COMMUNITY CAPITAL CORP /SC/ - FORM 10-K

Attached files

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EX-32 - SECTION 1350 CERTIFICATIONS - COMMUNITY CAPITAL CORP /SC/	ex32.htm
EX-23.1 - CONSENT OF ELLIOTT DAVIS, LLC - COMMUNITY CAPITAL CORP /SC/	ex23-1.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY WILLIAM G. STEVENS - COMMUNITY CAPITAL CORP /SC/	ex31-1.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION BY R. WESLEY BREWER - COMMUNITY CAPITAL CORP /SC/	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

Commission file number: 000-18460

COMMUNITY CAPITAL CORPORATION

(Exact name of Registrant as specified in its charter)

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

1402-C Highway 72 West Greenwood, South Carolina	29649
(Address of principal executive offices)	(Zip Code)

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

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

		Name of Each Exchange
Title of Each Class		On Which Reported

None

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

Common Stock, par value $1.00 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

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

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

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

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

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

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

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

The aggregate market value of the common equity held by non-affiliates of the registrant as of June 30, 2010, based on the closing price of the common stock as reported by The NASDAQ Global Market on such date, was approximately $27.1 million. The registrant has no outstanding non-voting common equity.

The number of outstanding common shares of the registrant as of March 2, 2011, was 10,041,249.

Documents Incorporated By Reference: Portions of the registrant’s Proxy Statement relating to its 2011 Annual Meeting of shareholders, to be filed subsequently, are incorporated herein by reference in Part III.

COMMUNITY CAPITAL CORPORATION

TABLE OF CONTENTS

Item			Page No.
PART I

1	.	Business	3
1	A.	Risk Factors	21
1	B.	Unresolved Staff Comments	30
2	.	Properties	30
3	.	Legal Proceedings	30
4	.	(Removed and Reserved)	30

PART II

5	.	Market for Registrant’s Common Equity, Related Shareholders Matters and Issuer Purchases of Equity Securities	31
6	.	Selected Financial Data	32
7	.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
7	A.	Qualitative and Quantitative Disclosures About Market Risk	53
8	.	Financial Statements and Supplementary Data	53
9	.	Changes and Disagreements with Accountants on Accounting and Financial Disclosure	53
9	A.	Controls and Procedures	53
9	B.	Other Information	55

PART III

10	.	Directors, Executive Officers, and Corporate Governance	55
11	.	Executive Compensation	55
12	.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
13	.	Certain Relationships and Related Transactions, and Director Independence	55
14	.	Principal Accountant Fees and Services	56

PART IV

15	.	Exhibits and Financial Schedules	56

Signatures			57
Index to Consolidated Financial Statements			F-1
Exhibit Index			E-1

PART I

ITEM 1.

BUSINESS.

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

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

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

our ability to comply with out Written Agreement and potential more restrictive regulatory actions if we fail to comply;

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

the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

the rate of delinquencies and amounts of charge-offs;

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

changes in political conditions or the legislative or regulatory environment;

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

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

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

changes occurring in business conditions and inflation;

changes in technology;

changes in monetary and tax policies;

changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the Financial Accounting Standards Board;

the rates of loan growth;

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

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

changes in the securities markets; and

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

These risks are exacerbated by the state of national and international financial markets, and we are unable to predict what effect these uncertain market conditions will have on our Company. During 2008 and 2009, the capital and credit markets experienced unprecedented levels of extended volatility and disruption which continued to impact the Company in 2010. There can be no assurance that these unprecedented recent developments will not materially and adversely affect our business, financial condition and results of operations.

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

General

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

Market Areas

At December 31, 2010, CapitalBank operated 17 full service branches and one drive through facility in South Carolina, three of which are located in Greenwood, two of which are located in Abbeville, Anderson and Greer, and one of which is located in each of Newberry, Belton, Greenville, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls.

The following table sets forth certain information concerning CapitalBank at December 31, 2010:

	Number of Locations	Total Assets	Total Loans	Total Deposits
		(Dollars in thousands)
CapitalBank	18	$654,907	$480,272	$496,281

Banking Services

Through CapitalBank, we provide a full range of lending services, including real estate, consumer and commercial loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans. Our primary focus has been on real estate construction loans, commercial mortgage loans and residential mortgage loans. We complement our lending services with a full range of retail and commercial banking products and services, including checking, savings and money market accounts, certificates of deposit, credit card accounts, individual retirement accounts safe deposit accounts, money orders and electronic funds transfer services. Deposits in CapitalBank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is currently $250,000 for each non-retirement depositor and $250,000 for certain retirement-account depositors. In addition to our traditional banking services, we also offer customers trust and fiduciary services. We make discount securities brokerage services available through a third-party brokerage firm that has contracted with CapitalBank.

Lending Activities

General. Through CapitalBank, we offer a range of lending services, including real estate, consumer, and commercial loans, to individuals and small business and other organizations that are located in or conduct a substantial portion of their business in CapitalBank’s market areas. Our total loans at December 31, 2010 totaled $479.4 million, or 81.1% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity, and amount of the loan, and are further subject to competitive pressures, availability of funds, and government regulations. We have no foreign loans or loans for highly leveraged transactions.

Our primary focus has been on real estate construction loans and commercial mortgage loans to individuals and small to medium-sized businesses in our market areas, as well as residential mortgage loans. These three loan types totaled approximately $420.8 million and constituted approximately 87.8% of our loan portfolio at December 31, 2010.

The following table sets forth the composition of our loan portfolio for each of the five years in the period ended December 31, 2010.

Loan Composition

(Dollars in thousands)

	December 31,
	2010			2009			2008			2007			2006
Commercial, financial and agricultural		8.28	%		6.18	%		6.77	%		6.89	%		7.83	%
Real estate:
Construction		20.67			25.59			28.89			25.92			24.88
Mortgage:
Residential		38.07			37.85			36.61			39.13			39.08
Commercial (1)		29.04			26.33			24.52			24.00			24.07
Consumer and other		3.94			4.05			3.21			4.06			4.14
Total loans		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%

Total loans (dollars)	$	479,393		$	567,178		$	641,737		$	645,154		$	573,639

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

Loan Approval. Certain credit risks are inherent in the loan making process. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. We attempt to minimize loan losses through various means and use standardized underwriting criteria. These means included the use of policies and procedures that impose officer and customer lending limits and require loans in excess of certain limits to be approved by the Board of Directors of CapitalBank. We do not make any loans to any director or executive officer of CapitalBank unless the loan is approved by the Board of Directors of CapitalBank and is on terms not more favorable than would be available to a person not affiliated with CapitalBank.

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

Real Estate Mortgage Loans. The principal component of our loan portfolio is loans secured by real estate mortgages. We obtain a security interest in real estate whenever possible, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. At December 31, 2010, loans secured by first or second mortgages on real estate made up approximately 87.8% of our loan portfolio.

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

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

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

cost overruns;

mismanaged construction;

inferior or improper construction techniques;

economic changes or downturns during construction;

a downturn in the real estate market;

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

failure to sell completed projects in a timely manner.

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

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

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

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

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

Deposit Services

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

Competition

CapitalBank generally competes with other financial institutions through the selection of banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and the personal manner in which services are offered. South Carolina law permits statewide branching by banks and savings institutions and many financial institutions in the state have branch networks. Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South Carolina. This change permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch to be opened would permit a bank chartered by that state to open a de novo branch. Consequently, commercial banking in South Carolina is highly competitive. South Carolina law also permits interstate banking whereby out-of-state banks and bank holding companies are allowed to acquire and merge with South Carolina banks and bank holding companies, as long as the South Carolina State Board of Financial Institutions gives prior approval for the acquisition or merger. Many large banking organizations currently operate in the market areas of CapitalBank, several of which are controlled by out-of-state ownership. In addition, competition between commercial banks and thrift institutions (savings institutions and credit unions) has been intensified significantly by the elimination of many previous distinctions between the various types of financial institutions and the expanded powers and increased activity of thrift institutions in areas of banking that previously had been the sole domain of commercial banks. See “Supervision and Regulation.”

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

Employees

Including the employees of CapitalBank, we currently have in the aggregate 171 full-time employees and 10 part-time employees.

Corporate Information

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

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

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

SUPERVISION AND REGULATION

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

In October 2009, the Federal Reserve Bank of Richmond (the “Federal Reserve”) conducted its safety and soundness examination of CapitalBank. Since receiving the Federal Reserve’s report of examination in October 2009, which was based on CapitalBank’s financial statements as of June 30, 2009 and loan data as of September 15, 2009, we have been actively addressing the concerns raised in the report and as a result have improved our financial condition materially since the examination date. Although we have materially improved our financial condition since the Federal Reserve’s October 2009 examination and remain well-capitalized as of June 30, 2010, the Company and CapitalBank entered into a written agreement (the “Written Agreement”) with the Federal Reserve and the South Carolina Board of Financial Institutions (the “S.C. Board”) on July 28, 2010 to ensure that certain requirements imposed by the Federal Reserve are fully addressed by us. The Written Agreement requires CapitalBank to take certain actions to continue to address concerns raised in the examination including, but not limited to, designing a plan to improve CapitalBank’s position on certain problem loans, reviewing and revising its allowance for loan and lease losses (“ALLL”) methodology, strengthening its credit risk management and lending program, enhancing its written liquidity and contingency funding plan, and submitting a capital plan to maintain CapitalBank’s capital ratios in excess of the minimum thresholds required to be well-capitalized. The Written Agreement also prohibits the Company and CapitalBank from declaring or paying any dividends without the prior written approval of the Federal Reserve and the S.C. Board, respectively.

The Written Agreement does not contain any provisions to increase capital and will not result in any change to financial results. We intend to take all actions necessary to enable CapitalBank to comply with the requirements of this agreement, and as of the date hereof we have submitted all documentation required to the Federal Reserve. Nevertheless, there can be no assurance that CapitalBank will be able to fully comply with the provisions of the Written Agreement, and the determination of our compliance will be made by the Federal Reserve. If we were unable to comply with the requirements of the Written Agreement, we could be subject to further regulatory action by the Federal Reserve.

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

Recent Regulatory Developments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The second plan is the Securities Program, which is administered by the Treasury and involves the creation of public-private investment funds (“PPIFs”) to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, “Legacy Securities”). Legacy Securities must be directly secured by actual mortgage loans, leases or other assets, and may be purchased only from financial institutions that meet TARP eligibility requirements. The U.S. Treasury received over 100 unique applications to participate in the Legacy Securities PPIP and in July 2009 selected nine PPIF managers. As of September 30, 2010, the PPIFs had completed their fundraising and have closed on approximately $7.4 billion of private sector equity capital, which was matched 100 percent by Treasury, representing $14.7 billion of total equity capital. The U.S. Treasury has also provided $14.7 billion of debt capital, representing $29.4 billion of total purchasing power. As of September 30, 2010, PPIFs have drawn-down approximately $18.6 billion of total capital which has been invested in eligible assets and cash equivalents pending investment.

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

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

In June 2010, the Federal Reserve, the FDIC and the OCC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

On July 21, 2010, the U.S. President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a comprehensive regulatory framework that will likely result in dramatic changes across the financial regulatory system, some of which became effective immediately and some of which will not become effective until various future dates. Implementation of the Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several years. Uncertainty remains as to the ultimate impact of the Dodd-Frank Act until final rulemaking is complete, which could have a material adverse impact either on the financial services industry as a whole or on our business, financial condition, results of operations, and cash flows. Provisions in the legislation that affect consumer financial protection regulations, deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate. The Dodd-Frank Act includes provisions that, among other things, will:

Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws;

Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;

Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions;

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion;

Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until December 31, 2012 for noninterest-bearing demand transaction accounts at all insured depository institutions;

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, which apply to all public companies, not just financial institutions;

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactions and other accounts;

Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer;

Eliminate the Office of Thrift Supervision (“OTS”) one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency (“OCC”), which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. In addition, the Federal Reserve will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS.

On September 27, 2010, the U.S. President signed into law the Small Business Jobs Act of 2010 (the “Act”). The Small Business Lending Fund (the “SBLF”), which was enacted as part of the Act, is a $30 billion fund that encourages lending to small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. On December 21, 2010, the U.S. Treasury published the application form, term sheet and other guidance for participation in the SBLF. Under the terms of the SBLF, the Treasury will purchase shares of senior preferred stock from banks, bank holding companies, and other financial institutions that will qualify as Tier 1 capital for regulatory purposes and rank senior to a participating institution’s common stock. The application deadline for participating in the SBLF is March 31, 2011.

Internationally, both the Basel Committee on Banking Supervision (the “Basel Committee”) and the Financial Stability Board (established in April 2009 by the Group of Twenty (“G-20”) Finance Ministers and Central Bank Governors to take action to strengthen regulation and supervision of the financial system with greater international consistency, cooperation, and transparency) have committed to raise capital standards and liquidity buffers within the banking system (“Basel III”). On September 12, 2010, the Group of Governors and Heads of Supervision agreed to the calibration and phase-in of the Basel III minimum capital requirements (raising the minimum Tier 1 common equity ratio to 4.5% and minimum Tier 1 equity ratio to 6.0%, with full implementation by January 2015) and introducing a capital conservation buffer of common equity of an additional 2.5% with full implementation by January 2019. The U.S. federal banking agencies support this agreement. In December 2010, the Basel Committee issued the Basel III rules text, outlining the details and time-lines of global regulatory standards on bank capital adequacy and liquidity. According to the Basel Committee, the framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress, and the introduction of two global liquidity standards.

In November 2010, the Federal Reserve's monetary policymaking committee, the Federal Open Market Committee (“FOMC”), decided that further support to the economy was needed. With short-term interest rates already nearing 0%, the FOMC agreed to deliver that support by committing to purchase additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term U.S. Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August 2010.

In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The second proposal changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger than the current base, the FDIC will lower assessment rates, which achieves the FDIC's goal of not significantly altering the total amount of revenue collected from the industry. Risk categories and debt ratings will be eliminated from the assessment calculation for large banks which will instead use scorecards. The scorecards will include financial measures that are predictive of long-term performance. A large financial institution will continue to be defined as an insured depository institution with at least $10 billion in assets. Both changes in the assessment system will be effective as of April 1, 2011 and will be payable at the end of September. In December 2010, the FDIC voted to increase the required amount of reserves for the designated reserve ratio (“DRR”) to 2.0%. The ratio is higher than the 1.35% set by the Dodd-Frank Act in July 2010 and is an integral part of the FDIC's comprehensive, long-range management plan for the DIF. On December 16, 2010, the Federal Reserve issued a proposal to implement a provision in the Dodd-Frank Act that requires the Federal Reserve to set debit card interchange fees. The proposed rule, if implemented in its current form, would result in a significant reduction in debit-card interchange revenue. Though the rule technically does not apply to institutions with less than $10 billion in assets, there is concern that the price controls may harm community banks, which could be pressured by the marketplace to lower their own interchange rates. In February 2011, the FDIC approved the final rules that, as noted above, change the assessment base from domestic deposits to average assets minus average tangible equity, adopt a new scorecard-based assessment system for financial institutions with more than $10 billion in assets, and finalize the DRR target size at 2.0% of insured deposits.

On December 29, 2010, the Dodd-Frank Act was amended to include full FDIC insurance on Interest on Lawyers Trust Accounts (“IOLTAs”). IOLTAs will receive unlimited insurance coverage as noninterest-bearing transaction accounts for two years ending December 31, 2012.

We have elected not to participate in the TARP Capital Purchase Program, but with respect to any other potential future government assistance programs, we will evaluate the merits of the programs, including the terms of the financing, our capital position, the cost to the Company of alternative capital, and our strategy for the use of additional capital, to determine whether it is prudent to participate. Regardless of our lack of participation, governmental intervention and new regulations under these programs could materially and adversely affect our business, financial condition and results of operations.

Although the Transaction Account Guarantee Program (“TAGP”) expired on December 31, 2010, a provision of the Dodd-Frank Act requires the FDIC to provide unlimited deposit insurance for all deposits in non-interest bearing transaction accounts. This deposit insurance mandate created by the Dodd-Frank Act took effect on December 31, 2010 and will continue through December 31, 2012. The deposit insurance mandate created by the Dodd-Frank Act is not an extension of the TAGP. Although the TAGP and the Dodd-Frank Act establish unlimited deposit insurance for certain types of non-interest bearing deposit accounts, unlike the TAGP, the coverage provided by the Dodd-Frank Act does not apply to NOW accounts and will be funded through general FDIC assessments, not special assessments.

Proposed Legislation and Regulatory Action

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or CapitalBank could have a material effect on the business of the Company.

Community Capital Corporation

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

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

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banking or managing or controlling banks;

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furnishing services to or performing services for our subsidiaries; and

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

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

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factoring accounts receivable;

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

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leasing personal or real property;

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

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trust company functions;

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financial and investment advisory activities;

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conducting discount securities brokerage activities;

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underwriting and dealing in government obligations and money market instruments;

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providing specified management consulting and counseling activities;

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performing selected data processing services and support services;

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

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performing selected insurance underwriting activities.

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

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

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

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

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

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

CapitalBank

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

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security devices and procedures;

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adequacy of capitalization and loss reserves;

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loans;

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investments;

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borrowings;

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deposits;

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mergers;

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issuances of securities;

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payment of dividends;

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interest rates payable on deposits;

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interest rates or fees chargeable on loans;

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establishment of branches;

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corporate reorganizations;

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maintenance of books and records; and

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

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

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

The minimum capital ratios for both the Company and CapitalBank are generally 8% for total capital, 4% for Tier 1 capital and 4% for leverage. To be eligible to be classified as “well capitalized,” CapitalBank must generally maintain a total capital ratio of 10% or more, a Tier 1 capital ratio of 6% or more, and a leverage ratio of 5% or more. Certain implications of the regulatory capital classification system are discussed in greater detail below.

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

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

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

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

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

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

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

If CapitalBank is not well capitalized, it cannot accept brokered time deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interests paid on deposits of comparable size and maturity in CapitalBank’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside CapitalBank’s normal market area. Moreover, if CapitalBank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the Federal Reserve that is subject to a limited performance guarantee by the Company. CapitalBank also would become subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

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

As of December 31, 2010, CapitalBank was deemed to be “well capitalized.”

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

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

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

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internal controls;

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information systems and audit systems;

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loan documentation;

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credit underwriting;

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interest rate risk exposure; and

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asset quality.

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

On October 3, 2008, President George W. Bush signed the EESA, which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective immediately upon the President’s signature. The legislation provided that the basic deposit insurance limit would return to $100,000 on December 31, 2013; however with the signing of the Dodd-Frank Act in July 2010, the federal deposit insurance coverage limit was permanently raised to $250,000 per depositor.

