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, 2011

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 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 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, 2011, 17,151,996 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, 2011
TABLE OF CONTENTS

PART I – Financial Information
Page
 
Item 1.
Consolidated Financial Statements (Unaudited)
 
 
Consolidated Statements of Financial Condition – June 30, 2011 and December 31, 2010
4
 
Consolidated Statements of Operations – Three and Six Months Ended June 30, 2011 and 2010
5
 
Consolidated Statement of Changes in Shareowners’ Equity – Six Months Ended June 30, 2011
6
 
Consolidated Statements of Cash Flow – Six Months Ended June 30, 2011 and 2010
7
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
21
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
38
     
Item 4.
Controls and Procedures
38
     
PART II – Other Information
 
 
Item 1.
Legal Proceedings
38
     
Item 1A.
Risk Factors
38
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38
     
Item 3.
Defaults Upon Senior Securities
38
     
Item 4.
[Removed and Reserved]
38
     
Item 5.
Other Information
38
     
Item 6.
Exhibits
39
     
Signatures
 
40
     
     
     

 
-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, 2010 (the “2010 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, including the Dodd-Frank Wall Street Reform and Consumer Protection Act;
§  
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;
§  
the frequency and magnitude of foreclosure of our loans;
§  
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;
§  
increased competition and its effect on pricing, including the effect of the repeal of Regulation Q on our net interest income;
§  
inflation, interest rate, market and monetary fluctuations;
§  
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;
§  
the effects of harsh weather conditions, including hurricanes, and man-made disasters;
§  
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;
§  
technological changes;
§  
negative publicity and the impact on our reputation;
§  
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;
§  
our ability to integrate the business and operations of companies and banks that we have acquired, and those we may acquire in the future;
§  
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, 2011 AND DECEMBER 31, 2010

   
Unaudited
       
(Dollars In Thousands, Except Share Data)
 
June 30, 2011
   
December 31, 2010
 
ASSETS
           
Cash and Due From Banks
 
$
71,554
   
$
35,410
 
Federal Funds Sold and Interest Bearing Deposits
   
223,183
     
200,783
 
Total Cash and Cash Equivalents
   
294,737
     
236,193
 
                 
Investment Securities, Available-for-Sale
   
304,313
     
309,731
 
                 
Loans, Net of Unearned Interest
   
1,687,602
     
1,758,671
 
Allowance for Loan Losses
   
(31,080
)
   
(35,436
)
Loans, Net
   
1,656,522
     
1,723,235
 
                 
Premises and Equipment, Net
   
112,576
     
115,356
 
Goodwill
   
84,811
     
84,811
 
Other Intangible Assets
   
888
     
1,348
 
Other Real Estate Owned
   
61,016
     
57,937
 
Other Assets
   
84,395
     
93,442
 
Total Assets
 
$
2,599,258
   
$
2,622,053
 
                 
LIABILITIES
               
Deposits:
               
Noninterest Bearing Deposits
 
$
568,813
   
$
546,257
 
Interest Bearing Deposits
   
1,532,198
     
1,557,719
 
Total Deposits
   
2,101,011
     
2,103,976
 
                 
Short-Term Borrowings
   
65,237
     
92,928
 
Subordinated Notes Payable
   
62,887
     
62,887
 
Other Long-Term Borrowings
   
49,196
     
50,101
 
Other Liabilities
   
60,383
     
53,142
 
Total Liabilities
   
2,338,714
     
2,363,034
 
                 
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; 17,127,320 and 17,100,081 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
   
171
     
171
 
Additional Paid-In Capital
   
37,724
     
36,920
 
Retained Earnings
   
237,709
     
237,679
 
Accumulated Other Comprehensive Loss, Net of Tax
   
(15,060
)
   
(15,751
)
Total Shareowners' Equity
   
260,544
     
259,019
 
Total Liabilities and Shareowners' Equity
 
$
2,599,258
   
$
2,622,053
 

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)
 
2011
   
2010
   
2011
   
2010
 
INTEREST INCOME
                       
Interest and Fees on Loans
 
$
24,305
   
$
26,644
   
$
48,252
   
$
53,636
 
Investment Securities:
                               
