31, 2004.

F-19

NOTE 10 – ADVANCES FROM THE FEDERAL HOME LOAN BANK – continued

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

(Dollars in thousands)	Amount
2005	$	24,025
2006		-
2007		15,000
2008		11,900
2009 and thereafter		15,400

Total	$	66,325

As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $111,900,000 and home equity lines of credit aggregating $35,000,000 (see Note 5) at December 31, 2004. In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.

NOTE 11 – SHAREHOLDERS’ EQUITY

During 2004 and 2003, the Board of Directors approved stock repurchase plans whereby the Company could repurchase up to $12,100,000 of its outstanding shares of common stock. As of December 31, 2004, the Company had purchased approximately 832,566 shares under the plans (and prior plans), at an average cost of $15.05.

At December 31, 2004 and 2003, the Company had authorized 2,000,000 shares of a special class of stock, par value $1.00 per share, the rights and preferences of which were to be designated as the Board of Directors should determine. At December 31, 2004 and 2003, no shares of the undesignated stock had been issued or were outstanding.

NOTE 12 – LEASES

The Bank occupies and uses office space, land and equipment under operating leases with initial terms expiring on various dates through 2007. 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 $115,020, $126,200 and $58,200 for the years ended December 31, 2004, 2003 and 2002, respectively. Minimum lease commitments under noncancelable operating leases are as follows:

(Dollars in thousands)	Amount
2005	$	87
2006		36
2007		7

Total	$	130

The cost of renewals is not included in the above.

The Company has a lease agreement for its data processing equipment. The rental term is for sixty months and provides for the lessee to pay certain maintenance costs.

F-20

NOTE 12 – LEASES – continued

Assets recorded under capital leases and included in premises and equipment were as follows at December 31, 2004:

(Dollars in thousands)	Amount
Equipment	$	808
Less, accumulated depreciation		633

Net assets under capital leases	$	175

The future minimum capital lease payments were as follows at December 31, 2004:

(Dollars in thousands)	Amount
2005	$	253
Less, amount representing interest		10
Less, amount representing maintenance		62

Total obligations under capital leases	$	181

In 2003, the Company outsourced its data processing function. This resulted in the disposal of some of the core processing equipment which had been leased. The writedown on the disposal of this piece of equipment and cancellation was $151,000 and is included in other operating expenses for the year ended December 31, 2003.

NOTE 13 – CAPITAL REQUIREMENTS AND REGULATORY MATTERS

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

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

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

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

F-21

NOTE 13 – CAPITAL REQUIREMENTS AND REGULATORY MATTERS – continued

The following tables summarize the capital ratios and the regulatory minimum requirements of the Company and the Bank at December 31, 2004 and 2003.

	Actual					For Capital Adequacy Purposes					To Be Well- Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2004
The Company
Total capital (to risk-weighted assets)	$	48,395		11.68	%	$	33,141		8.00	%	$	-		N/A
Tier 1 capital (to risk-weighted assets)		43,209		10.43			16,571		4.00			-		N/A
Tier 1 capital (to average assets)		43,209		8.05			21,480		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	47,076		11.41	%	$	33,017		8.00	%	$	41,271		10.00	%
Tier 1 capital (to risk-weighted assets)		41,910		10.15			16,509		4.00			24,763		6.00
Tier 1 capital (to average assets)		41,910		7.82			21,448		4.00			26,810		5.00

December 31, 2003
The Company
Total capital (to risk-weighted assets)	$	44,846		14.68	%	$	24,445		8.00	%	$	-		N/A
Tier 1 capital (to risk-weighted assets)		41,017		13.42			12,223		4.00			-		N/A
Tier 1 capital (to average assets)		41,017		10.38			15,808		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	43,522		14.31	%	$	24,344		8.00	%	$	30,430		10.00	%
Tier 1 capital (to risk-weighted assets)		39,739		13.06			12,172		4.00			18,256		6.00
Tier 1 capital (to average assets)		39,739		10.11			15,728		4.00			19,660		5.00

NOTE 14 - STOCK COMPENSATION PLANS

On May 27, 1998, the Company terminated its Employee Incentive Stock Option Plan and its Incentive and Nonstatutory Stock Option Plan (the “Plans”). These Plans were replaced by the 1997 Stock Incentive Plan effective January 1, 1998. On May 19, 2004, the Company terminated its 1997 Stock Incentive Plan and replaced it with the 2004 Equity Incentive Plan. Outstanding options issued under the former Plans will be honored in accordance with the terms and conditions in effect at the time they were granted, except that they are not subject to reissuance. At December 31, 2004, there were 236,455 options outstanding that had been issued under the terminated Plans.

Prior to its termination on May 19, 2004, the Company granted 57,050 options pursuant to the terms of the Company’s 1997 Stock Incentive Plan. The options are exercisable one year from the date of grant at prices ranging between $20.10 and $22.40 per share and expire during 2009.

