Annual Statements Open main menu

CAPITAL CITY BANK GROUP INC - Quarter Report: 2008 June (Form 10-Q)

form10q_0608.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
 

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2008

OR

o
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: 0-13358
 
 

 

CAPITAL CITY BANK GROUP, INC.
(Exact name of registrant as specified in its charter)


Florida
 
59-2273542
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)


217 North Monroe Street, Tallahassee, Florida
 
32301
(Address of principal executive office)
 
(Zip Code)

(850) 402-7000
(Registrant's telephone number, including area code)

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

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.

Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
   
(Do not check if smaller reporting company)
 

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

At July 31, 2008, 17,123,475 shares of the Registrant's Common Stock, $.01 par value, were outstanding.



 
 

 


CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2008

TABLE OF CONTENTS

PART I – Financial Information
 
Page
 
Item 1.
Consolidated Financial Statements (Unaudited)
 
 
4
 
5
 
6
 
7
 
8
     
Item 2.
17
     
Item 3.
34
     
Item 4.
34
     
PART II – Other Information
   
 
Item 1.
34
     
Item 1A.
34
     
Item 2.
35
     
Item 3.
35
     
Item 4.
35
     
Item 5.
36
     
Item 6.
36
     
 
37




INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control.  The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties.  Our actual future results may differ materially from those set forth in our forward-looking statements.

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business” (b) “Risk Factors” in Part I, Item 1A., as updated in our subsequent quarterly reports filed on Form 10-Q, and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7. as well as:
 
§  
the frequency and magnitude of foreclosure of our loans;
§  
the adequacy of collateral underlying collateralized loans and our ability to resell the collateral if we foreclose on the loans;
§  
the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
§  
the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision;
§  
the extent to which our nonperforming loans increase or decrease as a percentage of our total loan portfolio;
§  
our ability to integrate the business and operations of companies and banks that we have acquired, and those we may acquire in the future;
§  
our need and our ability to incur additional debt or equity financing;
§  
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
§  
the effects of harsh weather conditions, including hurricanes;
§  
inflation, interest rate, market and monetary fluctuations;
§  
effect of changes in the stock market and other capital markets;
§  
legislative or regulatory changes;
§  
our ability to comply with the extensive laws and regulations to which we are subject;
§  
the willingness of clients to accept third-party products and services rather than our products and services and vice versa;
§  
changes in the securities and real estate markets;
§  
increased competition and its effect on pricing;
§  
technological changes;
§  
changes in monetary and fiscal policies of the U.S. Government;
§  
the effects of security breaches and computer viruses that may affect our computer systems;
§  
changes in consumer spending and saving habits;
§  
growth and profitability of our noninterest income;
§  
changes in accounting principles, policies, practices or guidelines;
§  
the limited trading activity of our common stock;
§  
the concentration of ownership of our common stock;
§  
anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
§  
other risks described from time to time in our filings with the Securities and Exchange Commission; and
§  
our ability to manage the risks involved in the foregoing.

However, other factors besides those referenced also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.  Any forward-looking statements made by us or on our behalf speak only as of the date they are made.  We do not undertake to update any forward-looking statement, except as required by applicable law.



PART I. FINANCIAL INFORMATION
Item 1.               CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007


(Dollars In Thousands, Except Share Data)
 
June 30, 2008
   
December 31, 2007
 
ASSETS
           
Cash and Due From Banks
 
$
108,672
   
$
93,437
 
Funds Sold and Interest Bearing Deposits
   
192,786
     
166,260
 
Total Cash and Cash Equivalents
   
301,458
     
259,697
 
                 
Investment Securities, Available-for-Sale
   
185,971
     
190,719
 
                 
Loans, Net of Unearned Interest
   
1,916,815
     
1,915,850
 
Allowance for Loan Losses
   
(22,518
)
   
(18,066
)
Loans, Net
   
1,894,297
     
1,897,784
 
                 
Premises and Equipment, Net
   
102,559
     
98,612
 
Goodwill
   
84,811
     
84,811
 
Other Intangible Assets
   
10,840
     
13,757
 
Other Assets
   
69,479
     
70,947
 
Total Assets
 
$
2,649,415
   
$
2,616,327
 
                 
LIABILITIES
               
Deposits:
               
Noninterest Bearing Deposits
 
$
416,992
   
$
432,659
 
Interest Bearing Deposits
   
1,745,934
     
1,709,685
 
Total Deposits
   
2,162,926
     
2,142,344
 
                 
Short-Term Borrowings
   
51,783
     
53,131
 
Subordinated Notes Payable
   
62,887
     
62,887
 
Other Long-Term Borrowings
   
36,857
     
26,731
 
Other Liabilities
   
38,382
     
38,559
 
Total Liabilities
   
2,352,835
     
2,323,652
 
                 
SHAREOWNERS' EQUITY
               
Preferred Stock, $.01 par value, 3,000,000 shares authorized;
no shares outstanding
   
-
     
-
 
Common Stock, $.01 par value, 90,000,000 shares authorized; 17,111,439 and 17,182,553 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively
   
171
     
172
 
Additional Paid-In Capital
   
36,382
     
38,243
 
Retained Earnings
   
266,171
     
260,325
 
Accumulated Other Comprehensive Loss, Net of Tax
   
(6,144
)
   
(6,065
)
Total Shareowners' Equity
   
296,580
     
292,675
 
Total Liabilities and Shareowners' Equity
 
$
2,649,415
   
$
2,616,327
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.





CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30


   
Three Months Ended
   
Six Months Ended
   
(Dollars in Thousands, Except Per Share Data)
 
2008
   
2007
   
2008
   
2007
 
INTEREST INCOME
                       
Interest and Fees on Loans
 
$
33,422
   
$
39,092
   
$
68,677
   
$
78,145
 
Investment Securities:
                               
U.S. Treasury
   
182
     
142
     
349
     
283
 
U.S. Govt. Agencies
   
665
     
916
     
1,426
     
1,856
 
States and Political Subdivisions
   
781
     
708
     
1,567
     
1,384
 
Other Securities
   
182
     
177
     
361
     
360
 
Funds Sold
   
1,028
     
689
     
2,603
     
1,210
 
Total Interest Income
   
36,260
     
41,724
     
74,983
     
83,238
 
                                 
INTEREST EXPENSE
                               
Deposits
   
7,162
     
11,098
     
17,643
     
22,098
 
Short-Term Borrowings
   
296
     
737
     
817
     
1,498
 
Subordinated Notes Payable
   
931
     
932
     
1,862
     
1,858
 
Other Long-Term Borrowings
   
396
     
496
     
727
     
998
 
Total Interest Expense
   
8,785
     
13,263
     
21,049
     
26,452
 
                                 
NET INTEREST INCOME
   
27,475
     
28,461
     
53,934
     
56,786
 
Provision for Loan Losses
   
5,432
     
1,675
     
9,574
     
2,912
 
Net Interest Income After Provision For Loan Losses
   
22,043
     
26,786
     
44,360
     
53,874
 
                                 
NONINTEREST INCOME
                               
Service Charges on Deposit Accounts
   
7,060
     
6,442
     
13,825
     
12,487
 
Data Processing
   
812
     
790
     
1,625
     
1,505
 
Asset Management Fees
   
1,125
     
1,175
     
2,275
     
2,400
 
Securities Transactions
   
30
     
0
     
95
     
7
 
Mortgage Banking Revenues
   
506
     
850
     
1,000
     
1,529
 
Bank Card Fees
   
3,908
     
3,504
     
7,869
     
6,991
 
Other
   
2,277
     
2,323
     
6,828
     
4,127
 
Total Noninterest Income
   
15,718
     
15,084
     
33,517
     
29,046
 
                                 
NONINTEREST EXPENSE
                               
Salaries and Associate Benefits
   
15,318
     
14,992
     
30,922
     
30,711
 
Occupancy, Net
   
2,491
     
2,324
     
4,853
     
4,560
 
Furniture and Equipment
   
2,583
     
2,494
     
5,165
     
4,843
 
Intangible Amortization
   
1,459
     
1,458
     
2,917
     
2,917
 
Other
   
8,905
     
8,629
     
16,697
     
17,428
 
Total Noninterest Expense
   
30,756
     
29,897
     
60,554
     
60,459
 
                                 
INCOME BEFORE INCOME TAXES
   
7,005
     
11,973
     
17,323
     
22,461
 
Income Taxes
   
2,195
     
4,082
     
5,233
     
7,613
 
                                 
NET INCOME
 
$
4,810
   
$
7,891
   
$
12,090
   
$
14,848
 
                                 
Basic Net Income Per Share
 
$
.28
   
$
.43
   
$
.70
   
$
.81
 
Diluted Net Income Per Share
 
$
.28
   
$
.43
   
$
.70
   
$
.81
 
                                 
Average Basic Shares Outstanding
   
17,146,395
     
18,089,022
     
17,158,312
     
18,247,991
 
Average Diluted Shares Outstanding
   
17,146,837
     
18,089,223
     
17,159,052
     
18,248,245
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY


 
 
(Dollars In Thousands, Except Share Data)
Shares Outstanding
   
Common Stock
   
Additional
Paid-In Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Loss, Net of Taxes
 
Total
 
                                 
Balance, December 31, 2007
17,182,553
 
$
 172
 
$
38,243
   
$
260,325
   
$
(6,065
)
$
292,675
 
Cumulative Effect of Adoption of EITF 06-4
-
   
-
   
-
     
(30
)
   
-
   
(30
)
Comprehensive Income:
                                     
Net Income
-
   
-
   
-
     
12,090
     
-
   
12,090
 
Net Change in Unrealized Gain On
   Available-for-Sale Securities (net of tax)
-
   
-
   
-
     
-
     
(79
 
(79
Total Comprehensive Income
-
   
-
   
-
     
-
     
-
   
12,011
 
Cash Dividends ($.3700 per share)
-
   
-
   
-
     
(6,214)
     
-
   
(6,214
)
Stock Performance Plan Compensation
-
   
-
   
17
     
-
     
-
   
17
 
Issuance of Common Stock
18,927
   
-
   
535
     
-
     
-
   
535
 
Repurchase of Common Stock
(90,041
)
 
(1)
   
(2,413
)
   
-
     
-
   
(2,414
)
                                       
Balance, June 30, 2008
17,111,439
 
$
 171
 
$
36,382
   
$
266,171
   
$
(6,144
)
$
296,580
 


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30


(Dollars in Thousands)
 
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
 
$
12,090
   
$
14,848
 
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
               
Provision for Loan Losses
   
9,574
     
2,912
 
Depreciation
   
3,447
     
3,087
 
Net Securities Amortization
   
337
     
170
 
Amortization of Intangible Assets
   
2,917
     
2,917
 
Gain on Securities Transactions
   
(95
)
   
