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

FORM 10-Q
 

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

For the Quarterly Period Ended June 30, 2008

OR

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

For the transition period from ____________ to ____________


Commission File Number: 0-13358
 
 

 

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


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


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

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

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

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

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

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

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



 
 
 


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

TABLE OF CONTENTS

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


 
-2-


INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements

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

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

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

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


 
-3-

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

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


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

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



 
-4-


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


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

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

 
-5-


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


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


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


 
-6-

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


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

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

 
-7-


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
 

Basis of Presentation

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

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

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

NOTE 2 - INVESTMENT SECURITIES
 

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

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

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

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


 
-8-


NOTE 3 - LOANS
 

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

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

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

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

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

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

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

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


 
-9-


NOTE 5 - INTANGIBLE ASSETS
 

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

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

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

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

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

NOTE 6 - DEPOSITS

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

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


 
-10-


NOTE 7 - STOCK-BASED COMPENSATION

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

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

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

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

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

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

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


 
-11-


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

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

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

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

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

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

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

NOTE 8 - EMPLOYEE BENEFIT PLANS

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

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

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


 
-12-


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

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

NOTE 9 - COMMITMENTS AND CONTINGENCIES
 

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

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

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

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

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

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

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

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

NOTE 10 - COMPREHENSIVE INCOME

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

 
-13-


NOTE 11 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

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

 
-14-


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

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

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

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

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

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

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

NOTE 12 – SUBSEQUENT EVENT

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



 
-15-

QUARTERLY FINANCIAL DATA (UNAUDITED)

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

 
-16-
 
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

Reconciliation of operating efficiency ratio to efficiency ratio:

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

Reconciliation of operating net noninterest expense ratio:

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


 
-17-


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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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