Communitycorp 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2008

or

x Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from            to            

Commission File Number 33-76644

COMMUNITYCORP

(Exact name of registrant as specified in its charter)

South Carolina	57-1019001
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

1100 N. Jefferies Boulevard

Walterboro, SC 29488

(Address of principal executive offices, including zip code)

(843) 549-2265

(Issurer’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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	¨  (Do not check if a smaller reporting company)	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  ¨    NO  x

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

238,995 shares of common stock, $5.00 par value, as of September 30, 2008

Index

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2008 and December 31, 2007 (audited)	3
Condensed Consolidated Statements of Income - Six months ended September  30, 2008 and 2007 and three months ended September 30, 2008 and 2007	4
Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)- Six months ended September 30, 2008 and 2007	5
Condensed Consolidated Statements of Cash Flows - Six months ended September 30, 2008 and 2007	6
Notes to Condensed Consolidated Financial Statements	7-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-16
Item 3 Quantitative and Qualitative Disclosure About Market Risk	16
Item 4 Controls and Procedures	16
PART II. - OTHER INFORMATION
Item 1 Legal Proceedings	17
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3 Defaults Under Senior Securities	17
Item 4 Submission of Matters to a Vote of Security Holders	17
Item 5 Other Information	17
Item 6 Exhibits	17
Signatures	18

COMMUNITYCORP

PART 1. FINANCIAL INFORMATION

Item 1 - Financial Statements

Condensed Consolidated Balance Sheets

	September 30, 2008			December 31, 2007
	(Unaudited)			(Audited)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	4,245,702		$	4,929,768
Federal funds sold		4,775,000			1,991,000
Total cash and cash equivalents		9,020,702			6,920,768
Time deposits with other banks		200,000			—
Investment securities:
Securities available-for-sale		32,406,007			34,585,073
Securities held-to-maturity (estimated market value of $1,327,733 and $1,340,314 at September 30, 2008 and December 31, 2007, respectively)		1,319,579			1,819,481
Nonmarketable equity securities		508,435			347,257
Total investment securities		34,234,021			36,751,811
Loans receivable		113,816,271			114,597,378
Less allowance for loan losses		(1,875,185	)		(1,929,319	)
Loans, net		111,941,086			112,668,059
Premises, furniture & equipment, net		3,007,152			2,989,119
Accrued interest receivable		1,261,390			1,297,946
Other assets		849,748			691,984
Total assets	$	160,514,099		$	161,319,687
Liabilities and Shareholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing	$	13,945,631		$	16,461,238
Interest-bearing		127,573,222			123,133,074
		141,518,853			139,594,312
Short-term borrowings		410,000			3,068,000
Accrued interest payable		961,837			1,767,670
Other liabilities		247,237			153,304
Total liabilities		143,137,927			144,583,286
Shareholders’ Equity:
Preferred stock, $5 par value, 3,000,000 shares authorized and unissued					—
Common stock, $5 par value, 3,000,000 shares authorized, 300,000 shares issued and outstanding		1,500,000			1,500,000
Capital surplus		1,725,841			1,723,196
Accumulated other comprehensive loss		(187,915	)		70,928
Retained earnings		18,169,544			17,153,490
Treasury stock (61,005 shares in 2008 and 59,537 shares in 2007)		(3,831,298	)		(3,711,213	)
Total shareholders’ equity		17,376,172			16,736,401
Total liabilities and shareholders’ equity	$	160,514,099		$	161,319,687

See notes to condensed consolidated financial statements

3

COMMUNITYCORP

Condensed Consolidated Statements of Income

(Unaudited)

