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, 2010

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
 
 
CCBG LOGO
 


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 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  o   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, 2010, 17,077,156 shares of the Registrant's Common Stock, $.01 par value, were outstanding.

 
-1-

 


CAPITAL CITY BANK GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2010
TABLE OF CONTENTS

PART I   – Financial Information
Page
 
   
Item 1.
   
  4  
  5  
  6  
  7  
  8  
       
Item 2.
18  
       
Item 3.
35  
       
Item 4.
35  
       
PART II   Other Information    
   
Item 1.
35  
       
Item 1A.
35  
       
Item 2.
36  
       
Item 3.
36  
       
Item 4.
36  
       
Item 5.
36  
       
Item 6.
37  
       
  38  
       
       
       


 
-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, 2009 (the “2009 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:
 
§  
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 and the valuation allowance on deferred tax assets;
§  
continued depression of the market value of the Company that could result in an impairment of goodwill;
§  
restrictions on our operations, including the inability to pay dividends without our regulators’ consent;
§  
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;
§  
the effects of harsh weather conditions, including hurricanes, and man-made disasters, including the recent BP p.l.c. oil spill in the Gulf of Mexico;
§  
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 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, 2010 AND DECEMBER 31, 2009

(Dollars In Thousands, Except Share Data)
 
June 30, 2010
   
December 31, 2009
 
ASSETS
           
Cash and Due From Banks
 
$
52,380
   
$
57,877
 
Federal Funds Sold and Interest Bearing Deposits
   
250,508
     
276,416
 
Total Cash and Cash Equivalents
   
302,888
     
334,293
 
                 
Investment Securities, Available-for-Sale
   
218,785
     
176,673
 
                 
Loans, Net of Unearned Interest
   
1,821,782
     
1,915,940
 
Allowance for Loan Losses
   
(38,442
)
   
(43,999
)
Loans, Net
   
1,783,340
     
1,871,941
 
                 
Premises and Equipment, Net
   
116,802
     
115,439
 
Goodwill
   
84,811
     
84,811
 
Other Intangible Assets
   
2,610
     
4,030
 
Other Real Estate Owned
   
48,110
     
36,134
 
Other Assets
   
93,398
     
85,003
 
Total Assets
 
$
2,650,744
   
$
2,708,324
 
                 
LIABILITIES
               
Deposits:
               
Noninterest Bearing Deposits
 
$
460,168
   
$
427,791
 
Interest Bearing Deposits
   
1,740,143
     
1,830,443
 
Total Deposits
   
2,200,311
     
2,258,234
 
                 
Short-Term Borrowings
   
21,376
     
35,841
 
Subordinated Notes Payable
   
62,887
     
62,887
 
Other Long-Term Borrowings
   
55,605
     
49,380
 
Other Liabilities
   
48,885
     
34,083
 
Total Liabilities
   
2,389,064
     
2,440,425
 
                 
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; 17,067,426 and 17,036,407 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
   
171
     
170
 
Additional Paid-In Capital
   
36,633
     
36,099
 
Retained Earnings
   
238,779
     
246,460
 
Accumulated Other Comprehensive Loss, Net of Tax
   
(13,903
)
   
(14,830
)
Total Shareowners' Equity
   
261,680
     
267,899
 
Total Liabilities and Shareowners' Equity
 
$
2,650,744
   
$
2,708,324
 

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
(Unaudited)
   
Three Months Ended
   
Six Months Ended
   
(Dollars in Thousands, Except Per Share Data)
 
2010
   
2009
   
2010
   
2009
 
INTEREST INCOME
                       
Interest and Fees on Loans
 
$
26,644
   
$
29,742
   
$
53,636
   
$
59,279
 
Investment Securities:
                               
