COMMUNITY CAPITAL CORP /SC/ - FORM 10-Q/A

Attached files

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EX-32 - CERTIFICATION - COMMUNITY CAPITAL CORP /SC/	ex32.htm
EX-31.1 - CERTIFICATION - COMMUNITY CAPITAL CORP /SC/	ex31-1.htm
EX-31.2 - CERTIFICATION - COMMUNITY CAPITAL CORP /SC/	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 2 )

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

Commission File Number 0-18460

COMMUNITY CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

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

1402C Highway 72 West

Greenwood, SC 29649

(Address of principal executive offices, including zip code)

(864) 941-8200

(Registrant’s telephone number, including area code)

________________________________________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes__ No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ( ) Accelerated Filer ( ) Non-Accelerated Filer (X) Smaller Reporting Company ( )

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

9,858,524 shares of common stock, $1.00 par value, as of November 12, 2009

EXPLANATORY NOTE

Community Capital Corporation (the "Company") is filing this Amendment No. 2 to the Quarterly Report on Form 10-Q/A (the "Amendment No. 2") for the Company's quarterly period ended September 30, 2009 originally filed with the Securities and Exchange Commission ("SEC") on November 13, 2009 (the "Original Report"), as amended by Amendment No. 1 on Form 10-Q/A filed with the SEC on January 29, 2010 (the "Amended Report"), in response to a request for clarification from the SEC. This Amendment No. 2 contains a revised Item 4T and updated certifications from the Company's Principal Executive Officer and Principal Financial Officer but does not change the conclusions reached by management with respect to the disclosures provided by Item 4T as previously disclosed in the Amended Report.

As previously reported in the Amended Report, on January 27, 2010, the Company's Board of Directors determined that the Company's financials as of September 30, 2009 needed to be restated based on a request by the Federal Reserve based on its most recent examination findings of the Company's bank subsidiary and, on January 29, 2010, the Company filed the restatement on its Amended Report. This Amendment No. 2 clarifies the following: (1) the Company discussed the matters disclosed in the Amended Report with Elliot Davis LLC, the Company's independent registered public accounting firm and (2) the Company's management reevaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures in connection with the filing of the Amended Report and, as disclosed in the Amended Report, concluded that the Company maintains effective disclosure controls and procedures.

This Amendment No. 2 sets forth the Amended Report in its entirety, although the Company is only modifying Item 4T and updating its certifications as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. This Amendment No. 2 continues to speak as of the date of the Original Report, as amended by the Amended Report, and does not modify, amend or update in any way the financial statements or any other items or disclosures in the Original Report, as amended by the Amended Report.

COMMUNITY CAPITAL CORPORATION

Index

PART I. - FINANCIAL INFORMATION		Page No.

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets - September 30, 2009 and December 31, 2008	3

	Condensed Consolidated Statements of Operations -
	Nine months ended September 30, 2009 and 2008 and three months ended September 30, 2009 and 2008	4

	Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
	Nine months ended September 30, 2009 and 2008	5

	Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2009 and 2008	6

	Notes to Condensed Consolidated Financial Statements	7-13

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18-37

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	.38

Item 4T.	Controls and Procedures	38-39

PART II. - OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 1A.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Under Senior Securities	45

Item 4.	Submission of Matters to a Vote of Security Holders	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Balance Sheets

PART I. FINANCIAL STATEMENTS

Item 1. Financial Statements

	September 30,			December 31,
(Dollars in thousands)	2009			2008
Assets	(Unaudited)
Cash and cash equivalents:
Cash and due from banks	$	10,183		$	11,970
Interest-bearing deposit accounts		27,210			1,642
Total cash and cash equivalents		37,393			13,612
Securities:
Securities available-for-sale		73,410			78,828
Securities held-to-maturity (estimated fair value of $283
at September 30, 2009 and $225 at December 31, 2008)		215			215
Nonmarketable equity securities		10,186			10,815
Total securities		83,811			89,858

Loans held for sale		815			303

Loans receivable		601,846			641,737
Less allowance for loan losses		(37,943	)		(13,617	)
Loans, net		563,903			628,120
Other real estate owned		6,181			5,121
Premises and equipment, net		16,373			17,243
Accrued interest receivable		3,284			3,724
Intangible assets		1,769			2,089
Goodwill		-			7,418
Cash surrender value of life insurance		16,507			15,996
Other assets		18,188			7,116
Total assets	$	748,224		$	790,600

Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	102,906		$	73,663
Interest-bearing		471,964			439,938
Total deposits		574,870			513,601
Federal funds purchased and securities sold
under agreements to repurchase		-			33,838
Advances from the Federal Home Loan Bank		105,400			161,185
Accrued interest payable		1,335			1,802
Junior subordinated debentures		10,310			10,310
Other liabilities		5,966			4,907
Total liabilities		697,881			725,643
Shareholders’ Equity
Common stock, $1.00 par value; 20,000,000 shares authorized,
8,902,933 and 5,666,760 shares issued at September 30, 2009
and December 31, 2008, respectively		8,903			5,667
Nonvested restricted stock		(460	)		(445	)
Capital surplus		67,721			62,405
Accumulated other comprehensive income		1,000			527
Retained earnings		(10,323	)		14,218
Treasury stock at cost; 879,754 and 1,199,470 shares at September 30, 2009
and December 31, 2008, respectively		(16,498	)		(17,415	)
Total shareholders’ equity		50,343			64,957
Total liabilities and shareholders’ equity	$	748,224		$	790,600

COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands)	Nine Months Ended September 30,					Three Months Ended September 30,
	2009			2008		2009			2008
Interest income:
Loans, including fees	$	25,077		$	30,324	$	8,186		$	9,471
Investment securities:
Taxable		1,669			1,543		536			520
Tax-exempt		844			968		232			322
Nonmarketable equity securities		109			373		48			92
Other interest income		32			5		24			1
Total		27,731			33,213		9,026			10,406

Interest expense:
Deposits		5,863			8,552		2,199			2,425
Federal Home Loan Bank advances		4,177			4,518		1,261			1,562
Other interest expense		601			1,522		185			424
Total		10,641			14,592		3,645			4,411

Net interest income		17,090			18,621		5,381			5,995
Provision for loan losses		31,800			5,600		24,000			1,100
Net interest income after provision for loan losses		(14,710	)		13,021		(18,619	)		4,895

Other operating income:
Service charges on deposit accounts		1,730			1,841		594			672
Residential mortgage origination fees		1,174			918		359			315
Fees from brokerage services		185			127		74			34
Income from fiduciary activities		1,172			1,398		418			442
Gain on sales of securities		396			98		3			-
Other operating income		1,308			1,143		420			388
Total		5,965			5,525		1,868			1,851

Other operating expenses:
Salaries and employee benefits		7,811			8,643		2,601			2,735
Net occupancy expense		956			996		316			340
Amortization of intangible assets		320			337		106			112
Goodwill Impairment		7,418			-		7,418			-
Furniture and equipment expense		667			743		212			265
Loss on sales of fixed assets		39			-		20			-
Loss on sales of OREO		2,664			14		1,224			6
Other operating expenses		5,199			4,812		1,403			1,682
Total		25,074			15,545		13,300			5,140

Income(losses) before income taxes		(33,819	)		3,001		(30,051	)		1,606
Income tax provision (benefit)		(9,956	)		597		(8,266	)		410

Net income (loss)	$	(23,863	)	$	2,404	$	(21,785	)	$	1,196

Basic net income (loss) per share	$	(5.14	)	$	0.54	$	(4.35	)	$	0.27
Diluted net income (loss) per share	$	(5.14	)	$	0.54	$	(4.35	)	$	0.27

COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income

For the nine months ended September 30, 2009 and 2008

(Unaudited)

	Common Stock						Nonvested Restricted Stock			Capital Surplus			Retained Earnings			Accumulated Other Compre-hensive Income			Treasury Stock			Total
	Shares			Amount
Balance, December 31, 2007		5,603,570		$	5,604		$	(443	)	$	61,600		$	15,016		$	485		$	(17,415	)	$	64,847

Net income														2,404									2,404
Other comprehensive loss, net of tax benefit																	(575	)					(575	)
Comprehensive Income																							1,829
Cumulative change in accounting principle														(529	)								(529	)
Exercise of stock options		37,605			37						430												467
Issuance of restricted stock		26,800			27			(422	)		395												-
Amortization of deferred compensation on restricted Stock								302															302
Forfeitures of restricted stock		(900	)		(1	)		15			(15	)											(1	)
Dividends paid ($0.45 per share)														(2,008	)							(2,008		)
Balance, September 30, 2008		5,667,075		$	5,667		$	(548	)	$	62,410		$	14,883		$	(90	)	$	(17,415	)	$	64,907

Balance, December 31, 2008		5,666,760		$	5,667		$	(445	)	$	62,405		$	14,218		$	527		$	(17,415	)	$	64,957

Net loss														(23,863	)								(23,863	)
Other comprehensive income, net of tax																	473						473
Comprehensive loss																							(23,390	)
Rights Offering Issuance		3,186,973			3,187						5,065												8,252
Issuance of restricted stock		49,500			49			(300	)		251												-
Amortization of deferred compensation on restricted Stock								285															285
Forfeitures of restricted stock		(300	)																				-
Sale of treasury shares (319,716 shares)																				917			917
Dividends paid ($0.15 per share)														(678	)								(678	)
Balance, September 30, 2009		8,902,933		$	8,903		$	(460	)	$	67,721		$	(10,323	)	$	1,000		$	(16,498	)	$	50,343

COMMUNITY CAPITAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	(23,863	)	$	2,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation		678			825
Provision for possible loan losses		31,800			5,600
Amortization of intangible assets		320			337
Amortization less accretion on investments		16			11
Amortization of deferred loan costs		762			982
Amortization of deferred compensation on restricted stock		285			302
Gain on sales of securities available-for-sale		(478	)		(98	)
Loss on write-off of nonmarketable equity securities		82			-
Loss on write-off of goodwill impairment		7,418			-
Loss on sale of other real estate		2,664			9
Loss on sale of fixed assets		39			-
Cumulative change in accounting principle		-			(529	)
Disbursements of loans held for sale		(34,379	)		(16,563	)
Proceeds of loans held for sale		33,867			16,963
Decrease in interest receivable		440			689
Decrease in interest payable		(467	)		(1,434	)
Increase in other assets		(11,826	)		(1,706	)
Increase in other liabilities		1,059			685
Net cash provided by operating activities		8,417			8,477

