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CAPITAL CITY BANK GROUP INC - Annual Report: 2009 (Form 10-K)

form10k_123109.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
____________________
 
 
FORM 10-K
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended December 31, 2009
   
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
 
CCBG Logo
(Exact name of Registrant as specified in its charter)
 
Florida
 
0-13358
 
59-2273542
(State of Incorporation)
 
(Commission File Number)
 
(IRS Employer Identification No.)
217 North Monroe Street, Tallahassee, Florida
 
 
32301
(Address of principal executive offices)
 
(Zip Code)
(850) 671-0300
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class                                                           Name of Each Exchange on Which Registered
Common Stock, $0.01 par value                                                                           The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [   ] No  [ X ]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [   ] No [ X ]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No  [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [   ]  No  [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
 
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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
 
Large accelerated filer [   ]                                                                            Accelerated filer  [ X ]                                          Non-accelerated filer   [   ]Smaller reporting company [   ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No  [ X ]
 
The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $141,409,946 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at February 26, 2010
Common Stock, $0.01 par value per share
 
17,056,303 shares
     
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of our Proxy Statement for the Annual Meeting of Shareowners to be held on April 20, 2010, are incorporated by reference in Part III.  
 

 
1

 

CAPITAL CITY BANK GROUP, INC.
ANNUAL REPORT FOR 2009 ON FORM 10-K

TABLE OF CONTENTS
     
PAGE
         
Item 1.
   
4
Item 1A.
   
16
Item 1B.
   
25
Item 2.
   
25
Item 3.
   
25
Item 4.
   
 25
         
       
         
 Item 5.
 
   
25
Item 6.
   
27
Item 7.
   
28
Item 7A.
   
55
Item 8.
   
56
Item 9.
   
94
Item 9A.
   
94
Item 9B.
   
94
         
       
         
Item 10.
   
96
Item 11.
   
96
Item 12.
   
96
Item 13.
   
97
Item 14.
   
97
         
       
         
Item 15.
   
98
 
100



 
2

 

 
INTRODUCTORY NOTE
 
This Annual Report on Form 10-K 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.
 
In addition to those risks discussed in this Annual Report under Item 1A Risk Factors, factors that could cause our actual results to differ materially from those in the forward-looking statements, include, without limitation:
 
§  
legislative or regulatory changes;
§  
the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
§  
the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision;
§  
the effects of the health and soundness of other financial institutions, including the FDIC’s need to increase Deposit Insurance Fund assessments;
§  
our ability to declare and pay dividends;
§  
changes in the securities and real estate markets;
§  
changes in monetary and fiscal policies of the U.S. Government;
§  
inflation, interest rate, market and monetary fluctuations;
§  
the frequency and magnitude of foreclosure of our loans;
§  
the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
§  
our need and our ability to incur additional debt or equity financing;
§  
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 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;
§  
increased competition and its effect on pricing;
§  
technological changes;
§  
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 listed in Item 1A Risk Factors or discussed in this 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.

 
3

 

PART I

Item 1.        Business

About Us

General
 
Capital City Bank Group, Inc. (“CCBG”) is a financial holding company registered under the Gramm-Leach-Bliley Act (“Gramm-Leach-Bliley Act”).  CCBG was incorporated under Florida law on December 13, 1982, to acquire five national banks and one state bank that all subsequently became part of CCBG’s bank subsidiary, Capital City Bank (“CCB” or the “Bank”).  In this report, the terms “Company”, “we”, “us”, or “our” mean CCBG and all subsidiaries included in our consolidated financial statements.
 
We provide traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bank cards, data processing, and securities brokerage services through 70 full-service banking locations in Florida, Georgia, and Alabama.  CCB operates these banking locations.
 
At December 31, 2009, we had total consolidated assets of approximately $2.708 billion, total deposits of approximately $2.258 billion and shareowners’ equity was approximately $268 million.  Our financial condition and results of operations are more fully discussed in our consolidated financial statements.
 
CCBG’s principal asset is the capital stock of the Bank. CCB accounted for approximately 100% of consolidated assets at December 31, 2009, and approximately 100% of consolidated net income for the year ended December 31, 2009.  In addition to our banking subsidiary, we have seven indirect subsidiaries, Capital City Trust Company, Capital City Mortgage Company (inactive), Capital City Banc Investments, Inc., Capital City Services Company, First Insurance Agency of Grady County, Inc., Southern Oaks, Inc., and FNB Financial Services, Inc., all of which are wholly-owned subsidiaries of CCB, and two direct wholly-owned subsidiaries of CCBG, CCBG Capital Trust I and CCBG Capital Trust II.
 
Dividends and management fees received from the Bank are our primary source of income.  Dividend payments by the Bank to us depend on the capitalization, earnings and projected growth of the Bank, and are limited by various regulatory restrictions.  See the section entitled “Regulatory Considerations” in this Item 1 and Note 15 in the Notes to Consolidated Financial Statements for additional information.  We had a total of 1,006 (full-time equivalent) associates at February 26, 2010.  Page 27 contains other financial and statistical information about us.
 
We have one reportable segment with the following principal services:  Banking Services, Data Processing Services, Trust and Asset Management Services, and Brokerage Services.

Regulatory Matter
 
In late February 2010, the Board of Directors of the Bank and the Board of Directors of CCBG agreed to approve certain board resolutions requested by the Federal Reserve (the “Federal Reserve Resolutions”).  From a regulatory perspective, this is an informal, nonpublic agreement; however, in the interest of full disclosure, we are summarizing the main obligations of the Federal Reserve Resolutions.  The Federal Reserve Resolutions require the Bank and CCBG to take actions to address areas of concern and to provide periodic reports to the Federal Reserve.  For the Bank, these actions include, among other things, requiring the Bank to receive approval from the Federal Reserve prior to declaring or paying dividends and requiring the preparation of a written capital plan that demonstrates the Bank’s ability to remain “well capitalized”.  Without the prior approval of the Federal Reserve, CCBG agreed to not (i) incur any new debt or refinance existing debt; (ii) declare any dividends on any class of stock or make any payments on its trust preferred securities; (iii) reduce its capital position by redeeming shares of stock; or (iv) make any payment that would reduce capital outside of normal and routine operating expenses.

We have received approval from the Federal Reserve to pay a $0.19 per share dividend in March 2010.

Going forward, we may be unable to obtain the required approvals discussed above.  If we are unable to obtain these approvals, then the Federal Reserve Resolutions may have a significant effect on our future operations, as well as our ability to continue paying dividends and repurchase stock.  As of December 31, 2009, without the need to draw additional dividends from the Bank, we believe CCBG has sufficient cash to fund shareowner dividends in 2010 should the Board choose to declare and pay a quarterly dividend during the year and we receive the required approval from the Federal Reserve.

In addition to the above, we may elect to withdraw our election to be designated as a financial holding company.  At this time, because we are not engaged in any of the activities permitted by this designation, we do not expect there to be a material impact on our operations if we choose to withdraw that election.

4

Banking Services
 
CCB is a Florida chartered full-service bank engaged in the commercial and retail banking business. Significant services offered by the Bank include:
 
§  
Business Banking – The Bank provides banking services to corporations and other business clients. Credit products are available for a wide variety of general business purposes, including financing for commercial business properties, equipment, inventories and accounts receivable, as well as commercial leasing and letters of credit.  We also provide treasury management services, and, through a marketing alliance with Elavon, Inc., merchant credit card transaction processing services.


§  
Commercial Real Estate Lending – The Bank provides a wide range of products to meet the financing needs of commercial developers and investors, residential builders and developers, and community development.  Credit products are available to facilitate the purchase of land and/or build structures for business use and for investors who are developing residential or commercial property.

§  
Residential Real Estate Lending – The Bank provides products to help meet the home financing needs of consumers, including conventional permanent and construction/permanent (fixed or adjustable rate) financing arrangements, and FHA/VA loan products.  The bank offers both fixed-rate and adjustable rate residential mortgage (ARM) loans.  As of December 31, 2009, approximately 13.2% of the Bank’s loan portfolio consisted of residential ARM loans.  A portion of our loans originated are sold into the secondary market.  The Bank offers these products through its existing network of banking offices.  We do not originate subprime residential real estate loans.

§  
Retail Credit – The Bank provides a full range of loan products to meet the needs of consumers, including personal loans, automobile loans, boat/RV loans, home equity loans, and credit card programs.

§  
Institutional Banking – The Bank provides banking services to meet the needs of state and local governments, public schools and colleges, charities, membership and not-for-profit associations including customized checking and savings accounts, cash management systems, tax-exempt loans, lines of credit, and term loans.

§  
Retail Banking – The Bank provides a full range of consumer banking services, including checking accounts, savings programs, automated teller machines (ATMs), debit/credit cards, night deposit services, safe deposit facilities, PC/Internet banking, and mobile banking.  Clients can use Capital City Bank Direct which offers both a “live” call center between the hours of 8 a.m. to 6 p.m. five days a week, and an automated phone system offering 24-hour access to their deposit and loan account information, and transfer funds between linked accounts.  The Bank is a member of the “Star” ATM Network that permits banking clients to access cash at ATMs or point of sale merchants.
 
Data Processing Services

Capital City Services Company (the “Services Company”) provides data processing services to financial institutions (including CCB), government agencies, and commercial clients located in North Florida and South Georgia.  As of February 26, 2010, the Services Company is providing data processing services to seven correspondent banks, which have relationships with CCB.
 
Trust Services and Asset Management

Capital City Trust Company (the “Trust Company”) is the investment management arm of CCB.  The Trust Company provides asset management for individuals through agency, personal trust, IRAs, and personal investment management accounts.
 
Administration of pension, profit sharing, and 401(k) plans is a significant product line.  Associations, endowments, and other non-profit entities hire the Trust Company to manage their investment portfolios. Additionally, a staff of well-trained professionals serves individuals requiring the services of a trustee, personal representative, or a guardian.  The market value of trust assets under discretionary management exceeded $706.8 million as of December 31, 2009, with total assets under administration exceeding $784.9 million.
 
Brokerage Services

We offer access to retail investment products through Capital City Banc Investments, Inc., a wholly-owned subsidiary of CCB.  These products are offered through INVEST Financial Corporation, a member of FINRA and SIPC.  Non-deposit investment and insurance products are: (1) not FDIC insured; (2) not deposits, obligations, or guaranteed by any bank; and (3) subject to investment risk, including the possible loss of principal amount invested.  Capital City Banc Investments, Inc. offers a full line of retail securities products, including U.S. Government bonds, tax-free municipal bonds, stocks, mutual funds, unit investment trusts, annuities, life insurance and long-term health care.  We are not an affiliate of INVEST Financial Corporation.
 
 
5

 
Expansion of Business
 
Since 1984, we have completed 15 acquisitions totaling approximately $1.6 billion in deposits within existing and new markets.  In 2009, we opened one replacement office in Gainesville, Florida.  In 2009, we implemented a branding program for our retail banking offices - we expect to open two replacement offices in Macon, Georgia and Palatka, Florida, and a new office for Capital City Trust Company in Tallahassee, Florida during the first half of 2010.
 
We plan to continue our expansion, emphasizing a combination of growth in existing markets and acquisitions.  The restructuring in late 2007 of our community banking model has resulted in a more tactical focus on organic growth within certain higher growth metro markets, including Macon, Tallahassee, Gainesville, and Hernando/Pasco counties.  Acquisitions will be focused on Florida, Georgia, and Alabama with particular focus on acquiring banks and banking offices that are $100 million to $400 million in asset size, located on the outskirts of major metropolitan areas.  We will evaluate de novo expansion opportunities in attractive new markets in the event that acquisition opportunities are not feasible.  Other expansion opportunities that will be evaluated include asset management and mortgage banking.  Subject to regulatory approval, we will continue to seek expansion opportunities which meet our financial and strategic objectives.
 
Competition
 
We operate in a highly competitive environment, especially with respect to services and pricing. In addition, the banking business is experiencing enormous changes.  In 2009, 140 financial institutions failed in the U.S., including 25 in Georgia and 14 in Florida, nearly all of which were community banks.  The assets and deposits of many of these failed community banks were acquired mostly by large financial institutions, and we expect significant consolidation to continue during 2010.  We believe this consolidation further enhances our competitive position and opportunities in many of our markets.  Our primary market area is 20 counties in Florida, five counties in Georgia, and one county in Alabama.  In these markets, the Bank competes against a wide range of banking and nonbanking institutions including savings and loan associations, credit unions, money market funds, mutual fund advisory companies, mortgage banking companies, investment banking companies, finance companies and other types of financial institutions.  All of Florida’s major banking concerns have a presence in Leon County.  CCB’s Leon County deposits totaled $844.8 million, or 37.4%, of our consolidated deposits at December 31, 2009.
 
The following table depicts our market share percentage within each respective county, based on total commercial bank deposits within the county.
   
Market Share as of June 30,(1)
 
   
2009
   
2008
   
2007
 
Florida
                 
Alachua County
   
3.9
%
   
4.6
%
   
4.7
%
Bradford County
   
51.3
%
   
50.1
%
   
47.6
%
Citrus County
   
2.7
%
   
3.1
%
   
3.0
%
Clay County
   
1.7
%
   
1.9
%
   
2.0
%
Dixie County
   
23.4
%
   
23.4
%
   
22.9
%
Gadsden County
   
55.1
%
   
55.7
%
   
61.0
%
Gilchrist County
   
39.5
%
   
37.8
%
   
33.6
%
Gulf County
   
7.7
%
   
9.1
%
   
11.7
%
Hernando County
   
1.6
%
   
1.2
%
   
1.2
%
Jefferson County
   
18.3
%
   
21.9
%
   
22.8
%
Leon County
   
15.9
%
   
17.6
%
   
16.2
%
Levy County
   
27.9
%
   
31.7
%
   
33.0
%
Madison County
   
10.1
%
   
12.1
%
   
13.1
%
Pasco County
   
0.2
%
   
0.2
%
   
0.2
%
Putnam County
   
14.0
%
   
19.7
%
   
11.1
%
St. Johns County
   
0.8
%
   
1.1
%
   
1.2
%
Suwannee County
   
6.6
%
   
7.2
%
   
7.7
%
Taylor County
   
30.7
%
   
31.1
%
   
30.1
%
Wakulla County
   
3.8
%
   
5.5
%
   
2.6
%
Washington County
   
14.2
%
   
17.0
%
   
13.8
%
Georgia
                       
Bibb County
   
2.6
%
   
2.1
%
   
2.5
%
Burke County
   
7.7
%
   
7.4
%
   
7.8
%
Grady County
   
16.2
%
   
16.7
%
   
18.7
%
Laurens County
   
12.7
%
   
16.2
%
   
19.2
%
Troup County
   
5.9
%
   
5.6
%
   
6.2
%
Alabama
                       
Chambers County
   
6.6
%
   
7.3
%
   
6.5
%
(1)
Obtained from the June 30, 2009 FDIC/OTS Summary of Deposits Report.
 

 
6

 

The following table sets forth the number of commercial banks and offices, including our offices and our competitors' offices, within each of the respective counties.

County
 
Number of
Commercial Banks
   
Number of Commercial Bank Offices
 
Florida
           
   Alachua
   
15
     
66
 
   Bradford
   
3
     
3
 
   Citrus
   
14
     
49
 
   Clay
   
15
     
31
 
   Dixie
   
4
     
4
 
   Gadsden
   
4
     
6
 
   Gilchrist
   
3
     
6
 
   Gulf
   
6
     
9
 
   Hernando
   
13
     
43
 
   Jefferson
   
2
     
2
 
   Leon
   
20
     
96
 
   Levy
   
3
     
13
 
   Madison
   
6
     
6
 
   Pasco
   
26
     
120
 
   Putnam
   
6
     
16
 
   St. Johns
   
23
     
66
 
   Suwannee
   
5
     
8
 
   Taylor
   
3
     
4
 
   Wakulla
   
4
     
7
 
   Washington
   
6
     
5
 
Georgia
               
   Bibb
   
12
     
57
 
   Burke
   
5
     
10
 
   Grady
   
5
     
8
 
   Laurens
   
10
     
20
 
  Troup
   
11
     
27
 
Alabama
               
   Chambers
   
5
     
10
 

Data obtained from the June 30, 2009 FDIC/OTS Summary of Deposits Report.

Seasonality
 
We believe our commercial banking operations are not generally seasonal in nature; however, public deposits tend to increase with tax collections in the fourth quarter and decline with spending thereafter.

 
7

 

Regulatory Considerations

We must comply with state and federal banking laws and regulations that control virtually all aspects of our operations.  These laws and regulations generally aim to protect our depositors, not our shareowners or our creditors.  Any changes in applicable laws or regulations may materially affect our business and prospects.  Such legislative or regulatory changes may also affect our operations.  The following description summarizes some of the laws and regulations to which we are subject.  References to applicable statutes and regulations are brief summaries, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations.

Regulatory Reform
 
On June 17, 2009, the U.S. Treasury Department released a white paper entitled “Financial Regulatory Reform—A New Foundation: Rebuilding Financial Regulation and Supervision,” which outlined the Obama administration’s plan to make extensive and wide ranging reforms to the U.S. financial regulatory system.  The plan contains proposals to, among other things, (i) create a new financial regulatory agency called the Consumer Financial Protection Agency, (ii) enhance supervision and regulation of securitization markets, (iii) dispose of the interstate branching framework of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”) by giving national and state-chartered banks the unrestricted ability to branch across state lines, (iv) establish strengthened capital and prudential standards for banks and bank holding companies, (v) increase supervision and regulation of large financial firms, and (vi) create an Office of National Insurance within the U.S. Treasury Department.
 
On December 10, 2009, the U.S. House of Representatives approved “The Wall Street Reform and Consumer Protection Act,” which included some of the U.S. Treasury Department’s proposed reforms.  The House bill provides for, among other things, (i) the creation of the Consumer Financial Protection Agency, (ii) reforming mortgage lending and predatory lending practices, (iii) increased supervision and regulation of large financial firms, (iv) the creation of a federal insurance office, and (v) executive compensation reform.
 
We are unsure of what regulatory reforms, if any, will be adopted.  Thus, this “Regulatory Considerations” section discusses what we believe to be the most significant laws we currently face without regard to the impact of these significant, but not yet adopted, reforms.

The Company
 
CCBG is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a financial holding company under the Gramm-Leach-Bliley Act and is registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act of 1956. As a result, we are subject to supervisory regulation and examination by the Federal Reserve.  The Gramm-Leach-Bliley Act, the Bank Holding Company Act, and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Permitted Activities.  The Gramm-Leach-Bliley Act modernized the U.S. banking system by (i) allowing bank holding companies that qualify as “financial holding companies” to engage in a broad range of financial and related activities; (ii) allowing insurers and other financial service companies to acquire banks; (iii) removing restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and (iv) establishing the overall regulatory scheme applicable to bank holding companies that also engage in insurance and securities operations.  The general effect of the law was to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers.  Activities that are financial in nature are broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
 
In contrast to financial holding companies, bank holding companies are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  Except for the activities relating to financial holding companies permissible under the Gramm-Leach-Bliley Act, these restrictions will apply to us.  In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects.  Possible benefits include greater convenience, increased competition, and gains in efficiency.  Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices.  Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.
  
8

Changes in Control.  Subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank or bank holding company.  A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or as we will refer to as the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the acquisition.  Our common stock is registered under Section 12 of the Exchange Act.
 
The Federal Reserve Board maintains a policy statement on minority equity investments in banks and bank holding companies, that permits investors to (1) acquire up to 33 percent of the total equity of a target bank or bank holding company, subject to certain conditions, including (but not limited to) that the investing firm does not acquire 15 percent or more of any class of voting securities, and (2) designate at least one director, without triggering the various regulatory requirements associated with control.
 
As a bank holding company, we are required to obtain prior approval from the Federal Reserve before (i) acquiring all or substantially all of the assets of a bank or bank holding company, (ii) acquiring direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless we own a majority of such bank’s voting shares), or (iii) merging or consolidating with any other bank or bank holding company.  In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act of 1977.
 
Under Florida law, a person or entity proposing to directly or indirectly acquire control of a Florida bank must first obtain permission from the Florida Office of Financial Regulation. Florida statutes define “control” as either (a) indirectly or directly owning, controlling or having power to vote 25% or more of the voting securities of a bank; (b) controlling the election of a majority of directors of a bank; (c) owning, controlling, or having power to vote 10% or more of the voting securities as well as directly or indirectly exercising a controlling influence over management or policies of a bank; or (d) as determined by the Florida Office of Financial Regulation.  These requirements will affect us because the Bank is chartered under Florida law and changes in control of us are indirect changes in control of the Bank.
 
Tying.  Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extending credit, to other services or products (other than traditional banking products) offered by the holding company or its affiliates.
 
Capital; Dividends; Source of Strength.  The Federal Reserve imposes certain capital requirements on bank holding companies under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are described below under “Capital Regulations.”  Subject to its capital requirements and certain other restrictions, including the need to seek prior approval from the Federal Reserve in accordance with the Federal Reserve Resolutions, we are generally able to borrow money to make a capital contribution to the Bank, and such loans may be repaid from dividends paid from the Bank to us.
 
In accordance with state and federal regulations, the ability of the Bank to pay dividends is subject to prior approval by the Florida Office of Financial Regulation and the Federal Reserve Bank, and is further governed by the recently issued Federal Reserve Resolutions, which require us to receive approval from the Federal Reserve prior to paying a dividend.  Subject to compliance with federal and state securities laws, and without the need to seek regulatory approval, CCBG may raise capital for contributions to the Bank by issuing securities.
 
In accordance with Federal Reserve policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which we might not otherwise do so.  In furtherance of this policy, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company.  Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.
 
 
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Capital City Bank

CCB is a banking institution that is chartered by and headquartered in the State of Florida, and it is subject to supervision and regulation by the Florida Office of Financial Regulation.  The Florida Office of Financial Regulation supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of branches.  The Bank is also a member bank of the Federal Reserve System, which makes the Bank’s operations subject to broad federal regulation and oversight by the Federal Reserve.  In addition, the Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law, and the FDIC has certain enforcement powers over the Bank.
 
As a state chartered banking institution in the State of Florida, the Bank is empowered by statute, subject to the limitations contained in those statutes, to take and pay interest on savings and time deposits, to accept demand deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of banks and corporations and to provide various other banking services on behalf of the Bank’s clients.  Various consumer laws and regulations also affect the operations of the Bank, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit opportunity laws, and fair credit reporting.  In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prohibits insured state chartered institutions from conducting activities as principal that are not permitted for national banks.  A bank, however, may engage in an otherwise prohibited activity if it meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the Deposit Insurance Fund.
 
Reserves.  The Federal Reserve requires all depository institutions to maintain reserves against certain categories of transaction accounts.  The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements.  An institution may borrow from the Federal Reserve Bank “discount window” as a secondary source of funds, provided that the institution meets the Federal Reserve Bank’s credit standards.
 
Dividends.  The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to us.  The Federal Reserve may restrict the ability of the Bank to pay dividends if such payments would constitute an unsafe or unsound banking practice.  In accordance with the recently issued Federal Reserve Resolutions, the Bank must receive approval from the Federal Reserve before declaring or paying any dividends.  These regulations and restrictions may severely limit our ability to obtain funds from the Bank for our cash needs, including funds for acquisitions and the payment of dividends, interest, and operating expenses.
 
In addition, Florida law places restrictions on the declaration of dividends from state chartered banks to their holding companies.  Pursuant to the Florida Financial Institutions Code, the board of directors of state chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for reasonably anticipated future losses on loans and other assets, may quarterly, semi-annually or annually declare a dividend of up to the aggregate net profits of that period combined with the bank’s retained net profits for the preceding two years and, with the approval of the Florida Office of Financial Regulation and Federal Reserve, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of the bank until this fund becomes equal to the amount of the bank’s common stock then issued and outstanding.  A state chartered bank may not declare any dividend if (i) its net income from the current year combined with the retained net income for the preceding two years is a loss or (ii) the payment of such dividend would cause the capital account of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Office of Financial Regulation or a federal regulatory agency.
 
The Bank’s aggregate net profits for the past two years is significantly less than the dividends declared and paid to CCBG over that same period.  As a result, the Bank must seek approval from its regulators to issue and declare any further dividends to CCBG.  The Bank may not receive the required approvals.  Without such approvals, we would not have sufficient cash to continue to pay dividends on shares of our common stock or our trust preferred securities after December 31, 2010.  Even if we have sufficient cash to pay the dividend, we must seek prior Federal Reserve approval before paying any dividends.

Insurance of Accounts and Other Assessments. We pay our deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-based assessment system.
 
Our deposit accounts are currently insured by the Deposit Insurance Fund generally up to a maximum of $100,000 per separately insured depositor, except for certain retirement plan accounts, which are insured up to $250,000; however, the Emergency Economic Stabilization Act of 2008, temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor.  The basic deposit insurance limit will return to $100,000 after December 31, 2013.
 
 
 
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In addition, on November 26, 2008, the FDIC issued a final rule under its Transaction Account Guarantee Program (“TAGP”), pursuant to which the FDIC fully guarantees all non-interest bearing transaction deposit accounts, including all personal and business checking deposit accounts that do not earn interest, lawyer trust accounts where interest does not accrue to the account owner (IOLTA), and NOW accounts with interest rates no higher than 0.50%.  Thus, under TAGP, all money in these accounts is fully insured by the FDIC regardless of dollar amount.  This second increase to coverage was originally in effect through December 31, 2009, but was extended until June 30, 2010, unless we elected to “opt out” of participating in the expanded coverage, which we did not do.  The cost to us for participating in this expanded deposit insurance coverage program is a 15 basis point surcharge to our current insurance assessment rate with respect to the portions of the TAGP covered deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000.
 
Under the current assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institution’s most recent supervisory and capital evaluations, designed to measure risk.  Total base assessment rates currently range from 0.07% of deposits for an institution in the highest sub-category of the highest category to 0.775% of deposits for an institution in the lowest category.  On May 22, 2009, the FDIC imposed a special assessment of five basis points on each FDIC-insured depository institution’s assets, minus its Tier 1 capital, as of June 30, 2009.  This special assessment was collected on September 30, 2009, and resulted in an additional charge to us of $1.2 million.  Finally, on November 12, 2009, the FDIC adopted a new rule requiring insured institutions to prepay on December 30, 2009, estimated quarterly risk-based assessments for the 4th quarter of 2009 and for all of 2010, 2011, and 2012. We prepaid an assessment of $11.5 million, which incorporated a uniform 3 basis point increase effective January 1, 2011.
  
In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately one basis point of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019.
 
Transactions With Affiliates.  Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an “affiliate” generally must be collateralized and certain transactions between the Bank and its “affiliates”, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions.  In addition, the Bank generally may not purchase securities issued or underwritten by affiliates.
 
Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, which we refer to as 10% Shareholders, or to any political or campaign committee the funds or services of which will benefit those executive officers, directors, or 10% Shareholders or which is controlled by those executive officers, directors or 10% Shareholders, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and its corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act.  Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed the Bank’s unimpaired capital and unimpaired surplus. Section 22(g) identifies limited circumstances in which the Bank is permitted to extend credit to executive officers.
 
Community Reinvestment Act.  The Community Reinvestment Act and its corresponding regulations are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks.  These regulations provide for regulatory assessment of a bank’s record in meeting the needs of its service area. Federal banking agencies are required to make public a rating of a bank’s performance under the Community Reinvestment Act.  The Federal Reserve considers a bank’s Community Reinvestment Act rating when the bank submits an application to establish branches, merge, or acquire the assets and assume the liabilities of another bank. In the case of a bank holding company, the Community Reinvestment Act performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company.  An unsatisfactory record can substantially delay or block the transaction.  The Bank received a “satisfactory” rating on its most recent Community Reinvestment Act assessment.
 


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Capital Regulations.  The Federal Reserve has adopted risk-based, capital adequacy guidelines for bank holding companies and their subsidiary state-chartered banks that are members of the Federal Reserve System.  The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world.  Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories each with designated weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.
 
The current guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I Capital.  Tier I Capital, which includes common shareholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock and trust preferred securities, less certain goodwill items and other intangible assets, is required to equal at least 4% of risk-weighted assets.  The remainder (“Tier II Capital”) may consist of (i) an allowance for loan losses of up to 1.25% of risk-weighted assets, (ii) excess of qualifying perpetual preferred stock, (iii) hybrid capital instruments, (iv) perpetual debt, (v) mandatory convertible securities, and (vi) subordinated debt and intermediate-term preferred stock up to 50% of Tier I Capital. Total capital is the sum of Tier I and Tier II Capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the appropriate regulator (determined on a case by case basis or as a matter of policy after formal rule making).
 
In computing total risk-weighted assets, bank and bank holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply.  Most loans will be assigned to the 100% risk category, except for performing first mortgage loans fully secured by 1- to 4-family and certain multi-family residential property, which carry a 50% risk rating.  Most investment securities (including, primarily, general obligation claims on states or other political subdivisions of the United States) will be assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In covering off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor.  Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% conversion factor.  Short-term commercial letters of credit are converted at 20% and certain short-term unconditionally cancelable commitments have a 0% factor.
 
The federal bank regulatory authorities have also adopted regulations that supplement the risk-based guidelines.  These regulations generally require banks and bank holding companies to maintain a minimum level of Tier I Capital to total assets less goodwill of 4% (the “leverage ratio”).  The Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the bank achieves a 1 rating under the CAMELS rating system in its most recent examination, as long as the bank is not experiencing or anticipating significant growth.  The CAMELS rating is a non-public system used by bank regulators to rate the strength and weaknesses of financial institutions.  The CAMELS rating is comprised of six categories: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.
 
Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not satisfy the criteria described above, will be required to maintain a minimum leverage ratio ranging generally from 4% to 5%.  The bank regulators also continue to consider a “tangible Tier I leverage ratio” in evaluating proposals for expansion or new activities.  The tangible Tier I leverage ratio is the ratio of a banking organization’s Tier I Capital, less deductions for intangibles otherwise includable in Tier I Capital, to total tangible assets.
 
Federal law and regulations establish a capital-based regulatory scheme designed to promote early intervention for troubled banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”  To qualify as a “well-capitalized” institution, a bank must have a leverage ratio of no less than 5%, a Tier I Capital ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.  Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a bank holding company to acquire or merge with a bank or bank holding company.
 
Under the regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice.  The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates, and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or a part of their operations.  Bank holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans.
 
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It should be noted that the minimum ratios referred to above are merely guidelines and the banking regulators possess the discretionary authority to require higher ratios.
 
We currently exceed the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well capitalized” and are unaware of any material violation or alleged violation of these regulations, policies or directives.  Rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change our capital position in a relatively short period of time, making additional capital infusions necessary.
  
Interstate Banking and Branching.  The Bank Holding Company Act was amended by the Interstate Banking Act.  The Interstate Banking Act provides that adequately capitalized and managed financial and bank holding companies are permitted to acquire banks in any state.
 
State laws prohibiting interstate banking or discriminating against out-of-state banks are preempted. States are not permitted to enact laws opting out of this provision; however, states are allowed to adopt a minimum age restriction requiring that target banks located within the state be in existence for a period of years, up to a maximum of five years, before a bank may be subject to the Interstate Banking Act.  The Interstate Banking Act establishes deposit caps which prohibit acquisitions that result in the acquiring company controlling 30% or more of the deposits of insured banks and thrift institutions held in the state in which the target maintains a branch or 10% or more of the deposits nationwide.  States have the authority to waive the 30% deposit cap.  State-level deposit caps are not preempted as long as they do not discriminate against out-of-state companies, and the federal deposit caps apply only to initial entry acquisitions.
 