U.S. Treasuries
   
405
     
330
     
806
     
433
 
U.S. Government Agencies
   
336
     
299
     
693
     
619
 
States and Political Subdivisions
   
193
     
406
     
412
     
896
 
Other Securities
   
83
     
79
     
177
     
156
 
Federal Funds Sold
   
145
     
176
     
316
     
348
 
Total Interest Income
   
25,467
     
27,934
     
50,656
     
56,088
 
                                 
INTEREST EXPENSE
                               
Deposits
   
1,083
     
2,363
     
2,341
     
5,301
 
Short-Term Borrowings
   
110
     
12
     
221
     
             29
 
Subordinated Notes Payable
   
343
     
639
     
683
     
1,290
 
Other Long-Term Borrowings
   
492
     
551
     
986
     
1,077
 
Total Interest Expense
   
2,028
     
3,565
     
4,231
     
7,697
 
                                 
NET INTEREST INCOME
   
23,439
     
24,369
     
46,425
     
48,391
 
Provision for Loan Losses
   
3,545
     
3,633
     
7,678
     
14,373
 
Net Interest Income After Provision For Loan Losses
   
19,894
     
20,736
     
38,747
     
34,018
 
                                 
NONINTEREST INCOME
                               
Service Charges on Deposit Accounts
   
6,309
     
7,039
     
12,292
     
13,667
 
Data Processing
   
764
     
919
     
1,738
     
1,819
 
Asset Management Fees
   
1,080
     
1,080
     
2,160
     
2,100
 
Retail Brokerage Fees
   
939
     
846
     
1,668
     
1,411
 
Securities Transactions
   
-
     
-
     
-
     
5
 
Mortgage Banking Fees
   
568
     
641
     
1,185
     
1,149
 
Bank Card Fees
   
2,558
     
2,362
     
5,054
     
4,537
 
Other
   
2,230
     
1,787
     
6,685
     
3,953
 
Total Noninterest Income
   
14,448
     
14,674
     
30,782
     
28,641
 
                                 
NONINTEREST EXPENSE
                               
Salaries and Associate Benefits
   
16,000
     
15,584
     
32,577
     
32,363
 
Occupancy, Net
   
2,447
     
2,585
     
4,843
     
4,993
 
Furniture and Equipment
   
2,117
     
2,192
     
4,343
     
4,373
 
Intangible Amortization
   
107
     
710
     
460
     
1,420
 
Other Real Estate
   
3,033
     
4,082
     
6,710
     
6,907
 
Other
   
7,463
     
9,476
     
15,565
     
17,957
 
Total Noninterest Expense
   
31,167
     
34,629
     
64,498
     
68,013
 
                                 
INCOME (LOSS) BEFORE INCOME TAXES
   
3,175
     
781
     
5,031
     
(5,354
)
Income Tax Expense (Benefit)
   
1,030
     
50
     
1,576
     
(2,622
)
                                 
NET INCOME (LOSS)
 
$
2,145
   
$
731
   
$
3,455
   
$
(2,732)
 
                                 
Basic Net Income (Loss) Per Share
 
$
0.12
   
$
0.04
   
$
0.20
   
$
(0.16)
 
Diluted Net Income (Loss) Per Share
 
$
0.12
   
$
0.04
   
$
0.20
   
$
(0.16)
 
                                 
Average Basic Shares Outstanding
   
17,127,302
     
17,063,176
     
17,124,468
     
17,060,135
 
Average Diluted Shares Outstanding
   
17,139,234
     
17,074,202
     
17,134,520
     
17,071,031
 


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 Income, Net of Taxes
   
Total
 
                                 
Balance, December 31, 2010
17,100,081
 
$
 171
 
$
36,920
 
$
237,679
   
$
(15,751
)
 
$
259,019
 
Comprehensive Income:
                                     
Net Income
-
   
-
   
-
   
3,455
     
-
     
3,455
 
Net Change in Unrealized Gain On
   Available-for-Sale Securities (net of tax)
-
   
-
   
-
   
-
     
691
     
691
 
Total Comprehensive Income
-
   
-
   
-
                   
4,146
 
Cash Dividends ($0.20 per share)
-
   
-
   
-
   
(3,425
)
   
-
     
(3,425
)
Stock Performance Plan Compensation
-
   
-
   
391
   
-
     
-
     
391
 
Issuance of Common Stock
27,239
   
-
   
413
   
-
     
-
     
413
 
                                       
Balance, June 30, 2011
17,127,320
 
$
 171
 
$
37,724
 
$
237,709
   
$
(15,060
)
 
$
260,544
 


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)
 
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income (Loss)
 
$
3,455
   
$
(2,732
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
               
Provision for Loan Losses
   
        7,678
     
         14,373
 
Depreciation
   
           3,464
     
           3,495
 
Net Securities Amortization
   
           1,951
     
           1,537
 
Amortization of Intangible Assets
   
          460
     
           1,420
 
Gain (Loss) on Securities Transactions
   
              -
     
              (5
)
Loss on Impaired Security
   
-
     
61
 
Origination of Loans Held-for-Sale
   
     (51,887
)
   