(7
)
Origination of Loans Held-for-Sale
   
(32,269
)
   
(94,830
)
Proceeds From Sales of Loans Held-for-Sale
   
35,931
     
93,254
 
Net Gain From Sales of Loans Held-for-Sale
   
(1,000
)
   
(1,529
)
Non-Cash Compensation
   
17
     
63
 
Deferred Income Taxes
   
(730
   
76
 
Net Decrease (Increase) in Other Assets
   
7,922
     
(3,508
)
Net (Decrease) Increase in Other Liabilities
   
(1,387
   
11,271
 
Net Cash Provided By Operating Activities
   
36,754
     
28,724
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities Available-for-Sale:
               
Purchases
   
(49,001
)
   
(27,582
)
Sales
   
3,508
     
-
 
Payments, Maturities, and Calls
   
49,846
     
29,186
 
Net (Increase) Decrease in Loans
   
(13,216
   
67,966
 
Purchase of Premises & Equipment
   
(7,395
)
   
(9,540
)
Proceeds From Sales of Premises & Equipment
   
-
     
335
 
Net Cash (Used In) Provided By Investing Activities
   
(16,258
   
60,365
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net Increase (Decrease) in Deposits
   
20,582
     
(72,064
)
Net (Decrease) Increase in Short-Term Borrowings
   
(1,343
)
   
9,101
 
Increase in Other Long-Term Borrowings
   
11,623
     
1,700
 
Repayment of Other Long-Term Borrowings
   
(1,504
)
   
(3,323
Dividends Paid
   
(6,214
)
   
(6,475
)
Repurchase of Common Stock
   
(2,414
)
   
(23,219
)
Issuance of Common Stock
   
535
     
497
 
Net Cash Provided By (Used In) Financing Activities
   
21,265
     
(93,783
)
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
41,761
     
(4,694
)
                 
Cash and Cash Equivalents at Beginning of Period
   
259,697
     
177,564
 
Cash and Cash Equivalents at End of Period
 
$
301,458
   
$
172,870
 
                 
Supplemental Disclosure:
               
Interest Paid on Deposits
 
$
18,607
   
$
22,103
 
Interest Paid on Debt
 
$
3,391
   
$
4,377
 
Taxes Paid
 
$
8,961
   
$
6,601
 
Loans Transferred to Other Real Estate Owned
 
$
4,467
   
$
1,490
 
Issuance of Common Stock as Non-Cash Compensation
 
$
-
   
$
1,158
 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



CAPITAL CITY BANK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
 

Basis of Presentation

Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of banking and banking-related services to individual and corporate clients through its subsidiary, Capital City Bank, with banking offices located in Florida, Georgia, and Alabama.  The Company is subject to competition from other financial institutions, is subject to regulation by certain government agencies and undergoes periodic examinations by those regulatory authorities.

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Regulation S-X.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  Prior period financial statements have been reformatted and amounts reclassified, as necessary, to conform with the current presentation.  The Company and its subsidiary follow accounting principles generally accepted in the United States (“GAAP”) and reporting practices applicable to the banking industry.  The principles that materially affect its financial position, results of operations and cash flows are set forth in the Notes to Consolidated Financial Statements which are included in the 2007 Form 10-K.

In the opinion of management, the consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of June 30, 2008 and December 31, 2007, the results of operations for the three and six months ended June 30, 2008 and 2007, and cash flows for the six months ended June 30, 2008 and 2007.

NOTE 2 - INVESTMENT SECURITIES
 

The amortized cost and related market value of investment securities available-for-sale were as follows:

   
June 30, 2008
 
(Dollars in Thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Market Value
 
U.S. Treasury
 
$
25,104
   
$
89
   
$
284
   
$
24,909
 
U.S. Government Agencies
   
19,526
     
197
     
5
     
19,718
 
States and Political Subdivisions
   
94,466
     
706
     
194
     
94,978
 
Mortgage-Backed Securities
   
34,097
     
128
     
485
     
33,740
 
Other Securities(1)
   
12,572
     
54
     
-
     
12,626
 
Total Investment Securities
 
$
185,765
   
$
1,174
   
$
968
   
$
185,971
 

   
December 31, 2007
 
(Dollars in Thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Market Value
 
U.S. Treasury
 
$
16,216
   
$
97
   
$
-
   
$
16,313
 
U.S. Government Agencies
   
45,489
     
295
     
34
     
45,750
 
States and Political Subdivisions
   
90,014
     
164
     
177
     
90,001
 
Mortgage-Backed Securities
   
26,334
     
85
     
132
     
26,287
 
Other Securities(1)
   
12,307
     
61
     
-
     
12,368
 
Total Investment Securities
 
$
       190,360
   
$
            702
   
$
     343
   
$
  190,719
 

 (1)
Includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $6.7 million and $4.8 million, respectively, at June 30, 2008, and $6.5 million and $4.8 million, respectively, at December 31, 2007.




NOTE 3 - LOANS
 

The composition of the Company's loan portfolio was as follows:

(Dollars in Thousands)
 
June 30, 2008
   
December 31, 2007
 
Commercial, Financial and Agricultural
 
$
196,075
   
$
208,864
 
Real Estate-Construction
   
150,907
     
142,248
 
Real Estate-Commercial
   
622,282
     
634,920
 
Real Estate-Residential
   
489,268
     
485,608
 
Real Estate-Home Equity
   
205,536
     
192,428
 
Real Estate-Loans Held-for-Sale
   
1,565
     
2,764
 
Consumer
   
251,182
     
249,018
 
Loans, Net of Unearned Interest
 
$
1,916,815
   
$
1,915,850
 

Net deferred fees included in loans at June 30, 2008 and December 31, 2007 were $1.8 million and $1.6 million, respectively.

Above loan balances include loans in process with outstanding balances of $9.5 million and $7.4 million at June 30, 2008 and December 31, 2007, respectively.

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

An analysis of the changes in the allowance for loan losses for the six month periods ended June 30 was as follows:

(Dollars in Thousands)
 
2008
   
2007
 
Balance, Beginning of Period
 
$
18,066
   
$
 17,217
 
Provision for Loan Losses
   
9,574
     
2,912
 
Recoveries on Loans Previously Charged-Off
   
1,287
     
946
 
Loans Charged-Off
   
(6,409
)
   
 (3,606
)
Balance, End of Period
 
$
22,518
   
$
  17,469
 

Impaired Loans.  On a non-recurring basis, loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.  Selected information pertaining to impaired loans is depicted in the table below:

   
June 30, 2008
   
December 31, 2007
 
 
(Dollars in Thousands)
 
Balance
   
Valuation Allowance
   
Balance
   
Valuation Allowance
 
Impaired Loans:
                       
With Related Valuation Allowance
 
$
28,344
   
$
7,429
   
$
21,615
   
$
4,702
 
Without Related Valuation Allowance
   
34,106
     
-
     
15,019
     
-
 




NOTE 5 - INTANGIBLE ASSETS
 

The Company had net intangible assets of $95.6 million and $98.6 million at June 30, 2008 and December 31, 2007, respectively.  Intangible assets were as follows:

   
June 30, 2008
   
December 31, 2007
 
 
(Dollars in Thousands)
 
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
Core Deposit Intangibles
 
$
47,176
   
$
37,420
   
$
          47,176
   
$
         34,598
 
Goodwill
   
84,811
     
-
     
84,811
     
-
 
Customer Relationship Intangible
   
1,867
     
783
     
            1,867
     
688
 
Total Intangible Assets
 
$
133,854
   
$
38,203
   
$
133,854
   
$
35,286
 

Net Core Deposit Intangibles:  As of June 30, 2008 and December 31, 2007, the Company had net core deposit intangibles of $9.8 million and $12.6 million, respectively.  Amortization expense for the first six months of 2008 and 2007 was approximately $2.8 million.  Estimated annual amortization expense is $5.5 million.

Goodwill:  As of June 30, 2008 and December 31, 2007, the Company had goodwill, net of accumulated amortization, of $84.8 million.  Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”

Other:  As of June 30, 2008 and December 31, 2007, the Company had a customer relationship intangible, net of accumulated amortization, of $1.1 million and $1.2 million, respectively.  This intangible was recorded as a result of the March 2004 acquisition of trust customer relationships from Synovus Trust Company.  Amortization expense for the first six months of 2008 and 2007 was approximately $96,000.  Estimated annual amortization expense is approximately $191,000 based on use of a 10-year useful life.

NOTE 6 - DEPOSITS

The composition of the Company's interest bearing deposits at June 30, 2008 and December 31, 2007 was as follows:

(Dollars in Thousands)
 
June 30, 2008
   
December 31, 2007
 
NOW Accounts
 
$
814,380
   
$
744,093
 
Money Market Accounts
   
387,011
     
386,619
 
Savings Deposits
   
118,307
     
111,600
 
Other Time Deposits
   
426,236
     
467,373
 
Total Interest Bearing Deposits
 
$
1,745,934
   
$
1,709,685
 




NOTE 7 - STOCK-BASED COMPENSATION

The Company recognizes the cost of stock-based associate stock compensation in accordance with SFAS No. 123R, "Share-Based Payment” (Revised) under the fair value method.

As of June 30, 2008, the Company had three stock-based compensation plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP").  Total compensation expense associated with these plans for the six months ended June 30, 2008 and 2007 was approximately $208,000 and $137,000, respectively.  The Company, under the terms and conditions of the AIP, maintained a 2011 Incentive Plan (“2011 Plan”) which was terminated in March 2008 and approximately $577,000 in related expense accrued for this plan was reversed during the first quarter of 2008.

AIP.  The Company's AIP allows the Company's Board of Directors to award key associates various forms of equity-based incentive compensation.  Under the AIP, the Company adopted the Stock-Based Incentive Plan (the "2006 Incentive Plan"), effective January 1, 2006, which was a performance-based equity bonus plan for selected members of management, including all executive officers.  Under the 2006 Incentive Plan, all participants were eligible to earn an equity award, in the form of performance shares, on an annual basis over a term of five years.  Annual awards were tied to an internally established annual earnings target linked to the Company’s 2011 strategic initiative.

The Company terminated the 2006 Incentive Plan in March 2008 in conjunction with the termination of the Company’s 2011 strategic initiative.  Due to the performance targets not being met, no expense was recognized in 2008 or 2007 for the 2006 Incentive Plan.

During the first quarter of 2008, under the terms and conditions of the AIP, the Company adopted a new Stock-Based Incentive Plan (the “2008 Incentive Plan”), substantially similar to the 2006 Incentive Plan.  All participants in this plan are eligible to earn an equity award, in the form of restricted stock.  The award for 2008 is tied to internally established performance goals.  The grant-date fair value of the compensation award for 2008 is approximately $561,000.  In addition, each plan participant is eligible to receive from the Company a tax supplement bonus equal to 31% of the stock award value at the time of issuance.  A total of 21,146 shares are eligible for issuance.