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

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011. In December 2009, we paid $4.9 million in prepaid risk-based assessments, which included $322,000 related to the fourth quarter of 2009 that would have been otherwise payable in the first quarter of 2010. The assessment amount related to the fourth quarter of 2009 is included in deposit insurance expense for 2009. During 2010, we paid assessments of approximately $1.7 million, which reduced our prepaid balance with the FDIC. The remaining balance of approximately $3.0 million in prepaid deposit insurance is included in other assets in the accompanying balance sheet as of December 31, 2010.

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

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

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

Section 23B of the Federal Reserve Act, among other things, prohibits an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

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

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

Dividends. The Company’s principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends it receives from CapitalBank. Statutory and regulatory limitations apply to CapitalBank’s payment of dividends to the Company. As a general rule, the amount of a dividend may not exceed, without prior regulatory approval, the sum of net income in the calendar year to date and the retained net earnings of the immediately preceding two calendar years. A depository institution may not pay any dividend if payment would cause the institution to become undercapitalized or if it already is undercapitalized. The Federal Reserve may prevent the payment of a dividend if it determines that the payment would be an unsafe and unsound banking practice. As described further below, on July 28, 2010, the Company and CapitalBank entered into the Written Agreement with the Federal Reserve and the S.C. Board which, among other things, prohibits the Company and CapitalBank from declaring or paying any dividends or making any distributions of interest, principal, or other sums on subordinated debentures without the prior approval of the supervisory authorities.

Branching. Under current South Carolina law, we may open branch offices throughout South Carolina with the prior approval of the State Board. In addition, with prior regulatory approval, CapitalBank will be able to acquire existing banking operations in South Carolina. Furthermore, federal legislation permits interstate branching, including out-of-state acquisitions by bank holding companies, interstate branching by banks, and interstate merging by banks. The Dodd-Frank Act removes previous state law restrictions on de novo interstate branching in states such as South Carolina. This change permits out-of-state banks to open de novo branches in states where the laws of the state where the de novo branch to be opened would permit a bank chartered by that state to open a de novo branch.

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

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

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

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

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the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

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the Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit Transactions Act, governing the use and provision of information to credit reporting agencies, certain identity theft protections, and certain credit and other disclosures;

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

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the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of CapitalBank also are subject to:

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the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

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the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

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

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

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

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

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

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

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

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

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allowing check truncation without making it mandatory;

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

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

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

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

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

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

ITEM 1A.

RISK FACTORS.

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

We have become subject to a Written Agreement that will require us to take certain actions.

The Company and CapitalBank are subject to periodic examination by various regulatory agencies. In October 2009, the Federal Reserve conducted its safety and soundness examination of CapitalBank. Since receiving the Federal Reserve’s report of examination in January 2010, which was based on the Bank’s financial statements as of June 30, 2009 and loan data as of September 15, 2009, the Company has been actively addressing the concerns raised in the report and as a result has improved the Company's financial condition materially since the examination date. Although the Company has materially improved its financial condition since the Federal Reserve’s October 2009 examination and remains well-capitalized as of June 30, 2010, the Company and CapitalBank entered into the Written Agreement with the Federal Reserve and the S.C. Board on July 28, 2010. The Written Agreement requires CapitalBank to take certain actions to continue to address concerns raised in the examination, including, but not limited to, designing a plan to improve CapitalBank's position on certain problem loans, reviewing and revising its allowance for loan and lease losses (“ALLL”) methodology, strengthening its credit risk management and lending program, enhancing its written liquidity and contingency funding plan, and submitting a capital plan to maintain CapitalBank’s capital ratios in excess of the minimum thresholds required to be well-capitalized. The Written Agreement also prohibits the Company and CapitalBank from declaring or paying any dividends without the prior written approval of the Federal Reserve and the S.C. Board, respectively. The Company will continue to work diligently to ensure that the requirements of the formal agreement are met in a timely manner. Nevertheless, if the Company fails to comply with the requirements of the written agreement, the Company may be subject to further and more restrictive regulatory action.

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

There was significant disruption and volatility in the financial and capital markets during 2008, 2009 and into 2010. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant and rapid deterioration in mortgage lending and related real estate markets. Continued declines in real estate values, high unemployment and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on our borrowers or their customers, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

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

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

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

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

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

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

Our ability to generate earnings is significantly affected by our ability to properly originate, underwrite, and service loans. We have sustained losses primarily because borrowers, guarantors, or related parties have failed to perform in accordance with the terms of their loans and we failed to detect or respond to deterioration in asset quality in a timely manner. We could sustain additional losses for these reasons. Problems with credit quality or asset quality could cause our interest income and net interest margin to decrease, which could adversely affect our business, financial condition, and results of operations. We have recently identified credit deficiencies with respect to certain loans in our loan portfolio which are primarily related to the downturn in the residential housing industry. As a result of the decline of the residential housing market, property values for this type of collateral have declined substantially. In response to this determination, we increased our loan loss reserve throughout 2010 to a total loan loss reserve of $17.2 million at December 31, 2010 to address the risks inherent within our loan portfolio. Recent developments, including further deterioration in the South Carolina real estate market as a whole, may cause management to adjust its opinion of the level of credit quality in our loan portfolio. Such a determination may lead to an additional increase in our provisions for loan losses, which could also adversely affect our business, financial condition, and results of operations.

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

A significant portion of our loan portfolio is comprised of loans secured by either commercial real estate or single family homes that are under construction. As of December 31, 2010, $99.1 million, or 20.7% of our total loans, are classified as Real Estate Construction loans, $156.0 million, or 32.6% of our total loans are classified as Commercial Real Estate loans and $160.5 million, or 33.5% of our total loans, are classified as Mortgage Residential loans. Real Estate Construction loans represent the highest level of risk for the Company due to current real estate and other market conditions and represent 54.9% of our nonperforming loans. So far, other Commercial Real Estate loans have not been as severely impacted by the recent economic downturns. In our Commercial Real Estate loan portfolio, 76.4% of the loans cover owner-occupied real estate which has a lower risk element than non-owner occupied. Owner-occupied commercial real estate generally has a lower risk profile since business owners are obligated to repay the debt and, accordingly, the loan is not dependent on the liquidation of the collateral as the source of repayment. As of December 31, 2010, only 8.0% of the Company’s nonperforming loans are Commercial Real Estate loans. Delinquencies of 30 days and over were 6.1% as of December 31, 2010. Mortgage Residential loans past due 30 days or more were only 6.4% of total Mortgage Residential loans outstanding as of December 31, 2010. These Mortgage Residential loans represent 34.5% 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 and reserves for loan losses may materially and adversely affect our business.

Making loans and other extensions of credit is an essential element of our business. Although we seek to mitigate risks inherent in lending by adhering to specific underwriting practices, our loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:

·	the duration of the credit;

·	credit risks of a particular customer;

·	changes in economic and industry conditions; and

·	in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

We attempt to maintain an appropriate allowance for loan losses to provide for probable losses in our loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors, including:

·	an ongoing review of the quality, mix, and size of our overall loan portfolio;

·	our historical loan loss experience;

·	evaluation of economic conditions;

·	regular reviews of loan delinquencies and loan portfolio quality; and

·	the amount and quality of collateral, including guarantees, securing the loans.

There is no precise method of predicting credit losses; therefore, we face the risk that charge-offs in future periods may exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income, and possibly our capital.

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

A significant portion of our loan portfolio is secured by real estate. As of December 31, 2010, approximately 88.0% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. The weakening of the real estate markets in our geographic footprint may result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected. Acts of nature, including hurricanes, tornados, earthquakes, fires and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

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

As discussed above under “Supervision and Regulation”, CapitalBank’s deposits are insured up to applicable limits by the DIF of the FDIC and are subject to deposit insurance assessments to maintain deposit insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC.

Although we cannot predict what the insurance assessment rates will be in the future, deterioration in either risk-based capital ratios or adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

The FDIC may terminate deposit insurance of any insured depository institution if it determines that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. It also may suspend deposit insurance temporarily if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC.

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

We operate primarily in the upstate region of South Carolina and substantially all our loan customers and most of our deposit and other customers live or have operations in that area of South Carolina. Accordingly, our success significantly depends upon the growth in population, income levels, deposits and housing starts in that region, along with the continued attraction of business ventures to the area. The current economic downturn has negatively affected the markets in which we operate and, in turn, the quality of our loan portfolio. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally remain unfavorable, our business may not succeed. A continuation of the economic downturn or prolonged recession would likely result in the continued deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would hurt our business. Interest received on loans represented approximately 91.6% of our interest income for the year ended December 31, 2010.

If the economic downturn continues or a prolonged economic recession occurs in the economy as a whole, borrowers will be less likely to repay their loans as scheduled. Moreover, in many cases the value of real estate or other collateral that secures our loans has been adversely affected by the economic conditions and could continue to be negatively affected. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

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

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

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

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

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

We calculate income taxes in accordance with ASC 740-10, which requires the use of the asset and liability method. In accordance with ASC 740-10, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered. At December 31, 2010, our net deferred tax asset was $9.0 million. During 2009, we realized a valuation allowance in the amount of $380,000 for the parent company’s Net Operating Losses (“NOLs”). Realization of a deferred tax asset requires us to exercise significant judgment and is inherently speculative because it requires the future occurrence of circumstances that cannot be predicted with certainty. If we, or our regulators, determine that an additional valuation allowance of our deferred tax asset is necessary, we would incur a charge to earnings.

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

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

Liquidity risks could affect operations and jeopardize our financial condition.

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

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

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

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

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

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

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

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

Our directors and executive officers, as a group, beneficially owned approximately 16% of our outstanding common stock as of December 31, 2010. 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.

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

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

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

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

Current levels of market volatility are unprecedented.

During 2008 and 2009, the capital and credit markets unprecedented volatility and disruption. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If these levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

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

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

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

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

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

The banking industry is highly competitive.

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

•	other commercial and savings banks and savings and loan associations;

•	credit unions;

•	finance companies;

•	mortgage companies;

•	brokerage and investment banking firms; and

•	asset-based non-bank lenders.

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

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

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

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

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

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

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

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

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

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

Changes in accounting standards could impact reported earnings.

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

The preparation of our financial statements requires the use of estimates that may vary from actual results.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates that affect the financial statements. One of our most critical estimates is the level of the allowance for credit losses. Due to the inherent nature of this estimate, we cannot provide absolute assurance that we will not significantly increase the allowance for credit losses that are significantly higher than the provided allowance. For more information on the sensitivity of this estimate, refer to the Critical Accounting Policies section.

We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business and we may not be able to obtain substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted.

We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology. Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems. We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If the business continuity and disaster recovery plans that we have in place are not adequate to continue our operations in the event of a disaster, the business disruption can adversely impact our operations.

External events, including terrorist or military actions, or an outbreak of disease, such as Asian Influenza, or “bird flu,” and resulting political and social turmoil could cause unforeseen damage to our physical facilities, or could cause delays or disruptions to operational functions, including information processing and financial market settlement functions. Additionally, our customers, vendors and counterparties could suffer from such events. Should these events affect us, or the customers, vendors or counterparties with which we conduct business, our results of operations could be adversely affected.

Provisions in our articles of incorporation and South Carolina law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price for our stock.

Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore of making the removal of incumbent management difficult. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions. In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.

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

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

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

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

Our ability to pay cash dividends may be limited by regulatory restrictions, by CapitalBank’s ability to pay cash dividends to our holding company and by our need to maintain sufficient capital to support our operations. The ability of CapitalBank to pay cash dividends to our holding company is limited by its obligations to maintain sufficient capital and by other restrictions on their cash dividends that are applicable to South Carolina state banks and banks that are regulated by the FDIC. If CapitalBank is not permitted to pay cash dividends to our holding company, it is unlikely that we would be able to pay cash dividends on our common stock. In April 2009, we announced the suspension of our quarterly cash dividends to preserve our retained capital and because of regulatory concerns. Our future dividends are subject to the discretion of the Board of Directors and the approval of the Federal Reserve and the S.C. Board and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions.

Even though our common stock is currently traded on the Nasdaq Stock Market’s Global Market, it has less liquidity than the average stock quoted on a national securities exchange.

The trading volume in our common stock on the Nasdaq Global Market has been relatively low when compared with larger companies listed on the Nasdaq Global Market or the stock exchanges. As a result, it may be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders could sell a smaller number of shares. We also cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of our common stock. We can give no assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise capital through sales of our common stock. The market price of our common stock may fluctuate in the future, and these fluctuations may be unrelated to our performance. General market price declines or overall market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Our common stock is not insured, so you could lose your total investment.

Our common stock is not a deposit or savings account, and will not be insured by the FDIC or any other government agency. Should our business fail, you could lose your total investment.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2.

PROPERTIES.

We operate out of an approximately 3,000 square foot building located on approximately one acre of land leased from a third party in Greenwood, South Carolina. At December 31, 2010, CapitalBank operated 17 full service branches and one drive through facility in South Carolina, three of which are located in Greenwood, two of which are located in Abbeville, Anderson and Greer, and one of which is located in each of Newberry, Belton, Greenville, Clemson, Saluda, Prosperity, Honea Path, Clinton and Calhoun Falls. Of CapitalBank’s branches, 15 are located on land owned by CapitalBank, two are located on land owned by us and leased to CapitalBank, and one is located on land CapitalBank leases from a third party. We believe that all of our properties are well maintained and are suitable for their respective present needs and operations.

ITEM 3.

LEGAL PROCEEDINGS.

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

ITEM 4.

(REMOVED AND RESERVED).

PART II

ITEM 5.

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

Our common stock is traded publicly on the NASDAQ Global Market under the symbol “CPBK”. The following table reflects the high and low sales price per share for our common stock reported on the NASDAQ Global Market for the periods indicated.

Year	Quarter	High		Low
2010	Fourth	$	3.99	$	2.50
	Third		4.05		2.75
	Second		4.96		2.75
	First		3.18		2.74

2009	Fourth	$	3.94	$	2.49
	Third		4.90		2.50
	Second		6.00		4.59
	First		8.49		4.45

The closing price of our common shares as reported by the NASDAQ Global Market on March 2, 2011 was $2.76 per share. As of March 2, 2011, there were 10,041,249 shares of our common stock outstanding held by approximately 1,510 shareholders of record. We did not sell any of our equity securities during fiscal year 2010 that were not registered under the Securities Act of 1933, as amended.

Until September 17, 2001, we had not declared or distributed any cash dividends to our shareholders since our organization in 1988. From then until April 2009, we paid cash dividends to our shareholders on a quarterly basis. On March 6, 2009, we paid a cash dividend in the amount of $0.15 per share. In April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.

For the foreseeable future, we do not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen our capital base. Our future dividends are subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash requirements, and general business conditions. Our ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to us. As a state bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay. In addition, the Written Agreement prohibits us and CapitalBank from declaring or paying dividends, without the prior written approval of the Federal Reserve and the S.C. Board, respectively. Furthermore, neither we nor CapitalBank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business. See “Supervision and Regulation - CapitalBank Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Annual Report on Form 10-K, and Note 18 to our accompanying financial statements.

ITEM 6.

SELECTED FINANCIAL DATA.

Selected Financial Data

The following selected consolidated financial data for the five years ended December 31, 2010 are derived from our consolidated financial statements and other data. The selected consolidated financial data should be read in conjunction with our consolidated financial statements, including the accompanying notes, included elsewhere herein.

Year Ended December 31,	2010			2009			2008			2007			2006
(Dollars in thousands, except per share)
Income Statement Data:
Interest income	$	31,010		$	36,233		$	43,594		$	49,132		$	40,679
Interest expense		10,903			13,867			18,656			25,229			19,625
Net interest income		20,107			22,366			24,938			23,903			21,054
Provision for loan losses		18,350			32,800			9,300			1,025			1,140
Net interest income (loss) after provision for loan losses		1,757			(10,434	)		15,638			22,878			19,914
Net securities gains (losses)		1,999			224			98			(469	)		(61	)
Noninterest income		8,702			7,306			7,149			6,875			6,028
Noninterest expense		21,397			31,774			20,192			19,257			18,104
Income (loss) before income taxes		(8,939	)		(34,678	)		2,693			10,027			7,777
Income tax expense (benefit)		(3,454	)		(9,433	)		284			3,139			2,018
Net income (loss)	$	(5,485	)	$	(25,245	)	$	2,409		$	6,888		$	5,759
Balance Sheet Data:
Assets	$	655,934		$	749,442		$	790,600		$	800,598		$	713,244
Earning assets		590,904			686,443			733,539			727,367			648,450
Securities (1)		83,651			79,172			89,858			81,315			73,949
Loans (2)		484,909			568,281			642,040			645,785			574,193
Allowance for loan losses		17,165			14,160			13,617			6,759			6,200
Deposits		495,182			583,483			513,601			520,072			486,956
Federal Home Loan Bank advances		95,400			95,400			161,185			135,525			105,625
Shareholders’ equity		47,404			53,757			64,957			64,847			58,926
Per Share Data: (3)
Basic earnings (loss) per share	$	(0.55	)	$	(4.34	)	$	0.54		$	1.58		$	1.34
Diluted earnings (loss) per share		(0.55	)		(4.34	)		0.54			1.56			1.31
Book value (period end) (4)		4.73			5.44			14.54			14.72			13.52
Tangible book value (period end) (4)		4.61			5.27			12.41			12.46			11.13
Cash dividends per share		-			0.15			0.60			0.54			0.52
Performance Ratios:
Return on average assets		(0.75	)%		(3.28	)%		0.30	%		0.91	%		0.87	%
Return on average equity		(9.92	)		(40.26	)		3.69			11.09			10.05
Net interest margin (5)		3.05			3.18			3.48			3.52			3.59
Efficiency (6)		73.87			105.37			61.91			61.54			65.61
Allowance for loan losses to loans		3.58			2.50			2.12			1.05			1.08
Net charge-offs to average loans		2.90			5.23			0.38			0.08			0.24
Nonperforming assets to period end assets (7)		6.10			6.67			4.04			0.32			0.26
Capital and Liquidity Ratios:
Average equity to average assets		7.59			8.10			8.25			8.20			8.66
Leverage (4.00% required minimum)		7.77			8.31			8.44			8.33			8.46
Tier 1 risk-based capital ratio		10.89			10.88			10.43			10.05			10.03
Total risk-based capital ratio		12.17			12.15			11.69			11.10			11.09
Average loans to average deposits		94.31			112.23			124.85			120.46			110.96

____________

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

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

(3)	All share and per-share data have been adjusted to reflect the 15% common stock dividend in November 2007.