     (59,639
)
Proceeds From Sales of Loans Held-for-Sale
   
       54,181
     
       56,119
 
Net Gain From Sales of Loans Held-for-Sale
   
         (1,186
)
   
         (1,149
)
Non-Cash Compensation
   
                   391
     
                   115
 
Decrease in Deferred Income Taxes
   
          417
     
           538
 
Net Decrease in Other Assets
   
        28,048
     
            7,495
 
Net Increase in Other Liabilities
   
7,353
     
10,186
 
Net Cash Provided By Operating Activities
   
         54,325
     
         31,814
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Securities Available-for-Sale:
               
Purchases
   
       (41,915
)
   
       (91,038
)
Sales
   
           -
     
           505
 
Payments, Maturities, and Calls
   
         46,502
     
         47,871
 
Net Decrease in Loans
   
       35,001
     
       54,993
 
Purchase of Premises & Equipment
   
       (685
)
   
       (4,858
)
Net Cash Provided By Investing Activities
   
               38,903
     
               7,473
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Decrease in Deposits
   
       (2,965
)
   
       (57,923
)
Net Decrease in Short-Term Borrowings
   
         (27,690
   
         (14,465
Increase in Other Long-Term Borrowings
   
                  789
     
                  8,015
 
Repayment of Other Long-Term Borrowings
   
         (1,695
)
   
       (1,790
)
Dividends Paid
   
         (3,425
)
   
         (4,949
)
Issuance of Common Stock
   
         302
     
         420
 
Net Cash Used by Financing Activities
   
              (34,684
   
              (70,692
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
58,544
     
(31,405
)
                 
Cash and Cash Equivalents at Beginning of Period
   
236,193
     
334,293
 
Cash and Cash Equivalents at End of Period
 
$
294,737
   
$
302,888
 
                 
Supplemental Disclosure:
               
Interest Paid on Deposits
 
$
2,641
   
$
5,804
 
Interest Paid on Debt
   
1,975
     
2,407
 
Taxes Paid
   
2,737
     
338
 
Loans Transferred to Other Real Estate Owned
   
22,926
     
23,904
 
Issuance of Common Stock as Non-Cash Compensation
   
413
     
420
 
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 to 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 2010 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, 2011 and December 31, 2010, the results of operations for the three and six months ended June 30, 2011 and 2010, and cash flows for the six months ended June 30, 2011 and 2010.

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, 2011
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
  168,585
   
$
    1,625
   
$
3
   
$
       170,207
 
U.S. Government Agencies and Corporations
 
      10,367
     
     -
     
4
     
        10,363
 
States and Political Subdivisions
 
56,577
     
255
     
14
     
     56,818
 
Mortgage-Backed Securities
 
    54,149
     
985
     
59
     
      55,075
 
Other Securities(1)
 
    12,450
     
-
     
600
     
       11,850
 
Total Investment Securities
$
  302,128
   
$
2,865
   
$
680
   
$
304,313
 

 
December 31, 2010
 
(Dollars in Thousands)
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Market
Value
 
U.S. Treasury
$
  160,913
   
$
     1,371
   
$
134
   
$
       162,150
 
U.S. Government Agencies and Corporations
 
      -
     
     -
     
-
     
        -
 
States and Political Subdivisions
 
  78,990
     
319
     
9
     
     79,300
 
Mortgage-Backed Securities
 
    56,099
     
678
     
560
     
      56,217
 
Other Securities(1)
 
    12,664
     
-
     
600
     
       12,064
 
Total Investment Securities
$
  308,666
   
$
2,368
   
$
1,303
   
$
309,731
 

 (1)
Includes Federal Home Loan Bank and Federal Reserve Bank stock recorded at cost of $7.0 million and $4.8 million, respectively, at June 30, 2011 and $7.2 million and $4.8 million, respectively, at December 31, 2010.