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

	2004		2003		2002
Dividend yield		1.61%		2.29%		1.36%
Expected volatility		8.77%		9.86%		22.87%
Risk-free interest rate		3.28%		3.98%		4.78%
Expected life		5 years		5 years		5 years

The weighted-average fair value of options, calculated using the Black-Scholes option-pricing model, granted during 2004, 2003 and 2002 is $2.35, $1.69 and $3.21, respectively.

F-22

NOTE 14 - STOCK COMPENSATION PLANS - continued

A summary of the status of the Company’s stock option plans as of December 31, 2004, 2003, and 2002 and changes during the years ended on those dates is presented below:

	2004					2003					2002

(Dollars in thousands, except per share data)	Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price

Outstanding at beginning of year		288,145		$	10.37		548,852		$	9.34		804,483		$	8.76
Granted		57,050			20.58		73,000			14.46		60,250			12.54
Exercised		(103,330	)		12.66		(315,129	)		9.33		(301,025	)		8.32
Cancelled		(5,410	)		12.74		(18,578	)		13.70		(14,856	)		10.74

Outstanding at end of year		236,455			12.93		288,145			10.37		548,852			9.34

Options exercisable at December 31, 2004, 2003, and 2002 were 179,405, 215,645 and 490,402, respectively.

The 2004 Equity Incentive Plan provides for the granting of statutory incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as nonstatutory stock options, stock appreciation rights, or restricted stock of up to 225,000 shares of the Company’s common stock, to officers, employees, and directors of the Company. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, the Company’s Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock options may not be less than the fair value of a share of common stock on the date the option is granted. The per-share exercise price of nonqualified stock options may not be less than 50% of the fair value of a share on the effective date of grant. Any options that expire unexercised or are canceled become available for reissuance. No awards may be made on or after May 19, 2014. During 2004, the Company issued 10,000 shares of restricted stock pursuant to the 2004 Equity Incentive Plan. The shares cliff vest in three years and are fully vested on August 24, 2007. The weighted-average fair value of restricted stock issued during 2004 was $21.30. Compensation cost associated with the issuance was $30,000 for the year ended December 31, 2004. At December 31, 2004, the Company had 215,000 awards available for grant under the 2004 Equity Incentive Plan.

The following table summarizes information about the stock options outstanding under the Company’s plans at December 31, 2004:

Range of Exercise Prices	Options Outstanding		Remaining Life (years)		Weighted Average Exercise Price
Exercisable:
$5.90 to $7.71		72,066		0.94	$	6.91
$9.50 to $13.60		55,369		2.13		11.58
$14.10 to $15.65		51,970		3.04		14.33

Total exercisable		179,405

Not Exercisable:
$20.10 to $22.40		57,050		4.07		20.58

Total outstanding		236,455

F-23

NOTE 15 – RELATED PARTY TRANSACTIONS

Certain parties (primarily certain directors and executive officers, their immediate families and business interests) were loan customers and had other transactions in the normal course of business with the Company. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than normal risk of collectibility. Total loans and commitments outstanding to related parties at December 31, 2004, 2003 and 2002 were $17,760,000, $11,270,000 and $9,704,000, respectively. During 2004, $10,659,000 of new loans were made to related parties and payments totaled $4,168,000. During 2003, $4,192,000 of new loans were made to related parties and repayments totaled $2,626,000. During 2002, $1,335,000 of new loans were made to related parties and repayments totaled $863,000.

The Company purchases various types of insurance from agencies that are owned by two directors. Amounts paid for insurance premiums were $77,042, $122,000 and $139,000 in 2004, 2003, and 2002, respectively.

NOTE 16 – COMMITMENTS AND CONTINGENCIES

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

NOTE 17 – RESTRICTION ON SUBSIDIARY DIVIDENDS

The ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds in the form of cash dividends, loans, or advances to the Company. Dividends are payable only from the retained earnings of the Bank. At December 31, 2004 retained earnings of the bank was $5,021,000.

F-24

NOTE 18 – EARNINGS PER-SHARE

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

	Year ended December 31,
(Dollars in thousands, except per share data)	2004		2003		2002
Basic earnings per share:

Net income available to common shareholders	$	5,800	$	5,002	$	4,602

Average basic common shares outstanding		3,815,934		3,488,853		3,447,395

Basic earnings per share	$	1.52	$	1.43	$	1.34

Diluted earnings per share:

Net income available to common shareholders	$	5,800	$	5,002	$	4,602

Average common shares outstanding - basic		3,815,934		3,488,853		3,447,395
Incremental shares from assumed conversions:
Restricted Stock		6,814		-		-