Cash flows from investing activities:
Net increase in loans to customers		22,946			(4,817	)
Purchases of securities available-for-sale		(34,991	)		(15,248	)
Proceeds from maturities and sales of securities available-for-sale		41,587			12,950
Proceeds from maturities and sales of securities held-to-maturity		-			-
Purchases of nonmarketable equity securities		(1,785	)		(3,194	)
Proceeds from sales of nonmarketable equity securities		2,332			2,223
Proceeds from sales of other real estate		4,985			473
Purchases of premises and equipment		(129	)		(1,582	)
Proceeds from sales of premises and equipment		282			7
Net cash provided (used) by investing activities		35,227			(9,188	)

Cash flows from financing activities:
Net increase in deposit accounts		61,269			599
Net decrease in federal funds purchased and repos		(33,838	)		(28,588	)
Advances of Federal Home Loan Bank borrowings		39,700			58,255
Repayments of Federal Home Loan Bank borrowings		(95,485	)		(40,175	)
Dividends paid		(678	)		(2,008	)
Proceeds from exercise of stock options		-			467
Proceeds from rights offering		8,252			-
Sales of treasury stock		917			-
Net cash used by financing activities		(19,863	)		(11,450	)

Net increase (decrease) in cash and cash equivalents		23,781			(12,161	)

Cash and cash equivalents, beginning of period		13,612			29,409

Cash and cash equivalents, end of period	$	37,393		$	17,248

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 - Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures that would substantially duplicate those contained in the most recent annual report to shareholders. The financial statements as of September 30, 2009 and for the interim periods ended September 30, 2009 and 2008 are unaudited and include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The financial information as of December 31, 2008 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in our 2008 Annual Report. In preparing the financial statements, the Company has evaluated events and transactions occurring subsequent to the financial statement date through the filing date of January 29, 2010 for potential recognition of disclosure.

Note 2 - Supplemental Cash Flow Information

(Dollars in thousands)	Nine Months Ended September 30,
	2009		2008
Cash paid during the period for:
Income taxes	$	990	$	1,809
Interest		11,108		15,974

Noncash investing and financing activities:
Foreclosures on loans	$	8,709	$	1,925

Note 3 - Shareholders' Equity

On September 21, 2009, the Company completed its rights offering to shareholders and standby purchasers. The Company issued 3,186,973 shares of common stock, representing $8,252,000 in new capital, net of expenses, in connection with the rights offering. The remaining 4,085,754 unsubscribed shares were offered to the public through October 30, 2009, at the subscription rate of $2.75 per share. The Company raised an aggregate of $14,136,000 in new capital in the rights offering, the public offering, and employee purchases through our 401k plan net of expenses, of which $5,002,000, which was raised in the public offering, will be reflected in capital totals as of December 31, 2009.

The Company’s 401(k) plan and Dividend Reinvestment and Stock Purchase Plan now purchase shares from treasury versus the open market to generate additional capital for the Company. In 2009, the Company has issued 319,716 shares of treasury stock for total proceeds of $917,000. During the third quarter of 2009, the Company sold 312,440 shares of treasury shares for total proceeds of $879,000.

On January 21, 2009 the Board of Directors declared a cash dividend of $0.15 per share, which was paid to shareholders on March 6, 2009. Total cash paid for cash dividends during the nine month period ended September 30, 2009 was $678,000, all of which was paid in the first quarter. On April 21, 2009, the Board of Directors voted to suspend to the payment of the quarterly cash dividend on the Company’s common stock as a prudent means of capital preservation in light of the current economic conditions. We issued 49,500 shares of restricted stock on February 1, 2009 at a price of $6.14 per share. The shares cliff vest in three years and are fully vested on February 1, 2012.

In September 2006, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Agreements” (“FASB ASC 715-60”), which requires companies to recognize a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee extending to postretirement periods. The liability should be recognized based on the substantive agreement with the employee. ASC 715-60 was effective beginning January 1, 2008, and was applied as either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The one-time impact to the company upon adoption of ASC 715-60 was a reduction in retained earnings and an increase in other liabilities of $529,000 during the nine month period ended September 30, 2008.

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4 - Earnings (Losses) Per Share

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

(Dollars in thousands, except per share)	Nine Months Ended September 30, 2009
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings (losses) per share
Income available to common shareholders	$	(23,863	)		4,638,143	$	(5.14	)
Effect of dilutive securities
Stock options		-			-
Unvested restricted stock		-			60,603
Diluted earnings (losses) per share
Income (losses) available to common shareholders plus assumed conversions	$	(23,863	)		4,698,746	$	(5.14	)

(Dollars in thousands, except per share)	Nine Months Ended September 30, 2008
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic earnings (losses) per share
Income (losses) available to common shareholders	$	2,404		4,424,301	$	0.54
Effect of dilutive securities
Stock options		-		72
Unvested restricted stock		-		38,841
Diluted earnings (losses) per share
Income (losses) available to common shareholders plus assumed conversions	$	2,404		4,463,214	$	0.54

(Dollars in thousands, except per share)	Three Months Ended September 30, 2009
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings (losses) per share
Income (losses) available to common shareholders	$	(21,785	)		5,013,726	$	(4.35	)
Effect of dilutive securities
Stock options		-			-
Unvested restricted stock		-			58,537
Diluted earnings (losses) per share
Income (losses) available to common shareholders plus assumed conversions	$	(21,785	)		5,072,263	$	(4.35	)

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4 - Earnings (Losses) Per Share - continued

(Dollars in thousands, except per share)	Three Months Ended September 30, 2008
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic earnings (losses) per share
Income (losses) available to common shareholders	$	1,196		4,431,413	$	0.27
Effect of dilutive securities
Stock options		-		-
Unvested restricted stock		-		36,623
Diluted earnings (losses) per share
Income (losses) available to common shareholders plus assumed conversions	$	1,196		4,468,036	$	0.27

Note 5 - Comprehensive Income (Loss)

The following tables set forth the amounts of other comprehensive income (losses) included in equity along with the related tax effects:

	Nine Months Ended September 30, 2009
(Dollars in thousands)	Pre-tax Amount			(Expense) Benefit			Net-of-tax Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	1,195		$	(425	)	$	770
Less: reclassification adjustment for gains realized in net income		(478	)		181			(297	)
Net unrealized gains (losses) on securities		717			(244	)		473

Other comprehensive income (loss)	$	717		$	(244	)	$	473

	Nine Months Ended September 30, 2008
(Dollars in thousands)	Pre-tax Amount			(Expense) Benefit			Net-of-tax Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	(773	)	$	263		$	(510	)
Less: reclassification adjustment for gains realized in net income		98			(33	)		65
Net unrealized gains (losses) on securities		(871	)		296			(575	)

Other comprehensive income (loss)	$	(871	)	$	296		$	(575	)

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 - Comprehensive Income (Losses) - continued

	Three Months Ended September 30, 2009
(Dollars in thousands)	Pre-tax Amount			(Expense) Benefit			Net-of-tax Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	1,348		$	(477	)	$	871
Less: reclassification adjustment for gains realized in net income		(85	)		47			(38	)
Net unrealized gains (losses) on securities	$	1,263		$	(430	)	$	833

Other comprehensive income (loss)	$	1,263		$	(430	)	$	833

	Three Months Ended September 30, 2008
(Dollars in thousands)	Pre-tax Amount			(Expense) Benefit		Net-of-tax Amount
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period	$	(364	)	$	123	$	(241	)
Less: reclassification adjustment for gains (losses) realized in net income		-			-		-
Net unrealized gains (losses) on securities	$	(364	)	$	123	$	(241	)

Other comprehensive income (loss)	$	(364	)	$	123	$	(241	)

Note 6 – Stock Based Compensation

On May 19, 2004, we terminated our 1997 Stock Incentive Plan and replaced it with the 2004 Equity Incentive Plan. Outstanding options issued under any former Plans will be honored in accordance with the terms and conditions in effect at the time they were granted, except that they are not subject to reissuance. At September 30, 2008 there were 51,721 options outstanding that had been issued under the plans. All outstanding options expired during the first quarter of 2009, therefore there were no options outstanding for the period ended September 30, 2009.

A summary of the status of our stock option plans for the three months ended September 30, 2009 and September 30, 2008, and changes during the periods then ended are presented below:

	2009				2008
	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
Outstanding at beginning of period		-	$	-		52,009	$	18.01
Exercised		-		-		-		-
Cancelled		-		-		288		17.48
Outstanding at end of period		-		-		51,721		18.01

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6 – Stock Based Compensation - continued

A summary of the status of our stock option plans for the nine months ended September 30, 2009 and September 30, 2008, and changes during the periods then ended are presented below:

	2009				2008
	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
Outstanding at beginning of period		51,721	$	18.01		91,339	$	15.62
Exercised		-		-		37,605		12.43
Cancelled		51,721		18.01		2,013		13.68
Outstanding at end of period		-		-		51,721		18.01

The 2004 Equity Incentive Plan provides for the granting of restricted stock, statutory incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as nonstatutory stock options, or stock appreciation rights of up to 258,750 shares of our common stock, to officers, employees, and directors. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, our 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 2009 and 2008, we issued 49,500 and 26,800 shares, respectively, of restricted stock pursuant to the 2004 Equity Incentive Plan. The shares cliff vest in three years and are fully vested on February 1, 2012 and February 1, 2011, respectively. The weighted-average fair value of restricted stock issued during 2009 and 2008 was $6.14 and $15.73, respectively. Compensation cost associated with these and prior issuances were $285,000 and $302,000 for the nine months ended September 30, 2009 and 2008, respectively, and $94,000 and $98,000 for the three months ended September 30, 2009 and 2008, respectively. During the nine months ended September 30, 2009 and 2008, we had 300 and 900 shares, respectively, of restricted stock that were forfeited. At September 30, 2009, we had 96,698 stock awards available for grant under the 2004 Equity Incentive Plan.