U.S. Treasuries
   
330
     
157
     
433
     
319
 
U.S. Government Agencies
   
299
     
501
     
619
     
1,031
 
States and Political Subdivisions
   
406
     
695
     
896
     
1,432
 
Other Securities
   
79
     
84
     
156
     
168
 
Federal Funds Sold
   
176
     
1
     
348
     
4
 
Total Interest Income
   
27,934
     
31,180
     
56,088
     
62,233
 
                                 
INTEREST EXPENSE
                               
Deposits
   
2,363
     
2,500
     
5,301
     
4,995
 
Short-Term Borrowings
   
               12
     
               88
     
             29
     
             156
 
Subordinated Notes Payable
   
639
     
931
     
1,290
     
1,858
 
Other Long-Term Borrowings
   
551
     
566
     
1,077
     
1,134
 
Total Interest Expense
   
3,565
     
4,085
     
7,697
     
8,143
 
                                 
NET INTEREST INCOME
   
24,369
     
27,095
     
48,391
     
54,090
 
Provision for Loan Losses
   
3,633
     
8,426
     
14,373
     
16,836
 
Net Interest Income After Provision For Loan Losses
   
20,736
     
18,669
     
34,018
     
37,254
 
                                 
NONINTEREST INCOME
                               
Service Charges on Deposit Accounts
   
7,039
     
7,162
     
13,667
     
13,860
 
Data Processing
   
919
     
896
     
1,819
     
1,766
 
Asset Management Fees
   
1,080
     
930
     
2,100
     
1,900
 
Securities Transactions
   
-
     
6
     
5
     
6
 
Mortgage Banking Fees
   
641
     
902
     
1,149
     
1,486
 
Bank Card Fees
   
2,362
     
2,002
     
4,537
     
3,921
 
Other
   
2,633
     
2,736
     
5,364
     
5,737
 
Total Noninterest Income
   
14,674
     
14,634
     
28,641
     
28,676
 
                                 
NONINTEREST EXPENSE
                               
Salaries and Associate Benefits
   
15,584
     
16,049
     
32,363
     
33,286
 
Occupancy, Net
   
2,585
     
2,540
     
4,993
     
4,885
 
Furniture and Equipment
   
2,192
     
2,304
     
4,373
     
4,642
 
Intangible Amortization
   
710
     
1,010
     
1,420
     
2,021
 
Other Real Estate Expense
   
4,082
     
1,333
     
6,907
     
2,092
 
Other
   
9,476
     
9,694
     
17,957
     
18,261
 
Total Noninterest Expense
   
34,629
     
32,930
     
68,013
     
65,187
 
                                 
INCOME (LOSS) BEFORE INCOME TAXES
   
781
     
373
     
(5,354
   
743
 
Income Tax Expense (Benefit)
   
50
     
(401
   
(2,622
   
(681
)
                                 
NET INCOME (LOSS)
 
$
731
   
$
774
   
$
(2,732)
   
$
1,424
 
                                 
Basic Net Income (Loss) Per Share
 
$
0.04
   
$
0.04
   
$
(0.16)
   
$
0.08
 
Diluted Net Income (Loss) Per Share
 
$
0.04
   
$
0.04
   
$
(0.16)
   
$
0.08
 
                                 
Average Basic Shares Outstanding
   
17,063,176
     
17,009,672
     
17,060,135
     
17,059,175
 
Average Diluted Shares Outstanding
   
17,074,202
     
17,010,157
     
17,071,031
     
17,059,741
 


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
(Unaudited)

 
 
(Dollars In Thousands, Except Share Data)
Shares Outstanding
   
Common Stock
   
Additional
Paid-In Capital
 
Retained Earnings
   
Accumulated Other Comprehensive (Loss) Income, Net of Taxes
   
Total
   
                                 
Balance, December 31, 2009
17,036,407
 
$
 170
 
$
36,099
 
$
246,460
   
$
(14,830
)
 
$
267,899
 
Comprehensive Income:
                                     
Net Loss
-
   
-
   
-
   
(2,732
   
-
     
(2,732
Net Change in Unrealized Gain On
   Available-for-Sale Securities (net of tax)
                         
927
     
927
 
Total Comprehensive Loss
-
   
-
   
-
                   
(1,805
Cash Dividends ($.2900 per share)
-
   
-
   
-
   
(4,949
)
   