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

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

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

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

Selected Financial Data - continued

(Dollars in thousands	2010 Quarter ended										2009 Quarter ended
except per share)	Dec. 31			Sept. 30			June 30		Mar. 31		Dec. 31			Sept. 30			June 30			Mar. 31
Net interest income	$	5,021		$	4,692		$	5,068	$	5,326	$	5,277		$	5,381		$	5,757		$	5,952
Provision for loan losses		12,000			2,750			2,000		1,600		1,000			24,000			5,800			2,000
Noninterest income		2,160			2,742			2,452		3,347		1,981			1,868			2,238			1,862
Noninterest expense		5,908			5,556			5,146		4,787		7,117			13,300			7,022			4,753
Net income (loss)		(6,960	)		(478	)		353		1,600		(1,382	)		(21,785	)		(2,941	)		863
Basic earnings (loss) per share		(0.70	)		(0.05	)		0.04		0.16		(0.15	)		(4.35	)		(0.66	)		0.19
Diluted earnings (loss) per share		(0.70	)		(0.05	)		0.04		0.16		(0.15	)		(4.35	)		(0.66	)		0.19

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the preceding “Selected Financial Data” and our Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report on Form 10-K. The financial information provided below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report on Form 10-K.

General

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

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

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

We have included a number of tables to assist in our description of these measures. For example, the “Average Balances” table shows the average balance during 2010 and 2009 of each category of our assets and liabilities, as well as the yield we earned or the rate we paid with respect to each category. A review of this table shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we intend to channel a substantial percentage of our earning assets into our loan portfolio. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included a table to help explain this. Finally, we have included a number of tables that provide detail about our investment securities, our loans, and our deposits and other borrowings.

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

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

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

For the foreseeable future, we do not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen our capital base. Our future dividends are subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, our financial condition, cash requirements, and general business conditions. Our ability to distribute cash dividends will depend entirely upon CapitalBank’s ability to distribute dividends to us. As a state bank, CapitalBank is subject to legal limitations on the amount of dividends each is permitted to pay. In addition, the Written Agreement prohibits us and CapitalBank from declaring or paying dividends, without the prior written approval of the Federal Reserve and the S.C. Board, respectively. Furthermore, neither we nor CapitalBank may declare or pay a cash dividend on any of our capital stock if we are insolvent or if the payment of the dividend would render us insolvent or unable to pay our obligations as they become due in the ordinary course of business. See “Supervision and Regulation - CapitalBank Dividends” under Item 1 of this Form 10-K, “Liquidity Management and Capital Resources” under Item 7 of this Form 10-K, and Note 18 to our accompanying financial statements.

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

Results of Operations

Year ended December 31, 2010, compared with year ended December31, 2009

Net interest income decreased $2,259,000, or 10.10%, to $20.1 million in 2010 from $22.4 million in 2009. Average earning assets decreased $49.4 million, or 6.89%, and average interest bearing liabilities decreased $44.0 million, or 7.27%.

Our tax equivalent net interest spread and tax equivalent net interest margin were 2.74% and 3.05%, respectively, in 2010 compared to 2.83% and 3.18% in 2009. Yields on earning assets decreased from 5.12% in 2009 to 4.68% in 2010, and yields on interest-bearing liabilities decreased from 2.29% in 2009 to 1.94% in 2010.

The provision for loan losses was $18.4 million in 2010 compared to $32.8 million in 2009. Our allowance for loan losses was $17.2 million, which represented 3.58% of total loans outstanding at December 31, 2010. Our nonperforming loans totaled $27.5 million at December 31, 2010 compared to $42.8 million at December 31, 2009. We also had $39.4 million in impaired loans at December 31, 2010, of which $12.9 million were still accruing interest. Criticized and classified loans have decreased from $83.6 million at December 31, 2009 to $75.5 million at December 31, 2010. We diligently monitor and manage our loan portfolio to identify problem loans at the earliest possible point. As the economy deteriorated during 2009 and 2010, we aggressively rated any credits with signs of deterioration in quality, which resulted in the increase in criticized and classified loans and heightened provision expense. Total loans decreased $87.8 million during 2010, or 15.48%, to $479.4 million at December 31, 2010 from $567.2 million at December 31, 2009.

We incurred a goodwill impairment charge of $7.4 million in 2009, compared to no charges for the same period in 2010. We incurred one-time expenses of $896,000 during 2009 associated with the early termination of FHLB borrowings. During 2010, we incurred $1.5 million in prepayment penalties that are being amortized over the life of the restructured advances. We incurred $2.3 million in expenses associated with the cost of operation of other real estate owned during 2010, compared to $3.5 million during 2009.

We have included a more detailed discussion, including tabular presentations, of noninterest income and noninterest expense in the years ended December 31, 2010 and 2009 under the heading “Noninterest Income and Expense” located in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The combination of the above factors resulted in net losses of $5,485,000 for 2010, compared to net losses of $25,245,000 for 2009, a decrease in loss of $19,760,000. Basic losses per share were $0.55 in 2010, compared to losses of $4.34 per share in 2009. Due to net losses in 2010 and 2009, basic and diluted loss per share were the same. Return on average assets during 2010 was (0.75)% compared to (3.28)% during 2009, and return on average equity was (9.92)% during 2010 compared to (40.26)% during 2009.

Net Interest Income

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

We have included a number of tables to assist in our description of various measures of our financial performance. For example, the “Average Balances” table shows the average balance of each category of our assets and liabilities as well as the yield we earned or the rate we paid with respect to each category during 2010 and 2009. A review of these tables shows that our loans typically provide higher interest yields than do other types of interest-earning assets, which is why we direct a substantial percentage of our earning assets into our loan portfolio. Similarly, the “Rate/Volume Analysis” table helps demonstrate the effect of changing interest rates and changing volume of assets and liabilities on our financial condition during the periods shown. We also track the sensitivity of our various categories of assets and liabilities to changes in interest rates, and we have included tables to illustrate our interest rate sensitivity with respect to interest-earning accounts and interest-bearing accounts. Finally, we have included various tables that provide detail about our investment securities, our loans, our deposits, and other borrowings.

Net Interest Income - continued

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

Average Balances, Income and Expenses, and Rates

Year ended December 31,	2010								2009								2008
(Dollars in thousands)	Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate			Average Balance			Income/ Expense		Yield/ Rate
Assets:
Earning Assets:
Loans(1)(3)	$	528,403		$	28,587		5.41	%	$	617,311		$	32,753		5.31	%	$	649,454			39,754	6.12	%
Securities, taxable(2)		51,443			1,650		3.21			46,768			2,254		4.82			41,906			2,189	5.22
Securities, nontaxable(2)(3)		13,355			684		5.12			23,806			1,461		6.14			29,289			1,772	6.05
Nonmarketable equity securities		10,131			140		1.38			6,111			147		2.41			9,959			404	4.06
Federal funds sold and other		63,524			165		0.26			22,224			51		0.23			350			6	1.71
Total earning assets		666,856			31,226		4.68			716,220			36,666		5.12			730,958			44,125	6.04
Cash and due from banks		9,995								11,187								15,571
Premises and equipment		15,727								16,682								17,394
Other assets		48,713								47,762								35,707
Allowance for loan losses		(12,945	)							(17,186	)							(8,691	)
Total assets	$	728,346							$	774,665							$	790,939
Liabilities:
Interest-Bearing Liabilities:
Interest-bearing transaction accounts	$	200,331			2,060		1.03	%	$	192,222		$	1,615		0.84	%	$	224,924			2,902	1.29	%
Savings deposits		44,325			519		1.17			40,125			655		1.63			36,656			835	2.28
Time deposits		210,450			4,253		2.02			218,675			5,624		2.57			190,888			7,098	3.72
Other short-term borrowings		-			-		-			17,901			57		0.32			44,610			1,061	2.38
Federal Home Loan Bank advances		95,400			3,323		3.48			125,569			5,190		4.13			142,936			6,034	4.22
Junior subordinate debt		10,310			748		7.26			10,310			726		7.04			10,310			726	7.04
Total interest-bearing liabilities		560,816			10,903		1.94			604,802			13,867		2.29			650,324			18,656	2.87
Demand deposits		105,195								99,013								67,711
Accrued interest and other liabilities		7,042								8,139								7,643
Shareholders’ equity		55,293								62,711								65,261
Total liabilities and shareholders’ equity	$	728,346							$	774,665							$	790,939
Net interest spread							2.74	%							2.83	%						3.17	%
Net interest income	$	20,323							$	22,799							$	25,469
Net interest margin							3.05	%							3.18	%						3.48	%

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

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

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

Our tax-effected net interest spread and net interest margin were 2.74% and 3.05%, respectively, for the year ended December 31, 2010, compared to 2.83% and 3.18%, respectively, for the year ended December 31, 2009. The decline in net interest margin was primarily due to our increased level of nonaccrual loans and our desire to maintain cash liquidity. For the year ended December 31, 2010, earning assets averaged $666.9 million compared to $716.2 million for the year ended December 31, 2009. Interest earning assets exceeded interest bearing liabilities by $106.0 million and $111.4 million for the years ended December 31, 2010, and 2009, respectively.

For the year ended December 31, 2010, our tax-effected net interest income, the major component of our net income, was $20.3 million compared to $22.8 million for the year ended December 31, 2009. The average rate realized on interest-earning assets decreased to 4.68% at December 31, 2010, from 5.12% at December 31, 2009, while the average rate paid on interest-bearing liabilities decreased to 1.94% at December 31, 2010, from 2.29% at December 31, 2009.

Net Interest Income - continued

Our tax-effected interest income for the year ended December 31, 2010 was $31.2 million, which consisted of $28.6 million on loans, $2.5 million on investments, and $165,000 on interest bearing deposits with correspondent banks. Our tax-effected interest income for the year ended December 31, 2009 was $36.7 million, which consisted of $32.8 million on loans, $3.9 million on investments, and $51,000 on interest bearing deposits with correspondent banks. Interest on loans for the years ended December 31, 2010 and 2009, represented 91.55% and 89.33%, respectively, of total interest income, while interest on investments and interest bearing deposits with correspondent banks for the years ended December 31, 2010 and 2009 represented 8.45% and 10.67%, respectively, of total interest income. Average loans represented 79.24% and 86.19% of average earning assets for the years ended December 31, 2010 and December 31, 2009, respectively.

Interest expense for the year ended December 31, 2010 was $10.9 million, which consisted of $6.8 million related to deposits and $4.1 million related to other borrowings. Interest expense for the year ended December 31, 2009 was $13.9 million, which consisted of $7.9 million related to deposits and $6.0 million related to other borrowings. Interest expense on deposits for the years ended December 31, 2010 and December 31, 2009 represented 62.66% and 56.93%, respectively, of total interest expense, while interest expense on borrowings for the years ended December 31, 2010 and December 31, 2009, represented 37.34% and 43.07%, respectively. Average interest bearing deposits represented 81.15% and 74.57% of average interest bearing liabilities for the years ended December 31, 2010 and December 31, 2009, respectively.

Analysis of Changes in Net Interest Income. The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income from 2010 to 2009.

Analysis of Changes in Net Interest Income

	2010 Compared With 2009										2009 Compared With 2008
	Variance Due to										Variance Due to
(Dollars in thousands)	Volume (1)				Rate (1)			Total			Volume (1)				Rate (1)			Total
Earning Assets
Loans		$	(4,777	)	$	611		$	(4,166	)		$	(1,897	)	$	(5,104	)	$	(7,001	)
Securities, taxable			208			(812	)		(604	)			242			(177	)		65
Securities, nontaxable			(564	)		(213	)		(777	)			(336	)		25			(311	)
Nonmarketable equity securities			72			(79	)		(7	)			(125	)		(132	)		(257	)
Federal funds sold and other			106			8			114				54			(9	)		45
Total interest income			(4,955	)		(485	)		(5,440	)			(2,062	)		(5,397	)		(7,459	)

Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts			70			375			445				(379	)		(908	)		(1,287	)
Savings accounts			63			(199	)		(136	)			74			(254	)		(180	)
Time deposits			(205	)		(1,166	)		(1,371	)			931			(2,405	)		(1,474	)
Total interest-bearing deposits			(72	)		(990	)		(1,062	)			626			(3,567	)		(2,941	)
Other short-term borrowings			(29	)		(28	)		(57	)			(410	)		(594	)		(1,004	)
Federal Home Loan Bank advances			(1,130	)		(737	)		(1,867	)			(720	)		(124	)		(844	)
Junior subordinate debt			-			22			22				-			-			-
Total interest expense			(1,231	)		(1,733	)		(2,964	)			(504)			(4,285	)		(4,789	)
Net interest income		$	(3,724	)	$	1,248		$	(2,476	)		$	(1,558	)	$	(1,112	)	$	(2,670	)

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

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

Net Interest Income - continued

The following table sets forth our interest rate sensitivity at December 31, 2010.

Interest Sensitivity Analysis

				After One			After Three						Greater Than One
	Within			Through			Through			Within			Year
December 31, 2010	One			Three			Twelve			One			or Non-
(Dollars in thousands)	Month			Months			Months			Year			Sensitive			Total
Assets
Earning assets:
Loans(1)	$	94,988		$	13,082		$	70,953		$	179,023		$	279,397		$	458,420
Securities		-			-			319			319			83,332			83,651
Federal funds sold and other		27,860			-			-			27,860			-			27,860
Total earning assets		122,848			13,082			71,272			207,202			362,729			569,931
Liabilities
Interest-bearing liabilities
Interest-bearing deposits:
Demand deposits		196,433			-			-			196,433			-			196,433
Savings deposits		42,481			-			-			42,481			-			42,481
Time deposits		18,841			25,558			84,844			129,243			23,945			153,188
Total interest-bearing deposits		257,755			25,558			84,844			368,157			23,945			392,102
Federal Home Loan Bank advances		-			-			10,000			10,000			85,400			95,400
Junior subordinated debentures		-			-			10,310			10,310			-			10,310
Total interest-bearing liabilities		257,755			25,558			105,154			388,467			109,345			497,812
Period gap	$	(134,907	)	$	(12,476	)	$	(33,882	)	$	(181,265	)	$	253,384
Cumulative gap	$	(134,907	)	$	(147,383	)	$	(181,265	)	$	(181,265	)	$	72,119
Ratio of cumulative gap to total earning assets		(23.67	%)		(25.86	%)		(31.80	%)		(31.80	%)		12.65	%

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

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

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

Provision and Allowance for Loan Losses

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

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

In determining our allowance for loan loss, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over an eight quarter rolling average applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves.

We track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each and every loan in the portfolio based on one common set of parameters. These parameters include items like debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan.

After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard or impaired loans. The remaining loans are grouped into “performing loan pools”. The loss history for each performing loan pool is measured over an eight quarter rolling average to create a loss factor. The loss factor is then applied to the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Finally, impaired loans are segmented based upon size; smaller impaired loans are pooled and loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology.

In developing our ASC 450-20 general reserve estimate, we have segmented the loan portfolio into 12 risk categories:

installment loans

home equity lines of credit

DDA overdraft loans

cash secured loans

mortgage loans for resale

1-4 family residential loans

1-4 family residential construction loans

commercial real estate loans including (other construction and land loans, multi-family, commercial real estate owner-occupied, commercial real estate other and commercial and farm land)

Loss experience on each of the risk categories is compiled over the previous four quarters (or 12 months). Each of the segments of the loan portfolio is analyzed for historical loss percentages. We then apply the results generated from the four quarter loss history 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.

Provision and Allowance for Loan Losses - continued

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

Portfolio risk

Loan policy, procedures and monitoring risk

National and local economic trends and conditions

Concentration risk

Acquisition and development loan portfolio risks

Impaired loan portfolio additional risks

Certain problem loans are reviewed individually for impairment. An impaired loan may not represent an expected loss; however a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining if a loan is impaired, the bank considers all non-accrual loans, loans whose terms are modified in a troubled debt restructuring, and any other loan that is individually evaluated and determined to be impaired based on risk ratings and loan amounts of certain segments of the bank’s loan portfolio. If a loan is individually evaluated and identified as impaired, it is measured by using either the fair value of the collateral, less expected costs to sell, present value of expected future cash flows, discounted at the loans effective interest rate, or observable market price of the loan. Management chooses a method on a loan-by-loan basis. Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from those estimates. At December 31, 2010, impaired loans totaled $39.4 million, all of which are valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral.

Total provision expense for the year ended December 31, 2010 was $18.4 million, compared to $32.8 million for the year ended December 31, 2009. The decrease in provision expense during 2010 was primarily due to the decrease in net charge offs to $15.3 million for the year ended December 31, 2010 compared to $32.3 million for the year ended December 31, 2009. The allowance for loan losses was 3.58% of total loans at December 31, 2010 compared to 2.50% at December 31, 2009.

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

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

Provision and Allowance for Loan Losses - continued

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

Allowance for Loan Losses

(Dollars in thousands)

Year Ended December 31,	2010			2009			2008			2007			2006
Total loans outstanding at end of year	$	479,393		$	567,178		$	641,737		$	645,154		$	573,639
Average loans outstanding	$	528,403		$	617,311		$	649,454		$	612,366		$	522,521
Balance of allowance for loan losses at beginning of period	$	14,160		$	13,617		$	6,759		$	6,200		$	6,324
Loan losses:
Commercial and industrial		493			312			122			65			500
Real estate - mortgage		15,238			31,915			2,356			344			811
Consumer		36			83			96			140			120
Total loan losses		15,767			32,310			2,574			549			1,431
Recoveries of previous loan losses:
Commercial and industrial		1			3			1			21			42
Real estate - mortgage		396			28			109			18			71
Consumer		25			22			22			44			54
Total recoveries		422			53			132			83			167
Net loan losses		15,345			32,257			2,442			466			1,264
Provision for loan losses		18,350			32,800			9,300			1,025			1,140
Balance of allowance for loan losses at end of period	$	17,165		$	14,160		$	13,617		$	6,759		$	6,200
Allowance for loan losses to period end loans		3.58	%		2.50	%		2.12	%		1.05	%		1.08	%
Net charge offs to average loans		2.90	%		5.23	%		0.38	%		0.08	%		0.24	%

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

Nonperforming Assets

	December 31,
(Dollars in thousands)	2010			2009			2008			2007			2006
Nonaccrual loans	$	26,489		$	41,163		$	26,827		$	2,424		$	1,716
Other real estate owned		13,496			7,165			5,121			173			107
Total nonperforming assets	$	39,985		$	48,328		$	31,948		$	2,597		$	1,823
Loans 90 days or more past due and still accruing interest	$	1,042		$	1,662		$	696		$	115		$	489
Impaired loans still accruing interest	$	12,896		$	30,793		$	80,599		$	-		$	-
Nonperforming assets to period end assets		6.10	%		6.45	%		4.04	%		0.32	%		0.26	%

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

Total nonperforming assets totaled $40.0 million at December 31, 2010 and $48.3 million at December 31, 2009. This amount consists primarily of nonaccrual loans that totaled $26.5 million and $41.2 million at December 31, 2010 and 2009, respectively. The decrease in nonaccrual loans is primarily due to their migration into other real estate owned status and our efforts of selling these assets. Nonperforming assets were 8.34% of total loans at December 31, 2010. The allowance for loan losses to period end nonperforming assets was 42.93% at December 31, 2010. A significant portion, or 99.8%, of nonperforming loans at December 31, 2010 were secured by real estate. We have evaluated the underlying collateral on these loans and believe that the collateral on these loans is sufficient to minimize future losses. However, the recent downturn in the real estate market has resulted in increased loan delinquencies, defaults and foreclosures, and we believe that these trends are likely to continue. In some cases, this downturn has resulted in a

Provision and Allowance for Loan Losses - continued

significant impairment to the value of the collateral used to secure these loans and the ability to sell the collateral upon foreclosure. These conditions have adversely affected our loan portfolio. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, this could materially reduce our profitability and adversely affect our financial condition.

