Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

x QUARTERLY REPORT UNDER SECTION 13 AND 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2006
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT 1934
 
For the transition period from _______ to _______
 
Commission File Number: 000-25345

Community Capital Bancshares, Inc.
(Exact name of registrant as specified in its charter)

Georgia
(State or other jurisdiction of
Incorporation or organization)
  
58-2413468 
(IRS Employer
Identification No.)
 
P.O. Drawer 71269, Albany, Georgia 31708
(Address of principal executive offices)

 (229) 446-2265
(Registrant's telephone number, including area code)

  Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).
 
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o  No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 6, 2006: 3,018,231 shares

 
PART I - FINANCIAL INFORMATION
  
Page No.
         
ITEM 1.
  Financial Statements    
         
 
3
         
 
4
   
 
    
 
5
 
  
 
    
 
6
   
 
    
   
11
         
   
15
         
   
15
         
PART II - OTHER INFORMATION
    
         
   
17
         
   
17
         
   
17
         
   
17
         
   
17
         
   
17
         
   
17


and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
 
   
September 30,
2006
(unaudited)
  
December 31,
2005
  
Assets
          
Cash and due from banks
  
$
12,453
  
$
6,931
  
Federal funds sold
    
6,881
    
8,671
  
Securities available for sale
    
38,488
    
41,690
  
Restricted equity securities
    
2,294
    
2,426
  
Loans
    
244,304
    
230,908
  
Less allowance for loan losses
    
3,613
    
3,000
  
Loans, net
    
240,691
    
227,908
  
Premises and equipment
    
9,416
    
7,892
  
Goodwill
    
2,334
    
2,334
  
Core deposit premium
    
250
    
282
  
Other assets
    
12,471
    
11,323
  
Total Assets 
  
$
325,278
  
$
309,457
  
               
Liabilities and Shareholders' Equity
              
Deposits
              
Non-interest bearing
  
$
29,814
  
$
22,745
  
Interest bearing
   
234,378
    
222,824
  
Total deposits
    
264,192
    
245,569
  
Other borrowings
    
27,000
    
33,000
  
Guaranteed preferred beneficial interests in junior subordinated debentures
    
4,124
    
4,124
  
Other liabilities
    
2,425
    
1,369
  
Total Liabilities
    
297,741
    
284,062
  
               
Shareholders' equity
              
Preferred stock, par value not stated; 2,000,000 shares authorized;
              
no shares issued
  
$
—
  
$
—
  
Common stock, $1.00 par value, 10,000,000 shares authorized;
              
3,072,210 and 2,973,356 shares issued
    
3,072
    
2,973
  
Capital surplus
    
22,944
    
22,246
  
Retained earnings
    
2,629
    
1,468
  
Accumulated other comprehensive loss
    
(697
)
  
(845
)
Less cost of treasury stock, 54,979 and 59,851 shares as of September 30, 2006 and December 31, 2005 respectively
   
(411
)
  
(447
)
Total Shareholders' equity
    
27,537
    
25,395
  
Total Liabilities and Shareholders' Equity
  
$
325,278
  
$
309,457
  
 
 
3
 
and Subsidiaries
Consolidated Statements of Operations (unaudited)
For the three and nine months ended September 30, 2006 and 2005
(Dollars in thousands, except earnings per share)
 