-
     
(4,949
)
Stock Performance Plan Compensation
-
   
-
   
115
   
-
     
-
     
115
 
Issuance of Common Stock
31,019
   
1
   
419
   
-
     
-
     
420
 
                                       
Balance, June 30, 2010
17,067,426
 
$
 171
 
$
36,633
 
$
238,779
   
$
(13,903
)
 
$
261,680
 

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
(Unaudited)

(Dollars in Thousands)
 
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (Loss) Income
 
$
(2,732
 
$
1,424
 
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
               
Provision for Loan Losses
   
         14,373
     
         16,836
 
Depreciation
   
           3,495
     
           3,350
 
Net Securities Amortization
   
           1,537
     
           1,044
 
Amortization of Intangible Assets
   
           1,420
     
           2,021
 
Gain on Securities Transactions
   
              (5
)
   
(6
)
Loss on Impaired Security
   
61
     
-
 
Origination of Loans Held-for-Sale
   
     (59,639
)
   
(56,294
)
Proceeds From Sales of Loans Held-for-Sale
   
       56,119
     
         58,927
 
Net Gain From Sales of Loans Held-for-Sale
   
         (1,149
)
   
(1,486
)
Non-Cash Compensation
   
                   115
     
-
 
Increase in Deferred Income Taxes
   
           538
     
2,061
 
Net Decrease (Increase) in Other Assets
   
            7,495
     
(12,870
)
Net Increase in Other Liabilities
   
10,186
     
           20,653
 
Net Cash Provided By Operating Activities
   
         31,814
     
35,660
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities Available-for-Sale:
               
Purchases
   
       (91,038
)
   
        (40,544
)
Sales
   
           505
     
          1,986
 
Payments, Maturities, and Calls
   
         47,871
     
          35,184
 
Net Decrease (Increase) in Loans
   
       54,993
     
        (46,025
Purchase of Premises & Equipment
   
       (4,858
)
   
(5,969
)
Proceeds From Sales of Premises & Equipment
   
       -
     
2
 
Net Cash Provided By (Used In) Investing Activities
   
               7,473
     
(55,366
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
(Decrease) Increase in Deposits
   
       (57,923
)
   
13,757
 
Net (Decrease) Increase in Short-Term Borrowings
   
         (14,465
   
          11,950
 
Increase in Other Long-Term Borrowings
   
                  8,015
     
          2,666
 
Repayment of Other Long-Term Borrowings
   
       (1,790
)
   
          (1,788
)
Dividends Paid
   
         (4,949
)
   
          (6,486
)
Repurchase of Common Stock
   
         -
     
          (1,561
)
Issuance of Common Stock
   
         420
     
          629
 
Net Cash (Used In) Provided By Financing Activities
   
              (70,692
   
          19,167
 
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
(31,405
)
   
(539
)
                 
Cash and Cash Equivalents at Beginning of Period
   
334,293
     
94,949
 
Cash and Cash Equivalents at End of Period
 
$
302,888
   
$
94,410
 
                 
Supplemental Disclosure:
               
Interest Paid on Deposits
 
$
5,804
   
$
5,181
 
Interest Paid on Debt
 
$
2,407
   
$
3,153
 
Taxes Paid
 
$
338
   
$
5,643
 
Loans Transferred to Other Real Estate Owned
 
$
23,904
   
$
13,553
 
Issuance of Common Stock as Non-Cash Compensation
 
$
420
   
$
154
 
Transfer of Current Portion of Long-Term Borrowings
 
$
16
     
-
 

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 2009 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, 2010 and December 31, 2009, the results of operations for the three and six months ended June 30, 2010 and 2009, and cash flows for the six months ended June 30, 2010 and 2009.