Potential Problem Loans. At December 31, 2010, through our internal review mechanisms, we had identified $18.9 million of criticized loans and $56.6 million of classified loans. The results of this internal review process are the primary determining factor in our assessment of the adequacy of the allowance for loan losses.

Our criticized loans increased from $18.7 million at December 31, 2009 to $18.9 million at December 31, 2010. Total classified loans decreased from $64.8 million at December 31, 2009 to $56.6 million at December 31, 2010. The $9.0 million decrease in criticized and classified loans from December 31, 2009 to December 31, 2010 were primarily due to real estate development and single family construction loans, all of which are secured by real estate.

The continued elevated level of criticized and classified loans is primarily due to the current economic downturn and related decline in demand for residential real estate. As a result of the slowing demand, several real estate developers are having significant cash flow issues. Furthermore, residential real estate values are declining further exacerbating these cash flow issues.

Impaired loans primarily consist of nonperforming loans and troubled debt restructurings (“TDRs”), but can include other loans identified by management as being impaired. Historically, we considered all loans identified as “substandard” assets to be “impaired” assets. A regulatory external audit identified the need to separate these categories per the actual regulatory definition for each classification. A bank asset may meet the definition of “substandard” while not also meeting the definition of “impaired”. However, all assets meeting the definition of “impaired” are automatically “substandard”. Accordingly, we evaluated those loans identified as substandard and separated “substandard” assets from “substandard and impaired” assets.

Loans are classified as TDRs by the Company when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The Company only restructures loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans. With respect to restructured loans, the Company grants concessions by (1) reduction of the stated interest rate for the remaining original life of the debt, or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. The Company does not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases. Success in restructuring loans has been mixed but it has proven to be a useful tool in certain situations to protect collateral values and allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restricted agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value. The Company’s policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. The Company will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. The Company’s policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, the Company has not restored any nonaccrual loan classified as a TDR to accrual status.

Provision and Allowance for Loan Losses – continued

The following is a summary of information pertaining to TDRs:

	December 31,
(Dollars in thousands)	2010		2009
Nonperforming TDRs	$	6,815	$	2,612
Performing TDRs:
Commercial	$	152		-
Commercial real estate - construction		143		1,047
Residential		3,141		541
Total performing TDRs	$	3,436	$	1,588
Total TDRs	$	10,251	$	4,200

Noninterest Income and Expense

Noninterest Income. Noninterest income increased $3.2 million, or 37.69%, to $10.7 million in 2010 from $7.5 million in 2009. This increase was attributable in part to income received as a result of the settlement of a lawsuit related to the management of a participation loan. Proceeds of $912,000 included in other income were received during 2010 in the settlement. Including the litigation settlement, other operating income increased $1.1 million, or 65.36%, to $2.7 million in 2010 from $1.6 million in 2009. We also recognized gains on the sales of securities available-for-sale in the amount of $2.0 million during 2010, which were the results of management’s decision to shorten the duration of the portfolio. Gains on the sales of securities available-for-sale were $224,000 in 2009. Service charges on deposit accounts decreased $491,000, or 21.23%, to $1.8 million in 2010 from $2.3 million in 2009. Gains on sales of loans held for sale increased $425,000, or 29.31%, to $1.9 million in 2010 from $1.5 million in 2009. The increase in gains on sales of loans held for sale is primarily due to the increase in mortgage origination fees resulting from the high demand for refinance transactions. Income from fiduciary activities increased $313,000, or 19.29%, to $1.9 million in 2010 from $1.6 million in 2009. The increase is primarily due to new business development efforts as well as improving capital market conditions. Commissions on the sale of mutual funds increased $66,000, or 25.10%, to $329,000 in 2010 compared to $263,000 in 2009.

The Dodd-Frank Act calls for new limits on interchange transaction fees that banks receive from merchants via card networks like Visa, Inc. and MasterCard, Inc. when a customer uses a debit card. The results of this proposed regulation may impact our interchange income from debit card transactions in the future.

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

Noninterest Income

	Year ended December 31,
(Dollars in thousands)	2010		2009		2008
Service charges on deposit accounts	$	1,822	$	2,313	$	2,492
Gain on sale of loans held for sale		1,875		1,450		1,139
Commissions from sales of mutual funds		329		263		180
Income from fiduciary activities		1,936		1,623		1,725
Gain on sale of premises and equipment		-		-		6
Gain on sales securities available-for-sale		1,999		224		98
Income from Bank Owned Life Insurance		802		781		780
Other income		1,938		876		827
Total noninterest income	$	10,701	$	7,530	$	7,247

Noninterest Income and Expense - continued

Noninterest Expense. Noninterest expense decreased $10.4 million, or 32.66%, to $21.4 million in 2010 from $31.8 million in 2009. The decrease is primarily the result of the goodwill impairment charge of $7.4 million in 2009, one time expenses of $896,000 during 2009 associated with the early termination of FHLB borrowings, and a decrease in the net cost of operation of other real estate owned. The net cost of operation of other real estate owned decreased $1.2 million, or 35.25%, to $2.3 million in 2010 compared to $3.5 million in 2009. Salaries and employee benefits decreased $299,000, or 2.88%, to $10.1 million in 2010 from $10.4 million in 2009. Net occupancy expense was $1.3 million in 2010 compared to $1.3 million in 2009, and furniture and equipment expense was $764,000 in 2010 compared to $875,000 in 2009. We recorded no losses on sales of premises and equipment during 2010, compared to $38,000 in 2009. Total amortization of intangible assets decreased $23,000, or 5.39%, to $404,000 in 2010 compared to $427,000 in 2009. We realized a decrease in FDIC banking assessments of $169,000, or 9.07%, to $1.7 million in 2010 from $1.9 million in 2009. Other operating expenses decreased $140,000, or 2.78%, to $4.9 million in 2010 from $5.0 million in 2009. Our efficiency ratio was 73.87% in 2010 compared to 105.37% in 2009.

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

Noninterest Expense

	Year Ended December 31,
(Dollars in thousands)	2010			2009			2008

Salaries and employee benefits	$	10,090		$	10,389		$	10,853
Net occupancy expense		1,260			1,298			1,316
Furniture and equipment expense		764			875			975
Amortization of intangible assets		404			427			449
Goodwill impairment		-			7,418			-
Director and committee fees		50			184			347
Data processing and supplies		1,610			1,608			1,568
Mortgage loan department expenses		261			307			246
FDIC banking assessments		1,694			1,863			342
Professional fees and services		372			461			457
Postage and freight		167			191			204
Supplies		230			242			310
Telephone expenses		281			323			353
Loss on sale of premises and equipment		-			38			-
Loss on securities available for sale		-			-			-
Net cost of operation of other real estate owned		2,287			3,532			409
Prepayment penalties on FHLB borrowings		-			896			-
Other		1,927			1,722			2,363
Total noninterest expense	$	21,397		$	31,774		$	20,192
Efficiency ratio		73.87	%		105.37	%		61.91	%

Income Taxes. Our income tax benefit was $3.5 million for 2010 compared to $9.4 million for 2009. Our effective tax rate was 38.64% and 27.20% in 2010 and 2009, respectively.

Earning Assets

Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher yields are the inherent credit and liquidity risks that we attempt to control and counterbalance. Loans averaged $528.4 million in 2010 compared to $617.3 million in 2009, a decrease of $88.9 million, or 14.40%. The decrease in the portfolio was primarily attributable to the decrease in construction loans and commercial and residential real estate loans, which is primarily the result of general pay down of loan balances pursuant to management’s strategy to reduce loans during this period of economic stress and to improve the credit quality of our loan portfolio. At December 31, 2010, total loans were $479.4 million compared to $567.2 million at December 31, 2009. The following table sets forth the composition of the loan portfolio by category at the dates indicated.

Composition of Loan Portfolio

December 31,	2010						2009						2008						2007						2006
				Percent						Percent						Percent						Percent						Percent
(Dollars in				of						of						of						of						of
thousands)	Amount			Total			Amount			Total			Amount			Total			Amount			Total			Amount			Total

Commercial and industrial	$	39,720			8.28	%	$	35,082			6.18	%	$	43,442			6.77	%	$	44,467			6.89	%	$	44,910			7.83	%
Real estate
Construction		99,076			20.67			145,130			25.59			185,414			28.89			167,180			25.92			142,694			24.88
Mortgage- residential		182,513			38.07			214,655			37.85			234,920			36.61			252,461			39.13			224,175			39.08
Mortgage- nonresidential		139,214			29.04			149,325			26.33			157,367			24.52			154,834			24.00			138,071			24.07
Consumer and other		18,870			3.94			22,986			4.05			20,594			3.21			26,212			4.06			23,789			4.14
Total loans		479,393			100.00	%		567,178			100.00	%		641,737			100.00	%		645,154			100.00	%		573,639			100.00	%
Allowance for loan losses		(17,165	)					(14,160	)					(13,617	)					(6,759	)					(6,200	)
Net loans	$	462,228					$	553,018					$	628,120					$	638,395					$	567,439

The principal component of our loan portfolio is real estate mortgage loans. At December 31, 2010, real estate mortgage loans, which consist of first and second mortgages on single or multi-family residential dwellings, loans secured by commercial and industrial real estate, and other loans secured by multi-family properties and farmland, totaled $321.7 million and represented 67.11% of the total loan portfolio, compared to $364.0 million, or 64.18% of the loan portfolio, at December 31, 2009.

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

Real estate construction loans decreased $46.1 million, or 31.73%, to $99.1 million at December 31, 2010, from $145.1 million at December 31, 2009. Residential mortgage loans, which is the largest category of our loans, decreased $32.1 million, or 14.97%, to $182.5 million at December 31, 2010, from $214.7 million at December 31, 2009. Residential real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, decreased $10.1 million or 6.77%, to $139.2 million at December 31, 2010 from $149.3 million at December 31, 2009.

Commercial and industrial loans increased $4.6 million, or 13.22%, to $39.7 million at December 31, 2010, from $35.1 million at December 31, 2009. Consumer and other loans decreased $4.1 million, or 17.91%, to $18.9 million at December 31, 2010, from $23.0 million at December 31, 2009.

Our loan portfolio reflects the diversity of our markets. Our 17 full service branches and one stand-alone drive through are located from the northern Midlands of South Carolina through the Upstate. Primary market areas include Abbeville, Anderson, Belton, Clemson, Clinton, Greenville, Greenwood, Newberry and Saluda. The economies of these markets are varied and represent different industries including medium and light manufacturing, higher education, regional health care, and distribution facilities. These areas are expected to remain stable with continual growth. The diversity of the economy creates opportunities for all types of lending. We do not engage in foreign lending.

Earning Assets - continued

The repayment of loans in the loan portfolio as they mature is also a source of our liquidity. Due to the current economic downturn, all contractual maturities may not parallel actual payoffs due to the inability of borrowers to repay their loans. The following table sets forth our loans maturing within specified intervals at December 31, 2010.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

			Over
			One Year
December 31, 2010	One Year		Through		Over Five
(Dollars in thousands)	or Less		Five Years		Years		Total
Commercial and industrial	$	25,546	$	17,148	$	1,422	$	44,116
Real estate		172,445		215,883		40,618		428,946
Consumer and other		2,004		3,958		369		6,331
	$	199,995	$	236,989	$	42,409	$	479,393
Loans maturing after one year with:
Fixed interest rates							$	254,891
Floating interest rates								24,507
							$	279,398

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

Investment Securities. The investment securities portfolio is a significant component of our total earning assets. Total securities averaged $75.0 million in 2010, compared to $76.7 million in 2009. At December 31, 2010, the total securities portfolio was $83.7 million, an increase of $4.5 million, or 5.66% over total securities of $79.2 million at December 31, 2009. Securities designated as available-for-sale totaled $74.0 million and were recorded at estimated fair value. The securities portfolio also includes nonmarketable equity securities totaling $9.6 million which are carried at cost because they are not readily marketable or have no quoted market value. These include investments in Federal Reserve Bank stock, Federal Home Loan Bank stock, Community Capital Corporation Statutory Trust I, and the stock of one unrelated financial institution.

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

Book Value of Securities
December 31,	2010		2009
(Dollars in thousands)
Government sponsored enterprises	$	-	$	13,087
Obligations of state and local governments		10,796		16,718
		10,796		29,805
Mortgage-backed securities		63,229		39,181
Nonmarketable equity securities		9,626		10,186
Total securities	$	83,651	$	79,172

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2010.

Investment Securities Maturity Distribution and Yields

						After One But					After Five But
December 31, 2010	Within One Year					Within Five Years					Within Ten Years					Over Ten Years
(Dollars in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Obligations of state and
local governments(2)	$	319		7.68	%	$	1,800		7.01	%	$	3,821		6.58	%	$	4,856		6.03	%
Total securities(1)	$	319				$	1,800				$	3,821				$	4,856

(1) Excludes mortgage-backed securities totaling $63.2 million with a yield of 3.15% and nonmarketable equity securities.

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

Earning Assets - continued

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

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

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

Short-Term Investments. Short-term investments, which consist primarily of our cash held in our Federal Reserve correspondent account, federal funds sold and interest-bearing deposits with other banks, averaged $63.5 million in 2010, compared to $22.2 million in 2009. At December 31, 2010, short-term investments totaled $27.9 million, compared to $39.0 million at December 31, 2009. These funds are a source of our liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities decreased $44.0 million, or 7.27%, to $560.8 million in 2010, from $604.8 million in 2009. Average interest-bearing deposits increased $4.1 million, or 0.91%, to $455.1 million in 2010, from $451.1 million in 2009.

Deposits. Average total deposits increased $10.3 million, or 1.87%, to $560.3 million during 2010, from $550.0 million during 2009. At December 31, 2010, total deposits were $495.2 million compared to $583.5 million a year earlier, a decrease of 15.13%. The primary reason for the decrease was due to management’s strategy to allow approximately $60 million in high cost certificates of deposits to run off. We utilized low yielding cash to fund the outflow, which should improve our net interest margin and our capital ratios.

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

Deposits

December 31,	2010					2009					2008					2007					2006
			Percent					Percent					Percent					Percent					Percent
(Dollars in			of					of					of					of					of
thousands)	Amount		Deposits			Amount		Deposits			Amount		Deposits			Amount		Deposits			Amount		Deposits
Demand deposit
accounts	$	103,080		20.82	%	$	112,333		19.25	%	$	73,663		14.34	%	$	62,175		11.96	%	$	63,733		13.09	%
NOW accounts		63,024		12.73			66,807		11.45			65,699		12.79			63,866		12.28			64,743		13.3
Money market
accounts		133,409		26.94			123,806		21.22			96,377		18.77			140,934		27.10			129,801		26.65
Savings accounts		42,481		8.58			42,280		7.25			37,430		7.29			36,117		6.94			38,791		7.97
Brokered deposits		7,849		1.59			27,200		4.66			49,828		9.70			38,744		7.45			-		-
Time deposits
less than
$100,000		87,081		17.58			125,800		21.56			115,705		22.53			111,619		21.46			124,739		25.61
Time deposits
of $100,000
or over		58,258		11.76			85,257		14.61			74,899		14.58			66,617		12.81			65,149		13.38
Total deposits	$	495,182		100.00	%	$	583,483		100.00	%	$	513,601		100.00	%	$	520,072		100.00	%	$	486,956		100.00	%

Core deposits, which exclude brokered deposits and certificates of deposit of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits decreased $42.0 million, or 8.92%, from $471.1 million at December 31, 2009 to $429.1 million at December 31, 2010. The largest decrease in our core deposits was in certificates of deposit of $100,000 or less, which decreased $38.7 million, or 30.78%, to $87.1 million at December 31, 2010 from $125.8 million at December 31, 2009. Our money market accounts increased $9.6 million, or 7.76%, from $123.8 million at December 31, 2009 to $133.4 million at December 31, 2010.

Deposits and Other Interest-Bearing Liabilities - continued

Deposits, and particularly core deposits, have historically been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our brokered deposits at December 31, 2010 totaled $7.8 million, which represented 1.59% of our entire deposit base, compared to total brokered deposits of $27.2 million at December 31, 2009, which represented 4.66% of the entire deposit base. All of our brokered deposits at December 31, 2010 and 2009 were brokered time deposit accounts. 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.

As previously reported, the Dodd-Frank Act also permanently raises the current standard maximum deposit insurance amount to $250,000. The standard maximum amount of $100,000 had been temporarily raised to $250,000 until December 31, 2013. The FDIC coverage limit applies per depositor, per insured depository institution for each account ownership category.

Our loan-to-deposit ratio was 96.81% at December 31, 2010, and 97.21% at the end of 2009. The maturity distribution of our time deposits of $100,000 or more at December 31, 2010 is set forth in the following table.

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

(Dollars in thousands)	Within Three Months		After Three Through Six Months		After Six Through Twelve Months		After Twelve Months		Total

Certificates of deposit of $100,000 or more	$	19,348	$	21,868	$	11,299	$	5,743	$	58,258

Approximately 70.75% of our time deposits of $100,000 or more had scheduled maturities within six months and 90.14% had maturities within twelve months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.

Borrowed Funds. Borrowed funds consist of short-term borrowings, advances from the Federal Home Loan Bank, junior subordinated debentures and our correspondent bank line of credit. Short-term borrowings are primarily federal funds purchased from correspondent banks and securities sold under agreements to repurchase.