 
-8-

 

Securities with an amortized cost of $130.8 million and $131.6 million at June 30, 2011 and December 31, 2010, 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 $7.0 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, 2011, 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
 
$
               107,175
   
$
                107,682
 
Due after one through five years
   
               169,954
     
                172,110
 
Due after five through 10 years
   
                 10,797
     
                  10,926
 
Due after 10 years
   
1,752
     
1,745
 
No Maturity
   
                   12,450
     
11,850
 
Total Investment Securities
 
$
302,128
   
$
304,313
 

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, 2011 aggregated by major security type and length of time in a continuous unrealized loss position:

     
June 30, 2011
     
 
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
 
$
3,481
   
$
3
   
$
-
   
$
-
   
$
3,481
   
$
3
 
    U.S. Government Agencies and Corporations
   
10,367
     
4
     
-
     
-
     
10,367
     
4
 
    States and Political Subdivisions
   
3,716
     
14
     
-
     
-
     
3,716
     
14
 
    Mortgage-Backed Securities 
   
 7,011
     
 59
     
-
     
-
     
7,011
     
59
 
    Other Securities
   
-
     
-
     
-
     
600
     
-
     
600
 
    Total Investment Securities
 
$
24,575
   
$
80
   
$
  -
   
$
 600
   
$
24,575
   
$
680
 

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 the nature of the securities, the underlying collateral, the financial condition of the issuer, the extent and duration of the loss, our intent related to the individual securities, and the likelihood that we will have to sell the securities prior to the expected recovery.  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, 2011, the Company had securities of $302.1 million with net pre-tax unrealized gains of $2.2 million on these securities, of which $25.0 million have unrealized losses totaling $0.1 million and have been in a loss position for less than 12 months.  These securities are primarily in a loss position because they were acquired when the general level of interest rates was lower than that on June 30, 2011.  The Company believes that the losses in these securities are temporary in nature and that the full principal will be collected as anticipated.  Because the declines in the market value of these investments are attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until there is a recovery in fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.  One preferred bank stock issue for $0.6 million has been in a loss position for greater than 12 months.  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, 2011
   
December 31, 2010
 
Commercial, Financial and Agricultural
 
$
149,830
   
$
157,394
 
Real Estate-Construction
   
30,867
     
43,239
 
Real Estate-Commercial
   
660,058
     
671,702
 
Real Estate-Residential(1)
   
395,199
     
424,229
 
Real Estate-Home Equity
   
248,228
     
251,565
 
Real Estate-Loans Held-for-Sale
   
5,914
     
6,312
 
Consumer
   
197,506
     
204,230
 
Loans, Net of Unearned Interest
 
$
1,687,602
   
$
1,758,671
 

(1)  
Includes loans in process with outstanding balances of $6.3 million and $10.0 million for June 30, 2011 and December 31, 2010, respectively.

Net deferred fees included in loans at June 30, 2011 and December 31, 2010 were $1.7 million and $1.8 million, respectively.

Past Due Loans. A loan is defined as a past due loan when one full payment is past due or a contractual maturity is over 30 days past due (“DPD”).

The following table presents the aging of the recorded investment in past due loans as of June 30, 2011 and December 31, 2010 by class of loans:

June 30, 2011
(Dollars in Thousands)
30-59
DPD
60-89
DPD
90 +
DPD
Total
Past Due
Total
Current
Total
Loans
Commercial, Financial and Agricultural
$
 
754
   
208
   
-
   
962
   
147,736
 
$
149,830
Real Estate - Construction
   
140
   
-
   
-
   
140
   
29,571
   
30,867
Real Estate - Commercial Mortgage
   
3,681
   
1,217
   
-
   
4,898
   
627,931
   
660,058
Real Estate -  Residential
   
4,695
   
2,398
   
271
   
7,364
   
360,256
   
395,126
Real Estate - Home Equity
   
1,519
   
431
   
-
   
1,950
   
243,004
   
248,228
Consumer
   
2,787
   
273
   
-
   
3,060
   
196,772
   
203,493
Total Past Due Loans
$
 
13,576
   
4,527
   
271
   
18,374
   
1,605,270
 
$
1,687,602

December 31, 2010
(Dollars in Thousands)
30-59
DPD
60-89
DPD
90 +
DPD
Total
Past Due
Total
Current
Total
Loans
Commercial, Financial and Agricultural
$
 
645
   
193
   
-
   
838
   
155,497
 
$
157,394
Real Estate - Construction
   
314
   
129
   
-
   
443
   
40,890
   
43,239
Real Estate - Commercial Mortgage
   
5,577
   
840
   
-
   
6,417
   
638,411
   
671,702
Real Estate -  Residential
   
7,171
   
3,958
   
120
   
11,249
   
389,103
   
430,541
Real Estate - Home Equity
   
1,444
   
698
   
39
   
2,182
   
244,579
   
251,565
Consumer
   
2,867
   
356
   
-
   
3,223
   
200,139
   
204,230
Total Past Due Loans
$
 
18,018
   
6,174
   
159
   
24,352
   
1,668,619
 
$
1,758,671



 
-10-

 

Nonaccrual Loans.  Loans are generally placed on non-accrual status if principal or interest payments become 90 days past due and/or management deems the collectability of the principal and/or interest to be doubtful.  Loans are returned to accrual status when the principal and interest amounts contractually due are brought current or when future payments are reasonably assured.