	Nine Months Ended September 30,				Three Months Ended September 30,
	2008		2007		2008		2007
Interest income:
Loans, including fees	$	6,272,236	$	6,135,722	$	2,085,417	$	2,105,173
Securities		1,135,728		1,219,149		369,519		459,696
Other interest income		155,898		389,207		29,057		104,321
Total		7,563,862		7,744,078		2,483,993		2,669,190
Interest expense:
Deposit accounts		3,214,631		3,530,825		919,982		1,220,100
Other interest expense		6,356		8,670		1,083		3,007
		3,220,987		3,539,495		921,065		1,223,107
Net interest income		4,342,875		4,204,583		1,562,928		1,446,083
Provision for loan losses		175,000		170,000		75,000		30,000
Net interest income after provision for loan losses		4,167,875		4,034,583		1,487,928		1,416,083
Noninterest income:
Service charges		407,999		355,623		133,875		128,577
Other income		117,798		148,243		35,189		42,495
Total		525,797		503,866		169,064		171,072
Noninterest expenses:
Salaries and benefits		1,527,778		1,456,720		518,969		493,909
Net occupancy expense		442,780		445,145		156,567		148,321
Other operating expenses		870,430		772,341		286,871		277,595
Total		2,840,988		2,674,206		962,407		919,825
Income before taxes		1,852,684		1,864,243		694,585		667,330
Income tax provision		584,093		575,000		224,575		205,000
Net income	$	1,268,591	$	1,289,243	$	470,010	$	462,330
Earnings per share:
Weighted average common shares outstanding		240,232		240,776		240,022		240,543
Net income per common share	$	5.28	$	5.35	$	1.96	$	1.92

See notes to condensed consolidated financial statements

4

COMMUNITYCORP

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income

for the nine months ended September 30, 2008 and 2007

(Unaudited)

	Common Stock			Capital		Accumulated Other Comprehensive			Retained			Treasury			Total
	Shares	Amount		Surplus		Income (Loss)			Earnings			Stock
Balance, December 31, 2006	300,000	$	1,500,000	$	1,720,382	$	(95,015	)	$	15,632,119		$	(3,620,051	)	$	15,137,435
Cash dividends declared – ($1.00 per share)										(240,543	)					(240,543	)
Net income for the period										1,289,243						1,289,243
Other comprehensive income, net of tax of expense of $39,240							74,500									74,500
Comprehensive income																1,363,743
Sale of treasury stock					2,814								28,738			31,552
Purchase of treasury stock													(112,200	)		(112,200	)
Balance, September 30, 2007	300,000	$	1,500,000	$	1,723,196	$	(20,515	)	$	16,680,819		$	(3,703,513	)	$	16,179,987
Balance, December 31, 2007	300,000	$	1,500,000	$	1,723,196	$	70,928		$	17,153,490		$	(3,711,213	)	$	16,736,401
Cash dividends declared – ($1.05 per share)										(252,537	)					(252,537	)
Net income for the period										1,268,591						1,268,591
Other comprehensive loss, net of tax benefit of $133,128							(258,843	)								(258,843	)
Comprehensive income																1,009,748
Sale of treasury stock					2,645								9,355			12,000
Purchase of treasury stock													(129,440	)		(129,440	)
Balance, September 30, 2008	300,000	$	1,500,000	$	1,725,841	$	(187,915	)	$	18,169,544		$	(3,831,298	)	$	17,376,172

See notes to condensed consolidated financial statements

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COMMUNITYCORP

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	1,268,591		$	1,289,243
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		167,843			169,313
Provision for possible loan losses		175,000			170,000
Net amortization (accretion) on investments		14,428			(44,586	)
Net amortization of deferred loan costs		18,250			(6,611	)
(Increase) decrease in interest receivable		36,556			(111,282	)
Decrease in interest payable		(805,833	)		(25,989	)
(Increase) decrease in other assets		(24,636	)		66,173
Increase (decrease) in other liabilities		93,933			(129,871	)
Net cash provided by operating activities		944,132			1,376,390
Cash flows from investing activities:
Net (increase) decrease in loans to customers		533,723			(3,015,190	)
Purchases of securities available-for-sale		(17,795,105	)		(23,599,980	)
Maturities of securities available-for-sale		19,567,674			17,166,587
Purchases of securities held-to-maturity					(300,000	)
Maturities of securities held-to-maturity		500,000			55,000
Increase in nonmarketable equity securities		(161,178	)		(4,400	)
(Increase) decrease in time deposits with other banks		(200,000	)		100,000
Purchases of premises and equipment		(185,876	)		(60,475	)
Net cash provided (used) by investing activities		2,259,238			(9,658,458	)
Cash flows from financing activities:
Net increase in deposit accounts		1,924,541			6,094,221
Increase (decrease) in short-term borrowings		(2,658,000	)		20,000
Dividends paid		(252,537	)		(240,543	)
Sale of treasury stock		12,000			31,552
Purchase of treasury stock		(129,440	)		(112,200	)
Net cash provided (used) by financing activities		(1,103,436	)		5,793,030
Net increase (decrease) in cash and cash equivalents		2,099,934			(2,489,038	)
Cash and cash equivalents, beginning of period		6,920,768			14,404,317
Cash and cash equivalents, end of period	$	9,020,702		$	11,915,279
Cash paid during the period for:
Income taxes	$	560,000		$	682,280
Interest		4,026,820			3,565,484
Supplemental non cash activities
Changes in unrealized gains (losses) on securities available-for-sale	$	(258,843	)	$	74,500