Note 7 – Investment Securities

Securities available-for-sale at September 30, 2009 and December 31, 2008 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2009
Government-sponsored enterprises	$	13,993	$	227	$	-	$	14,220
Obligations of state and local governments		21,032		415		190		21,257
		35,025		642		190		35,477
Mortgage-backed securities		36,748		1,185		-		37,933
Total	$	71,773	$	1,827	$	190	$	73,410

December 31, 2008
Government-sponsored enterprises	$	28,425	$	791	$	-	$	29,216
Obligations of state and local governments		28,533		280		535		28,278
		56,958		1,071		535		57,494
Mortgage-backed securities		20,917		464		47		21,334
Total	$	77,875	$	1,535	$	582	$	78,828

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7 – Investment Securities - continued

Securities held-to-maturity as of September 30, 2009 and December 31, 2008 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
September 30, 2009
Obligations of state and local governments	$	215	$	68	$	-	$	283

December 31, 2008
Obligations of state and local governments	$	215	$	10	$	-	$	225

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2009.

Securities Available-for-Sale

	Less than				Twelve months
	twelve months				or more				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair value		losses		Fair value		losses		Fair value		losses
Obligations of state and local	$	-	$	-	$	2,956	$	190	$	2,956	$	190
governments
Mortgage-backed securities		-		-		-		-		-		-

Total	$	-	$	-	$	2,956	$	190	$	2,956	$	190

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7 – Investment Securities - continued

Securities classified as available-for-sale are recorded at fair market value. All of the securities with unrealized losses were in a continuous loss position for twelve months or more. The Company has the ability and intent to hold this security until such time as the value recovers or the security matures. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

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

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

The following table summarizes the maturities of securities available-for-sale and held-to-maturity as of September 30, 2009, based on the contractual maturities. Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

	Securities				Securities
	Available-For-Sale				Held-To-Maturity
	Amortized		Estimated		Amortized		Estimated
(Dollars in thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	1,245	$	1,254	$	-	$	-
Due after one year but within five years		8,002		8,147		215		230
Due after five years but within ten years		17,844		18,158		-		-
Due after ten years		7,935		7,918		-		-
		35,026		35,477		215		230
Mortgage-backed securities		36,748		37,933		-		-
Total	$	71,774	$	73,410	$	215	$	230

Proceeds from maturities and sales of securities available-for-sale during the nine months ended September 30, 2009 were $41,587,000 which resulted in gross realized gains of $478,000 during the nine months ended September 30, 2009. There were no sales of securities held-to-maturity during the nine month period ended September 30, 2009.

At September 30, 2009 and December 31, 2008, securities having amortized costs of approximately $44,394,000 and $78,090,000, respectively, were pledged as collateral for short-term borrowings, to secure public and trust deposits, and for other purposes as required and permitted by law.

The Company has nonmarketable equity securities consisting of investments in several financial institutions. These investments totaled $10,186,000 at September 30, 2009 and $10,815,000 at December 31, 2008. During 2009, the Company wrote off the investment in one financial institution resulting in losses of $82,000.

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8 – Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

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

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

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

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8 – Fair Value Measurements - continued

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

	September 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
(Dollars in thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets:
Cash and due from banks	$	10,183	$	10,183	$	11,970	$	11,970
Interest-bearing deposit accounts		27,210		27,210		1,642		1,642
Securities available-for-sale		73,410		73,410		78,828		71,828
Securities held-to-maturity		215		283		215		225
Nonmarketable equity securities		10,186		10,186		10,815		10,815
Cash surrender value of life insurance		16,507		16,507		15,996		15,996
Loans and loans held for sale		602,661		599,228		642,040		658,309
Accrued interest receivable		3,284		3,284		3,724		3,724

Financial Liabilities:
Demand deposit, interest bearing
transaction, and savings accounts	$	331,972	$	325,076	$	322,997	$	322,997
Certificates of deposit and other time deposits		242,899		245,604		190,604		193,606
Federal funds purchased and securities
sold under agreements to repurchase		-		-		33,838		33,838
Advances from the Federal Home Loan Bank		105,400		97,566		161,185		150,771
Junior subordinated debentures		10,310		10,310		10,310		10,310
Accrued interest payable		1,335		1,335		1,802		1,802

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8 – Fair Value Measurements - continued

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“ASC 825-10”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC 825-10 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

ASC 825-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 825-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.
Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Assets and liabilities measured at fair value on a recurring basis are as follows as of September 30, 2009:

(Dollars in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Available-for-sale investment securities	$	-	$	73,410	$	-
Mortgage loans held for sale		-		815		-
Total	$	-	$	74,225	$	-

COMMUNITY CAPITAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8 – Fair Value Measurements - continued

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the ASC 825-10 valuation hierarchy (as described above) as of September 30, 2009 for which a nonrecurring change in fair value has been recorded during the quarter ended September 30, 2009.

Assets and liabilities measured at fair value on a nonrecurring basis are as follows as of September 30, 2009:

(Dollars in thousands)	Quoted market price in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Intangible assets	$	-	$	-	$	1,769

Goodwill		-		-		0

Other real estate owned		-		6,181		-

Impaired loans		-		102,002		-
Total	$	-	$	108,182	$	1,769

Note 9 – Goodwill

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

In accordance with FASB ASC 805, the Company evaluates its goodwill on an annual basis. The annual evaluation was performed in June 2009. At the time of the evaluation, the Company determined that no impairment existed. However, the valuation has declined over the past several months as investors have demanded a higher return for equity investments in financial institutions due to sustained weakness in the industry and as earnings multiples have declined. These negative industry trends coupled with lower cash flow projections have resulted in management’s reevaluation of its internal valuations.

Due to these events and circumstances, the Company updated its goodwill impairment testing as of December 31, 2009. Given the substantial decline in the Company's common stock price, declining operating results and reduced projected results, asset quality trends, market comparables and the current economic climate of the banking industry, the results of this testing indicate that the Company’s goodwill was fully impaired. Based on the results of this analysis, the Company has recorded a $7.4 million goodwill impairment charge.

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

In this quarterly report on Form 10-Q/A, or this “Quarterly Report,” we refer to Community Capital Corporation as “we,” “us,” “our,” or the “Company,” unless we specifically state otherwise or the context indicates otherwise.

Overview

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

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

As of September 30, 2009, we had total consolidated assets of approximately $748 million, total deposits of approximately $575 million, total consolidated liabilities, including deposits, of approximately $698 million and total consolidated shareholders’ equity of approximately $50 million. While the majority of our loan portfolio continues to perform well, the real estate, construction and land development portion of our portfolio has been negatively impacted by the current economic climate and the deterioration in the residential real estate sector. We continue to actively manage our non-performing assets and we may sell assets and take advantage of other market opportunities to dispose of problem assets. Recently, we have emphasized cost controls throughout our organization, which have been an important focus as economic growth has slowed.

Recent Developments

On October 30, 2009, we announced the completion of our capital raise. The shares that were unsubscribed for in the rights offering that expired on September 21, 2009 were offered to the public at a subscription price of $2.75 per share.

The following is a discussion of our financial condition as of September 30, 2009 compared to December 31, 2008 and the results of operations for the nine and three months ended September 30, 2009 compared to the nine and three months ended September 30, 2008. These comments should be read in conjunction with our condensed consolidated financial statements and accompanying footnotes appearing in this report.

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

Results of Operations

Net Interest Income

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.

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

Average Balances, Income and Expenses, and Rates

	For the Three Months Ended
	September 30, 2009							September 30, 2008
(Dollars in thousands)	Average Balance		Income/ Expense		Yield/ Rate (1)			Average Balance		Income/ Expense		Yield/ Rate (1)
Assets:
Earning Assets:
Loans(2)(4)	$	609,033		8,194		5.34	%	$	645,425		9,481		5.84	%
Securities, taxable (3)		47,186		536		4.51	%		40,104		521		5.17	%
Securities, nontaxable (3)(4)		21,842		320		5.81	%		29,550		433		5.83	%
Nonmarketable equity securities		10,186		48		1.87	%		10,306		92		3.55	%
Fed funds sold and other		35,254		24		0.24	%		279		1		1.43	%
Total earning assets		723,501		9,122		5.00	%		725,664		10,528		5.77	%
Non-earning assets		56,919							57,110
Total assets	$	780,420						$	782,774

Liabilities:
Interest bearing liabilities:
Interest bearing transaction accounts		186,265		473		1.01	%		214,021		633		1.18	%
Savings accounts		41,999		174		1.64	%		36,816		197		2.13	%
Time deposits		246,454		1,551		2.50	%		189,239		1,595		3.35	%
Other short-term borrowings		359		-		0.00	%		43,037		244		2.26	%
Federal Home Loan Bank borrowings		119,096		1,262		4.20	%		149,862		1,561		4.14	%
Junior subordinated debentures		10,310		185		7.12	%		10,310		181		6.98	%
Total interest bearing liabilities		604,483		3,645		2.39	%		643,285		4,411		2.73	%
Non-interest bearing liabilities		112,261							74,709
Shareholders’ equity		63,676							64,780
Total liabilities and shareholders’ equity	$	780,420						$	782,774
Net interest spread						2.61	%						3.04	%
Net interest income/margin			$	5,477		3.00	%			$	6,117		3.35	%

(1) Annualized for the three month period.

(2) The effect of loans in nonaccrual status and fees collected is not significant to the computations.

All loans and deposits are domestic.

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

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

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

Net Interest Income - continued

The tax-effected net interest spread and net interest margin were 2.61% and 3.00%, respectively, for the three month period ended September 30, 2009, compared to 3.04% and 3.35% for the three month period ended September 30, 2008. The decline in net interest margin was primarily due to our increased level of nonaccrual loans and our desire to maintain cash liquidity. During the three months ended September 30, 2009, earning assets averaged $723,501,000, compared to $725,664,000 for the three months ended September 30, 2008. Average interest earning assets exceeded average interest bearing liabilities by $119,018,000, and $82,379,000 for the three month periods ended September 30, 2009 and September 30, 2008, respectively.