   
Three months ended
  
Nine months ended
  
   
September 30, 2006
  
September 30, 2005
  
September 30, 2006
  
September 30, 2005
  
Interest Income
                  
Loans
  
$
5,556
  
$
3,540
  
$
15,810
  
$
8,754
  
Investment securities
    
473
    
423
    
1,410
    
1,318
  
Deposits in banks
    
6
    
6
    
17
    
14
  
Federal funds sold
    
21
    
40
    
205
    
100
  
Total interest income
    
6,056
    
4,009
    
17,442
    
10,186
  
Interest expense
                          
Deposits
    
2,681
    
1,340
    
7,402
    
2.987
  
Other borrowed money
    
399
    
391
    
1,260
    
937
  
Total interest expense
    
3,080
    
1,731
    
8,662
    
3,924
  
Net interest income
    
2,976
    
2,278
    
8,780
    
6,262
  
Provision for loan losses
    
124
    
370
    
937
    
800
  
Net interest income after provision for loan losses
    
2,852
    
1,908
    
7,843
    
5,462
  
Other income
                          
Service charges on deposit accounts
    
303
    
277
    
958
    
748
  
Financial service fees
    
54
    
71
    
161
    
140
  
Mortgage origination fees
    
290
    
257
    
720
    
341
  
Loss on sale of investment securities
    
(59
)
  
—
    
(59
)
  
—
  
Gain (loss) on sale of foreclosed properties
    
(90
)
  
10
    
(109
)
  
(7
)
Increase in cash surrender value of bank owned life insurance policies
    
63
    
60
    
185
    
181
  
Other operating income
    
192
    
31
    
304
    
123
  
Total other income
    
753
    
706
    
2,160
    
1,526
  
Other expenses
                          
Salaries and employee benefits
    
1,456
    
1,110
    
4,175
    
2,860
  
Equipment and occupancy expense
    
354
    
309
    
989
    
872
  
Marketing expense
    
57
    
50
    
148
    
148
  
Data processing expense
    
175
    
148
    
516
    
454
  
Administrative expenses
   
230
    
180
    
833
    
471
  
Legal and professional
    
135
    
84
    
394
    
294
  
Directors fees
    
78
    
63
    
205
    
187
  
Amortization of intangible assets
    
10
    
12
    
32
    
36
  
Stationery and supply expense
    
63
    
47
    
177
    
138
  
Loss on other than temporarily impaired security
    
—
   
763
    
—
   
763
  
Other operating expenses
    
192
    
195
    
549
    
431
  
Total other expense
    
2,750
    
2,961
    
8,018
    
6,654
  
Income before income taxes
    
855
    
(347
)
  
1,985
    
334
  
Income tax expense
    
285
    
(142
)
  
643
    
48
  
Net Income (loss)
  
$
570
  
$
(205
)
$
1,342
  
$
286
  
Basic earnings per share
  
$
.19
  
$
(.07
)
$
.46
  
$
.10
  
Diluted earnings per share
  
$
.18
  
$
(.07
)
$
.44
  
$
.09
  
Weighted average common shares outstanding
    
2,996,578
    
2,913,365
    
2,947,298
    
2,907,168
  
Weighted average diluted common shares outstanding
    
3,074,149
    
3,052,124
    
3,030,709
    
3,054,440
  
Dividends Declared per share
    
.02
    
.02
    
.06
    
.06
  
 
4
 
Community Capital Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
 
Three and nine months ended September 30, 2006 and 2005
(Dollars in thousands) 
 
   
Three Months Ended
  
Nine Months Ended
  
   
September 30, 2006
  
September 30, 2005
  
September 30, 2006
  
September 30, 2005
  
                   
Net Income
  
$
570
  
$
(205
)
$
1,342
  
$
286
  
Other comprehensive income (loss)
                          
Net unrealized holding gains (losses) arising during the period.
    
786
    
(814
)
  
165
    
(1,047
)
Tax benefit (expense) on unrealized holding gains
    
(267
)
  
277
    
(56
)
  
356
  
Reclassification adjustment for losses included in net income
    
59
          
59
        
Tax benefit for losses included in net income
    
(20
)
  
—
    
(20
)
  
—
  
Recognized loss from other than temporarily impaired security
    
—
    
763
    
—
    
763
  
Tax benefit from recognition of loss
    
—
    
(259
)
        
(259
)
Total other comprehensive income (loss)
    
558
    
(33
)
  
148
    
(187
)
                           
 Comprehensive income (loss)
  
$
1,128
  
$
(238
)
$
1,490
  
$
99
  
 
5
 
and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 
Nine Months ended September 30, 2006 and 2005
(Dollars in thousands)