See notes to condensed consolidated financial statements

6

COMMUNITYCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders. The condensed consolidated financial statements as of September 30, 2008 and for the interim periods ended September 30, 2008 and 2007 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The financial information as of December 31, 2007 has been derived from the audited consolidated financial statements as of that date. For further information, refer to the consolidated financial statements and the related notes included in Communitycorp’s 2007 Annual Report.

NOTE 2 - COMPREHENSIVE INCOME

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

	Pre-tax Amount			Tax Benefit (Expense)			Net-of-tax Amount
For the Nine Months Ended September 30, 2008:
Net unrealized losses on securities available-for-sale	$	(391,971	)	$	133,128		$	(258,843	)
Reclassification adjustment for gains (losses) realized in net income		—
Other comprehensive income (loss)	$	(391,971	)	$	133,128		$	(258,843	)
For the Nine Months Ended September 30, 2007:
Net unrealized gains on securities available-for-sale	$	113,740		$	(39,240	)	$	74,500
Reclassification adjustment for gains (losses) realized in net income		—
Other comprehensive income (loss)	$	113,740		$	(39,240	)	$	74,500
For the Three Months Ended September 30, 2008:
Net unrealized losses on securities available-for-sale	$	(20,154	)	$	6,953		$	(13,201	)
Reclassification adjustment for gains (losses) realized in net income		—			—			—
Other comprehensive income (loss)	$	(20,154	)	$	6,953		$	(13,201	)
For the Three Months Ended September 30, 2007:
Net unrealized gains on securities available-for-sale	$	282,749		$	(97,548	)	$	185,201
Reclassification adjustment for gains (losses) realized in net income		—			—			—
Other comprehensive income (loss)	$	282,749		$	(97,548	)	$	185,201

Accumulated other comprehensive income consists solely of net unrealized gains and losses on securities available for sale, net of the deferred tax effects.

NOTE 3 - FAIR VALUE MEASUREMENTS

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

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

7

COMMUNITYCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - FAIR VALUE MEASUREMENTS –(Continued)

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. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
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 and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

Available-for-sale investment securities ($32,406,007 at September 30,2008) are the only assets whose fair values are measured on a recurring basis using Level 1 inputs (active market quotes). The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans, which are deemed to be impaired, are primarily valued at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at September 30, 2008 was $1,065,235.

8

COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations

The following is a discussion of the Company’s financial condition as of September 30, 2008 compared to December 31, 2007, and the results of operations for the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2008. These comments should be read in conjunction with the Company’s condensed consolidated financial statements and accompanying footnotes appearing in this report. This report contains “forward-looking statements” relating to, without limitation, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of the Company’s management, as well assumptions made by and information currently available to the Company’s management. The words “expect,” “estimate,” “anticipate” and “believe,” as well as similar expressions, are intended to identify forward-looking statements. The Company’s actual results may differ materially from the results discussed in the forward-looking statements, and the Company’s operating performance each quarter is subject to various risks and uncertainties that are discussed in detail in the Company’s filings with the Securities and Exchange Commission.