For the three months ended September 30, 2009, our tax-effected net interest income, the major component of our net income, was $5,477,000 compared to $6,117,000 for the same period of 2008, a decrease of $640,000 or 10.46%. The average rate realized on interest-earning assets decreased to 5.00% from 5.77%, while the average rate paid on interest-bearing liabilities also decreased to 2.39% from 2.73% for the three month periods ended September 30, 2009 and 2008, respectively.

Our tax-effected interest income for the three months ended September 30, 2009 was $9,122,000, which consisted of $8,194,000 on loans, $904,000 on investments, and $24,000 on fed funds sold and interest bearing deposits with correspondent banks. The tax-effected interest income for the three months ended September 30, 2008 was $10,528,000, which consisted of $9,481,000 on loans, $1,046,000 on investments, and $1,000 on fed funds sold and interest bearing deposits with correspondent banks. Interest on loans for the three months ended September 30, 2009 and September 30, 2008, represented 89.83% and 90.06%, respectively, of total interest income. Average loans represented 84.18% and 88.94% of average earning assets for the three month periods ended September 30, 2009 and September 30, 2008, respectively.

Interest expense for the three months ended September 30, 2009 was $3,645,000, which consisted of $2,198,000 related to deposits and $1,447,000 related to other borrowings. Interest expense for the three months ended September 30, 2008 was $4,411,000 which consisted of $2,425,000 related to deposits and $1,986,000 related to other borrowings. Interest expense on deposits for the three months ended September 30, 2009 and September 30, 2008 represented 60.30% and 54.98%, respectively, of total interest expense. Average interest bearing deposits represented 78.53% and 68.41% of average interest bearing liabilities for the three months ended September 30, 2009 and September 30, 2008, respectively.

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

Net Interest Income - continued

Average Balances, Income and Expenses, and Rates

	For the Nine Months Ended
	September 30, 2009							September 30, 2008
(Dollars in thousands)	Average Balance		Income/ Expense		Yield/ Rate (1)			Average Balance		Income/ Expense		Yield/ Rate (1)
Assets:
Earning Assets:
Loans(2)(4)	$	624,327		25,101		5.38	%	$	651,796		30,357		6.22	%
Securities, taxable (3)		45,531		1,669		4.90	%		39,781		1,544		5.18	%
Securities, nontaxable (3)(4)		25,025		1,165		6.22	%		29,375		1,299		5.91	%
Nonmarketable equity securities		4,753		109		3.07	%		9,829		373		5.07	%
Fed funds sold and other		19,357		32		0.22	%		279		5		2.39	%
Total earning assets		718,993		28,076		5.22	%		731,060		33,578		6.14	%
Non-earning assets		63,335							61,120
Total assets	$	782,328						$	792,180

Liabilities:
Interest bearing liabilities:
Interest bearning transaction accounts		194,066		1,092		0.75	%		228,010		2,516		1.47	%
Savings accounts		39,452		504		1.71	%		36,313		638		2.35	%
Time deposits		211,878		4,266		2.69	%		189,597		5,398		3.80	%
Other short-term borrowings		23,935		57		0.32	%		49,412		981		2.65	%
Federal Home Loan Bank borrowings		134,271		4,177		4.16	%		140,334		4,518		4.30	%
Junior subordinated debentures		10,310		545		7.07	%		10,310		542		7.02	%
Total interest bearing liabilities		613,912		10,641		2.32	%		653,976		14,593		2.98	%
Non-interest bearing liabilities		104,127							73,068
Shareholders’ equity		64,289							65,136
Total liabilities and shareholders’ equity	$	782,328						$	792,180
Net interest spread						2.90	%						3.15	%
Net interest income/margin			$	17,435		3.24	%			$	18,985		3.47	%

(1) Annualized for the nine month period.

(2) The effect of loans in nonaccrual status and fees collected is not significant to the computations.

All loans and deposits are domestic.

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

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

The tax-effected net interest spread and net interest margin were 2.90% and 3.24%, respectively, for the nine month period ended September 30, 2009, compared to 3.15% and 3.47% for the nine month period ended September 30, 2008. During the nine months ended September 30, 2009, earning assets averaged $718,993,000, compared to $731,060,000 for the nine months ended September 30, 2008. Average interest earning assets exceeded average interest bearing liabilities by $105,081,000, and $77,084,000 for the nine month periods ended September 30, 2009 and September 30, 2008, respectively.

For the nine months ended September 30, 2009, our tax-effected net interest income, the major component of our net income, was $17,435,000 compared to $18,985,000 for the same period of 2008, a decrease of $1,550,000 or 8.16%. The average rate realized on interest-earning assets decreased to 5.22% from 6.14%, while the average rate paid on interest-bearing liabilities decreased to 2.32% from 2.98% for the nine month periods ended September 30, 2009 and 2008, respectively.

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

Net Interest Income - continued

Our tax-effected interest income for the nine months ended September 30, 2009 was $28,076,000, which consisted of $25,101,000 on loans, $2,943,000 on investments, and $32,000 on fed funds sold and interest bearing deposits with correspondent banks. The tax-effected income for the nine months ended September 30, 2008 was $33,578,000, which consisted of $30,357,000 on loans, $3,216,000 on investments, and $5,000 on fed funds sold and interest bearing deposits with correspondent banks. Interest on loans for the nine months ended September 30, 2009 and September 30, 2008, represented 89.40% and 90.41%, respectively, of total interest income. Average loans represented 86.83% and 89.16% of average earning assets for the nine month periods ended September 30, 2009 and September 30, 2008, respectively.

Interest expense for the nine months ended September 30, 2009 was $10,641,000, which consisted of $5,862,000 related to deposits and $4,779,000 related to other borrowings. Interest expense for the nine months ended September 30, 2008 was $14,593,000 which consisted of $8,552,000 related to deposits and $6,041,000 related to other borrowings. Interest expense on deposits for the nine months ended September 30, 2009 and September 30, 2008 represented 55.09% and 58.60%, respectively, of total interest expense. Average interest bearing deposits represented 72.55% and 69.41% of average interest bearing liabilities for the nine months ended September 30, 2009 and September 30, 2008, respectively.

Analysis of Changes in Net Interest Income

The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the time periods indicated.

	Three Months Ended
	September 30, 2009 vs. 2008									September 30, 2008 vs. 2007
	Variance Due to									Variance Due to
(Dollars in thousands)	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
Earning Assets
Loans	$	(508	)	$	(779	)	$	(1,287	)	$	429		$	(2,603	)	$	(2,174	)
Securities, taxable		86			(71	)		15			(88	)		1			(87	)
Securities, nontaxable		(112	)		(1	)		(113	)		22			(15	)		7
Nonmarketable equity securities		(1	)		(43	)		(44	)		17			(62	)		(45	)
Federal funds sold and other		25			(2	)		23			1			(3	)		(2	)
Total interest income		(510	)		(896	)		(1,406	)		381			(2,682	)		(2,301	)
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts		(76	)		(84	)		(160	)		(119	)		(1,042	)		(1,161	)
Savings accounts		26			(49	)		(23	)		(8	)		(60	)		(68	)
Time deposits		419			(463	)		(44	)		7			(755	)		(748	)
Total interest-bearing deposits		369			(596	)		(227	)		(120	)		(1,857	)		(1,977	)
Other short-term borrowings		(122	)		(122	)		(244	)		20			(307	)		(287	)
Federal Home Loan Bank advances		(322	)		23			(299	)		259			(147	)		112
Junior subordinated debentures		-			4			4			-			(2	)		(2	)
Total interest expense		(75	)		(691	)		(766	)		159			(2,313	)		(2,154	)
Net interest income	$	(435	)	$	(205	)	$	(640	)	$	222		$	(369	)	$	(147	)

(1)

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

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

Net Interest Income - continued

	Nine Months Ended
	September 30, 2009 vs. 2008									September 30, 2008 vs. 2007
	Variance Due to									Variance Due to
(Dollars in thousands)	Volume(1)			Rate(1)			Total			Volume(1)			Rate(1)			Total
Earning Assets
Loans	$	(1,243	)	$	(4,013	)	$	(5,256	)	$	2,535		$	(5,739	)	$	(3,204	)
Securities, taxable		213			(88	)		125			(196	)		179			(17	)
Securities, nontaxable		(201	)		67			(134	)		128			(68	)		60
Nonmarketable equity securities		(150	)		(114	)		(264	)		40			(63	)		(23	)
Federal funds sold and other		36			(9	)		27			(5	)		(7	)		(12	)
Total interest income		(1,345	)		(4,157	)		(5,502	)		2,502			(5,698	)		(3,196	)
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts		(332	)		(1,092	)		(1,424	)		289			(2,565	)		(2,276	)
Savings accounts		51			(185	)		(134	)		(49	)		(81	)		(130	)
Time deposits		579			(1,711	)		(1,132	)		106			(1,489	)		(1,383	)
Total interest-bearing deposits		298			(2,988	)		(2,690	)		346			(4,135	)		(3,789	)
Other short-term borrowings		(341	)		(583	)		(924	)		186			(904	)		(718	)
Federal Home Loan Bank advances		(194	)		(147	)		(341	)		610			(315	)		295
Junior subordinated debentures		-			-			-			-			(2	)		(2	)
Total interest expense		(237	)		(3,718	)		(3,955	)		1,142			(5,356	)		(4,214	)
Net interest income	$	(1,108	)	$	(439	)	$	(1,547	)	$	1,360		$	(342	)	$	1,018

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

Provision and Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. The Board of Directors reviews and approves the appropriate level for CapitalBank’s allowance for loan losses quarterly based upon management’s recommendations, the results of the internal monitoring and reporting system, analysis of economic conditions in our markets, and a review of historical statistical data for both us and other financial institutions. Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our income statement, are periodically made to maintain the allowance at an appropriate level based on our analysis of the potential risk in the loan portfolio. Loan losses, which include write downs and charge offs, and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

Our allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, we monitor overall portfolio quality through observable trends in delinquency, charge offs, and general and economic conditions in the service area. Risks are inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

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

Provision and Allowance for Loan Losses – continued

Components in our reserve calculation include specific reserve analysis for impaired loans based on SFAS 114 “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15.” (FASB ASC 310-10-35), general reserve analysis applying historical loss rates based on SFAS No. 5 “Accounting for Contingencies,” (FASB ASC 450-20) and qualitative and environmental factors.