Stock options		113,610		183,653		200,905

Average diluted common shares outstanding		3,936,358		3,672,506		3,648,300

Diluted earnings per share	$	1.47	$	1.36	$	1.26

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:

	2004		2003		2002
Number of options		12,000		2,000		162,552
Weighted-average of these options
outstanding during the year		9,902		293		95,978
Weighted-average exercise price	$	22.40	$	19.33	$	14.35

F-25

NOTE 19 – INCOME TAXES

Income tax expense consisted of the following:

	Year ended December 31,
(Dollars in thousands)	2004			2003			2002
Currently payable:
Federal	$	1,841		$	1,677		$	1,333
State		251			240			211

Total current		2,092			1,917			1,544

Deferred income tax provision (benefit)		(536	)		(315	)		562

Income tax expense	$	1,556		$	1,602		$	2,106

Income tax expense (benefit) is allocated as follows:
To continuing operations	$	1,599		$	1,663		$	1,683
To shareholders’ equity		(43	)		(61	)		423

Income tax expense	$	1,556		$	1,602		$	2,106

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

	December 31,
(Dollars in thousands)	2004		2003
Deferred tax assets:
Allowance for loan losses	$	1,736	$	1,308
Net operating loss carryforward - state		74		124
Deferred compensation		454		221
Nonaccrual of interest		83		61
Other real estate owned		35		27
Loans fees and costs		37		-
Director fees		17		4

Total deferred tax assets		2,436		1,745

Deferred tax liabilities:
Accumulated depreciation		149		66
Available-for-sale securities		440		448
Loans fees and costs		-		46
Federal Home Loan Bank stock dividends		16		16
Investment property		2		-
Merger related, net		124		-

Total deferred tax liabilities		731		576

Net deferred tax asset recognized	$	1,705	$	1,169

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. Management has determined that it is more likely than not that the entire deferred tax asset at December 31, 2004 will be realized, and accordingly, has not established a valuation allowance. Net deferred tax assets are included in other assets.

F-26

NOTE 19 – INCOME TAXES – continued

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

	Year ended December 31,
(Dollars in thousands)	2004			2003			2002
Income tax at the statutory rate	$	2,516		$	2,266		$	2,137
State income tax, net of federal income tax benefit		173			158			116
Tax-exempt interest income		(492	)		(415	)		(440	)
Disallowed interest expense		32			35			49
Stock option compensation		(306	)		(417	)		(110	)
Increase in cash surrender value of life insurance		(203	)		(165	)		-
Other, net		(121	)		201			(69	)

Income tax expense	$	1,599		$	1,663		$	1,683

NOTE 20 – OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

	Year ended December 31,
(Dollars in thousands)	2004		2003		2002
Banking and ATM supplies	$	564	$	491	$	416
Directors’ fees		187		172		167
Mortgage loan department expenses		113		190		122
Data processing and supplies		568		483		578
Postage and freight		398		309		321
Professional fees		598		446		287
Telephone expenses		293		281		268
Prepayment penalty for FHLB advances		-		1,093		-
Other		1,933		1,740		1,222

Total	$	4,654	$	5,210	$	3,381

NOTE 21 – RETIREMENT AND BENEFIT PLANS

The Company sponsors a voluntary nonleveraged employee stock ownership plan (ESOP) as part of a 401(k) savings plan covering substantially all full-time employees. The Company matches 75 cents per dollar, up to a maximum of 6% of employee compensation. Company contributions to the savings plan were $277,000, $213,000 and $187,000 in 2004, 2003 and 2002, respectively. The Company’s policy is to fund amounts approved by the Board of Directors. At December 31, 2004 and 2003, the savings plan owned 161,426 and 150,625 shares of the Company’s common stock purchased at an average cost of $17.45 and $17.07 per share, respectively, adjusted for the effects of stock dividends. The estimated value of shares held at December 31, 2004 and 2003 was $3,890,000 and $2,982,000, respectively.

The Company had an Incentive Plan for 2004 which provided incentive pay for outstanding accomplishments of officers and employees of the Company. Cash awards were based upon various performance measures, including earnings per share growth and asset growth. Incentive payments accrued at December 31, 2004 and 2003 totaled $475,000 and $100,000, 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, 2004, 2003, or 2002.

F-27

NOTE 21 – RETIREMENT AND BENEFIT PLANS – continued

During 1999, certain officers opted out of the Executive Supplemental Compensation Plan. Under a new agreement, split-dollar life insurance policies were obtained on the lives of these officers. The officers are entitled to all of the benefits of these policies, with the exception of the premiums paid by the Company. There was no expense associated with this plan in 2004, 2003, or 2002. No insurance premiums were paid on the plan during 2004 or 2003.