A total of 875,000 shares of common stock have been reserved for issuance under the AIP.  To date, the Company has issued a total of 60,892 shares of common stock under the AIP.

Executive Stock Option Agreement.  For 2003 through 2006, under the provisions of the AIP (and its predecessor), the Company's Board of Directors approved stock option agreements for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG).  These agreements granted a non-qualified stock option award upon achieving certain annual earnings per share conditions set by the Board, subject to certain vesting requirements.  The options granted under the agreements have a term of ten years and vested at a rate of one-third on each of the first, second, and third anniversaries of the date of grant.  Under the 2004 and 2003 agreements, 37,246 and 23,138 options, respectively, were issued, none of which have been exercised.  The fair value of a 2004 option was $13.42, and the fair value of a 2003 option was $11.64.  The exercise prices for the 2004 and 2003 options are $32.69 and $32.96, respectively.  Under the 2006 and 2005 agreements, the earnings per share conditions were not met; therefore, no options were granted and no expense was recognized related to these agreements.  In accordance with the provisions of SFAS 123R and SFAS 123, the Company recognized expenses in 2005 through 2007 of approximately $193,000, $205,000, and $125,000, respectively, related to the 2004 and 2003 agreements.  In 2007, the Company replaced its practice of entering into a stock option arrangement by establishing a Performance Share Unit Plan under the provisions of the AIP that allows the executive to earn shares based on the compound annual growth rate in diluted earnings per share over a three-year period.  The details of this program for the executive are outlined in a Form 8-K filing dated January 31, 2007.  No expense related to this plan was recognized for the first six months of 2008 as results fell short of the earnings performance goal.




A summary of the status of the Company’s option shares as of June 30, 2008 is presented below:

Options
 
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Term
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2008
    60,384     $ 32.79       6.9     $ -  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited or expired
    -       -       -       -  
Outstanding at June 30, 2008
    60,384     $ 32.79       6.4     $ -  
Exercisable at June 30, 2008
    60,384     $ 32.79       6.4     $ -  

As of June 30, 2008, there was no unrecognized compensation cost related to the option shares granted under the agreements. 

DSPP.  The Company's DSPP allows the directors to purchase the Company's common stock at a price equal to 90% of the closing price on the date of purchase.  Stock purchases under the DSPP are limited to the amount of the director’s annual cash compensation.  The DSPP has 93,750 shares reserved for issuance.  A total of 39,817 shares have been issued since the inception of the DSPP.  For the first six months of 2008, the Company recognized approximately $21,000 in expense related to this plan.  For the first six months of 2007, the Company recognized approximately $23,000 in expense related to the DSPP.

ASPP.  Under the Company's ASPP, substantially all associates may purchase the Company's common stock through payroll deductions at a price equal to 90% of the lower of the fair market value at the beginning or end of each six-month offering period.  Stock purchases under the ASPP are limited to 10% of an associate's eligible compensation, up to a maximum of $25,000 (fair market value on each enrollment date) in any plan year.  Shares are issued at the beginning of the quarter following each six-month offering period.  The ASPP has 593,750 shares of common stock reserved for issuance.  A total of 69,749 shares have been issued since inception of the ASPP.  For the first six months of 2008, the Company recognized approximately $58,000 in expense related to this plan.  For the first six months of 2007, the Company recognized $51,000 in expense related to the ASPP.

Based on the Black-Scholes option pricing model, the weighted average estimated fair value of each of the purchase rights granted under the ASPP was $5.51 for the first six months of 2008.  For the first six months of 2007, the weighted average fair value purchase right granted was $5.91.  In calculating compensation, the fair value of each stock purchase right was estimated on the date of grant using the following weighted average assumptions:

   
Six Months Ended June 30,
 
   
2008
   
2007
 
Dividend yield
   
2.8
%
   
2.0
%
Expected volatility
   
39.0
%
   
24.0
%
Risk-free interest rate
   
3.1
%
   
4.9
%
Expected life (in years)
   
0.5
     
0.5
 

NOTE 8 - EMPLOYEE BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all full-time and eligible part-time associates and a Supplemental Executive Retirement Plan (“SERP”) covering its executive officers.

The components of the net periodic benefit costs for the Company's qualified benefit pension plan were as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
 
                         
Discount Rate
   
6.00
%
   
6.00
%
   
6.00
%
   
6.00
%
Long-Term Rate of Return on Assets
   
8.00
%
   
8.00
%
   
8.00
%
   
8.00
%
                                 
Service Cost
 
$
1,279
   
$
1,350
   
$
2,558
   
$
2,700
 
Interest Cost
   
1,063
     
1,025
     
2,126
     
2,050
 
Expected Return on Plan Assets
   
(1,253
)
   
(1,300
)
   
(2,506
)
   
(2,600
)
Prior Service Cost Amortization
   
75
     
100
     
151
     
200
 
Net Loss Amortization
   
280
     
250
     
561
     
500
 
Net Periodic Benefit Cost
 
$
1,444
   
$
1,425
   
$
2,890
   
$
2,850
 




The components of the net periodic benefit costs for the Company's SERP were as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
 
                         
Discount Rate
   
6.00
%
   
6.00
%
   
6.00
%
   
6.00
%
                                 
Service Cost
 
$
22
   
$
25
   
$
44
   
$
50
 
Interest Cost
   
56
     
63
     
111
     
126
 
Prior Service Cost Amortization
   
2
     
3
     
4
     
6
 
Net Loss Amortization
   
1
     
18
     
3
     
36
 
Net Periodic Benefit Cost
 
$
81
   
$
109
   
$
162
   
$
218
 

NOTE 9 - COMMITMENTS AND CONTINGENCIES
 

Lending Commitments.  The Company is a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of its clients.  These financial instruments consist of commitments to extend credit and standby letters of credit.

The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments.  The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments.  As of June 30, 2008, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Millions)
 
Amount
 
Commitments to Extend Credit(1)
 
$
401
 
Standby Letters of Credit
 
$
17
 

(1)
Commitments include unfunded loans, revolving lines of credit, and other unused commitments.

Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Contingencies.  The Company is a party to lawsuits and claims arising out of the normal course of business.  In management's opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on the consolidated results of operations, financial position, or cash flows of the Company.

Indemnification Obligation.  The Company is a member of the Visa U.S.A. network.  Visa U.S.A believes that its member banks are required to indemnify Visa U.S.A. for potential future settlement of certain litigation (the “Covered Litigation”).  The Company recorded a charge in its fourth quarter 2007 financial statements of approximately $1.9 million, or $0.07 per diluted common share, to recognize its proportionate contingent liability related to the costs of the judgments and settlements from the Covered Litigation.

The Company reversed a portion of the Covered Litigation accrual in the amount of approximately $1.1 million to account for the establishment of an escrow account by Visa Inc., the parent company of Visa U.S.A., in conjunction with Visa’s initial public offering during the first quarter of 2008.  This escrow account was established to pay the costs of the judgments and settlements from the Covered Litigation.  Approximately $0.8 million remains accrued for the contingent liability related to remaining Covered Litigation.

NOTE 10 - COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income," requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income.  Comprehensive income totaled $3.7 million and $12.0 million, respectively, for the three and six months ended June 30, 2008, and $7.3 million and $14.6 million, respectively, for the comparable periods in 2007.  The Company’s comprehensive income consists of net income and changes in unrealized gains and losses on securities available-for-sale (net of income taxes) and changes in the pension liability (net of taxes).  The after-tax reduction in net unrealized gains on securities totaled approximately ($1,065,000) and ($79,000), respectively, for the three and six months ended June, 2008.  The after-tax increase in net unrealized losses on securities totaled approximately $585,000 and $270,000, respectively, for the three and six months ended June 30, 2007.  Reclassification adjustments consist only of realized gains and losses on sales of investment securities and were not material for the three and six months ended June 30, 2008 and 2007.



NOTE 11 – FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, "Fair Value Measurements," for financial assets and financial liabilities.  In accordance with Financial Accounting Standards Board Staff Position No. 157-2, "Effective Date of FASB Statement No. 157," the Company will delay application of SFAS 157 for non-financial assets and non-financial liabilities, until January 1, 2009.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs.  An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction.  Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.  The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.  The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied.  Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.  Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available.  If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters.  Valuation adjustments may be made to ensure that financial instruments are recorded at fair value.  These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters.  Any such valuation adjustments are applied consistently over time.  The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale.  Securities classified as available for sale are reported at fair value on a recurring basis utilizing Level 1, 2, or 3 inputs.  For these securities, the Company obtains fair value measurements from an independent pricing service or a model that uses, as inputs, observable market based parameters.  The fair value measurements consider observable data that may include quoted prices in active markets, or other inputs, including dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, and credit information and the bond's terms and conditions.



The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 
(Dollars in Thousands)
 
Level 1 Inputs
   
Level 2 Inputs
   
Level 3 Inputs
   
Total
Fair Value
 
                         
Securities Available for Sale
  $ 44,627     $ 128,718     $ 1,054     $ 174,399  

The change in the fair value of Level 3 securities from March 31, 2008 to June 30, 2008 relates to the change in an unrealized gain of approximately $54,000 for one security.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2008.

Impaired Loans.  On a non-recurring basis, certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.  Impaired loans had a carrying value of $62.5 million, with a valuation allowance of $7.4 million, resulting in an additional provision for loan losses of $2.7 million for the six months ended June 30, 2008.

Loans Held for Sale.  Loans held for sale, which are carried at the lower of cost or fair value, are adjusted to fair value on a non-recurring basis.  Fair value is based on observable markets rates for comparable loan products which is considered a level 2 fair value measurement.

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates.  Changes in fair value on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date.  The fair value option (i) is applied instrument by instrument, with certain exceptions, thus the Company may record identical financial assets and liabilities at fair value or by another measurement basis permitted under generally accepted accounting principals, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments.  Adoption of SFAS 159 on January 1, 2008 did not have a significant impact on the Company’s financial statements because the Company did not elect fair value measurement under SFAS 159.

NOTE 12 – SUBSEQUENT EVENT

On July 31, 2008, Capital City Bank Group, Inc. and its subsidiary, Capital City Bank entered into a marketing alliance with Elavon Inc., formerly NOVA Information Systems, a wholly owned subsidiary of U.S. Bancorp.  Under this alliance, Elavon purchased substantially all of Capital City Bank’s merchant services business for $6.25 million.  Elavon will provide merchant bankcard processing to Capital City Bank clients going forward.