   
2006
  
2005
  
           
Cash Flows from operating activities:
  
$
1,342
  
$
286
  
Net income
              
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation
    
349
    
324
  
Amortization of core deposit premium
    
32
    
36
  
Provision for loan losses
    
937
    
800
  
Provision for deferred taxes
    
(58
)
  
(30
)
Increase in interest receivable
    
(173
)
  
(419
)
Recognized loss from other than temporarily impaired security
    
—
    
763
  
Other operating activities
    
514
    
(370
)
Net cash provided by operating activities
    
2,943
    
1,390
  
               
Cash Flows from Investing Activities:
              
Purchase of property and equipment
    
(1,991
)
  
(2,002
)
Net (increase) decrease in federal funds sold
    
1,790
    
(6,859
)
Net increase in loans
    
(13,720
)
  
(76,607
)
Proceeds from maturities of securities available for sale
    
1,551
    
1,024
  
Proceeds from sale of securities
    
4,234
    
1,980
  
Purchase of securities available for sale
    
(2,612
)
  
(4,171
)
Proceeds for sale of fixed assets
    
108
    
—
  
Net cash used in investing activities
    
(10,640
)
  
(86,635
)
               
Cash Flows from Financing Activities:
              
Net increase in deposits
    
18,623
    
80,651
  
Dividends paid to shareholders
    
(182
)
  
(178
)
Proceeds from exercise of stock options
    
692
    
214
  
Net increase (decrease) in other borrowings
    
(6,000
)
  
7,847
  
Treasury stock transactions, net
    
86
    
(16
)
Net cash provided by financing activities
    
13,219
    
88,518
  
Net increase in cash
    
5,522
    
3,273
  
Cash and due from banks at beginning of period
    
6,931
    
5,515
  
Cash and due from banks at end of period
    
12,453
    
8,788
  
               
Supplemental Disclosure
              
Cash paid for interest
  
$
8,604
  
$
3,704
  
Income taxes
  
$
711
  
$
—
  
               
Non-Cash Transaction
              
Unrealized gains (losses) on securities available for sale
              
   
$
165
 
$
(284
)
 
6
 
Community Capital Bancshares, Inc.
and Subsidiaries
Notes to Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Nature of Business

Community Capital Bancshares, Inc. (the “Company”) is a multi-bank holding company whose principal activity is the ownership and management of its wholly-owned bank subsidiaries, Albany Bank & Trust, N.A, and AB & T National Bank, collectively referred to as “the Banks.” Albany Bank & Trust’s main office is located in Albany, Dougherty County, Georgia, with two full service branches in Albany and one full service branch in Leesburg, Georgia and a loan production office in Charleston, South Carolina. AB&T National Bank’s main office is located in Dothan, Houston County, Alabama with a full service branch located in Auburn, Alabama. The Banks provide a full range of banking services to individual and corporate customers in their primary market areas.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and accounts are eliminated in consolidation.  The Company also owns Community Capital Statutory Trust I, a Delaware statutory business trust. This non-operating subsidiary was created in 2003 for the sole purpose of issuing trust preferred securities and investing the proceeds in subordinated debt issued by the Company. During the first quarter of 2004, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (Revised December 2003), Consolidation of Variable Interest Entities. This interpretation addresses consolidation by business entities of variable interest entities and when such entities are subject to consolidation under the provisions of this interpretation. The Company has determined that the revised provisions required deconsolidation of Community Capital Statutory Trust I. The adoption of FASB Interpretation No. 46R did not have a material effect on the Company’s financial condition or results of operations.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred taxes.

The interim financial statements included herein are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim period presented. All such adjustments are of a normal recurring nature. The results of operations for the periods ended September 30, 2006 and 2005 are not necessarily indicative of the results of a full year’s operations, and should be read in conjunction with the Company’s annual report, for the year ended December 31, 2005 as filed on Form 10-KSB.

The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP) and with general practices within the banking industry.

7
 
Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in the tax rates and laws.