In developing our ASC 450-20 general reserve estimate, we have segmented the loan portfolio into ten risk categories: consumer loans, home equity lines, overdraft protection lines, 1-4 residential loans, commercial loans, commercial real estate loans, cash secured loans, mortgages held for resale, government guaranteed portions of loans, and DDA overdrafts. Loss experience on each of the risk categories is compiled over the previous three year period. From this segmentation, we have identified several homogeneous pools and applied the corresponding three year loss factor for the reserve allocation. The homogeneous pools we have identified include consumer installment loans, home equity lines of credit, overdraft protection lines, cash secured loans, mortgages held for resale, government guaranteed portions of loans, and DDA overdrafts in excess of sixty days. The remaining segments of the loan portfolio, which include 1-4 residential loans, commercial loans, and commercial real estate loans, are analyzed with the entire loan portfolio for progressions through our risk rating system. We then apply the results generated from the three year historical loss migration analysis to each of these segments. When a particular loan is identified as impaired, it is removed from the corresponding segment and individually analyzed and measured for specific reserve allocation, in accordance with SFAS No. 114.

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

Portfolio risk

Loan policy, procedures and monitoring risk

National and local economic trends and conditions

Concentration risk

Acquisition and development loan portfolio risks

Impaired loan portfolio additional risks

Certain problem loans are reviewed individually for impairment which is measured in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15” (FASB ASC 310-10-35). An impaired loan may not represent an expected loss; however a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining if a loan is impaired, the bank considers all non-accrual loans, loans whose terms are modified in a troubled debt restructuring, and any other loan that is individually evaluated and determined to be impaired based on risk ratings and loan amounts of certain segments of the bank’s loan portfolio. If a loan is individually evaluated and identified as impaired as prescribed by ASC 310-10-35, it is measured by using either the fair value of the collateral, less expected costs to sell, present value of expected future cash flows, discounted at the loans effective interest rate, or observable market price of the loan. Management chooses a method on a loan-by-loan basis. Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from those estimates.

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

Provision and Allowance for Loan Losses – continued

Activity in the Allowance for Loan Losses is as follows:

(Dollars in thousands)	September 30,
		2009			2008
Balance, January 1,	$	13,617		$	6,759
Provision for loan losses for the period		31,800			5,600
Charge-offs		(7,503	)		(1,630	)
Recoveries		29			124

Balance, end of period	$	37,943		$	10,853

Gross loans outstanding, end of period	$	601,846		$	645,558

Allowance for loan losses to loans outstanding		6.30	%		1.68	%

For the nine months ended September 30, 2009, total provision expense was $31,800,000, compared to $5,600,000 for the nine month period ended September 30, 2008. For the three months ended September 30, 2009, provision expense totaled $24,000,000 as compared to $1,100,000 for the same period in 2008. The increase in provision expense during the third quarter was primarily due to the decrease in market valuations on nonaccrual and impaired loans. At the time of the filing of the Original Report on Form 10-Q, substantially all of the Company's impaired loans were evaluated based on management’s estimate of the fair value of the collateral reflecting management's strategy with respect to the anticipated resolution of these loans. As a result of the continuing deterioration in the Company's markets and an inability to complete a satisfactory arrangement for a third party to manage these impaired loans, in early December 2009 management changed its strategy and intent regarding these impaired loans. This change in strategy necessitated a change in valuation of the loans to reflect a lower estimated fair value as a result of significant continued declines in real estate values and the Company’s new strategy of more quickly liquidating the assets. Because this change in strategy was made before completion of the Bank's most recent Federal Reserve examination, the Federal Reserve is requiring the Bank to record the impact of this change in strategy in the third quarter of 2009 rather than the fourth quarter. This change in strategy for valuing the impaired loans necessitates an $18 million increase in the allowance for loan losses as of September 30, 2009 over the amount originally recorded.

Additionally, the increase in provision was due to the increase in net charge offs to $7,474,000 for the nine months ended September 30, 2009, compared to $1,506,000 for the nine months ended September 30, 2008. Net charge offs for the three month period September 30, 2009 were $908,000 compared to $123,000 for the three months ended September 30, 2008. The allowance for loan losses was 6.30% of total loans at September 30, 2009, as compared to 2.41% at June 30, 2009 and 1.68% at September 30, 2008.

Our judgment about the adequacy of the allowance is based upon a number of assumptions about future events, which we believe to be reasonable, but which may not prove to be accurate. Thus, charge-offs in future periods could exceed the allowance for loan losses, or substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease of our net income and, possibly, our capital. Based on present information, we believe the allowance for loan losses is adequate at September 30, 2009 to meet presently known and inherent risks in the loan portfolio.

Please see our risk factors that appear in Part I – Item 1A – Risk Factors of this Quarterly Report.

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

Noninterest Income

Total noninterest income for the nine months ended September 30, 2009 was $5,965,000, an increase of $440,000, or 7.96% compared to $5,525,000 for the nine months ended September 30, 2008. Total noninterest income for the quarter ended September 30, 2009 increased $17,000, or 0.92% to $1,868,000, compared to $1,851,000 at September 30, 2008.

The largest component of noninterest income, service charges on deposit accounts, decreased $111,000, or 6.03% from the nine months ended September 30, 2008 to the nine months ended September 30, 2009 and $78,000, or 11.61% from the three months ended September 30, 2008 to the three months September 30, 2009. Residential mortgage origination fees increased $256,000, or 27.89% to $1,174,000 from $918,000 for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008 and increased $44,000, or 13.97% from $315,000 to $359,000 for the three months ended September 30, 2009, compared to the three months ended September 30, 2008.

The income from fiduciary activities decreased $226,000, or 16.17% from the nine month period ended September 30, 2008 to the nine month period ended September 30, 2009, and $24,000, or 5.43% from the three month period ended September 30, 2008 to the three month period ended September 30, 2009. The decrease is primarily a result of the decline in the market value of assets under management. However, we have continued to increase the number of customer accounts during this period of significant market disruption. Fees from brokerage services increased $58,000, or 45.67% from the nine months ended September 30, 2008 to the nine months ended September 30, 2009 and $40,000, or 117.65% for the three months ended September 30, 2008 to the three months ended September 30, 2009. The increase in our brokerage fee income is primarily the result of the sale of annuities. We realized a gain on the sales/calls of securities available for sale of $396,000 for the nine months ended September 30, 2009, compared to $98,000 during the same period of 2008. Other operating income increased $165,000, or 14.44% from the nine months ended September 30, 2008 to the nine months ended September 30, 2009 and increased $32,000, or 8.25% from the three months ended September 30, 2008 to the three months ended September 30, 2009.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Noninterest Expense

Total noninterest expense for the first nine months of 2009 was $25,074,000, an increase of $9,529,000, or 61.30%, when compared to $15,545,000 for the first nine months of 2008. For the quarter ended September 30, 2009, noninterest expense was $13,300,000, an increase of $8,160,000, or 158.75%, over the comparable period of 2008.

The primary component of noninterest expense is salaries and benefits, which decreased $832,000, or 10.65%, from $8,643,000 for the nine months ended September 30, 2008 to $7,811,000 for the nine months ended September 30, 2009 and decreased $135,000, or 4.94%, from $2,735,000 for the three months ended September 30, 2008 to $2,600,000 for the three months ended September 30, 2009. The decrease in salary expense is primarily a result of our reduction in the number of employees by 9.55% since September 30, 2008. Net occupancy expense decreased $40,000 for the nine month period ended September 30, 2009, or 4.02% over the related period in 2008, and decreased $24,000, or 7.06% for the three months ended September 30, 2009 compared to the same period in 2008. The amortization of intangible assets decreased $17,000, or 5.04% to $320,000 from the nine month period ended September 30, 2008 to the nine month period ended September 30, 2009, and decreased $6,000, or 5.36% from the three month period ended September 30, 2008 to the three months ended September 30, 2009. We incurred a goodwill impairment charge of $7,418,000 for the three and nine months ended September 30, 2009, compared to no charges for the same period in 2008. In December 2009, , we reevaluated our goodwill impairment testing as of December 31, 2009. Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of our testing indicated the need for this charge. Furniture and equipment expense decreased $76,000, or 10.23% from the nine month period ended September 30, 2008 to the nine month period ended September 30, 2009, and decreased $53,000, or 20.00% from the three month period ended September 30, 2008 to the three month period ended September 30, 2009. We realized a loss on sales of fixed assets of $39,000 for nine months ended September 30, 2009, of which $20,000 was during the three month period ended September 30, 2009, compared to no losses for the three and nine month period ended September 30, 2008. Other operating expenses were $7,863,000 for the nine months ended September 30, 2009, as compared to $4,826,000 for the same period in 2008, an increase of $3,037,000, or 62.93%. For the quarter ended September 30, 2009, other operating expenses were $2,627,000, an increase of $939,000, or 55.63%, over the comparable period of 2008. The increases in other operating expenses are primarily due to increases in Federal Deposit Insurance Corporation (“FDIC”) assessments, prepayment penalties associated with the early payoff of Federal Home Loan Bank borrowings, and expenses associated with other real estate owned. We realized an increase in FDIC insurance premiums during the nine months ended September 30, 2009, including a one-time FDIC Insurance assessment of $375,000, when compared to the nine months ended September 30, 2008. We incurred a one-time expense of $359,000 associated with the early termination of $15,000,000 in Federal Home Loan Bank borrowings during the three months ended September 30, 2009. In addition, we had a net loss on other real estate owned of $2,665,000 during the nine months ended September 30, 2009, $1,216,000 of which was in the three month period ended September 30, 2009, compared to a net loss of $9,000 for the nine months ended September 30, 2008 and $5,000 for the three months ended September 30, 2008. Effective July 1, 2009, we eliminated bank and holding company director fees, which has resulted in cost savings. We continue our efforts in controlling and eliminating noninterest expenses.