Average Federal Home Loan Bank advances during 2010 were $95.4 million compared to $125.6 million during 2009, a decrease of $30.2 million. Advances from the Federal Home Loan Bank are collateralized by one-to-four family residential mortgage loans, multi-family residential loans, home equity lines and commercial real estate loans. At December 31, 2010 and December 31, 2009, borrowings from the Federal Home Loan Bank were $95.4 million respectively. During 2010, management made the decision to refinance two FHLB advances, each in the amount of $10 million, incurring $1.5 million in prepayment penalties, however also significantly reducing our interest expense related to our FHLB borrowings. The prepayment penalties incurred in 2010 are being amortized over the life of the restructured advances. During 2009, we utilized cash generated from deposit growth at relatively lower rates versus the Federal Home Loan Bank advances to prepay three advances totaling $25 million, incurring one-time expenses of $896,000 during associated with the early termination of FHLB borrowings. Although we expect to continue using short-term borrowings and Federal Home Loan Bank advances as secondary funding sources, core deposits will continue to be our primary funding source. Of the $95.4 million advances from the Federal Home Loan Bank outstanding at December 31, 2010, $10.0 million mature in 2011, $15.0 million in 2012, $5.4 million in 2013, $20.0 million in 2014, $25.0 million in 2015, and $20.0 million in 2017.

During 2010, there were no short term borrowings. Average short-term borrowings were $17.9 million in 2009. Federal Reserve Discount Window and Term Auction Facility (“TAF”) Borrowings averaged $15.4 million in 2009. Federal funds purchased from correspondent banks averaged $1.1 million in 2009. Securities sold under agreements to repurchase averaged $1.4 million in 2009. At December 31, 2010 and December 31, 2009, there were no short term borrowings outstanding.

On June 15, 2006, Community Capital Corporation Statutory Trust I (a non-consolidated subsidiary) issued $10 million in trust preferred securities with a maturity of June 15, 2036. The rate is fixed at 7.04% until June 14, 2011, at which point the rate adjusts quarterly to the three-month LIBOR plus 1.55%, and can be called without penalty beginning on June 15, 2011. We received from the Trust the $10 million proceeds from the issuance of the securities and the

Deposits and Other Interest-Bearing Liabilities - continued

$310,000 initial proceeds from the capital investment in the Trust, and accordingly have shown the funds due to the Trust as $10.3 million in junior subordinated debentures. Average junior subordinated debentures during 2010 were $10.3 million.

The following table summarizes our various sources of borrowed funds for the years ended December 31, 2010 and 2009. These borrowings consist of securities sold under agreements to repurchase, federal funds purchased, advances from the FHLB, and junior subordinated debentures. Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by government-sponsored enterprise securities. Federal funds purchased are short-term borrowings from other financial institutions that mature daily. Advances from Federal Home Loan Bank mature at different periods as discussed in the footnotes to the financial statements and are secured by CapitalBank’s one to four family residential mortgage loans, home equity lines and commercial real estate loans. The junior subordinated debentures mature on June 15, 2036.

	Year Ended December 31,
	Maximum				Weighted
	Outstanding				Average					Interest
	at any		Average		Interest			Balance		Rate at
(Dollars in thousands)	Month End		Balance		Rate			December 31,		December 31,
2010
Advances from Federal Home Loan Bank	$	95,400		95,400		3.09	%	$	95,400		3.03	%
Junior subordinated debentures		10,310		10,310		7.25	%		10,310		7.04	%

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

Capital

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

The Company and CapitalBank are also required to maintain capital at a minimum level based on average total assets, which is known as the leverage ratio. Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum. To provide the additional capital needed to support our Bank’s growth in assets in 2006, we issued $10.3 million in junior subordinated debentures in connection with our trust preferred securities offering.

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

Capital - continued

new capital in the rights offering, the public offering, and employee purchases through our 401k plan purchased through treasury shares, of which $5,002,000 was raised in the public offering.

Beginning in 2009, our 401(k) plan and Dividend Reinvestment and Stock Purchase Plan began to purchase shares from treasury versus the open market to generate additional capital. In 2010, we issued 140,925 shares of treasury stock to these plans for total proceeds of $434,000.

The Company and CapitalBank exceeded the Federal Reserve’s fully phased-in regulatory capital ratios at December 31, 2010 and 2009, as set forth in the following table.

										To Be Well-
					For Capital					Capitalized Under
					Adequacy					Prompt Corrective
	Actual				Purposes					Action Provisions
(Dollars in thousands)	Amount Ratio				Amount		Ratio			Amount		Ratio
December 31, 2010
The Company
Total capital (to risk-weighted assets)	$	58,148	12.17	%	$	38,236		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		52,035	10.89			19,118		4.00			-		N/A
Tier 1 capital (to average assets)		52,035	7.77			26,786		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	57,186	11.99	%	$	38,153		8.00	%	$	47,691		10.00	%
Tier 1 capital (to risk-weighted assets)		51,086	10.71			19,076		4.00			28,615		6.00
Tier 1 capital (to average assets)		51,086	7.64			26,753		4.00			33,442		5.00

December 31, 2009
The Company
Total capital (to risk-weighted assets)	$	68,300	12.15	%	$	44,976		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		61,185	10.88			22,488		4.00			-		N/A
Tier 1 capital (to average assets)		61,185	8.31			29,447		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	66,656	11.88	%	$	44,886		8.00	%	$	56,108		10.00	%
Tier 1 capital (to risk-weighted assets)		59,554	10.61			22,443		4.00			33,665		6.00
Tier 1 capital (to average assets)		59,554	8.10			29,404		4.00			36,756		5.00

Liquidity Management and Capital Resources

Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, we would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities we serve.

Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control.

Our loans-to-assets ratio decreased from 2009 to 2010 and our loans-to-funds ratio decreased from 2009 to 2010. The loans-to-assets ratio at December 31, 2010 was 73.09% compared to 75.68% at December 31, 2009, and the loans-to-funds ratio at December 31, 2010 was 81.17% compared to 83.55% at December 31, 2009. The amount of advances from the Federal Home Loan Bank were approximately $95.4 million at December 31, 2010 and December 31, 2009. We expect to continue using these advances as a source of funding. At December 31, 2010 we had no short term borrowings outstanding and had the ability to receive $8.0 million in funds under the terms of our agreement with the Federal Reserve Bank. Additionally, we had approximately $15 million of unused lines of credit for federal funds purchases and $41.4 million of unpledged securities available-for-sale at December 31, 2010 as sources of liquidity. We also have the ability to receive an additional $12.9 million in advances under the terms of our agreement with the Federal Home Loan Bank.

Capital - continued

We depend on dividends from CapitalBank as our primary source of liquidity. The ability of CapitalBank to pay dividends is subject to general regulatory restrictions that may have a material impact on the liquidity available to us. As previously reported, we entered into the Written Agreement with the Federal Reserve and the S.C. Board on July 28, 2010, where we must obtain approval from these regulatory agencies before declaring or paying any dividends to the Company or to our shareholders. We paid stock dividends in September 1998, June 2000, May 2001, and November 2007 and may do so in the future. We paid cash dividends on a quarterly basis from the third quarter of 2001 through the first quarter of 2009. In April 2009, we announced we were suspending our quarterly cash dividends to preserve our retained capital and because of regulatory concerns.

Critical Accounting Policies

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

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

The Allowance for Loan Losses represents our estimate of probable losses inherent in the lending portfolio. See Provision and Allowance for Losses for additional discussion including factors impacting the Allowance and the methodology for analyzing the adequacy of the Allowance. This methodology relies upon our judgment. Our judgments are based on an assessment of various issues, including, but not limited to, the pace of loan growth, emerging portfolio concentrations, the risk management system relating to lending activities, entry into new markets, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions. We consider the year-end Allowance appropriate and adequate to cover probable losses in the loan portfolio. However, our judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant circumstances, will not require significant future additions to the Allowance, thus adversely impacting the results of operations of the Company.

We believe the accounting for 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 evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition of the issuer,the outlook for receiving the contractual cash flows of the investments, and anticipated outlook for changes in the general level of interest rates, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value.

Critical Accounting Policies - continued

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

Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service. We are subject to potential adverse adjustments, including, but not limited to, an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets. Historically, our estimated income taxes have been materially correct, and we are not aware of any reason that a material change will occur in the future. See Note 20 of Notes to Consolidated Financial Statements contained in Item 8 herein that summarizes current period income tax expense as well as future tax liabilities associated with differences in the timing of expenses and income recognition for book and tax accounting purposes.

Non-GAAP Financial Information

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

Impact of Inflation

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

Impact of Off-Balance Sheet Instruments

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

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

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

Through its operations, CapitalBank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to CapitalBank’s customers at

Impact of Off-Balance Sheet Instruments - continued

predetermined interest rates for a specified period of time. At December 31, 2010, CapitalBank had issued commitments to extend credit of $50.0 million and standby letters of credit of $1.6 million through various types of commercial lending arrangements. Approximately $38.8 million of these commitments to extend credit had variable rates. Our experience has been that a significant portion of these commitments often expire without being used.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2010.

			After One		After Three
			Through		Through				Greater
	Within One		Three		Twelve		Within One		Than
(Dollars in thousands)	Month		Months		Months		Year		One Year		Total
Unused commitments to extend credit	$	3,334	$	2,528	$	15,678	$	21,540	$	28,421	$	49,961
Standby letters of credit		33		433		1,144		1,610		37		1,647
Totals	$	3,367	$	2,961	$	16,822	$	23,150	$	28,458	$	51,608

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

ITEM 7A.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

ITEM 9.

CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.

CONTROLS AND PROCEDURES.

Management's Annual Report on Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2010 based on the criteria established in a report entitled “Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company’s management has evaluated and concluded that the Company's internal control over financial reporting was effective as of December 31, 2010.

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

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

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

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

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

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

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

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.

The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2011 annual meeting of shareholders to be held on May 25, 2011.

ITEM 11.

EXECUTIVE COMPENSATION.

The information required by Item 11 is hereby incorporated by reference from our proxy statement for our 2011 annual meeting of shareholders to be held on May 25, 2011.

ITEM 12.

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

Equity Compensation Plan Information

The following table sets forth, as of the end of December 31, 2010, certain information relating to our compensation plans (including individual compensation arrangements) under which grants of options, restricted stock, or other rights to acquire our common stock may be granted from time to time.

Plan Category (1)	Number of shares of our common stock to be issued upon exercise of outstanding options, warrants, and rights	Weighted-average exercise price of outstanding options, warrants, and rights	Number of shares of our common stock remaining available for future issuance under equity compensation plans (excluding shares of our common stock reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	-	-	97,198
Equity compensation plans not approved by security holders	-	-	-
Total	-	-	97,198

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

The additional information required by Item 12 is hereby incorporated by reference from our proxy statement for our 2011 annual meeting of shareholders to be held on May 25, 2011.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 13 is hereby incorporated by reference from our proxy statement for our 2011 annual meeting of shareholders to be held on May 25, 2011.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by Item 14 is hereby incorporated by reference from our proxy statement for our 2010 annual meeting of shareholders to be held on May 25, 2011.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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

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

(a)(3) Exhibits:

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

SIGNATURES

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

	COMMUNITY CAPITAL CORPORATION


Dated: March 21, 2011	By:	/s/ William G. Stevens
		William G. Stevens President and Chief Executive Officer

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

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

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

Signature	Title	Date

/s/ William G. Stevens	President, Chief Executive	March 21, 2011
William G. Stevens	Officer, and Director

/s/ R. Wesley Brewer	Chief Financial Officer, Executive	March 21, 2011
R. Wesley Brewer	Vice President, and Secretary

/s/ Patricia C. Hartung	Chair	March 21, 2011
Patricia C. Hartung

/s/ Harold Clinkscales, Jr.	Director	March 21, 2011
Harold Clinkscales, Jr.

/s/ Wayne Q. Justesen, Jr.	Director	March 21, 2011
Wayne Q. Justesen, Jr.

/s/ B. Marshall Keys	Director	March 21, 2011
B. Marshall Keys

/s/ Clinton C. Lemon, Jr.	Director	March 21, 2011
Clinton C. Lemon, Jr.

/s/ Miles Loadholt	Director	March 21, 2011
Miles Loadholt

/s/ H. Edward Munnerlyn	Director	March 21, 2011
H. Edward Munnerlyn

/s/ George B. Park	Director	March 21, 2011
George B. Park

/s/ George D. Rodgers	Director	March 21, 2011
George D. Rodgers

/s/ Stephen G. Skiba	Director	March 21, 2011
Stephen G. Skiba

/s/ Lex D. Walters	Director	March 21, 2011
Lex D. Walters

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

COMMUNITY CAPITAL CORPORATION

	Page No.

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

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Community Capital Corporation

Greenwood, South Carolina

We have audited the accompanying consolidated balance sheets of Community Capital Corporation and subsidiary as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community Capital Corporation and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2010 in conformity with U.S. generally accepted accounting principles.


			/s/ Elliott Davis, LLC

Greenville, South Carolina

March 21, 2011

F-2

Community Capital Corporation

Consolidated Balance Sheets

	December 31,
(Dollars in thousands, shares are not in dollars)	2010			2009
Assets:
Cash and cash equivalents:
Cash and due from banks	$	9,315		$	10,141
Interest-bearing deposit accounts		27,860			38,990

Total cash and cash equivalents		37,175			49,131
Investment securities:
Securities available-for-sale		74,025			68,826
Securities held-to-maturity (estimated fair value of $170 at December 31, 2009)		-			160
Nonmarketable equity securities		9,626			10,186
Total investment securities		83,651			79,172
Loans held for sale		5,516			1,103
Loans receivable		479,393			567,178
Less allowance for loan losses		(17,165	)		(14,160	)
Loans, net		462,228			553,018
Other real estate owned		13,496			7,165
Premises and equipment, net		15,342			16,150
Accrued interest receivable		2,289			3,046
Prepaid expenses		3,349			4,873
Intangible assets		1,259			1,663
Cash surrender value of life insurance		17,397			16,689
Deferred tax asset		8,992			6,622
Income tax receivable		3,158			9,634
Other assets		2,082			1,176

Total assets	$	655,934		$	749,442

Liabilities:
Deposits:
Noninterest-bearing	$	103,080		$	112,333
Interest-bearing		392,102			471,150

Total deposits		495,182			583,483
Advances from the Federal Home Loan Bank		95,400			95,400
Accrued interest payable		708			1,337
Junior subordinated debentures		10,310			10,310
Other liabilities		6,930			5,155
Total liabilities		608,530			695,685
Commitments and contingencies - Notes 4, 13, and 17

Shareholders’ equity:
Common stock, $1.00 par value; 20,000,000 shares authorized;
10,721,350 and 10,721,450 shares issued at December 31, 2010 and 2009, respectively		10,721			10,721
Nonvested restricted stock		(116	)		(364	)
Capital surplus		64,679			66,472
Accumulated other comprehensive income (loss)		(460	)		909
Retained earnings (deficit)		(17,189	)		(11,704	)
Treasury stock, at cost (704,702 and 845,627 shares in 2010 and 2009, respectively)		(10,231	)		(12,277	)
Total shareholders’ equity		47,404			53,757
Total liabilities and shareholders’ equity	$	655,934		$	749,442

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

F-3

Community Capital Corporation

Consolidated Statements of Operations

	For the years ended
	December 31,
(Dollars in thousands, except for per share data amounts)	2010			2009			2008
Interest income:
Loans, including fees	$	28,559		$	32,722		$	39,710
Investment securities:
Taxable		1,650			2,254			2,189
Tax-exempt		496			1,059			1,285
Nonmarketable equity securities		140			147			404
Federal funds sold and other		165			51			6

Total interest income		31,010			36,233			43,594

Interest expense:
Deposits		6,832			7,894			10,835
Advances from the Federal Home Loan Bank		3,323			5,190			6,034
Federal funds purchased and securities sold under
agreements to repurchase		-			57			1,061
Other		748			726			726
Total interest expense		10,903			13,867			18,656

Net interest income		20,107			22,366			24,938
Provision for loan losses		18,350			32,800			9,300

Net interest income (loss) after provision for loan losses		1,757			(10,434	)		15,638

Noninterest income:
Service charges on deposit accounts		1,822			2,313			2,492
Income from fiduciary activities		1,936			1,623			1,725
Commissions from sales of mutual funds		329			263			180
Gain on sales of securities available-for-sale		1,999			224			98
Gain on sale of loans held for sale		1,875			1,450			1,139
Gain on sale of premises and equipment		-			-			6
Other operating income		2,740			1,657			1,607
Total noninterest income		10,701			7,530			7,247

Noninterest expenses:
Salaries and employee benefits		10,090			10,389			10,853
Goodwill impairment		-			7,418			-
Net occupancy		1,260			1,298			1,316
Furniture and equipment		764			875			975
Amortization of intangible assets		404			427			449
Loss on sale of fixed assets		-			38			-
FDIC banking assessments		1,694			1,863			342
FHLB prepayment penalties		-			896			-
Net cost of operation of other real estate owned		2,287			3,532			409
Other operating expenses		4,898			5,038			5,848
Total noninterest expenses		21,397			31,774			20,192

Income (loss) before income taxes		(8,939	)		(34,678	)		2,693
Income tax expense (benefit)		(3,454	)		(9,433	)		284

Net income(loss)	$	(5,485	)	$	(25,245	)	$	2,409
Earnings (loss) per share:
Basic earnings (loss) per share	$	(0.55	)	$	(4.34	)	$	0.54
Diluted earnings (loss) per share	$	(0.55	)	$	(4.34	)	$	0.54