In 2002, the Company purchased Bank Owned Life Insurance (BOLI) Policies on certain key officers of the Company. Earnings on such policies will be used to offset expenses associated with retirement benefits for these officers. The total amount of premiums paid on the policies during the year ended December 31, 2002 totaled $7,500,000. There were no premiums paid in 2004 or 2003. The policies increased their cash values by $341,000 and $394,000 during 2004 and 2003, respectively. Cash values at December 31, 2004 and 2003 were $9,920,000 and $8,031,000, respectively.

NOTE 22 – UNUSED LINES OF CREDIT

As of December 31, 2004, the subsidiary bank had unused lines of credit to purchase federal funds from unrelated banks totaling $32,888,000. These lines of credit are available on a one to fourteen day basis for general corporate purposes. The lenders have reserved the right not to renew their respective lines. The Bank also has a line of credit to borrow funds from the Federal Home Loan Bank up to 25% of the Bank’s total assets which provided total availability of $137,040,000 at December 31, 2004. As of December 31, 2004, the Bank had borrowed $66,325,000 on this line.

NOTE 23 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

Accrued Interest Receivable and Payable – The carrying value of these instruments is a reasonable estimate of fair value.

F-28

NOTE 23 – FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

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

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

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

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

	December 31,
	2004				2003
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Value

Financial Assets:
Cash and due from banks	$	9,053	$	9,053	$	16,664	$	16,664
Interest-bearing deposit accounts		75		75		270		270
Securities available-for-sale		71,119		71,119		42,198		42,198
Securities held-to-maturity		425		455		470		517
Nonmarketable equity securities		6,052		6,052		3,230		3,230
Cash surrender value of life insurance		12,900		12,900		10,794		10,794
Loans and loans held for sale		426,884		421,432		326,452		326,622
Accrued interest receivable		2,136		2,136		1,627		1,627

Financial Liabilities:
Demand deposit, interest bearing
transaction, and savings accounts	$	237,832	$	237,832	$	202,863	$	202,863
Certificates of deposit and other time deposits		142,525		142,835		111,410		111,595
Federal funds purchased and securities
sold under agreements to repurchase		43,978		43,978		20,178		20,178
Advances from the Federal Home Loan Bank		66,325		65,766		30,425		29,476
Accrued interest payable		736		736		508		508


	Notional Amount		Estimated Fair Value		Notional Amount		Estimated Fair Value
Value

Off-Balance Sheet Financial Instruments:
Commitments to extend credit	$	67,700	$	-	$	48,434	$	-
Standby letters of credit		1,870		-		973		-

F-29

NOTE 24 – COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY)

Condensed financial statements for Community Capital Corporation (Parent Company Only) follow:

Condensed Balance Sheets

	December 31,
(Dollars in thousands)	2004			2003
Assets
Cash and cash equivalents	$	46		$	109
Investment in banking subsidiary		53,782			44,254
Nonmarketable equity securities		500			526
Premises and equipment, net		1,048			1,391
Other assets		1,114			729

Total assets	$	56,490		$	47,009

Liabilities and Shareholders’ Equity
Notes payable to subsidiary	$	1,094		$	1,212
Other liabilities		293			264

Total liabilities		1,387			1,476

Common stock		4,661			4,176
Nonvested restricted stock		(183	)		-
Capital surplus		45,751			37,375
Retained earnings		16,653			12,791
Accumulated other comprehensive income		785			869
Treasury stock		(12,564	)		(9,678	)

Total shareholders’ equity		55,103			45,533

Total liabilities and shareholders’ equity	$	56,490		$	47,009

Condensed Statements of Income

	For the years ended December 31,
(Dollars in thousands)	2004			2003			2002
Income:
Dividend income from subsidiary	$	10,850		$	650		$	1,400
Dividend income from equity securities		-			14			20
Net gain on sale of nonmarketable equity securities		-			467			-
Other interest income		7			17			49
Other income		8			246			241

Total income		10,865			1,394			1,710

Expenses:
Salaries		43			16			20
Net occupancy expense		(34	)		132			128
Furniture and equipment expense		65			70			113
Interest expense		54			70			104
Other operating expenses		417			394			299

Total expense		545			682			664

Income before income taxes and equity in undistributed
earnings of subsidiary		10,320			712			1,046
Income tax expense (benefit)		501			(186	)		(258	)

Income before equity in undistributed earnings of subsidiary		10,821			898			1,304
Equity in undistributed earnings and (losses) of subsidiary		(5,021	)		4,104			3,298

Net income	$	5,800		$	5,002		$	4,602

F-30

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

Condensed Statements of Cash Flows

	For the years ended December 31,
(Dollars in thousands)	2004			2003			2002
Operating activities:
Net income	$	5,800		$	5,002		$	4,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of banking subsidiary		5,021			(4,104	)		(3,297	)
Depreciation and amortization expense		110			174			279
Amortization of deferred compensation on restricted stock		30			-			-
Deferred taxes		(740	)		(451	)		43
Gain on sale of nonmarketable equity securities		-			(467	)		-
Loss on sale of fixed assets		9			-			-
Increase (decrease) in other liabilities		27			(96	)		34
(Increase) decrease in other assets		436			472			(501	)