The Interstate Banking Act also provides that adequately capitalized and managed banks are able to engage in interstate branching by merging with banks in different states.  Unlike the interstate banking provision discussed above, states were permitted to opt out of the application of the interstate merger provision by enacting specific legislation.
 
Florida responded to the enactment of the Interstate Banking Act by enacting the Florida Interstate Branching Act (the “Florida Branching Act”).  The purpose of the Florida Branching Act was to permit interstate branching through merger transactions under the Interstate Banking Act. Under the Florida Branching Act, with the prior approval of the Florida Office of Financial Regulation, a Florida bank may establish, maintain and operate one or more branches in a state other than the State of Florida pursuant to a merger transaction in which the Florida bank is the resulting bank. In addition, the Florida Branching Act provides that one or more Florida banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from this transaction may maintain and operate the branches of the Florida bank that participated in this merger.  An out-of-state bank, however, is not permitted to acquire a Florida bank in a merger transaction unless the Florida bank has been in existence and continuously operated for more than three years.

Anti-money Laundering.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), provides the federal government with additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements.  By way of amendments to the Bank Secrecy Act (“BSA”), the USA PATRIOT Act puts in place measures intended to encourage information sharing among bank regulatory and law enforcement agencies. In addition, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions.
 
Among other requirements, the USA PATRIOT Act and the related Federal Reserve regulations require banks to establish anti-money laundering programs that include, at a minimum:
 
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internal policies, procedures and controls designed to implement and maintain the savings association’s compliance with all of the requirements of the USA PATRIOT Act, the BSA and related laws and regulations;
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systems and procedures for monitoring and reporting of suspicious transactions and activities;
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a designated compliance officer;
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employee training;
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an independent audit function to test the anti-money laundering program;
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procedures to verify the identity of each customer upon the opening of accounts; and
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heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships.

Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”) as part of our anti-money laundering program.  The key components of the CIP are identification, verification, government list comparison, notice and record retention.  The purpose of the CIP is to enable the financial institution to determine the true identity and anticipated account activity of each customer.  To make this determination, among other things, the financial institution must collect certain information from customers at the time they enter into the customer relationship with the financial institution. This information must be verified within a reasonable time through documentary and non-documentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists.  We and our affiliates have adopted policies, procedures and controls to comply with the BSA and the USA PATRIOT Act, and we engage in very few transactions of any kind with foreign financial institutions or foreign persons.
 
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Federal Home Loan Bank System.  The Bank is a member of the FHLB of Atlanta, which is one of 12 regional Federal Home Loan Banks. Each FHLB serves as a reserve or central bank for its members within its assigned region.  It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB system.  It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of trustees of the FHLB.
 
As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB in an amount at least equal to 0.18% (or 18 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta under the activity-based stock ownership requirement.  On December 31, 2009, the Bank was in compliance with this requirement.
 
Privacy.  Under the Gramm-Leach-Bliley Act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties.
 
Overdraft Fee Regulation.  Effective July 1, 2010, a new federal banking rule under the Electronic Fund Transfer Act will prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machines (“ATM”) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those type of transactions.  If a consumer does not opt in, any ATM transaction or debit that overdraws the consumer’s account will be denied.  Overdrafts on the payment of checks and regular electronic bill payments are not covered by this new rule.  Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices.  Financial institutions must provide consumers who do not opt in with the same account terms, conditions and features (including pricing) that they provide to consumers who do opt in.  Management is currently studying the impact of the new rules on our business because overdraft fees are a significant source of revenue for us.
 
Consumer Laws and Regulations.  The Bank is also subject to other federal and state consumer laws and regulations that are designed to protect consumers in transactions with banks.  While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Check Clearing for the 21st Century Act, the Credit Card Accountability, Responsibility, and Disclosure Act (CARD), the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and Accurate Transaction Act, the Mortgage Disclosure Improvement Act, and the Real Estate Settlement Procedures Act, among others.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits or making loans to such clients.  The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing client relations.

Future Legislative Developments

Various legislative acts are from time to time introduced in Congress and the Florida legislature.  This legislation may change banking statutes and the environment in which our banking subsidiary and we operate in substantial and unpredictable ways.  We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our banking subsidiary.
 
Effect of Governmental Monetary Policies
 
The commercial banking business in which the Bank engages is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve.  Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign branches and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve.  These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits.  The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future.  The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government.  Future monetary policies and the effect of such policies on the future business and earnings of the Bank cannot be predicted.
 
Income Taxes
 
We are subject to income taxes at the federal level and subject to state taxation based on the laws of each state in which we operate.  We file a consolidated federal tax return with a fiscal year ending on December 31. 

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Website Access to Company's Reports
 
Our Internet website is www.ccbg.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.  The information on our website is not incorporated by reference into this report.



 
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Item 1A.   Risk Factors

An investment in our common stock contains a high degree of risk. You should consider carefully the following risk factors before deciding whether to invest in our common stock.  Our business, including our operating results and financial condition, could be harmed by any of these risks. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business.  The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in our filings with the SEC, including our financial statements and related notes.

Risks Related to Our Business

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.
 
The Emergency Economic Stabilization Act of 2008, or EESA, was enacted on October 3, 2008.  Under EESA, the U.S. Treasury has the authority to, among other things, invest in financial institutions and purchase up to $700 billion of troubled assets and mortgages from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.  Under the U.S. Treasury’s Capital Purchase Program, or CPP, it committed to purchase up to $250 billion of preferred stock and warrants in eligible institutions.  The EESA also temporarily increased FDIC deposit insurance coverage to $250,000 per depositor through December 31, 2009, which was recently extended to December 31, 2013 under the Helping Families Save Their Homes Act of 2009.
 
On February 10, 2009, the U.S. Treasury announced the Financial Stability Plan which, among other things, provides a forward-looking supervisory capital assessment program that is mandatory for banking institutions with over $100 billion of assets and makes capital available to financial institutions qualifying under a process and criteria similar to the CPP.  In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009, and includes, among other things, extensive new restrictions on the compensation and governance arrangements of financial institutions.
 
Numerous actions have been taken by the U.S. Congress, the Federal Reserve, the U.S. Treasury, the FDIC, the SEC and others to address the current liquidity and credit crisis that has followed the sub-prime mortgage crisis that commenced in 2007, including the Financial Stability Program adopted by the U.S. Treasury.  In addition, the Secretary of the Treasury proposed fundamental changes to the regulation of financial institutions, markets and products on June 17, 2009. On December 10, 2009, the U.S. House of Representatives approved “The Wall Street Reform and Consumer Protection Act,” which included some of the U.S. Treasury Department’s proposed reforms.
  
We cannot predict the actual effects of EESA, the ARRA, the proposed regulatory reform measures and various governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the economy, the financial markets, on us.  The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions, could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
 
Difficult market conditions and economic trends have adversely affected our industry and our business.
 
Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions.  General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of consumer confidence, increased market volatility and widespread reduction in general business activity.
 
The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets may adversely affect our business, financial condition, results of operations and stock price.
 
 
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Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more complex by these difficult market and economic conditions.  We also expect to face increased regulation and government oversight beyond EESA, ARRA, and other recent proposed or enacted regulations, such as the new overdraft regulations, as a result of these downward trends.
 
We do not believe these difficult conditions are likely to improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult economic conditions on us, our customers and the other financial institutions in our market.  As a result, we may experience increases in foreclosures, delinquencies, and customer bankruptcies, as well as more restricted access to funds.  Additional regulation may also reduce our revenue, increase our costs, and reduce our net income.
 
An inadequate allowance for loan losses would reduce our earnings.

We are exposed to the risk that our clients will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment.  This will result in credit losses that are inherent in the lending business.  We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as:
 
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the risk characteristics of various classifications of loans;
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previous loan loss experience;
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specific loans that have loss potential;
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delinquency trends;
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estimated fair market value of the collateral;
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current economic conditions; and
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geographic and industry loan concentrations.

As of December 31, 2009, the Bank’s allowance for loan losses was $44.0 million, which represented approximately 2.30% of its total amount of loans.  The Bank had $86.3 million in non-accruing loans as of December 31, 2009.  The allowance may not prove sufficient to cover future loan losses.  Although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Bank’s non-performing or performing loans. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans.  Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination.  Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases to the allowance may be required in the future if economic conditions should worsen.  Material additions to the Bank’s allowance for loan losses would adversely impact our net income and capital.
 
We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from the Bank.
 
The Bank is subject to extensive regulation, supervision and examination by the Florida Office of Financial Regulation, the Federal Reserve, and the FDIC.  Our compliance with these industry regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, access to capital and brokered deposits and locations of banking offices.  In addition, please see “Item 1. Business–About Us–Regulatory Matter” for a discussion regarding the Federal Reserve Resolutions.  If we are unable to meet these regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
 
The Bank must also meet regulatory capital requirements imposed by our regulators.  An inability to meet these capital requirements would result in numerous mandatory supervisory actions and additional regulatory restrictions, and could have a negative impact on our financial condition, liquidity and results of operations.

In addition to the regulations of the Florida Office of Financial Regulation, the Federal Reserve, and the FDIC, as a member of the Federal Home Loan Bank, the Bank must also comply with applicable regulations of the Federal Housing Finance Agency and the Federal Home Loan Bank.
  
Regulation by all of these agencies is intended primarily for the protection of our depositors and the Deposit Insurance Fund and not for the benefit of our shareowners.  The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit and other activities.  A sufficient claim against us under these laws could have a material adverse effect on our results.  Please refer to the Section entitled “Business – Regulatory Considerations” of this Report.

 
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We may be required to pay significantly higher FDIC deposit insurance premiums and assessments in the future.
 
Recent insured depository institution failures, as well as deterioration in banking and economic conditions, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the Deposit Insurance Fund to historical lows.  The FDIC expects a higher rate of insured depository institution failures in the next few years compared to recent years; thus, the reserve ratio may continue to decline.  In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000 through December 31, 2013, which may result in even larger losses to the Deposit Insurance Fund. These developments have caused an increase to our assessments, and the FDIC may be required to make additional increases to the assessment rates and levy additional special assessments on us.  Higher assessments increase our non-interest expense.
 
In 2009, our assessment rates, which also include our assessment for participating in the FDIC’s Transaction Account Guarantee Program, increased from 10.00 basis points to 15.00 basis points.  Additionally, on May 22, 2009, the FDIC announced a final rule imposing a special 5 basis point emergency assessment as of June 30, 2009, payable September 30, 2009, based on assets minus Tier 1 Capital at June 30, 2009, but the amount of the assessment was capped at 10.00 basis points of domestic deposits.  Finally, on November 12, 2009, the FDIC adopted a new rule requiring insured institutions to prepay on December 30, 2009, estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.  We prepaid an assessment of $11.5 million, which incorporated a uniform 3.00 basis point increase effective January 1, 2011.
  
These higher FDIC assessment rates and special assessments have had and will continue to have an adverse impact on our results of operations.  Our FDIC insurance related cost was $4.6 million for the year ended December 31, 2009 compared to $0.8 million for the year ended December 31, 2008.  We are unable to predict the impact in future periods, including whether and when additional special assessments will occur.
 
Higher insurance premiums and assessments increase our costs and may limit our ability to pursue certain business opportunities.  We also may be required to pay even higher FDIC premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.
 
We have incurred net losses for 2009 and may incur further losses.
 
We incurred a net loss of $3.5 million for the year ended December 31, 2009.  We may incur further losses, especially in light of economic conditions that continue to adversely affect our borrowers and us.
 
Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.
 
Due to the lack of diversified industry within the markets served by the Bank and the relatively close proximity of our geographic markets, we have both geographic concentrations as well as concentrations in the types of loans funded.  Specifically, due to the nature of our markets, a significant portion of the portfolio has historically been secured with real estate.  As of December 31, 2009, approximately 37.4% and 34.6% of our $1.916 billion loan portfolio was secured by commercial real estate and residential real estate, respectively.  As of this same date, approximately 5.8% was secured by property under construction.
 
The current downturn in the real estate market, the deterioration in the value of collateral, and the local and national economic recessions, have adversely affected our clients’ ability to repay their loans.  If these conditions persist, or get worse, our clients’ ability to repay their loans will be further eroded. In the event we are required to foreclose on a property securing one of our mortgage loans or otherwise pursue our remedies in order to protect our investment, we may be unable to recover funds in an amount equal to our projected return on our investment or in an amount sufficient to prevent a loss to us due to prevailing economic conditions, real estate values and other factors associated with the ownership of real property.  As a result, the market value of the real estate or other collateral underlying our loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of the loans, and consequently, we would sustain loan losses.
 
Our loan portfolio incudes loans with a higher risk of loss.
 
We originate commercial real estate loans, commercial loans, construction loans, vacant land loans, consumer loans, and residential mortgage loans primarily within our market area.  Commercial real estate, commercial, construction, vacant land, and consumer loans may expose a lender to greater credit risk than loans secured by single-family residential real estate because the collateral securing these loans may not be sold as easily as single-family residential real estate.  In addition, these loan types tend to involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle.  These loans also have historically had greater credit risk than other loans for the following reasons:
 
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Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.  These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity.  A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.

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Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business.  In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business.

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Construction Loans. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing.  During the construction phase, a number of factors can result in delays or cost overruns.  If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral.

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Vacant Land Loans. Because vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business.  These loans are susceptible to adverse conditions in the real estate market and local economy.

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Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss.

If our nonperforming loans continue to increase, our earnings will suffer.
 
At December 31, 2009, our non-performing loans (which consist of non-accrual loans) totaled $107.9 million, or 5.6% of the total loan portfolio, which is an increase of $99.9 million over non-performing loans at December 31, 2006.  At December 31, 2009, our nonperforming assets (which include foreclosed real estate) were $144.1 million, or 5.3% of total assets.  In addition, the Bank had approximately $36.5 million in accruing loans that were 30-89 days delinquent as of December 31, 2009.  Our non-performing assets adversely affect our net income in various ways.  We do not record interest income on non-accrual loans or real estate owned.  In addition, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.  In addition, the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity.
 
An impairment in the carrying value of our goodwill could negatively impact our earnings and capital.
 
Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable.  Given the current economic environment and conditions in the financial markets, including the sustained trading price of our common stock at below book value, we could be required to evaluate the recoverability of goodwill prior to our normal annual assessment if we experience disruption in our business, unexpected significant declines in our operating results, or sustained market capitalization declines.  These types of events and the resulting analyses could result in goodwill impairment charges in the future.  These non-cash impairment charges could adversely affect our results of operations in future periods, and could also significantly impact certain financial ratios and limit our ability to obtain financing or raise capital in the future.  A goodwill impairment charge does not adversely affect the calculation of our risk based and tangible capital ratios.  Please see Note 5 in the Notes to Consolidated Financial Statements for additional discussion.  As of December 31, 2009, we had $84.8 million in goodwill, which represented approximately 3.1% of our total assets.
 
We may need additional capital resources in the future and these capital resources may not be available when needed or at all. If we do raise additional capital, your ownership could be diluted.
 
 
We may need to incur additional debt or equity financing in the future to maintain required minimum capital ratios, make strategic acquisitions or investments, or for future growth.  Such financing may not be available to us on acceptable terms or at all.  Prior to issuing new or refinancing existing debt, we must request approval from the Federal Reserve.
 
Further, our Articles of Incorporation do not provide shareowners with preemptive rights and such shares may be offered to investors other than shareowners at the discretion of the Board.  If we do sell additional shares of common stock to raise capital, the sale could dilute your ownership interest and such dilution could be substantial.

We may incur losses if we are unable to successfully manage interest rate risk.
 
Our profitability depends to a large extent on the Bank’s net interest income, which is the difference between income on interest-earning assets such as loans and investment securities, and expense on interest-bearing liabilities such as deposits and borrowings.  We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets.  Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities
 
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reprice or mature during a time when interest rates are declining or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising.
 
Changes in the difference between short- and long-term interest rates may also harm our business.  For example, short-term deposits may be used to fund longer-term loans.  When differences between short-term and long-term interest rates shrink or disappear, as is likely in the current zero interest rate policy environment, the spread between rates paid on deposits and received on loans could narrow significantly, decreasing our net interest income.
 
If market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thereby limiting the incremental income generated by those loans in any one year. Our loan portfolio is heavily concentrated in mortgage loans secured by properties in Florida and Georgia.
 
Our interest-earning assets are heavily concentrated in mortgage loans secured by real estate, particularly real estate located in Florida and Georgia.  As of December 31, 2009, approximately 77.3% of our loans had real estate as a primary, secondary, or tertiary component of collateral.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower; however, the value of the collateral may decline during the time the credit is extended.  If we are required to liquidate the collateral securing a loan during a period of reduced real estate values, such as in today’s market, to satisfy the debt, our earnings and capital could be adversely affected.
  
Additionally, as of December 31, 2009, substantially all of our loans secured by real estate are secured by commercial and residential properties located in Northern Florida and Middle and Southern Georgia.  The concentration of our loans in this area subjects us to risk that a downturn in the economy or recession in those areas, such as the one the areas are currently experiencing, could result in a decrease in loan originations and increases in delinquencies and foreclosures, which would more greatly affect us than if our lending were more geographically diversified.  In addition, since a large portion of our portfolio is secured by properties located in Florida and Georgia, the occurrence of a natural disaster, such as a hurricane, could result in a decline in loan originations, a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us.  We may suffer further losses due to the decline in the value of the properties underlying our mortgage loans, which would have an adverse impact on our operations.

Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income.
 
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.
 
The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:
 
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general or local economic conditions;
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environmental cleanup liability;
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neighborhood values;
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interest rates;
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real estate tax rates;
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operating expenses of the mortgaged properties;
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supply of and demand for rental units or properties;
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ability to obtain and maintain adequate occupancy of the properties;
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zoning laws;
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governmental rules, regulations and fiscal policies; and
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acts of God.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate.  Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss.
 
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
 
Liquidity is essential to our business.  An inability to raise funds through deposits, borrowings, and other sources, could have a substantial negative effect on our liquidity.  Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general.  Factors that could negatively impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, adverse regulatory action against us, or our inability to attract and retain deposits.  Our ability to borrow could be impaired by factors that are not specific to us, such a
 
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disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of recent turmoil faced by banking organizations and the unstable credit markets.  CCBG’s ability to borrow requires prior approval from the Federal Reserve.
 
Concerns of clients over deposit insurance may cause a decrease in our deposits.
 
With increased concerns about bank failures, clients are increasingly concerned about the extent to which their deposits are insured by the FDIC.  Clients may withdraw deposits from the Bank in an effort to ensure that the amount that they have on deposit at the Bank is fully insured.  Decreases in deposits may adversely affect our funding costs and net income.
  
Future economic growth in our Florida market area is likely to be slower compared to previous years.

The State of Florida’s population growth has historically exceeded national averages.  Consequently, the state has experienced substantial growth in population, new business formation, and public works spending.  Due to the moderation of economic growth and migration into our market area and the downturn in the real estate market, management believes that growth in our market area will be restrained in the near term.  We have experienced an overall slowdown in the origination of residential mortgage loans recently due to the slowing in residential real estate sales activity in our markets.  A decrease in existing and new home sales decreases lending opportunities and negatively affects our income.  Additionally, if property values continue to decline,  this could lead to additional valuation adjustments on our loan portfolios.
  
The soundness of other financial institutions could adversely affect us.
 
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial institutions are interrelated as a result of trading, clearing, counterparty, lending, or other relationships.  As a result, defaults by, or even rumors or questions about, one or more financial institutions, or the financial services industry generally, could lead to market-wide liquidity problems, losses of depositor, creditor or counterparty confidence and could result in losses or defaults by us or by other institutions.  We could experience increases in assets as a result of other banks’ difficulties or failure, which would increase the level of capital required to support the incremental growth.
 
The market value of our investments could decline.
 
Our investment securities portfolio as of December 31, 2009 has been designated as available-for-sale pursuant to U.S. generally accepted accounting principles relating to accounting for investments.  Such principles require that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive income/loss.  At December 31, 2009, we maintained all of our investment securities in the available-for-sale classification.
  
Shareowners’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments.  The fair value of our investment portfolio may decline, causing a corresponding decline in shareowners’ equity.
  
Management believes that several factors will affect the fair values of our investment portfolio.  These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates).  These and other factors may impact specific categories of the portfolio differently, and we cannot predict the effect these factors may have on any specific category.
  
Confidential client information transmitted through our online banking service is vulnerable to security breaches and computer viruses, which could expose us to litigation and adversely affect our reputation and our ability to generate deposits.
 
We provide our clients the ability to bank online.  The secure transmission of confidential information over the Internet is a critical element of banking online.  Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems.  We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.  To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities.  Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits.
 
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Florida financial institutions, such as the Bank, face a higher risk of noncompliance and enforcement actions with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

Since September 11, 2001, banking regulators have intensified their focus on anti-money laundering and Bank Secrecy Act compliance requirements, particularly the anti-money laundering provisions of the USA PATRIOT Act.  There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (“OFAC”). Since 2004, federal banking regulators and examiners have been extremely aggressive in their supervision and examination of financial institutions located in the State of Florida with respect to the institution’s Bank Secrecy Act/Anti-Money Laundering compliance. Consequently, numerous formal enforcement actions have been issued against financial institutions.
 
In order to comply with regulations, guidelines and examination procedures in this area, the Bank has been required to adopt new policies and procedures and to install new systems.  If the Bank’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that it has already acquired or may acquire in the future are deficient, the Bank would be subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans. In addition, because the Bank operates in Florida, we expect that the Bank will face a higher risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
 
Our controls and procedures may fail or be circumvented.
 
We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
 
We are exposed to operational risk because of providing certain services, which could adversely affect our results of operations.
 
We are exposed to operational risk because of providing various fee-based services including electronic banking, item processing, data processing, correspondent banking, merchant services, and asset management. Operational risk is the risk of loss resulting from errors related to transaction processing, breaches of the internal control system and compliance requirements, fraud by employees or persons outside the company or business interruption due to system failures or other events.  We continually assess and monitor operational risk in our business lines and provide for disaster and business recovery planning including geographical diversification of our facilities; however, the occurrence of various events including unforeseeable and unpreventable events such as hurricanes or other natural disasters could still damage our physical facilities or our computer systems or software, cause delay or disruptions to operational functions, impair our clients, vendors and counterparties and negatively impact our results of operations.  Operational risk also includes potential legal or regulatory actions that could arise because of noncompliance with applicable laws and regulatory requirements that could have an adverse affect on our reputation.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
 
We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area.  A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services.  To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us.  As a result, these non-bank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.
 

 
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Risks Related to an Investment in Our Common Stock

Our ability to declare and pay dividends is subject to our regulators’ approval and restrictions under the terms of the trust preferred securities.
 
Under applicable statutes and regulations, the Bank’s board of directors, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for reasonably anticipated future losses on loans and other assets, may quarterly, semi-annually, or annually declare and pay dividends to CCBG of up to the aggregate net profits of that period combined with the Bank’s retained net profits for the preceding two years and, with the approval of the Florida Office of Financial Regulation and Federal Reserve, declare a dividend from retained net profits which accrued prior to the preceding two years.
  
The Bank’s aggregate net profits for the past two years is significantly less than the dividends declared and paid to CCBG over that same period.  In addition, pursuant to the Federal Reserve Resolutions, the Bank must request approval from the Federal Reserve prior to paying any dividends to us.  The Bank may not receive the required approvals.  Without such approvals, we would not have sufficient cash to continue to pay dividends on shares of our common stock after December 31, 2010.  Even if we have sufficient cash to pay the dividend, we must seek prior Federal Reserve approval before paying any dividends.
 
Dividends paid by the Bank to CCBG also provide cash flow used to service the interest payments on our trust preferred securities. Under the Federal Reserve Resolutions, the Bank must receive approval from the Federal Reserve prior to paying dividends to CCBG, and CCBG must receive approval from the Federal Reserve prior to making distributions (interest payments) on our trust preferred securities.  Under the terms of the trust preferred securities notes, we may elect to defer interest payments on the notes for up to five years; however, during such deferment (or if we default) we would be restricted from declaring or paying dividends on our shares of common stock.

Thus, holders of our common stock should understand that future dividends could be reduced or eliminated.  In addition, if we suspend or curtail our dividends, the price of our shares of common stock may decline.
 
Limited trading activity for shares of our common stock may contribute to price volatility.
 
While our common stock is listed and traded on The NASDAQ Global Select Market, there has been limited trading activity in our common stock.  The average daily trading volume of our common stock over the twelve-month period ending December 31, 2009 was approximately 46,881 shares.  Due to the limited trading activity of our common stock, relativity small trades may have a significant impact on the price of our common stock.
 
Our insiders have substantial control over matters requiring shareowner approval, including changes of control.
 
Our insiders, who own more than 5% of our common stock, directors, and executive officers, beneficially owned approximately 42.7% of the outstanding shares of our stock as of February 26, 2010.  Accordingly, these principal shareowners, directors, and executive officers, if acting together, may be able to influence or control matters requiring approval by our shareowners, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions.
 
They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests.  The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareowners of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
 
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.
 
The trading market for our common stock will depend in part on the research and reports that securities analysts publish about our business and our Company.  We do not have any control over these securities analysts and they may not initiate coverage or continue to cover our common stock.  If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price.  If we are covered by securities analysts, and our common stock is the subject of an unfavorable report, our stock price would likely decline.  If one or more of these analysts ceases to cover our Company or fails to publish regular reports on us, we could lose visibility in the financial markets, which may cause our stock price or trading volume to decline.

Our Articles of Incorporation, Bylaws, and certain laws and regulations may prevent or delay transactions you might favor, including a sale or merger of CCBG.
 
CCBG is registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act. As a result, we are subject to supervisory regulation and examination by the Federal Reserve.  The Gramm-Leach-Bliley Act, the Bank Holding Company Act, and other federal laws subject bank holding companies to particular restrictions on the types of activities in which
 
 
23

 
they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
 
Provisions of our Articles of Incorporation, Bylaws, certain laws and regulations and various other factors may make it more difficult and expensive for companies or persons to acquire control of us without the consent of our Board of Directors.  It is possible, however, that you would want a takeover attempt to succeed because, for example, a potential buyer could offer a premium over the then prevailing price of our common stock.
 
For example, our Articles of Incorporation permit our Board of Directors to issue preferred stock without shareowner action. The ability to issue preferred stock could discourage a company from attempting to obtain control of us by means of a tender offer, merger, proxy contest or otherwise.  Additionally, our Articles of Incorporation and Bylaws divide our Board of Directors into three classes, as nearly equal in size as possible, with staggered three-year terms.  One class is elected each year.  The classification of our Board of Directors could make it more difficult for a company to acquire control of us.  We are also subject to certain provisions of the Florida Business Corporation Act and our Articles of Incorporation that relate to business combinations with interested shareowners.  Other provisions in our Articles of Incorporation or Bylaws that may discourage takeover attempts or make them more difficult include:
 
§  
Supermajority voting requirements to remove a director from office;
§  
Provisions regarding the timing and content of shareowner proposals and nominations;
§  
Supermajority voting requirements to amend Articles of Incorporation unless approval is received by a majority of “disinterested directors”
§  
Absence of cumulative voting; and
§  
Inability for shareowners to take action by written consent.

Your shares of common stock are not an insured deposit.
 
The shares of our common stock are not a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency.  Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.
 
 
 

 
24

 

 
Item 1B.
 
None.

 

We are headquartered in Tallahassee, Florida.  Our executive office is in the Capital City Bank building located on the corner of Tennessee and Monroe Streets in downtown Tallahassee.  The building is owned by the Bank, but is located on land leased under a long-term agreement.

As of February 27, 2010, the Bank had 70 banking locations.  Of the 70 locations, the Bank leases the land, buildings, or both at 11 locations and owns the land and buildings at the remaining 59.

Item 3.

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.

Item 4.


PART II

Item 5.

Common Stock Market Prices and Dividends

Our common stock trades on the NASDAQ Global Select Market under the symbol "CCBG."

The following table presents the range of high and low closing sales prices reported on the NASDAQ Global Select Market and cash dividends declared for each quarter during the past two years.  We had a total of 1,778 shareowners of record as of February 26, 2010.

 
2009
 
2008
 
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
Fourth
Quarter
 
Third
Quarter
 
Second
Quarter
 
First
Quarter
 
Common stock price:
                               
High
 
$
14.34
   
$
17.10
   
$
17.35
   
$
27.31
   
$
33.32
   
$
34.50
   
$
30.19
   
$
29.99
 
Low
   
11.00
     
13.92
     
11.01
     
9.50
     
21.06
     
19.20
     
21.76
     
24.76
 
Close
   
13.84
     
14.20
     
16.85
     
11.46
     
27.24
     
31.35
     
21.76
     
29.00
 
Cash dividends declared per share
   
.1900
     
.1900
     
.1900
     
.1900
     
.1900
     
.1850
     
.1850
     
.1850
 

Future payment of dividends will be subject to determination and declaration by our Board of Directors.  Florida law limits the amount of dividends that the Bank can pay annually to us.  In addition, the Bank must seek approval from our regulators prior to paying any dividends to us.  If these approvals are not received, our ability to pay dividends to our shareowners is severely limited.  Furthermore,  in accordance with the Federal Reserve Resolutions, we must seek regulatory approval from the Federal Reserve before paying any dividends to our shareowners.  See subsection entitled "Capital; Dividends; Sources of Strength" and “Dividends” in the Business section on pages 9 and 10, respectively, and the section entitled “Liquidity and Capital Resources – Dividends” -- in Management's Discussion and Analysis of Financial Condition and Operating Results on page 49 and Note 15 in the Notes to Consolidated Financial Statements.

 
25

 

Performance Graph

This performance graph compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return of the NASDAQ Composite Index and the SNL Financial LC $1B-$5B Bank Index for the past five years.  The graph assumes that $100 was invested on December 31, 2004 in our common stock and each of the above indices, and that all dividends were reinvested.  The shareholder return shown below represents past performance and should not be considered indicative of future performance.

 
Total Performance Graph
  
     
Period Ending
     
Index
12/31/04
 
12/31/05
 
12/31/06
 
12/31/07
 
12/31/08
 
12/31/09
 
Capital City Bank Group, Inc.
 
$
100.00
   
$
104.36
   
$
109.58
   
$
89.68
   
$
89.10
   
$
48.04
 
NASDAQ Composite
   
100.00
     
101.37
     
111.03
     
121.92
     
72.49
     
104.31
 
SNL $1B-$5B Bank Index
   
100.00
     
98.29
     
113.74
     
82.85
     
64.72
     
49.26
 

 
26

 

Item 6.
 