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

F-4

Community Capital Corporation

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

For the years ended December 31, 2010, 2009, and 2008

													Accumulated
							Nonvested						other
(Dollars in thousands,	Common stock						restricted			Capital			comprehensive			Retained			Treasury
except for per share amounts)	Shares			Amount			stock			surplus			income (loss)			earnings			stock			Total
Balance, December 31, 2007		5,603,570		$	5,604		$	(443	)	$	61,600		$	485		$	15,016		$	(17,415	)	$	64,847
Net income																	2,409						2,409
Other comprehensive income,
net of tax effects														42									42
Comprehensive income																							2,451
Cumulative change in accounting principle																	(530	)					(530	)
Dividends paid ($0.60 per share)																	(2,679	)					(2,679	)
Stock options exercised		37,605			37						430												467
Issuance of restricted stock		26,800			27			(422	)		395												-
Amortization of deferred
compensation on restricted stock								406															406
Forfeitures of restricted stock		(1,215	)		(1	)		14			(2	)					2						(5	)
Balance, December 31, 2008		5,666,760			5,667			(445	)		62,405			527			14,218			(17,415	)		64,957
Net loss																	(25,245	)					(25,245	)
Other comprehensive income, net of tax effects														382									382
Comprehensive loss																							(24,863	)
Redemption of treasury shares (353,843 shares)
Dividends paid ($0.15 per share)
Rights offering issuance, net		5,005,890			5,006						8,081												13,087
Reduction of tax benefit for vesting restricted stock
Issuance of restricted stock		49,500			49			(304	)		255												-
Amortization of deferred
compensation on restricted stock								381															381
Forfeitures of restricted stock		(700	)		(1	)		4			(7	)											(4	)
Balance, December 31, 2009		10,721,450		$	10,721		$	(364	)	$	66,472		$	909		$	(11,704	)	$	(12,277	)	$	53,757
Net loss																	(5,485	)					(5,485
Other comprehensive income (loss),
net of tax effects														(1,369	)								(1,369	)
Comprehensive loss																							(6,854	)
Redemption of treasury shares (140,925 shares)											(1,612	)								2,046			434
Reduction of tax benefit for vesting restricted stock											(125	)											(125	)
Capitalized expenses associated with rights offering											(54	)											(54	)
Amortization of deferred
compensation on restricted stock								248															248
Forfeitures of restricted stock		(100	)								(2	)											(2	)
Balance, December 31, 2010		10,721,350		$	10,721		$	(116	)	$	64,679		$	(460	)	$	(17,189	)	$	(10,231	)	$	47,404

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

F-5

Community Capital Corporation

Consolidated Statements of Cash Flows

	For the years ended
	December 31,
(Dollars in thousands)	2010			2009			2008
Cash flows from operating activities:
Net income(loss)	$	(5,485	)	$	(25,245	)	$	2,409
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		916			1,064			1,047
Provision for loan losses		18,350			32,800			9,300
Deferred income tax benefit (expense)		663			(727	)		(467	)
Amortization of intangible assets		404			426			449
Amortization of deferred compensation on restricted stock		248			381			406
Cumulative change in accounting principle		-			-			(530	)
Premium amortization less discount accretion on securities available-for-sale		178			29			8
Amortization of deferred loan costs and fees, net		879			976			1,244
Write down of other real estate		1,191			3,243			409
Net (gain) loss on sale of premises and equipment		-			38			(6	)
Net loss on sale of other real estate		263			104			194
Net gain on sales or calls of securities available-for-sale		(1,999	)		(224	)		(98	)
Loss on write-off of nonmarketable equity securities		-			82			-
Goodwill impairment		-			7,418			-
Proceeds of loans held for sale		50,277			40,555			20,704
Disbursements for loans held for sale		(54,690	)		(41,355	)		(20,376	)
Decrease in interest receivable		757			678			688
(Increase) decrease in income tax receivable		6,476			(9,634	)		-
Decrease in interest payable		(629	)		(465	)		(1,322	)
Increase in other assets		(2,544	)		(5,887	)		(3,105	)
Increase in other liabilities		1,775			248			464
Net cash provided by operating activities		17,030			4,505			11,418

Cash flows from investing activities:
Net (increase) decrease in loans made to customers		55,101			28,316			(6,705	)
Proceeds from sales of securities available-for-sale		86,564			22,431			980
Proceeds from calls and maturities of securities available-for-sale		19,117			26,908			17,042
Purchases of securities available-for-sale		(111,134	)		(38,563	)		(25,154	)
Proceeds from calls and maturities of securities held-to-maturity		160			55			55
Proceeds from sales of nonmarketable equity securities		887			2,332			7,520
Purchase of nonmarketable equity securities		(327	)		(1,785	)		(8,832	)
Purchase of premises and equipment		(129	)		(190	)		(1,628	)
Proceeds from sales of premises and equipment		21			210			73
Proceeds from sales of other real estate		8,675			7,619			885
Net cash (used) provided by investing activities		58,935			47,333			(15,764	)

Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts		(22,583	)		22,229			(18,839	)
Net increase (decrease) in time deposits		(65,718	)		47,653			12,368
Net decrease in federal funds purchased and securities sold under agreements to repurchase		-			(33,838	)		(28,428	)
Proceeds from advances from the Federal Home Loan Bank		20,000			39,700			210,240
Repayments of advances from the Federal Home Loan Bank		(20,000	)		(105,485	)		(184,580	)
Dividends paid		-			(677	)		(2,679	)
Net proceeds (expenses) from rights offering		(54	)		13,087			-
Proceeds from exercise of stock options		-			-			467
Sales of treasury stock		434			1,012			-
Net cash used by financing activities		(87,921	)		(16,319	)		(11,451	)
Net increase (decrease) in cash and cash equivalents		(11,956	)		35,519			(15,797	)
Cash and cash equivalents, beginning of year		49,131			13,612			29,409

Cash and cash equivalents, end of year	$	37,175		$	49,131		$	13,612

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

F-6

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Community Capital Corporation (the Company) serves as a bank holding company for CapitalBank (the Bank). CapitalBank operates eighteen branches throughout South Carolina. The Bank offers a full range of banking services, including a wealth management group featuring a wide array of financial services, with personalized attention, local decision making and strong emphasis on the needs of individuals and small to medium-sized businesses.

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

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

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, including valuation allowances for impaired loans, the carrying amount of real estate acquired in connection with foreclosures or in satisfaction of loans, and deferred tax positions. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

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

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

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

Nonmarketable Equity Securities - Nonmarketable equity securities include the costs of the Company’s investments in the stock of the Federal Reserve Bank and the Federal Home Loan Bank. The stocks have no quoted market value and no ready market exists. Investment in Federal Reserve Bank stock is required for state-chartered member banks. Investment in Federal Home Loan Bank stock is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to secure the borrowings. At December 31, 2010 and 2009, the investment in Federal Reserve Bank stock was $1,903,450 and $1,686,300, respectively. At December 31, 2010 and 2009, the investment in Federal Home Loan Bank stock was $7,277,500 and $8,145,500, respectively. Upon request, the stock may be sold back to the Federal Home Loan Bank, at cost.

The Company has invested in the stock of several unrelated financial institutions. The Company owns less than five percent of the outstanding shares of each institution, and the stocks either have no quoted market value or are not readily marketable. At December 31, 2010 and 2009, the investments in the stock of the unrelated financial institutions, at cost, was $134,600 and $44,600, respectively. During 2009, the Company recorded an other-than-temporary-impairment (“OTTI”) charge in the amount of $81,864 for its investment in Community Financial Services, Inc. Also included in nonmarketable equity securities is the investment in the Community Capital Corporation Statutory Trust I which totaled $310,000 at December 31, 2010 and 2009.

F-7

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Loans Receivable - Loans are recorded at their unpaid principal balance. Direct loan origination costs and loan origination fees are deferred and amortized over the lives of the loans as an adjustment to yield. Unamortized net deferred loan costs included in loans at December 31, 2010 and 2009 were $439,026 and $276,884, respectively.

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

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

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected. At December 31, 2010 and 2009, the Company had impaired loans of approximately $39,385,000 and $71,956,000, respectively.

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

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

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

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

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

F-8

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Intangible Assets - Intangible assets consist of core deposit premiums resulting from the Company’s acquisitions. The core deposit premiums are being amortized over twelve to fifteen years using the straight-line method. In 2009, during the annual evaluation of goodwill, it was determined that the value of the recorded goodwill was impaired and accordingly the balance was written off as an impairment expense in the amount of $7,418,000.

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

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

Advertising Expense - Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of $22,468, $56,715 and $285,073 were included in the Company's results of operations for 2010, 2009, and 2008, respectively.

Stock-Based Compensation – The Company accounts for stock options and warrants in accordance with generally accepted accounting principles. Compensation expense is recognized as salaries and benefits in the statement of income (loss). Any share issued as a result of exercise will be issued from common shares authorized as discussed in Note 15. The Company did not issue any stock options during the fiscal years ended December 31, 2010 and 2009.

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

The following summarizes supplemental cash flow information:

	Year ended December 31,
(Dollars in thousands)	2010			2009		2008
Cash paid for interest	$	11,532		$	14,332	$	19,988
Cash paid for income taxes		1,528			990		3,286
Supplemental noncash investing and financing activities:
Foreclosures on loans		16,460			12,906		6,242
Change in unrealized gain (loss) on securities available-for sale, net of tax		(1,369	)		382		42

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

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

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with

F-9

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

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

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

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

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

	Year ended December 31,
(Dollars in thousands)	2010			2009			2008
Unrealized holding gains (losses) on available-for-sale securities	$	(76	)	$	803		$	162
Reclassification adjustment for gains realized in income		(1,999	)		(224	)		(98	)
Net unrealized (gains) losses on securities		(2,075	)		579			64
Tax effect		706			(197	)		(22	)
Net-of-tax amount	$	(1,369	)	$	382		$	42

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

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

Recent Accounting Pronouncements – The following is a summary of recent authoritative pronouncements:

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company is required to begin to comply with the disclosures in its financial statements for the year ended December 31, 2010. Disclosures about Troubled Debt Restructurings (TDRs) required by the Update have been deferred by FASB in an update issued in early 2011. The TDR disclosures are anticipated to be effective for periods ending after June 15, 2011. See Note 4.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities

F-10

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments. Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

In August 2010, two updates were issued to amend various SEC rules and schedules pursuant to Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial Reporting Policies and based on the issuance of SEC Staff Accounting Bulletin 112. The amendments related primarily to business combinations and removed references to “minority interest” and added references to “controlling” and “noncontrolling interests(s)”. The updates were effective upon issuance but had no impact on the Company’s financial statements.

Also in December 2010, the Business Combinations topic of the ASC was amended to specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also requires that the supplemental pro forma disclosures include a description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This amendment is effective for the Company for business combinations for which the acquisition date is on or after January 1, 2011, although early adoption is permitted. The Company does not expect the amendment to have any impact on the financial statements.

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

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

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

Cash surrender value of life insurance – Cash surrender value of life insurance policies represents the cash value of policies on certain officers of the bank.

Reclassifications - Certain captions and amounts in the 2009 and 2008 financial statements were reclassified to conform with the 2010 presentation. Such reclassifications had no effect on net income (loss) or shareholders’ equity.

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

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

The Company is required to maintain average reserve balances computed as a percentage of deposits. At December 31, 2010 and 2009, the required cash reserves were satisfied by vault cash on hand and amounts due from correspondent banks.

F-11

NOTE 3 - INVESTMENT SECURITIES

Securities available-for-sale at December 31, 2010 and 2009 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2010
Obligations of state and local governments	$	10,853	$	133		190		10,796
Mortgage-backed securities		63,869		157		797		63,229
Total	$	74,722	$	290	$	987	$	74,025

December 31, 2009
Government-sponsored enterprises	$	12,996	$	91	$	-	$	13,087
Obligations of state and local governments		16,167		391		-		16,558
		29,163		482		-		29,645
Mortgage-backed securities		38,174		1,063		56		39,181
Total	$	67,337	$	1,545	$	56	$	68,826

Securities held-to-maturity as of December 31, 2010 and 2009 consisted of the following:

	Amortized		Gross Unrealized				Estimated
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2010
Obligations of state and local governments	$	-	$	-	$	-	$	-

December 31, 2009
Obligations of state and local governments	$	160	$	10	$	-	$	170

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 and 2009.

Securities Available-for-Sale

	Less than				Twelve months
	twelve months				or more				Total
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair value		losses		Fair value		losses		Fair value		losses
December 31, 2010
Obligations of state and local governments	$	4,683	$	190	$		$		$	4,683	$	190
Mortgage-backed securities		47,998		797		-		-		47,998		797
Total	$	52,631	$	987	$	-	$	-	$	52,631	$	987

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

Securities classified as available-for-sale are recorded at fair market value. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities before recovery of its amortized cost. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. At December 31, 2010 and 2009, the Company did not have any securities in a continuous loss position for twelve months or more.

The following table summarizes the maturities of securities available-for-sale and held-to-maturity as of December 31, 2010, 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. Mortgage-backed securities are presented as a separate line item since paydowns are expected before the contractual maturity dates.

F-12

NOTE 3 - INVESTMENT SECURITIES - continued

	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	$	315		$	319	$	-		$	-
Due after one year but within five years		1,775			1,800		-			-
Due after five years but within ten years		3,721			3,821		-			-
Due after ten years		5,042			4,856		-			-
		10,853			10,796		-			-
Mortgage-backed securities		63,869			63,229		-			-
Total	$	74,722		$	74,025	$	-		$	-

Proceeds from sales of securities available-for-sale during 2010, 2009, and 2008 were $86,564,000, $22,431,000 and $980,000, respectively, resulting in gross realized gains of $1,999,000, $224,000 and $98,000 in 2010, 2009 and 2008, respectively. There were no sales of securities held-to-maturity in 2010, 2009, or 2008.

At December 31, 2010 and 2009, securities having amortized costs of approximately $32,681,000 and $36,317,000, respectively, and estimated fair values of $32,588,000 and $37,224,000, respectively, were pledged as collateral for short-term borrowings, to secure public and trust deposits, and for other purposes as required and permitted by law.

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

As noted in Note 1, the Company has nonmarketable equity securities consisting of investments in several financial institutions. These investments totaled $9,626,000 and $10,186,000 at December 31, 2010 and 2009, respectively. During 2010 and 2009, proceeds from sales of nonmarketable equity securities totaled $887,000 and $2,332,000, respectively. During 2010 there were no losses related to OTTI, however in 2009, the company recorded OTTI of $82,000 on its investment in Community Financial Services, Inc. stock.

NOTE 4 - LOANS RECEIVABLE

Loans receivable are summarized as follows:

	December 31,
(Dollars in thousands)	2010		2009
Commercial	$	51,112	$	50,363
Commercial real estate – construction		79,762		117,988
Commercial real estate – other		162,367		173,560
Residential		137,618		170,153
Home equity		42,167		47,409
Consumer		6,367		7,705
Total gross loans	$	479,393	$	567,178

At December 31, 2010 and 2009, the Company had sold participations in loans aggregating $3,665,000 and $4,240,000, respectively, to other financial institutions on a nonrecourse basis. Collections on loan participations and remittances to participating institutions conform to customary banking practices.

The Bank accepts residential mortgage loan applications and funds loans of qualified borrowers (see Note 1). Funded loans are sold with limited recourse to investors under the terms of pre-existing commitments. The Company does not service residential mortgage loans for the benefit of others.

F-13

NOTE 4 - LOANS RECEIVABLE - continued

At December 31, 2010 and 2009, the Company had pledged approximately $101,870,000 and $119,028,000, respectively, of loans on residential and commercial real estate as collateral for advances from the Federal Home Loan Bank (see Note 10).

An analysis of the allowance for loan losses for the years ended December 31, 2010, 2009, and 2008, is as follows:

(Dollars in thousands)	2010			2009			2008
Balance, beginning of year	$	14,160		$	13,617		$	6,759
Provision charged to operations		18,350			32,800			9,300
Recoveries on loans previously charged-off		422			53			132
Loans charged-off		(15,767	)		(32,310	)		(2,574	)
Balance, end of year	$	17,165		$	14,160		$	13,617

An analysis of the allowance for loan losses for the year ended December 31, 2010 is as follows:

(Dollars in thousands)					Commercial Real Estate Construction		Commercial Real Estate Other
Allowance for credit losses:	Commercial				Commercial Real Estate Construction		Commercial Real Estate Other			Consumer			Residential			HELOC			Unallocated			Total
Beginning balance	$	248		$	4,375		$	98		$	59		$	1,718		$	386		$	7,276		$	14,160
Chargeoffs		(493	)		(8,902	)		(1,309	)		(36	)		(4,481	)		(546	)		-			(15,767	)
Recoveries		1			104			61			25			226			5			-			422
Provisions		682			11,464			2,467			(20	)		6,639			685			(3,567	)		18,350
Ending balance	$	438		$	7,041		$	1,317		$	28		$	4,102		$	530		$	3,709		$	17,165

Ending balance: Individually evaluated for impairment	$	7		$	229		$	142		$	-		$	336		$	-		$	-		$	714
Ending balance: Collectively evaluated for impairment	$	431		$	6,812		$	1,175		$	28		$	3,766		$	530		$	3,709		$	16,451
Ending balance: Loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-

Loans receivable:
Ending balance	$	51,112		$	79,762		$	162,367		$	6,367		$	137,618		$	42,167		$	-		$	479,393
Ending balance: Individually evaluated for impairment	$	690		$	17,430		$	8,993		$	-		$	12,218		$	54		$	-		$	39,385
Ending balance: Collectively evaluated for impairment	$	50,422		$	62,332		$	153,374		$	6,367		$	125,400		$	42,113		$	-		$	440,008
Ending balance: Loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-		$	-		$	-

Credit Quality Indicators

The Company segments its commercial loans into risk categories based on relevant information about the ability of the borrowers and guarantors (if any) to service their debt. Relevant items include but are not limited to current financial information, historical payment and loan performance experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further signs of improvement or deterioration and to determine if the loan remains properly classified and what impairment may be required, if any. Other loans rated Pass, where the total credit exposure to one borrower is $500,000 or more, are reviewed at least annually to validate the assigned loan grade. In addition, any consumer or commercial unsecured loan or lines of $5,000 or more are specifically reviewed annually to validate the loan grade, if any. Further, during the renewal process of any loan, as well as if a loan becomes past due, or for any Home Equity Lines that have a loan-to-value greater than 80% and either are past due more than 30 days or are funded at 90% or more, the Company will evaluate the loan grade.

F-14

NOTE 4 - LOANS RECEIVABLE - continued

Consumer loans are not assigned a risk rating at loan origination. If a consumer loan becomes past due and shows signs of deterioration in the creditworthiness of the borrower, a rating classification will then be assigned for monitoring purposes and the loan will be monitored quarterly with the commercial loans indicated above.

Loans excluded from the scope of the annual review process are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modified repayment plan. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard, doubtful or loss.

The Company utilizes an asset risk classification system in compliance with guidelines established by the Federal Reserve as part of its efforts to improve commercial asset quality. “Special Mention” loans are defined as loans that in management’s opinion are subject to potential future ratings downgrades, where market conditions may unfavorably affect the borrower in the future or where there are declining trends in the borrowers operations or where market conditions may unfavorably affect the borrower in the future. “Substandard” assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and that the Company may experience a loss if the weakness(es) are not corrected. Assets that are rated “Doubtful” have the same characteristics of a substandard asset with an additional weakness that make collection or liquidation of the asset highly questionable, and there is a high probability of loss based on currently existing facts, conditions or values.