QUARTERLY FINANCIAL DATA (UNAUDITED)

   
2008
   
2007
   
2006
 
(Dollars in Thousands, Except Per Share Data)
 
Second
   
First
   
Fourth
   
Third
   
Second
 
First
 
Fourth
   
Third
   
Summary of Operations:
                                             
Interest Income
 
$
36,260
   
$
38,723
   
$
      40,786
   
$
41,299
   
$
41,724
 
$
41,514
 
$
42,600
   
$
42,512
   
Interest Expense
   
8,785
     
12,264
     
     13,241
     
   13,389
     
13,263
   
 13,189
   
13,003
     
12,289
   
Net Interest Income
   
27,475
     
26,459
     
   27,545
     
   27,910
     
28,461
   
28,325
   
29,597
     
30,223
   
Provision for Loan Losses
   
5,432
     
4,142
     
   1,699
     
    1,552
     
1,675
   
 1,237
   
460
     
711
   
Net Interest Income After
Provision for Loan Losses
   
                  22,043
     
22,317
     
    25,846
     
26,358
     
26,786
   
27,088
   
 
29,137
     
 
29,512
   
Noninterest Income
   
15,718
     
17,799
     
   15,823
     
14,431
     
15,084
   
13,962
   
14,385
     
14,144
   
Noninterest Expense
   
30,756
     
29,798
     
     31,614
     
29,919
     
29,897
   
30,562
   
29,984
     
30,422
   
Income Before Provision for Income Taxes
   
7,005
     
10,318
     
                  10,055
     
    10,870
     
11,973
   
10,488
   
 
13,538
     
 
13,234
   
Provision for Income Taxes
   
2,195
     
3,038
     
2,391
     
          3,699
     
4,082
   
 3,531
   
4,688
     
4,554
   
Net Income
 
$
 4,810
   
$
 7,280
   
$
         7,664
   
$
         7,171
   
$
7,891
 
$
   6,957
 
$
 8,850
   
$
 8,680
   
Net Interest Income (FTE)
 
$
28,081
   
$
27,077
   
$
28,196
   
$
        28,517
   
$
29,050
 
$
   28,898
 
$
 30,152
   
$
 30,745
   
                                                               
Per Common Share:
                                                             
Net Income Basic
 
$
0.28
   
$
0.42
   
$
    0.44
   
$
0.41
   
$
0.43
 
$
   0.38
 
$
 0.48
   
$
 0.47
   
Net Income Diluted
   
0.28
     
0.42
     
     0.44
     
0.41
     
0.43
   
0.38
   
0.48
     
0.47
   
Dividends Declared
   
.185
     
.185
     
.185
     
.175
     
.175
   
  .175
   
.175
     
.163
   
Diluted Book Value
   
17.33
     
17.33
     
17.03
     
16.95
     
16.87
   
 16.97
   
17.01
     
17.18
   
Market Price:
                                                             
High
   
30.19
     
29.99
     
34.00
     
         36.40
     
33.69
   
 35.91
   
35.98
     
33.25
   
Low
   
21.76
     
24.76
     
24.60
     
      27.69
     
29.12
   
 29.79
   
30.14
     
29.87
   
Close
   
21.76
     
29.00
     
28.22
     
31.20
     
31.34
   
 33.30
   
35.30
     
31.10
   
                                                               
Selected Average
                                                             
Balances:
                                                             
Loans
 
$
1,908,802
   
$
1,909,574
   
$
1,908,069
   
$
  1,907,235
   
$
1,944,969
 
$
 1,980,224
 
$
 2,003,719
   
$
 2,025,112
   
Earning Assets
   
2,303,971
     
2,301,463
     
2,191,230
     
   2,144,737
     
2,187,236
   
2,211,560
   
2,238,066
     
2,241,158
   
Assets
   
2,634,771
     
2,646,474
     
2,519,682
     
2,467,703
     
2,511,252
   
2,530,790
   
2,557,357
     
2,560,155
   
Deposits
   
2,140,546
     
2,148,874
     
2,016,736
     
   1,954,160
     
1,987,418
   
2,003,726
   
2,028,453
     
2,023,523
   
Shareowners’ Equity
   
300,890
     
296,804
     
299,342
     
      301,536
     
309,352
   
  316,484
   
323,903
     
318,041
   
Common Equivalent Shares:
                                                             
Basic
   
17,146
     
17,170
     
17,444
     
17,709
     
18,089
   
18,409
   
18,525
     
18,530
   
Diluted
   
17,147
     
17,178
     
17,445
     
17,719
     
18,089
   
18,420
   
18,569
     
18,565
   
                                                               
Ratios:
                                                             
ROA
   
.73
%
   
1.11
%
   
1.21
%
   
1.15
%
   
1.26
%
 
 1.11
%
 
1.37
%
   
1.35
%
 
ROE
   
6.43
%
   
9.87
%
   
10.16
%
   
9.44
%
   
10.23
%
 
 8.91
%
 
10.84
%
   
10.83
%
 
Net Interest Margin (FTE)
   
4.90
%
   
4.73
%
   
5.10
%
   
5.27
%
   
5.33
%
 
 5.29
%
 
5.35
%
   
5.45
%
 
Efficiency Ratio
   
66.89
%
   
63.15
%
   
68.51
%
   
66.27
%
   
64.44
%
 
67.90
%
 
63.99
%
   
64.35
%
 

 
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes.  The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Results of Operations," "Financial Condition," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting Policies."  The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2008 compares with prior years.  Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

In this MD&A, we present an operating efficiency ratio and an operating net noninterest expense as a percent of average assets ratio, both of which are not calculated based on accounting principles generally accepted in the United States ("GAAP"), but that we believe provide important information regarding our results of operations.  Our calculation of the operating efficiency ratio is computed by dividing noninterest expense less intangible amortization and merger expenses, by the sum of tax equivalent net interest income and noninterest income.  We calculate our operating net noninterest expense as a percent of average assets by subtracting noninterest expense excluding intangible amortization and merger expenses from noninterest income.  Management uses these non-GAAP measures as part of its assessment of its performance in managing noninterest expenses.  We believe that excluding intangible amortization and merger expenses in our calculations better reflect our periodic expenses and is more reflective of normalized operations.

Although we believe the above-mentioned non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.  In addition, there are material limitations associated with the use of these non-GAAP financial measures such as the risks that readers of our financial statements may disagree as to the appropriateness of items included or excluded in these measures and that our measures may not be directly comparable to other companies that calculate these measures differently.  Our management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measure as detailed below.

Reconciliation of operating efficiency ratio to efficiency ratio:

   
Six Months Ended June 30,
 
   
2008
   
2007
 
Efficiency ratio
    68.29 %     69.50 %
Effect of intangible amortization expense
    (3.29 )%     (3.35 )%
Operating efficiency ratio
    65.00 %     66.15 %

Reconciliation of operating net noninterest expense ratio:

   
Six Months Ended June 30,
 
   
2008
   
2007
 
Net noninterest expense as a percent of average assets
    2.06 %     2.51 %
Effect of intangible amortization expense
    (0.22 )%     (0.23 )%
Operating net noninterest expense as a percent of average assets
    1.84 %     2.28 %




The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties.  Our actual future results may differ materially from those set forth in our forward-looking statements.  Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.  Any forward-looking statements made by us or on our behalf speak only as of the date they are made.  We do not undertake to update any forward-looking statement, except as required by applicable law.


BUSINESS OVERVIEW

We are a financial holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or "CCB").  The Bank offers a broad array of products and services through a total of 69 full-service offices and one mortgage lending office located in Florida, Georgia, and Alabama.  The Bank offers commercial and retail banking services, as well as trust and asset management, merchant services, retail securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings.  Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as service charges on deposit accounts, asset management and trust fees, retail securities brokerage fees, mortgage banking revenues, merchant service fees, and data processing revenues.

Our philosophy is to grow and prosper, building long-term relationships based on quality service, high ethical standards, and safe and sound banking practices.  We maintain a locally oriented, community-based focus, which is augmented by experienced, centralized support in select specialized areas.  Our local market orientation is reflected in our network of banking office locations, experienced community executives with a dedicated president for each market, and community boards which support our focus on responding to local banking needs.  We strive to offer a broad array of sophisticated products and to provide quality service by empowering associates to make decisions in their local markets.

Our long-term vision is to continue our expansion, emphasizing a combination of growth in existing markets and acquisitions.  Acquisitions will continue to be focused on a three state area including Florida, Georgia, and Alabama with a particular focus on financial institutions, which are $100 million to $400 million in asset size and generally located on the outskirts of major metropolitan areas.  Six markets have been identified, five in Florida and one in Georgia, in which management will proactively pursue expansion opportunities.  These markets include Alachua, Marion, Hernando, and Pasco Counties in Florida, the western panhandle in Florida, and Bibb and surrounding counties in central Georgia.  We continue to evaluate de novo expansion opportunities in attractive new markets in the event that acquisition opportunities are not feasible.  Expansion opportunities that will be evaluated include asset management and mortgage banking.




FINANCIAL OVERVIEW

A summary overview of our financial performance for 2008 versus 2007 is provided below.

Financial Performance Highlights –

·  
Earnings of $4.8 million ($0.28 per diluted share) for the second quarter of 2008 compared to $7.9 million ($0.43 per diluted share) for the second quarter of 2007.  Earnings of $12.1 million ($0.70 per diluted share) compared to $14.8 million ($0.81 per diluted share) for the same period in 2007.  The decline in earnings for both periods was driven by lower net interest income and higher loan loss provisions.

·  
Tax equivalent net interest income declined 3.3% and 4.8% for the three and six month periods reflective of margin compression driven by an increased level of foregone interest associated with a higher level of nonperforming loans and an unfavorable shift in the mix of earning assets reflective of a decline in loan balances.

·  
Noninterest income grew 4.2% for the three month period reflective of higher deposit fees and retail brokerage fees.  For the first half of 2008, the redemption of Visa Inc. shares ($2.4 million) drove a 15.4% increase over the same period in 2007.  Deposit fees and bank card fees also posted strong gains.

·  
Noninterest expense continues to be well controlled as evidenced by increases of $.9 million, or 2.9%, and $.1 million, or .16% for the three and six month periods.  Noninterest expense for the first half of 2008 included the reversal of $1.1 million in our Visa Inc. litigation accrual.

·  
Higher loan loss provision for both the three and six month periods is due to the current economic slowdown and the impact of the stressed housing and real estate markets.  The allowance for loan losses continues to be adequately funded at 1.18% of total loans compared to .91% in the same period in 2007.

·  
We remain well-capitalized with a risk based capital ratio of 14.35% and a tangible capital ratio of 7.87%.




RESULTS OF OPERATIONS

Net Income

Net income for the second quarter of 2008 totaled $4.8 million ($0.28 per diluted share) compared to $7.3 million ($0.42 per diluted share) in the first quarter of 2008 and $7.9 million ($0.43 per diluted share) for the second quarter of 2007.  Earnings for the second quarter of 2008 include a loan loss provision of $5.4 million ($.20 per diluted share) versus $4.1 million ($.15 per diluted share) in the first quarter of 2008 and $1.7 million ($.06 per diluted share) in the second quarter of 2007.