   
For the Years Ended December 31,
 
(Dollars in Thousands, Except Per Share Data)(1) (3)
 
2009
   
2008
   
2007
   
2006
   
2005
 
                               
Interest Income
 
$
122,776
   
$
142,866
   
$
165,323
   
$
165,893
   
$
140,053
 
Net Interest Income
   
105,934
     
108,866
     
112,241
     
119,136
     
109,990
 
Provision for Loan Losses
   
40,017
     
32,496
     
6,163
     
1,959
     
2,507
 
Net (Loss) Income
   
(3,471
)
   
15,225
     
29,683
     
33,265
     
30,281
 
                                         
Per Common Share:
                                       
Basic Net (Loss) Income
 
$
(0.20
 
$
0.89
   
$
1.66
   
$
1.79
   
$
1.66
 
Diluted Net (Loss) Income
   
(0.20
   
0.89
     
1.66
     
1.79
     
1.66
 
Cash Dividends Declared
   
.760
     
.745
     
.710
     
.663
     
.619
 
Book Value
   
15.72
     
16.27
     
17.03
     
17.01
     
16.39
 
                                         
Key Performance Ratios:
                                       
Return on Average Assets
   
(0.14
)%
   
0.59
%
   
1.18
%
   
1.29
%
   
1.22
%
Return on Average Equity
   
(1.26
   
5.06
     
9.68
     
10.48
     
10.56
 
Net Interest Margin (FTE)
   
4.96
     
4.96
     
5.25
     
5.35
     
5.09
 
Dividend Pay-Out Ratio
   
NM
     
83.71
     
42.77
     
37.01
     
37.35
 
Equity to Assets Ratio
   
9.89
     
11.20
     
11.19
     
12.15
     
11.65
 
                                         
Asset Quality:
                                       
Allowance for Loan Losses
 
$
43,999
   
$
37,004
   
$
18,066
   
$
17,217
   
$
17,410
 
Allowance for Loan Losses to Loans
   
2.30
%
   
1.89
%
   
0.95
%
   
0.86
%
   
0.84
%
Nonperforming Assets
   
144,052
     
107,842
     
28,163
     
8,731
     
5,550
 
Nonperforming Assets to Loans + ORE
   
7.38
     
5.48
     
1.47
     
0.44
     
0.27
 
Allowance to Nonperforming Loans
   
40.77
     
37.52
     
71.92
     
214.09
     
331.11
 
Net Charge-Offs to Average Loans
   
1.66
     
0.71
     
0.27
     
0.11
     
0.13
 
                                         
Averages for the Year:
                                       
Loans, Net
 
$
1,961,990
   
$
1,918,417
   
$
1,934,850
   
$
2,029,397
   
$
1,968,289
 
Earning Assets
   
2,184,232
     
2,240,649
     
2,183,528
     
2,258,277
     
2,187,672
 
Total Assets
   
2,516,815
     
2,567,905
     
2,507,217
     
2,581,078
     
2,486,733
 
Deposits
   
1,992,429
     
2,066,065
     
1,990,446
     
2,034,931
     
1,954,888
 
Subordinated Notes
   
62,887
     
62,887
     
62,887
     
62,887
     
50,717
 
Long-Term Borrowings
   
51,973
     
39,735
     
37,936
     
57,260
     
70,216
 
Shareowners' Equity
   
275,545
     
300,890
     
306,617
     
317,336
     
286,712
 
                                         
Year-End Balances:
                                       
Loans, Net
 
$
1,915,940
   
$
1,957,797
   
$
1,915,850
   
$
1,999,721
   
$
2,067,494
 
Earning Assets
   
2,369,029
     
2,156,172
     
2,272,829
     
2,270,410
     
2,299,677
 
Total Assets
   
2,708,324
     
2,488,699
     
2,616,327
     
2,597,910
     
2,625,462
 
Deposits
   
2,258,234
     
1,992,174
     
2,142,344
     
2,081,654
     
2,079,346
 
Subordinated Notes
   
62,887
     
62,887
     
62,887
     
62,887
     
62,887
 
Long-Term Borrowings
   
49,380
     
51,470
     
26,731
     
43,083
     
69,630
 
Shareowners' Equity
   
267,899
     
278,830
     
292,675
     
315,770
     
305,776
 
                                         
Other Data:
                                       
Basic Average Shares Outstanding
   
17,043,964
     
17,141,454
     
17,909,396
     
18,584,519
     
18,263,855
 
Diluted Average Shares Outstanding
   
17,044,711
     
17,146,914
     
17,911,587
     
18,609,839
     
18,281,243
 
Shareowners of Record(2)
   
1,778
     
1,756
     
1,750
     
1,805
     
1,716
 
Banking Locations(2)
   
70
     
68
     
70
     
69
     
69
 
Full-Time Equivalent Associates(2)
   
1,006
     
1,042
     
1,097
     
1,056
     
1,013
 
  
(1)
All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005.
(2)
As of record date.  The record date is on or about March 1st of the following year.
(3)
The consolidated financial statements reflect the acquisition of First Alachua Banking Corporation on May 20, 2005.
NM
= Not meaningful

 
27

 


Item 7.

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 included in the Annual Report on Form 10-K.  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," “Fourth Quarter, 2009 Financial Results,” 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 2009 compares with prior years.  Throughout this section, Capital City Bank Group, Inc., and its subsidiary, 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:

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Efficiency ratio
   
79.77
%
   
68.09
%
   
70.13
%
Effect of intangible amortization and merger expenses
   
(2.44
)%
   
(3.19
)%
   
(3.36
)%
Operating efficiency ratio
   
77.33
%
   
64.91
%
   
66.77
%

Reconciliation of operating net noninterest expense ratio:

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Net noninterest expense as a percent of average assets
   
2.97
%
   
2.12
%
   
2.50
%
Effect of intangible amortization and merger expenses
   
(0.16
)%
   
(0.22
)%
   
(0.23
)%
Operating net noninterest expense as a percent of average assets
   
2.81
%
   
1.90
%
   
2.27
%



 
28

 


CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, 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 this Annual Report for a discussion of factors that could cause our actual results to differ materially from those in the forward-looking statements.

However, other factors besides those listed in Item 1A Risk Factors or discussed in this 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 70 full-service offices located in Florida, Georgia, and Alabama.  The Bank offers commercial and retail banking services, as well as trust and asset management, 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, bank card 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 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.  Five markets have been identified, four 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 of 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.  Other expansion opportunities that will be evaluated include asset management and mortgage banking.  Our ability to expand, however, may be restricted by the Federal Reserve Resolutions (See Item 1. Business-About Us-Regulatory Matter).

Much of our lending operations is in the State of Florida, which has been particularly hard hit in the current U.S. economic recession.  Evidence of the economic downturn in Florida is reflected in current unemployment statistics.  According to the U.S. Department of Labor, the Florida unemployment rate (seasonally adjusted) at December 2009 increased to 11.8% from 7.6% at the end of 2008 and 4.8% at the end of 2007.  A worsening of the economic condition in Florida would likely exacerbate the adverse effects of these difficult market conditions on our clients, which may have a negative impact on our financial results.


 
29

 

FINANCIAL OVERVIEW

A summary overview of our financial performance for 2009 versus 2008 is provided below.

2009 Financial Performance Highlights –

·  
For the full year 2009, we realized a net loss of $3.5 million, $0.20 per diluted share, compared to net income of $15.2 million, or $0.89 per diluted share for 2008.  For the year, weak economic and real estate market conditions required an increase in our loan loss provision.  Higher pension expense, FDIC insurance fees, and an increase in costs related to the management and resolution of problem assets also negatively impacted earnings for 2009.  For 2008, our earnings included a $6.25 million gain ($0.22 per diluted share) from the sale of a portion of the bank’s merchant services portfolio, a $2.4 million gain from the redemption of Visa shares and the reversal of $1.1 million in Visa related litigation reserves.

·  
For 2009, tax equivalent net interest income declined $3.1 million, or 2.8%, to $108.2 million due primarily to a higher level of foregone interest and lower loan fees, both associated with an increased level of nonperforming loans.  During the course of 2009, unfavorable asset re-pricing also placed pressure on our net interest margin, which was flat year over year at 4.96%.

·  
Loan loss provision was $40.0 million for 2009 compared to $32.5 million for 2008 with the increase attributable to a higher level of required reserves.  Growth in the level of nonaccrual loans coupled with weaker economic conditions and declining property values (primarily vacant residential land) were the primary factors contributing to the higher required reserves.  Net loan charge-offs for 2009 were 166 basis points of average loans compared to 71 basis points in 2008.  At year-end 2009, the allowance for loan losses was 2.30% of outstanding loans (net of overdrafts) and provided coverage of 41% of nonperforming loans, compared to 1.89% and 38%, respectively, at the end of 2008.

·  
For 2009, noninterest income decreased $9.6 million, or 14.4%, due to one-time transactions in 2008, including a $6.25 million pre-tax gain from the Bank’s merchant services portfolio sale and a $2.4 million pre-tax gain from the redemption of Visa shares.  Additionally, lower merchant fees of $3.2 million related to the disposition of a portion of our merchant services portfolio also contributed to the unfavorable variance.  Improvement in deposit fees ($400,000) and mortgage banking fees ($1.1 million) as well as a higher level of card fees ($794,000), partially offset the aforementioned unfavorable variances.

·  
Noninterest expense increased $10.6 million, or 8.8%, in 2009 due to higher legal fees ($1.7 million), other real estate owned (“OREO”) expenses ($5.7 million), pension expense ($2.8 million), and FDIC insurance fees ($3.9 million).  Legal fees and OREO expenses were higher due to the cost of managing and resolving problem assets.  The unfavorable variance in pension expense reflects a decline in pension asset value in 2008.  FDIC insurance fees increased as a result of the second quarter special assessment as well as the general increase in premium rates as mandated by the FDIC.  The unfavorable variance was also impacted by the reversal of a portion ($1.1 million) of our Visa litigation accrual in 2008, which had the effect of reducing noninterest expense.  Lower intangible amortization expense ($1.6 million) as well as various initiatives to better manage controllable expenses partially offset the aforementioned unfavorable variances.

·  
Average earning assets were $2.244 billion for the fourth quarter of 2009, an increase of $86.7 million, or 4.0%, from the fourth quarter of 2008 due to improvement in the overnight funds position primarily driven by deposit growth of $144.1 million, or 7.4%.

·  
As of December 31, 2009, we are well-capitalized with a risk based capital ratio of 14.11% and a tangible common equity ratio of 6.84% compared to 14.69% and 7.76%, respectively, at year-end 2008.

 
30

 


RESULTS OF OPERATIONS

For 2009, we realized a net loss of $3.5 million, or $0.20 per diluted share, compared to net income of $15.2 million, or $0.89 per diluted share in 2008, and $29.7 million, or $1.66 per diluted share, in 2007.

Earnings for 2009 include a loan loss provision of $40.0 million ($1.44 per diluted share) compared to $32.5 million ($1.16 per diluted share) for 2008.  Lower net interest income ($2.9 million), higher pension costs ($2.8 million), FDIC insurance fees ($3.9 million), and an increase in costs related to the management and resolution of problem assets also negatively impacted earnings for 2009.
 
The decline in earnings in 2008 of $14.5 million, or $0.77 per diluted share, was primarily due to lower net interest income of $3.4 million and a higher loan loss provision of $26.3 million, partially offset by a $6.25 million gain from the sale of the bank’s merchant services portfolio ($0.22 per diluted share) and a $2.4 million gain from the redemption of Visa, Inc. shares related to its initial public offering.  Additionally, our 2007 earnings included a $1.9 million charge to reserve for Visa litigation and our 2008 earnings included the reversal of $1.1 million of our Visa litigation reserve.
 
 
A condensed earnings summary for the last three years is presented in Table 1 below:

Table 1
CONDENSED SUMMARY OF EARNINGS

   
For the Years Ended December 31,
 
(Dollars in Thousands, Except Per Share Data)
 
2009
   
2008
   
2007
 
Interest Income
 
$
122,776
   
$
142,866
   
$
165,323
 
Taxable Equivalent Adjustments
   
2,296
     
2,482
     
2,420
 
Total Interest Income (FTE)
   
125,072
     
145,348
     
167,743
 
Interest Expense
   
16,842
     
34,000
     
53,082
 
Net Interest Income (FTE)
   
108,230
     
111,348
     
114,661
 
Provision for Loan Losses
   
40,017
     
32,496
     
6,163
 
Taxable Equivalent Adjustments
   
2,296
     
2,482
     
2,420
 
Net Interest Income After Provision for Loan Losses
   
65,917
     
76,370
     
106,078
 
Noninterest Income
   
57,391
     
67,040
     
59,300
 
Noninterest Expense
   
132,115
     
121,472
     
121,992
 
(Loss) Income Before Income Taxes
   
(8,807
)
   
21,938
     
43,386
 
Income Tax (Benefit) Expense
   
(5,336
)
   
6,713
     
13,703
 
Net (Loss) Income
 
$
(3,471
)
 
$
15,225
   
$
29,683
 
                         
Basic Net (Loss) Income Per Share
 
$
(0.20
)
 
$
0.89
   
$
1.66
 
Diluted Net (Loss) Income Per Share
 
$
(0.20
)
 
$
0.89
   
$
1.66
 


 
31

 

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.  We provide an analysis of our net interest income, including average yields and rates in Tables 2 and 3.  We provide this information on a "taxable equivalent" basis to reflect the tax-exempt status of income earned on certain loans and investments, the majority of which are state and local government debt obligations.

In 2009, our taxable equivalent net interest income decreased $3.1 million, or 2.8%.  This follows a decrease of $3.3 million, or 2.9%, in 2008, and an increase of $6.3 million, or 5.2%, in 2007.  The decrease in our taxable equivalent net interest income in 2009 primarily reflects a higher level of foregone interest associated with the increased level of nonperforming assets, unfavorable asset repricing and a decline in average earning assets, partially offset by the lower costs of funds for deposits.

For the year 2009, taxable equivalent interest income declined $20.3 million, or 13.9% from 2008 and $22.5 million, or 13.4% in 2008 over 2007.  As compared to 2008, taxable equivalent interest income was impacted by the higher level of foregone interest on nonperforming loans, lower loan fees and unfavorable asset repricing due to the declining interest rate environment all of which resulted in a lower yield on our earning assets during 2009.

These factors produced a 75 basis point decline in the yield on earning assets, which decreased from 6.48% in 2008 to 5.73% for 2009.  This compares to a 120 basis point decline in 2008 over 2007.

Interest expense decreased $17.2 million, or 50.0% from 2008, and $19.1 million, or 36.0% in 2008 over 2007.  The decrease reflects declining market rates and management’s efforts to reduce its overall cost of funds.  The Federal Reserve lowered its target fed funds rate during the latter part of 2007 and 2008, and kept this rate at historically low levels during 2009. In response, management aggressively lowered its deposit rates, which has helped to minimize the overall impact on our net interest margin.

The average rate paid on interest bearing liabilities in 2009 decreased 92 basis points compared to 2008, reflecting the factors mentioned above.

Our interest rate spread (defined as the taxable equivalent yield on average earning assets less the average rate paid on interest bearing liabilities) increased 17 basis points in 2009 compared to 2008 and 2 basis points in 2008 compared to 2007.  The increase in 2009 was primarily attributable to the repricing of our deposit base, which more than offset the adverse impact of lower rates and higher foregone interest.

Our net interest margin (defined as taxable equivalent interest income less interest expense divided by average earning assets) of 4.96% in 2009 remained constant with 2008, but was lower than the 5.25% recorded in 2007.  In 2009, compared to 2008, the yield on earning assets and the cost of funds both declined 75 basis points resulting in no change in the margin year-over-year.

While our net interest margin was flat year over year, pressure on asset repricing and an unfavorable shift in our earning asset mix resulted in a net interest margin of 4.59% for the fourth quarter of 2009, which represents a decline of 67 basis points over the fourth quarter of 2008 and 40 basis points over the linked quarter in 2009.  The aforementioned shift in earning asset mix was attributable to strong deposit growth during the fourth quarter of 2009 (reflecting seasonal growth in public funds deposits and our Absolutely Free Money Market promotion), which enhanced our overall liquidity, but was a contributing factor to the reduction in our net interest margin percentage.
 
 
During the course of 2009, historically low interest rates (essentially setting a floor on deposit repricing), foregone interest, lower loan fees, unfavorable asset repricing without the flexibility to significantly adjust deposit rates and core deposit growth (which has strengthened our liquidity position, but resulted in an unfavorable shift in our earning asset mix), have all placed pressure on our net interest margin.  Although the market offers a steep yield curve, our current strategy as well as historically, is to not accept greater interest rate risk by reaching further out the curve for yield, particularly given the fact that short term rates are at historical lows.  We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions.  Over time, this strategy has produced fairly consistent outcomes and a net interest margin that is significantly above peer comparisons.  Given our recent deposit growth and unfavorable asset repricing, we anticipate continued pressure on the margin during the first half of 2010.




 
32

 


Table 2
AVERAGE BALANCES AND INTEREST RATES

   
2009
 
2008
 
2007
 
(Taxable Equivalent Basis - Dollars in Thousands)
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
Balance
 
Interest
 
Rate
 
ASSETS
                                     
Loans, Net of Unearned Interest(1)(2)
 
$
1,961,990
 
$
118,186
   
6.02
%
$
1,918,417
 
$
133,457
   
6.96
%
$
1,934,850
 
$
155,434
   
8.03
%
Taxable Investment Securities
   
83,648
   
2,698
   
3.22
   
93,149
   
3,889
   
5.04
   
103,840
   
4,949
   
4.76
 
Tax-Exempt Investment Securities(2)
   
105,683
   
4,106
   
3.88
   
97,010
   
4,893
   
4.16
   
84,849
   
4,447
   
5.24
 
Funds Sold
   
32,911
   
82
   
0.25
   
132,073
   
3,109
   
2.32
   
59,989
   
2,913
   
4.79
 
Total Earning Assets
   
2,184,232
   
125,072
   
5.73
%
 
2,240,649
   
145,348
   
6.48
%
 
2,183,528
   
167,743
   
7.68
%
Cash & Due From Banks
   
76,107
               
82,410
               
86,692
             
Allowance for Loan Losses
   
(42,331
)
             
(23,015
)
             
(17,535
)
           
Other Assets
   
298,807
               
267,861
               
254,532
             
TOTAL ASSETS
 
$
2,516,815
             
$
2,567,905
             
$
2,507,217
             
                                                         
LIABILITIES
                                                       
NOW Accounts
 
$
711,753
 
$
1,039
   
0.15
%
$
743,327
 
$
7,454
   
1.00
%
$
$557,060
 
$
10,748
   
1.93
%
Money Market Accounts
   
320,531
   
1,288
   
0.40
   
374,278
   
5,242
   
1.40
   
397,193
   
13,667
   
3.44
 
Savings Accounts
   
121,582
   
60
   
0.05
   
116,413
   
121
   
0.10
   
119,700
   
279
   
0.23
 
Other Time Deposits
   
420,198
   
8,198
   
1.95
   
424,748
   
14,489
   
3.41
   
474,728
   
19,993
   
4.21
 
Total Interest Bearing Deposits
   
1,574,064
   
10,585
   
0.67
%
 
1,658,766
   
27,306
   
1.65
%
 
1,548,681
   
44,687
   
2.89
%
Short-Term Borrowings
   
79,321
   
291
   
0.36
   
61,181
   
1,157
   
1.88
   
66,397
   
2,871
   
4.31
 
Subordinated Notes Payable
   
62,887
   
3,730
   
5.85
   
62,887
   
3,735
   
5.84
   
62,887
   
3,730
   
5.93
 
Other Long-Term Borrowings
   
51,973
   
2,236
   
4.30
   
39,735
   
1,802
   
4.54
   
37,936
   
1,794
   
4.73
 
Total Interest Bearing Liabilities
   
1,768,245
   
16,842
   
0.95
%
 
1,822,569
   
34,000
   
1.87
%
 
1,715,901
   
53,082
   
3.09
%
Noninterest Bearing Deposits
   
418,365
               
407,299
               
441,765
             
Other Liabilities
   
54,660
               
37,147
               
42,934
             
TOTAL LIABILITIES
   
2,241,270
               
2,267,015
               
2,200,600
             
                                                         
SHAREOWNERS' EQUITY
                                                       
TOTAL SHAREOWNERS' EQUITY
   
275,545
               
300,890
               
306,617
             
                                                         
TOTAL LIABILITIES & EQUITY
 
$
2,516,815
             
$
2,567,905
             
$
2,507,217
             
                                                         
Interest Rate Spread
               
4.78
%
             
4.61
%
             
4.59
%
Net Interest Income
       
$
108,230
             
$
111,348
             
$
114,661
       
Net Interest Margin(3)
               
4.96
%
             
4.96
%
             
5.25
%

(1)
Average balances include nonaccrual loans.  Interest income includes loan fees of $1.6 million, $2.3 million, and $3.0 million in 2009, 2008, and 2007, respectively.
(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.

 
33

 


Table 3
RATE/VOLUME ANALYSIS (1)

   
 
2009 Changes From 2008
 
2008 Changes From 2007
     
    Due to Average
           
  Due to Average
(Taxable Equivalent Basis - Dollars in Thousands)
 
 
Total
 
Calendar(3)
 
Volume
 
Rate
 
Total
   
Calendar(3)
   
Volume
   
Rate
Earnings Assets:
                                                 
Loans, Net of Unearned Interest(2)
$
(15,271
)
$
(365
$
2,491
 
$
(17,397
)
$
(21,978
)
$
426
 
$
(2,012
)
 
$
(20,392
Investment Securities:
                                                 
Taxable
 
(1,191
 
(11
 
(483
)
 
(697
)
 
(1,061
)
 
13
   
(400
)
   
(674
Tax-Exempt(2)
 
(787
)
 
(13
 
439
   
(1,213
)
 
448
   
12
   
636
     
(200
Funds Sold
 
(3,027
 
(8
 
(2,368
 
(651
 
196
   
8
   
3,393
     
(3,205
)
                                                   
Total
 
(20,276
 
(397
 
79
   
(19,958
 
(22,395
 
459
   
1,617
     
(24,471
                                                   
Interest Bearing Liabilities:
                                                 
NOW Accounts
 
(6,415
 
(21
 
(316
 
(6,078
 
(3,293
 
29
   
3,584
     
(6,906
Money Market Accounts
 
(3,954
 
(14
 
(753
)
 
(3,187
 
(8,425
 
37
   
(786
)
   
(7,676
Savings Accounts
 
(61
 
-
   
4
   
(65
 
(159
 
1
   
(8
)
   
(152
Time Deposits
 
(6,291
 
(40
 
(155
)
 
(6,096
 
(5,505
 
55
   
(2,099
)
   
(3,461
Short-Term Borrowings
 
(866
 
(3
 
227
   
(1,090
 
(1,713
)
 
8
   
(185
)
   
(1,536
Subordinated Notes Payable
 
(5
 
(10
 
-
   
5
   
5
   
10
   
-
     
(5
Long-Term Borrowings
 
434
   
(5
 
555
   
(116
)
 
8
   
5
   
85
     
(82
                                                   
Total
 
(17,158
 
(93
 
(438
 
(16,627
 
(19,082
)
 
145
   
591
 
 
 
(19,818
                                                   
Changes in Net Interest Income
$
(3,118
)
$
(304
$
517
 
$
(3,331
$
(3,313
)
$
314
 
$
1,026
   
$
(4,653
)

(1)
This table shows the change in taxable equivalent net interest income for comparative periods based on either changes in average volume or changes in average rates for earning assets and interest bearing liabilities. Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate changes.

(2)
Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt loans and securities to a taxable equivalent basis.

(3)
Reflects difference in 365 day year (2009 and 2007) versus 366 day year (2008).

 
34

 


Provision for Loan Losses

The provision for loan losses was $40.0 million in 2009, compared to $32.5 million in 2008 and $6.2 million in 2007.  The increase in the provision for both 2009 and 2008 is attributable to a higher level of required reserves reflective of growth in the level of nonperforming loans due to weaker economic and real estate market conditions.  Activity within our real estate markets slowed significantly in 2008 and remained at historically low levels during 2009, which has resulted in declining property values, particularly vacant residential land.  Loans to consumers as well as builders and investors involved in the residential real estate industry have realized increased default and loss rates over the past two years.

Net charge-offs for 2009 totaled $32.6 million, or 1.66% of average loans for the year compared to $13.6 million, or .71% for 2008 and $5.3 million, or .27% for 2007.  A majority (68%) of our net loan charge-offs realized during 2009 were for loans secured by residential real estate property.  Consumer loan losses increased noticeably in 2008, but declined slightly in 2009 due to tightening of underwriting standards and increased collection efforts.  See Table 7 on page 41 for a detailed analysis of loan charge-offs and recoveries over the past five years.  Given the current stage of this credit cycle, we would expect that our net loan charge-offs will remain at an elevated level in 2010.

Noninterest Income

Noninterest income decreased $9.6 million, or 14.4% and increased $7.7 million or 13.0%, in 2009 and 2008, respectively, compared to the immediately preceding year.  For 2009, the unfavorable variance was particularly due to one-time transactions in 2008, including a $6.25 million pre-tax gain from the sale of the bank’s merchant services portfolio and a $2.4 million pre-tax gain from the redemption of Visa shares.  Additionally, lower merchant fees of $3.2 million related to the aforementioned merchant services portfolio sale also contributed to the unfavorable variance.  Improvement in deposit fees ($400,000) and mortgage banking fees ($1.1 million) as well as a higher level of card fees ($794,000) partially offset the aforementioned unfavorable variances.

The increase in 2008 was primarily due to the aforementioned one-time transactions as well as strong improvement in deposit fees ($1.6 million).  The aforementioned gains were partially offset by a reduction in merchant services fees ($1.7 million) attributable to the merchant services portfolio sale and lower mortgage banking revenues ($1.0 million).

Noninterest income as a percent of average assets was 2.28% in 2009, compared to 2.61% in 2008, and 2.37% in 2007.  One-time transactions in 2008 related to the sale of the bank’s merchant services portfolio and the redemption of Visa shares were the primary reasons for the variances for both 2009 and 2008.  Noninterest income as a percent of taxable equivalent operating revenues was 34.7% in 2009, down from 37.6% in 2008 with the reduction also primarily attributable to the two aforementioned gains totaling $8.65 million.

The table below reflects the major components of noninterest income.

   
For the Years Ended December 31,
 
(Dollars in Thousands)
 
2009
   
2008
   
2007
 
Noninterest Income:
                 
Service Charges on Deposit Accounts
 
$
28,142
   
$
27,742
   
$
26,130
 
Data Processing Fees
   
3,628
     
3,435
     
3,133
 
Asset Management Fees
   
3,925
     
4,235
     
4,700
 
Retail Brokerage Fees
   
2,655
     
2,399
     
2,510
 
Gain/(Loss) on Sale/Call of Investment Securities
   
10
     
125
     
14
 
Mortgage Banking Revenues
   
2,699
     
1,623
     
2,596
 
Merchant Fees(1)
   
2,359
     
5,548
     
7,257
 
Interchange Fees(1)
   
4,432
     
4,165
     
3,757
 
Gain on Sale of Portion of Merchant Services Portfolio
   
-
     
6,250
     
-
 
ATM/Debit Card Fees(1)
   
3,515
     
2,988
     
2,692
 
Other
   
6,026
     
8,530
     
6,511
 
Total Noninterest Income
 
$
57,391
   
$
67,040
   
$
59,300
 

(1) Together called “Bank Card Fees”



 
35

 


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

Service Charges on Deposit Accounts.  Deposit service charge fees increased $400,000, or 1.4%, in 2009, compared to an increase of $1.6 million, or 6.2%, in 2008.  Deposit service charge revenues in any one year are dependent on the number of accounts, primarily transaction accounts, the level of activity subject to service charges, and the collection rate.  The $400,000 increase for 2009 was primarily due to a lower level of overdraft charge-offs relative to 2008.  For 2008, a higher level of overdraft and nonsufficient funds ("NSF") activity as well as improved fee collection contributed to the improvement.  Effective July 2010, new federal rules under the Electronic Funds Transfer Act will potentially reduce the level of our overdraft and NSF fees prospectively.  Management is currently studying the impact of the new rules and, in an effort to mitigate the impact on this revenue source, we are developing programs to inform and educate our clients on their options and the value of our overdraft protection programs.   Total overdraft and NSF fees for 2009 and 2008 were $23.6 million and $23.5 million, respectively.

Asset Management Fees.  In 2009, asset management fees decreased $310,000, or 7.3%, versus a decline of $465,000, or 9.9%, in 2008.  At year-end 2009, assets under management totaled $706.8 million, reflecting an increase of $42.1 million, or 6.3% from 2008.  At year-end 2008, assets under management totaled $664.7 million, reflecting a decline of $116.6 million, or 14.9% from 2007.  The decline for 2009 primarily reflects a lower level of estate management fees.  The decrease in 2008 was due to a reduction in assets under management because of a decline in market values for managed accounts.

Mortgage Banking Revenues.  In 2009, mortgage banking revenues increased $1.1 million, or 66.3%, compared to a $973,000, or 37.5% decrease in 2008.  In early 2009, a lower interest rate environment generated an increase in refinancing activity which was the primary reason for the increase.  Lower production reflective of weak economic conditions and a significant slowdown in our housing markets was the primary reason for the decline in 2008.  We generally sell all fixed rate residential loan production into the secondary market.  Market conditions, housing activity, the level of interest rates, and the percent of our fixed rate production have significant impacts on our mortgage banking revenues.

Gain on the Sale of Merchant Services Portfolio.  On July 31, 2008, we sold a portion of the Bank’s merchant services portfolio resulting in a pre-tax gain of $6.25 million, but retained one merchant account which continues to be serviced by the Bank.

Bank Card Fees.  Bank Card fees (including merchant service fees, interchange fees, and ATM/debit card fees) decreased $2.4 million, or 18.9%, in 2009 despite interchange fees and ATM/debit card fees increasing 6.4% and 17.7%, respectively, for the year due to higher transaction volumes and a fee increase for certain ATM/debit card transactions.  Merchant service fees declined significantly due to the sale of a portion of the bank’s merchant services portfolio in July 2008.  In 2008, card fees decreased $1.0 million, or 7.3% despite interchange fees and ATM/debit card fees increasing 10.9% and 11.0%, respectively, due to higher transaction volumes. Merchant service fees were significantly reduced due to the aforementioned merchant services portfolio sale.

Other.  Other income decreased $2.2 million, or 20.6%, from 2008 due to the impact of a $2.4 million gain in 2008 from the redemption of Visa shares related to its initial public offering.  A higher level of retail brokerage fees ($257,000) in 2009 partially offset the aforementioned unfavorable variance related to the one-time gain from the sale of Visa shares.

Noninterest Expense

Noninterest expense increased $10.6 million, or 8.8%, in 2009 primarily due to higher legal fees ($1.7 million), OREO expenses ($5.7 million), pension expense ($2.8 million), and FDIC insurance fees ($3.9 million).  The increase in legal fees and OREO expenses were both attributable to the cost of managing and resolving problem assets.  The unfavorable variance in pension expense reflects a decline in pension asset value in 2008.  FDIC insurance fees increased as a result of the second quarter special assessment as well as the general increase in premium rates.  The unfavorable variance was also impacted by the reversal of a portion ($1.1 million) of our Visa litigation accrual in 2008, which had the effect of reducing noninterest expense.  Lower expense for intangible amortization expense ($1.6 million) and interchange fees ($2.6 million) as well as various initiatives to better manage controllable expenses partially offset the aforementioned unfavorable variances.

For 2008, noninterest expense decreased $520,000, or 0.43%, reflecting the impact of a $1.9 million Visa litigation charge in the fourth quarter of 2007 and the reversal of $1.1 million in Visa litigation reserves during the first quarter of 2008.  Lower interchange expense ($1.5 million) reflecting the sale of a portion of the bank’s merchant services portfolio in July 2008 also contributed to the favorable variance for the year.  Partially offsetting the aforementioned favorable variances were increases in salary expense ($1.1 million), legal fees ($501,000), FDIC insurance fees ($555,000), OREO expense ($1.0 million), and higher processing costs for our accounts receivable financing service ($643,000).


 
36

 


The table below reflects the major components of noninterest expense.