Net cash provided by operating activities		10,693			530			1,160

Investing activities:
Purchase of premises and equipment		(10	)		(9	)		(18	)
Proceeds from sales of premises and equipment		385			-			-
Proceeds from sales on nonmarketable equity securities		-			1,287			-
Net assets acquired in bank acquisition		11,229			-			-
Transfer of assets to Bank		(18,455	)		-			-

Net cash provided (used) by investing activities		(6,851	)		1,278			(18	)

Financing activities:
Dividends paid		(1,936	)		(1,158	)		(588	)
Proceeds from exercise of stock options		1,035			2,936			2,508
Repayments on borrowings from subsidiary		(118	)		(765	)		(160	)
Purchase of treasury stock		(2,886	)		(5,535	)		(2,208	)

Net cash used by financing activities		(3,905	)		(4,522	)		(448	)

Net increase (decrease) in cash and cash equivalents		(63	)		(2,714	)		694
Cash and cash equivalents, beginning of year		109			2,823			2,129

Cash and cash equivalents, end of year	$	46		$	109		$	2,823

Supplemental noncash investing activities:
Stock issued in connection with Bank of
of Abbeville acquisition	$	7,612		$	-		$	-

Transfer net assets acquired in Bank of
of Abbeville acquisition to Bank	$	(2,942	)	$	-		$	-

F-31

NOTE 25 – QUARTERLY DATA (UNAUDITED)

	December 31,

	2004								2003

(Dollars in thousands except per share)	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter

Interest income	$	6,927	$	6,589	$	6,280	$	5,612	$	5,067	$	5,263	$	5,373	$	5,328
Interest expense		1,959		1,711		1,488		1,404		1,428		1,588		1,672		1,767

Net interest income		4,968		4,878		4,792		4,208		3,639		3,675		3,701		3,561
Provision for loan losses		300		350		450		100		236		100		37		106

Net interest income after
provision for loan losses		4,668		4,528		4,342		4,108		3,403		3,575		3,664		3,455
Noninterest income		1,582		1,358		1,471		1,196		1,633		2,953		1,316		1,199
Noninterest expenses		4,121		3,886		4,142		3,705		3,822		4,388		3,249		3,074

Income before taxes		2,129		2,000		1,671		1,599		1,214		2,140		1,731		1,580
Income tax expense		533		486		255		325		188		615		480		380

Net income	$	1,596	$	1,514	$	1,416	$	1,274	$	1,026	$	1,525	$	1,251	$	1,200

Earnings per share:
Basic		0.42		0.39		0.36		0.35		0.29		0.44		0.36		0.34
Diluted		0.41		0.38		0.35		0.34		0.28		0.41		0.34		0.33

F-32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Community Capital Corporation
Employee Stock Ownership Plan
Greenwood, South Carolina

We have audited the accompanying statements of net assets available for benefits of Community Capital Corporation Employee Stock Ownership Plan as of December 31, 2004 and 2003, and the related statement of changes in net assets available for benefits for the year ended December 31, 2004. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit 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 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 financial statements referred to above present fairly, in all material respects, the net assets available for benefits of Community Capital Corporation Employee Stock Ownership Plan as of December 31, 2004 and 2003, and the changes in net assets available for benefits for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental information is the responsibility of the Plan’s management. The supplemental information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Elliott Davis, LLC
Columbia, South Carolina
March 11, 2005

F-33

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Statements of Net Assets Available for Benefits

	December 31,
	2004		2003
Assets:
Receivables
Employer contributions	$	9,229	$	8,721
Employee contributions		16,508		15,856

Total receivables		25,737		24,577

Investments, at fair value
Community Capital Corporation common stock		3,890,362		3,000,446
Mutual funds		2,687,063		1,233,479
Participant loans		33,616		29,882

Total investments		6,611,041		4,263,807

Net assets available for benefits	$	6,636,778	$	4,288,384

F-34

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Statement of Changes in Net Assets Available for Benefits
For the year ended December 31, 2004

Additions to net assets attributed to:
Employer contributions	$	259,876
Employee contributions		484,065
Other		12,932

Total contributions		756,873

Transfer from another plan		759,736

Net earnings and appreciation in fair value of investments		1,015,934

Total additions		2,532,543

Deductions from net assets attributed to:
Distributions paid to participants		160,974
Administrative expenses		23,175

Total deductions		184,149

Net increase		2,348,394

Net assets available for benefits:
Beginning of year		4,288,384

End of year	$	6,636,778

F-35

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Notes to Financial Statements

NOTE 1 – DESCRIPTION OF THE PLAN

Community Capital Corporation (the Company) established the Community Capital Corporation Employee Stock Ownership Plan (with 401(k) Provision) (the Plan) effective as of January 1, 1991 and serves as administrator to the Plan. The Plan operates as a nonleveraged employee stock ownership plan (ESOP) that allows for salary-deferral contributions by the Company’s employees in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The Plan is designed to comply with Section 4975(e)(7) and the regulations thereunder of the Internal Revenue Code and is subject to the applicable provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The following description of Community Capital Corporation Employee Stock Ownership Plan (with Code Section 401(k) Provisions) provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan’s provisions.