Results of Operations

Net Interest Income

The largest component of total income is net interest income, the difference between the income earned on assets and the interest accrued or paid on deposits and borrowings used to support such assets. The volume and mix of assets and liabilities and their sensitivity to interest rate movement determine changes in net interest income. Net interest margin is determined by dividing annualized net interest income by average earning assets. Net interest spread is derived from determining the weighted-average rate of interest paid on deposits and borrowings and subtracting it from the weighted-average yield on earning assets.

Net interest income for the nine months ended September 30, 2008, was $4,342,875 compared to $4,204,583 for the same period last year, an increase of 3.29%. For the quarter ended September 30, 2008, net interest income was $1,562,928 compared to $1,446,083 for the quarter ended September 30, 2007, an increase of 8.08%. The increase in both periods is mainly attributable to the increase in the average volume of our loans and because the average interest rate paid on our interest bearing liabilities declined significantly more than the average annualized yield earned on our earnings assets.

For the nine months ended September 30, 2008, average-earning assets totaled $155,862,037 with an annualized average yield of 6.48% compared to $154,351,532 and 6.71%, respectively, for the same period last year. Average interest-bearing liabilities totaled $129,099,010 with an annualized average cost of 3.33% for the nine months ended September 30, 2008, compared to $128,318,606 and 3.69%, respectively, for the same period last year.

For the quarter ended September 30, 2008, average-earning assets totaled $154,005,379 with an annualized average yield of 6.42% compared to $156,242,686 and 6.85%, respectively, for the same period last year. Average interest-bearing liabilities totaled $127,319,908 with an annualized average cost of 2.88% for the quarter ended September 30, 2008, compared to $130,168,639 and 3.73%, respectively, for the same period last year.

Our annualized yield on earning assets decreased 23 and 43 basis points during the nine months and quarter ended September 30, 2008, respectively, from the annualized yield on earnings assets for the same periods last year. Annualized average cost of our interest-bearing liabilities decreased 36 and 85 basis points during the nine months and quarter ended September 30, 2008, respectively, from the annualized average cost of our interest-bearing liabilities for the same periods last year.

Our net interest margin and net interest spread was 3.72% and 3.15%, respectively, for the nine months ended September 30, 2008, compared to 3.64% and 3.02%, respectively, for the nine months ended September 30, 2007. For the quarter ended September 30, 2008, our net interest margin and our net interest spread was 4.04% and 3.54%, respectively, compared to 3.67% and 3.12%, respectively, for the quarter ended September 30, 2007. The increase in both the net interest margin and the net interest spread for the nine and three months ended September 30, 2008, is primarily attributable to the volume of fixed rate loans included in our loan portfolio.

Details of the components of earning assets and interest-bearing liabilities are discussed in the following paragraphs.

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Net Interest Income –(continued)

Because loans often provide a higher yield than other types of earning assets, one of our goals is to maintain our loan portfolio as the largest component of total earning assets. Loans comprised approximately 72.02% and 70.03% of average-earning assets for the nine months ended September 30, 2008 and 2007, respectively, and 73.05%, and 69.80% for the quarter s ended September 30, 2008 and 2007, respectively. Loan interest income for the nine months and three months ended September 30, 2008, totaled $6,272,236 and $2,085,417, respectively, compared to $6,135,722 and $2,105,173, respectively, for the same periods in 2007. The annualized average yield on loans was 7.46% and 7.37% for the nine months and three months ended September 30, 2008, respectively. Average balances of loans increased to $112,251,033 during the nine months ended September 30, 2008, an increase of $4,154,00 over the average of $108,096,983 during the comparable period in 2007. For the quarters ended September 30, 2008, the average balances of loans increased by $3,444,067 over the average balances of loans of $109,055,427 for the quarter ended September 30, 2007. Fixed rates loans comprised approximately 99% of our loan portfolio for all periods presented.

Investment securities averaged $34,632,271, or 22.22% of average-earning assets, for the nine months ended September 30, 2008, compared to $36,435,277, or 23.61% of average earning assets, for the same period in 2007. For the quarter ended September 30, 2008, investment securities averaged $35,999,145, or 23.38% of average-earnings assets compared to $39,344,021 or 25.18% of average earnings-assets for the three months ended September 30, 2007. Interest earned on investment securities amounted to $1,135,728 for the nine months ended September 30, 2008, compared to $1,219,149 for the same period last year. For the quarter ended September 30, 2008, interest earned on investment securities amounted to $369,519 compared to $459,696 for the same period last year. Investment securities yielded 4.38% and 4.47% for the nine months ended September 30, 2008 and 2007, respectively. For the quarters ended September 30, 2008 and 2007, the yields on investment securities were 4.08% and 4.64%, respectively.