   
For the Years Ended December 31,
 
(Dollars in Thousands)
 
2009
   
2008
   
2007
 
Noninterest Expense:
                 
Salaries
 
$
50,494
   
$
50,581
   
$
49,206
 
Associate Benefits
   
14,573
     
11,250
     
11,073
 
Total Compensation
   
65,067
     
61,831
     
60,279
 
                         
Premises
   
9,798
     
9,729
     
9,347
 
Equipment
   
9,096
     
9,902
     
9,890
 
Total Occupancy
   
18,894
     
19,631
     
19,237
 
                         
Legal Fees
   
3,975
     
2,240
     
1,739
 
Professional Fees
   
4,501
     
4,083
     
3,855
 
Processing Services
   
3,591
     
3,921
     
3,278
 
Advertising
   
3,285
     
3,609
     
3,742
 
Travel and Entertainment
   
1,123
     
1,390
     
1,470
 
Printing and Supplies
   
1,882
     
1,977
     
2,124
 
Telephone
   
2,227
     
2,522
     
2,373
 
Postage
   
1,711
     
1,743
     
1,565
 
FDIC Insurance Fees
   
4,616
     
835
     
240
 
Intangible Amortization
   
4,042
     
5,685
     
5,834
 
Interchange Fees
   
1,929
     
4,577
     
6,118
 
Other Real Estate Owned
   
6,843
     
1,120
     
159
 
Miscellaneous
   
8,429
     
6,308
     
9,979
 
Total Other
   
48,154
     
40,010
     
42,476
 
                         
Total Noninterest Expense
 
$
132,115
   
$
121,472
   
$
121,992
 

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

Compensation.  Total compensation expense increased $3.2 million, or 5.2% in 2009 due to higher associate benefit expense of $3.3 million, or 29.5%, reflective of higher expense for our pension plan driven primarily by a loss in market value for pension plan assets.    In 2010, we expect our pension plan expense to decrease slightly due to improvement in the market value of pension plan assets during 2009.

In 2008, total compensation expense increased $1.6 million, or 2.6% due primarily to higher associate salaries of $2.1 million, or 5.1%, which generally reflects routine merit adjustments during the course of the year, and an increase in associate benefit expense of $177,000, or 1.6%.  Partially offsetting these unfavorable variances was lower cash based incentive compensation which experienced a favorable variance of approximately $1.1 million, or 19.2% for the year generally reflective of lower earnings performance.

Occupancy.  Occupancy expense (including furniture, fixtures and equipment) decreased by $737,000, or 3.8% in 2009 primarily due to a decrease in depreciation and maintenance expense for furniture, fixtures, and equipment (“FF&E”).  The decreases reflect the full depreciation of several larger technology systems and an overall effort to improve the management and control of these expenditures.  In 2010, we expect our occupancy expense to increase by approximately $1.5 million primarily due to the opening of one relocated retail banking office in Macon, Georgia and a new office building for Capital City Trust Company located in Tallahassee, Florida.

In 2008, occupancy expense (including furniture, fixtures and equipment) increased by $394,000, or 2.0% primarily due to an increase in depreciation expense for both buildings and furniture, fixtures, and equipment.  The increase primarily reflects the addition of one new banking office in late 2007, major remodeling of two banking offices in mid-2007, and the opening of two new banking offices during 2008.



 
37

 

Other.  Other noninterest expense increased $8.1 million, or 20.4%, in 2009 due to higher legal fees ($1.7 million), OREO expenses ($5.7 million), and FDIC insurance fees ($3.9 million).  Legal fees and OREO expenses were higher due to the cost of managing and resolving problem assets.  FDIC insurance fees increased as a result of the second quarter special assessment and a general increase in premium rates as mandated by the FDIC.  The unfavorable variance was also impacted by the reversal of a portion ($1.1 million) of our Visa litigation accrual in 2008, which had the effect of reducing noninterest expense in that year.  Lower expense for intangible amortization expense ($1.6 million) and interchange fees ($2.6 million) as well as various initiatives to better manage controllable expenses partially offset the aforementioned unfavorable variances.  Given the stage of this credit cycle, we expect that our legal expenses and OREO expense will remain at an elevated level in 2010.
 
For 2008, other noninterest expense decreased $2.3 million, or 6.3%, due to the impact of a $1.9 million Visa litigation charge in the fourth quarter of 2007 and the reversal of $1.1 million in Visa reserves during the first quarter of 2008.  Lower interchange expense ($1.5 million) reflecting the sale of a portion of the bank’s merchant services portfolio also contributed to the favorable variance for the year.  Partially offsetting the aforementioned favorable variances were higher legal fees ($501,000), FDIC insurance fees ($555,000), and OREO expenses ($1.0 million).  Legal expense increased due to a higher level of legal support needed for problem loan collection/workout efforts.  Our FDIC insurance fees increased during the second half of 2008 primarily reflecting the full use of our premium credits.  Expense related to our OREO properties was higher due to an increase in general holding costs driven by a higher level of properties, but more significantly, the unfavorable variance was driven by subsequent valuation adjustments (write-downs) on properties.

The operating net noninterest expense ratio (defined as noninterest income minus noninterest expense, net of intangible amortization and merger expenses, as a percent of average assets) was 2.81% in 2009 compared to 1.90% in 2008, and 2.27% in 2007.  Our operating efficiency ratio (expressed as noninterest expense, net of intangible amortization and merger expenses, as a percent of taxable equivalent net interest income plus noninterest income) was 77.33%, 64.91%, and 66.87% in 2009, 2008 and 2007, respectively.

The increase in the both of the aforementioned ratios in 2009 is attributable to a higher level of operating expenses as previously discussed.  A lower level of operating revenues (tax equivalent net interest income plus noninterest income) in 2009 also contributed to the decline in the operating efficiency ratio.

The above mentioned ratios for 2008 reflect the impact of the $6.25 million gain from the sale of the bank’s merchant services portfolio, the $2.4 million gain from the redemption of Visa shares, and the $1.1 million reversal of Visa litigation reserve, which were the primary factors driving the change in these ratios for 2008.

As part of our strategic planning process, we continue to review and enhance our expense control procedures, including the implementation of a vendor contract review process in 2009 which accrued cost savings benefits in 2009 and will continue to do so in 2010.

Income Taxes

In 2009, we realized a tax benefit of $5.3 million as compared to tax expense of $6.7 million in 2008 and $13.7 million in 2007.  In 2009, a financial statement operating loss and $2.3 million of tax free investment and loan income were the primary reasons for the tax benefit for the year.  A lower level of financial statement operating income was the primary reason for the decline in the 2008 income tax provision as compared to 2007.

The effective tax rate was 60.6% in 2009, 30.6% in 2008, and 31.6% in 2007.  As previously noted, the effective tax rate for 2009 was affected by a financial statement operating loss and favorable permanent financial statement/tax differences, specifically tax-exempt income on loans and securities.  The effective tax rates for 2008 and 2007 were affected by a lower level of financial statement operating income, primarily reflective of our higher loan loss provisions, in relation to the size of our permanent financial statement/tax differences.  The 2007 effective tax rate was also impacted by a true-up of our deferred tax liabilities, which resulted in a net reduction in our income tax provision of $937,000.


FINANCIAL CONDITION

Average assets totaled approximately $2.517 billion, a decrease of $51.0 million, or 1.9%, in 2009 versus the comparable period in 2008.  Average earning assets for 2009 were approximately $2.184 billion, representing a decrease of $56.4 million, or 2.2%, over 2008.  A decrease in average short term investments of $99.2 million partially offset by an increase in average loans of $43.6 million drove the decrease in earning assets.  We discuss these variances in more detail below.

Table 2 provides information on average balances and rates, Table 3 provides an analysis of rate and volume variances, and Table 4 highlights the changing mix of our earning assets over the last three years.



 
38

 

Loans

Average loans increased $43.6 million, or 2.3%, from the comparable period in 2008.  Loans as a percent of average earning assets declined to 85.0% in 2009, down from the 2008 level of 85.6%.  The loan portfolio experienced growth during the first half of 2009 driven by increases in the commercial real estate and home equity loan categories.  The increase in the commercial real estate category reflects both the reclassification of construction loans to permanent status as well as new loan production.  New production was centered in loans secured by both owner occupied and non-owner occupied commercial properties.    Our home equity loan balance increased primarily due to increased line utilization by existing borrowers and to a lesser extent new production related to a mid-year promotion.  Loan balances declined during the second half of 2009 as production eased in the majority of CCB markets and the migration of nonaccrual loans to the other real estate owned category ($44.0 million) and/or loan charge-offs (gross charge-offs totaled $36.1 million) increased.

Our bankers continue to try to reach clients who are interested in moving or expanding their banking relationships. While we strive to identify opportunities to increase loans outstanding and enhance the portfolio's overall contribution to earnings, we will only do so by adhering to sound lending principles applied in a prudent and consistent manner.  Thus, we will not relax our underwriting standards in order to achieve designated growth goals and, where appropriate, have adjusted our standards to reflect risks inherent in the current economic environment.

Table 4
SOURCES OF EARNING ASSET GROWTH

   
2008 to
   
Percentage
   
Components of
 
   
2009
   
Of Total
   
Average Earning Assets
 
(Average Balances – Dollars In Thousands)
 
Change
   
Change
   
2009
   
2008
   
2007
 
                               
Loans:
                             
  Commercial, Financial, and Agricultural
   
2,988
     
    5.0
 %
   
9.1
%
   
8.8
%
   
9.5
%
  Real Estate – Construction
   
(7,797
)
   
(14.0
)%
   
6.4
%
   
6.6
%
   
7.3
%
  Real Estate – Commercial
   
59,353
     
105.0
 %
   
31.5
%
   
28.0
%
   
29.2
%
  Real Estate – Residential
   
(7,421
)
   
(13.0
)%
   
31.6
%
   
31.1
%
   
31.5
%
Consumer
   
(3,550
)
   
(6.0
)%
   
11.2
%
   
11.1
%
   
11.2
%
    Total Loans
   
43,573
     
77.0
 %
   
89.8
%
   
85.6
%
   
88.7
%
                                         
Investment Securities:
                                       
  Taxable
   
(9,501
)
   
(17.0
)%
   
3.8
%
   
4.2
%
   
4.8
%
  Tax-Exempt
   
8,673
     
16.0
 %
   
4.9
%
   
4.3
%
   
3.8
%
    Total Securities
   
(828
)
   
(1.0
)%
   
8.7
%
   
8.5
%
   
8.6
%
                                         
Funds Sold
   
(99,162
)
   
(176.0
)%
   
1.5
%
   
5.9
%
   
2.7
%
                                         
      Total Earning Assets
 
$
(56,417
)
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%

Our average loan-to-deposit ratio increased to 98.5% in 2009 from 92.9% in 2008.  The higher loan-to-deposit ratio reflects both growth in average loan balances, and a lower level of average deposits.

The composition of our loan portfolio at December 31st for each of the past five years is shown in Table 5.  Table 6 arrays our total loan portfolio as of December 31, 2009, based upon maturities.  As a percent of the total portfolio, loans with fixed interest rates represent 34.6% as of December 31, 2009, versus 33.2% at December 31, 2008.

Table 5
LOANS BY CATEGORY

   
As of December 31,
 
(Dollars in Thousands)
 
2009
   
2008
   
2007
   
2006
   
2005
 
Commercial, Financial and Agricultural
 
$
189,061
   
$
206,230
   
$
208,864
   
$
229,327
   
$
218,434
 
Real Estate - Construction
   
111,249
     
141,973
     
142,248
     
179,072
     
160,914
 
Real Estate - Commercial
   
716,791
     
656,959
     
634,920
     
643,885
     
718,741
 
Real Estate - Residential
   
416,469
     
484,238
     
488,372
     
536,138
     
558,000
 
Real Estate – Home Equity
   
246,722
     
218,500
     
192,428
     
173,597
     
165,336
 
Consumer
   
235,648
     
249,897
     
249,018
     
237,702
     
246,069
 
Total Loans, Net of Unearned Interest
 
$
1,915,940
   
$
1,957,797
   
$
1,915,850
   
$
1,999,721
   
$
2,067,494
 

 
39

 

Table 6
LOAN MATURITIES
 
 
   
Maturity Periods
 
(Dollars in Thousands)
 
One Year
or Less
   
Over One
Through
Five Years
   
Over
Five
Years
   
Total
 
Commercial, Financial and Agricultural
 
$
90,321
   
$
81,995
   
$
16,745
   
$
189,061
 
Real Estate – Construction
   
97,860
     
10,581
     
2,808
     
111,249
 
Real Estate – Commercial Mortgage
   
159,873
     
130,602
     
426,316
     
716,791
 
Real Estate – Residential
   
79,179
     
45,919
     
291,371
     
416,469
 
Real Estate – Home Equity
   
618
     
7,328
     
238,776
     
246,722
 
Consumer(1)
   
23,967
     
168,062
     
43,619
     
235,648
 
Total
 
$
451,818
   
$
444,487
   
$
1,019,635
   
$
1,915,940
 
                                 
Loans with Fixed Rates
 
$
158,165
   
$
337,403
   
$
166,920
   
$
662,488
 
Loans with Floating or Adjustable Rates
   
293,653
     
107,084
     
852,715
     
1,253,452
 
Total
 
$
451,818
   
$
444,487
   
$
1,019,635
   
$
1,915,940
 

 (1)
Demand loans and overdrafts are reported in the category of one year or less.

Allowance for Loan Losses

Management believes it maintains the 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 the 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.  As such, all related risks of lending are considered when assessing the adequacy of the allowance.  The allowance for loan losses is established through a provision charged to expense.  Loan losses 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 credit 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 loan portfolio's overall credit quality and other risk factors both internal and external to us.

Management evaluates the adequacy of the allowance for loan losses on a quarterly basis.  Loans that have been identified as impaired are reviewed for adequacy of collateral, with a specific reserve assigned to those loans when necessary.  A loan is deemed impaired when, based on current information and events, it is probable that the company will not be able to collect all amounts due (principal and interest payments), according to the contractual terms of the loan agreement.  All classified loan relationships that exceed $100,000 are reviewed for impairment.  The evaluation to determine if a loan is impaired is based on the repayment capacity of the borrower or current payment status of the loan.

The method used to assign a specific reserve depends on whether repayment of the loan is dependent on liquidation of collateral. If repayment is dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the fair value of the collateral after estimated sales expenses.  If repayment is not dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the estimated cash flows discounted using the loan’s effective interest rate. The discounted value of the cash flows is based on the anticipated timing of the receipt of cash payments from the borrower.  The reserve allocations for impaired loans are sensitive to the extent market conditions or the actual timing of cash receipts change.

Once specific reserves have been assigned to impaired loans, general reserves are assigned to the remaining portfolio.  General reserves are assigned to various homogenous loan pools, including commercial, commercial real estate, construction, residential 1-4 family, home equity, and consumer.  General reserves are assigned based on historical loan loss ratios (by loan pool and internal risk rating) and are adjusted for various internal and external risk factors unique to each loan pool.
 
 
The unallocated portion of the allowance is monitored on a regular basis and adjusted based on management’s determination of estimation risk.  Table 7 analyzes the activity in the allowance over the past five years.


 
40

 

Table 8 provides an allocation of the allowance for loan losses to specific loan types for each of the past five years.  The reserve allocations, as calculated using the above methodology, are assigned to specific loan categories corresponding to the type represented within the components discussed.

The allowance for loan losses was $44.0 million at December 31, 2009 and $37.0 million at December 31, 2008.  The allowance for loan losses was 2.30% of outstanding loans (net of overdrafts) and provided coverage of 41% of nonperforming loans at year-end 2009 compared to 1.89% and 38% in 2008.  Growth in the level of nonaccrual loans reflective of weaker economic conditions and declining property values (particularly vacant residential land) were the primary factors contributing to the higher level of required reserves.  Impaired loans are discussed in further detail below under the section “Risk Element Assets”.  It is management’s opinion that the allowance at December 31, 2009 is adequate to absorb losses inherent in the loan portfolio at quarter-end.
 
 
Table 7
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
  
 
For the Years Ended December 31,
 
(Dollars in Thousands)
2009
   
2008
   
2007
   
2006
   
2005
 
                             
Balance at Beginning of Year
$
37,004
   
$
18,066
   
$
17,217
   
$
17,410
   
$
16,037
 
Acquired Reserves
 
-
     
-
     
-
     
-
     
1,385
 
Reclassification of Unfunded Reserve to Other Liability
 
392
     
-
     
-
     
-
       
-
                                       
Charge-Offs:
                                     
                                       
Commercial, Financial and Agricultural
 
2,590
     
1,649
     
1,462
     
841
     
1,287
 
Real Estate - Construction
 
8,031
     
2,581
     
166
     
-
     
-
 
Real Estate - Commercial
 
4,417
     
1,499
     
709
     
346
     
255
 
Real Estate - Residential
 
13,491
     
3,787
     
407
     
260
     
311
 
Real Estate - Home Equity
 
1,632
     
267
     
1,022
     
20
     
10
 
Consumer
 
5,912
     
6,192
     
3,451
     
2,516
     
2,380
 
Total Charge-Offs
 
36,073
     
15,975
     
7,217
     
3,983
     
4,243
 
                                       
Recoveries:
                                     
                                       
Commercial, Financial and Agricultural
 
567
     
331
     
174
     
246
     
180
 
Real Estate - Construction
 
540
     
4
     
-
     
-
     
-
 
Real Estate - Commercial
 
53
     
15
     
14
     
17
     
3
 
Real Estate - Residential
 
525
     
161
     
34
     
11
     
37
 
Real Estate - Home Equity
 
5
     
1
     
2
     
-
     
-
 
Consumer
 
1,753
     
1,905
     
1,679
     
1,557
     
1,504
 
Total Recoveries
 
3,443
     
2,417
     
1,903
     
1,831
     
1,724
 
                                       
Net Charge-Offs
 
32,630
     
13,558
     
5,314
     
2,152
     
2,519
 
                                       
Provision for Loan Losses
 
40,017
     
32,496
     
6,163
     
1,959
     
2,507
 
                                       
Balance at End of Year
$
43,999
   
$
37,004
   
$
18,066
   
$
17,217
   
$
17,410
 
                                       
Ratio of Net Charge-Offs to Average Loans Outstanding
 
1.66
%
   
.71
%
   
.27
%
   
.11
%
   
.13
%
                                       
Allowance for Loan Losses as a Percent of Loans at End of Year
 
2.30
%
   
1.89
%
   
.94
%
   
.86
%
   
.84
%
                                       
Allowance for Loan Losses as a Multiple of Net Charge-Offs
 
1.35
x
   
2.73
x
   
3.40
x
   
8.00
x
   
6.91
x


 
41

 

Table 8
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

 
2009
2008
2007
2006
2005
 
(Dollars in Thousands)
Allowance
Amount
Percent
of Loans
in Each
Category
To Total
Loans
Allowance
Amount
Percent
of Loans
in Each
Category
To Total
Loans
Allowance
Amount
Percent
of Loans
in Each
Category
To Total
Loans
Allowance
Amount
Percent
of Loans
in Each
Category
To Total
Loans
Allowance
Amount
Percent
of Loans
in Each
Category
To Total
Loans
 
                       
Commercial, Financial and Agricultural
$
2,409
9.9
%
$
2,401
10.5
%
$
3,106
10.9
%
$
3,900
11.5
%
$
3,663
10.6
%
Real Estate:
                                       
Construction
 
12,117
5.8
   
8,973
7.3
   
3,117
7.4
   
745
9.0
   
762
7.8
 
Commercial
 
8,751
37.4
   
6,022
33.6
   
4,372
33.1
   
5,996
32.2
   
6,352
34.7
 
Residential
 
14,159
21.7
   
12,489
24.7
   
3,733
35.6
   
1,050
35.5
   
1,019
35.0
 
Home Equity
 
2,201
12.9
   
1,091
11.2
   
-
-
   
-
-
   
-
-
 
Consumer
 
3,457
12.3
   
5,055
12.8
   
2,790
13.0
   
3,081
11.8
   
3,105
11.9
 
Not Allocated
 
905
-
   
973
-
   
948
-
   
2,445
-
   
2,509
-
 
                                         
Total
$
43,999
100.0
%
$
37,004
100.0
%
$
18,066
100.0
%
$
17,217
100.0
%
$
17,410
100.0
%

Risk Element Assets

Risk element assets consist of nonaccrual loans, restructured loans, loans past due 90 days or more, other real estate owned, potential problem loans and loan concentrations.  Table 9 depicts certain categories of our risk element assets as of December 31st for each of the last five years.  We also discuss potential problem loans and loan concentrations within this section.

Nonperforming Assets.  At year-end 2009, nonperforming assets (including nonaccrual loans, troubled debt restructurings, and other real estate owned) totaled $144.1 million, a net increase of $36.2 million from year-end 2008.  Nonaccrual loans totaled $86.3 million at year-end 2009, a net decrease of $10.6 million from year-end 2008 reflective of the migration of loans to the other real estate owned category, loan charge-offs, as well as improvement in successful problem loan restructurings.  Troubled debt restructurings increased $19.9 million to $21.6 million and other real estate owned increased $26.9 million to $36.1 million at year-end 2009.  Compared to the prior year-end, the overall increase in nonperforming assets generally reflects weak economic and real estate market conditions, which have increased loan default rates primarily within our residential real estate loan portfolio.  Vacant residential land loans of $28.1 million (approximately 110 borrowing relationships) represented approximately 33% of our nonaccrual loan balance at year-end 2009, which is a decline from $47.5 million, or 49%, at the end of 2008.  Total nonperforming assets represented 7.38% of loans and other real estate at year-end 2009 compared to 5.48% at the end of 2008.

Generally, loans are placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful.  Once a loan is placed in nonaccrual status, all previously accrued and uncollected interest is reversed against interest income.  Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful.  Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.  If interest on our loans classified as nonaccrual during 2009 had been recognized on a fully accruing basis, we would have recorded an additional $10.9 million of interest income for the year ended December 31, 2009.

Troubled debt restructurings are loans on which, due to the deterioration in the borrower’s financial condition, the original terms have been modified in favor of the borrower or either principal or interest has been forgiven.  Loans with this classification totaled $21.6 million at December 31, 2009 compared to $1.7 million at December 31, 2008.

Foreclosed assets represent property acquired as the result of borrower defaults on loans.  Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure.  Write-downs occurring at foreclosure are charged against the allowance for possible loan losses.  On an ongoing basis, properties are appraised as required by market indications and applicable regulations.  Write-downs are provided for subsequent declines in value and are included in other noninterest expense along with other expenses related to maintaining the properties.

Other real estate owned totaled $36.1 million at December 31, 2009 versus $9.2 million at December 31, 2008.  This category includes property owned by the Bank that was acquired either through foreclosure procedures or by receiving a deed in lieu of foreclosure.  During 2009, we added properties totaling $44.0 million, and partially or completely liquidated properties totaling $12.4 million, resulting in a net increase in other real estate of approximately $26.9 million.  Revaluation adjustments for other real estate owned properties during 2009 totaled $4.7 million and were charged to noninterest expense when realized.
 
 
42

 
Table 9
RISK ELEMENT ASSETS



 
As of December 31,
 
(Dollars in Thousands)
2009
   
2008
   
2007
   
2006
   
2005
 
                             
Nonaccruing Loans
$
86,274
   
$
96,876
   
$
25,119
   
$
8,042
   
$
5,258
 
Troubled Debt Restructurings
 
21,644
     
1,744
     
-
     
-
     
-
 
Total Nonperforming Loans
 
107,918
     
98,620
     
25,119
     
8,042
     
5,258
 
Other Real Estate Owned
 
36,134
     
9,222
     
3,043
     
689
     
292
 
Total Nonperforming Assets
$
144,052
   
$
107,842
   
$
28,162
   
$
8,731
   
$
5,550
 
Past Due 90 Days or More (still accruing interest)
-
   
 $
88
   
 $
416
   
135
   
$
309
 
                                       
Nonperforming Loans/Loans
 
5.63
%
   
5.04
%
   
1.31
%
   
.40
%
   
.25
%
Nonperforming Assets/Loans Plus Other Real Estate
 
7.38
%
   
5.48
%
   
1.47
%
   
.44
%
   
.27
%
Nonperforming Assets/Capital(1)
 
46.19
%
   
34.15
%
   
9.06
%
   
2.62
%
   
1.72
%
Allowance/Nonperforming Loans
 
40.77
%
   
37.52
%
   
71.92
%
   
214.09
%
   
331.11
%

(1)
For computation of this percentage, "Capital" refers to shareowners' equity plus the allowance for loan losses.

Potential Problem Loans.  Potential problem loans are defined as those loans which are now current but where management has doubt as to the borrower’s ability to comply with present loan repayment terms.  At December 31, 2009, we had $28.0 million in loans of this type which are not included in either of the nonaccrual, troubled debt restructurings or 90 day past due loan categories compared to $30.0 million at year-end 2008.  The year over year decline reflects a slowdown in the additions to our potential problem loan pool during the second half of 2009.  Approximately $6.2 million of the potential problem loans at December 31, 2009 were secured by vacant residential land.  Management monitors these loans closely and reviews their performance on a regular basis.

Loan Concentrations.  Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which cause them to be similarly impacted by economic or other conditions and such amount exceeds 10% of total loans.  Due to the lack of diversified industry within the markets served by the Bank and the relatively close proximity of the markets, we have both geographic concentrations as well as concentrations in the types of loans funded.  Specifically, due to the nature of our markets, a significant portion of the portfolio has historically been secured with real estate.

While we have a majority of our loans (77.3%) secured by real estate, the primary types of real estate collateral are commercial properties and 1-4 family residential properties.  At December 31, 2009, commercial real estate mortgage loans and residential real estate mortgage loans accounted for 37.4% and 34.6%, respectively, of the loan portfolio.  Furthermore, approximately 9.5% of our loan portfolio is secured by vacant residential land loans.  These loans include both improved and unimproved land and are comprised of loans to individuals as well as builders/developers.




 
43

 

Investment Securities

In 2009, our average investment portfolio decreased $0.8 million, or 0.4%, from 2008 and increased $1.5 million, or 0.8%, from 2007 to 2008.  As a percentage of average earning assets, the investment portfolio represented 8.7% in 2009, compared to 8.5% in 2008.  In 2009, the decrease in the average balance of the investment portfolio was primarily attributable to not replacing a portion of maturing securities due to a reduction in the level of securities required to be pledged against our public funds deposits.  The lower level of pledging requirements is primarily attributable to the FDIC Transaction Account Guarantee Program.  In 2008, the increase in the average balance of the investment portfolio was primarily due to the reinvestment of a portion of the interest earned on these investments.  In 2010, we will closely monitor liquidity levels and pledging requirements to assess the need to purchase additional investments.
 
 
In 2009, average taxable investments decreased $9.5 million, or 10.2%, while tax-exempt investments increased $8.7 million, or 8.9%.  The mix changed as tax-exempt securities offered a more attractive spread compared to taxable securities during the year. Management will continue to purchase municipal issues when it considers the yield to be attractive and we can do so without adversely impacting our tax position.

The 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 December 31, 2009, all securities are classified as available-for-sale which offers management full flexibility in managing our liquidity and interest rate sensitivity without adversely impacting our regulatory capital levels.  It is neither management's intent nor practice to participate in the trading of investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.  Securities in the available-for-sale portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive income (loss) component of shareowners' equity.  At December 31, 2009, the investment portfolio maintained a net pre-tax unrealized gain of $2.0 million compared to a net pre-tax unrealized gain of $2.3 million at December 31, 2008.  Approximately $8.5 million of our investment securities have an unrealized loss totaling $0.1 million and have been in a loss position for less than 12 months.  These securities consist of mortgage-backed securities and municipal bonds that are in a loss position because they were acquired when the general level of interest rates was lower than that on December 31, 2009.  For 2009, we realized $0.3 million in other than temporary impairment through earnings for one preferred bank stock issue.

The average maturity of the total portfolio at December 31, 2009 and 2008 was 1.13 and 2.00 years, respectively.  See Table 10 for a breakdown of maturities by investment type.

The weighted average taxable equivalent yield of the investment portfolio at December 31, 2009 was 3.43%, versus 4.26% in 2008. This lower yield was a result of matured bonds being invested at lower market rates during 2009.  Our bond portfolio contained no investments in obligations, other than U.S. Governments, of any one state, municipality, political subdivision or any other issuer that exceeded 10% of our shareowners' equity at December 31, 2009.  New investments are being made selectively into high quality bonds.  Due diligence is continually performed on the investment portfolio, namely the municipal bonds.

Table 10 and Note 2 in the Notes to Consolidated Financial Statements present a detailed analysis of our investment securities as to type, maturity and yield.

 
44

 

Table 10
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
 
   
As of December 31,
 
   
2009
 
2008
 
2007
 
(Dollars in Thousands)
 
Amortized
Cost
 
Market
Value
 
Weighted(1)
Average
Yield
 
Amortized
Cost
 
Market
Value
 
Weighted(1)
Average
Yield
 
Amortized
Cost
 
Market
Value
 
Weighted(1)
Average
Yield
 
                                       
U.S. GOVERNMENTS
                                     
Due in 1 year or less
 
$
11,034
 
$
11,111
   
2.04
%
$
18,695
 
$
19,033
   
3.54
%
$
36,441
 
$
36,570
   
4.62
%
Due over 1 year through 5 years
   
11,236
   
11,333
   
1.53
   
17,490
   
17,909
   
1.98
   
25,264
   
25,493
   
4.46
 
Due over 5 years through 10 years
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Due over 10 years
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
TOTAL
   
22,270
   
22,444
   
1.78
   
36,185
   
36,942
   
2.79
   
61,705
   
62,063
   
4.56%
 
                                                         
STATES & POLITICAL SUBDIVISIONS
                                                       
Due in 1 year or less
   
58,987
   
59,477
   
3.90
   
39,277
   
39,581
   
5.02
   
25,675
   
25,697
   
5.19
 
Due over 1 year through 5 years
   
47,468
   
48,073
   
2.49
   
61,093
   
61,981
   
4.55
   
64,339
   
64,304
   
5.38
 
Due over 5 years through 10 years
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Due over 10 years
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
TOTAL
   
106,455
   
107,550
   
3.28
   
100,370
   
101,562
   
4.74
   
90,014
   
90,001
   
5.32%
 
                                                         
MORTGAGE-BACKED SECURITIES(2)
                                                       
Due in 1 year or less
   
8,400
   
8,506
   
3.91
   
1,258
   
1,267
   
3.84
   
4,125
   
4,117
   
4.23
 
Due over 1 year through 5 years
   
24,742
   
25,398
   
4.01
   
30,803
   
30,907
   
4.44
   
15,043
   
15,070
   
4.89
 
Due over 5 years through 10 years
   
233
   
239
   
4.44
   
1,420
   
1,426
   
5.29
   
7,166
   
7,100
   
5.21
 
Due over 10 years
   
-
   
-
   
-
   
6,379
   
6,476
   
5.38
   
-
   
-
   
-
 
TOTAL
   
33,375
   
34,143
   
3.99
   
39,860
   
40,076
   
3.74
   
26,334
   
26,287
   
4.87%
 
                                                         
OTHER SECURITIES
                                                       
Due in 1 year or less
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Due over 1 year through 5 years
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Due over 5 years through 10 years
   
-
   
-
   
-
   
1,000
   
1,107
   
5.00
   
1,000
   
1,061
   
5.00
 
Due over 10 years(3)
   
12,536
   
12,536
   
6.18
   
11,882
   
11,882
   
5.94
   
11,307
   
11,307
   
5.90
 
TOTAL
   
12,536
   
12,536
   
6.18
   
12,882
   
12,989
   
5.87
   
12,307
   
12,368
   
5.90
 
                                                         
TOTAL INVESTMENT SECURITIES
 
$
174,636
 
$
176,673
   
3.43
%
$
189,297
 
$
191,569
   
4.26
%
$
190,360
 
$
190,719
   
5.08
%

(1)
Weighted average yields are calculated on the basis of the amortized cost of the security. The weighted average yields on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate.
(2)
Based on weighted average life.
(3)
Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average yield, but do not have stated maturities.