The Company and its subsidiaries file a consolidated income tax return. Each entity provides for income taxes based on its contribution to the income taxes (benefits) of the consolidated group.
 
Stock Compensation Plans

At September 30, 2006, the Company had stock-based compensation plans, which are more fully described in Note 10 of the Company's Annual Report on Form 10-KSB for the year ended December 31, 2005. On January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective-transition method. Under that transition method, compensation cost recognized beginning in 2006 includes: (a) the compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB Statement Note 123, and (b) the compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the three months ended September 30, 2006 was $35,000 and $29,000, lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the three months ended September 30, 2006 would have been $.19 and $.18, respectively, if the Company had not adopted SFAS 123(R), compared to reported basic and diluted earnings per share of $.18 and $.17, respectively, for the same time period in 2006. The Company’s income before income taxes and net income for the nine months ended September 30, 2006 was $91,000 and $78,000, lower, respectively, than if it had continued to account for share-based compensation under APB Opinion 25. Basic and diluted earnings per share for the nine months ended September 30, 2006 would have been $.48 and $.47, respectively, if the Company had not adopted SFAS 123(R), compared to reported basic and diluted earnings per share of $.46 and $.44, respectively, for the same time period in 2006.

Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows from excess tax benefits (the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options) to be classified as financing cash flows.

8
 
The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, to stock-based employee compensation:
 
   
For The Three
Months Ended
September 30, 2006
($000)
  
For The Three
Months Ended
September 30, 2005
($000)
  
For The Nine
Months Ended
September 30, 2006
($000)
  
For The Nine
Months Ended
September 30, 2005
($000)
  
Net income, as reported
  
$
570
  
$
(205
)
$
1,342
  
$
286
  
Add:
                          
Stock-based employee compensation
                          
included in reported net income,
                          
net of related tax effects
    
29
          
78
        
Deduct:
                          
Total stock-based employee
                          
compensation expense
                          
determined under fair value
                          
method, net of related tax effects
    
(29
)
  
(30
)
  
(78
)
  
(82
)
                           
Pro forma net earnings
  
$
570
  
$
(235
)
$
1,342
    
204
  
                           
Earnings per share:
                          
Basic - as reported
  
$
.19
  
$
(.07
)
$
.46
  
$
.10
  
                       
Basic - pro forma
  
$
.19
  
$
(.08
)
$
.46
  
$
.07
  
                           
Diluted - as reported
  
$
.18
  
$
(.07
)
$
.44
  
$
.09
  
                           
Diluted - pro forma
  
$
.18
  
$
(.08
)
$
.44
  
$
.07
  

A summary of the status of the employee stock option plans as of September 30, 2006 and December 31, 2005 and activity during the periods is as follows:

   
Period Ended
September 30, 2006
  
Year Ended
December 31, 2005
  
   
Number
  

Weighted- Average Exercise Price
  
Weighted- Average Remaining Contractual Term
  

Aggregate Intrinsic Value
($000)
  
Number
  

Weighted- Average Exercise Price
  

Average Remaining Contractual Term
  

Aggregate Intrinsic Value
($000)
  
                                       
Under option, beginning
   
374,621
   
9.81
   
6.37
 
$
408
    
305,435
    
9.33
              
of the period:
                                                  
Granted
    
58,296
    
10.64
                
86,185
    
11.20
             
Exercised
    
(77,000
)
  
7.00
                
(5,596
)
  
10.06
             
Forfeited
    
(85,356
)
  
12.03
                
(11,400
)
  
10.94
             
Under option, end of
                                                  
the period
    
270,561
    
9.96
   
4.89
    
623
    
374,621
    
9.81
   
6.37
 
$
408
 
                                                   
Unvested at the end of the period
    
138,259
    
10.93
    
8.18
    
184
    
168,190
   
11.43
   
8.50
  
$
—
 
                                                   
Vested and exercisable at the
                                                 
end of the period
    
132,202
    
8.94
    
6.71
    
439
    
206,431
    
8.32
    
4.64
  
$
532
  
                                                   
Weighted-average fair
                                                  
value per option of options
                                                  
granted during the year
                    
$
4.11
                   
$
3.76
 
 
9
 
The fair value of the options granted was based upon the discounted value of future cash flows of the options using the Black-Scholes option-pricing model and the following assumptions. There were 38,307 options granted during the quarter ended September 30, 2006.