Total interest expense for the nine months ended September 30, 2008 and 2007 was $3,220,987 and $3,539,495, respectively. For the quarters ended September 30, 2008 and 2007, interest expense was $921,065 and $1,223,107, respectively. The largest component of interest expense is interest on deposit accounts. Interest expense for deposit accounts was $3,214,631 and $3,530,825, for the nine months ended September 30, 2008 and 2007, respectively. The average balance of interest-bearing deposits increased to $128,755,217 during the nine months ended September 30, 2008, from $128,053,005 during the same period last year. During the quarter ended September 30, 2008, the average balances of interest-bearing deposits increased to $126,938,582 from $129,890,976 for the same period last year. The annualized average cost of deposits was 3.34 % for the nine months ended September 30, 2008, compared to 3.69% for the same period in 2007. For the quarters ended September 30, 2008 and 2007, the annualized average cost of deposits was 2.88% and 3.73%, respectively.

Provision and Allowance for Loan Losses

We provide for loan losses using the allowance method. Increases to the allowance are charged by recording a provision for loan losses. Loan losses and recoveries are charged to the allowance. Charge-offs to the allowance are made when all or a portion of the loan is confirmed as a loss based on our review of the loan, through possession of the underlying security, or through a troubled debt restructuring transaction. Likewise, recoveries offset these increases through credits to the allowance.

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Provision and Allowance for Loan Losses –(continued)

The allowance is maintained at a level that we believe is sufficient to cover losses in the loan portfolio at a specific point in time. Assessing the adequacy of the allowance requires considerable judgment. The adequacy of the allowance is analyzed on a monthly basis using an internal analysis model. For purposes of this analysis, adequacy is defined as a level sufficient to absorb probable losses in the portfolio. This methodology relies upon our judgment. Our judgments are based on our 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 and future economic and business conditions. An allowance model is used that takes into account factors including the composition of the loan portfolio such as risk grade classifications, historical asset quality trends including, but not limited to, previous loss experience ratios, our assessment of current and future economic conditions, and reviews of specific high risk sectors of the portfolio. Loans are graded at inception and are reviewed on a periodic basis to ensure that assigned risk grades are proper based on the definition of such classification. The value of underlying collateral is also considered during such analysis. The resulting monthly model and the related conclusions are reviewed and approved by Senior Management. Our analysis of allowance adequacy includes consideration for loan impairment. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if results differ substantially from the assumptions used in making the evaluations

The methodology for assessing the adequacy of the allowance establishes both an allocated and unallocated component of the allowance. The allocated component is based principally on current loan grades and historical loss rates. The unallocated component is the result of the portion of the assessment that estimates probable losses in the portfolio that are not fully captured in the allocated allowance. This analysis includes, but is not necessarily limited to, industry concentrations, future market expansions, model imprecision, and the estimated impact of current economic conditions on historical loss rates. On a continual basis, we monitor trends within the portfolio, both quantitative and qualitative, and assess the reasonableness of the unallocated component.

The allowance is subject to examination and adequacy testing by regulatory agencies. In addition, such regulatory agencies could require allowance adjustments based on information available to them at the time of their examination.

The allowance for loan losses was 1.65% and 1.77% of total loans at September 30, 2008 and 2007, respectively. The allowance for loan losses at September 30, 2008, is reflective of the results of our allowance model methodology. We monitor and evaluate the adequacy of the allowance and loss exposure in the loan portfolio by considering the borrowers’ financial conditions and other factors in the unallocated component of the allowance model methodology. Accordingly, we believe the allowance as of September 30, 2008, is adequate, based on our assessment of probable losses, and available facts and circumstances then prevailing.