Please see our risk factors that appear in Part I – Item 1A – Risk Factors of this Quarterly Report.

Income Taxes

For the nine months ended September 30, 2009 and 2008, the effective income tax rate was 29.44% and 19.89%, respectively, and the income tax benefit was $9,956,000 for the nine month period ended September 30, 2009, compared to an income tax provision of $597,000 for the same period ended September 30, 2008. For the quarter ended September 30, 2009, the effective tax rate was 27.51% compared to 25.53% for the third quarter of 2008. The increase in effective tax rates for the three and nine month periods ended September 30, 2009 compared to September 30, 2008 were primarily due to a lower percentage of pretax income being derived from tax free sources.

Net Income (Loss)

The combination of the above factors resulted in net losses of $23,863,000 for the nine months ended September 30, 2009 compared to net income of $2,404,000 for the comparable period in 2008, a decrease of $26,267,000. For the quarter ended September 30, 2009, net losses were $21,785,000, a decrease of $22,981,000 when compared to net income of $1,196,000 for the third quarter of 2008.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Assets and Liabilities

During the first nine months of 2009, total assets decreased $42,376,000, or 5.36%, when compared to December 31, 2008. We experienced a decrease of $39,891,000, or 6.22% in loans during the first nine months of 2009. Total investment securities decreased $6,047,000, or 6.73%, to $83,811,000 at September 30, 2009 compared to $89,858,000 at December 31, 2008. Cash and due from banks increased $23,781,000, or 174.71% during the first nine months of 2009 to $37,393,000 at September 30, 2009 compared to $13,612,000 at December 31, 2008. The increase in cash and due from banks at September 30, 2009 compared to December 31, 2008 was primarily due to our efforts to increase our on-balance-sheet liquidity. As a result we retained significant balances in our Federal Reserve account rather than investing them in other types of assets. Goodwill was impaired 100%, or $7,418,000, as of December 31, 2009. In December 2009, as a result of recent events and circumstances, we reevaluated our goodwill as of December 31, 2009. Given the substantial declines in our common stock price, declining operating results, asset quality trends, market comparables and the economic outlook for our industry, the results of our testing indicated the need for this impairment. This adjustment was recorded as of September 30, 2009. On the liability side, total deposits increased $61,269,000, or 11.93%, to $574,870,000 at September 30, 2009 from $513,601,000 at December 31, 2008, primarily due to the successful implementation of new deposit growth strategies. Total federal funds purchased and repurchase agreements decreased $33,838,000, or 100%, from $33,838,000 at December 31, 2008 to $0 at September 30, 2009. Our advances from Federal Home Loan Bank decreased $55,785,000, or 34.61%, from $161,185,000 at December 31, 2008 to $105,400,000 at September 30, 2009. The reduction in Federal Home Loan Bank advances is a result of normal maturities and our desire to reduce reliance on wholesale funding.

Investment Securities

Investment securities decreased $6,047,000 or 6.73% to $83,811,000 at September 30, 2009 from $89,858,000 at December 31, 2008. Securities available for sale decreased $5,418,000, or 6.87% during the first nine months of 2009 and nonmarketable equity securities decreased $629,000, or 5.82% during the first nine months of 2009. As of September 30, 2009, securities available for sale totaling $2,956,000 were in an unrealized loss position, all of which were in a continuous loss position for twelve months or more. Based on industry analyst reports and credit ratings, we believe that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

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

Loans

Loans receivable decreased $39,891,000, or 6.22%, from $641,737,000 at December 31, 2008, to $601,846,000 at September 30, 2009. The primary reasons for the decrease are that we continue to experience a lack of demand for new loans and our portfolio continues to pay down. In addition, we have foreclosed on $8,667,000 in loans since December 31, 2008. Real estate – construction loans decreased $7,830,000 or 4.22% to $177,584,000 at September 30, 2009. Real estate – mortgage and commercial also decreased $25,431,000, or 7.38% to $319,026,000 at September 30, 2009 from $344,457,000 at December 31, 2008. Commercial and agricultural loans decreased $6,486,000, or 14.93% to $36,956,000 at September 30, 2009. Home equity loans decreased $515,000, or 1.08%, to $47,315,000 at September 30, 2009.

Balances within the major loan receivable categories as of September 30, 2009 and December 31, 2008 are as follows:

(Dollars in thousands)	September 30, 2009		December 31, 2008
Commercial and agricultural	$	36,956	$	43,442
Real estate – construction		177,584		185,414
Real estate – mortgage and commercial		319,026		344,457
Home equity		47,315		47,830
Consumer, installment		19,538		19,073
Consumer, credit card and checking		1,427		1,521
	$	601,846	$	641,737

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Risk Elements in the Loan Portfolio

We incorporate by reference under this heading the disclosures under the heading “Provision and Allowance for Loan Losses” under this Item 2 of Part I.

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

(Dollars in thousands)	September 30,		December 31,
	2009		2008
Loans:
Nonaccrual loans	$	55,041	$	26,827
Other impaired loans	$	46,961	$	80,599
Accruing loans more than 90 days past due	$	398	$	696

Loans identified by the internal review mechanism, including nonaccrual loans and accruing loans more than 90 days past due:
Criticized	$	15,939	$	31,205
Classified	$	93,176	$	76,101

Criticized and classified loans increased $1,809,000, or 1.69% from $107,306,000 at December 31, 2008 to $109,115,000 at September 30, 2009. The increase was primarily due to the current economic downturn and related decline in demand for residential real estate. As a result of the slowing demand, several development lenders are having significant cash flow issues. Furthermore, residential real estate values are declining further exacerbating these cash flow issues. Nonaccrual and other impaired loans decreased $5,424,000, or 5.05% from $107,426,000 December 31, 2008 to $102,002,000 at September 30, 2009.

The following is a summary of information pertaining to impaired loans:

(Dollars in thousands)	September 30,		December 31,
	2009		2008
Impaired loans without a valuation allowance	$	73,827	$	84,359
Impaired loans with a valuation allowance		28,175		23,067

Total impaired loans	$	102,002	$	107,426

Valuation allowance related to impaired loans	$	21,905	$	6,196

(Dollars in thousands)	September 30,		December 31,
	2009		2008
Average investment in impaired loans	$	102,072	$	102,864

Interest income recognized on impaired loans	$	2,197	$	4,543

Interest income recognized on a cash basis on impaired loans	$	1,464	$	2,913

The valuation allowance related to impaired loans increased $15,709,000, or 253.53%, from December 31, 2008 to September 30, 2009. The increases of nonaccrual and impaired loans and the related valuation allowance was primarily due to our change in strategy regarding our intention to hold our nonaccrual assets for the foreseeable future to a strategy of more quickly liquidating the assets. . This change in strategy necessitated a change in valuation of our impaired loans to reflect lower fair values based on a planned orderly liquidation. . Because this change in strategy was made before completion of our Bank's most recent Federal Reserve examination, the Federal Reserve has required that we record the impact of this change in strategy in the third quarter of 2009. Total impaired loans represent 16.95% of total loans outstanding as of September 30, 2009, compared to 16.74% at December 31, 2008.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Risk Elements in the Loan Portfolio - continued

In order to concentrate our efforts on the timely resolution and disposition of nonperforming and foreclosed assets, we formed a special assets task force. This group’s objective is to oversee, manage and form strategies for assets adversely rated or any other higher credit risks which have potential for further deterioration based on current market conditions. This group is comprised of the Bank’s CEO, CFO, Chief Retail Officer, Chief Lending Officer, Senior Credit Officer, and the task force director who has extensive experience in problem credit workout and resolutions. The task force works with all phases of foreclosures, including deed in lieu requests, troubled debt restructurings, nonaccrual assets, bankruptcies, and all loans with an internal rating of watch or worse. The primary goal of the task force is to efficiently and effectively provide a positive outcome, at the highest recovery value, for any collateral that is pursued through legal action. For credits that continue to have positive merits that could warrant the bank’s continuation of working with the borrower and guarantors, the group considers plans that would preserve, strengthen or otherwise enhance our position. The group meets weekly and works in tandem with credit administration personnel. Monthly reports are provided to the Board of Directors.

Premises and Equipment

Our purchases of fixed assets during the first nine months of 2009 totaled $129,000. Of this amount, $32,000 was during the third quarter of 2009. Total fixed assets, net of depreciation, decreased $870,000 during the first nine months of 2009. The decrease during the first nine months of 2009 was primarily due to the sale of land used for a former bank branch, and routine depreciation of fixed assets.

Deposits

Total deposits increased $61,269,000, or 11.93%, to $574,870,000 at September 30, 2009 from $513,601,000 at December 31, 2008. We experienced an increase in noninterest-bearing deposits of 39.70% from $73,663,000 at December 31, 2008 to $102,906,000 at September 30, 2009. Interest bearing deposits increased $32,026,000, or 7.28% to $471,964,000 at September 30, 2009 from $439,938,000 at December 31, 2008. Our non-interest bearing deposits have increased due to our successful rollout of significantly improved cash management services and the movement of funds from customer repurchase agreements to bank deposits taking advantage of unlimited deposit insurance. Certificates of deposits, or “CDs,” increased $22,878,000, or 12% to $213,482,000 at September 30, 2009 from $190,604,000 at December 31, 2008. The increase was primarily a result of a certificate of deposit campaign we conducted during the second quarter 2009, which offered an annual percentage rate of 3% for a term of 15 months. We generated approximately $62,346,000 in certificates of deposit through this campaign. During the second quarter of 2009, our brokered money market deposit account balances were reduced significantly and were replaced with longer term brokered CDs. During the third quarter of 2009 we eliminated the remaining $17,144,000 in brokered money market deposits. While we do not anticipate that brokered CDs will be a material part of our funding base, we will continue to use this funding source as long as it provides a significantly lower cost of funds versus in-market deposits.