AVERAGE MATURITY
 
   
As of December 31,
 
(In Years)
 
2009
   
2008
   
2007
 
U.S. Governments
    0.95       1.15       1.09  
States and Political Subdivisions
    0.96       1.56       1.48  
Mortgage-Backed Securities
    1.82       4.98       3.47  
Other Securities
    -       -       -  
TOTAL
    1.13       2.24       1.63  


 
45

 

Deposits and Funds Purchased

Average total deposits for the year were $1.992 billion, a decrease of $73.6 million, or 3.6%, compared to the same period in 2008.  The decline was primarily a result of lower money market and NOW deposits of $53.7 million and $31.5 million, respectively.  A steady decline in the money market balances occurred throughout the first nine months.  During the fourth quarter, the money market campaigns that started late in the third quarter generated in excess of $90 million in new deposit balances and served to support our core deposit growth initiatives and to further strengthen the bank’s overall liquidity position.  NOW balances declined during the second and third quarters primarily as a result of a decline in public funds.  Starting late in the fourth quarter, we had an influx of public funds deposits (primarily NOW accounts), which is seasonal in nature and we anticipate those deposits will decline during the first and second quarter of 2010.  Partially offsetting the declines during the first nine months in average money market and NOW balances discussed above were higher noninterest bearing deposits of $11.1 million.  This was a result of our Absolutely Free Checking product which continues to be successful as both balances and the number of accounts continued to experience growth.
 
Compared to year-end 2008, the increase in average deposits reflects higher core deposits and public funds.  Core deposits have increased and money market balances declined during the first half of 2009, but have experienced an increase primarily as a result of the factors discussed above.  We continue to pursue prudent pricing discipline and to manage the mix of our deposits.  Therefore, we are not attempting to compete on price with higher rate paying competitors for these deposits.

Table 2 provides an analysis of our average deposits, by category, and average rates paid thereon for each of the last three years. Table 11 reflects the shift in our deposit mix over the last three years and Table 12 provides a maturity distribution of time deposits in denominations of $100,000 and over.

Average short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances (maturing in less than one year), and other borrowings, increased $18.1 million, or 29.6% in 2009.  The increase is attributable to a $21.9 million increase in funds purchased, partially offset by a decline in repurchase agreements of $1.2 million and a $2.6 million decrease in other borrowings primarily attributable to maturities of FHLB advances.  See Note 8 in the Notes to Consolidated Financial Statements for further information on short-term borrowings.

Strategically, we continue to focus on the value of our deposit franchise, which produces a strong base of core deposits with minimal reliance on wholesale funding.

Table 11
SOURCES OF DEPOSIT GROWTH
 
 
2008 to
 
Percentage
 
Components of
 
 
2009
 
of Total
 
Total Deposits
 
(Average Balances - Dollars in Thousands)
Change
 
Change
 
2009
 
2008
 
2007
 
Noninterest Bearing Deposits
$
11,066
 
15.0
%
21.0
%
19.7
%
22.2
%
NOW Accounts
 
(31,574)
 
(42.9)
 
35.7
 
36.0
 
28.0
 
Money Market Accounts
 
(53,747)
 
(73.0)
 
16.1
 
18.1
 
20.0
 
Savings
 
5,169
 
7.0
 
6.1
 
5.6
 
6.0
 
Time Deposits
 
(4,550)
 
(6.1)
 
21.1
 
20.6
 
23.9
 
Total Deposits
$
(73,636)
 
(100.0)
%
100.0
%
100.0
%
100.0
%

Table 12
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER

   
December 31, 2009
 
(Dollars in Thousands)
 
Time Certificates of Deposit
   
Percent
 
Three months or less
 
$
45,973
     
29.84
%
Over three through six months
   
38,893
     
25.24
 
Over six through twelve months
   
50,779
     
32.96
 
Over twelve months
   
18,420
     
11.96
 
Total
 
$
154,065
     
100.00
%


 
46

 

Market Risk and Interest Rate Sensitivity

Overview.  Market risk management arises from changes in interest rates, exchange rates, commodity prices, and equity prices.  We have risk management policies to monitor and limit exposure to market risk and do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices.  In asset and liability management activities, our policies are designed to minimize structural interest rate risk.

Interest Rate Risk Management.  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 our 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, 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, 200, and 300 basis points (“bp”), 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.


 
47

 

ESTIMATED CHANGES IN NET INTEREST INCOME (1)

Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
 
           
Policy Limit
+/-10.0%
+/-7.5%
+/-5.0%
+/-5.0%
 
December 31, 2009
 -6.1%
-3.4%
-0.8%
 0.7%
 
December 31, 2008
  1.4%
 1.6%
 1.2%
-1.4%
 


The Net Interest Income at Risk position declined for the month of December 2009, when compared to the same period in 2008, for the “up rate” scenarios.  Our largest exposure is at the +300 basis point (“bp”) level, with a measure of -6.1%, which is still within our policy limit of -10.0%.  The year-over-year variance is attributable to several key assumption changes, as a result of recommendations from an independent third party review of the asset/liability simulation process and completion of a core deposit study.  All measures of net interest income at risk are within our prescribed policy limits.

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 (1)

Changes in Interest Rates
+300 bp
+200 bp
+100 bp
-100 bp
 
           
Policy Limit
+/-12.5%
+/-10.0%
+/-7.5%
+/-7.5%
 
December 31, 2009
-4.3%
0.4%
2.7%
-7.0%
 
December 31, 2008
0.5%
2.0%
1.7%
-3.8%
 

Our risk profile, as measured by EVE, declined for the month of December 2009, when compared to the same period in 2008, for the “down rate” and “up rate” scenarios, with the exception of the +100 bp scenario.  The unfavorable variance between periods is attributable to the changes in several key assumptions, as previously mentioned above in the Net Interest Income at Risk section. All measures of economic value of equity are within our prescribed policy limits.

(1)
Down 200 and 300 rate scenarios have been excluded due to the current historically low interest rate environment.

 
48

 

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

In general terms, liquidity is a measurement of our ability to meet our cash needs.  Our objective in managing our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their terms, without an adverse impact on our current or future earnings.  Our liquidity strategy is guided by policies that are formulated and monitored by our Asset Liability Committee (ALCO) and senior management, and which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments.  We regularly evaluate all of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.  For the years ended December 31, 2009 and 2008, our principal source of funding has been our client deposits, supplemented by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and FHLB borrowings.  We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are sufficient to meet our future operating capital and funding requirements.

Overall, we have the ability to generate $950 million in additional liquidity through all of our available resources.  In addition to primary borrowing outlets mentioned above, we also have the ability to generate liquidity by borrowing from the Federal Reserve Discount Window and through brokered deposits.  Management recognizes the importance of maintaining liquidity and has developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level of severity.  We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity level increases that certain credit facilities may no longer be available.  The liquidity available to us is considered sufficient to meet the ongoing needs.

We view our investment portfolio as a liquidity source and have the option to pledge the portfolio as collateral for borrowings or deposits, and/or sell selected securities.  The portfolio consists of debt issued by the U.S. Treasury, U.S. governmental agencies, and municipal governments.  The weighted average life of the portfolio is approximately one year and as of year-end had a net unrealized pre-tax gain of $2.0 million.

Our average liquidity (defined as funds sold plus interest bearing deposits with other banks less funds purchased) for the fourth quarter of 2009 reflects a net overnight funds sold position of $101.1 million during the fourth of 2009 compared to an average net overnight funds purchased position of $53.5 million in the third quarter and an average net overnight funds purchased position of $18.0 million during the fourth quarter of 2008.  The favorable variance of $154.5 million in the funds position compared to the linked quarter is primarily attributable to the growth in core deposits mentioned above and net reductions in both the loan and investment portfolios.  The favorable variance from the fourth quarter of 2008 reflects core deposit growth and a net reduction in investment securities.

Capital expenditures are expected to approximate $10.2 million over the next 12 months, which consist primarily of new banking office construction, office equipment and furniture, and technology purchases.  Management believes that these capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations.

Borrowings

At December 31, 2009, advances from the FHLB consisted of $50.0 million in outstanding debt consisting of 41 notes.  In 2009, the Bank made FHLB advance payments totaling approximately $39.7 million and obtained five new FHLB advances totaling $38.6 million.  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. 


 
49

 

Table 13
CONTRACTUAL CASH OBLIGATIONS

Table 13 sets forth certain information about contractual cash obligations at December 31, 2009.

   
Payments Due By Period
 
(Dollars in Thousands)
 
< 1 Yr
   
> 1 – 3 Yrs
   
> 3 – 5 Yrs
   
> 5 Years
   
Total
 
Federal Home Loan Bank Advances
 
$
3,277
   
$
16,069
   
$
15,597
   
$
15,072
   
$
50,015
 
Subordinated Notes Payable
   
-
     
-
     
-
     
62,887
     
62,887
 
Operating Lease Obligations
   
1,268
     
1,138
     
862
     
4,739
     
8,007
 
Time Deposit Maturities
   
378,009
     
53,698
     
3,612
     
-
     
435,319
 
Liability for Unrecognized Tax Benefits
   
590
     
2,091
     
2,318
     
673
     
5,672
 
Total Contractual Cash Obligations
 
$
383,144
   
$
72,996
   
$
22,389
   
$
83,371
   
$
561,900
 

We have issued two junior subordinated deferrable interest notes to 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.  See Note 9 in the Notes to Consolidated Financial Statements for additional information on these borrowings.  The interest payments for the CCBG Capital Trust I borrowing are due quarterly at a fixed rate of 5.71% and effective January 2010 will adjust quarterly to a variable rate of LIBOR plus a margin of 1.90%.  This note matures on December 31, 2034.  The interest payments for the CCBG Capital Trust II borrowing are due quarterly at a fixed rate of 6.07% and effective June 2010 will adjust annually to a variable rate of LIBOR plus a margin of 1.80%.  This note matures on June 15, 2035.  The proceeds of these borrowings were used to partially fund acquisitions.
 
In accordance with the Federal Reserve Resolutions, CCBG must receive approval from the Federal Reserve prior to incurring new debt, refinancing existing debt, or making interest payments on its trust preferred securities.  Under the terms of each trust preferred securities note, in the event of default or if we elect to defer interest on the note, we may not, with certain exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock.

Capital

We continue to maintain a strong capital position.  The ratio of shareowners' equity to total assets at year-end was 9.89%, 11.20%, and 11.19%, in 2009, 2008, and 2007, respectively.  Management believes its strong capital base offers protection against adverse developments that may arise during the course of an economic downturn.

We are subject to risk-based capital guidelines that measure capital relative to risk weighted assets and off-balance sheet financial instruments.  Capital guidelines issued by the Federal Reserve Board require bank holding companies to have a minimum total risk-based capital ratio of 8.00%, with at least half of the total capital in the form of Tier I Capital.  As of December 31, 2009, we exceeded these capital guidelines with a total risk-based capital ratio of 14.11% and a Tier 1 ratio of 12.76%, compared to 14.69% and 13.34%, respectively, in 2008.  As allowed by Federal Reserve Board capital guidelines the trust preferred securities issued by CCBG Capital Trust I and CCBG Capital Trust II are included as Tier I Capital in our capital calculations previously noted.  See Note 9 in the Notes to Consolidated Financial Statements for additional information on our two trust preferred security offerings.  See Note 14 in the Notes to Consolidated Financial Statements for additional information as to our capital adequacy.

A tangible leverage ratio is also used in connection with the risk-based capital standards and is defined as Tier I Capital divided by average assets.  The minimum leverage ratio under this standard is 3% for the highest-rated bank holding companies which are not undertaking significant expansion programs.  An additional 1% to 2% may be required for other companies, depending upon their regulatory ratings and expansion plans.  On December 31, 2009, we had a leverage ratio of 10.39% compared to 11.51% in 2008.

Shareowners' equity as of December 31, for each of the last three years is presented below:

(Dollars in Thousands)
2009
   
2008
   
2007
 
Common Stock
 
170
     
171
     
172
 
Additional Paid-in Capital
 
36,099
     
36,783
     
38,243
 
Retained Earnings
 
246,460
     
262,890
     
260,325
 
Subtotal
 
282,729
     
299,844
     
298,740
 
Accumulated Other Comprehensive (Loss), Net of Tax
 
(14,830
)
   
(21,014
)
   
(6,065
)
Total Shareowners' Equity
$
267,899
   
$
278,830
   
$
292,675
 

 
50

 

At December 31, 2009, our common stock had a book value of $15.72 per diluted share compared to $16.27 in 2008.  Book value is impacted by the net unrealized gains and losses on investment securities available-for-sale.  At December 31, 2009, the net unrealized gain was $0.6 million compared to $1.5 million in 2008.  Beginning in 2006, book value has been impacted by the recording of our unfunded pension liability through other comprehensive income in accordance with Accounting Standards Code Topic 715.  At December 31, 2009, the net pension liability reflected in other comprehensive income was $15.4 million compared to $22.5 million at December 31, 2008.  The change in our net pension liability in 2008 was primarily attributable to a decline in pension plan assets driven by market disruption and significant asset de-valuation occurring during the second half of the year.  In 2009, pension plan asset values improved resulting in a favorable variance in our net pension liability.

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.  During the nine year period ended December 31, 2009, we have repurchased a total of 2,520,130 shares at an average purchase price of $25.19 per share.  In 2009, we repurchased 145,888 shares at an average purchase price of $10.65 and in 2008 we repurchased a total of 90,041 shares at an average purchase price of $26.77 per share.  We must seek prior approval from the Federal Reserve before repurchasing any additional shares of our common stock.

We offer an Associate Stock Incentive Plan under which certain associates are eligible to earn shares of our common stock based upon achieving established performance goals.  In 2009 and 2008, we issued no shares under this plan as the financial performance goal for each year was not achieved.

We also offer stock purchase plans, which permit our associates and directors to purchase shares at a 10% discount.  In 2009, 49,104 shares, valued at approximately $700,000 (before 10% discount), were issued under these plans.

Dividends

Adequate capital and financial strength is paramount to our stability and the stability of our subsidiary bank.  Cash dividends declared and paid should not place unnecessary strain on our capital levels.  When determining the level of dividends the following factors are considered:

·  
Compliance with state and federal laws and regulations;
·  
Our capital position and our ability to meet our financial obligations;
·  
Projected earnings and asset levels; and
·  
The ability of the Bank and us to fund dividends.

Although we believe a consistent dividend payment is favorably viewed by the financial markets and our shareowners, our Board of Directors will declare dividends only if we are considered to have sufficient capital.  Future capital requirements and corporate plans are considered when the Board considers a dividend payment.

Dividends declared and paid totaled $.7600 per share in 2009.  For each quarter of 2009, we declared and paid a dividend of $.1900 per share.  We paid dividends of $.7450 per share in 2008 and $.7100 per share in 2007.  Total cash dividends declared per share in 2009 represented a 2.0% increase over 2008.  For 2009, our dividend payout ratio was not meaningful as our dividends exceeded our earnings for the year by $16.4 million.  The dividend payout ratio was 83.71% and 42.77% for 2008 and 2007, respectively.
 
State and federal regulations place certain restrictions on the payment of dividends by both CCBG and the Bank.  The Bank’s aggregate net profits for the past two years are significantly less than the dividends declared and paid to CCBG over that same period.  In addition, in accordance with the Federal Reserve Resolutions, the Bank must seek approval from the Federal Reserve prior to declaring or paying a dividend.  As a result, the Bank must obtain approval from its regulators to issue and declare any further dividends to CCBG.  The Bank may not receive the required approvals.  As of December 31, 2009, we believe we have sufficient cash to fund shareowner dividends in 2010 should the Board choose to declare and pay a quarterly dividend during the year.  Even if we have sufficient cash to pay dividends, we must seek approval from the Federal Reserve to pay dividends to our shareowners and may not receive the required approvals.  We will continue to evaluate our dividend quarterly and consult with our regulators concerning matters relating to our overall dividend policy.

Inflation

The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.

Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices.  While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.  Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail in the section entitled "Results of Operations."
 
51

 
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 December 31, 2009, we had $326.2 million in commitments to extend credit and $13.2 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 may 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 our ability to meet on-going obligations.  In the event these commitments require funding in excess of historical levels, management believes current liquidity, investment security maturities, available advances from the FHLB and Federal Reserve Bank provide a sufficient source of funds to meet these commitments.

FOURTH QUARTER 2009 – FINANCIAL RESULTS

For the fourth quarter of 2009, we realized a net loss of $3.4 million, or $0.20 per diluted share compared to a net loss of $1.5 million, or $0.08 per diluted share, for the third quarter of 2009.  The loss reported for the fourth quarter reflects a loan loss provision of $10.8 million ($0.39 per diluted share) versus $12.3 million ($0.45 per diluted share) in the third quarter.  Higher costs related to the management and resolution of problem assets also negatively impacted earnings for the fourth quarter.

Tax equivalent net interest income for the fourth quarter of 2009 was $25.8 million compared to $27.1 million for the third quarter of 2009.  The decrease of $1.3 million in net interest income from the third quarter was partially due to a shift in earning asset mix, unfavorable asset repricing and a slight increase in the costs of funds.  Quarter over quarter, interest income was adversely impacted by declines in the investment and loan portfolios as well as unfavorable repricing, while interest expense increased reflecting the incremental costs of our money market promotion.  A decrease in both short-term and long-term borrowings, and a lower level of foregone interest on nonaccrual loans partially offset the unfavorable variances referenced above.
 
Pressure on asset repricing and an unfavorable shift in our earning asset mix, coupled with a higher cost of funds resulted in the net interest margin of 4.59% for the fourth quarter of 2009, which represents a decline of 40 basis points from the third quarter.
 
The provision for loan losses for the fourth quarter was $10.8 million compared to $12.3 million for the third quarter of 2009.  The reduction in the loan loss provision compared to the prior quarter was primarily due to a lower level of reserves required for impaired loans as this portfolio declined $9.1 million from the third quarter.  Net charge-offs in the fourth quarter totaled $11.8 million (2.42% of average loans) compared to $8.7 million (1.76% of average loans) in the third quarter of 2009.  At year-end 2009, the allowance for loan losses of $44.0 million was 2.30% of outstanding loans (net of overdrafts) and provided coverage of 41% of nonperforming loans compared to 2.32% and 41%, respectively at the end of the third quarter.
 
Noninterest income for the fourth quarter of 2009 totaled $14.4 million compared to $14.3 million in the third quarter of 2009.  Compared to the linked quarter, the $0.1 million, or 0.7% increase was due to higher deposit and asset management fees of $84,000 and $105,000, respectively, partially offset by lower mortgage banking revenues ($113,000).  The increase in deposit fees reflects a reduction in overdraft losses, while the increase in asset management fees is attributable to higher account valuations for managed accounts.  The decline in mortgage banking revenues is attributable to a reduction in our residential real estate loan pipeline.
 
Noninterest expense totaled $35.3 million for the fourth quarter of 2009 compared to $31.6 million in the third quarter of 2009.  Compared to the linked quarter, increases in professional fees ($595,000), legal fees ($214,000), OREO expense ($1.6 million), pension expense ($587,000), and advertising expense ($223,000) drove the unfavorable variance.  Legal fees and OREO expenses were higher due to the cost of managing and resolving problem assets.  The increase in professional fees primarily reflects payment to a consulting firm for services related to a review of our vendor maintenance contracts that will result in future cost reductions.  The variance in pension expense reflects a third quarter adjustment based on final pension expense estimates provided to us by our actuarial firm.  A deposit promotion initiated during the fourth quarter as well an increase in public relations expenses drove the unfavorable variance in advertising expense.

The $3.0 million tax benefit is attributable to our book operating loss and reflects a higher than normalized effective tax rate due to our permanent book/tax differences, primarily tax exempt income.

Average earning assets were $2.238 billion for the fourth quarter of 2009, an increase of $80.2 million, or 3.6% from the third quarter of 2009.  The improvement from the third quarter is primarily attributable to an increase in the overnight funds position of $109.0 million, partially offset by a $9.2 million and $20.1 million decrease in the investment and loan portfolios, respectively.  
 
52

 
The improvement in the net funds position reflects our focus on core deposit growth, a successful money market account (“MMA”) campaign in selected markets and the increase in balances of several large deposit relationships.  Loans declined primarily in the residential and construction portfolios with moderate growth experienced in the commercial mortgage portfolio.  Loans transferred to Other Real Estate Owned and gross charge-offs were significant factors contributing to the net reduction in the loan portfolio for the quarter.
 
At the end of the fourth quarter, nonperforming assets (including nonaccrual loans, restructured loans, and other real estate owned) totaled $144.1 million, a net decrease of $0.3 million from the third quarter.  Nonaccrual loans totaled $86.3 million at the end of the fourth quarter, a net decrease of $5.6 million from the prior linked quarter primarily due to the migration of loans to the other real estate owned category and loan charge-offs.  Quarter over quarter, the other real estate owned balance increased $2.8 million and restructured loans increased by $2.5 million.  Vacant residential land loans of $28.1 million represented approximately 33% of our nonaccrual loan balance at quarter-end, which is a decline from $39.4 million, or 43%, at the end of the linked quarter.  Total nonperforming assets represented 7.38% of loans and other real estate at the end of the fourth quarter compared to 7.25% at the prior quarter-end.  The increase over the linked quarter is attributable to a net decline in the loan portfolio as nonperforming assets have been essentially flat for the last two quarters.
 
Average total deposits were $2.090 billion for the fourth quarter, an increase of $139.8 million, or 7.2%, from the third quarter.  On a linked quarter basis, the increase reflects core deposit growth of approximately $150.0 million resulting from the MMA campaign in select markets and the opening of several large deposit relationships.  The recent MMA campaign, which was launched during the third quarter, generated in excess of $90.0 million in new deposit balances and served to support our core deposit growth initiatives and to further strengthen the bank’s overall liquidity position.  Additionally, our absolutely free checking product continues to be successful as both balances and the number of accounts continue to post growth quarter over quarter.  Certificates of deposit balances have grown as rate pressures from higher paying institutions have eased in most of our markets.  Partially offsetting the core deposit growth was a decline in average public funds of approximately $10.0 million attributable to seasonal run-off and the decision not to match competitors’ rates.  Starting late in the fourth quarter, we had an influx of public funds deposits (an increase of $159 million over prior quarter-end), which is seasonal in nature and we anticipate those deposits will decline during the first and second quarter of 2010.
 
We maintained an average net overnight funds (deposits with banks plus Fed funds sold less Fed funds purchased) sold position of $101.1 million during the fourth of 2009 compared to an average net overnight funds purchased position of $53.5 million in the third quarter.  The favorable variance of $154.5 million in the funds position compared to the linked quarter is primarily attributable to the growth in core deposits mentioned above and net reductions in both the loan and investment portfolios.

 
53

 

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 a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans.  The allowance is that amount considered adequate to absorb losses inherent in the loan portfolio based on management’s evaluation of credit risk as of the balance sheet date.

The allowance for loan losses includes allowance allocations calculated in accordance with FASB ASC Topic 310 – Receivables (formerly Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118), and allowance allocations calculated in accordance with ASC Topic 450 (formerly SFAS 5), "Accounting for Contingencies."  The level of the allowance reflects management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company’s allowance for loan losses consists of three components: (i) specific valuation allowances established for probable losses on specific loans deemed impaired; (ii) valuation allowances calculated for specific homogenous loan pools based on, but not limited to, historical loan loss experience, current economic conditions, levels of past due loans, and levels of problem loans; and (iii) an unallocated allowance that reflects management’s determination of estimation risk.

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 or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable.  Impairment testing requires management to make significant judgments and estimates relating to the fair value of its reporting unit.

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 our operating results.

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 Operations 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 defined pension 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.  The discount rate utilized in 2009 was 6.00%.  The estimated impact to 2009 pension expense of a 25 basis point increase or decrease in the discount rate would have been a decrease and increase of approximately $344,000 and $361,000, respectively.  We anticipate using a 5.75% discount rate in 2010.

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).  The weighted-average expected long-term rate of return on plan assets utilized for 2009 was 8.0%.  The estimated impact to 2009 pension expense of a 25 basis point increase or decrease in the rate of return would have been an approximate $158,000 decrease or increase, respectively.  We anticipate using a rate of return on plan assets for 2010 of 8.0%.

 
54

 
The assumed rate of annual compensation increases of 5.50% in 2009 is based on expected trends in salaries and the employee base.  We anticipate using a compensation increase of 4.5% for 2010 reflecting current market trends.

Detailed information on the pension plan, the actuarially determined disclosures, and the assumptions used are provided in Note 12 of the Notes to Consolidated Financial Statements.

Recent Accounting Pronouncements

The Financial Accounting Standards Board, the SEC, and other regulatory bodies have enacted new accounting pronouncements and standards that either has impacted our results in prior years presented, or will likely impact our results in 2010.  Please refer to the footnote No. 1 in the Notes to our Consolidated Financial Statements.


ITEM 7A.

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.



 
55

 


Item 8.  

Table 14
QUARTERLY FINANCIAL DATA (Unaudited)

   
2009
   
2008
 
(Dollars in Thousands, Except Per Share Data)
 
Fourth
   
Third(1)
   
Second
   
First
   
Fourth
   
Third
   
Second
   
First
 
Summary of Operations:
                                               
Interest Income
 
$
29,756
   
$
 
                  30,787
   
$
 
31,180
   
$
 
31,053
   
$
33,229
   
$
34,654
   
$
 
36,260
   
$
38,723
 
Interest Expense
   
4,464
     
        4,235
     
        4,085
     
4,058
     
5,482
     
7,469
     
8,785
     
12,264
 
Net Interest Income
   
25,292
     
       26,552
     
       27,095
     
26,995
     
27,747
     
27,185
     
27,475
     
26,459
 
Provision for Loan Losses
   
10,834
     
         12,347
     
         8,426
     
8,410
     
12,497
     
10,425
     
5,432
     
4,142
 
Net Interest Income After
Provision for Loan Losses
   
14,458
     
 
14,205
     
 
18,669
     
 
18,585
     
15,250
     
16,760
     
 
22,043
     
22,317
 
Noninterest Income
   
14,411
     
14,304
     
14,634
     
14,042
     
13,311
     
20,212
     
15,718
     
17,799
 
Noninterest Expense
   
35,313
     
31,615
     
32,930
     
32,257
     
31,002
     
29,916
     
30,756
     
29,798
 
(Loss) Income Before  Income Taxes
   
(6,444
)
   
(3,106
)
   
 
373
     
 
370
     
(2,441
)
   
7,056
     
 
7,005
     
10,318
 
Income Tax (Benefit) Expense
   
(3,037
)
   
(1,618
)
   
(401
)
   
(280
)
   
(738
)
   
2,218
     
2,195
     
3,038
 
Net (Loss) Income
 
$
(3,407
)
 
$
(1,488
)
 
$
774
   
$
650
   
$
(1,703
)
 
$
4,838
   
$
4,810
   
$
7,280
 
Net Interest Income (FTE)
 
$
25,845
   
$
27,128
   
$
27,679
   
$
27,578
   
$
28,387
   
$
27,802
   
$
28,081
   
$
27,078
 
                                                     
 
         
Per Common Share:
                                                   
 
         
Net (Loss) Income Basic
 
$
(0.20
)
 
$
(0.08
 
$
0.04
   
$
0.04
   
$
(0.10)
   
$
0.29
   
$
0.28
   
$
0.42
 
Net (Loss) Income Diluted
   
(0.20
)
   
(0.08
   
0.04
     
0.04
     
(0.10)
     
0.29
     
0.28
     
0.42
 
Dividends Declared
   
0.190
     
0.190
     
0.190
     
0.190
     
0.190
     
0.185
     
0.185
     
0.185
 
Diluted Book Value
   
15.72
     
15.76
     
16.03
     
16.18
     
16.27
     
17.45
     
17.33
     
17.33
 
Market Price:
                                                   
 
         
High
   
14.34
     
17.10
     
17.35
     
27.31
     
33.32
     
34.50
     
30.19
     
29.99
 
Low
   
11.00
     
13.92
     
11.01
     
9.50
     
21.06
     
19.20
     
21.76
     
24.76
 
Close
   
13.84
     
14.20
     
16.85
     
11.46
     
27.24
     
31.35
     
21.76
     
29.00
 
                                                     
 
         
Selected Average
                                                   
 
         
Balances:
                                                   
 
         
Loans
 
$
1,944,873
   
$
1,964,984
   
$
1,974,197
   
$
1,964,086
   
$
1,940,083
   
$
1,915,008
   
$
1,908,802
   
$
1,909,574
 
Earning Assets
   
2,237,561
     
2,157,362
     
2,175,281
     
2,166,237
     
2,150,841
     
2,207,670
     
2,303,971
     
2,301,463
 
Assets
   
2,575,250
     
2,497,969
     
2,506,352
     
2,486,925
     
2,463,318
     
2,528,638
     
2,634,771
     
2,646,474
 
Deposits
   
2,090,008
     
1,950,170
     
1,971,190
     
1,957,354
     
1,945,866
     
2,030,684
     
2,140,545
     
2,148,874
 
Shareowners’ Equity
   
268,556
     
275,027
     
277,114
     
281,634
     
302,227
     
303,595
     
300,890
     
296,804
 
Common Equivalent Average Shares:
                                                   
 
         
Basic
   
17,034
     
17,024
     
17,010
     
17,109
     
17,125
     
17,124
     
17,146
     
17,170
 
Diluted
   
17,035
     
17,025
     
17,010
     
17,131
     
17,135
     
17,128
     
17,147
     
17,178
 
                                                     
 
         
Ratios:
                                                   
 
         
Return on Assets
   
(0.52
)%
   
(0.24
)%
   
0.12
%
   
0.11
%
   
(0.28
)%
   
0.76
%
   
0.73
%
   
1.11
%
Return on Equity
   
(5.03
)%
   
(2.15
)%
   
1.12
%
   
0.94
%
   
(2.24
)%
   
6.34
%
   
6.43
%
   
9.87
%
Net Interest Margin (FTE)
   
4.59
%
   
4.99
 %
   
5.11
%
   
5.16
%
   
5.26
%
   
5.01
%
   
4.90
%
   
4.73
%
Efficiency Ratio
   
85.21
%
   
73.86
 %
   
75.44
%
   
75.07
%
   
71.21
%
   
59.27
%
   
66.89
%
   
63.15
%

1) Includes $6.25 million ($3.8 million after-tax) one-time gain on sale of portion of merchant services portfolio.

 
56

 


CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
 
PAGE
 
   
 58
   
 59
   
 60
   
 61
   
 62
   
63




 
57

 




Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of
Capital City Bank Group, Inc.