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days and still on accrual by class of loans as of June 30, 2011 and December 31, 2010:

   
June 30, 2011
   
December 31, 2010
(Dollars in Thousands)
 
Nonaccrual
   
90 + DPD
   
Nonaccrual
     
90+ DPD
 
 
Commercial, Financial and Agricultural
  $ 1,133      $ -     $ 1,059     $ -  
Real Estate - Construction
    1,156       -       1,907       -  
Real Estate - Commercial Mortgage
    27,229       -       26,874       -  
Real Estate -  Residential
    27,505       271       30,189       120  
Real Estate - Home Equity
    3,275       -       4,803       39  
Consumer
    778       -       868       -  
Total Nonaccrual Loans
  $ 61,076      $ 271     $ 65,700     $ 159  

Credit Quality Indicators. As part of the ongoing monitoring of the Company’s loan portfolio quality, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment performance, credit documentation, and current economic/market trends, among other factors.  Risk ratings are assigned to each loan and revised as needed through established monitoring procedures for individual loan relationships over a predetermined amount and review of smaller balance homogenous loan pools.  The Company uses the following definitions for the categorizing and managing its problem loans.

Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems.  Adverse economic or market conditions may negatively impact the borrower’s ability to repay.  Loans in this category may not meet required underwriting criteria and have no mitigating factors.  More than the ordinary amount of attention is warranted for these loans.

Substandard – Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower.  The possibility of loss is much more evident and above average supervision is required for these loans.

Nonaccrual – Loans in this category are on nonaccrual status due to the borrower’s inability to meet the repayment terms and where future capacity to repay is remote.

The following table presents the risk category of loans by segment as of June 30, 2011 and December 31, 2010:
 
 
 June 30, 2011
(Dollars in Thousands)
 
Commercial,
Financial,
Agriculture
   
 
Real Estate
   
 
Consumer
   
 
Total
 
Special Mention
  $ 9,165     $ 94,141     $ 116     $ 103,422  
Substandard
    8,627       152,207       623       161,457  
Nonaccrual
    1,133       59,165       778       61,076  
Total Loans
  $ 18,925     $ 305,513     $ 1,517     $ 325,955  

December 31, 2010
(Dollars in Thousands)
 
Commercial,
Financial,
 Agriculture
   
 
Real Estate
   
 
Consumer
   
 
Total
 
Special Mention
  $ 20,539     $ 100,008     $ 102     $ 120,649  
Substandard
    10,599       165,143       719       176,461  
Nonaccrual
    1,060       63,773       867       65,700  
Total Loans
  $ 32,198     $ 328,924     $ 1,688     $ 362,810  


 
-11-

 

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

(Dollars in Thousands)
2011
   
2010
 
Balance, Beginning of Year
$
35,436
   
$
43,999
 
Provision for Loan Losses
 
7,678
     
14,373
 
Recoveries on Loans Previously Charged-Off
 
1,226
     
2,129
 
Loans Charged-Off
 
(13,260
)
   
(22,059
)
Balance, End of Period
$
31,080
   
$
38,442
 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of June 30, 2011 and December 31, 2010:

June 30, 2011
(Dollars in Thousands)
Commercial,
Financial,
Agricultural
Real Estate Construction
Real Estate 
Commercial
 Mortgage
Real Estate
 Residential
 
Real Estate
 Home Equity
 
 
Consumer
 
 
Unallocated
 
 
Total
Allowance Allocated to:
                                   
Loans Individually Evaluated for
Impairment
 
$
 
591
 
487
   
 
3,582
 
5,800
   
 
506
 
41
-
 
$
11,007
Loans Collectively Evaluated for
Impairment
   
 
1,193
 
1,258
   
 
4,979
 
8,147
   
 
1,742
 
1,754
1,000
 
20,073
Total
 
$
1,784
 
1,745
   
8,561
 
13,947
   
2,248
 
1,795
1,000
$
31,080
                                     
                                     
Total Loans:
                                   