NOTE 2 - INVESTMENT SECURITIES

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

   
June 30, 2010
 
(Dollars in Thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Market Value
 
U.S. Treasury
 
$
79,521
   
$
1,386
   
$
-
   
$
80,907
 
States and Political Subdivisions
   
92,963
     
            735
     
2
     
93,696
 
Residential Mortgage-Backed Securities
   
            30,747
     
              899
     
-
     
       31,646
 
Other Securities(1)
   
            13,136
     
               -
     
600
     
       12,536
 
Total Investment Securities
 
$
          216,367
   
$
           3,020
   
$
602
   
$
     218,785
 

   
December 31, 2009
 
(Dollars in Thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Market Value
 
U.S. Treasury
 
$
22,270
   
$
174
   
$
-
   
$
22,444
 
States and Political Subdivisions
   
106,455
     
1,166
     
71
     
107,550
 
Residential 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
 

 (1)
Includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $7.7 million and $4.8 million, respectively, at June 30, 2010, and $7.7 million and $4.8 million, respectively, at December 31, 2009.

 
-8-

 
Securities with an amortized cost of $57.3 million and $62.9 million at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes.

The Company’s subsidiary, Capital City Bank, as a member of the Federal Home Loan Bank (“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.

Maturity Distribution. As of June 30, 2010, 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
 
$
                 74,434
   
$
                75,034
 
Due after one through five years
   
                 128,654
     
                131,068
 
Due after five through 10 years
   
                   143
     
                  147
 
No Maturity
   
                 13,136
     
                12,536
 
Total Investment Securities
 
$
216,367
   
$
218,785
 

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.

Other Than Temporarily Impaired Securities. The following table summarizes the investment securities with unrealized losses at June 30, 2010 aggregated by major security type and length of time in a continuous unrealized loss position:

     
June 30, 2010
     
 
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
   
1,276
     
2
     
-
     
-
     
1,276
     
2
 
    Mortgage-Backed Securities 
   
 -
     
 -
     
-
     
-
     
-
     
-
 
    Other Securities
   
-
     
600
     
-
     
-
     
-
     
600
 
    Total Investment Securities
 
$
1,276
   
$
602
   
$
  -
   
$
  -
   
$
1,276
   
$
602
 

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 issues, and analysts’ reports.

At June 30, 2010, the Company had securities of $218.8 million with net unrealized gains of $2.4 million on these securities.  Approximately $1.3 million of the investment securities, consisting of seven positions, have an unrealized loss totaling $0.6 million. Six of these positions representing approximately $1.3 million of our investment portfolio have minimal unrealized losses.  All of the positions have been in a loss position for less than 12 months.  These positions consist of municipal bonds pre-refunded with U.S. Government securities which are not considered impaired, and are expected to mature at par or better.  The remaining position is a bank preferred stock issue that has an unrealized loss of $0.6 million and a zero book value as of June 30, 2010.  This security has accumulated other than temporary credit impairment of $0.4 million.  The Company continues to closely monitor the fair value of this security as the subject bank continues to experience negative operating trends.

 
-9-

 
 
NOTE 3 - LOANS

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

(Dollars in Thousands)
 
June 30, 2010
   
December 31, 2009
 
Commercial, Financial and Agricultural
 
$
161,268
   
$
189,061
 
Real Estate-Construction(2)
   
56,910
     
111,249
 
Real Estate-Commercial(2)
   
676,516
     
716,791
 
Real Estate-Residential(1) (2)
   
447,555
     
408,578
 
Real Estate-Home Equity
   
247,726
     
246,722
 
Real Estate-Loans Held-for-Sale
   
12,939
     
7,891
 
Consumer
   
218,868
     
235,648
 
Loans, Net of Unearned Interest
 
$
1,821,782
   
$
1,915,940
 

(1)  
Includes loans in process with outstanding balances of $9.4 million and $10.7 million for June 30, 2010 and December 31, 2009, respectively.
(2)  
Reclassified $10 million in construction loans to residential real estate category and $30 million in commercial real estate loans to the residential real estate to better reflect the nature of the loans and their underlying collateral.