We have audited the accompanying consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareowners’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital City Bank Group, Inc. and subsidiary at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Capital City Bank Group, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2010 expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP

Birmingham, Alabama
March 4, 2010

 
58

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 
As of December 31,
 
(Dollars in Thousands)
2009
   
2008
 
ASSETS
         
Cash and Due From Banks
$
57,877
   
$
88,143
 
Federal Funds Sold and Interest Bearing Deposits
 
276,416
     
6,806
 
Total Cash and Cash Equivalents
 
334,293
     
94,949
 
               
Investment Securities, Available-for-Sale
 
176,673
     
191,569
 
               
Loans, Net of Unearned Interest
 
1,915,940
     
1,957,797
 
Allowance for Loan Losses
 
(43,999
)
   
(37,004
)
Loans, Net
 
1,871,941
     
1,920,793
 
               
Premises and Equipment, Net
 
115,439
     
106,433
 
Goodwill
 
84,811
     
84,811
 
Other Intangible Assets
 
4,030
     
8,072
 
Other Assets
 
121,137
     
82,072
 
Total Assets
$
2,708,324
   
$
2,488,699
 
               
LIABILITIES
             
Deposits:
             
Noninterest Bearing Deposits
$
427,791
   
$
419,696
 
Interest Bearing Deposits
 
1,830,443
     
1,572,478
 
Total Deposits
 
2,258,234
     
1,992,174
 
               
Short-Term Borrowings
 
35,841
     
62,044
 
Subordinated Notes Payable
 
62,887
     
62,887
 
Other Long-Term Borrowings
 
49,380
     
51,470
 
Other Liabilities
 
34,083
     
41,294
 
Total Liabilities
 
2,440,425
     
2,209,869
 
               
SHAREOWNERS' EQUITY
             
Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding
 
-
     
-
 
Common Stock, $.01 par value; 90,000,000 shares authorized; 17,036,407 and 17,126,997 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively
 
170
     
171
 
Additional Paid-In Capital
 
36,099
     
36,783
 
Retained Earnings
 
246,460
     
262,890
 
Accumulated Other Comprehensive Loss, Net of Tax
 
(14,830
)
   
(21,014
)
Total Shareowners' Equity
 
267,899
     
278,830
 
Total Liabilities and Shareowners' Equity
$
2,708,324
   
$
2,488,699
 

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


 
59

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

 
For the Years Ended December 31,
 
(Dollars in Thousands, Except Per Share Data)
2009
   
2008
   
2007
 
INTEREST INCOME
               
Interest and Fees on Loans
$
117,324
   
$
132,682
   
$
154,567
 
Investment Securities:
                     
U.S. Treasury
 
547
     
747
     
574
 
U.S. Government Agencies and Corporations
 
1,827
     
2,562
     
3,628
 
States and Political Subdivisions
 
2,672
     
3,185
     
2,894
 
Other Securities
 
324
     
581
     
747
 
Funds Sold
 
82
     
3,109
     
2,913
 
Total Interest Income
 
122,776
     
142,866
     
165,323
 
                       
INTEREST EXPENSE
                     
Deposits
 
10,585
     
27,306
     
44,687
 
Short-Term Borrowings
 
291
     
1,157
     
2,871
 
Subordinated Notes Payable
 
3,730
     
3,735
     
3,730
 
Other Long-Term Borrowings
 
2,236
     
1,802
     
1,794
 
Total Interest Expense
 
16,842
     
34,000
     
53,082
 
                       
NET INTEREST INCOME
 
105,934
     
108,866
     
112,241
 
Provision for Loan Losses
 
40,017
     
32,496
     
6,163
 
Net Interest Income After Provision for Loan Losses
 
65,917
     
76,370
     
106,078
 
                       
NONINTEREST INCOME
                     
Service Charges on Deposit Accounts
 
28,142
     
27,742
     
26,130
 
Data Processing Fees
 
3,628
     
3,435
     
3,133
 
Asset Management Fees
 
3,925
     
4,235
     
4,700
 
Securities Transactions
 
10
     
125
     
14
 
Mortgage Banking Revenues
 
2,699
     
1,623
     
2,596
 
Bank Card Fees
 
10,306
     
12,701
     
13,706
 
Gain on Sale of Portion of Merchant Services Portfolio
 
-
     
6,250
     
-
 
Other
 
8,681
     
10,929
     
9,021
 
Total Noninterest Income
 
57,391
     
67,040
     
59,300
 
                       
NONINTEREST EXPENSE
                     
Salaries and Associate Benefits
 
65,067
     
61,831
     
60,279
 
Occupancy, Net
 
9,798
     
9,729
     
9,347
 
Furniture and Equipment
 
9,096
     
9,902
     
9,890
 
Intangible Amortization
 
4,042
     
5,685
     
5,834
 
Other
 
44,112
     
34,325
     
36,642
 
Total Noninterest Expense
 
132,115
     
121,472
     
121,992
 
                       
(LOSS) INCOME BEFORE INCOME TAXES
 
(8,807
   
21,938
     
43,386
 
Income Tax (Benefit) Expense
 
(5,336
)
   
6,713
     
13,703
 
                       
NET (LOSS) INCOME
$
(3,471
)
 
$
15,225
   
$
29,683
 
BASIC NET (LOSS) INCOME PER SHARE
$
(0.20
)
 
$
0.89
   
$
1.66
 
DILUTED NET (LOSS) INCOME  PER SHARE
$
(0.20
)
 
$
0.89
   
$
1.66
 
                       
Average Basic Common Shares Outstanding
 
17,044
     
17,141
     
17,909
 
Average Diluted Common Shares Outstanding
 
17,045
     
17,147
     
17,912
 

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


 
60

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(Dollars in Thousands, Except Per Share Data)
 
Shares Outstanding
   
Common Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated Other
Comprehensive
(Loss) Income,
Net of Taxes
   
Total
Balance, December 31, 2006
 
  18,518,398
   
185
     
80,654
     
243,242
     
(8,311
)
   
315,770
 
Comprehensive Income:
                                           
Net  Income
       
-
     
-
     
29,683
     
-
     
29,683
 
Ne     Net Change in Unrealized Loss On Available-for-Sale Securities
      (net of tax)
       
-
     
-
     
-
     
1,080
     
1,080 
 
Net  Change in Funded Status of Defined Pension Plan and SERP Plan
               (net of tax)
       
-
     
-
     
-
     
1,166
     
1,166 
 
Total Comprehensive Income
       
-
     
-
     
-
     
-
     
31,929
 
Miscellaneous – Other
       
-
     
-
     
223
     
-
     
223
 
Cash Dividends ($.710 per share)
       
-
     
-
     
(12,823
)
   
-
     
(12,823
)
Stock Performance Plan Compensation
       
-
     
265
     
-
     
-
     
265
 
Issuance of Common Stock
 
 68,519
   
1
     
571
     
-
     
-
     
572
 
Repurchase of Common Stock
 
(1,404,364
)
 
(14
)
   
(43,247
)
   
-
     
-
     
(43,261
)
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
)
ComComprehensive Income:
                                           
Net  Net Income
       
-
     
-
     
15,225
     
-
     
15,225
 
Net   Change in Unrealized Gain On Available-for-Sale Securities
      (net of tax)
       
-
     
-
     
-
     
1,230
     
 1,230
 
Net   Change in Funded Status of Defined Pension Plan and SERP Plan
               (net of tax)
       
-
     
-
     
-
     
(16,179
)
   
(16,179
)
Total Comprehensive Income
       
-
     
-
     
-
     
-
     
276
 
Cash Dividends ($.7450 per share)
       
-
     
-
     
(12,630
)
   
-
     
(12,630
)
Stock Performance Plan Compensation
       
-
     
62
     
-
     
-
     
62
 
Issuance of Common Stock
 
 34,485
           
891
     
-
     
-
     
891
 
Repurchase of Common Stock
 
(90,041
)
 
(1
)
   
(2,413
)
   
-
     
-
     
(2,414
)
        Balance, December 31, 2008
 
17,126,997
   
171
     
36,783
     
262,890
     
(21,014
)
   
278,830
 
Co    Comprehensive Income:
                                           
Ne    Net Loss
       
-
     
-
     
(3,471
   
-
     
(3,471
Net   Change in Unrealized Gain on  Available-for-Sale Securities
      (net of tax)
       
-
     
-
     
-
     
(888
   
 (888
Net   Change in Funded Status of Defined Pension Plan and SERP Plan (net of tax)
       
-
     
-
     
-
     
 7,072
     
7,072
 
Total Comprehensive Income
       
-
     
-
     
-
     
-
     
2,713
 
Cash Dividends ($.7600 per share)
       
-
     
-
     
(12,959
)
   
-
     
(12,959
)
Stock Performance Plan Compensation
       
-
     
(176
)
   
-
     
-
     
(176
Issuance of Common Stock
 
 55,298
           
1,052
     
-
     
-
     
 1,052
 
Repurchase of Common Stock
 
(145,888
)
 
(1
)
   
(1,560
)
   
-
     
-
     
(1,561
)
Balance, December 31, 2009
 
17,036,407
 
$
170
   
$
36,099
   
$
246,460
   
$
(14,830
)
 
$
267,899
 

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

 
61

 

CAPITAL CITY BANK GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
For the Years Ended December 31,
 
(Dollars in Thousands)
2009
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net (Loss) Income
$
(3,471
)
 
$
15,225
   
$
29,683
 
A Adjustments to Reconcile Net (Loss) Income to Cash Provided by Operating Activities:
                     
Provision for Loan Losses
 
40,017
     
32,496
     
6,163
 
Depreciation
 
6,680
     
6,798
     
6,338
 
Net Securities Amortization
 
2,364
     
990
     
279
 
Amortization of Intangible Assets
 
4,042
     
5,685
     
5,834
 
(Gain) on Securities Transactions
 
(10
)
   
(125
)
   
(14
)
Loss on Impaired Security
 
300
     
-
     
-
 
Origination  of Loans Held-for-Sale
 
(158,193
)
   
(106,340
)
   
(158,390
)
Proceeds From Sales of Loans Held-for-Sale
 
156,865
     
108,218
     
162,835
 
Net Gain From Sales of Loans Held-for Sale
 
(2,699
)
   
(1,623
)
   
(2,596
)
Gain on Sale of Portion of Merchant Services Portfolio
 
-
     
(6,250
)
   
-
 
Proceeds From Sale of Portion of Merchant Services Portfolio
 
-
     
6,250
     
-
 
Non-Cash Compensation
 
-
     
62
     
265
 
Net Decrease (Increase) in Deferred Income Taxes
 
2,911
     
(15,235
)
   
1,328
 
Net Decrease (Increase) in Other Assets
 
5,929
     
(1,371
)
   
(12,894
)
Net (Decrease) Increase in Other Liabilities
 
(4,176
)
   
2,200
     
8,115
 
Net Cash Provided by Operating Activities
 
50,559
     
46,980
     
46,946
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                     
Securities Available-for-Sale:
                     
Purchases
 
(66,794
)
   
(89,059
)
   
(56,289
)
Sales
 
2,806
     
10,490
     
-
 
Payments, Maturities, and Calls
 
75,295
     
78,767
     
58,894
 
Net (Increase) Decrease in Loans
 
(31,135
)
   
(66,635
)
   
74,058
 
Purchase of Premises & Equipment
 
(15,688
)
   
(14,626
)
   
(18,613
)
Proceeds From Sales of Premises & Equipment
 
2
     
6
     
203
 
Net Cash (Used In) Provided By Investing Activities
 
(35,514
)
   
(81,057
)
   
58,253
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                     
Net Increase (Decrease) in Deposits
 
266,061
     
(150,171
)
   
60,690
 
Net (Decrease) Increase in Short-Term Borrowings
 
(26,486
)
   
8,925
     
(12,263
)
Increase (Decrease) in Other Long-Term Borrowings
 
2,029
     
30,600
     
(10,618
)
Repayment of Other Long-Term Borrowings
 
(3,837
)
   
(5,872
)
   
(5,363
)
Dividends Paid
 
(12,959
)
   
(12,630
)
   
(12,823
)
Repurchase of Common Stock
 
(1,561
   
 (2,414
)
   
(43,261
)
Issuance of Common Stock
 
1,052
     
891
     
572
 
Net Cash Provided by (Used In) Financing Activities
 
224,299
     
(130,671
)
   
(23,066
)
                       
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
239,344
     
(164,748
)
   
82,133
 
                       
Cash and Cash Equivalents at Beginning of Year
 
94,949
     
259,697
     
177,564
 
Cash and Cash Equivalents at End of Year
$
334,293
   
$
94,949
   
$
259,697
 
                       
SUPPLEMENTAL DISCLOSURES:
                     
  Interest Paid on Deposits
$
10,586
   
$
29,729
   
$
44,510
 
  Interest Paid on Debt
$
6,273
   
$
6,658
   
$
8,463
 
  Taxes Paid
$
7,218
   
$
16,998
   
$
12,431
 
  Loans Transferred to Other Real Estate
$
43,997
   
$
10,874
   
$
3,494
 
  Iss   Issuance of Common Stock as Non-Cash Compensation
$
155
   
$
-
   
$
1,160
 
  Transfer of Current Portion of Long-Term Borrowings
$
637
   
$
176
   
$
12,318
 

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

 
62

 

Notes to Consolidated Financial Statements

Note 1
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of Capital City Bank Group, Inc. ("CCBG"), and its wholly-owned subsidiary, Capital City Bank ("CCB" or the "Bank" and together with CCBG, the "Company").  All material inter-company transactions and accounts have been eliminated.

The Company, which operates a single reportable business segment comprised of commercial banking within the states of Florida, Georgia, and Alabama, follows accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry.  The principles which materially affect the financial position, results of operations and cash flows are summarized below.

The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provide the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities.  The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest.  As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity.  A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE.  CCBG's wholly-owned subsidiaries, CCBG Capital Trust I (established November 1, 2004) and CCBG Capital Trust II (established May 24, 2005) are VIEs for which the Company is not the primary beneficiary.  Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.

Certain items in prior financial statements have been reclassified to conform to the current presentation.

The Company has evaluated subsequent events for potential recognition and/or disclosure through March 3, 2010, the date the consolidated financial statements included in this Annual Report on Form 10-K were issued.  

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could vary from these estimates.  Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses, pension expense, income taxes, loss contingencies, and valuation of goodwill and other intangibles and their respective analysis of impairment.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods and all other cash equivalents have a maturity of 90 days or less.  The Company is required to maintain average reserve balances with the Federal Reserve Bank based upon a percentage of deposits.  The average amounts of these reserve balances for the years ended December 31, 2009 and 2008 were $18.2 million and $11.9 million, respectively.

Investment Securities

Investment securities available-for-sale are carried at fair value and represent securities that are available to meet liquidity and/or other needs of the Company.  Gains and losses are recognized and reported separately in the Consolidated Statements of Operations upon realization or when impairment of values is deemed to be other than temporary.  In estimating other-than-temporary impairment losses, management considers, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for anticipated recovery in fair value. Gains or losses are recognized using the specific identification method.  Unrealized holding gains and losses for securities available-for-sale are excluded from the Consolidated Statements of Operations and reported net of taxes in the accumulated other comprehensive income component of shareowners' equity until realized.  Accretion and amortization are recognized on the effective yield method over the life of the securities.

 
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Loans

Loans are stated at the principal amount outstanding, net of unearned income. Interest income is accrued on the effective yield method based on outstanding balances.  Fees charged to originate loans and direct loan origination costs are deferred and amortized over the life of the loan as a yield adjustment.  The Company defines loans as past due when one full payment is past due or a contractual maturity is over 30 days late.  The accrual of interest is generally suspended on loans more than 90 days past due with respect to principal or interest.  When a loan is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income.  Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful.  Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.  Loans are charged-off (if unsecured) or written-down (if secured) when losses are probable and reasonably quantifiable.

Loans Held For Sale

Certain residential mortgage loans are originated for sale in the secondary mortgage loan market.  Additionally, certain other loans are periodically identified to be sold.  The Company has the ability and intent to sell these loans and they are classified as loans held for sale and carried at the lower of cost or estimated fair value.  At December 31, 2009 and December 31, 2008, the Company had $7.9 million and $3.2 million, respectively, in loans classified as held for sale which were committed to be purchased by third party investors.  Fair value is determined on the basis of rates quoted in the respective secondary market for the type of loan held for sale.  Loans are generally sold with servicing released at a premium or discount from the carrying amount of the loans. Such premium or discount is recognized as mortgage banking revenue at the date of sale.  Fixed commitments are generally used at the time loans are originated or identified for sale to mitigate interest rate risk.  The fair value of fixed commitments to originate and sell loans held for sale is not material.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses within the existing portfolio of loans.  The allowance is that amount considered adequate to absorb losses inherent in the loan portfolio based on management’s evaluation of credit risk as of the balance sheet date.

The allowance for loan losses includes allowance allocations calculated in accordance with FASB ASC Topic 310 – Receivables (formerly Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118), and allowance allocations calculated in accordance with ASC Topic 450 (formerly SFAS 5), "Accounting for Contingencies."  The level of the allowance reflects management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing.  This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The Company’s allowance for loan losses consists of three components: (i) specific valuation allowances established for probable losses on specific loans deemed impaired; (ii) valuation allowances calculated for specific homogenous loan pools based on, but not limited to, historical loan loss experience, current economic conditions, levels of past due loans, and levels of problem loans; (iii) an unallocated allowance that reflects management’s determination of estimation risk.

Long-Lived Assets

Premises and equipment is stated at cost less accumulated depreciation, computed on the straight-line method over the estimated useful lives for each type of asset with premises being depreciated over a range of 10 to 40 years, and equipment being depreciated over a range of 3 to 10 years.  Additions, renovations and leasehold improvements to premises are capitalized and depreciated over the lesser of the useful life or the remaining lease term.  Repairs and maintenance are charged to noninterest expense as incurred.

Intangible assets, other than goodwill, consist of core deposit intangible assets and client relationship assets that were recognized in connection with various acquisitions.  Core deposit intangible assets are amortized on the straight-line method over various periods, with the majority being amortized over an average of 5 to 10 years.  Other identifiable intangibles are amortized on the straight-line method over their estimated useful lives.

Long-lived assets are evaluated for impairment if circumstances suggest that their carrying value may not be recoverable, by comparing the carrying value to estimated undiscounted cash flows.  If the asset is deemed impaired, an impairment charge is recorded equal to the carrying value less the fair value.



 
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Goodwill

FASB ASC Topic 350, “Intangibles – Goodwill and Other”, (formerly Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), prohibits the Company from amortizing goodwill and requires the Company to identify reporting units to which the goodwill relates for purposes of assessing potential impairment of goodwill on an annual basis, or more frequently, if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  In accordance with the guidelines in FASB ASC Topic 350, the Company determined it has one goodwill reporting unit.  The Company’s goodwill evaluation for the year ended December 31, 2009, indicated that none of its goodwill was impaired.  See Note 5 – Intangible Assets for additional information.
 
Foreclosed Assets

Assets acquired through or instead of loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less estimated selling costs when acquired.  Costs after acquisition are generally expensed.  If the fair value of the asset declines, a write-down is recorded through expense.  The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions.  Foreclosed assets are included in other assets in the accompanying consolidated balance sheets and totaled $36.1 million and $9.2 million at December 31, 2009 and 2008.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Income Taxes

The Company files a consolidated federal income tax return and each subsidiary files a separate state income tax return.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount that is expected to be realized.  

The Company adopted FASB ASC Topic 740, “Income Taxes”, (formerly FASB Interpretation 48, Accounting for Uncertainty in Income Taxes), as of January 1, 2007.  A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.  The adoption had no material effect on the Company’s financial statements.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Earnings Per Common Share

Basic earnings per common share is based on net income divided by the weighted-average number of common shares outstanding during the period excluding non-vested stock.  Diluted earnings per common share include the dilutive effect of stock options and non-vested stock awards granted using the treasury stock method.  A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 13 — Earnings Per Share.

Comprehensive Income

Comprehensive income includes all changes in shareowners’ equity during a period, except those resulting from transactions with shareowners.  Besides net income, other components of the Company’s comprehensive income include the after tax effect of changes in the net unrealized gain/loss on securities available for sale and changes in the funded status of defined benefit and supplemental executive retirement plans.  Comprehensive income is reported in the accompanying Consolidated Statements of Changes in Shareowners’ Equity.

Stock Based Compensation

The Company follows the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation”, (formerly Statement of Financial Accounting Standards No. 123R, "Share-Based Payment (Revised 2004)"), when recording stock based compensation.  See Note 11 – Stock-Based Compensation for additional information.



 
65

 

NEW AUTHORITATIVE ACCOUNTING GUIDANCE

 
On July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the away companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

FASB ASC Topic 260, “Earnings Per Share.”  (Formerly FSP No. EITF 03-6-1) New authoritative accounting guidance under ASC Topic 260-10 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.  ASC Topic 260-10 became effective on January 1, 2009 and did not have a significant impact on the Company’s financial statements.
 
FASB ASC Topic 320, “Investments - Debt and Equity Securities.” (Formerly SFAS 115-2 and SFAS 124-2)  New authoritative accounting guidance under ASC Topic 320,  (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 320 during the second quarter of 2009. Adoption of the new guidance did not significantly impact the Company’s financial statements.
 

FASB ASC Topic 715, “Compensation - Retirement Benefits.” (Formerly FSP No. 132(R)-1) New authoritative accounting guidance under ASC Topic 715, “Compensation - Retirement Benefits,” provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC Topic 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The provisions of the new authoritative accounting guidance under ASC Topic 715 became effective for the Company’s financial statements for the year-ended December 31, 2009 and the required disclosures are reported in Note 12 – Employee Benefit Plans.
 
ASC Topic 805, “Business Combinations.”  (Formerly SFAS No. 141) On January 1, 2009, new authoritative accounting guidance under ASC Topic 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses.   ASC Topic 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquirer 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  previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value.   ASC Topic 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 prior accounting guidance.  Under ASC Topic 805, the requirements of ASC Topic 420, “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 ASC Topic 450, “Accounting for Contingencies.”   ASC Topic 805 is applicable to the Company’s accounting for business combinations closing on or after January 1, 2009.  The provisions of the new authoritative accounting guidance under ASC Topic 305 became effective during the first quarter of 2009.  The new guidance did not significantly impact the Company’s financial statements.

FASB ASC Topic 810, “Consolidation.”  (Formerly SFAS No. 160) New authoritative accounting guidance under ASC Topic 810, “Consolidation,” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC Topic 810, 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, ASC Topic 810 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
 
66

 
to the parent and to the non-controlling interest. The new authoritative accounting guidance under ASC Topic 810 became effective for the Company on January 1, 2009 and did not have a significant impact on the Company’s financial statements.

Further new authoritative accounting guidance under ASC Topic 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC Topic 810 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.

FASB ASC Topic 815, “Derivatives and Hedging.” (Formerly SFAS No. 161) New authoritative accounting guidance under ASC Topic 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC Topic 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new authoritative accounting guidance under ASC Topic 815 became effective for the Company on January 1, 2009 and did not have an impact on the Company’s financial statements.

FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”  (Formerly FSP ASC 820-10-4) New authoritative accounting guidance under ASC Topic 820,”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC Topic 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Company adopted the new authoritative accounting guidance under ASC Topic 820 during the second quarter of 2009 and it did not significantly impact the Company’s financial statements.
 
 Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC Topic 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The provisions of the new authoritative accounting guidance under ASC Topic 820 became effective for the Company on January 1, 2009 and the required disclosures are reported in Note 19 – Fair Value Measurements. FASB ASC Topic 825 “Financial Instruments.”(Formerly SFAS 107-1 and APB 28-1) New authoritative accounting guidance under ASC Topic 825,”Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods. The new interim disclosures required under Topic 825 are included in Note 11 - Fair Value Measurements.
 
FASB ASC Topic 855, “Subsequent Events.”(Formerly SFAS No. 165) New authoritative accounting guidance under ASC Topic 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC Topic 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC Topic 855 became effective for the Company’s financial statements for periods ending after June 15, 2009 and did not have a significant impact on the Company’s financial statements.

FASB ASC Topic 860, “Transfers and Servicing.”(Formerly SFAS No. 166) New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 will be effective January 1, 2010 and is not expected to have a significant impact on the Company’s financial statements.
 
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ASC Topic 105, “Generally Accepted Accounting Principles, (Formerly SFAS No. 168), establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles.  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants.  All guidance contained in the Codification carries an equal level of authority.  All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative.  The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 105, which became effective September 30, 2009. Adoption of the new guidance is included in the financial statements for the third quarter of 2009.


 
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Note 2
INVESTMENT SECURITIES

Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale at December 31, 2009, were as follows:

 
2009
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
    22,270
   
$
     174
   
$
-
   
$
       22,444
 
U.S. Government Agencies and Corporations
 
      -
     
     -
     
-
     
        -
 
States and Political Subdivisions
 
  106,455
     
1,166
     
71
     
     107,550
 
Mortgage-Backed Securities
 
    33,375
     
798
     
30
     
       34,143
 
Other Securities(1)
 
    13,236
     
-
     
700
     
       12,536
 
Total Investment Securities
$
  175,336
   
$
2,138
   
$
801
   
$
176,673
 

 
2008
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
    29,094
   
$
     577
   
$
-
   
$
       29,671
 
U.S. Government Agencies and Corporations
 
      7,091
     
     180
     
-
     
         7,271
 
States and Political Subdivisions
 
  100,370
     
1,224
     
32
     
     101,562
 
Mortgage-Backed Securities
 
    39,860
     
332
     
116
     
       40,076
 
Other Securities(1)
 
    12,882
     
107
     
-
     
       12,989
 
Total Investment Securities
$
  189,297
   
$
2,420
   
$
148
   
$
191,569
 

(1)
Includes Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stock recorded at cost of $7.7 million and $4.8 million, respectively, at December 31, 2009 and $7.0 million and $4.8 million, respectively, at December 31, 2008.

Securities with an amortized cost of $62.9 million and $83.5 million at December 31, 2009 and 2008, respectively, were pledged to secure public deposits and for other purposes.

The Company’s subsidiary, Capital City Bank, as a member of the FHLB of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of residential and commercial real estate loans, and FHLB advances.  FHLB stock of $7.7 million which is included in other securities is pledged to secure FHLB advances.  No ready market exists for this stock, and it has no quoted market value.  However, redemption of this stock has historically been at par value.

Investment Sales. The total proceeds from the sale or call of investment securities and the gross realized gains and losses from the sale or call of such securities for each of the last three years are as follows:
  
(Dollars in Thousands)
Year
 
Total
Proceeds
   
Gross
Realized Gains
   
Gross
Realized Losses
 
 
 2009
 
$
5,316
   
$
10
   
$
-
 
 
 2008
 
$
30,517
   
$
126
   
$
  (1
 
 2007
 
$
5,393
   
$
14
   
$
-
 
 
Maturity Distribution. As of December 31, 2009, the Company's investment securities had the following maturity distribution based on contractual maturities:

(Dollars in Thousands)
 
Amortized Cost
 
Market Value
Due in one year or less
$
   78,421
 
 $
              79,095
 
Due after one through five years
 
      83,446
   
            84,803
 
Due after five through ten years
 
          233
   
                239
 
Due over ten years
 
          -
   
                -
 
No Maturity
 
        12,536
   
              12,536
 
Total Investment Securities
$
   174,636
 
 $
       176,673
 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
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Other Than Temporarily Impaired Securities. The following table summarizes the investment securities with unrealized losses at December 31, 2009 and December 31, 2008 aggregated by major security type and length of time in a continuous unrealized loss position:

     
December 31, 2009
     
 
Less Than
12 Months
 
Greater Than
12 Months
 
Total
 
(Dollars in Thousands)
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
U.S. Treasury
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
    U.S.Government Agencies and Corporations
   
-
     
-
     
-
     
-
     
-
     
-
 
    States and Political Subdivisions
   
3,107
     
71
     
-
     
-
     
3,107
     
71
 
    Mortgage-Backed Securities 
   
 5,381
     
 30
     
 -
     
 -
     
5,381
     
5,381
 
    Other Securities
   
700
     
700
     
-
     
-
     
700
     
700
 
    Total Investment Securities
 
$
9,188
   
$
801
   
$
     
$
     
$
9,188
   
$
801
 


     
December 31, 2008
     
 
Less Than
12 Months
 
Greater Than
12 Months
 
Total
 
(Dollars in Thousands)
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
Market
Value
 
Unrealized
Losses
 
U.S. Treasury
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
U.S. Government Agencies and Corporations
   
-
     
-
     
-
     
-
     
-
     
-
 
States and Political Subdivisions
   
2,652
     
32
     
-
     
-
     
2,652
     
32
 
Mortgage-Backed Securities
   
14,149
     
116
     
-
     
-
     
14,149
     
116
 
Total Investment Securities
 
$
16,801
   
$
148
   
$
     
$
     
$
16,801
   
$
148
 

Management evaluates securities for other than temporary impairment at least quarterly, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to: 1) the length of time and the extent to which the fair value has been less than amortized cost, 2) the financial condition and near-term prospects of the issuer, and 3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for recovery in the fair value above amortized cost.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by rating agencies have occurred, regulatory and analysts’ report.

At December 31, 2009, the Company had securities of $176.7 million with net unrealized gains of $2.0 million on these securities, of which $9.2 million have unrealized losses totaling $0.8 million and have been in a loss position for less than 12 months.  These securities are primarily in a loss position because they were acquired when the general level of interest rates was lower than that on December 31, 2009.  The Company believes that the losses in these securities are temporary in nature and that the full principal will be collected as anticipated.  Because the declines in the market value of these investments are attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2009.  For 2009, the Company did realize $0.3 million in other than temporary impairment through earnings for one preferred bank stock issue.



 
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Note 3
LOANS

Loan Portfolio Composition. At December 31, the composition of the Company's loan portfolio was as follows:

(Dollars in Thousands)
2009
 
2008
 
Commercial, Financial and Agricultural
$
189,061
 
$
206,230
 
Real Estate - Construction
 
111,249
   
141,973
 
Real Estate - Commercial Mortgage
 
716,791
   
656,959
 
Real Estate -  Residential(1)
 
408,578
   
481,034
 
Real Estate - Home Equity
 
246,722
   
218,500
 
Real Estate - Loans Held-for-Sale
 
7,891
   
3,204
 
Consumer
 
235,648
   
249,897
 
Total Loans, Net of Unearned Interest
$
1,915,940
 
$
1,957,797
 

(1)
Includes loans in process with outstanding balances of $10.7 million and $13.9 million for 2009 and 2008, respectively.

Net deferred fees included in loans at December 31, 2009 and December 31, 2008 were $2.0 million and $1.9 million, respectively.

Concentrations of Credit.  Substantially all of the Company's lending activity occurs within the states of Florida, Georgia, and Alabama.  As of December 31, 2009, there were no concentrations of loans related to any single borrower or industry (other than real estate) in excess of 10% of total loans.  A large majority of the Company's loan portfolio (77.3%) consists of loans secured by real estate, the primary types of collateral being commercial properties and 1-4 family residential properties.  At December 31, 2009, commercial real estate mortgage loans and residential real estate mortgage loans accounted for 37.4% and 34.6% of the loan portfolio, respectively.  

Nonperforming/Past Due Loans.  Nonaccruing loans amounted to $86.3 million and $96.9 million, at December 31, 2009 and 2008, respectively.  Restructured loans totaled $21.6 million at December 31, 2009 and $1.7 million at December 31, 2008.   Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful.  Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon management's expectations as to the ultimate collectability of principal and interest in full. If interest on non-accruing loans had been recognized on a fully accruing basis, interest income recorded would have been $10.9 million, $6.5 million, and $0.9 million higher for the years ended December 31, 2009, 2008, and 2007, respectively.  There were no accruing loans past due more than 90 days as of December 31, 2009.  As of December 31, 2008, accruing loans past due more than 90 days totaled $0.1 million.