The following table summarizes the credit risk profile of the company’s commercial loan portfolio as of December 31, 2010 based on the company’s internally assigned grade:

Commercial Credit Exposure

			Commercial		Commercial
(Dollars in thousands)			Real Estate		Real Estate
Grade:	Commercial		Construction		Other
Pass	$	46,959	$	57,003	$	142,598
Special mention		2,093		843		8,676
Substandard		2,060		20,250		11,093
Doubtful		-		1,666		-
Total	$	51,112	$	79,762	$	162,367

Consumer Credit Exposure

The following table summarizes the credit risk profile of the company’s residential loan portfolio as of December 31, 2010 based on the company’s internally assigned grade. In determining the classification of a subprime loan, the company utilizes the definition supplied by the Federal Home Loan Bank.


(Dollars in thousands)	Residential		Residential
Grade:	Prime		Subprime
Pass	$	108,000	$	2,731
Special mention		5,834		672
Substandard		19,110		1,271
Doubtful		-		-
Total	$	132,944	$	4,674

The following table summarizes the credit risk profile of the company’s consumer loan portfolio as of December 31, 2010 based on payment activity:

(Dollars in thousands)
	Consumer
	Overdraft Protection		HELOC		Consumer Other
Performing	$	1,228	$	42,113	$	5,139
Nonperforming		-		54		-
Total	$	1,228	$	42,167	$	5,139

F-15

NOTE 4 - LOANS RECEIVABLE - continued

Impaired Loans

The following is a summary of information relating to impaired loans at December 31, 2010:

(Dollars in thousands)			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	538	$	539	$	-	$	365	$	10
Commercial real estate – construction		12,908		22,552		-		19,163		398
Commercial real estate – other		7,393		7,885		-		7,892		356
Residential – prime		1,189		1,229		-		1,163		31
Residential – subprime		9,363		11,377		-		10,935		143
HELOC		54		71		-		71		1

With an allowance recorded:
Commercial		152		152		7		157		11
Commercial real estate – construction		4,522		4,743		229		4,689		2
Commercial real estate – other		1,600		1,601		142		1,615		96
Residential – prime		1,666		1,667		336		1,681		49

Total:
Commercial	$	690	$	691	$	7	$	522	$	21
Commercial real estate – construction		17,430		27,295		229		23,852		400
Commercial real estate – other		8,993		9,486		142		9,507		452
Residential – prime		2,855		2,896		336		2,844		80
Residential – subprime		9,363		11,377		-		10,935		143
HELOC		54		71		-		71		1
Totals	$	39,385	$	51,816	$	714	$	47,731	$	1,097

Modifications

The following is a summary of information relating to modifications and troubled debt restructurings at December 31, 2010:

		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(Dollars in thousands)	Contracts	Investments		Investments
Troubled debt restructuring:
Commercial	1	$	152	$	152
Commercial real estate – construction	3		640		640
Commercial real estate – other	2		1,572		1,572
Residential – prime	7		7,097		7,097
Residential – subprime	2


Troubled debt restructuring that subsequently defaulted	Number of Contracts	Recorded Investment
Commercial real estate – construction	1	$	83
Residential – prime	2	$	2,758

F-16

NOTE 4 - LOANS RECEIVABLE - continued

The following is a summary of information pertaining to TDRs:

(Dollars in thousands)	2010		2009

Nonperforming TDRs	$	6,815	$	2,612

Performing TDRs:
Commercial	$	152	$	-
Commercial real estate - construction		143		1,047
Residential		3,141		541
Total performing TDRs	$	3,436	$	1,588

Total TDRs	$	10,251	$	4,200

Analysis of Past Due Loans Receivable

The following is a summary of information relating to analysis of past due loans receivable at December 31, 2010:

													Recorded
(Dollars in thousands)					Greater						Total		Investment
	30 – 59 days		60 – 89 days		Than		Total				Loans		> 90 days and
	Past Due		Past Due		90 days		Past Due		Current		Receivable		Accruing
Commercial	$	255	$	14	$	44	$	313	$	50,799	$	51,112	$	-
Commercial RE - Construction		76		-		14,615		14,691		65,071		79,762		-
Commercial RE – Other		223		233		2,198		2,654		159,053		162,367		660
Residential – prime		146		302		9,180		9,628		122,934		132,944		382
Residential - subprime		164		-		398		562		4,112		4,674		-
HELOC		-		113		54		167		42,000		42,167		-
Consumer – OD Protection		5		-		-		5		1,223		1,228		-
Consumer – Other		16		-		-		16		5,123		5,139		-
Total	$	885	$	662	$	26,489	$	28,036	$	450,315	$	479,393	$	1,042

Loans Receivable on Nonaccrual Status

The following is a summary of information relating to loans receivable on nonaccrual status at December 31, 2010 and 2009:

	December 31,
(Dollars in thousands)	2010		2009
Commercial	$	44	$	35
Commercial RE - Construction		14,615		26,503
Commercial RE – Other		2,198		478
Residential – prime		8,553		13,486
Residential - subprime		1,025		-
HELOC		54		662
Total	$	26,489	$	41,164

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

F-17

NOTE 4 - LOANS RECEIVABLE – continued

At December 31, 2010 and 2009, the Company had unfunded commitments, including standby letters of credit, of $51,768,000 and $69,451,000, of which $6,193,000 and $8,015,000, respectively, were unsecured. The fair value of any potential liabilities associated with standby letters of credit is insignificant.

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions. Various recourse agreements exist, ranging from thirty days to twelve months. The Company’s exposure to credit loss in the event of nonperformance by the other party to the loan is represented by the contractual notional amount of the loan. Since none of the loans sold have ever been returned to the Company, the total loans sold with limited recourse amount does not necessarily represent future cash requirements. The Company uses the same credit policies in making loans held for sale as it does for on-balance-sheet instruments. Total loans sold with limited recourse in 2010 and 2009 was $70,853,000 and $67,857,000, respectively.

NOTE 5 – OTHER REAL ESTATE OWNED

The Bank owned $13,496,000 and $7,165,000 in other real estate owned at December 31, 2010 and 2009, respectively. During the years ended December 31, 2010 and 2009, the bank transferred $16,460,000 and $12,906,000 into other real estate owned.

Transactions in other real estate owned for the years ended December 31, 2010 and 2009 are summarized below:

	December 31,
(Dollars in thousands)	2010			2009
Balance, beginning of year	$	7,165		$	5,121
Additions		16,460			12,906
Sales		(8,938	)		(7,619	)
Write downs		(1,191	)		(3,243	)
Balance, end of year	$	13,496		$	7,165

The following is a summary of information relating to analysis of other real estate owned at December 31, 2010 and 2009:

	December 31,
(Dollars in thousands)	2010		2009
Construction, land development and other land	$	12,111	$	4,083
Commercial RE – Other		1,020		1,644
Residential		365		1,438
Total	$	13,496	$	7,165

NOTE 6 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

	December 31,
(Dollars in thousands)	2010			2009
Land	$	4,333		$	4,333
Building and land improvements		13,132			13,155
Furniture and equipment		8,932			8,823
Total		26,397			26,311
Less, accumulated depreciation		(11,055	)		(10,161	)
Premises and equipment, net	$	15,342		$	16,150

Depreciation and amortization expense was approximately $916,000, $1,064,000 and $1,047,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

F-18

NOTE 7 - INTANGIBLE ASSETS

As of December 31, 2010 and 2009, intangible assets consisted of core deposit premiums, net of accumulated amortization amounted to $1,259,000 and $1,663,000, respectively. Amortization expense related to the core deposit premium was $404,000, $427,000 and $449,000 for the years ended December 31, 2010, 2009 and 2008, respectively.

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. In 2009, during the annual evaluation of goodwill, given the substantial decline in the Company’s stock price, declining operating results and reduced projected results, asset quality trends, market comparables and the current economic climate of the banking industry, the results of the analysis indicated that the Company’s goodwill was fully impaired. As a result, the Company recorded a $7,418,000 goodwill impairment charge during 2009.

NOTE 8 – DEPOSITS

The following is a summary of deposit accounts:

	December 31,
(Dollars in thousands)	2010		2009
Noninterest-bearing demand deposits	$	103,080	$	112,333
Interest-bearing demand deposits		63,024		66,807
Money market accounts		133,409		123,806
Brokered deposits		7,849		27,200
Savings		42,481		42,280
Certificates of deposit and other time deposits		145,339		211,057
Total deposits	$	495,182	$	583,483

At December 31, 2010 and 2009, certificates of deposit of $100,000 or more totaled approximately $58,258,000 and $85,257,000, respectively. Interest expense on these deposits was approximately $1,644,000, $2,127,000 and $3,012,000 in 2010, 2009 and 2008, respectively.

Scheduled maturities of certificates of deposit and other time deposits as of December 31, 2010 were as follows:

(Dollars in thousands)
Maturing in	Amount
2011	$	129,229
2012		13,638
2013		2,205
2014		187
2015 and thereafter		80
Total	$	145,339

NOTE 9 – FEDERAL RESERVE DISCOUNT WINDOW

The Company has a borrowing line with the Federal Reserve Bank’s discount window. Through this agreement, the Company had the ability to borrow up to $7,914,000 and $20,987,000 as of December 31, 2010 and 2009, respectively. At December 31, 2010 and 2009, the Company had pledged certain types of commercial, construction and land loans totaling $27,052,000 and $38,413,000, respectively, as collateral to secure borrowings on this line. As of December 31, 2010 and 2009, there were no outstanding borrowings on this line.

F-19

NOTE 10 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

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

(Dollars in thousands)		December 31,
Description	Interest Rate	2010		2009
Advances maturing:
December 7, 2011	4.12%, fixed	$	10,000	$	10,000
February 9, 2012	4.61%, fixed		-		10,000
March 1, 2012	4.32%, fixed		10,000		10,000
May 18, 2012	4.62%, fixed		5,000		5,000
June 14, 2012	4.94%, fixed		-		10,000
March 5, 2013	1.94%, fixed		5,400		5,400
January 6, 2014	0.40%, floating		10,000		-
January 6, 2014	0.40%, floating		10,000		-
January 16, 2015	2.77%, fixed		10,000		10,000
June 3, 2015	3.36%, fixed		15,000		15,000
February 2, 2017	4.31%, fixed		10,000		10,000
May 18, 2017	4.15%, fixed		10,000		10,000
		$	95,400	$	95,400

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

(Dollars in thousands)	Amount
2011	$	10,000
2012		15,000
2013		5,400
2014		20,000
2015 and thereafter		45,000
Total	$	95,400

As collateral, the Company had pledged first mortgage loans on one to four family residential loans aggregating $63,520,000, multi-family residential loans aggregating $3,147,000, home equity lines of credit aggregating $17,055,000, and commercial real estate loans aggregating $18,149,000 (see Note 4) at December 31, 2010. In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties. The company incurred prepayment penalties totaling $1,516,000 and $896,000 during 2010 and 2009, respectively. Prepayment penalties for 2010 are being amortized over the life of the restructured advances.

NOTE 11 – JUNIOR SUBORDINATED DEBENTURES

On June 15, 2006, Community Capital Corporation Statutory Trust I (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities with a maturity of June 15, 2036. The rate is fixed at 7.04% until June 14, 2011, at which point the rate adjusts quarterly to the three-month LIBOR plus 1.55%, and can be called without penalty beginning on June 15, 2011. In accordance with the authoritative guidance, the Trust has not been consolidated in these financial statements. The Company received from the Trust the $10,000,000 proceeds from the issuance of the securities and the $310,000 initial proceeds from the capital investment in the Trust, and accordingly has shown the funds due to the Trust as $10,310,000 junior subordinated debentures. The 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 amounts of junior subordinated debentures to be included in the calculation of regulatory capital of the Bank.

In January 2010, we announced the decision to defer future interest payments on our trust preferred subordinated debt, beginning with our interest payment due on March 15, 2010, for the foreseeable future to maintain cash levels at the holding company. The terms of the debentures and trust indentures allow for us to defer interest payments for up to 20 consecutive quarters without default or penalty. During the period that the interest deferrals are elected, we will continue to record interest expense associated with the debentures. Upon the expiration of the deferral period, all accrued and unpaid interest will be due and payable. In July 2010, the Company and the Bank entered a written agreement with the Federal Reserve and the South Carolina Board of Financial Institutions (the “Written Agreement”) whereby the Company and CapitalBank must receive prior approval from the Federal Reserve prior to making any distributions of interest on trust preferred securities.

F-20

NOTE 12 - 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, net of expenses, in new capital in the rights offering, the public offering, and employee purchases through our 401k plan purchased through treasury shares, of which $5,002,000 was raised in the public offering.

Beginning in 2009, the Company’s 401(k) plan and Dividend Reinvestment and Stock Purchase Plan began to purchase shares from treasury versus the open market to generate additional capital for the Company. In 2010 and 2009, the Company issued 140,925 shares and 353,843 shares, respectively, of treasury stock to these plans for total proceeds of $434,000, and $1,012,000, respectively.

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

The Board of Directors has approved stock repurchase plans whereby the Company could repurchase up to $19,100,000 of its outstanding shares of common stock. As of December 31, 2010, the Company had purchased approximately 1,044,000 shares under the plans (and prior plans), at an average cost of $14.52.

The Board of Directors may issue up to 2,300,000 shares of a special class of stock, par value $1.00 per share, the rights and preferences of which are to be designated at issuance. At December 31, 2010 and 2009, no shares of the undesignated stock had been issued or were outstanding.

NOTE 13 - LEASES

The Bank occupies and uses office space, land and equipment under operating leases with initial terms expiring on various dates through 2016. The lease agreements generally provide that the Bank is responsible for ongoing costs of repairs and maintenance, insurance and real estate taxes. The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental expenses under operating leases were $101,312, $100,890 and $125,159 for the years ended December 31, 2010, 2009 and 2008, respectively. Minimum lease commitments under noncancelable operating leases are as follows:

(Dollars in thousands)	Amount
2011	$	95
2012		61
2013		56
2014		50
2015 and thereafter		79
Total	$	341

The cost of renewals is not included in the above.

NOTE 14 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS

In July 2010, the Company entered into a written agreement with the Federal Reserve, which requires the Bank to take certain actions, including, but not limited to, designing a plan to improve the Bank’s position on certain problem loans, reviewing and revising its ALLL methodology, strengthening its credit risk management and lending program, enhancing its written liquidity and contingency funding plan, and submitting a capital plan to maintain the Bank’s capital ratios in excess of the minimum thresholds required to be well-capitalized. The written agreement also prohibits the Company and the Bank from declaring or paying dividends, without the prior written approval of the Federal Reserve and the South Carolina Board of Financial Institutions, respectively. The written agreement does not contain any provisions to increase capital.

F-21

NOTE 14 - CAPITAL REQUIREMENTS AND REGULATORY MATTERS - continued

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 100%. Tier 1 capital of the Company and the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The Company and the Bank are also required to maintain capital at a minimum level based on average assets (as defined), which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

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

The following tables summarize the capital ratios and the regulatory minimum requirements of the Company and the Bank at December 31, 2010 and 2009.

										To Be Well-
					For Capital					Capitalized Under
					Adequacy					Prompt Corrective
	Actual				Purposes					Action Provisions
(Dollars in thousands)	Amount Ratio				Amount		Ratio			Amount		Ratio
December 31, 2010
The Company
Total capital (to risk-weighted assets)	$	58,148	12.17	%	$	38,236		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		52,035	10.89			19,118		4.00			-		N/A
Tier 1 capital (to average assets)		52,035	7.77			26,786		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	57,186	11.99	%	$	38,153		8.00	%	$	47,691		10.00	%
Tier 1 capital (to risk-weighted assets)		51,086	10.71			19,076		4.00			28,615		6.00
Tier 1 capital (to average assets)		51,086	7.64			26,753		4.00			33,442		5.00

December 31, 2009
The Company
Total capital (to risk-weighted assets)	$	68,300	12.15	%	$	44,976		8.00	%		-		N/A
Tier 1 capital (to risk-weighted assets)		61,185	10.88			22,488		4.00			-		N/A
Tier 1 capital (to average assets)		61,185	8.31			29,447		4.00			-		N/A

CapitalBank
Total capital (to risk-weighted assets)	$	66,656	11.88	%	$	44,886		8.00	%	$	56,108		10.00	%
Tier 1 capital (to risk-weighted assets)		59,554	10.61			22,443		4.00			33,665		6.00
Tier 1 capital (to average assets)		59,554	8.10			29,404		4.00			36,756		5.00

NOTE 15 - STOCK COMPENSATION PLANS

The 2004 Equity Incentive Plan provides for the granting of statutory incentive stock options within the meaning of Section 422 of the Internal Revenue Code as well as nonstatutory stock options, stock appreciation rights, or restricted stock of up to 258,750 shares of the Company’s common stock, to officers, employees, and directors of the Company. Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, the Company’s Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock options may not be less than the fair value of a share of common stock on the date the option is granted. The per-share exercise price of nonqualified stock options may not be less than 50% of the fair value of a share on the effective date of grant. Any options that expire unexercised or are canceled become available for

F-22

NOTE 15 - STOCK COMPENSATION PLANS - continued

reissuance. No awards may be made on or after May 19, 2014. As of December 31, 2010, there were no options outstanding under the plan.

A summary of the status of the Company’s stock option plans as of December 31, 2010, 2009, and 2008 and changes during the years ended on those dates is presented below:

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

During 2010, there were no issuances of stock pursuant to the 2004 Equity Incentive Plan. During 2009, the Company issued 49,500 shares of restricted stock pursuant to the 2004 Equity Incentive Plan. The Company did not issue any restricted stock during 2010. The shares cliff vest in three years and are fully vested on February 1, 2012, and the weighted-average fair value of restricted stock issued during 2009 was $6.14. Compensation cost associated with all issuances was $404,000, $381,000 and $406,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Forfeitures totaled $2,000 and $4,000 for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010, the Company had 97,198 stock awards available for grant under the 2004 Equity Incentive Plan.

NOTE 16 - RELATED PARTY TRANSACTIONS

Certain parties (primarily certain directors and executive officers, their immediate families and business interests) were loan customers and had other transactions in the normal course of business with the Bank. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than normal risk of collectability. Total loans and commitments outstanding to related parties at December 31, 2010 and 2009 were $14,019,000 and $14,886,000, respectively. During 2010, $37,000 of new loans were made to related parties and repayments totaled $904,000. During 2009, $2,693,000 of new loans were made to related parties and repayments totaled $7,767,000.

The Company purchases various types of insurance from agencies that are owned by two directors. Amounts paid for insurance premiums to the related agencies were $57,250, $67,110 and $97,997 in 2010, 2009, and 2008, respectively.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

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

NOTE 18 - RESTRICTION ON SUBSIDIARY DIVIDENDS

The ability of the Company to pay cash dividends to shareholders is dependent upon receiving cash in the form of dividends from the Bank. However, certain restrictions exist regarding the ability of the Bank to transfer funds in the form of cash dividends, loans, or advances to the Company. Dividends are payable only from the retained earnings of the Bank. At December 31, 2010, the Bank had a retained deficit of $(14,670,000); therefore no dividends could be paid. In addition, the Written Agreement also prohibits the Company and the Bank from declaring or paying dividends, without the prior written approval of the Federal Reserve and the South Carolina Board of Financial Institutions, respectively.