Individually Evaluated for Impairment
 
$
1,730
 
1,311
   
42,531
 
29,829
   
2,351
 
79
-
$
77,831
Collectively Evaluated for Impairment
   
148,100
 
29,556
   
617,526
 
365,297
   
245,878
 
203,414
-
 
1,609,771
Total
 
$
149,830
 
30,867
   
660,057
 
395,126
   
248,229
 
203,493
-
$
1,687,602


December 31, 2010
(Dollars in Thousands)
 
Commercial,
Financial,
Agricultural 
Real Estate Construction 
Real Estate 
Commercial
 Mortgage 
Real Estate
Residential 
Real Estate
 Home Equity 
 Consumer
 
Unallocated 
Total 
Allowance Allocated to:
                           
Loans Individually Evaluated for
Impairment
 
$
 
252
   
 
413
 
 
$
 
4,640
   
 
7,965
 
 
$
 
1,389
 
 
$
 
71
 
-
 
$
 
14,730
Loans Collectively Evaluated for
Impairment
   
 
1,292
   
 
1,647
   
 
4,005
   
 
9,081
   
 
1,133
   
 
2,541
 
1,007
 
 
20,706
Total
 
$
1,544
   
2,060
   
8,645
   
17,046
   
2,522
   
2,612
1,007
$
35,436
                                           
                                           
Total Loans:
                                         
Individually Evaluated for Impairment
 
$
1,685
   
2,533
 
$
42,369
   
37,779
 
$
3,278
 
$
144
-
$
87,788
Collectively Evaluated for Impairment
   
155,709
   
40,706
   
629,333
   
392,762
   
248,287
   
204,086
-
 
1,670,883
Total
 
$
157,394
   
43,239
   
671,702
   
430,541
   
251,565
   
204,230
-
 $
1,758,671



 
-12-

 

Impaired Loans. Loans are deemed to be impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due (principal and interest payments), according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  Interest income recognized on impaired loans was approximately $1.2 million for the six month periods ended June 30, 2011 and June 30, 2010, respectively.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010:
 
(Dollars in Thousands)
 
Unpaid
Principal
 Balance
   
 
Recorded
 Investment
 With No
Allowance
   
 
 
Recorded
 Investment With Allowance
   
 
 
 
Related
 Allowance
   
 
 
 
Average Recorded Investment
 
June 30, 2011:
                             
Commercial, Financial and Agricultural
  $ 1,730     $ 273     $ 1,458     $ 591     $ 1,563  
Real Estate - Construction
    1,311       10,557       1,311       487       1,950  
Real Estate - Commercial Mortgage
    42,531       4,746       31,974       3,582       46,145  
Real Estate -  Residential
    29,829       522       25,083       5,800       30,782  
Real Estate - Home Equity
    2,351       4       1,829       506       2,844  
Consumer
    79       -       74       41       108  
Total
  $ 77,831     $ 16,102     $ 61,729     $ 11,007     $ 83,392  
                                         
                                         
December 31, 2010:
                                       
Commercial, Financial and Agricultural
  $ 1,684     $ 389     $ 1,295     $ 252     $ 2,768  
Real Estate - Construction
    2,533       -       2,533       413       5,801  
Real Estate - Commercial Mortgage
    42,370       9,030       33,340       4,640       48,820  
Real Estate -  Residential
    37,780       3,295       34,485       7,965       41,958  
Real Estate - Home Equity
    3,278       375       2,903       1,389       3,087  
Consumer
    143       -       143       71       172  
Total
  $ 87,788     $ 13,089     $ 74,699     $ 14,730     $ 102,606  


NOTE 5 - INTANGIBLE ASSETS

The Company had net intangible assets of $85.7 million and $86.2 million at June 30, 2011 and December 31, 2010, respectively.  Intangible assets were as follows:

   
June 30, 2011
   
December 31, 2010
 
 
(Dollars in Thousands)
 
Gross
Amount
   
Accumulated
Amortization
   
Gross
Amount
   
Accumulated
Amortization
 
Core Deposit Intangibles
 
$
47,176
   
$
46,798
   
$
47,176
   
$
46,434
 
Goodwill
   
84,811
     
-
     
84,811
     
-
 
Customer Relationship Intangible
   
1,867
     
1,357
     
1,867
     
1,261
 
Total Intangible Assets
 
$
133,854
   
$
48,155
   
$
133,854
   
$
47,695
 

Net Core Deposit Intangibles:  As of June 30, 2011 and December 31, 2010, the Company had net core deposit intangibles of $0.4 million and $0.7 million, respectively.  Amortization expense for the first six months of 2011 and 2010 was approximately $0.4 million and $1.4 million, respectively.  Estimated annual amortization expense for 2011 is $0.5 million.  All of our core deposit intangibles will be fully amortized in January 2013.