The provision for loan losses is the charge to operating earnings that management feels is necessary to maintain the allowance for possible loan losses at an adequate level. For the nine months ended September 30, 2008, the provision charged to expense was $175,000 as compared to $170,000 in the same period in 2007. For the three months ended September 30, 2008 and 2007, the provision charged to expense was $75,000 and $30,000, respectively.

Noninterest Income

Noninterest income for the nine months ended September 30, 2008, was $525,797, an increase of $21,931, or 4.35% from the comparable period in 2007. This increase is primarily attributable to the increase in service charges on deposit accounts, which increased because of increasing the charge for non-sufficient checks. Income from service charges was $407,999 and $355,623 for the nine months ended September 30, 2008 and 2007, respectively, while other income was $117,798 and $148,243, respectively. The decline in other income is attributable to the decline in rates paid for certain types of miscellaneous income.

For the quarter ended September 30, 2008, noninterest income decreased $2,008, or 1.17% from the same period in 2007. Service charges on deposit accounts increased $5,298 from the quarter ended September 30, 2007 to $133,875 for the quarter ended September 30, 2008. Other income was $35,189 and $42,495 for the quarter ended September 30, 2008 and 2007 respectively. The explanations for the changes in noninterest income for the nine months ended September 30, 2008, apply to the similar changes for the quarter ended September 30, 2007.

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Noninterest Expense

Total noninterest expense for the nine months ended September 30, 2008, increased $166,782, or 6.24% over the same period in 2007. Total noninterest expense was $2,840,988 and $2,674,206 for the nine months ended September 30, 2008 and 2007, respectively. Compared to the nine months ended September 30, 2007, salaries and benefits increased $71,058, or 4.88% to $1,522,788. This increase is primarily attributable to normal salary increases. Net occupancy and equipment expense decreased $2,365, or 0.53% to $442,780; and other operating expenses increased $98,089, or 12.70% to $870,430.

For the quarter ended September 30, 2008, noninterest expense increased $42,582, or 4.63% over the same period in 2007. Noninterest expense was $962,407 and $919,825 for the quarter ended September 30, 2008 and 2007, respectively. Compared to the quarter ended September 30, 2007, salaries and benefits increased $25,060, or 5.07 % to $518,969; net occupancy and equipment expense increased $8,246, or 5.56% to $156,567; and other operating expenses increased $9,276, or 3.34% to $286,871.

Income Taxes

The income tax provision for the nine months ended September 30, 2008, was $584,093 as compared to $575,000 for the same period in 2007. The effective tax rates were 31.53% and 30.84% for the nine months ended September 30, 2008 and September 30, 2007, respectively. For the quarters ended September 30, 2008 and 2007, the income tax provision was $224,575 and $205,000, respectively. The effective tax rates were 32.33% and 30.72% for the quarters ended September 30, 2008 and September 30, 2007, respectively.

Net Income

The combination of the above factors resulted in net income for the nine months ended September 30, 2008, of $1,268,591 as compared to $1,289,243 for the same period in 2007. This represents a decrease of $20,652, or 1.60% from the same period in 2007. Net income for the quarter ended September 30, 2008, was $470,010 as compared to $462,330 for quarter ended September 30, 2007, which represents an increase of $7,680, or 1.66% over the same period in 2007.

Assets and Liabilities

During the first nine months of 2008, total assets decreased $805,588, or 0.50%, when compared to December 31, 2007. The decrease in total assets was mainly attributable to investments securities and gross loans, which decreased $2,517,790 and $781,107, respectively. These decreases were partially offset by the increase in federal funds sold, which increased $2,784,000.

For the nine months ended September 30, 2008, total liabilities decreased $1,445,359, or 1.00% from December 31, 2007. Deposits increased $1,924,541, or 1.38%, while short-term borrowings decreased $2,658,000, or 86.64%.

For more analysis of the components of the changes in asset and liabilities, see the following discussion of major balance sheet categories and the Consolidated Statements of Cash Flows included in “Item 1. Financial Statements.”

We closely monitor and seek to maintain appropriate levels of interest-earning assets and interest-bearing liabilities so that maturities of assets are such that adequate funds are provided to meet customer withdrawals and loan demands.