General – The Plan is a defined contribution plan covering all employees of the Company. Employees can enter the Plan at the beginning of the month following start of employment.

Participant’s Salary Reduction Election – Each participant may elect to defer up to 20% of his or her compensation as defined by the Plan, subject to certain Internal Revenue Code (IRC) limitations.

Employer Contributions – For each plan year, the Company may make contributions to accounts of eligible participants, including the following:

•	A matching contribution equal to 75% of the salary reduction election of each participant limited to 6% of the participant’s compensation.

•	A discretionary contribution on behalf of each non-highly compensated participant equal to a uniform percentage of each participant’s compensation. The exact percentage, if any, will be determined by the Company.

•	As necessary, the amount required to provide the top heavy minimum contribution.

Participant Accounts – Each Participant’s account is credited with the participant’s salary reduction election, allocations of the Company’s matching contribution and discretionary contribution (if any), plan earnings, and forfeitures of terminated participants’ nonvested accounts, if applicable. A participant must be employed by the Company on the last day of the Plan year and complete 1,000 hours to be eligible to receive an allocation of discretionary contributions.

Vesting – Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company’s contribution portion of their accounts plus actual earnings thereon is based on years of service. Vesting commences after one year of credited service and a participant is 100 percent vested after five years of credited service. Upon retirement, death, or total disability, a participant is 100 percent vested.

Investment Options – The Plan currently offers eleven mutual funds and the Company’s common stock as investment options for participants. Participants direct the investment of their contributions into various investment options offered by the Plan. The matching Company contribution is invested directly in Community Capital common stock and must remain invested in Community Capital common stock until the participant has completed ten years of service and attained age fifty-five, at which time a portion of the account attributable to Community Capital common stock can be transferred to other investments options.

Participant Loans – The Trustee may, in the Trustee’s discretion, make loans to participants and beneficiaries under the following circumstances: (1) loans shall be made available to all participants and beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to highly compensated employees in an amount greater than the amount made available to other participants and beneficiaries; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; (5) loans shall provide for periodic repayment over a reasonable period of time; and (6) loans shall only be available in the event of hardship or financial necessity.

F-36

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Notes to Financial Statements

NOTE 1 – DESCRIPTION OF THE PLAN – continued

Payment of Benefits – On termination of service due to death, disability or retirement, a participant may elect to receive either one lump-sum payment, or payments over a period of monthly, quarterly, semiannual, or annual installments. Distributions are made in cash, or, if a participant elects in the form of Company common shares plus cash for any fractional share.

Under the provisions of the Plan, the Plan and the Company each have the right of first refusal for fourteen days following notice of a participant’s desire to sell any share which have been distributed under the terms of the Plan.

Voting Rights – With respect to any corporate matter which involves the voting of Company stock relating to the approval or disapproval of any corporate merger, consolidation, or similar matters, each participant is entitled to exercise voting rights attributable to shares of the Company’s stock allocated to his or her account.

Plan loans – The Plan may incur acquisition loans to finance the acquisition of the Company’s stock or to repay a prior loan. As of December 31, 2004 and 2003, there were no loans outstanding.

Forfeited Accounts – As of December 31, 2004 and 2003, forfeited non-vested accounts totaled $4,282 and $23,267, respectively. Forfeitures attributable to matching contributions not used by the Plan for payment of Plan expenses will be allocated to participants eligible to share in the Company’s matching contribution in the same proportion that their compensation bears to the total compensation of all such participants. Forfeitures attributable to the Company’s discretionary contribution will be added to any discretionary contribution for the plan year in which such forfeitures occur and allocated among the participant’s accounts in the same manner as any discretionary contribution.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

Basis of Presentation – The Plan’s financial statements are prepared using the accrual method of accounting.

Valuation of Investments and Income Recognition – The Plan’s investments are stated at fair value. Shares of mutual funds are valued at quoted market prices which represent the net asset value of shares held by the Plan at year-end. Shares of the Company are valued at fair value, which was the closing quoted price of the Company’s stock as noted by the American Stock Exchange as of the close of business December 31, 2004. Participant loans receivable are valued at cost, which approximates fair value.

Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date.

Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Accordingly, actual results may differ from those estimates.