F-23

NOTE 19 - EARNINGS (LOSS) PER SHARE

Earnings (loss) per share - basic is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Earnings (loss) per share - diluted is computed by dividing net income (loss) by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Due to the net loss in 2010 and 2009, basic and diluted loss per share were the same.

	Year ended December 31,
(Dollars in thousands, except per share data)	2010		2009		2008
Basic earnings (loss) per share:
Net income (loss)	$	(5,485)	$	(25,245)	$	2,409
Average basic common shares outstanding		9,914,218		5,820,045		4,427,379
Basic earnings (loss) per share	$	(0.55)	$	(4.34)	$	0.54
Diluted earnings (loss) per share:
Net income (loss)	$	(5,485)	$	(25,245)	$	2,409
Average common shares outstanding - basic		9,914,218		5,820,045		4,427,379
Incremental shares from assumed conversions:
Unvested restricted stock		-		-		36,884
Average diluted common shares outstanding		9,914,218		5,820,045		4,464,263
Diluted earnings (loss) per share	$	(0.55)	$	(4.34)	$	0.54

The above computation of diluted earnings per share does not include the following options that were outstanding at year-end since their exercise price was greater than the average market price of the common shares:

	2010		2009		2008
Number of options		-		-		51,721
Weighted-average of these options outstanding during the year		NA		NA		53,674
Weighted-average exercise price	$	NA	$	NA	$	18.01

NOTE 20 - INCOME TAXES

Income tax expense consisted of the following:

	Year ended December 31,
(Dollars in thousands)	2010			2009			2008
Currently payable (receivable):
Federal	$	(1,665	)	$	(8,879	)	$	3,024
State		-			-			139
Total current		(1,665	)		(8,879	)		3,163
Deferred income tax provision (benefit)		(2,370	)		(357	)		(2,857	)
Income tax expense (benefit)	$	(4,035	)	$	(9,236	)	$	306
Income tax expense (benefit) is allocated as follows:
To continuing operations	$	(3,454	)	$	(9,433	)	$	284
To shareholders’ equity		(581	)		197			22
Income tax expense	$	(4,035	)	$	(9,236	)	$	306

F-24

NOTE 20 - INCOME TAXES - continued

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

	December 31,
(Dollars in thousands)	2010			2009
Deferred tax assets:
Allowance for loan losses	$	5,836		$	4,815
Net operating loss carryforward - state		342			321
Deferred compensation		1,349			1,229
Nonaccrual of interest		57			706
Other real estate owned		462			421
Loss on worthless equity securities		28			28
Director fees		105			102
Restricted stock		226			284
Available for sale securities		237			-
Charitable contributions		43			36
Alternative minimum tax credits		1,191			-
Deferred revenue		2			24
Gross deferred tax assets		9,878			7,966
Valuation allowance		(395	)		(380	)
Net deferred tax assets		9,483			7,586
Deferred tax liabilities:
Accumulated depreciation		260			256
Federal Home Loan Bank stock dividends		16			16
Available-for-sale securities		-			469
Merger related, net		-			38
Core deposit intangibles		30			49
Loans fees and costs		149			94
Prepaids		36			42
Total deferred tax liabilities		491			964
Net deferred tax asset recognized	$	8,992		$	6,622

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. Management has determined that it is more likely than not the South Carolina deferred tax asset of the Holding Company will not be realized, and accordingly, has established a valuation allowance for this portion of the deferred tax asset.

A federal net operating loss (“NOL”) of $8,325,000 was created in 2010. This entire NOL will be carried back to generate tax refunds of previous taxes paid of approximately $1,640,000. In addition, refunds of current year estimated payments of $1,518,000 will be requested. The total refunds of $3,158,000 have been recorded as income tax receivable in the Company’s Consolidated Balance Sheet.

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

	Year ended December 31,
(Dollars in thousands)	2010			2009			2008
Income tax at the statutory rate	$	(3,039	)	$	(11,791	)	$	916
State income tax, net of federal income tax benefit		(22	)		(23	)		92
Tax-exempt interest income		(231	)		(403	)		(491	)
Disallowed interest expense		14			30			49
Goodwill		-			2,522			-
Increase in cash surrender value of life insurance		(217	)		(201	)		(203	)
Other, net		26			53			(79	)
Valuation allowance		15			380			-
Income tax expense (benefit)	$	(3,454	)	$	(9,433	)	$	284

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions.

F-25

NOTE 21 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

	Year ended December 31,
(Dollars in thousands)	2010		2009		2008
Banking and ATM supplies	$	431	$	451	$	547
Directors’ fees		50		184		347
Mortgage loan department expenses		261		307		246
Data processing and supplies		1,610		1,608		1,568
Postage and freight		167		191		204
Professional fees		372		461		457
Telephone expenses		281		323		353
Other		1,726		1,513		2,126
Total	$	4,898	$	5,038	$	5,848

NOTE 22 - RETIREMENT AND BENEFIT PLANS

The Company sponsors a voluntary nonleveraged employee stock ownership plan (ESOP) as part of a 401(k) savings plan covering substantially all full-time employees. The Company matches 75 cents per dollar, up to a maximum of 6% of employee compensation. Company contributions to the savings plan were $306,000, $312,000 and $360,000 in 2010, 2009, and 2008, respectively. The Company’s policy is to fund amounts approved by the Board of Directors. At December 31, 2010 and 2009, the savings plan owned 831,268 and 722,610 shares of the Company’s common stock purchased at an average cost of $6.59 and $7.11 per share, respectively. The estimated value of shares held at December 31, 2010 and 2009 was $2,248,000 and $2,096,000, respectively.

The Company has an Executive Supplemental Compensation Plan that provides certain officers with salary continuation benefits upon retirement. The plan also provides for benefits in the event of early retirement, death, or substantial change of control of the Company. In connection with, but not directly related to, the Executive Supplemental Compensation Plan, life insurance contracts were purchased on the officers. No insurance premiums were paid in the years ended December 31, 2010, 2009, or 2008.

In September 2006, the 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 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 $530,000 during 2008.

During 1999, certain officers opted out of the Executive Supplemental Compensation Plan. Under a new agreement, split-dollar life insurance policies were obtained on the lives of these officers. In 2002 upon the purchase of Bank Owned Life Insurance (BOLI) Policies as described below, these officers forfeited any benefits associated with these policies and as a result these policies are in essence key man policies. The Company is the sole owner of the policies and has the right to exercise all incidents of ownership. The Company is the direct beneficiary of an amount of death proceeds equity to the greater of a) the cash surrender value of the policy, b) the aggregate premiums paid on the policy by the Company less any outstanding indebtedness to the insurer, or c) the total death proceeds less the split dollar amount. The split dollar amount is 50 percent of the difference between the total policy death proceeds and the policy cash surrender value at the date of the Executive’s death. There was no expense associated with this plan in 2010, 2009, or 2008. No insurance premiums were paid on the plan during 2010, 2009 or 2008. The policies increased their cash values by $250,000 and $249,000 during 2010 and 2009, respectively. Cash values at December 31, 2010 and 2009 were $4,904,000 and $4,654,000, respectively.

In 2002, the Company purchased BOLI Policies on certain key officers of the Company. Earnings on such policies will be used to offset expenses associated with retirement benefits for these officers. There were no premiums paid on the policies during the years ended December 31, 2010, 2009, or 2008. The policies increased their cash values by $458,000 and $444,000 during 2010 and 2009, respectively. Cash values at December 31, 2010 and 2009 were $12,493,000 and $12,035,000, respectively.

F-26

NOTE 23 - UNUSED LINES OF CREDIT

As of December 31, 2010, the subsidiary bank had an unused line of credit to purchase federal funds from an unrelated bank totaling $15,000,000. This line of credit is available on a one to thirty day basis for general corporate purposes. The lender has reserved the right not to renew their respective line. The Bank also has a line of credit to borrow funds from the Federal Home Loan Bank up to 25% of the Bank’s total assets which provided total availability of $108,264,000 at December 31, 2010. As of December 31, 2010, the Bank had borrowed $95,400,000 on this line. As of December 31, 2010, the Bank also has a line of credit through the Federal Reserve Bank’s Discount Window in the amount of $7,914,000. There were no outstanding borrowings on this line at December 31, 2010.

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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

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

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

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

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

Junior Subordinated Debentures – The fair value of fixed rate junior subordinated debentures are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can reprice frequently.

Off-Balance-Sheet Financial Instruments – Fair values of off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Commitments to Extend Credit and Commercial Letters of Credit – Because commitments to expand credit and commercial letters of credit are made using variable rates, or are recently executed, the contract value is a reasonable estimate of fair value.

F-27

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

	December 31,
	2010						2009
	Carrying			Estimated			Carrying			Estimated
(Dollars in thousands)	Amount			Fair Value			Amount			Fair Value

Financial Assets:
Cash and due from banks		$	9,315		$	9,315		$	10,141		$	10,141
Interest-bearing deposit accounts			27,860			27,860			38,990			38,990
Securities available-for-sale			74,025			74,025			68,826			68,826
Securities held-to-maturity			-			-			160			170
Nonmarketable equity securities			9,626			9,626			10,186			10,186
Cash surrender value of life insurance			17,397			17,397			16,689			16,689
Loans and loans held for sale			484,909			483,885			568,281			562,072
Accrued interest receivable			2,289			2,289			3,046			3,046

Financial Liabilities:
Demand deposit, interest bearing transaction, and savings accounts		$	341,994		$	341,994		$	345,226		$	345,226
Certificates of deposit and other time deposits			153,188			154,187			238,257			240,729
Advances from the Federal Home Loan Bank			95,400			100,753			95,400			100,322
Junior subordinated debentures			10,310			10,422			10,310			10,740
Accrued interest payable			708			708			1,337			1,337

		Notional			Estimated			Notional			Estimated
		Amount			Fair Value			Amount			Fair Value
Off-Balance Sheet Financial Instruments:
Commitments to extend credit		$	49,961		$	-		$	66,933		$	-
Letters of credit			1,647			-			2,518		$	-

Accounting standards provide a framework for measuring and disclosing fair value which require disclosure about the fair value of assets and liabilities recognized on the balance sheet, whether the measurements are made on a recurring basis or on a nonrecurring basis. Fair value is defined as the exchange in 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. Accounting standards also establish a fair value hierarchy, which requires an entity to maximize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The objective is to enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values.

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1	Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries, and money market funds.

Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities, and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

F-28

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

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.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale – Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of cash flows, adjusted for the security’s rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities includes those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter market and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans – The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Other Real Estate Owned – Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated seling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

F-29

NOTE 24 - FAIR VALUE OF FINANCIAL INSTRUMENTS – continued

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

December 31, 2010	Quoted market price in active markets		Significant other observable inputs		Significant unobservable inputs
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Mortgage-backed securities	$	-	$	63,229	$	-
State and municipal obligations		-		10,796
Available-for-sale securities		-		74,025		-
Loans held for sale		-		5,516		-
Total	$	-	$	79,541	$	-


December 31, 2009
(Dollars in thousands)
Government-sponsored enterprises	$	-	$	13,087	$	-
Mortgage-backed securities		-		39,181		-
State and municipal obligations		-		16,558		-
Available-for-sale securities		-		68,826		-
Loans held for sale		-		1,103		-
Total	$	-	$	69,929	$	-

There were no liabilities measured at fair value on a recurring basis for the years ended December 31, 2010 and 2009.

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

December 31, 2010	Quoted market price in active markets		Significant other observable inputs		Significant unobservable inputs
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Other real estate owned	$	-	$	8,781	$	4,715
Impaired loans		-		35,498		3,173
Total	$	-	$	44,279	$	7,888


December 31, 2009
(Dollars in thousands)
Other real estate owned	$	-	$	7,165	$	-
Impaired loans		-		66,735		5,221
Total	$	-	$	73,900	$	5,221

There were no liabilities measured at fair value on a nonrecurring basis for the years ended December 31, 2010 and 2009.

F-30

NOTE 25 - COMMUNITY CAPITAL CORPORATION (PARENT COMPANY ONLY)

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

Condensed Balance Sheets

	December 31,
(Dollars in thousands)	2010			2009
Assets
Cash and cash equivalents	$	1,122		$	990
Investment in banking subsidiary		56,456			62,126
Nonmarketable equity securities		310			310
Premises and equipment, net		1,117			1,145
Other assets		481			575
Total assets	$	59,486		$	65,146

Liabilities and Shareholders’ Equity
Notes payable to subsidiary	$	879		$	918
Junior subordinated debentures		10,310			10,310
Other liabilities		893			161
Total liabilities		12,082			11,389
Common stock		10,721			10,721
Nonvested restricted stock		(116	)		(364	)
Capital surplus		64,679			66,472
Retained earnings (deficit)		(17,189	)		(11,704	)
Accumulated other comprehensive expense		(460	)		909
Treasury stock		(10,231	)		(12,277	)
Total shareholders’ equity		47,404			53,757
Total liabilities and shareholders’ equity	$	59,486		$	65,146

Condensed Statements of Income (Loss)

	For the years ended December 31,
(Dollars in thousands)	2010			2009			2008
Income:
Dividend income from subsidiary	$	-		$	1,081		$	2,200
Dividend income from equity securities		-			22			22
Other interest income		41			108			10
Other income		-			-			1
Total income		41			1,211			2,233
Expenses:
Salaries		247			380			405
Net occupancy expense		(240	)		(226	)		(210	)
Furniture and equipment expense		5			6			7
Interest expense		780			759			779
Goodwill impairment		-			20			-
Other operating expenses		95			116			195
Total expense		887			1,055			1,176
Income (loss) before income taxes and equity in undistributed
earnings of subsidiary		(846	)		156			1,057
Income tax expense (benefit)		(267	)		(9	)		(460	)
Income (loss) before equity in undistributed earnings of subsidiary		(579	)		165			1,517
Equity in undistributed earnings (loss) of subsidiary		(4,906	)		(25,410	)		892
Net income(loss)	$	(5,485	)	$	(25,245	)	$	2,409

F-31

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

Condensed Statements of Cash Flows

	For the years ended December 31,
(Dollars in thousands)	2010			2009			2008
Operating activities:
Net income (loss)	$	(5,485	)	$	(25,245	)	$	2,409
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in undistributed (earnings) loss of banking subsidiary		4,906			25,410			(892	)
Depreciation and amortization expense		33			34			35
Amortization of deferred compensation on restricted stock		248			381			406
Deferred tax benefit (expense)		192			681			(44	)
Increase (decrease) in other liabilities		732			(100	)		(119	)
(Increase) decrease in other assets		(225	)		16			19
Net cash provided by operating activities		401			1,177			1,814

Investing activities:
Purchase of premises and equipment		(5	)		(7	)		(29	)
Investment in Bank subsidiary		(605	)		(13,713	)		-
Net cash used by investing activities		(610	)		(13,720	)		(29	)

Financing activities:
Dividends paid		-			(677	)		(2,679	)
Proceeds from exercise of stock options		-			-			467
Proceeds (expenses) from rights offering		(54	)		13,087			-
Repayments on borrowings from subsidiary		(39	)		(41	)		(34	)
Sales of treasury stock		434			1,012			-

Net cash provided (used) by financing activities		341			13,381			(2,246	)

Net increase (decrease) in cash and cash equivalents		132			838			(461	)

Cash and cash equivalents, beginning of year		990			152			613

Cash and cash equivalents, end of year	$	1,122		$	990		$	152

NOTE 26 – SUBSEQUENT EVENTS

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

F-32

EXHIBIT INDEX

Exhibit
Number	Description

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

E-1

10.15	CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters (incorporated by reference to Exhibit 10.54 of the Company’s Form 8-K filed on January 3, 2008).*
10.16	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Lex D. Walters (incorporated by reference to Exhibit 10.55 of the Company’s Form 8-K filed on January 3, 2008).*
10.17	CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt (incorporated by reference to Exhibit 10.56 of the Company’s Form 8-K filed on January 3, 2008).*
10.18	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 20, 2003 for Miles Loadholt (incorporated by reference to Exhibit 10.57 of the Company’s Form 8-K filed on January 3, 2008).*
10.19	CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys (incorporated by reference to Exhibit 10.58 of the Company’s Form 8-K filed on January 3, 2008).*
10.20	First Amendment to the CapitalBank Director Deferred Fee Agreement Dated August 21, 2003 for B. Marshall Keys (incorporated by reference to Exhibit 10.59 of the Company’s Form 8-K filed on January 3, 2008).*
10.21	First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for Ralph W. Brewer (incorporated by reference to Exhibit 10.62 of the Company’s Form 8-K filed on March 4, 2008).*
10.22	First Amendment to the CapitalBank Salary Continuation Agreement Dated October 17, 2002 for William G. Stevens (incorporated by reference to Exhibit 10.63 of the Company’s Form 8-K filed on March 4, 2008).*
10.23	Employment Agreement by and between Community Capital Corporation and William G. Stevens dated March 3, 2008 (incorporated by reference to Exhibit 10.81 of the Company’s Form 8-K filed on March 4, 2008).*
10.24	Employment Agreement by and between Community Capital Corporation and R. Wesley Brewer dated March 3, 2008 (incorporated by reference to Exhibit 10.82 of the Company’s Form 8-K filed on March 4, 2008).*
10.25	Community Capital Stock Ownership Plan (With Code Section 401(k) Provisions) dated as of December 20, 2001, as amended (incorporated by reference to Exhibit 10.84 of the Company's Amendment No. 1 to Form S-8 filed on April 16, 2009).*
10.26	Written Agreement between Community Capital Corporation and CapitalBank and the Federal Reserve Bank of Richmond and the South Carolina Board of Financial Institutions (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 3, 2010).
14.1	Code of Ethics (incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed on March 26, 2004).
21.1	Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed on March 28, 2002).
23.1	Consent of Elliott Davis, LLC
24.1	Directors’ Powers of Attorney
31.1	Rule 13a-14(a)/15d-14(a) Certification by William G. Stevens
31.2	Rule 13a-14(a)/15d-14(a) Certification by R. Wesley Brewer
32	Section 1350 Certifications

* Management contract or compensation plan or arrangement.

E-2

COMMUNITY CAPITAL CORP /SC/ - FORM 10-K - March 21, 2011

Attached files

COMMUNITY CAPITAL CORP /SC/ Reports