Earnings for the first half of 2008 totaled $12.1 million ($0.70 per diluted share) compared to $14.8 million ($0.81 per diluted share) for the first half of 2007.  Year-to-date earnings include a loan loss provision of $9.6 million ($0.34 per diluted share).  Current year earnings also include a $2.4 million pre-tax gain from the redemption of Visa Inc. shares related to its initial public offering, the reversal of $1.1 million (pre-tax) in Visa related litigation reserves, the reversal of $577,000 (pre-tax) in accrued expense for our 2011 Incentive Plan, and the reversal of a $425,000 tax reserve related to the resolution of a tax contingency, all four of which were recorded in the first quarter.

A condensed earnings summary is presented below:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
 
Interest Income
 
$
36,260
   
$
41,724
   
$
74,983
   
$
83,238
 
Taxable Equivalent Adjustment(1)
   
606
     
589
     
1,225
     
1,162
 
Interest Income (FTE)
   
36,866
     
42,313
     
76,208
     
84,400
 
Interest Expense
   
8,785
     
13,263
     
21,049
     
26,452
 
Net Interest Income (FTE)
   
28,081
     
29,050
     
55,159
     
57,948
 
Provision for Loan Losses
   
5,432
     
1,675
     
9,574
     
2,912
 
Taxable Equivalent Adjustment
   
606
     
589
     
1,225
     
1,162
 
Net Interest Income After Provision
   
22,043
     
26,786
     
44,360
     
53,874
 
Noninterest Income
   
15,718
     
15,084
     
33,517
     
29,046
 
Noninterest Expense
   
30,756
     
29,897
     
60,554
     
60,459
 
Income Before Income Taxes
   
7,005
     
11,973
     
17,323
     
22,461
 
Income Taxes
   
2,195
     
4,082
     
5,233
     
7,613
 
Net Income
 
4,810
   
7,891
   
$
12,090
   
14,848
 
Basic Net Income Per Share
 
$
0.28
   
$
0.43
   
$
0.70
   
$
0.81
 
Diluted Net Income Per Share
 
$
0.28
   
$
0.43
   
 0.70
   
$
0.81
 
                                 
Return on Average Assets(2)
   
.73
%
   
1.26
%
   
.92
%
   
1.19
%
Return on Average Equity(2)
   
6.43
%
   
10.23
%
   
8.14
%
   
9.57
%

(1)
Computed using a statutory tax rate of 35%
(2)
Annualized




Net Interest Income

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities.  Tax equivalent net interest income for the second quarter of 2008 was $28.1 million compared to $29.0 million for the second quarter of 2007.  For the first six months of 2008, tax equivalent net interest income totaled $55.2 million compared to $57.9 million for the comparable period in 2007.  Table I on page 33 provides a comparative analysis of our average balances and interest rates.

The decline in net interest income for the three and six months ended June 30, 2008, as compared to the same periods of 2007 was primarily the result of a higher level of foregone interest associated with the increased level of nonperforming assets and an unfavorable shift in the mix of earning assets as the loan balances declined throughout the first nine months of 2007.  These factors, coupled with the influx of higher cost municipal deposits in 2008, led to compression in our net interest margin of 43 and 50 basis points, respectively.

Average negotiated deposits, which include municipal deposits, have grown from $287 million in the second quarter of 2007 to $538 million in the current quarter.  Although this growth in deposits has had a positive impact on net interest income, it has had an adverse impact on our margin due to the relatively thin spreads on the municipal deposits.  See “Financial Condition” section below for a more detailed analysis of nonperforming assets and deposit growth.

For the second quarter of 2008, taxable-equivalent interest income decreased $5.4 million, or 12.9%, from the second quarter in 2007.  During the first half of 2008, taxable-equivalent interest income declined $8.2 million, or 9.7% from the comparable period in 2007.  The decrease in each respective period was attributable to lower yields resulting from the Federal Reserve rate cuts, a shift in mix on earning assets and a higher level of foregone interest associated with the increased level of nonperforming loans.  The average yield on earning assets declined 133 and 101 basis points over the three and six month periods, respectively.

Interest expense for the three and six month periods ended June 30, 2008 decreased $4.5 million, or 33.8% and $5.4 million, or 20.4%, respectively, from the comparable prior year periods.  For the same comparable periods, the average cost of funds has decreased 90 and 58 points, respectively.  Since September 2007, we have aggressively reduced our deposit rates in response to the rate reductions initiated by the Federal Reserve and continue to believe we have been successful in neutralizing these rate reductions.  However, the rapid growth in the higher cost negotiated deposits (primarily public funds) mitigated the full impact of lowering our deposit rates and, therefore, the decline in our average cost of funds was not commensurate with the decline in our average yield on earning assets.

Our interest rate spread (defined as the average fully taxable-equivalent yield on earning assets less the average rate paid on interest bearing liabilities) for the second quarter of 2008 was 4.55% compared to 4.64% for the second quarter of 2007.  For the first half of 2008, the interest rate spread was 4.41% compared to 4.62% in the comparable period of 2007.  The decline for each of the aforementioned periods reflects the shift in earning assets, lower yields due to the Federal Reserve rate cuts and the higher level of nonperforming loans, partially offset by the lower cost of funds.

Our net yield on earning assets (defined as fully taxable-equivalent net interest income divided by average earning assets) was 4.90% and 4.81%, respectively, for the three and six month periods of 2008, versus 5.33% and 5.31%, respectively, for the comparable periods in 2007.  For both comparable periods, the margin decrease is primarily attributable to the factors noted above plus the recent influx of higher cost negotiated deposits.




Provision for Loan Losses

The provision for loan losses for the current quarter was $5.4 million compared to $1.7 million for the second quarter of 2007.  The provision for the first six months of 2008 totaled $9.6 million compared to $2.9 million for the same period in 2007.  The increase in the provision for both periods generally reflects the current economic slowdown and the impact of the stressed housing and real estate markets on our loan portfolio.  For the first half of 2008 compared to the same period in 2007, the increase in the loan loss provision specifically reflects a higher level of required reserves for all loan types with the exception of our home equity loan portfolio.  A majority of the increase in required reserves was driven by stress on our residential real estate and consumer (indirect auto) portfolios reflective of the impact of the aforementioned economic and real estate market slowdowns.

Net charge-offs totaled $3.2 million, or .67% of average loans for the second quarter of 2008 compared to $1.3 million, or .27% for the second quarter of 2007.  For the six month period ended June 30, 2008, net charge-offs totaled $5.1 million, or .54%, of average loans compared to $2.7 million or .27% of average loans for the same period in 2007.  The increase in net charge offs for both of the aforementioned periods primarily reflects a higher level of consumer (indirect auto) and commercial real estate loan charge-offs.

Charge-off activity for the respective periods is set forth below:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
 
CHARGE-OFFS
                       
Commercial, Financial and Agricultural
 
$
407
   
$
253
   
$
1,043
   
$
813
 
Real Estate – Construction
   
158
     
-
     
730
     
108
 
Real Estate – Commercial
   
1,115
     
5
     
1,241
     
331
 
Real Estate – Residential
   
817
     
992
     
993
     
1,059
 
Consumer
   
1,232
     
534
     
2,402
     
1,295
 
Total Charge-offs
   
3,729
     
1,784
     
6,409
     
3,606
 
                                 
RECOVERIES
                               
Commercial, Financial and Agricultural
   
55
     
47
     
195
     
83
 
Real Estate – Construction
   
-
     
-
     
-
     
-
 
Real Estate – Commercial
   
13
     
5
     
14
     
10
 
Real Estate – Residential
   
24
     
26
     
28
     
27
 
Consumer
   
446
     
392
     
1,051
     
826
 
Total Recoveries
   
538
     
470
     
1,288
     
946
 
                                 
Net Charge-offs
 
$
3,191
   
$
1,314
   
$
5,121
   
$
2,660
 
                                 
Net Charge-offs (Annualized) as a
                               
Percent of Average Loans Outstanding,
                               
Net of Unearned Interest
   
.67
%
   
.27
%
   
.54
%
   
.27
%






Noninterest Income

Noninterest income increased $634,000, or 4.2%, and $4.5 million, or 15.4%, respectively, over the comparable three and six month periods in 2007.  The increase in the current quarter reflects higher deposit fees and retail brokerage fees partially offset by a decrease in mortgage banking revenues.  The increase for the six month period is attributable to a pre-tax gain of $2.4 million from the redemption of Visa Inc. shares as well as higher deposit and bank card fees of $1.4 million and $878,000, respectively.

Noninterest income represented 36.4% and 38.3% of operating revenue, respectively, for the three and six month periods of 2008 compared to 34.6% and 33.8%, respectively, for the same periods in 2007.  The improvement for both periods reflects the aforementioned increase in noninterest income and a lower level of net interest income contribution.

The table below reflects the major components of noninterest income.

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
 
Noninterest Income:
                       
Service Charges on Deposit Accounts
 
$
7,060
   
$
6,442
   
$
13,825
   
$
12,487
 
Data Processing
   
812
     
790
     
1,625
     
1,505
 
Fees for Trust Services
   
1,125
     
1,175
     
2,275
     
2,400
 
Retail Brokerage Fees
   
735
     
804
     
1,204
     
1,266
 
Invest Sec Gain (Losses)
   
30
     
-
     
95
     
7
 
Mortgage Banking Revenues
   
506
     
850
     
1,000
     
1,529
 
Merchant Service Fees (1)
   
2,074
     
1,892
     
4,282
     
3,828
 
Interchange Fees (1)
   
1,076
     
951
     
2,085
     
1,861
 
ATM/Debit Card Fees (1)
   
758
     
661
     
1,502
     
1,302
 
Other
   
1,542
     
1,519
     
5,624
     
2,861
 
                                 
Total Noninterest Income
 
$
15,718
   
$
15,084
   
$
33,517
   
$
29,046
 

(1) Together called “Bank Card Fees”

Various significant components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts.  Deposit service charge fees increased $618,000, or 9.6%, and $1.3 million, or 10.7%, respectively, over the comparable three and six month periods in 2007.  The increase for both periods reflects a higher level of overdraft and nonsufficient funds activity.

Asset Management Fees.  Fees from asset management activities decreased $50,000, or 4.3%, and $125,000, or 5.2%, respectively, for the three and six month periods ended June 30, 2008.  The decline for both periods is due to a reduction in assets under management primarily reflective of a decline in market values for discretionary managed accounts and account attrition related to the resolution of trust and estate accounts.  At June 30, 2008, assets under management totaled $719.3 million compared to $767.8 million at the end of the second quarter of 2007.