Net deferred fees included in loans at June 30, 2010 and December 31, 2009 were $1.9 million and $2.0 million, 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)
 
2010
   
2009
 
Balance, Beginning of Period
 
$
43,999
   
$
37,004
 
Provision for Loan Losses
   
14,373
     
16,836
 
Recoveries on Loans Previously Charged-Off
   
2,129
     
1,604
 
Loans Charged-Off
   
(22,059
)
   
(13,662
)
Balance, End of Period
 
$
38,442
   
$
41,782
 

Impaired Loans.  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, 2010
   
December 31, 2009
 
 
(Dollars in Thousands)
 
Balance
   
Valuation Allowance
   
Balance
   
Valuation Allowance
 
Impaired Loans:
                       
With Related Valuation Allowance
 
$
83,750
   
$
16,213
   
$
83,986
   
$
21,066
 
Without Related Valuation Allowance
   
21,500
     
-
     
27,926
     
-
 

NOTE 5 - INTANGIBLE ASSETS

The Company had net intangible assets of $87.4 million and $88.8 million at June 30, 2010 and December 31, 2009, respectively.  Intangible assets were as follows:

   
June 30, 2010
   
December 31, 2009
 
 
(Dollars in Thousands)
 
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
Core Deposit Intangibles
 
$
47,176
   
$
45,267
   
$
47,176
   
$
43,943
 
Goodwill
   
84,811
     
-
     
84,811
     
-
 
Customer Relationship Intangible
   
1,867
     
1,166
     
1,867
     
1,070
 
Total Intangible Assets
 
$
133,854
   
$
46,433
   
$
133,854
   
$
45,013
 

Net Core Deposit Intangibles:  As of June 30, 2010 and December 31, 2009, the Company had net core deposit intangibles of $1.9 million and $3.2 million, respectively.  Amortization expense for the first six months of 2010 and 2009 was approximately $1.4 million and $2.0 million, respectively.  Estimated annual amortization expense for 2010 is $2.7 million.

 
-10-

 
Goodwill:  As of June 30, 2010 and December 31, 2009, 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 Accounting Standards Codification (“ASC”) 350-20-35-1, “Goodwill and Other Intangible Assets.”

The book value of our equity exceeded our market capitalization as of June 30, 2010, and as such we considered the guidelines set forth in ASC Topic 350 to discern whether further testing for potential impairment was needed.  Based on this assessment, we concluded that no further testing for impairment was needed as of June 30, 2010.

Other:  As of June 30, 2010 and December 31, 2009, the Company had a customer relationship intangible asset, net of accumulated amortization, of $0.7 million and $0.8 million, respectively.  This intangible asset 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 2010 and 2009 was approximately $96,000.  Estimated annual amortization expense is approximately $191,000 based on using a 10-year useful life.

NOTE 6 - DEPOSITS

The composition of the Company's interest bearing deposits at June 30, 2010 and December 31, 2009 was as follows:

(Dollars in Thousands)
 
June 30, 2010
   
December 31, 2009
 
NOW Accounts
 
$
891,636
   
$
899,649
 
Money Market Accounts
   
303,369
     
373,105
 
Savings Deposits
   
132,174
     
122,370
 
Other Time Deposits
   
412,964
     
435,319
 
Total Interest Bearing Deposits
 
$
1,740,143
   
$
1,830,443
 

NOTE 7 - 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 June 30, 2010, 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 the six months ended June 30, 2010 and 2009 was $184,000 and $81,000, respectively.  
 
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 performance shares.  The Company, under the terms and conditions of the ASIP, created the 2010 Incentive Plan (“2010 Plan”), which has an award tied to an internally established earnings goal for 2010.  The grant-date fair value of the shares eligible to be awarded in 2010 is approximately $913,000.  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 58,648 shares are eligible for issuance.  For the first six months of 2010, the Company recognized approximately $115,000 in expense related to the ASIP.
 
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 67,040 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 the first six months of 2010 and 2009 as results did not meet the earnings performance goal.

 
-11-

 

A summary of the status of the Company’s options as of June 30, 2010 is presented below:

Options
 
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Term
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2010
    60,384     $ 32.79       4.9     $ -  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited or expired
    -       -       -       -  
Outstanding at June 30, 2010
    60,384     $ 32.79       4.4     $ -  
Exercisable at June 30, 2010
    60,384     $ 32.79       4.4     $ -  

Compensation expense associated with the aforementioned option shares was fully recognized as of December 31, 2007. 

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 75,331 shares have been issued since the inception of the DSPP.  For the first six months 2010 and 2009, the Company recognized approximately $14,000 in expense related to this plan.  