Concentration of Credit Risk – Financial instruments, which potentially subject the Plan to concentrations of credit risk, consist principally of investments in managed funds and in stock of the Company. The Plan’s trustee offers a variety of funds so participants may diversify investments between separate funds in order to limit the amount of credit exposure to any one fund. The underlying assets owned by that fund collateralize each managed fund.

At December 31, 2004 and 2003, the Plan held Community Capital Corporation common stock valued at $3,890,362 and $3,000,446, respectively. Actual common shares held of the Company’s stock were 161,426 and 151,538, respectively. Community Capital Corporation common stock comprised 59 percent and 70 percent of Plan assets at December 31, 2004 and 2002, respectively.

Payment of Benefits – Benefits are recorded when paid.

F-37

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Notes to Financial Statements

NOTE 3 – PLAN TERMINATION

Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100% vested in their accounts.

NOTE 4 – ADMINISTRATION OF PLAN ASSETS

Mutual funds and investments in the Company’s common shares are held and managed by the custodians of the Plan.

Certain administrative functions are performed by officers of the Company. No such officer receives compensation from the Plan. The Company pays the administrative costs of the Plan with the exception of certain investment and custodial fees, which are paid by the Plan.

NOTE 5 – INVESTMENTS

Investments that represent 5% or more of the Plan’s net assets at December 31, 2004 and 2003 are as follows:

	2004		2003
Investments at fair value as determined by
quoted market prices
Community Capital Corporation common shares	$	3,890,362	$	3,000,446
Federated Max-Cap		863,466		816,311
Dodge & Cox Stock		511,913		87,883

During 2004, the Plan’s investments (including investments bought, sold, and held during the year) appreciated in value as follows:

	2004		2003
Realized and unrealized gains and losses
including dividends and interest, net
Mutual funds	$	747,627	$	253,633
Community Capital Corporation common stock		268,307		847,842

	$	1,015,934	$	1,101,475

NOTE 6 – TAX STATUS

The Plan has received a determination letter from the Internal Revenue Service dated August 9, 2002, stating that the Plan is qualified under Section 401(a) of the Internal Revenue Code (the “Code”) and, therefore, the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan has been amended since receiving the determination letter. The Plan sponsor has indicated that it will take the necessary steps, if any, to maintain the Plan’s qualified status. Management believes the Plan continues to maintain its qualified status.

NOTE 7 – RELATED PARTY TRANSACTIONS

Certain plan assets are invested with the Company as described in Note 2. This relationship is considered a party-in-interest.

F-38

COMMUNITY CAPITAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN

Notes to Financial Statements

NOTE 8 – TRANSFER FROM ANOTHER PLAN

In 2004, the Company acquired Abbeville Capital Corporation and its subsidiary, the Bank of Abbeville. As a result, on May 3, 2004, $758,028 in assets were transferred to the Plan from a qualified plan sponsored by the Bank of Abbeville.

NOTE 9 – RECONCILIATION OF FINANCIAL STATEMENTS TO SCHEDULE H OF FORM 5500

The following is a reconciliation of net assets available for benefits per the financial statements at December 31, 2004 and 2003 to Schedule H of Form 5500:

	2004		2003
Net assets available for benefits per financial statements	$	6,636,778	$	4,288,384
Employee contributions receivable		-		(15,856	)
Employer contributions receivable		-		(8,388	)

Net assets available for benefits per Schedule H of Form 5500	$	6,636,778	$	4,264,140

The following is a reconciliation of contributions received per the financial statements for the year ended December 31, 2004 to Schedule H of Form 5500:

Contributions per the financial statements	$	756,873
Employee contributions receivable at December 31, 2003
per the financial statements		8,721
Employer contributions receivable at December 31, 2003
per the financial statements		15,856
Employee contributions receivable at December 31, 2003
per the Form 5500		(333	)

Contributions per Schedule H of Form 5500	$	781,117

NOTE 10 – PLAN AMENDMENT

The Plan was amended on March 4, 2004 to provide for the immediate and full vesting of Plan participants who previously were employed by The Bank of Abbeville and Abbeville Capital Corporation, which merged with and into the Employer.