Mortgage Banking Revenues.  Mortgage banking revenues declined $344,000, or 40.5%, and $529,000, or 34.6%, respectively, from the three and six month periods in 2007 reflective of current economic conditions and the housing market slowdown.

Bank Card Fees.  Bank card fees (including merchant services fees, interchange fees, and ATM/debit card fees) increased $404,000, or 11.5%, and $878,000, or 12.6%, respectively, over the three and six month periods of 2007 reflective of higher transaction volumes.

Other.  Other income increased $23,000, or 1.5% from the second quarter of 2007 due to higher fees for accounts receivable financing.  For the first half of 2008, other income increased $2.8 million, or 96.6% due primarily to a $2.4 million gain from the redemption of Visa Inc. shares related to their initial public offering.  Higher fees received for accounts receivable financing and gains from the sale of other real estate also contributed to the increase.




Noninterest Expense

Noninterest expense increased $859,000, or 2.9%, and $.1 million, or .16%, respectively, over the comparable three and six month periods in 2007.  The increase in the current quarter was driven by an increase in compensation and occupancy costs.  For the first six months of 2008, the increase was primarily due to the aforementioned higher compensation and occupancy expense, with a one-time reversal of our Visa Inc. litigation accrual ($1.1 million) substantially offsetting those increases.  Higher expense for commission fees related to processing cost for our accounts receivable financing product also increased over this period.  Management continues to work on expense reduction opportunities and improvement in cost controls as a core strategic objective.

The table below reflects the major components of noninterest expense.
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
(Dollars in Thousands)
 
2008
   
2007
   
2008
   
2007
Noninterest Expense:
                     
Salaries
 
$
12,627
   
$
12,286
   
$
25,631
   
$
24,629
Associate Benefits
   
2,691
     
2,706
     
5,291
     
6,082
Total Compensation
   
15,318
     
14,992
     
30,922
     
30,711
                               
Premises
   
2,491
     
2,324
     
4,853
     
4,560
Equipment
   
2,583
     
2,494
     
5,165
     
4,843
Total Occupancy
   
5,074
     
4,818
     
10,018
     
9,403
                               
Legal Fees
   
474
     
429
     
976
     
935
Professional Fees
   
948
     
872
     
1,819
     
1,864
Processing Services
   
434
     
622
     
895
     
1,004
Advertising
   
895
     
1,004
     
1,673
     
1,868
Travel and Entertainment
   
341
     
400
     
674
     
745
Printing and Supplies
   
522
     
584
     
1,037
     
1,098
Telephone
   
701
     
536
     
1,294
     
1,083
Postage
   
435
     
309
     
864
     
649
Intangible Amortization
   
1,459
     
1,458
     
2,917
     
2,917
Interchange Fees
   
1,738
     
1,573
     
3,587
     
3,242
Commission Fees
   
443
     
220
     
845
     
443
Courier Service
   
117
     
247
     
244
     
524
Miscellaneous
   
1,857
     
1,833
     
2,789
     
3,973
Total Other
   
10,364
     
10,087
     
19,614
     
20,345
                               
Total Noninterest Expense
 
$
30,756
   
$
29,897
   
$
60,554
   
$
60,459

Various significant components of noninterest expense are discussed in more detail below.

Compensation.  Salaries and associate benefit expense increased $326,000, or 2.2%, and $211,000, or .69%, respectively, over the comparable three and six month periods in 2007.  The increase in compensation for both periods is attributable to higher associate base salaries reflective of annual merit/market based raises and the opening of three new banking offices in 2007.  For the six month period, a decline in pension expense and stock based compensation partially offset the aforementioned increase in associate base salaries.  The lower pension expense generally reflects the positive impact of aggressive plan funding in prior years.  The decline in stock based compensation is due to the reversal of $577,000 in accrued expense during the first quarter of 2008 related to the termination of our 2011 Incentive Plan.

Occupancy.  Occupancy expense (including premises and equipment) increased $256,000, or 5.3%, and $615,000, or 6.5%, respectively from the comparable three and six month periods in 2007.  For both periods, the increase was due to higher depreciation expense and maintenance and repair expense for furniture, fixtures, and equipment.  The increase in depreciation expense reflects the addition of capitalized assets related to new banking offices opened during 2007, the purchase of a new phone system in early 2008, and the upgrade of banking office security equipment during the first half of 2008.  The increase in maintenance and repair expense is primarily related to higher expense for maintenance agreements in part due to the opening of new banking offices, but more significantly, maintenance related to the purchase of new software during 2007.



Other.  Other noninterest expense increased $277,000, or 2.7%, from the second quarter of 2007 due primarily to higher processing fees for our accounts receivable financing product.  For the first half of 2008, other noninterest expense decreased $731,000, or 3.6%, due to the reversal of $1.1 million of litigation reserve related to certain Visa Inc. litigation which was accrued for in the fourth quarter of 2007.  Approximately $800,000 remains accrued for Visa Inc. litigation.  The aforementioned increase in processing fees for our accounts receivable financing product and higher expense for other real estate holding costs and repossession expenses partially offset the aforementioned reversal in litigation reserve.

Operating net noninterest expense (noninterest income minus noninterest expense, excluding intangible amortization expenses) as a percent of average assets was 1.84% for the first half of 2008 compared to 2.28% for the first half of 2007.  Our operating efficiency ratio (noninterest expense, excluding intangible amortization expense, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 65.00% for the first half of 2008 compared to 66.15% for the same period in 2007.  The variances in these metrics include the impact of Visa Inc. related entries.

Income Taxes

The provision for income taxes decreased $1.9 million, or 46.2%, and $2.4 million, or 31.3%, respectively, from the comparable three and six month periods of 2007, reflecting lower taxable income.  The six month period was also affected by the resolution of a tax contingency that occurred during the first quarter of 2008.  Our effective tax rate for the three and six months ended June 30, 2008 was    31.34% and 30.21%, respectively, compared to 34.09% and 33.89%, respectively, for the same periods in 2007.  The variance in our effective tax rate for both periods was driven by a lower level of taxable income, primarily reflective of our higher loan loss provisions, in relation to the size of our permanent book/tax differences.  In addition, the six month period was also affected by the tax reserve adjustment previously mentioned.


FINANCIAL CONDITION

Average assets increased $115.1 million, or 4.57%, to $2.635 billion for the quarter-ended June 30, 2008 from $2.520 billion in the fourth quarter of 2007.  Average earning assets of $2.304 billion increased $112.7 million, or 5.15%, from the fourth quarter of 2007.  The increase was primarily due to an increase in short-term investments reflective of an increase in our client deposit balances (see discussion below).  We discuss balance sheet variances in more detail below.

Funds Sold

We ended the second quarter with approximately $195.5 million in average net overnight funds sold, compared to $84.1 million net average overnight funds sold in the fourth quarter of 2007.  An increase in public funds deposits was the primary factor driving the growth in overnight funds for the first half of the year.

Investment Securities

Our investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management.  As of June 30, 2008, the average investment portfolio decreased $1.8 million, or .95%, from the fourth quarter of 2007.  We will continue to evaluate the need to purchase securities for the investment portfolio for the remainder of 2008, taking into consideration the Bank’s overall liquidity position and pledging requirements.

Securities classified as available-for-sale are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareowners’ equity.  At June 30, 2008 and December 31, 2007, shareowners’ equity included a net unrealized gain of $167,000 and $246,000, respectively.

Loans

Average loans increased $733,000, or .04% from the fourth quarter of 2007 due to a steady pace of new loan production.  Our loan balances so far in 2008 have been stable despite the current operating environment and economic conditions, and reflect the diversity of our loan products and the variety of quality lending opportunities that we believe our banking relationships and markets continue to offer.  The lack of more significant loan growth is not unexpected given our credit underwriting discipline in the current environment.




Nonperforming Assets

Nonperforming assets of $47.8 million increased from the fourth quarter of 2007 by $19.6 million.  Nonaccrual loans increased $16.6 million from the same period in the prior year.  These increases are primarily the result of the addition of three real estate loan relationships totaling $9.8 million during the first quarter and the addition of several smaller balance residential real estate loans to builders and investors during the second quarter.  The three large real estate loan relationships previously mentioned are non-coastal related real estate developments.  Management believes that these additions have been adequately reserved for at quarter-end.  Restructured loans totaled $1.7 million at the end of the second quarter.  Other real estate owned totaled $4.3 million at the end of the quarter compared to $3.0 million at year-end 2007.  Nonperforming assets represented 2.49% of loans and other real estate at the end of the first quarter compared to 1.47% at year-end 2007.

Management performs a detailed review and valuation assessment of impaired loans on a quarterly basis and, in accordance with its current charge-off procedures, writes existing nonaccrual loans down to fair value when principal is deemed uncollectible.  Increased resources have been allocated to this process to review impaired loans migrating through the foreclosure process and record write-downs on these loans as market conditions change.  Due to elevated case loads, it is taking longer for foreclosure cases to move through the court system and, therefore, where appropriate, we are recognizing losses prior to the final resolution of the legal process for problem assets.

Allowance for Loan Losses

We maintain an allowance for loan losses at a level sufficient to provide for the estimated credit losses inherent in the loan portfolio as of the balance sheet date.  Credit losses arise from borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk.  All related risks of lending are considered when assessing the adequacy of the loan loss reserve.  The allowance for loan losses is established through a provision charged to expense.  Loans are charged against the allowance when management believes collection of the principal is unlikely.  The allowance for loan losses is based on management's judgment of overall loan quality.  This is a significant estimate based on a detailed analysis of the loan portfolio.  The balance can and will change based on changes in the assessment of the portfolio's overall credit quality.  We evaluate the adequacy of the allowance for loan losses on a quarterly basis.

The allowance for loan losses at June 30, 2008 was $22.5 million, compared to $18.1 million at December 31, 2007.  At June 30, 2008, the allowance represented 1.18% of outstanding loans (net of overdrafts) and provided coverage of 52% of nonperforming loans, compared to 0.95% and 72%, respectively at December 31, 2007.  The increase in the allowance for loan losses was driven by a higher level of required reserves for our residential real estate and consumer loan portfolios.  As previously mentioned, current economic conditions and stress within our real estate markets has had an adverse impact on our consumer borrowers and borrowers who derive their revenue or personal incomes from the real estate industry.  While there can be no assurance that we will not sustain loan losses in a particular period that are substantial in relation to the size of the allowance, our assessment of the loan portfolio does not indicate a likelihood of this occurrence.  It is management’s opinion that the allowance at June 30, 2008 is adequate to absorb losses inherent in the loan portfolio at quarter-end.