   
Period Ended
  
Year Ended
  
   
September 30, 2006
  
December 31, 2005
  
           
Risk-free interest rate
    
4.91
%
  
4.40
%
Expected life of the options
    
10 years
    
10 years
  
Expected dividend yield
    
0.78
%
  
.78
%
Expected volatility
    
20.25
%
  
14.83% - 15.96
%

A summary of the status of the Company’s nonvested shares as of December 31, 2005 and changes during the period ended September 30, 2006, is presented below:

   
Shares
  
 Weighted-Average
Grant-Date
Fair Value
  
            
Nonvested at January 1, 2006
    
168,193
 
$
4.17
  
Granted
    
58,296
        
Vested
    
(27,230
)
      
Forfeited
    
(61,000
)
      
Nonvested at September 30, 2006
    
138,259
 
$
4.25
  

At September 30, 2006, there was $347,000 of unrecognized compensation cost related to stock-based awards which is expected to be recognized over a weighted-average period of 3.72 years.
 
Accounting Standards

Except for the effects of SFAS 123(R)as previously discussed, there are no recent accounting pronouncements that have had or will have had a material impact on our earnings or financial position as of or for the quarter ended September 30, 2006.

10
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to assist in an understanding of the Company's financial condition and results of operations. This analysis should be read in conjunction with the financial statements and related notes appearing in Item 1 of the September 30, 2006 Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company's Form 10-KSB for the year ended December 31, 2005.

Financial Condition

As of September 30, 2006, the Company’s total assets were $325,278,000, representing an increase of $15,821,000, or 5.11%, from December 31, 2005. Earning assets consist of federal funds sold, investment securities and loans. These assets provide the majority of the Company’s earnings. The mix of earning assets is a reflection of management’s philosophy regarding earnings versus risk.
 
Federal funds sold represent an overnight investment of funds and can be converted immediately to cash. At September 30, 2006, the Company had $6,881,000 in federal funds sold. At December 31, 2005, the Company had federal funds sold of $8,671,000. The $1,790,000 decrease in federal funds sold during the nine months ended September 30, 2006 was used to fund loan growth during the period.
 
Investment securities consist of U.S. Government and Agency securities and municipal bonds. These investments are used to provide fixed maturities and as collateral for advances and large public fund deposits. From December 31, 2005 to September 30, 2006, investment securities decreased by $3,202,000. All securities are classified as available for sale, and are carried at current market values.
 
The loan portfolio is the largest earning asset and is the primary source of earnings for the Company. At September 30, 2006, net loans were $240,691,000. The loan portfolio increased $12,783,000, or 5.61%, over the year-end amount. At September 30, 2006, the allowance for loan losses was $3,613,000 or 1.48% of total loans. Management believes this is an adequate but not excessive amount based upon the composition of the current loan portfolio and current economic conditions. The relationship of the allowance to total loans will vary over time based upon management’s evaluation of the loan portfolio. Management evaluates the adequacy of the allowance on a monthly basis and adjusts it accordingly by a monthly charge to earnings using the provision for loan losses. During the first three quarters of 2006, the provision for potential loan losses was $937,000 as compared to the 2005 amount of $800,000. The reserve was based upon management’s estimate to provide for potential loan losses on the new loans during the quarter.
 
Non-earning assets consist of premises and equipment and other assets. Premises and equipment increased during the year as a result of the construction costs for the Charleston loan production office and the construction of the new Auburn, Alabama office building. Other assets consist primarily of bank-owned life insurance, other real estate owned, and accrued interest receivable. Bank-owned life insurance and other real estate owned increased $185,000 and $21,000, respectively, over the year-end amount. Accrued interest receivable increased $173,000 over the previous year-end amount as a result of a larger loan portfolio upon which to accrue interest.
 