Note 4
ALLOWANCE FOR LOAN LOSSES

An analysis of the changes in the allowance for loan losses for the years ended December 31, is as follows:

(Dollars in Thousands)
2009
   
2008
   
2007
 
Balance, Beginning of Year
$
37,004
   
$
18,066
   
$
17,217
 
Provision for Loan Losses
 
40,017
     
32,496
     
6,163
 
Recoveries on Loans Previously Charged-Off
 
3,442
     
2,417
     
1,903
 
Loans Charged-Off
 
(36,072
)
   
(15,975
)
   
(7,217
)
Reclassification of Unfunded Reserve to Other Liability
 
(392
)
   
-
     
-
 
Balance, End of Year
$
43,999
   
$
37,004
   
$
18,066
 


 
71

 

Impaired Loans. Selected information pertaining to impaired loans, at December 31, is as follows:

 
2009
 
2008
 
(Dollars in Thousands)
Valuation
Balance
 
Valuation
Allowance
 
Valuation
Balance
 
Valuation
Allowance
 
Impaired Loans:
                       
With Related Credit Allowance
 
$
83,986
   
$
21,066
   
$
68,705
   
$
15,901
 
Without Related Credit Allowance
   
27,926
     
-
     
37,723
     
-
 
 
(Dollars in Thousands)
2009
 
2008
 
2007
 
Average Recorded Investment in Impaired Loans
$
120,905
 
$
80,827
 
$
23,922
 
                   
Interest Income on Impaired Loans
                 
Recognized
$
3,421
 
$
1,708
 
$
761
 
Collected in Cash
 
3,421
   
1,708
   
761
 

Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reduction of principal.

Note 5
INTANGIBLE ASSETS

The Company had intangible assets of $88.8 million and $92.9 million at December 31, 2009 and December 31, 2008, respectively.  Intangible assets at December 31st, were as follows:
 
2009
   
2008
 
(Dollars in Thousands)
Gross
Amount
 
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
Core Deposits Intangibles
$
47,176
 
$
43,943
   
$
47,176
   
$
40,092
 
Goodwill
 
84,811
   
-
     
84,811
     
-
 
Customer Relationship Intangible
 
1,867
   
1,070
     
1,867
     
879
 
Total Intangible Assets
$
133,854
 
$
45,013
   
$
133,854
   
$
40,971
 

Net Core Deposit Intangibles.  As of December 31, 2009 and December 31, 2008, the Company had net core deposit intangibles of $3.2 million and $7.1 million, respectively.  Amortization expense for the 12 months of 2009, 2008 and 2007 was approximately $3.9 million, $5.5 million, and $5.6 million, respectively.  The estimated annual amortization expense (in millions) for the next three years is expected to be approximately $2.5, $0.5, and $0.2 per year.  All of our core deposit intangible assets will be fully amortized in January 2013.

Goodwill.  As of December 31, 2009 and December 31, 2008, the Company had goodwill of $84.8 million.  Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of FASB ASC Topic 350.  On December 31, 2009, the Company performed its annual impairment review and concluded that no impairment adjustment was necessary.  The Company cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill at December 31, 2009.  Such events include, but are not limited to, economic conditions, financial market conditions, and the Company’s market capitalization.

We have selected November 30, 2009 as the date to perform our annual impairment test.  The closing price per common share of our stock in the open market approximated 80% of book value, which was considered a possible indication of impairment.  We performed a valuation analysis utilizing a discounted cash flow model as well as change in control valuation data and concluded that our goodwill had suffered no impairment as of the review date.  In performing the analysis, we also considered the length of time our stock had traded under book value, as well as other factors unique to our institution, including the make-up of our balance sheet, capital ratios, market share, the various markets in which we conduct business, and profitability.  Bank stocks have traded in a relatively wide range during 2009 and our stock price has been more volatile during this period, and as such the rise and decline in our stock price has been partially attributable to general market factors affecting the banking industry as a whole.  We will continue to periodically test our goodwill for impairment during this period of economic and industry stress and uncertainty.  Significant changes to the estimates used in our analysis, when and if they occur, could result in a non-cash impairment charge and thus have a material impact on our operating results for any particular reporting period.  A goodwill impairment represents a non-cash charge to our earnings and does not adversely affect the calculation of our risk based and tangible capital ratios.

Other.  As of December 31, 2009, the Company had a client relationship intangible, net of accumulated amortization, of $0.8 million.  This intangible asset was booked as a result of the March 2004 acquisition of trust client relationships from Synovus Trust Company.  Amortization expense for 2009 was $191,000.  Estimated annual amortization expense is $191,000 based on use of a 10-year useful life.  
 
72

 
Note 6
PREMISES AND EQUIPMENT

The composition of the Company's premises and equipment at December 31, was as follows:

(Dollars in Thousands)
 
2009
   
2008
 
Land
  $ 24,408     $ 24,289  
Buildings
    111,649       100,179  
Fixtures and Equipment
    54,493       56,493  
Total
    190,550       180,961  
Accumulated Depreciation
    (75,111 )     (74,528 )
Premises and Equipment, Net
  $ 115,439     $ 106,433  

Note 7
DEPOSITS

Interest bearing deposits, by category, as of December 31, were as follows:

(Dollars in Thousands)
 
2009
   
2008
 
NOW Accounts
  $ 899,649     $ 758,976  
Money Market Accounts
    373,105       324,646  
Savings Accounts
    122,370       115,261  
Time Deposits
    435,319       373,595  
Total
  $ 1,830,443     $ 1,572,478  

At December 31, 2009 and 2008, $2.1 million and $2.9 million, respectively, in overdrawn deposit accounts were reclassified as loans.

Deposits from certain directors, executive officers, and their related interests totaled $33.6 million and $35.1 million at December 31, 2009 and 2008 respectively.

Time deposits in denominations of $100,000 or more totaled $154.1 million and $95.2 million at December 31, 2009 and December 31, 2008, respectively.

At December 31, 2009, the scheduled maturities of time deposits were as follows:

(Dollars in Thousands)
     
2010
 
$
378,009
 
2011
   
41,009
 
2012
   
12,689
 
2013
   
2,251
 
2014 and thereafter
   
1,361
 
Total
 
$
435,319
 

Interest expense on deposits for the three years ended December 31, was as follows:

(Dollars in Thousands)
 
2009
   
2008
   
2007
 
NOW Accounts
  $ 1,039     $ 7,454     $ 10,748  
Money Market Accounts
    1,288       5,242       13,666  
Savings Accounts
    60       121       280  
Time Deposits < $100,000
    5,362       10,199       13,990  
Time Deposits > $100,000
    2,836       4,290       6,003  
Total
  $ 10,585     $ 27,306     $ 44,687  

 
73

 

Note 8
SHORT-TERM BORROWINGS

Short-term borrowings included the following:

(Dollars in Thousands)
 
Federal
Funds
Purchased
   
Securities
Sold Under
Repurchase
Agreements(1)
   
Other
Short-Term
Borrowings
   
2009
                   
Balance at December 31,
  $ 8,350     $ 25,520     $ 1,972 (2  
Maximum indebtedness at any month end
    93,400       46,672       21,434    
Daily average indebtedness outstanding
    41,702       31,270       6,349    
Average rate paid for the year
    0.56 %     0.08 %     0.44
%
 
Average rate paid on period-end borrowings
    0.01 %     0.18 %     2.79
%
 
                           
2008
                         
Balance at December 31,
  $ 19,875     $ 40,868     $ 1,302 (2  
Maximum indebtedness at any month end
    36,700       40,868       14,087    
Daily average indebtedness outstanding
    19,777       32,433       8,971    
Average rate paid for the year
    1.58 %     1.50 %     3.93
%
 
Average rate paid on period-end borrowings
    0.56 %     0.11 %     0.41
%
 
                           
2007
                         
Balance at December 31,
  $ 7,550     $ 32,806     $ 12,775 (2  
Maximum indebtedness at any month end
    26,400       47,047       13,664    
Daily average indebtedness outstanding
    15,812       38,683       11,902    
Average rate paid for the year
    4.89 %     4.11 %     4.17
%
 
Average rate paid on period-end borrowings
    2.47 %     3.32 %     4.29
%
 

(1)
Balances are fully collateralized by government treasury or agency securities held in the Company’s investment portfolio.

(2)
Includes FHLB debt and client tax deposit balances of $0.6 million and $1.4 million, respectively at December 31, 2009, $0.1million and $1.2 million, respectively at December 31, 2008, and $12.2 million and $0.6 million, respectively at December 31, 2007.



 
74

 

Note 9
LONG-TERM BORROWINGS

Federal Home Loan Bank Notes.  At December 31, Federal Home Loan Bank advances included:

(Dollars in Thousands)
2009
 
2008
 
Due on October 19, 2009, fixed rate 3.69%
 
          -
   
          134
(1)
Due on November 10, 2010, fixed rate 4.72%
 
         634
(1)
 
         665
 
Due on December 31, 2010, fixed rate 3.85%
 
     -
   
     349
 
Due on September 08, 2011, fixed rate 3.65%
 
   10,000
   
   10,000
 
Due on December 18, 2012, fixed rate 4.84%
 
491
   
517
 
Due on March 13, 2013, fixed rate 3.55%
 
1,154
   
1,188
 
Due on March 18, 2013, fixed rate 3.31%
 
           388
   
           399
 
Due on March 18, 2013, fixed rate 6.37%
 
           335
   
            420
 
Due on April 17, 2013, fixed rate 3.42%
 
         1,057
   
         1,155
 
Due on April 17, 2013, fixed rate 3.50%
 
         1,644
   
         1,694
 
Due on May 15, 2013, fixed rate 3.81%
 
            944
   
            970
 
Due on May 15, 2013, fixed rate 3.81%
 
         1,089
   
         1,120
 
Due on June 17, 2013, fixed rate 3.85%
 
78
   
82
 
Due on June 17, 2013, fixed rate 3.53%
 
            -
   
            583
 
Due on June 17, 2013, fixed rate of 4.11%
 
1,529
   
1,597
 
Due on September 23, 2013, fixed rate 5.64%
 
            509
   
            622
 
Due on January 13, 2014, fixed rate 2.96%
 
         1,600
   
         -
 
Due on January 26, 2014, fixed rate 5.79%
 
996
   
1,067
 
Due on January 27, 2014, fixed rate 5.31%
 
         1,497
   
         1,571
 
Due on February 14, 2014, fixed rate 3.08%
 
          1,066
   
            -
 
Due on March 10, 2014, fixed rate 4,21%
 
            -
   
            435
 
Due on May 27, 2014, fixed rate 5.92%
 
         279
   
         334
 
Due on May 31, 2014, fixed rate 4.88%
 
       1,968
   
         2,357
 
Due on February 23, 2015, fixed rate 4.07%
 
            712
   
            725
 
Due on August 17, 2015, fixed rate 4.31%
 
           541
   
            586
 
Due on October 15, 2015, fixed rate 4.11%
 
            714
   
            745
 
Due on July 20, 2016, fixed rate 6.27%
 
            779
   
            897
 
Due on October 3, 2016, fixed rate 5.41%
 
            205
   
            235
 
Due on October 31, 2016, fixed rate 5.16%
 
            456
   
            522
 
Due on June 27, 2017, fixed rate 5.53%
 
            525
   
            595
 
Due on October 31, 2017, fixed rate 4.79%
 
            653
   
            736
 
Due on December 11, 2017, fixed rate 4.78%
 
            583
   
            656
 
Due on February 22, 2018, fixed rate 4.61%
 
         1,386
   
         1,425
 
Due on April 10, 2018, fixed rate 4.20%
 
         1,196
   
         1,217
 
Due on April 10, 2018, fixed rate 4.20%
 
         993
   
         1,010
 
Due on September 17, 2018, fixed rate 4.23%
 
         2,896
   
         2,925
 
Due on September 18, 2018, fixed rate 5.15%
 
            420
   
            468
 
Due on November 5, 2018, fixed rate 5.10%
 
         3,072
   
         3,222
 
Due on December 3, 2018, fixed rate 4.87%
 
            442
   
            492
 
Due on December 17, 2018, fixed rate 6.33%
 
         1,214
   
         1,310
 
Due on February 16, 2021, fixed rate 3.00%
 
           693
   
            736
 
Due on January 18, 2022, fixed rate 5.25%
 
            915
   
            926
 
Due on May 30, 2023, fixed rate 2.50%
 
            817
   
            858
 
Due on June 15, 2023, fixed rate 4.77%
 
            450
   
            483
 
Due on July 1, 2025, fixed rate 4.80%
 
         3,095
   
         3,294
 
Total Outstanding
$
50,015
 
$
51,322
 

(1)
$0.6 million is classified as short-term borrowings as of December 31, 2009 and $0.1million classified as short-term borrowings as of December 31, 2008.


 
75

 

Scheduled minimum future principal payments on FHLB advances at December 31, 2009 were as follows:

(Dollars in Thousands)
     
2010
 
$
3,276
 (1)
2011
   
12,766
 
2012
   
3,303
 
2013
   
9,266
 
2014
   
6,331
 
2015 and thereafter
   
15,073
 
Total
 
$
50,015
 

(1)
$0.6 million is classified as short-term borrowings.

The FHLB advances are collateralized by a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans. Interest on the FHLB advances is paid on a monthly basis.

Junior Subordinated Deferrable Interest Notes.  The Company has issued two junior subordinated deferrable interest notes to wholly owned Delaware statutory trusts.  The first note for $30.9 million was issued to CCBG Capital Trust I.  The second note for $32.0 million was issued to CCBG Capital Trust II. The two trusts are considered variable interest entities for which the Company is not the primary beneficiary.  Accordingly, the accounts of the trusts are not included in the Company’s consolidated financial statements. See Note 1 - Summary of Significant Accounting Policies for additional information about the Company’s consolidation policy.  Details of the Company’s transaction with the two trusts are provided below.

In November 2004, CCBG Capital Trust I issued $30.0 million of trust preferred securities which represent beneficial interest in the assets of the trust.  The interest payments are due quarterly at a fixed rate of 5.71% and effective January 2010 will adjust quarterly to LIBOR plus a margin of 1.90%.  The trust preferred securities will mature on December 31, 2034, and are redeemable upon approval of the Federal Reserve in whole or in part at the option of the Company at any time after December 31, 2009 and in whole at any time upon occurrence of certain events affecting their tax or regulatory capital treatment. Distributions on the trust preferred securities are payable quarterly on March 31, June 30, September 30, and December 31 of each year.  CCBG Capital Trust I also issued $928,000 of common equity securities to CCBG.  The proceeds of the offering of trust preferred securities and common equity securities were used to purchase a $30.9 million junior subordinated deferrable interest note issued by the Company, which has terms substantially similar to the trust preferred securities.

In May 2005, CCBG Capital Trust II issued $31.0 million of trust preferred securities which represent beneficial interest in the assets of the trust.  The interest payments are due quarterly at a fixed rate of 6.07% and effective June 2010 will adjust annually to LIBOR plus a margin of 1.80%.  The trust preferred securities will mature on June 15, 2035, and are redeemable upon approval of the Federal Reserve in whole or in part at the option of the Company at any time after May 20, 2010 and in whole at any time upon occurrence of certain events affecting their tax or regulatory capital treatment. Distributions on the trust preferred securities are payable quarterly on March 15, June 15, September 15, and December 15 of each year.  CCBG Capital Trust II also issued $959,000 of common equity securities to CCBG.  The proceeds of the offering of trust preferred securities and common equity securities were used to purchase a $32.0 million junior subordinated deferrable interest note issued by the Company, which has terms substantially similar to the trust preferred securities.

The Company has the right to defer payments of interest on the two notes at any time or from time to time for a period of up to twenty consecutive quarterly interest payment periods.  Under the terms of each note, in the event that under certain circumstances there is an event of default under the note or the Company has elected to defer interest on the note, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. The Company is current on the interest payment obligations and has not executed the right to defer interest payments on the notes, however, pursuant to the Federal Reserve Resolutions, the Company must receive approval from the Federal Reserve before making any payments on the trust preferred securities.

The Company has entered into agreements to guarantee the payments of distributions on the trust preferred securities and payments of redemption of the trust preferred securities.  Under these agreements, the Company also agrees, on a subordinated basis, to pay expenses and liabilities of the two trusts other than those arising under the trust preferred securities.  The obligations of the Company under the two junior subordinated notes, the trust agreements establishing the two trusts, the guarantee and agreement as to expenses and liabilities, in aggregate, constitute a full and unconditional guarantee by the Company of the two trusts' obligations under the two trust preferred security issuances.

Despite the fact that the accounts of CCBG Capital Trust I and CCBG Capital Trust II are not included in the Company’s consolidated financial statements, the $30.0 million and $31.0 million, respectively, in trust preferred securities issued by these subsidiary trusts are included in the Tier I Capital of Capital City Bank Group, Inc. as allowed by Federal Reserve guidelines.

 
76

 

Note 10
INCOME TAXES

The provision for income taxes reflected in the statements of operations is comprised of the following components:

(Dollars in Thousands)
2009
   
2008
   
2007
 
Current:
               
Federal
$
2,340
   
$
11,730
   
$
13,603
 
State
 
417
     
510
     
280
 
Deferred:
                     
Federal
 
(5,767
)
   
(4,882
)
   
(32
)
State
 
(2,475
)
   
(1,289
)
   
(148
)
Valuation Allowance
 
149
     
644
     
-
 
Total
$
(5,336
 
$
6,713
   
$
13,703
 

Income taxes provided were different than the tax expense computed by applying the statutory federal income tax rate of 35% to pre-tax income as a result of the following:

(Dollars in Thousands)
2009
   
2008
   
2007
 
Tax Expense at Federal Statutory Rate
$
(3,083
 
$
7,678
   
$
15,185
 
Increases (Decreases) Resulting From:
                     
Tax-Exempt Interest Income
 
(1,533
)
   
(1,663
)
   
(1,630
)
Change in Reserve for Uncertain Tax Position
 
 687
     
 -
     
 -
 
State Taxes, Net of Federal Benefit
 
(1,337
)
   
(506
)
   
86
 
Other
 
(219
   
560
     
62
 
Change in Valuation Allowance
 
149
     
644
     
-
 
Actual Tax Expense
$
(5,336
 
$
6,713
   
$
13,703
 

Deferred income tax liabilities and assets result from differences between assets and liabilities measured for financial reporting purposes and for income tax return purposes.  These assets and liabilities are measured using the enacted tax rates and laws that are currently in effect.  The net deferred tax asset and the temporary differences comprising that balance at December 31, 2009 and 2008 are as follows:

(Dollars in Thousands)
2009
 
2008
 
Deferred Tax Assets attributable to:
       
Allowance for Loan Losses
$
16,975
 
$
14,276
 
Associate Benefits
 
297
   
385
 
Accrued Pension/SERP
 
9,685
   
14,127
 
Interest on Nonperforming Loans
 
2,971
   
2,247
 
State Net Operating Loss Carry Forwards
 
1,786
   
776
 
Intangible Assets
 
147
   
121
 
Core Deposit Intangible
 
3,144
   
2,569
 
Contingency Reserve
 
373
   
323
 
Accrued Expense
 
458
   
450
 
Leases
 
433
   
456
 
Other Real Estate Owned
 
4,136
   
482
 
Other
 
614
   
586
 
Total Deferred Tax Assets
$
41,019
 
$
36,798
 
             
Deferred Tax Liabilities attributable to:
           
Depreciation on Premises and Equipment
$
4,492
 
$
4,677
 
Deferred Loan Fees and Costs
 
4,413
   
3,897
 
Net Unrealized Gains on Investment Securities
 
749
   
796
 
Intangible Assets
 
2,219
   
1,919
 
Accrued Pension/SERP
 
6,850
   
7,080
 
Securities Accretion
 
9
   
15
 
Market Value on Loans Held for Sale
 
28
   
2
 
Other
 
-
   
-
 
Total Deferred Tax Liabilities
 
18,760
   
18,386
 
Valuation Allowance
 
793
   
644
 
Net Deferred Tax Assets
$
21,466
 
$
17,768
 

 
77

 

In the opinion of management, it is more likely than not that all of the deferred tax assets, with the exception of the separate state net operating loss carry-forward of the holding company, will be realized.  Accordingly, a valuation allowance for the holding company’s separate state net operating loss carry-forward was recorded in 2008, and increased for the holding company’s additional state operating loss carry-forward generated in 2009.  At year-end 2009, the Company had state net operating loss carry-forwards of approximately $22.0 million, the majority of which expire in 2029.  The Company also had state tax credit carry-forwards of approximately $397,000 which expire at various dates from 2011 through 2014.

Changes in net deferred income tax assets were:

(Dollars in Thousands)
2009
   
2008
 
Balance at Beginning of Year
$
17,768
   
$
2,761
 
Income Tax (Expense) Benefit From Change in Pension Liability
 
(4,442
   
10,163
 
Income Tax Benefit (Expense) From Change in Unrealized Losses on Available-for-Sale Securities
 
47
     
(683
Deferred Income Tax Benefit on Continuing Operations
 
8,093
     
5,527
 
Balance at End of Year
$
21,466
   
$
17,768
 

The Company had unrecognized tax benefits at December 31, 2009, 2008, and 2007 of $4.6 million, $3.9 million, and $3.2 million, respectively, of which $3.0 million would increase income from continuing operations, and thus impact the Company’s effective tax rate, if ultimately recognized into income.

A reconciliation of the beginning and ending unrecognized tax benefit is as follows:

(Dollars in Thousands)
2009
 
2008
   
2007
 
Balance at January 1,
$
3,916
 
$
3,254
   
$
2,021
 
Additions Based on Tax Positions Related to Prior Years
 
  -
   
  -
     
252 
 
Decreases Based on Tax Positions Related to Prior Years
 
-
   
(252
)
   
-
 
Addition Based on Tax Positions Related to Current  Year
 
673
   
914
     
918
 
Balance at December 31, 2009
$
4,589
 
$
3,916
   
$
3,254
 

It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts.  The total amounts of interest and penalties recorded in the income statement for the years ended December 31, 2009, 2008, and 2007 were $250,000, $281,000 and $409,000, respectively.  The amounts accrued for interest and penalties at December 31, 2009 2008, and 2007 were $1.1 million, $834,000 and $553,000, respectively.

No significant increases or decreases in the amounts of unrecognized tax benefits are expected in the next 12 months.

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as file various returns in states where its banking offices are located.  The Company is no longer subject to U.S. federal or state tax examinations for years before 2006.  


 
78

 

Note 11
STOCK-BASED COMPENSATION

The Company recognizes the cost of stock-based associate stock compensation in accordance with ASC-718-20-05-1 and ASC 718-50-05-01, (formerly SFAS No. 123R), "Share-Based Payment” (Revised) under the fair value method.

As of December 31, 2009, the Company had three stock-based compensation plans, consisting of the 2005 Associate Stock Incentive Plan ("ASIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP").  Total compensation expense associated with these plans for 2007 through 2009 was $0.2 million, $0.3 million, and $0.2 million, respectively.  The Company, under the terms and conditions of the ASIP, maintained a 2011 Incentive Plan, which was terminated in March 2008, and the Company reversed approximately $577,000 in related stock compensation expense in conjunction with the termination of the Company’s 2011 strategic initiative.
 
 
ASIP.  The Company's ASIP allows the Company's Board of Directors to award key associates various forms of equity-based incentive compensation.  Under the ASIP, all participants in this plan are eligible to earn an equity award, in the form of restricted stock.  The Company, under the terms and conditions of the ASIP, created the 2009 Incentive Plan (“2009 Plan”), which has an award  tied to an internally established earnings goal for 2009.  The grant-date fair value of the shares eligible to be awarded in 2009 is approximately $718,000.  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 53,795 shares are eligible for issuance.  There was no expense recognized for this plan in 2009 as results fell short of the earnings performance goal.
 
 
A total of 875,000 shares of common stock have been reserved for issuance under the ASIP.  To date, the Company has issued a total of 67,022 shares of common stock under the ASIP.

Executive Stock Option Agreement.  Prior to 2007, the Company maintained a stock option arrangement for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG).  The status of the options granted under this arrangement is detailed in the table provided below.  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 ASIP 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 2009 or 2008 as results fell short of the earnings performance goal.

A summary of the status of the Company’s option shares as of December 31, 2009 is presented below:

Options
 
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2009
   
60,384
   
$
32.79
   
$
5.9
   
$
-
 
Granted
   
-
     
-
     
-
     
-
 
Exercised
   
-
     
-
     
-
     
-
 
Forfeited or expired
   
-
     
-
     
-
     
-
 
Outstanding at December 31, 2009
   
60,384
   
$
32.79
   
$
4.9
   
$
-
 
Exercisable at December 31, 2009
   
60,384
   
$
32.79
   
$
4.9
   
$
-
 

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 directors' annual retainer and meeting fees.  The DSPP has 93,750 shares reserved for issuance.  A total of 62,620 shares have been issued since the inception of the DSPP.  For 2009, the Company issued 19,300 shares under the DSPP and recognized approximately $26,000 in expense related to this plan.  For 2008, the Company issued 12,454 shares and recognized approximately $30,000 in expense related to the DSPP.  For 2007, the Company issued 12,128 shares and recognized approximately $33,000 in expense under 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 111,586 shares have been issued since inception of the ASPP.  For 2009, the Company issued 29,804 shares under the ASPP and recognized approximately $144,000 in expense related to this plan.  For 2008, the Company issued 21,970 shares and recognized approximately $125,000 in expense related to the ASPP.   For 2007, the Company issued 23,531 shares and recognized approximately $102,000 in expense under the ASPP.

79

 
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 $5.97 for 2009.  For 2008 and 2007, the weighted average fair value purchase right granted was $4.97 and $5.82, respectively.  In calculating compensation, the fair value of each stock purchase right was estimated on the date of grant using the following weighted average assumptions:

   
2009
   
2008
   
2007
 
Dividend yield
   
3.7
%
   
3.0
%
   
2.1
%
Expected volatility
   
67.5
%
   
37.0
%
   
25.5
%
Risk-free interest rate
   
0.3
%
   
2.6
%
   
4.8
%
Expected life (in years)
   
0.5
     
0.5
     
0.5
 

Note 12
EMPLOYEE BENEFIT PLANS

Pension Plan

The Company sponsors a noncontributory pension plan covering substantially all of its associates.  Benefits under this plan generally are based on the associate's total years of service and average of the five highest consecutive years of compensation during the ten years immediately preceding their departure.  The Company's general funding policy is to contribute amounts sufficient to meet minimum funding requirements as set by law and to ensure deductibility for federal income tax purposes.
The following table details on a consolidated basis the components of pension expense, the funded status of the plan, amounts recognized in the Company's consolidated statements of financial condition, and major assumptions used to determine these amounts.


 
80

 

 
(Dollars in Thousands)
2009
   
2008
   
2007
 
Change in Projected Benefit Obligation:
               
Benefit Obligation at Beginning of Year
$
   79,607
   
$
   70,118
   
$
68,671
 
Service Cost
 
         5,593
     
         5,351
     
4,903
 
Interest Cost
 
         4,588
     
         4,482
     
3,967
 
Actuarial (Gain)/Loss
 
(2,977
)
   
         4,038
     
(1,420
)
Benefits Paid
 
        (2,829
)
   
        (6,483
)
   
(5,759
)
Expenses Paid
 
           (233
)
   
           (165
)
   
(244
)
Plan Change(1)
 
-
     
2,266
     
-
 
Projected Benefit Obligation at End of Year
$
83,749
   
$
79,607
   
$
70,118
 
                       
Accumulated Benefit Obligation at End of Year
$
64,889
   
$
56,368
   
$
51,256
 
                       
Change in Plan Assets:
                     
Fair Value of Plan Assets at Beginning of Year
$
    66,363
   
$
    75,653
   
$
66,554
 
Actual Gain/(Loss) Return on Plan Assets
 
8,246
     
(14,642
   
3,602
 
Employer Contributions
 
       8,000
     
       12,000
     
11,500
 
Benefits Paid
 
        (2,829
)
   
        (6,483
)
   
(5,759
)
Expenses Paid
 
           (233
)
   
           (165
)
   
(244
)
Fair Value of Plan Assets at End of Year
$
79,547
   
$
66,363
   
$
75,653
 
                       
Amounts Recognized in the Consolidated Statements of Financial Condition:
                     
Other Assets
$
-
   
$
-
   
$
5,535
 
Other Liabilities
 
4,202
     
13,245
     
-
 
                       
Amounts (Pre-Tax) Recognized in Accumulated Other Comprehensive Income:
                     
Net Actuarial Losses
$
23,224
   
$
32,341
   
$
8,622
 
Prior Service Cost
 
2,860
     
3,369
     
1,611
 
                       
Components of Net Periodic Benefit Costs:
                     
Service Cost
$
5,593
   
$
5,351
   
$
4,903
 
Interest Cost
 
4,588
     
4,482
     
3,967
 
Expected Return on Plan Assets
 
(5,060
)
   
(5,921
)
   
(5,083
)
Amortization of Prior Service Costs
 
509
     
509
     
301
 
Recognized Net Actuarial Loss
 
2,954
     
882
     
1,039
 
Net Periodic Benefit Cost
$
8,584
   
$
5,303
   
$
5,127
 
                       
Assumptions:
                     
Weighted-average used to determine benefit obligations:
                     
Discount Rate
 
5.75
%
   
6.00
%
   
6.25
%
Expected Return on Plan Assets
 
8.00
%
   
8.00
%
   
8.00
%
Rate of Compensation Increase
 
4.50
%
   
5.50
%
   
5.50
%
Measurement Date
12/31/09
   
12/31/08
   
12/31/07
 
                       
Weighted-average used to determine net cost:
                     
Discount Rate
 
6.00
%
   
6.25
%
   
6.00
%
Expected Return on Plan Assets
 
8.00
%
   
8.00
%
   
8.00
%
Rate of Compensation Increase
 
5.50
%
   
5.50
%
   
5.50
%
                       
(1) In 2008, the employee benefits plan was amended to include stock as plan compensation.
 
                     


 
81

 

Other Comprehensive Income.  The estimated amounts (dollars in thousands) that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2010 are as follows:

Actuarial Loss
 
$
2,123
 
Prior Service Cost
   
509
 
    Total
 
$
2,632
 

Return on Plan Assets.  The overall expected long-term rate of return on assets is a weighted-average expectation for the return on plan assets.  The Company considers historical performance and current benchmarks to arrive at expected long-term rates of return in each asset category.  The Company assumed that 65% of its portfolio would be invested in equity securities, with the remainder invested in debt securities and/or cash equivalents.

Plan Assets. The Company’s pension plan asset allocation at year-end 2009 and 2008, and the target asset allocation for 2010 are as follows:

 
Target Allocation
   
Percentage of Plan
Assets at Year-End(1)
 
 
2010
   
2009
   
2008
 
Equity Securities
65
%
   
45
%
   
39
%
Debt Securities
30
%
   
26
%
   
26
%
Cash Equivalent
5
%
   
29
%
   
35
%
Total
100
%
   
100
%
   
100
%

(1)
Represents asset allocation at year-end which may differ from the average target allocation for the year due to the year-end cash contribution to the plan.

The Company’s pension plan assets are overseen by the CCBG Retirement Committee.  Capital City Trust Company acts as the investment manager for the plan.  The investment strategy is to maximize return on investments while minimizing risk.  The Company believes the best way to accomplish this goal is to take a conservative approach to its investment strategy by investing in high-grade equity and debt securities.

The major categories of assets in the Company’s pension plan as of year-end are presented in the following table.  Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (see Note 19 – Fair Value Measurements).

(Dollars in Thousands)  
2009
   
2008
 
Level 1:
           
    U.S. Treasury
  $ 5,375     $ 4,189  
    Common Stocks
    9,469       6,464  
    Mutual Funds
    30,795       33,568  
    Cash and Cash Equivalents
    21,756       12,159  
                 
Level 2: 
               
    U.S. Government Agencies and Corporations
    12,152       9,449  
                 
        Total fair value of plan assets
  $ 79,547     $ 65,829  

 
82

 
Expected Benefit Payments.  As of December 31, 2009, expected benefit payments related to the defined benefit pension plan were as follows:

2010
 
$
2,967,094
 
2011
   
3,865,783
 
2012
   
4,629,786
 
2013
   
5,474,838
 
2014
   
6,571,039
 
2015 through 2019
   
40,737,804
 
Total
 
$
64,246,344
 

Contributions.  The following table details the amounts contributed to the pension plan in 2009 and 2008, and the expected amount to be contributed in 2010.