Deposits

Average total deposits were $2.141 billion for the second quarter of 2008, an increase of $123.8 million, or 6.1%, over the fourth quarter of 2007.  The increase was driven by strong growth in negotiated NOW accounts, primarily public funds deposits which began migrating late in the fourth quarter from the Florida State Board of Administration’s Local Government Investment Pool to Capital City Bank.  Partially offsetting this increase was a decline in money market accounts and certificates of deposit.

The ratio of average noninterest bearing deposits to total deposits was 19.4% for the second quarter of 2008, compared to 20.8% for the fourth quarter of 2007.  For the same periods, the ratio of average interest bearing liabilities to average earning assets was 81.5% and 80.0%, respectively.




Market Risk and Interest Rate Sensitivity

Overview
 
Our net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and shareowners’ equity.

We have established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (ALCO).  The policy establishes limits of risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years.  We measure the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling.  The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts.  As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by us.  When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model.  Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.

We prepare a current base case and three alternative simulations, at least once a quarter, and report the analysis to the Board of Directors.  In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when other business conditions so dictate.

Our interest rate risk management goal is to avoid unacceptable variations in net interest income and capital levels due to fluctuations in market rates.   Management attempts to achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by maintaining a pool of administered core deposits, and by adjusting pricing rates to market conditions on a continuing basis.

The balance sheet is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by plus or minus 100 and 200 basis points (“bp”) and plus 300bp, although we may elect not to use particular scenarios that we determined are impractical in a current rate environment.  It is management’s goal to structure the balance sheet so that net interest earnings at risk over a 12-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

We augment our quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis.  These alternative interest rate scenarios may include non-parallel rate ramps.




Analysis

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.  These measures are typically based upon a relatively brief period, usually one year.  They do not necessarily indicate the long-term prospects or economic value of the institution.

ESTIMATED CHANGES IN NET INTEREST INCOME

Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
           
Policy Limit
10.0%
7.5%
5.0%
-5.0%
-7.5%
June 30, 2008
1.2%
3.2%
2.7%
-1.8%
-7.1%
March 31, 2008
1.3%
3.9%
3.1%
-2.6%
-7.5%
 
The Net Interest Income at Risk position improved since the first quarter of 2008 in all rate scenarios.  All of the above measures of net interest income at risk remained well within prescribed policy limits.  Although assumed to be unlikely, our largest exposure is at the -200 bp level, with a measure of -7.1%.  This is within our prescribed policy limit of -7.5%.

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all of our cash flows, and discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of our net assets.

ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY
 
Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
-200 bp
           
Policy Limit
12.5%
10.0%
7.5%
-7.5%
-10.0%
June 30, 2008
1.5%
3.1%
2.3%
-3.3%
-7.1%
March 31, 2008
1.6%
3.3%
2.5%
-3.6%
-7.2%
 
Our risk profile, as measured by EVE, improved over the first quarter of 2008 in all rate scenarios.  Although assumed to be unlikely, our largest exposure is at the -200 bp level, with a measure of -7.1%.  This is well within our prescribed policy limit of 10.0%.




LIQUIDITY AND CAPITAL RESOURCES

Liquidity

General.  Liquidity for a banking institution is the availability of funds to meet increased loan demand, excessive deposit withdrawals, and the payment of other contractual cash obligations.  Management monitors our financial position in an effort to ensure we have sufficient access to liquid funds to meet normal transaction requirements and take advantage of investment opportunities and cover unforeseen liquidity demands.  In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities (i.e., collection of interest and fees), federal funds sold, loan and investment maturities, our bank lines of credit, approved lines for the purchase of federal funds by CCB, and Federal Home Loan Bank (“FHLB”) advances.

Average liquidity, defined as funds sold and interest bearing deposits with other banks, for the second quarter of 2008 was $207.0 million compared to $96.7 million in the fourth quarter of 2007.  The increase reflects the higher level of public funds deposit balances realized for the first half of the year (see discussion above – Deposits).

Borrowings.  At June 30, 2008, advances from the FHLB consisted of $45.1 million in outstanding debt and 39 notes.  For the first six months of the year, the Bank made FHLB advance payments totaling approximately $5.2 million and obtained 11 new FHLB advances totaling $11.6 million to match-fund term loan fixed rate financing for commercial loan clients.  The FHLB notes are collateralized by a blanket floating lien on all of our 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans.

We have the ability to draw on a $25.0 million Revolving Credit Note with SunTrust that is due on March 2010.  Interest is payable monthly at the floating 30 day LIBOR plus .75%.  Principal is due at maturity.  The revolving credit is unsecured.  The existing loan agreement contains certain financial covenants that we must maintain.  At June 30, 2008, we were in compliance with all of the terms of the agreement and had $23.5 million available to borrow under the line of credit facility.

We have issued two junior subordinated, deferrable interest notes to two wholly-owned Delaware statutory trusts.  The first note for $30.9 million was issued to CCBG Capital Trust I in November 2004.  The second note for $32.0 million was issued to CCBG Capital Trust II in May 2005.  The interest payments for the CCBG Capital Trust I borrowing are due quarterly at a fixed rate of 5.71% for five years, then adjustable annually to LIBOR plus a margin of 1.90%.  This note matures on December 31, 2034.  The proceeds of this borrowing were used to partially fund the acquisition of Farmers and Merchants Bank of Dublin.  The interest payments for the CCBG Capital Trust II borrowing are due quarterly at a fixed rate of 6.07% for five years, then adjustable quarterly to LIBOR plus a margin of 1.80%.  This note matures on June 15, 2035.  The proceeds of this borrowing were used to partially fund the First Alachua Banking Corporation acquisition.

Capital

Equity capital was $296.6 million as of June 30, 2008, compared to $292.7 million as of December 31, 2007.  Management continues to monitor our capital position in relation to our level of assets with the objective of maintaining a strong capital position.  The leverage ratio was 10.54% at June 30, 2008 compared to 10.41% at December 31, 2007.  Further, the risk-adjusted capital ratio of 14.35% at June 30, 2008 exceeds the 8.0% minimum requirement and the 10% threshold to be designated as “well-capitalized” under the risk-based regulatory guidelines.  As allowed by the Federal Reserve Board capital guidelines, the trust preferred securities issued by CCBG Capital Trust I and CCBG Capital Trust II are included as Tier 1 capital in our capital calculations.

Adequate capital and financial strength is paramount to the stability of CCBG and the Bank.  Cash dividends declared and paid should not place unnecessary strain on our capital levels.  Although a consistent dividend payment is believed to be favorably viewed by the financial markets and shareowners, the Board of Directors will declare dividends only if we are considered to have adequate capital.  Future capital requirements and corporate plans are considered when the Board considers a dividend payment.  Dividends declared and paid during the first six months of 2008 totaled $.370 per share compared to $.350 per share for the first six months of 2007, an increase of 5.7%.  The dividend payout ratios for the first six months of 2008 and 2007 were 52.6% and 42.9%, respectively.

State and federal regulations place certain restrictions on the payment of dividends by both CCBG and the Bank.  At June 30, 2008, these regulations and covenants did not impair CCBG or the Bank's ability to declare and pay dividends or to meet other existing obligations in the normal course of business.

During the first six months of 2008, shareowners’ equity increased $3.9 million, or 2.7%, on an annualized basis.  During this same period, shareowners’ equity was positively impacted by net income of $12.1 million and the issuance of common stock of $.5 million.  Equity was reduced by dividends paid during the first six months by $6.2 million, or $.370 per share, the repurchase/retirement of common stock of $2.4 million, and a decline in the unrealized gain on investment securities of $.1 million.  At June 30, 2008, our common stock had a book value of $17.33 per diluted share compared to $17.03 at December 31, 2007.




Our Board of Directors has authorized the repurchase of up to 2,671,875 shares of our outstanding common stock.  The purchases are made in the open market or in privately negotiated transactions.  To date, we have repurchased a total of 2,374,242 shares at an average purchase price of $26.08 per share.  We repurchased 90,041 shares of our common stock during the first six months of 2008 at an average purchase price of $26.77 and repurchased 65,041 of the 90,041 shares of our common stock in the second quarter of 2008 at an average purchase price of $25.88 per share.


OFF-BALANCE SHEET ARRANGEMENTS

We do not currently engage in the use of derivative instruments to hedge interest rate risks.  However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.

At June 30, 2008, we had $400.8 million in commitments to extend credit and $16.6 million in standby letters of credit.  Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party.  We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet on-going obligations.  In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the FHLB, and investment security maturities provide a sufficient source of funds to meet these commitments.




ACCOUNTING POLICIES

Critical Accounting Policies

The consolidated financial statements and accompanying Notes to Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make various estimates and assumptions (see Note 1 in the Notes to Consolidated Financial Statements).  We believe that, of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Allowance for Loan Losses.  The allowance for loan losses is established through a charge to the provision for loan losses.  Provisions are made to reserve for estimated losses in loan balances.  The allowance for loan losses is a significant estimate and is evaluated quarterly by us for adequacy.  The use of different estimates or assumptions could produce a different required allowance, and thereby a larger or smaller provision recognized as expense in any given reporting period.  A further discussion of the allowance for loan losses can be found in the section entitled "Allowance for Loan Losses" and Note 1 in the Notes to Consolidated Financial Statements in our 2007 Form 10-K.

Intangible Assets.  Intangible assets consist primarily of goodwill, core deposit assets, and other identifiable intangibles that were recognized in connection with various acquisitions.  Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets.  We perform an impairment review on an annual basis to determine if there has been impairment of our goodwill.  We have determined that no impairment existed at December 31, 2007.  Impairment testing requires management to make significant judgments and estimates relating to the fair value of its identified reporting units.  Significant changes to these estimates may have a material impact on our reported results.

Core deposit assets represent the premium we paid for core deposits.  Core deposit intangibles are amortized on the straight-line method over various periods ranging from 5-10 years.  Generally, core deposits refer to nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW, money market and savings.  We make certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the client bases acquired.  If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment.  Any changes in the original estimates may materially affect reported earnings.

Pension Assumptions. We have a defined benefit pension plan for the benefit of substantially all of our associates.  Our funding policy with respect to the pension plan is to contribute amounts to the plan sufficient to meet minimum funding requirements as set by law.  Pension expense, reflected in the Consolidated Statements of Income in noninterest expense as "Salaries and Associate Benefits," is determined by an external actuarial valuation based on assumptions that are evaluated annually as of December 31, the measurement date for the pension obligation.  The Consolidated Statements of Financial Condition reflect an accrued pension benefit cost due to funding levels and unrecognized actuarial amounts.  The most significant assumptions used in calculating the pension obligation are the weighted-average discount rate used to determine the present value of the pension obligation, the weighted-average expected long-term rate of return on plan assets, and the assumed rate of annual compensation increases.  These assumptions are re-evaluated annually with the external actuaries, taking into consideration both current market conditions and anticipated long-term market conditions.