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Loans

Our loan portfolio during the nine months ended September 30, 2008, decreased $781,107, or 0.68% during the period. Balances within the major loans receivable categories as of September 30, 2008 and December 31, 2007, are as follows:

	September 30, 2008		December 31, 2007
Real estate – construction	$	4,483,456	$	4,791,125
Real estate – mortgage		30,586,837		32,249,064
Commercial and industrial		68,733,021		65,995,943
Consumer and other		10,012,957		11,561,246
	$	113,816,271	$	114,597,378

Risk Elements in the Loan Portfolio

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

	September 30,
	2008		2007
Nonaccrual loans	$	1,065,235	$	758,636
Accruing loans more than 90 days past due	$	17,052	$	3,433
Loans identified by the internal review mechanism:
Criticized	$	1,965,304	$	1,459,273
Classified	$	2,261,489	$	1,091,095

Criticized loans have potential weaknesses that deserve close attention and could, if uncorrected, result in deterioration of the prospects for repayment or our credit position at a future date. Classified loans are inadequately protected by the sound worth and paying capacity of the borrower or any collateral and there is a distinct possibility or probability that we will sustain a loss if the deficiencies are not corrected.

At September 30, 2008, real estate or other collateral secured practically all of the loans that were criticized and classified. In the event of foreclosure on these loans, there can be no assurance that in the case of liquidation the collateral can be sold for its estimated fair market value or even for an amount at least equal to or greater than the loan amount.

The results of this internal review process is the primary determining factor in management’s assessment of the adequacy of the allowance for loan losses.

Activity in the Allowance for Loan Losses is as follows:

	September 30,
	2008			2007
Balance, January 1,	$	1,929,319		$	1,856,888
Provision for loan losses for the period		175,000			170,000
Net loans (charged-off) recovered for the period		(229,134	)		(107,520	)
Balance, end of period	$	1,875,185		$	1,919,368
Gross loans outstanding, end of period	$	113,816,271		$	108,754,641
Allowance for loan losses to loans outstanding		1.65	%		1.77	%

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Deposits

Total deposits increased $1,924,541, or 1.38% from December 31, 2007. Interest-bearing deposits increased $4,440,148 to $127,573,222 at September 30, 2008. Noninterest-bearing deposits decreased $2,515,607 to $13,945,631 at September 30, 2008. Expressed in percentages, interest-bearing deposits increased 3.61% and noninterest-bearing deposits decreased 15.28%.

Balances within the major deposit categories are as follows:

	September 30, 2008		December 31, 2007
Noninterest-bearing demand deposits	$	13,945,631	$	16,461,238
Interest-bearing demand deposits		22,466,797		20,840,913
Savings deposits		15,926,626		14,270,926
Certificates of deposits		89,179,799		88,021,235
	$	141,518,853	$	139,594,312

There were no brokered deposits at December 31, 2007 or September 30, 2008.

Liquidity

Liquidity needs are met by us through scheduled maturities of loans and investments on the asset side and through pricing policies on the liability side for demand deposit accounts and short-term borrowings. The level of liquidity is measured by the loan-to-total funds ratio (total deposits plus short-term borrowings), which was at 80.19% at September 30, 2008 and 80.33% at December 31, 2007.

Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold. Available for sale securities, particularly those maturing within one year, provide a secondary source of liquidity. In addition, funds from maturing loans are a source of liquidity.

At September 30, 2008, the Bank had available unused short-term lines of credit to purchase up to $4,300,000 of federal funds from unrelated correspondent institutions. The Bank also has a credit availability agreement with the Federal Home Loan Bank totaling 15% of the Bank’s assets as of any quarter end. As of September 30, 2008, the available credit totaled approximately $25,076,000, and there were no borrowings outstanding. Any borrowings from the Federal Home Loan Bank will be secured by a blanket on all of the Bank’s 1-4 family residential first lien mortgage loans and or investment securities.

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COMMUNITYCORP

Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Interest Rate Sensitivity

Interest rate sensitivity is defined as the exposure to variability in net interest income resulting from changes in market-based interest rates. Asset/liability management is the process by which we monitor and control the mix, maturities, and interest sensitivity of our assets and liabilities. Asset/liability management seeks to ensure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and liabilities to minimize potentially adverse impacts on earnings from changes in market interest rates. 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. We believe that interest rate risk management becomes increasingly important in an interest rate environment and economy such as the one that we are currently experiencing.