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 129,876 shares have been issued since inception of the ASPP.  For the first six months of 2010, the Company recognized approximately $56,000 in expense related to the ASPP plan compared to approximately $67,000 in expense for the same period in 2009.  

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)
 
2010
   
2009
   
2010
   
2009
 
                         
Discount Rate
   
5.75
%
   
6.00
%
   
5.75
%
   
6.00
%
Long-Term Rate of Return on Assets
   
8.00
%
   
8.00
%
   
8.00
%
   
8.00
%
                                 
Service Cost
 
$
1,525
   
$
1,525
   
$
3,050
   
$
3,050
 
Interest Cost
   
1,175
     
1,200
     
2,350
     
2,400
 
Expected Return on Plan Assets
   
(1,525
)
   
(1,275
)
   
(3,050
)
   
(2,550
)
Prior Service Cost Amortization
   
125
     
125
     
250
     
250
 
Net Loss Amortization
   
525
     
750
     
1,050
     
1,500
 
Net Periodic Benefit Cost
 
$
1,825
   
$
2,325
   
$
3,650
   
$
4,650
 

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)
 
2010
   
2009
   
2010
   
2009
 
                         
Discount Rate
   
5.75
%
   
6.00
%
   
5.75
%
   
6.00
%
                                 
Service Cost
 
$
-
   
$
5
   
$
-
   
$
10
 
Interest Cost
   
42
     
74
     
84
     
148
 
Prior Service Cost Amortization
   
45
     
45
     
90
     
90
 
Net Loss Amortization
   
(85
   
(5
   
(170
)
   
(11
Net Periodic Benefit Cost
 
$
2
   
$
119
   
$
4
   
$
237
 
 
 
 
-12-

 
 
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, 2010, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Thousands)
 
Amount
 
Commitments to Extend Credit(1)
 
$
345,832
 
Standby Letters of Credit
 
$
12,957
 

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

Commitments to extend credit are agreements to lend to clients 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 it for potential future settlement of certain litigation (the “Covered Litigation”).  As of June 30, 2010, the Company had approximately $0.8 million accrued for the contingent liability related to the Covered Litigation.  The Company could be required to separately fund its proportionate share of any Covered Litigation losses, however, it is expected that all or a substantial amount of future settlements will be funded by a litigation escrow account established by Visa Inc.

NOTE 10 - 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.  Comprehensive income totaled $1.6 million for the six months ended June 30, 2010 and $1.4 million for the comparable period in 2009.  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 increase in net unrealized gains on securities totaled approximately $927,000 for the six months ended June 30, 2010.  Reclassification adjustments consist only of realized gains and losses on sales of investment securities and were not material for the same comparable periods.  As of June 30, 2010, total accumulated other comprehensive loss (net of taxes) totaled $13.9 million consisting of a pension liability of $15.4 million and an unrealized gain on investment securities of $1.5 million.  For the six month period ended June 30, 2010, there was no change in the Company’s pension liability as this liability is adjusted on an annual basis at December 31st per ASC 715.

NOTE 11 – 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.

 
-13-

 
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.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2010, 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
 
June 30, 2010
                       
Securities available for sale:
                       
    US Treasury
  $ 80,907     $ -     $ -     $ 80,907  
    States and Political Subdivisions
    4,507       89,189       -       93,696  
    Residential Mortgage-Backed Securities
    -       31,646       -       31,646  
                                 
December 31, 2009
                               
Securities available for sale:
                               
    US Treasury 
    22, 444       -       -       22,444  
    States and Political Subdivisions 
    3,709       103,841       -       107,550  
    Residential Mortgage-Backed Securities
    -       34,143       -       34,143  
                                 
 
 
 
-14-

 
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 June 30, 2010.

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 2 inputs based on customized discounting criteria.  Impaired loans had a carrying value of $105.3 million, with a valuation allowance of $16.2 million, resulting in an additional provision for loan losses of $4.9 million for the six month period ended June 30, 2010.