The weighted-average discount rate is determined by matching the anticipated Retirement Plan cash flows to a long-term corporate Aa-rated bond index and solving for the underlying rate of return, which investing in such securities would generate.  This methodology is applied consistently from year-to-year.  We anticipate using a 6.25% discount rate in 2008.

The weighted-average expected long-term rate of return on plan assets is determined based on the current and anticipated future mix of assets in the plan.  The assets currently consist of equity securities, U.S. Government and Government Agency debt securities, and other securities (typically temporary liquid funds awaiting investment).  We anticipate using a rate of return on plan assets of 8.0% for 2008.

The assumed rate of annual compensation increases is based on expected trends in salaries and the employee base.  We used a rate of 5.50% in 2007 and do not expect this assumption to change materially in 2008.

Information on components of our net periodic benefit cost is provided in Note 8 of the Notes to Consolidated Financial Statements included herein and Note 12 of the Notes to Consolidated Financial Statements in our 2007 Form 10-K.




Recent Accounting Pronouncements

Statement of Financial Accounting Standards

SFAS No. 141, “Business Combinations (“SFAS 141R”).”  SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses.  SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date.  Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt.  This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.  SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141.  Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.”   SFAS 141R is effective for business combinations closing on or after January 1, 2009.  We are in the process of reviewing the impact of SFAS 141R.

SFAS No. 157, "Fair Value Measurements."  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements (see Note 11 – Fair Value Measurements).

SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115."  SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates (see Note 11 – Fair Value Measurements).

SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.”  SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements.  Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest.  It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.  SFAS 160 is effective on January 1, 2009 and is not expected to have a significant impact on our financial statements.

Emerging Issues Task Force (“EITF”) Issues

In September 2006, the FASB ratified the consensus the EITF reached regarding EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“Issue 06-4”), which provides accounting guidance for postretirement benefits related to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policies.  The consensus concludes that an employer should recognize a liability for the postretirement benefit in accordance with Statement 106.  In addition, the consensus states that an employer should also recognize an asset based on the substance of the arrangement with the employee.  Issue 06-4 is effective for fiscal years beginning after December 15, 2007 with early application permitted.  We adopted EITF 06-4 on January 1, 2008 as a change in accounting principle through a cumulative-effect adjustment to retained earnings totaling $30,000.

SEC Staff Accounting Bulletins

SAB No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings."  SAB No. 109 supersedes SAB No. 105, "Application of Accounting Principles to Loan Commitments," and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.  The guidance in SAB No. 109 became effective on January 1, 2008 and did not have a material impact on our financial statements.


TABLE I
AVERAGE BALANCES & INTEREST RATES
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
   
Balance
   
Interest
   
Rate
 
ASSETS
                                                                       
Loans, Net of Unearned Interest(1)(2)
 
$
1,908,802
   
$
33,610
     
7.08
%
 
$
1,944,969
   
$
39,300
     
8.10
%
 
$
1,909,187
   
$
69,063
     
7.27
%
 
$
1,962,499
   
$
78,564
     
8.07
%
Taxable Investment Securities
   
93,814
     
1,028
     
4.38
     
105,425
     
1,236
     
4.68
     
94,300
     
2,136
     
4.52
     
106,894
     
2,499
     
4.68
 
Tax-Exempt Investment Securities(2)
   
94,371
     
1,200
     
5.09
     
83,907
     
1,088
     
5.19
     
92,581
     
2,407
     
5.20
     
83,270
     
2,127
     
5.11
 
Funds Sold
   
206,984
     
1,028
     
1.96
     
52,935
     
689
     
5.15
     
206,649
     
2,602
     
2.49
     
46,669
     
1,210
     
5.16
 
Total Earning Assets
   
2,303,971
     
36,866
     
6.43
     
2,187,236
     
42,313
     
7.76
     
2,302,717
     
76,208
     
6.65
     
2,199,332
     
84,400
     
7.73
 
Cash & Due From Banks
   
82,182
                     
88,075
                     
88,214
                     
88,376
                 
Allowance for Loan Losses
   
(20,558
)
                   
(17,263
)
                   
(19,392
)
                   
(17,169
)
               
Other Assets
   
269,176
                     
253,204
                     
269,083
                     
250,428
                 
TOTAL ASSETS
 
$
2,634,771
                   
$
2,511,252
                   
$
2,640,622
                   
$
2,520,967
                 
                                                                                                 
LIABILITIES
                                                                                               
NOW Accounts
 
$
788,237
   
$
1,935
     
0.99
%
 
$
541,525
   
$
2,611
     
1.93
%
 
$
781,064
   
$
5,375
     
1.38
%
 
$
546,884
   
$
5,237
     
1.93
%
Money Market Accounts
   
376,996
     
1,210
     
1.29
     
393,403
     
3,458
     
3.53
     
383,412
     
3,408
     
1.79
     
390,088
     
6,885
     
3.56
 
Savings Accounts
   
117,182
     
29
     
0.10
     
122,560
     
74
     
0.24
     
115,172
     
63
     
0.11
     
123,982
     
152
     
0.25
 
Other Time Deposits
   
443,006
     
3,988
     
3.62
     
474,761
     
4,955
     
4.19
     
455,143
     
8,797
     
3.89
     
477,845
     
9,824
     
4.15
 
Total Int. Bearing Deposits
   
1,725,421
     
7,162
     
1.67
     
1,532,249
     
11,098
     
2.91
     
1,734,791
     
17,643
     
2.05
     
1,538,799
     
22,098
     
2.90
 
Short-Term Borrowings
   
55,830
     
296
     
2.13
     
66,764
     
737
     
4.41
     
61,963
     
817
     
2.64
     
67,832
     
1,498
     
4.44
 
Subordinated Notes Payable
   
62,887
     
931
     
5.86
     
62,887
     
932
     
5.94
     
62,887
     
1,862
     
5.86
     
62,887
     
1,858
     
5.96
 
Other Long-Term Borrowings
   
34,612
     
396
     
4.60
     
42,284
     
496
     
4.71
     
31,128
     
727
     
4.70
     
42,708
     
998
     
4.71
 
Total Int. Bearing Liabilities
   
1,878,750
     
8,785
     
1.88
     
1,704,184
     
13,263
     
3.12
     
1,890,769
     
21,049
     
2.24
     
1,712,226
     
26,452
     
3.11
 
Noninterest Bearing Deposits
   
415,125
                     
455,169
                     
409,918
                     
456,728
                 
Other Liabilities
   
40,006
                     
42,547
                     
41,088
                     
39,115
                 
TOTAL LIABILITIES
   
2,333,881
                     
2,201,900
                     
2,341,775
                     
2,208,069
                 
                                                                                                 
SHAREOWNERS' EQUITY
                                                                                               
TOTAL SHAREOWNERS' EQUITY
   
300,890
                     
309,352
                     
298,847
                     
312,898
                 
                                                                                                 
TOTAL LIABILITIES & EQUITY
 
$
2,634,771
                   
$
2,511,252
                   
$
2,640,622
                   
$
2,520,967
                 
                                                                                                 
Interest Rate Spread
                   
4.55
                     
4.64
                     
4.41
                     
4.62
 
Net Interest Income
         
$
28,081
                   
$
29,050
                   
$
55,159
                   
$
57,948
         
Net Interest Margin(3)
                   
4.90
%
                   
5.33
%
                   
4.81
%
                   
5.31
%
 
(1)
Average balances include nonaccrual loans.  Interest income includes fees on loans of $682,000 and $1.4 million, for the three and six months ended June 30, 2008, versus $743,000 and $1.6 million for the comparable periods ended June 30, 2007.

(2)
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.

(3)
Taxable equivalent net interest income divided by average earning assets.



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Financial Condition - Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.  Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2007.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of June 30, 2008, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of June 30, 2008, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934).  There have been no significant changes in our internal control over financial reporting during our most recently completed fiscal quarter that could significantly affect our internal control over financial reporting.

PART II.
OTHER INFORMATION

Legal Proceedings

We are party to lawsuits and claims arising out of the normal course of business.  In management's opinion, there are no known pending claims or litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position, or cash flows.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face.  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.
Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table contains information about all purchases made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.
 
Period
Total number
of shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased as
part of our share
repurchase program(1)
 
Maximum Number
of shares that
may yet be purchased
under our share
repurchase program
 
                               
April 1, 2008 to
April 30, 2008
 
 
6,500
     
 
$25.90
     
 
2,315,701
     
 
356,174
 
May 1, 2008 to
May 31, 2008
 
 
38,050
     
 
$25.74
     
 
2,353,751
     
 
318,124
 
June 1, 2008 to
June 30, 2008
 
 
20,491
     
 
$25.99
     
 
2,374,242
     
 
297,633
 
Total
 
65,041
     
$25.88
     
2,374,242
     
297,633
 
                               

(1)
This balance represents the number of shares that were repurchased through the Capital City Bank Group, Inc. Share Repurchase Program (the “Program”), which was approved on March 30, 2000, and modified by our Board on January 24, 2002, March 22, 2007, and November 11, 2007 under which we were authorized to repurchase up to 2,671,875 shares of our common stock.  The Program is flexible and shares are acquired from the public markets and other sources using free cash flow.  There is no predetermined expiration date for the Program.  No shares in the second quarter were repurchased outside of the Program.

Item 3.
Defaults Upon Senior Securities

None.

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

The Annual Meeting of Shareowners of Capital City Bank Group, Inc. was held on April 24, 2008.  Proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, and there was no solicitation in opposition to management’s solicitations.  The following summarizes all matters voted upon at this meeting.

1.
The following directors were elected for terms expiring as noted.  These individuals served on the Board of Directors prior to the Annual Meeting.  The number of votes cast were as follows:

For terms to expire at the 2011 annual meeting:
 
For
   
Against/Withheld
 
Thomas A. Barron
    14,348,133       50,871  
J. Everitt Drew
    14,345,156       53,848  
Lina Knox
    14,318,221       80,783  


2.
The shareowners ratified the selection of Ernst & Young as the Company's independent auditors for the fiscal year ending December 31, 2008.  The number of votes cast were as follows:

 
Against/
 
Broker
For
Withheld
Abstention
Non Vote
14,349,754
24,063
25,186
0





Item 5.
Other Information

None.

Item 6.

(A)
Exhibits

10.1

31.1

31.2

32.1

32.2  

 
 
 

 


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 Chief Financial Officer hereunto duly authorized.

CAPITAL CITY BANK GROUP, INC.
        (Registrant)

 
By: /s/ J. Kimbrough Davis
 
J. Kimbrough Davis
 
Executive Vice President and Chief Financial Officer
 
(Mr. Davis is the Principal Financial Officer and has been duly
 
 authorized to sign on behalf of the Registrant)  
   
Date:  August 8, 2008
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
-37-