We monitor interest rate sensitivity by measuring our interest sensitivity through a “gap” analysis, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given time period. However, since interest rates and yields on various interest sensitive assets and liabilities do not all adjust in the same degree when there is a change in prevailing interest rates (such as prime rate), the traditional gap analysis is only a general indicator of rate sensitivity and net interest income volatility. As stated in “Results of Operations for the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007 – Net Interest Income,” our net interest margin has increased during the current year. If net interest margin were to decline, net income will likely decline also.

Capital Resources

Total shareholders’ equity increased from $16,736,401 at December 31, 2007 to $17,376,172 at September 30, 2008. The net increase of $639,771 is attributable to earnings for the period of $1,268,591 less the payment of a cash dividend of $252,537, the net decrease of $117,440 from the sales and purchases of treasury stock and the decrease of $258,843 in the fair value of securities available-for-sale, net of income taxes.

Bank holding companies, such as ours, and their banking subsidiaries are required by banking regulators to meet certain minimum levels of capital adequacy, which are expressed in the form of certain ratios. Capital is separated into Tier 1 capital (essentially common shareholders’ equity less intangible assets) and Tier 2 capital (essentially the allowance for loan losses limited to 1.25% of risk-weighted assets). The first two ratios, which are based on the degree of credit risk in our assets, provide the weighting of assets based on assigned risk factors and include off-balance sheet items such as loan commitments and stand-by letters of credit. The ratio of Tier 1 capital to risk-weighted assets must be at least 4.0% and the ratio of total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets must be at least 8.0%. The capital leverage ratio supplements the risk-based capital guidelines. Banks and bank holding companies are required to maintain a minimum ratio of Tier 1 capital to adjusted quarterly average total assets of 3.0%.

The following table summarizes the Bank’s risk-based capital at September 30, 2008:

Shareholders’ equity	$	17,516,796
Less: intangibles		—
Tier 1 capital		17,516,796
Plus: allowance for loan losses (1)		1,560.563
Total capital	$	19,077,359
Net risk-weighted assets	$	124,845,000
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets)		14.03	%
Total capital (to risk-weighted assets)		15.28	%
Tier 1 capital (to quarterly average assets)		10.90	%

(1) limited to 1.25% of gross risk-weighted assets

The Federal Reserve Board has similar requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies of less than $500,000,000 in consolidated assets.

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Item 2 - Management’s Discussion and Analysis or Plan of Operations– continued

Off-Balance Sheet Risk

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2008, we had issued commitments to extend credit of $9,330,000 and standby letters of credit of $1,198,000 through various types of commercial lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies, but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

Regulatory Matters

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

Critical Accounting Policies

We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2007, as filed in our annual report on Form 10-KSB. Certain accounting policies involve significant judgments and assumptions by us, which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

Recently Issued Accounting Standards

Accounting standards which have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable since we are a smaller reporting company.

Item 4. Controls and Procedures.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. The design of any system of controls 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, regardless of how remote.

In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

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Part II – Other Information

Item 1 Legal Proceedings

There are no material pending legal proceedings to which we are a party or of which any of our properties are the subject.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable

Item 3 Default Upon Senior Securities

Not applicable

Item 4 Submission of Matters to a Vote of Security Holders

Not applicable

Item 5 Other Information

Not applicable

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits – The following exhibits are filed with this report.

31.1	Rule 15d-14(a) Certifications
31.2	Rule 15d-14(a) Certifications
32	Section 1350 Certifications

(b) Reports on Form 8-K – There were no reports on form 8-K filed during the period.

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SIGNATURES

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

	COMMUNITYCORP
Date: November 12, 2008	By:	/s/ W. ROGER CROOK
		W. Roger Crook
		President & Chief Executive Officer
Date: November 12, 2008	By:	/s/ GWEN P. BUNTON
		Gwen P. Bunton
		Chief Financial Officer

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