Loans Held for Sale.  Loans held for sale were $12.9 million as of June 30, 2010.  These loans are carried at the lower of cost or fair value and 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 first six months of 2010, certain foreclosed assets, upon initial recognition, were measured and reported at fair value through a charge-off to the allowance for 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 $23.9 million during the six months ended June 30, 2010.  In addition, the Company recognized subsequent losses totaling $4.1 million for foreclosed assets that were re-valued during the six months ended June 30, 2010.  The carrying value of foreclosed assets was $48.1 million at June 30, 2010.

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.
A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s 2009 Form 10-K.

The Company’s financial instruments that have estimated fair values are presented below:
       
   
June 30, 2010
   
December 31, 2009
 
(Dollars in Thousands)
 
Carrying
Value
   
Estimated
Fair
Value
   
Carrying
Value
   
Estimated
Fair
Value
 
Financial Assets:
                       
Cash
 
$
52,380
   
$
52,380
   
$
57,877
   
$
57,877
 
Short-Term Investments
   
250,508
     
250,508
     
276,416
     
276,416
 
Investment Securities
   
218,785
     
218,785
     
176,673
     
176,673
 
Loans, Net of Allowance for Loan Losses
   
1,783,340
     
1,761,917
     
1,871,941
     
1,851,699
 
Total Financial Assets
 
$
2,305,013
   
$
2,283,590
   
$
2,382,907
   
$
2,362,665
 
                                 
Financial Liabilities:
                               
Deposits
 
$
2,200,311
   
$
2,202,577
   
$
2,258,234
   
$
2,258,899
 
Short-Term Borrowings
   
21,376
     
20,773
     
35,841
     
34,209
 
Subordinated Notes Payable
   
62,887
     
62,888
     
62,887
     
62,569
 
Long-Term Borrowings
   
55,605
     
58,839
     
49,380
     
51,509
 
Total Financial Liabilities
 
$
2,340,179
   
$
2,345,077
   
$
2,406,342
   
$
2,407,186
 

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.
 
 
-15-

 
 
NOTE 12 – NEW AUTHORITATIVE ACCOUNTING GUIDANCE

Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.”  ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements.  ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy.  The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011.  The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2009-17, “Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”  ASU 2009-17 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.  ASU 2009-17 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 effect on the entity’s financial statements.  ASU 2009-17 became effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.”  The new authoritative accounting guidance 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.  ASU 2009-16 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 ASU 2009-16 became effective January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No.2010-20, “Receivable (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The accounting standard was amended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables.  Under this statement, allowance for credit losses are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable.  Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required.  The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance.  This amendment addresses disclosure only and does not seek to change measurement or recognition.  The new authoritative accounting guidance under Subtopic 310 will be effective in the fourth quarter of 2010 and will be included in the notes to the financial statements for the Company’s 2010 Form 10-K.
 
 
-16-

 
 
QUARTERLY FINANCIAL DATA (UNAUDITED)
   
2010
   
2009
   
2008
 
 (Dollars in Thousands, Except Per Share Data)
 
Second
   
First
   
Fourth
   
Third
   
Second
   
First
   
Fourth
   
Third(1)
 
Summary of Operations:
                                               
Interest Income
  $ 27,934     $ 28,154     $ 29,756     $ 30,787     $ 31,180     $ 31,053     $ 33,229     $ 34,654  
Interest Expense
    3,565       4,132       4,464       4,235       4,085       4,058       5,482       7,469  
Net Interest Income
    24,369       24,022       25,292       26,552       27,095       26,995       27,747       27,185  
Provision for Loan Losses
    3,633       10,740       10,834       12,347       8,426       8,410       12,497       10,425  
Net Interest Income After
Provision for Loan Losses
    20,736       13,282       14,458       14,205       18,669       18,585       15,250       16,760  
Noninterest Income
    14,674       13,967       14,411       14,304       14,634       14,042       13,311       20,212  
Noninterest Expense
    34,629       33,384       35,313       31,615       32,930       32,257       31,002       29,916  
Income (Loss) Before Provision for Income Taxes
    781       (6,135 )     (6,444 )     (3,106 )     373       370       (2,441 )     7,056  
Income Tax Expense (Benefit)
    50       (2,672 )     (3,037 )     (1,618 )     (401 )     (280 )     (738 )     2,218  
Net Income (Loss)
  $ 731     $ (3,463 )   $ (3,407 )   $ (1,488 )   $ 774     $ 650     $ (1,703 )   $ 4,838  
Net Interest Income (FTE)
  $ 24,738     $ 24,473     $ 25,845     $ 27,128     $ 27,679     $ 27,578     $ 28,387     $ 27,802  
                                                                 