Balances within the major deposit categories as of September 30, 2009 and December 31, 2008 are as follows:

(Dollars in thousands)	September 30, 2009		December 31, 2008

Noninterest-bearing demand deposits	$	102,906	$	73,663
Interest-bearing demand deposits		61,098		65,699
Money market accounts		125,254		96,377
Brokered money market deposits		-		49,828
Savings deposits		42,713		37,430
Certificates of deposits		213,482		190,604
Brokered certificates of deposits		29,417		-
	$	574,870	$	513,601

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank of Atlanta to us decreased $55,785,000 to $105,400,000 as of September 30, 2009 compared to $161,185,000 at December 31, 2008. During the third quarter of 2009, we paid out $30,000,000 in Federal Home Loan Bank borrowings, incurring a one-time prepayment penalty of $359,000. Of the $105,400,000 in advances with Federal Home Loan Bank, the following have scheduled maturities greater than one year:

Maturing on	Interest Rate	Principal
(Dollars in thousands)
03/28/11	4.68% - fixed, callable 12/28/09	$	10,000
12/07/11	4.12% - fixed, callable 12/07/09		10,000
02/09/12	4.61% - fixed, callable 11/09/09		10,000
03/01/12	4.32% - fixed, callable 12/01/09		10,000
05/18/12	4.62% - fixed, callable 11/18/09		5,000
06/14/12	4.94% - fixed, callable 12/14/09		10,000
03/05/13	1.94% - fixed, callable 12/07/09		5,400
01/16/15	2.77% - fixed, callable 01/19/10		10,000
06/03/15	3.36% - fixed, callable 12/03/09		15,000
02/02/17	4.31% - fixed, callable 11/02/09		10,000
05/18/17	4.15% - fixed, callable 11/18/09		10,000
		$	105,400

Junior Subordinated Debentures

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Capital

Quantitative measures established by the federal banking agencies to ensure capital adequacy require us to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

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

On September 21, 2009, we completed our recently announced rights offering of shares of our common stock to shareholders and certain standby purchasers. In connection with the rights offering, we issued 3,186,973 shares of common stock representing $8,252,000 in new capital, net of expenses. The remaining shares of common stock were offered to the public until October 30, 2009, and the capital raised will be reflected in capital at December 31, 2009. As of September 30, 2009, shareholders’ equity was $69,299,000 compared to $64,957,000 at December 31, 2008. We raised an aggregate of $14,136,000 in new capital in the rights offering, the public offereing, and employee purchases through our 401k plan net of expenses, of which $5,002,000, which was raised in the public offering, will be reflected in capital totals as of December 31, 2009.

In addition to the stock offering, we have undertaken several other initiatives to improve our capital position since June 2008. These initiatives include, but are not limited to, shrinking our balance sheet by reducing our loan portfolio and loan balances, transitioning our bond portfolio into lower risk-weighted alternatives, including Small Business Administration bonds, or SBA bonds, and reducing our staff by approximately 16%. In April 2009, we announced that we were suspending our quarterly cash dividends on our common stock to preserve our retained capital. We have also begun to purchase shares of our common stock directly from the Company pursuant to our 401(k) matching program and dividend reinvestment program, rather than repurchasing such shares from the open market. Effective July 1, 2009, we have eliminated director fees for members of the Company and CapitalBank’s Board of Directors. We intend to explore additional initiatives to improve our capital position in light of the turbulent economic environments and our desire to preserve capital.

The following table summarizes capital ratios and the regulatory minimum requirements at September 30, 2009:

		Tier 1	Total	Tier 1
		Risk-based	Risk-based	Leverage
Actual ratio:
	Community Capital Corporation	9.97%	11.28%	7.39%
	CapitalBank	8.97%	10.29%	6.65%
Regulatory minimums:
	For capital adequacy purposes	4.00%	8.00%	4.00%
	To be well-capitalized under prompt action provisions	6.00%	10.00%	5.00%

Liquidity and Capital Resources

Shareholders’ equity was increased by $8,252,000 from the issuance of 3,186,973 shares of common stock in connection with the rights offering that concluded on September 21, 2009. The remaining shares of common stock were offered to the public until October 30, 2009, and the capital raised in the reoffer period will be reflected in capital at December 31, 2009.

During the nine months ended September 30, 2009, shareholders’ equity was decreased by a net loss of $23,863,000 for the first nine months of 2009. Total equity was also reduced by cash dividends of $678,000 for the nine months ended September 30, 2009. Due to changes in the market rates of interest, the fair value of our securities available-for-sale increased, which had the effect of increasing shareholders’ equity by $473,000 net of the deferred taxes for the nine months ended September 30, 2009 when compared to December 31, 2008. Total equity was increased by $285,000 for the amortization of deferred compensation on restricted stock for the nine months ended September 30, 2009. Total equity was also increased by $917,000 for sales of treasury shares.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Liquidity and Capital Resources - continued

Our liquidity position increased during the quarter ended September 30, 2009, as we had no overnight wholesale borrowings and $27,000,000 in our Federal Reserve correspondent account at September 30, 2009. During the third quarter, we reduced our wholesale funding by $60,100,000. Included in this amount was $30,100,000 in overnight federal funds purchased and Term Auction Facility (“TAF”) borrowings. The remaining $30,000,000 was in Federal Home Loan Bank borrowings, $15,000,000 of which matured during the quarter and $15,000,000 that we made the decision to prepay during the quarter ended September 30, 2009, and in doing so we incurred a onetime prepayment penalty of $359,000. Our total deposits have increased $61,269,000 since December 31, 2008. For the near term, maturities and sales of securities available-for-sale are expected to be a source of liquidity as we deploy these funds into loans to achieve the desired mix of assets and liabilities. We also expect to continue to build our deposit base. Advances from the Federal Home Loan Bank, availability at the Federal Reserve Discount Window, and our correspondent banks will also continue to serve as a funding source, at least for the near future. We have the ability to receive an additional $85,850,000 in advances under the terms of our agreement with the Federal Home Loan Bank. We have the ability to receive $29,413,000 from the Discount Window at the Federal Reserve Bank. Short-term borrowings by CapitalBank are not expected to be a primary source of liquidity for the near term; however, we have approximately $15,000,000 million of unused lines of credit to purchase federal funds. Our liquidity, on a parent only basis, is adversely affected by our current inability to receive dividends from CapitalBank without prior regulatory approval.

Off-Balance Sheet Risk

Through the operations of CapitalBank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2009, we had issued commitments to extend credit of $70,181,000 and standby letters of credit of $2,817,000 through various types of commercial lending arrangements. Approximately $55,255,000 million of these commitments to extend credit had variable rates.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2009.

			After One		After Three
	Within		Through		Through				Greater
	One		Three		Twelve		Within		Than
(Dollars in thousands)	Month		Months		Months		One Year		One Year		Total
Unused commitments
to extend credit	$	5,950	$	1,911	$	21,550	$	29,411	$	40,770	$	70,181
Standby letters of
credit		202		330		2,252		2,784		33		2,817
Total	$	6,152	$	2,241	$	23,802	$	32,195	$	40,803	$	72,998

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2008 as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates, which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

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

We use assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.

Recently Issued Accounting Standards

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities. The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure. Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. Changes to the ASC subsequent to June 30, 2009 are referred to as Accounting Standards Updates (“ASU”).

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC. ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position or results of operations but will change the referencing system for accounting standards. Certain of the following pronouncements were issued prior to the issuance of the ASC and adoption of the ASUs. For such pronouncements, citations to the applicable Codification by Topic, Subtopic and Section are provided where applicable in addition to the original standard type and number.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Recently Issued Accounting Standards - continued

In December 2008, the FASB issued FASB Staff Position (“FSP”) SFAS 132(R)-1 (FASB ASC 715-20-65), “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”). This FSP provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The objective of the FSP is to provide the users of financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. The FSP also requires a nonpublic entity, as defined in Statement of Financial Accounting Standard (“SFAS”) 132, to disclose net periodic benefit cost for each period for which a statement of income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Staff Position will require the Company to provide additional disclosures related to its benefit plan.

The FASB issued SFAS 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009. SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is removed from SFAS 140 along with the exception from applying FIN 46(R). The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the standard to have any impact on the Company’s financial statements.

SFAS 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009. The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance. Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard. SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were available under FIN 46(R). SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the standard to have any impact on the Company’s financial position.

The FASB issued ASU 2009–05, “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when estimating the fair value of a liability. When a quoted price in an active market for the identical liability is not available, fair value should be measured using (a) the quoted price of an identical liability when traded as an asset; (b) quoted prices for similar liabilities or similar liabilities when traded as assets; or (c) another valuation technique consistent with the principles of Topic 820 such as an income approach or a market approach. If a restriction exists that prevents the transfer of the liability, a separate adjustment related to the restriction is not required when estimating fair value. The ASU was effective October 1, 2009 for the Company and will have no impact on financial position or operations.

ASU 2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),” issued in September, 2009, allows a company to measure the fair value of an investment that has no readily determinable fair market value on the basis of the investee’s net asset value per share as provided by the investee. This allowance assumes that the investee has calculated net asset value in accordance with the GAAP measurement principles of Topic 946 as of the reporting entity’s measurement date. Examples of such investments include investments in hedge funds, private equity funds, real estate funds and venture capital funds. The update also provides guidance on how the investment should be classified within the fair value hierarchy based on the value for which the investment can be redeemed. The amendment is effective for interim and annual periods ending after December 15, 2009 with early adoption permitted. The Company does not have investments in such entities and, therefore, there will be no impact to our financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued

Recently Issued Accounting Standards - continued

ASU 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force” was issued in October, 2009 and provides guidance on accounting for products or services (deliverables) separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the Update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the update to have an impact on its financial statements.