The Company funds its assets primarily through deposits from customers. Additionally, it borrows funds from other sources to provide longer term fixed rate funding for its assets. The Company must pay interest on the majority of these funds and attempts to price these funds competitively in the market place but at a level that it can safely re-invest the funds profitably. At September 30, 2006, total deposits were $264,192,000 as compared to the year-end amount of $245,569,000. This is an increase of $18,623,000 or 7.58%. The increased deposits were used to fund loan growth and reduce other borrowings during the quarter.
 
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Interest bearing deposits are comprised of the following categories:
 
   
September 30, 2006
 
December 31, 2005
  
Interest bearing demand and savings
  
$
65,325,000
  
$
56,538,000
  
Certificates of deposit in denominations of $100,000 or greater
    
106,553,000
    
113,197,000
  
Other Certificates of deposit
    
62,500,000
    
53,089,000
  
Total
  
$
234,378,000
  
$
222,824,000
  
 
Other borrowings consist of Federal Home Loan Bank advances and are secured by investment securities and loans of Albany Bank & Trust. One $5,000,000 advance matured during the third quarter, and there were $7,000,000 in new borrowings during the quarter.
 
Capital Adequacy
 
The following table presents the Company’s regulatory capital position as of September 30, 2006.
 
Tier 1 Capital to risk weighted assets
      
Ratio, actual
    
12.73
%
Tier 1 Capital minimum requirement
    
4.00
%
         
Tier 2 Capital to risk weighted assets
        
Ratio, actual
    
13.98
%
Tier 2 Capital minimum requirement
    
8.00
%
         
Tier 1 Leverage Ratio
    
8.93
%
Tier 1 Leverage Ratio minimum requirement
    
4.00
%
 
The Company’s ratios are well above the required regulatory minimums under capital adequacy guidelines and provide a sufficient basis to support future growth of the Company. The subsidiary banks remain above the required regulatory capital minimums and the parent company has the ability to support the subsidiary banks’ capital levels should the need arise.
 
Results of operations
 
For the quarter end compared to prior year quarter end
 
Net income for the three months ended September 30, 2006 was $570,000 as compared to the net loss of $205,000 for the same period in 2005.

Total interest income increased $2,047,000 for the three months ended September 30 2006 or 51.06% compared to the same period in 2005. This was the result of increased interest income on loans, primarily the result of the larger loan portfolio in the current year combined with a higher overall rate environment.

Interest expense for the three months ended September 30, 2006 was $3,080,000, which is an increase of $1,349,000 or 77.93% over the same period in 2005. This increase is indicative of the larger deposit base in the current year to fund the loan growth and the generally higher level of interest rates as compared to 2005.

Net interest income after the provision for loan losses was $2,852,000 for the three months ended September 30, 2006, as compared to the 2005 amount of $1,908,000. This is an increase of $944,000 or 49.48% which is the combined result of the increased level of earning assets, offset by the increase in cost of funds during the current year.
 
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Other noninterest income increased $47,000 to $753,000 for the three months ended September 30, 2006 as compared to the same period in 2005. Other operating income increased $161,000 to $192,000 due to management fee income of $132,000 during the period. This increase was offset by a $59,000 loss on sale of investments and a $90,000 loss on sale of foreclosed properties. Service charges on deposit accounts increased $26,000 or 9.39% due to the larger number of deposit accounts and slightly higher pricing for deposit services. Mortgage origination fees increased $33,000 to $290,000 when compared to the same period in 2005. This increase is the result of the Charleston loan production office.