Per Common Share:
                                                               
Net Income (Loss) Basic
  $ 0.04     $ (0.20 )   $ (0.20 )   $ (0.08 )   $ 0.04     $ 0.04     $ (0.10 )   $ 0.29  
Net Income (Loss) Diluted
    0.04       (0.20 )     (0.20 )     (0.08 )     0.04       0.04       (0.10 )     0.29  
Dividends Declared
    0.100       0.190       0.190       0.190       0.190       0.190       0.190       0.185  
Diluted Book Value
    15.32       15.34       15.72       15.76       16.03       16.18       16.27       17.45  
Market Price:
                                                               
High
    18.25       14.61       14.34       17.10       17.35       27.31       33.32       34.50  
Low
    12.36       11.57       11.00       13.92       11.01       9.50       21.06       19.20  
Close
    12.38       14.25       13.84       14.20       16.85       11.46       27.24       31.35  
                                                                 
Selected Average
                                                               
Balances:
                                                               
Loans
  $ 1,841,379     $ 1,886,367     $ 1,944,873     $ 1,964,984     $ 1,974,197     $ 1,964,086     $ 1,940,083     $ 1,915,008  
Earning Assets
    2,329,365       2,358,288       2,237,561       2,157,362       2,175,281       2,166,237       2,150,841       2,207,670  
Assets
    2,678,488       2,698,419       2,575,250       2,497,969       2,506,352       2,486,925       2,463,318       2,528,638  
Deposits
    2,234,178       2,248,760       2,090,008       1,950,170       1,971,190       1,957,354       1,945,866       2,030,684  
Shareowners’ Equity
    263,873       268,555       268,556       275,027       277,114       281,634       302,227       303,595  
Common Equivalent Shares:
                                                               
Basic
    17,063       17,057       17,034       17,024       17,010       17,109       17,125       17,124  
Diluted
    17,074       17,070       17,035       17,025       17,010       17,131       17,135       17,128  
                                                                 
Ratios:
                                                               
ROA
    0.11 %     (0.52 )%     (0.52 )%     (0.24 )%     0.12 %     0.11 %     (0.28 )%     0.76 %
ROE
    1.11 %     (5.23 )%     (5.03 )%     (2.15 )%     1.12 %     0.94 %     (2.24 )%     6.34 %
Net Interest Margin (FTE)
    4.26 %     4.21 %     4.59 %     4.99 %     5.11 %     5.16 %     5.26 %     5.01 %
Efficiency Ratio
    86.06 %     85.00 %     85.21 %     73.86 %     75.44 %     75.07 %     71.21 %     59.27 %
(1)
Includes a $6.25 million ($3.8 million after-tax) one-time gain on sale of a portion of our merchant services portfolio.
 
 
 
-17-

 
 
Item 2.

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," “Market Risk and Interest Rate Sensitivity,” "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Critical 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 2010 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:

         
Three Months Ended
   
Six Months Ended
 
   
June 30,
2010
   
March 31,
2010
   
June 30,
2009
   
June 30,
2010
   
June 30,
2009
 
Efficiency ratio
    87.86 %     86.85 %     77.83 %     87.36 %     77.67 %
Effect of intangible amortization expense
    (1.80 )%     (1.85 )%     (2.39 )%     (1.82 )%     (2.41 )%
Operating efficiency ratio
    86.06 %     85.00 %     75.44 %     85.54 %     75.26 %

Reconciliation of operating net noninterest expense ratio:

         
Three Months Ended
   
Six Months Ended
 
   
June 30,
2010
   
March 31,
2010
   
June 30,
2009