Issued October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic 470 and provides guidance for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with Topic 820 and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendments also require several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendments are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

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

Regulatory Matters

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

Cautionary Note Regarding Forward-Looking Statements

Some of our statements contained in, or incorporated by reference into, this Quarterly Report are “forward-looking statements” within the meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “target,” “could,” “is likely,” “should,” “would,” “will,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to, the following:

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

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;

our ability and success in resolving troubled loans;

our dependence on senior management;

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;

adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions);

changes in deposit rates, the net interest margin, and funding sources;

inflation, interest rate, and market fluctuations;

risks inherent in making loans including repayment risks and value of collateral;

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

Cautionary Note Regarding Forward-Looking Statements - continued

the strength of the U.S. 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;

fluctuations in consumer spending and saving habits;

the demand for our products and services;

technological changes;

the challenges and uncertainties in the implementation of our expansion and development strategies;

the ability to increase market share;

the adequacy of expense projections and estimates of impairment loss;

the impact of changes in accounting policies by the SEC;

unanticipated regulatory or judicial proceedings;

the potential negative effects of future legislation affecting financial institutions (including without limitation laws concerning taxes, banking, securities, and insurance);

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;

the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet;

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;

other factors described in this Quarterly Report and in other reports filed by the Company with the SEC; and

our success at managing the risks involved in the foregoing.

All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of this Quarterly Report. Any forward-looking statement speaks only as of the date which such statement was made, and, except as required by law, we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

The primary objective of asset and liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the next twelve months. At September 30, 2009, on a cumulative basis through 12 months, rate-sensitive assets exceeded rate-sensitive liabilities by $56,994,000.

Item 4T. Controls and Procedures

Controls Evaluation and Related CEO and CFO Certifications. In conjunction with the determination to restate the Company's financial statements as described in the Explanatory Note to our Amended Report, we conducted a reevaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls reevaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as exhibits to this Quarterly Report are currently-dated certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act and are in connection with the reevaluation conducted by management prior to filing the Amended Report. 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 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the 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.

Item 4T. Controls and Procedures - continued

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

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

Conclusions. Based on the reevaluation of our disclosure controls and procedures, including, but not limited to, our consideration of the restatement described in our Explanatory Note in the Amended Report, our CEO and CFO have concluded that, as of September 30, 2009, we maintained disclosure controls and procedures that were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting During the Quarter Ended September 30, 2009. There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are party to certain litigation that we consider routine and incidental to our business. Management does not expect the results of any of these actions to have a material effect on our business, results of operations or financial condition.

Item 1A. Risk Factors

In addition to the risk factors described below, information regarding risk factors appears in Part I – Item 1A – Risk Factors of our annual report on Form 10-K for the fiscal year ended December 31, 2008.

Risks Related to the Common Stock

Our ability to pay dividends is limited and we suspended payment of dividends during the second quarter of 2009. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.

We continually evaluate, as part of our overall capital plan, whether to continue, reduce or eliminate our common stock dividend. The holders of our common stock are entitled to receive dividends when and if declared by our Board of Directors out of funds legally available therefor. In addition, our ability to pay dividends is restricted by federal and state laws and policies, including various regulatory restrictions with respect to dividends payable by our subsidiary bank, which is our primary source of cash flow and dividends for our shareholders. We have paid cash dividends to our shareholders in the past. However, in April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.

We may issue additional shares of our common stock in the future, which would dilute your ownership if you did not, or were not permitted to, invest in the additional issuances.

In the future, we may seek to raise capital through offerings of our common stock, special stock, securities convertible into common stock, or rights to acquire such securities or our common stock. Our Articles of Incorporation, as amended, makes available additional authorized shares of common stock and special stock for issuance from time to time at the discretion of our Board of Directors, without further action by the shareholders, except where shareholder approval is required by law or The Nasdaq Global Market requirements. The issuance of any additional shares of common stock, special stock, or convertible securities could be substantially dilutive to shareholders of our common stock. Moreover, to the extent that we issue restricted stock, restricted stock units, stock options, stock appreciation rights, options, or warrants to purchase our common stock in the future and those awards, rights, options, or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle them to purchase their pro-rata share of any offering of shares of any class or series and, therefore, our shareholders may not be permitted to invest in future issuances of our common stock and as a result will be diluted.

The issuance of our shares of special stock could adversely affect holders of our common stock which may negatively impact your investment.

Our Board of Directors is authorized to issue additional classes or series of special stock without any action on the part of the shareholders. The Board of Directors also has the power without shareholder approval, to set the terms of any such classes or series of special stock that may be issued, including voting rights, dividend rights, and preferences over our common stock with respect to dividends or upon our dissolution, winding-up and liquidation and other terms. If we issue additional special stock in the future that have a preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue special stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.

PART II - OTHER INFORMATION - continued

Risks Related to Our Business

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

A significant portion of our loan portfolio is comprised of loans secured by either commercial real estate or single family homes that are under construction. As of September 30, 2009, $177.6 million, or 29.5% of our total loans, are classified as Construction and Development loans, $171.9 million, or 28.6% of our total loans, are classified as Commercial Real Estate loans and $189.1 million, or 31.4% of our total loans, are classified as 1-4 Family Residential loans. Construction and Development loans represent the highest level of risk for the Company due to current real estate and other market conditions and represent 80.7% of our nonperforming loans. So far, other Commercial Real Estate loans have not been as severely impacted by the recent economic downturns. In our Other Commercial Real Estate loan portfolio, 73.1% of the loans cover owner-occupied real estate which has a lower risk element than non-owner occupied. Owner-occupied commercial real estate generally has a lower risk profile since business owners are obligated to repay the debt and, accordingly, the loan is not dependent on the liquidation of the collateral as the source of repayment. As of September 30, 2009, only 2.3% of the Company’s nonperforming loans are Other Commercial Real Estate loans. Our 1-4 Family Residential loans have continued to perform with only moderate increases in delinquencies. Delinquencies of 30 days and over increased from 6.3% as of June 30, 2009 to 9.7% as of September 30, 2009. 1-4 Family Residential loans past due 30 days or more were only 5.6% of total 1-4 Family Residential loans outstanding as of September 30, 2009. These 1-4 Family Residential loans represent 16.9% of our nonperforming loans.

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

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

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

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

If our assumptions are wrong, our current allowance may not be sufficient to cover our loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to our

PART II - OTHER INFORMATION - continued

allowance would materially decrease our net income. Our allowance for loan losses as of September 30, 2009, June 30, 2009, December 31, 2008, December 31, 2007, and December 31, 2006 was $37.9 million, $14.9 million, $13.6 million, $6.8 million and $6.2 million, respectively.

During the third quarter of 2009, nonperforming assets increased to $61.6 million, or 10.13% of period-end loans and other real estate, which was up from $34.4 million, or 5.5% at June 30, 2009, and up from $29.5 million, or 4.56%, in the year-earlier quarter. The increase reflects rapidly deteriorating economic conditions and growing weakness in the residential real estate sector across our markets since the first quarter of 2008. There can be no assurance that we will not experience further increases in nonperforming loans in the future.

As of September 30, 2009, 100% of our nonperforming loans were secured by real estate. In evaluating the adequacy of the allowance for loan losses, we obtained updated external appraisals on many of the properties underlying the nonperforming loans or performed internal valuations based on current market conditions. We recorded annualized net charge-offs, as a percentage of average loans, of 1.44% in the first nine months of 2009 compared with 0.28% in the same period of 2008.

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

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

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

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

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

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

•

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

•

temporarily increase the limits on federal deposit insurance; and

•

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

In addition to the EESA and ARRA, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and financial institution regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or

PART II - OTHER INFORMATION - continued

regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans. President Obama recently announced a proposal to reform the U.S. financial system. Among other things, the plan would create a new consumer protection agency and authorize greater powers for the Federal Reserve Board.

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

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

We calculate income taxes in accordance with SFAS 109, Accounting for Income Taxes (“ASC 740-10”), which requires the use of the asset and liability method. In accordance with ASC 740-10, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. At September 30, 2009, our net deferred tax asset was $3.0 million. Realization of a deferred tax asset requires us to exercise significant judgment and is inherently speculative because it requires the future occurrence of circumstances that cannot be predicted with certainty. If we, or our regulators, determine that an additional valuation allowance of our deferred tax asset is necessary, we would incur a charge to earnings.

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

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

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

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

Liquidity risks could affect operations and jeopardize our financial condition.

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

PART II - OTHER INFORMATION - continued

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

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

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

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

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

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

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

Our directors and executive officers, as a group, beneficially owned approximately 17% of our outstanding common stock, as of September 30, 2009. As a result of their ownership, the directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our shareholders for approval, including the election of directors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

(a)

Our special shareholder meeting was held on August 5, 2009.

(b)

The matters voted upon at the meeting and the votes cast with respect to each matter were as follows:

The following proposal was voted upon and approved, with the votes on the proposal as indicated below:

Approval of an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from ten million (10,000,000) shares to twenty million (20,000,000) shares.

For	Against	Abstentions	Broker Non-votes
3,570,176	331,516	41,554	0

At the same meeting, the following proposal was voted upon and approved, with the votes on the proposal as indicated below:

Approval of the issuance of shares of the Company’s common stock equal to or greater than 20% of the Company’s outstanding common stock pursuant to a rights offering or a private offering to investors.

For	Against	Abstentions	Broker Non-votes
2,473,893	319,067	34,647	1,115,639

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit 3.5

Articles of Amendment to Articles of Incorporation of Company dated August 5, 2009.*

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32

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

* Filed with the Original Report on November 13, 2009.

SIGNATURES

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

	COMMUNITY CAPITAL CORPORATION


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


Date: February 26 , 2010	By:	/s/ R. Wesley Brewer
		R. Wesley Brewer Chief Financial Officer

Exhibit Index

Exhibit 3.5

Articles of Amendment to Articles of Incorporation of Company dated August 5, 2009.*

Exhibit 31.1

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

Exhibit 31.2

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

Exhibit 32

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

* Filed with the Original Report on November 13, 2009.

Attached files

COMMUNITY CAPITAL CORP /SC/ Reports

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