Non-interest expense decreased $211,000 to $2,750,000 for the three months ended September 30, 2006 as compared to the same period in 2005. This is a decrease of 7.13%, which is attributable to a $763,000 loss on an equity fund investment that was recognized during the third quarter of 2005. There were areas of increased expense that offset the aforementioned loss. Salaries and employee benefits amounted to $1,456,000 for the three months ended September 30, 2006 as compared to the 2005 amount of $1,110,000. This increase of $346,000, or 31.17%, was primarily due to staffing for the Charleston loan production office, which includes the increased commissions paid to mortgage originators as a result of increased mortgage originations.

Legal and professional increased $51,000, or 60.71%, for the three months ended September 30, 2006 from the same period in 2005. The increase is primarily due to the legal costs associated with the responses to the Formal Agreements that the Banks have entered into with the Office of the Comptroller of the Currency (“OCC”). Administrative expenses increased $50,000 as compared to the third quarter 2005. The major area of increase was consulting fees associated with requirements of the Formal Agreements with the OCC.

Diluted earnings per share for the three months ended September 30, 2006 were $0.18 and increased $0.25, or 357.14%, as compared to the third quarter of the previous year.
 
For the year to date comparison to prior year

Net income for the nine months ended September 30, 2006 was $1,342,000 as compared to $286,000 for the same period in 2005.

Total interest income increased $7,256,000 for the nine months ended September 30, 2006, or 71.24%, from the same period in the previous year. This was the result of increased interest income on loans, which increased $7,056,000, and federal funds sold income, which increased $105,000 over the same period in 2005. The increase in interest income was primarily the result of the larger loan portfolio in the current year combined with a higher overall rate environment.

Interest expense for the nine months ended September 30, 2006 was $8,662,000, which is an increase of $4,738,000 over the same period in 2005. This increase is indicative of the larger deposit base in the current year and the generally higher level of interest rates as compared to 2005.

Net interest income after the provision for loan losses was $7,843,000 for the nine months ended September 30, 2006, as compared to the 2005 amount of $5,462,000. This is an increase of $2,381,000, or 43.59%. This increase is the combined result of the increased level of earning assets, offset by the increase in cost of funds during the current year. The largest area of growth during the past year is the Charleston loan production office, which has generated over $51,000,000 in loans since its opening in June 2005. These loans are primarily funded with short term high cost certificates of deposit. The other major source of loan growth has been through the Company’s subsidiary bank in Alabama. This franchise contributed $16,000,000 in loan growth over the past twelve months, which is funded primarily through its core deposits.

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Other noninterest income increased $634,000 to $2,160,000 for the nine months ended September 30, 2006 as compared to the same period in 2005. Service charges on deposit accounts increased $210,000 or 28.07% due to the larger number of deposit accounts and slightly higher pricing for deposit services. Mortgage origination fees increased $379,000 to $720,000 during the period. This increase is the result of the additional fees generated by the Charleston loan production office.

Non-interest expense increased $1,364,000 to $8,018,000 for the nine months ended September 30, 2006 as compared to the same period in 2005. This is an increase of 20.50%. The largest area of increase was in the salary and employee benefits category. Salaries and benefits amounted to $4,175,000 for the nine months ended September 30, 2006 as compared to the 2005 amount of $2,860,000. This increase of $1,315,000 or 45.98% was primarily due to the cost of staffing for the Charleston loan production office of $352,000, which includes the increased commissions paid to mortgage originators as a result of increased mortgage originations, and $130,000 for a severance payment to the Company’s former president.

Equipment and occupancy expenses increased $117,000 or 13.42% for the nine months ended September 30, 2006 from the same period in 2005. The increase is due to the additional office locations in Charleston and Auburn, Alabama. Legal and professional expense increased $100,000 or 34.01% for the nine months ended September 30, 2006 from the same period in 2005. This increase was a result of the costs associated with the response to the Formal Agreements with the OCC and other increases in professional fees. Administrative expenses increased $362,000 to $833,000 in the current year. The majority of this increase is the result of increased consulting expenses in connection with the Formal Agreements.

Diluted earnings per share for the nine months ended September 30, 2006 were $0.44 and increased $0.35 or 388.89% as compared to the first nine months of the previous year.