Goodwill:  As of June 30, 2011 and December 31, 2010, the Company had goodwill, net of accumulated amortization, of $84.8 million.  

Goodwill is tested for impairment on an annual basis, or more often if impairment indicators exist.  A goodwill impairment test consists of two steps.  Step One compares the estimated fair value of the reporting unit to its carrying amount.  If the carrying amount exceeds the estimated fair value, Step Two is performed by comparing the fair value of the reporting unit’s implied goodwill to the carrying value of goodwill.  If the carrying value of the reporting unit’s goodwill exceeds the estimated fair value, an impairment charge is recorded equal to the excess.
As of June 30, 2011, the book value of the Company’s equity exceeded its market capitalization, and as such the Company performed goodwill impairment testing.  The Step One test indicated that the carrying amount (including goodwill) of the Company’s reporting unit exceeded its estimated fair value.  The Step Two test indicated the estimated fair value of our reporting unit’s implied goodwill exceeded its carrying amount.  Based on the results of the Step Two analysis, the Company concluded that goodwill was not impaired as of June 30, 2011.  The Company will continue to test goodwill as defined by ASC Topic 350.

 
-13-

 
 
Other:  As of June 30, 2011 and December 31, 2010, the Company had a customer relationship intangible asset, net of accumulated amortization, of $0.5 million and $0.6 million, respectively.  This intangible asset was recorded as a result of the March 2004 acquisition of trust customer relationships.  Amortization expense for the first six months of 2011 and 2010 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, 2011 and December 31, 2009 was as follows:

(Dollars in Thousands)
 
June 30, 2011
   
December 31, 2010
 
NOW Accounts
 
$
764,480
   
$
770,149
 
Money Market Accounts
   
283,230
     
275,416
 
Savings Deposits
   
153,403
     
139,888
 
Other Time Deposits
   
331,085
     
372,266
 
Total Interest Bearing Deposits
 
$
1,532,198
   
$
1,557,719
 

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, 2011, the Company had three stock-based compensation plans, consisting of the 2011 Associate Stock Incentive Plan ("ASIP"), the 2011 Associate Stock Purchase Plan ("ASPP"), and the 2011 Director Stock Purchase Plan ("DSPP"). These plans are new plans replacing substantially similar plans approved by the shareowners in 2004.  Total compensation expense associated with these plans for the six months ended June 30, 2011 and 2010 was $448,000 and $184,000, 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 2011 Incentive Plan (“2011 Plan”), which has an award tied to an internally established earnings goal.  The grant-date fair value of the shares eligible to be awarded in 2011 is approximately $895,000.  A total of 51,952 shares are eligible for issuance.  For the first six months of 2011 and 2010, the Company recognized approximately $319,000 and $115,000 in expense related to the ASIP.
 
Executive Stock Option Agreement.  Prior to 2007, the Company maintained a stock option program 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 an annual 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.  For the first six months of 2011, the Company recognized $72,000 in expense related this plan.  No expense was recognized under this plan for the first six months of 2010.

A summary of the status of the Company’s options as of June 30, 2011 is presented below:

Options
 
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Term
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2011
    60,384     $ 32.79       3.9     $ -  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited or expired
    -       -       -       -  
Outstanding at June 30, 2011
    60,384     $ 32.79       3.4     $ -  
Exercisable at June 30, 2011
    60,384     $ 32.79       3.4     $ -  

Compensation expense associated with the aforementioned option shares was fully recognized as of December 31, 2007. 
 
 
-14-

 
 
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.  For the first six months 2011 and 2010, the Company recognized approximately $15,000 and $14,000 in expense related to this plan or its predecessor plan, the 2005 Director Stock Purchase 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.  For the first six months of 2011, the Company recognized approximately $42,000 in expense related to the ASPP plan or its processor plan, the 2005 Associate Stock Purchase Plan compared to approximately $56,000 in expense for the same period in 2010.  