 
 
(Dollars in Thousands)
2009
 
2008
 
Expected Range of Contribution
2010(1)
Actual Contributions
$ 8,000
 
$ 12,000
 
$ 6,000 - $12,000

(1)
Estimate reflects the Company’s best estimate given historical funding practice and the 2010 minimum ($6.0 million) and maximum ($45.0 million) allowable contribution.

 
83

 

Supplemental Executive Retirement Plan

The Company has a Supplemental Executive Retirement Plan ("SERP") covering selected executive officers.  Benefits under this plan generally are based on the same service and compensation as used for the pension plan, except the benefits are calculated without regard to the limits set by the Internal Revenue Code on compensation and benefits.  The net benefit payable from the SERP is the difference between this gross benefit and the benefit payable by the pension plan.

The following table details the components of the SERP’s periodic benefit cost, the funded status of the plan, amounts recognized in the Company's consolidated statements of financial condition, and major assumptions used to determine these amounts.

(Dollars in Thousands)
2009
   
2008
   
2007
 
Change in Projected Benefit Obligation:
               
Benefit Obligation at Beginning of Year
$
     5,033
   
$
3,706
   
$
4,018
 
Service Cost
 
              20
     
31
     
83
 
Interest Cost
 
            178
     
287
     
208
 
Actuarial Gain
 
         (2,057
)
   
(180
)
   
(603
)
Plan Change(1)
 
         -
     
1,190
     
-
 
Projected Benefit Obligation at End of Year
$
   3,174
   
$
5,034
   
$
3,706
 
                       
Accumulated Benefit Obligation at End of Year
$
2,889
   
$
2,899
   
$
2,603
 
                       
Amounts Recognized in the Consolidated Statements of Financial Condition:
                     
Other Liabilities
$
           3,174
   
$
5,034
   
$
3,706
 
                       
Amounts (Pre-Tax) Recognized in Accumulated Other Comprehensive Income:
                     
Net Actuarial Gain
$
(1,854)
   
$
(148)
   
$
(3)
 
Prior Service Cost
 
874
     
1,055
     
44
 
                       
Components of Net Periodic Benefit Costs:
                     
Service Cost
$
20
   
$
31
   
$
83
 
Interest Cost
 
178
     
287
     
208
 
Amortization of Prior Service Cost
 
180
     
180
     
7
 
Recognized Net Actuarial (Gain)Loss
 
           (350
)
   
           (36
)
   
8
 
Net Periodic Benefit Cost
$
28
   
$
462
   
$
306
 
                       
Assumptions:
                     
Weighted-average used to determine the benefit obligations:
                     
Discount Rate
 
5.75
%
   
6.00
%
   
6.25
%
Rate of Compensation Increase
 
4.50
%
   
5.50
%
   
5.50
%
Measurement Date
12/31/09
   
12/31/08
   
12/31/07
 
                       
Weighted-average used to determine the net cost:
                     
Discount Rate
 
6.00
%
   
6.25
%
   
6.00
%
Rate of Compensation Increase
 
5.50
%
   
5.50
%
   
5.50
%

(1)
In 2008, the SERP plan was amended to include stock as plan compensation.

 
84

 

Expected Benefit Payments. As of December 31, 2009, expected benefit payments related to the SERP were as follows:

2010
 
$
217,590
 
2011
   
251,160
 
2012
   
273,567
 
2013
   
267,543
 
2014
   
399,901
 
2015 through 2019
   
1,651,556
 
  Total
 
$
3,061,317
 

401(k) Plan

The Company has a 401(k) Plan which enables associates to defer a portion of their salary on a pre-tax basis.  The plan covers substantially all associates of the Company who meet minimum age requirements.  The plan is designed to enable participants to elect to have an amount from 1% to 15% of their compensation withheld in any plan year placed in the 401(k) Plan trust account. Matching contributions of 50% from the Company are made up to 6% of the participant's compensation for eligible associates.  During 2009, 2008, and 2007, the Company made matching contributions of $355,000, $349,000 and $299,000, respectively.  The participant may choose to invest their contributions into twenty-four investment options available to 401(k) participants, including the Company’s common stock.  A total of 50,000 shares of CCBG common stock have been reserved for issuance.  These shares have historically been purchased in the open market.

Other Plans

The Company has a Dividend Reinvestment and Optional Stock Purchase Plan.  A total of 250,000 shares have been reserved for issuance.  In recent years, shares for the Dividend Reinvestment and Optional Stock Purchase Plan have been acquired in the open market and, thus, the Company did not issue any shares under this plan in 2009, 2008 and 2007.

Note 13
EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

(Dollars in Thousands, Except Per Share Data)
 
2009
   
2008
   
2007
 
Numerator:
                 
Net (Loss) Income
  $ (3,471 )   $ 15,225     $ 29,683  
                         
Denominator:
                       
Denominator for Basic Earnings Per Share Weighted-Average Shares
    17,044       17,141       17,909  
Effects of Dilutive Securities Stock Compensation Plans
    1       6       3  
                         
Denominator for Diluted Earnings Per Share Adjusted Weighted-Average Shares and Assumed Conversions
    17,045       17,147       17,912  
                         
Basic (Loss) Earnings Per Share
  $ (0.20 )   $ 0.89     $ 1.66  
                         
Diluted (Loss) Earnings Per Share
  $ (0.20 )   $ 0.89     $ 1.66  

Stock options for 23,138 and 37,246 shares of common stock related to awards earned in 2003 and 2004, respectively, were not considered in computing diluted earnings per common share for 2009, 2008 and 2007 because they were anti-dilutive.

 
85

 

Note 14
CAPITAL

The Company is subject to various regulatory capital requirements which involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items.  The Company's capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  Quantitative measures established by regulation to ensure capital adequacy require that the Company maintain amounts and ratios (set forth in the table below) of total and Tier I Capital to risk-weighted assets, and of Tier I Capital to average assets.  As of December 31, 2009, the Company met all capital adequacy requirements to which it is subject.

A summary of actual, required, and capital levels necessary to be considered well-capitalized for Capital City Bank Group, Inc. consolidated and its banking subsidiary, Capital City Bank, as of December 31, 2009 and December 31, 2008 are as follows:

   
Actual
 
Required
For Capital
Adequacy Purposes
 
To Be Well-
Capitalized Under
Prompt Corrective
Action Provisions
 
(Dollars inThousands)
 
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
 
As of December 31, 2009:
                   
Tier I Capital:
                   
CCBG
 
$
257,108
12.76
%
$
81,370
4.00
%
*
*
 
CCB
   
238,433
11.86
%
 
81,194
4.00
%
121,791
6.00
%
                         
Total Capital:
                       
CCBG
   
284,423
14.11
%
 
162,740
8.00
%
*
*
 
CCB
   
263,806
13.12
%
 
162,388
8.00
%
202,985
10.00
%
                         
Tier I Leverage:
                       
CCBG
   
257,108
10.39
%
 
81,370
4.00
%
*
*
 
CCB
   
238,433
9.66
%
 
81,194
4.00
%
101,493
5.00
%
                         
As of December 31, 2008:
                       
Tier I Capital:
                       
CCBG
 
$
271,767
13.34
%
$
81,948
4.00
%
*
*
 
CCB
   
269,812
13.27
%
 
81,762
4.00
%
122,643
6.00
%
                         
Total Capital:
                       
CCBG
   
299,263
14.69
%
 
163,895
8.00
%
*
*
 
CCB
   
295,362
14.53
%
 
163,524
8.00
%
204,405
10.00
%
                         
Tier I Leverage:
                       
CCBG
   
271,767
11.51
%
 
81,948
4.00
%
*
*
 
CCB
   
269,812
11.45
%
 
81,762
4.00
%
102,202
5.00
%

*
Not applicable to bank holding companies.

Note 15
DIVIDEND RESTRICTIONS

Substantially all the Company’s retained earnings are undistributed earnings of its banking subsidiary which are restricted by various regulations administered by federal and state bank regulatory authorities.

The approval of the appropriate regulatory authority is required if the total of all dividends declared by a subsidiary bank in any calendar year exceeds the bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years.  In addition, pursuant to the Federal Reserve Resolutions, the Bank must receive prior approval from the Federal Reserve before declaring or paying any dividends.  Under these guidelines and restrictions, the Bank must receive  approval from its regulators to issue and declare any further dividends to CCBG.  In addition, CCBG must receive approval from the Federal Reserve to pay any dividends to its shareowners.


 
86

 

Note 16
RELATED PARTY INFORMATION

Related Party Loans.  At December 31, 2009 and 2008, certain officers and directors were indebted to the Company’s bank subsidiary in the aggregate amount of $23.2 million and $20.7 million, respectively.  During 2009, $31.5 million in new loans were made and repayments totaled $29.0 million.  In the opinion of management, these loans were made on similar terms as loans to other individuals of comparable creditworthiness and were all current at year-end.

Note 17
SUPPLEMENTARY INFORMATION

Components of other noninterest income and noninterest expense in excess of 1% of the sum of total interest income and noninterest income, which are not disclosed separately elsewhere, are presented below for each of the respective years.

(Dollars in Thousands)
 
2009
   
2008
   
2007
 
Noninterest Income:
                 
Merchant Fee Income
  $ 2,359     $ 5,548     $ 7,257  
Interchange Commission Fees
    4,432       4,165       3,757  
ATM/Debit Card Fees
    3,515       2,988       2,692  
Retail Brokerage Fees
    2,655       2,399       2,510  
                         
Noninterest Expense:
                       
Maintenance Agreements -  FF&E
    3,225       3,506       3,684  
Legal Fees
    3,975       2,240       1,739  
Professional Fees
    4,501       4,083       3,855  
Interchange Fees
    1,929       4,577       6,118  
Telephone
    2,227       2,522       2,373  
Advertising
    3,285       3,609       3,742  
Processing Services
    3,591       3,921       3,278  
FDIC Insurance Fees
    4,616       835
(1)
    240
(1) 
Printing and Supplies
    1,882       1,977
(1) 
    2,124
(1) 
Other Real Estate Owned
    6,843       1,120
(1) 
    159
(1) 

(1)
Less than 1% of the appropriate threshold.


 
87

 

Note 18
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 December 31, 2009, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Thousands)
 
Amount
 
Commitments to Extend Credit(1)
 
$
326,170
 
Standby Letters of Credit
 
$
13,219
 

(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.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In general, management does not anticipate any material losses as a result of participating in these types of transactions.  However, any potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit facilities.

For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is deemed necessary.  The Company evaluates each client’s creditworthiness on a case-by-case basis.  The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; real estate; accounts receivable; property, plant and equipment; and inventory.

Other Commitments.  In the normal course of business, the Company enters into lease commitments which are classified as operating leases.  Rent expense incurred under these leases was approximately $1.5 million in 2009, $1.5 million in 2008, and $1.5 million in 2007.  Minimum lease payments under these leases due in each of the five years subsequent to December 31, 2009, are as follows (dollars in millions): 2010, $1.3; 2011, $0.6; 2012, $0.6;  2013, $0.5; 2014, $0.4; thereafter, $4.7.

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 a litigation 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.

In October 2008 and July 2009, Visa Inc. funded additional amounts of $1.096 billion and $700 million, respectively, into the litigation escrow account to fund the settlement of the Discover Financial Services litigation and additional pending litigation, which in effect reduced the exchange ratio for the Company’s Class B shares of Visa Inc.  While the Company could be required to separately fund its proportionate share of any Covered Litigation losses, it is expected that this litigation escrow account will be used to pay all or a substantial amount of the losses.

 
88

 

Note 19
FAIR VALUE MEASUREMENTS

The Company adopted the provisions of ASC 820-10 (Formerly SFAS No. 157), "Fair Value Measurements," for financial assets and financial liabilities effective January 1, 2008.  Subsequently, on January 1, 2009, the Company adopted ASC 820-10-15 (Formerly SFAS No. 157-2) "Effective Date of FASB Statement No. 157" for non-financial assets and non-financial liabilities.  ASC 820-10 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

ASC 820-10 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.

ASC 820-10 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, ASC 820-10 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.

89

 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2009, 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
 
2009
                       
Securities available for sale:
                       
    US Treasury
  $ 22,445     $ -     $ -     $ 22,444  
    U.S. Government Agencies and Corporations
    -       -       -       -  
    State and Political Subdivisions
    3,709       103,841       -       107,550  
    Mortgage-Backed Securities
    -       34,143       -       34,143  
    Other Securities 
    -       -       -       -  
                                 
2008
                               
Securities available for sale:
                               
    US Treasury 
    29,672       -       -       29,672  
    U.S. Government Agencies and Corporations 
    -       33,842       -       33,842  
    State and Political Subdivisions 
    2,698       98,864       -       101,562  
    Mortgage-Backed Securities
    -       13,504       -       13,504  
    Other Securities 
                    1,107       1,107  
                                 
 
The following table reconciles the beginning and ending balances of available for sale securities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs:

(Dollars in Thousands)
 
2009
    2008   
Balance, Beginning of year
  $ 1,107     $ 1,061
Temporary impairment included in other comprehensive income
    (807      
Other than temporary credit impairment realized in earnings
    (300      
Balance, End of  year
  $ -     $ 1,107

Certain financial and non-financial assets measured at fair value on a nonrecurring basis are detailed below; 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 and non-financial liabilities measured at fair value on a nonrecurring basis were not significant at December 31, 2009.

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 liquidation of collateral.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.  Impaired loans had a carrying value of $111.9 million, with a valuation allowance of $21.1 million, resulting in an additional provision for loan losses of $5.2 million for the year ended December 31, 2009.

Loans Held for Sale.  Loans held for sale of $7.9 million, 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.

Other Real Estate Owned.  During the 12 months of 2009, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for possible loan losses based on the fair value of the foreclosed asset.  The fair value of the foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data.  Foreclosed assets measured at fair value upon initial recognition totaled $44.0 million during the 12 months ended December 31, 2009.  The Company recognized subsequent losses totaling $4.7 million for foreclosed assets that were re-valued during the 12 months ended December 31, 2009.  The carrying value of foreclosed assets was $36.1 million at December 31, 2009.

Effective January 1, 2008, the Company adopted the provisions of ASC 825-10 (Formerly SFAS No. 159), "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of ASC 320-10 (Formerly FASB Statement No. 115)." ASC 825-10 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 principles, (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 ASC 825-10 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 ASC 825-10.
 
90

 
Other Financial Instruments. Many of the Company’s assets and liabilities are short-term financial instruments whose carrying values approximate fair value. These items include Cash and Due From Banks, Interest Bearing Deposits with Other Banks, Federal Funds Sold, Federal Funds Purchased, Securities Sold Under Repurchase Agreements, and Short-Term Borrowings.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  The resulting fair values may be significantly affected by the assumptions used, including the discount rates and estimates of future cash flows.

The methods and assumptions used to estimate the fair value of the Company’s other financial instruments are as follows:

Loans - The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows and estimated discount rates that reflect the credit and interest rate risks inherent in each loan category.  The calculated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category.

Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities.

Subordinated Notes Payable - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obligations.

Long-Term Borrowings - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar debt.

Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties. The fair value of these fees is not material.

The Company’s financial instruments that have estimated fair values are presented below:

   
At December 31,
 
   
2009
   
2008
 
(Dollars in Thousands)
 
Carrying
Value
   
Estimated
Fair
Value
   
Carrying
Value
   
Estimated
Fair
Value
 
Financial Assets:
                       
Cash
 
$
57,877
   
$
57,877
   
$
88,143
   
$
88,143
 
Short-Term Investments
   
276,416
     
276,416
     
6,806
     
6,806
 
Investment Securities
   
176,673
     
176,673
     
191,569
     
191,569
 
Loans, Net of Allowance for Loan Losses
   
1,871,941
     
1,851,699
     
1,920,793
     
1,915,887
 
Total Financial Assets
 
$
2,382,907
   
$
2,362,665
   
$
2,207,311
   
$
2,202,405
 
                                 
Financial Liabilities:
                               
Deposits
 
$
2,258,234
   
$
2,258,899
   
$
1,992,174
   
$
1,960,361
 
Short-Term Borrowings
   
35,841
     
34,209
     
62,044
     
61,799
 
Subordinated Notes Payable
   
62,887
     
62,569
     
62,887
     
63,637
 
Long-Term Borrowings
   
49,380
     
51,509
     
51,470
     
57,457
 
Total Financial Liabilities
 
$
2,406,342
   
$
2,407,186
   
$
2,168,575
   
$
2,143,254
 

All non-financial instruments are excluded from the above table.  The disclosures also do not include certain intangible assets such as client relationships, deposit base intangibles and goodwill.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.


 
91

 

Note 20
PARENT COMPANY FINANCIAL INFORMATION

The operating results of the parent company for the three years ended December 31, are shown below:

Parent Company Statements of Operations

(Dollars in Thousands)
2009
   
2008
   
2007
 
OPERATING INCOME
               
Income Received from Subsidiary Bank:
               
Dividends
$
35,000
   
$
16,655
   
$
49,207
 
Overhead Fees
 
3,209
     
3,209
     
3,532
 
Other Income
 
121
     
184
     
164
 
Total Operating Income
 
38,330
     
20,048
     
52,903
 
                       
OPERATING EXPENSE
                     
Salaries and Associate Benefits
 
1,694
     
1,341
     
1,812
 
Interest on Long-Term Debt
 
-
     
35
     
-
 
Interest on Subordinated Notes Payable
 
3,730
     
3,735
     
3,730
 
Professional Fees
 
999
     
978
     
787
 
Advertising
 
202
     
244
     
260
 
Legal Fees
 
176
     
213
     
375
 
Other
 
813
     
620
     
621
 
Total Operating Expense
 
7,614
     
7,166
     
7,585
 
Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiary Bank
 
30,716
     
12,882
     
45,318
 
Income Tax Benefit
 
(1,430
)
   
(737
)
   
(1,429
)
Income Before Equity in Undistributed Earnings of Subsidiary Bank
 
32,146
     
13,619
     
46,747
 
Equity in Undistributed Earnings of Subsidiary Bank
 
(35,617
)
   
1,606
     
(17,064
)
Net (Loss) Income
$
(3,471
 
$
15,225
   
$
29,683
 

The following are condensed statements of financial condition of the parent company at December 31:

Parent Company Statements of Financial Condition

(Dollars in Thousands, Except Per Share Data)
2009
   
2008
 
ASSETS
         
Cash and Due From Subsidiary Bank
$
20,425
   
$
950
 
Investment in Subsidiary Bank
 
314,946
     
343,603
 
Other Assets
 
2,265
     
2,689
 
Total Assets
$
337,636
   
$
347,242
 
               
LIABILITIES
             
Subordinated Notes Payable
$
62,887
   
$
62,887
 
Other Liabilities
 
6,850
     
5,525
 
Total Liabilities
$
69,737
   
$
68,412
 
               
SHAREOWNERS' EQUITY
             
Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares issued and outstanding
 
-
     
-
 
Common Stock, $.01 par value; 90,000,000 shares authorized; 17,036,407 and 17,126,997 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively
 
170
     
171
 
Additional Paid-In Capital
 
36,099
     
36,783
 
Retained Earnings
 
246,460
     
262,890
 
Accumulated Other Comprehensive Loss, Net of Tax
 
(14,830
)
   
(21,014
)
Total Shareowners' Equity
 
267,899
     
278,830
 
Total Liabilities and Shareowners' Equity
$
337,636
   
$
347,242
 

 
92

 

The cash flows for the parent company for the three years ended December 31, were as follows:

Parent Company Statements of Cash Flows

(Dollars in Thousands)
2009
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net Income
$
(3,471
)
 
$
15,225
   
$
29,683
 
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
                     
Equity in Undistributed Earnings of Subsidiary Bank
 
35,617
     
(1,606
)
   
17,064
 
Non-Cash Compensation
 
-
     
62
     
238
 
Increase in Other Assets
 
(528
)
   
254
     
(152
)
Increase in Other Liabilities
 
1,325
     
210
     
222
 
Net Cash Provided by Operating Activities
 
32,943
     
14,145
     
47,055
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                     
Cash Paid for Investment in:
                     
Purchase of held-to-maturity and available-for-sale securities
 
-
     
-
     
(1,000
)
Increase in Investment in Bank Subsidiary
 
-
     
-
     
1,466
 
Net Cash Used in Investing Activities
 
-
     
-
     
466
 
                       
CASH FROM FINANCING ACTIVITIES:
                     
Payment of Dividends
 
(12,959
)
   
(12,630
)
   
(12,823
)
Repurchase of Common Stock
 
(1,561)
     
(2,414
)
   
(43.233
)
Issuance of Common Stock
 
1,052
     
891
     
572
 
Net Cash (Used in) Provided by Financing Activities
 
(13,468
)
   
(14,153
)
   
(55,484
)
                       
Net Increase (Decrease) in Cash
 
19,475
     
(8
)
   
(7,963
)
Cash at Beginning of Period
 
950
     
958
     
8,921
 
Cash at End of Period
$
20,425
   
$
950
   
$
958
 

Note 21
COMPREHENSIVE INCOME

FASB Topic ASC 220, “Comprehensive Income” (Formerly SFAS No. 130) requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income.  Total comprehensive income is reported in the accompanying statements of changes in shareowners’ equity.  Information related to net comprehensive income (loss) is as follows:

 (Dollars in Thousands)
 
2009
   
2008
   
2007
 
Other Comprehensive Income (Loss):
                 
       Securities available for sale:
                 
             Change in net unrealized gain, net of tax benefit of $460 and a tax expense of $683 and $616
 
$
(888
)
 
$
1,230
   
$
1,080
 
       Retirement plans:
                       
             Change in funded status of defined benefit pension plan and SERP, net of tax
              expense $4,441, tax benefit of $10,613, and tax expense of $830
   
7,072
     
(16,179
)
   
1,166
 
       Net Other Comprehensive Gain (Loss)
 
$
6,184
   
$
(14,949
)
 
$
2,246
 
                         
The components of accumulated other comprehensive income, net of tax, as of year-end were as follows:
                       
                         
       Net unrealized gain on securities available for sale
 
$
588
   
$
1,476
   
$
246
 
       Net unfunded liability for defined benefit pension plan and SERP
   
(15,418
)
   
(22,490
)
   
(6,311
)
   
$
(14,830
)
 
$
(21,014
)
 
$
(6,065
)


 
93

 

Item 9.

None.

Item 9A.

Evaluation of Disclosure Controls and Procedures.  As of December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, 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 December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, we maintained effective disclosure controls and procedures.

Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, our management has concluded we maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rule 13a-15(f), as of December 31, 2009.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management.

Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements as of and for the year ended December 31, 2009, and opined as to the effectiveness of internal control over financial reporting as of December 31, 2009, as stated in its attestation report, which is included herein on page 95.

Change in Internal Control. Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control. There have been no significant changes in our internal control during our most recently completed fiscal quarter, nor subsequent to the date of their evaluation, that could significantly affect our internal control over financial reporting.

Item 9B.

None.



 
94

 

Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders of
Capital City Bank Group, Inc.

We have audited Capital City Bank Group, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Capital City Bank Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of  Management on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Capital City Bank Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareowners’ equity, and cash flows for each of the three years in the period ended December 31, 2009 of Capital City Bank Group, Inc. and our report dated March 4, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Birmingham, Alabama
March 4, 2010

 
95

 

Part III

Item 10.
 
Incorporated herein by reference to the subsection entitled “Codes of Conduct and Ethics” under the section entitled “Corporate Governance,” “Nominees for Election as Directors,” “Continuing Directors and Executive Officers,” “Share Ownership” and the subsection entitled “Committees of the Board” under the section “Board and Committee Membership” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 20, 2010.

Item 11.
 
Incorporated herein by reference to the sections entitled “Executive Compensation” and “Director Compensation” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 20, 2010.

Item 12.

Equity Compensation Plan Information
 
Our 2005 Associate Incentive Plan, 2005 Associate Stock Purchase Plan, and 2005 Director Stock Purchase Plan were approved by our shareowners.  The following table provides certain information regarding our equity compensation plans.

Plan Category
 
Number of securities to be issued upon exercise of
outstanding options, warrants and rights
 
Weighted-average exercise price
of outstanding options, warrants and rights
 
Number of securities remaining available
for future issuance under equity
compensation plans (excluding
securities reflected in column (a))
   
(a)
 
(b)
 
(c)
Equity Compensation Plans Approved by Securities Holders
 
60,384(1)
 
$32.79
 
1,321,272(2)
             
Equity Compensation Plans Not Approved by Securities Holders
 
--
 
--
 
--
Total
 
60,384
 
$32.79
 
1,321,272

 (1)
Includes 60,384 shares that may be issued upon exercise of outstanding options under the terminated 1996 Associate Incentive Plan.

(2)
Consists of 807,978 shares available for issuance under our 2005 Associate Incentive Plan, 482,164 shares available for issuance under our 2005 Associate Stock Purchase Plan, and 31,130 shares available for issuance under our 2005 Director Stock Purchase Plan.  Of these plans, the only plan under which options may be granted in the future is our 2005 Associate Incentive Plan.
 
For additional information about our equity compensation plans, see Stock Based Compensation in Note 11 in the Notes to the Consolidated Financial Statements.
 
The other information required by Item 11 is incorporated herein by reference to the section entitled “Share Ownership” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 20, 2010.
 

 
96

 

Item 13.                      Certain Relationships and Related Transactions, and Director Independence
 
Incorporated herein by reference to the subsections entitled “Procedures for Review, Approval, or Ratification of Related Person Transactions” and “Transactions With Related Persons” under the section entitled “Executive Officers and Transactions with Related Persons” and the subsection entitled “Independent Directors” under the section entitled “Corporate Governance” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 20, 2010.

Item 14.                      Principal Accountant Fees and Services
 
Incorporated herein by reference to the section entitled “Audit Fees and Related Matters” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 20, 2010.

 
97

 

PART IV
 
Item 15.                      Exhibits and Financial Statement Schedules
 
The following documents are filed as part of this report

1.      Financial Statements
 
Reports of Independent Registered Public Accounting Firms
Consolidated Statements of Financial Condition at the End of Fiscal Years 2009 and 2008
Consolidated Statements of Operations for Fiscal Years 2009, 2008, and 2007
Consolidated Statements of Changes in Shareowners’ Equity for Fiscal Years 2009, 2008, and 2007
Consolidated Statements of Cash Flows for Fiscal Years 2009, 2008, and 2007
Notes to Consolidated Financial Statements
2.      Financial Statement Schedules

Other schedules and exhibits are omitted because the required information either is not applicable or is shown in the financial statements or the notes thereto.
 
3.      Exhibits Required to be Filed by Item 601 of Regulation S-K

Reg. S-K
Exhibit
Table
Item No.                      Description of Exhibit

 
3.1
Amended and Restated Articles of Incorporation - incorporated herein by reference to Exhibit 3 of the Registrant’s 1996 Proxy Statement (filed 4/11/96) (No. 0-13358).
 
 
3.2
Amended and Restated Bylaws - incorporated herein by reference to Exhibit 3.2 of the Registrant’s Form 8-K (filed 11/30/07) (No. 0-13358).
 
 
4.1
See Exhibits 3.1, and 3.2 for provisions of Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, which define the rights of its shareholders.
 
 
4.2
Capital City Bank Group, Inc. 2005 Director Stock Purchase Plan - incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242).
 
 
4.3
Capital City Bank Group, Inc. 2005 Associate Stock Purchase Plan - incorporated herein by reference to Exhibit 4.4 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242).
 
 
4.4
Capital City Bank Group, Inc. 2005 Associate Incentive Plan - incorporated herein by reference to Exhibit 4.5 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242).
 
 
4.5
In accordance with Regulation S-K, Item 601(b)(4)(iii)(A) certain instruments defining the rights of holders of long-term debt of Capital City Bank Group, Inc. not exceeding 10% of the total assets of Capital City Bank Group, Inc. and its consolidated subsidiaries have been omitted; the Registrant agrees to furnish a copy of any such instruments to the Commission upon request.
 
 
10.1
Capital City Bank Group, Inc. 1996 Dividend Reinvestment and Optional Stock Purchase Plan - incorporated herein by reference to Exhibit 10 of the Registrant’s Form S-3 (filed 01/30/97) (No. 333-20683).
 
98

 
 
10.2
Capital City Bank Group, Inc. Supplemental Executive Retirement Plan - incorporated herein by reference to Exhibit 10(d) of the Registrant’s Form 10-K (filed 3/27/03) (No. 0-13358).
 
 
10.3
Capital City Bank Group, Inc. 401(k) Profit Sharing Plan – incorporated herein by reference to Exhibit 4.3 of Registrant’s Form S-8 (filed 09/30/97) (No. 333-36693).
 
 
10.4
2005 Stock Option Agreement by and between Capital City Bank Group, Inc. and William G. Smith, Jr., dated March 24, 2005 – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/31/05) (No. 0-13358).
 
 
10.5
2006 Stock Option Agreement by and between Capital City Bank Group, Inc. and William G. Smith, Jr., dated March 23, 2006 – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/29/06) (No. 0-13358).
 
 
10.6
Capital City Bank Group, Inc. Non-Employee Director Plan, as amended – incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 8-K (filed 3/29/06) (No. 0-13358).
 
 
10.7
Form of Participant Agreement for the Capital City Bank Group, Inc. Long-Term Incentive Plan – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (filed 8/10/06) (No. 0-13358).
 
 
10.8
Form of Participant Agreement for 2008 Stock-Based Incentive Plan – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 6/5/08) (No. 0-13358).
 
 
10.9
Form of Participant Agreement for 2009 Stock-Based Incentive Plan – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 6/30/09) (No. 0-13358).
 
 
11
Statement re Computation of Per Share Earnings.*
 
 
14
Capital City Bank Group, Inc. Code of Ethics for the Chief Financial Officer and Senior Financial Officers - incorporated herein by reference to Exhibit 14 of the Registrant’s Form 8-K (filed 3/11/05) (No. 0-13358).
 
 
21
Capital City Bank Group, Inc. Subsidiaries – incorporated herein by reference to Exhibit 21 of the Registrant’s Form 10-K (filed 3/13/09) (No. 0-13358).
 
 
23.1
Consent of Independent Registered Public Accounting Firm.**
 
 
31.1
Certification of CEO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002.**
 
 
31.2
Certification of CFO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002.**
 
 
32.1
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
 
32.2
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
 
*
Information required to be presented in Exhibit 11 is provided in Note 13 to the consolidated financial statements under Part II, Item 8 of this Form 10-K in accordance with the provisions of U.S. generally accepted accounting principles.
**
Filed electronically herewith.


 
99

 

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 4, 2010, on its behalf by the undersigned, thereunto duly authorized.

CAPITAL CITY BANK GROUP, INC.


/s/ William G. Smith, Jr.                                                      
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 4, 2010 by the following persons in the capacities indicated.


/s/ William G. Smith, Jr.                                                      
William G. Smith, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)


/s/ J. Kimbrough Davis                                                      
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 

Directors:
   
     
/s/ DuBose Ausley
 
/s/ L. McGrath Keen, Jr.
DuBose Ausley
 
L. McGrath Keen, Jr.
     
     
/s/ Thomas A. Barron
 
/s/ Lina S. Knox
Thomas A. Barron
 
Lina S. Knox
     
     
/s/ Frederick Carroll, III
 
/s/ Henry Lewis, III
Frederick Carroll, III
 
Henry Lewis, III
     
     
/s/ J. Everitt Drew
 
/s/ William G. Smith, Jr.
J. Everitt Drew
 
William G. Smith, Jr.
     
     
/s/ John K. Humphress
   
John K. Humphress
   




 
 
 
 
 
 
                                                         
                                                100