F-39

Plan 001
EIN 57-0866395
Schedule H, Line 4i – Schedule of Assets Held at End of Year
December 31, 2004

(a)	(b)	(c)	(d)	(e)
Identity of party involved	Identity of issue, borrower, lessor, or similar party	Description of investment including maturity date, rate of interest, collateral, par or maturity value	Cost	Current value
*	Community Capital Corporation	161,425.8224 shares	**	$3,890,362

	Dodge & Cox Stock	3931.1412 shares	**	511,913

	Federated Gov’t Sec 1-3 Yr	5,088.2912 shares	**	53,936

	Federated High Yield Trust	9,324.2164 shares	**	58,090

	Artisan International	5,020.1047 shares	**	111,145

	Federated Kaufmann A	25,291.5683 shares	**	135,563

	Federated Max-Cap	35,315.5806 shares	**	863,466

	Federated Prime Obligation SS	150,642.0700 shares	**	150,642

	Federated Short-Term Income	9,992.4121 shares	**	84,436

	Federated Total Return Bond IS	16,037.1460 shares	**	173,853

	T. Rowe Price Growth Stock	9,344.9635 shares	**	249,230

	Fidelity Low Priced Stock	7,323.9484 shares	**	294,789

*	Participant Loans	5.00 - 6.75 percent	**	33,616


				$6,611,041

*	Indicates a party-in-interest to the Plan.

**	Cost information omitted due to participant-directed plan.

F-40

EXHIBIT INDEX

Exhibit
Number

Description

2.1¹	Merger Agreement dated as of October 15, 2003 between Community Capital Corporation and Abbeville Capital Corporation

3.1²	Articles of Incorporation of Registrant

3.2²	Articles of Amendment to Articles of Incorporation of Registrant (re: Change of Name)

3.3³	Bylaws of Registrant

3.4⁴	Amendment to Bylaws dated as of January 16, 2002

3.5⁵	Amendment to Bylaws dated as of September 18, 2002

4.1⁶	Form of Common Stock Certificate. (The rights of security holders of the Registrant are set forth in the Registrant’s Articles of Incorporation and Bylaws included as Exhibits 3.1 through 3.5.)

10.3²

*Registrant’s Executive Supplemental Income Plan (Summary) and form of Executive Supplemental Income Agreement

10.4²

*Registrant’s Management Incentive Compensation Plans (Summary)

10.6⁶

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

10.18⁷

*1997 Stock Incentive Plan, as amended

10.21⁸

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

10.22⁸

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

10.23⁸

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

10.24⁸

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

10.25⁸

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

10.26⁸

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

10.27⁸

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

10.28⁸

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

10.29⁸

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

10.30⁸

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

10.31⁸

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

10.32⁸

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

10.33⁸

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

10.36⁴

*Split Dollar Agreement between Greenwood Bank & Trust and S. Hazel Hughes dated November 16, 1998

10.37⁹

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

10.38¹⁰

Letter of Intent dated August 18, 2003 by and among Community Capital Corporation, Abbeville Capital Corporation and The Bank of Abbeville

10.39⁷

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

10.40⁷

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

10.41⁷

SubLease between CapitalBank and Carolina First dated May 6, 2002

10.42⁷

SubLease between CapitalBank and Jack E. Shaw and Nuevo Latino Investment Company, LLC dated October 1, 2002

10.43¹¹

Share Repurchase Agreement between Community Capital Corporation and SunTrust Robinson Humphrey dated August 9, 2004

E-1

10.44¹²

Restricted Stock Agreement

10.45¹³

*2004 Equity Incentive Plan

14⁷	Code of Ethics

21.1¹⁴

Subsidiaries of the Registrant

23.1	Consent of Elliott Davis, LLC

24.1	Directors’ Powers of Attorney

31.1	Rule 13a-14(a)/15d-14(a) Certification by William G. Stevens

31.2	Rule 13a-14(a)/15d-14(a) Certification by R. Wesley Brewer

32	Section 1350 Certifications

¹	Incorporated by reference to Appendix A of the Proxy Statement/Prospectus filed in connection with the Registrant’s Form S-4 on December 12, 2003.

²	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 8-K on August 2, 2004.

³	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 10-K for the fiscal year ended December 31, 2002 and filed on March 31, 2003.

⁴	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 10-K for the fiscal year ended December 31, 2002 and filed on March 31, 2003.

⁵	Incorporated by reference to Exhibit 3.4 filed in connection with the Registrant’s 10-Q for the quarter ended September 30, 2002 and filed on November 13, 2002.

⁶	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Registration Statement on Form S-2 initially filed on December 20, 1996 (File No. 333-18457).

⁷	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-K for the fiscal year ended December 31, 2003 and filed on March 26, 2004.

⁸	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-Q for the quarter ended September 30, 2002 and filed on November 13, 2002.

⁹	Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on May 22, 2003.

¹⁰	Incorporated by reference to Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on August 19, 2003.

¹¹	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 8-K filed on August 12, 2004.

¹²	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s Form 10-Q for the quarter ended September 30, 2004 and filed on November 9, 2004.

¹³	Incorporated by reference to Appendix A of Amendment No. 1 to the Registrant’s Proxy Statement filed on April 26, 2004.

¹⁴	Incorporated by reference to the Exhibit of the same number filed in connection with the Registrant’s 10-K for the fiscal year ended December 31, 2001 and filed on March 28, 2002.

* Management contract or compensation plan or arrangement.

E-2