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)
 
2011
   
2010
   
2011
   
2010
 
                         
Discount Rate
   
5.55
%
   
5.75
%
   
5.55
%
   
5.75
%
Long-Term Rate of Return on Assets
   
8.00
%
   
8.00
%
   
8.00
%
   
8.00
%
                                 
Service Cost
 
$
1,550
   
$
1,525
   
$
3,100
   
$
3,050
 
Interest Cost
   
1,325
     
1,175
     
2,650
     
2,350
 
Expected Return on Plan Assets
   
(1,650
)
   
(1,525
)
   
(3,300
)
   
(3,050
)
Prior Service Cost Amortization
   
125
     
125
     
250
     
250
 
Net Loss Amortization
   
550
     
525
     
1,100
     
1,050
 
Net Periodic Benefit Cost
 
$
1,900
   
$
1,825
   
$
3,800
   
$
3,650
 

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)
 
2011
   
2010
   
2011
   
2010
 
                         
Discount Rate
   
5.55
%
   
5.75
%
   
5.55
%
   
5.75
%
                                 
Service Cost
 
$
-
   
$
-
   
$
-
   
$
-
 
Interest Cost
   
40
     
42
     
80
     
84
 
Prior Service Cost Amortization
   
45
     
45
     
90
     
90
 
Net Loss Amortization
   
(98
   
(85
   
(196
)
   
(170
)
Net Periodic Benefit Cost
 
$
(13
 
$
2
   
$
(26
 
$
4
 

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.
 
 
-15-

 
 
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, 2011, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Millions)
 
Amount
 
Commitments to Extend Credit(1)
 
$
308
 
Standby Letters of Credit
 
$
11
 

(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”).  In 2008, the Company, as a member of the Visa U.S.A. network, obtained Class B shares of Visa, Inc. upon its initial public offering.  Since its initial public offering, Visa, Inc. has funded a litigation reserve for the Covered Litigation resulting in a reduction in the Class B shares held by the Company.  During the first quarter of 2011, the Company sold its remaining Class B shares resulting in a $3.2 million pre-tax gain.  Associated with this sale, the Company entered into a swap contract with the purchaser of the shares that requires a payment to the counterparty in the event that Visa, Inc. makes subsequent revisions to the conversion ratio for its Class B shares.  Further information on the swap contract is contained within Note 10 below.

NOTE 10 – FAIR VALUE MEASUREMENTS

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability.  In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach.  Such valuation techniques are consistently applied.  Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.  ASC Topic 820 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.

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.  A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth in the Company’s 2010 Form 10-K.
 

 
 
-16-

 
 
Financial Assets and Financial Liabilities.  The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2011 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, 2011
                     
ASSETS:
                     
Securities available for sale:
                     
    US Treasury
 $
 170,207
 
-
 
 -
 
170,207
    States and Political Subdivisions
 
1,481
   
55,337
   
 -
   
 56,818
    Residential Mortgage-Backed Securities   -     65,438     -     65,438
    Other Securities   -     11,850     -     11,850
                       
LIABILITIES:
                     
Fair Value Swap
  -       -    
445
   
445

Fair Value Swap.  During the first quarter of 2011, the Company entered into a stand-alone derivative contract with the purchaser of its Visa Class B shares.  The valuation represents an internally developed estimate of the exposure based upon probability-weighted potential Visa litigation losses and related carrying cost obligations required under the contract.

Non-Financial Assets and Non-Financial Liabilities.  Certain 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).

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 $77.8 million, with a valuation allowance of $11.0 million.

Loans Held for Sale.  Loans held for sale were $5.9 million as of June 30, 2011.  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 2011, 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 $22.9 million during the six months ended June 30, 2011.  In addition, the Company recognized subsequent losses totaling $2.1 million for foreclosed assets that were re-valued during the six months ended June 30, 2011.  The carrying value of foreclosed assets was $61.0 million at June 30, 2011.

FASB ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring or non-recurring basis.  A detailed description of the valuation methodologies used in estimating the fair value of financial instruments is set forth in the Company’s 2010 Form 10-K.

 
-17-

 
 
The Company’s financial instruments that have estimated fair values are presented below:
       
   
June 30, 2011
   
December 31, 2010
 
(Dollars in Thousands)
 
Carrying
Value
   
Estimated
Fair
Value
   
Carrying
Value
   
Estimated
Fair
Value
 
Financial Assets:
                       
Cash
 
$
71,554
   
$
71,554
   
$
35,410
   
$
35,410
 
Short-Term Investments
   
223,183
     
223,183
     
200,783
     
200,783
 
Investment Securities
   
304,313
     
304,313
     
309,731
     
309,731
 
Loans, Net of Allowance for Loan Losses
   
1,656,522
     
1,558,801
     
1,723,235
     
1,675,997
 
Total Financial Assets
 
$
2,255,572
   
$
2,157,851
   
$
2,269,159
   
$
2,221,921
 
                                 
Financial Liabilities:
                               
Deposits
 
$
2,101,011
   
$
2,101,972
   
$