Off-Balance Sheet Arrangements

Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or when the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to a financial instrument for commitments to extend credit, and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of September 30, 2006 and December 31, 2005 are as follows:

 
  
September-06
  
December-05
  
Commitments to extend credit
  
$
73,202,000
  
$
71,362,000
  
Standby letters of credit
  
$
1,020,000
  
$
1,293,000
  
 
LIQUIDITY AND CAPITAL RESOURCES

Liquidity is an important factor in our financial condition and affects our ability to meet the borrowing needs and deposit withdrawal requirements of our customers. Assets, consisting primarily of loans and investment securities, are funded by customer deposits, borrowed funds, and retained earnings. Maturities in the investment and loan portfolios also provide a steady flow of funds for reinvestment. In addition, our liquidity continues to be enhanced by a relatively stable core deposit base and the availability of additional funding sources. Management monitors its future liquidity needs based upon quarterly projections of loan and deposit growth. Management feels that it has sufficient capital and liquidity resources to support its future growth.
 
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REGULATORY MATTERS

On July 27, 2006, each of the Banks entered into a written Formal Agreement with the OCC. The Formal Agreements were described in the Form 8-K filed on August 2, 2006 and in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2006. Compliance with the requirements of the Formal Agreements has led to a decrease in the Company’s total assets in order to reach specified capital levels. Any future increases in assets will be dependent upon the Banks’ ability to generate the additional capital necessary to support the growth.

Forward-Looking Statements

This document contains statements that constitute “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended. The words “believe”, “estimate”, “expect”, “intend”, “anticipate” and similar expressions and variations thereof identify certain of such forward-looking statements, which speak only as of the dates that they were made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Users are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that the actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. For a discussion of the factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, please read the “Risk Factors” section of our report on Form 10-KSB for the year ended December 31, 2005. Users are cautioned not to place undue reliance on these forward-looking statements.

ITEM 3.

Market risk is a risk of loss arising from adverse changes in market prices and rates. The Company's market risk is composed primarily of interest rate risk created by its lending and deposit taking activities. The primary purpose of managing interest rate risk is to reduce the effects of interest rate volatility on our financial condition and results of operations. Management addresses this risk through an active asset/liability management process and through management of maturities and repricing of interest-earning assets and interest-bearing liabilities. The Company's market risk and strategies for market risk management are more fully described in its 2005 annual report of Form 10-KSB. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2006. Through September 30, 2006, management has not utilized derivatives as a part of this process.
 
ITEM 4.

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our "disclosure controls and procedures" ("Disclosure Controls"). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
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Our management, including our principal executive officer and principal financial officer, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are 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. The design of any system of controls also is based in part upon 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.

Based upon their controls evaluation, our principal executive officer and principal financial officer have concluded that our Disclosure Controls are effective at a reasonable assurance level.
 
There have been no changes in our internal controls over financial reporting during our first nine months of the fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

16
 
PART II

ITEM 1.
None

ITEM 1.A.

You should carefully consider the factors discussed in Part I, “Item 1. Business" under the heading "Risk Factors” in our Annual Report on Form 10-KSB for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-KSB are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2.
(a)
None
(b)
None
(c)
None
 
ITEM 3.
None

ITEM 4.
None

ITEM 5.
None

Item 6.
 
31.1  
Certification of the Chief Executive officer pursuant to Rule 13a-14(a) under the Securities exchange act of 1934, as amended.
   
31.2  
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities exchange act of 1934, as amended.
 
32.1
 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities exchange act of 1934, as amended.
 
17
 
SIGNATURES
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
 
 		  
 
Community Capital Bancshares, Inc.
 
November 13, 2006
 /s/ John H. Monk, Jr.
Date
Date John H. Monk, Jr.
Chief Executive Officer
 
     
November 13, 2006
 /s/ David J. Baranko
Date
David J. Baranko
Chief Financial Officer
(Duly authorized officer and
principal financial / accounting
officer)
 
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