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 September 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 October 31, 2011, 17,156,574 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 SEPTEMBER 30, 2011
TABLE OF CONTENTS

PART I – Financial Information
Page
 
Item 1.
Consolidated Financial Statements (Unaudited)
  
 
Consolidated Statements of Financial Condition – September 30, 2011 and December 31, 2010
4
 
Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2011 and 2010
5
 
Consolidated Statement of Changes in Shareowners’ Equity – Nine Months Ended September 30, 2011
6
 
Consolidated Statements of Cash Flow – Nine Months Ended September 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
22
     
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
39
     
Item 4.
Controls and Procedures
39
     
PART II – Other Information
  
 
Item 1.
Legal Proceedings
39
     
Item 1A.
Risk Factors
39
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
47
     
Item 3.
Defaults Upon Senior Securities
47
     
Item 4.
[Removed and Reserved]
47
     
Item 5.
Other Information
47
     
Item 6.
Exhibits
48
     
Signatures
  
49
     
     
     

 
-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 SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

   
Unaudited
        
(Dollars In Thousands, Except Share Data)
  
September 30, 2011
    
December 31, 2010
  
ASSETS
            
Cash and Due From Banks
  
$
53,027
    
$
35,410
  
Federal Funds Sold and Interest Bearing Deposits
    
193,387
      
200,783
  
Total Cash and Cash Equivalents
    
246,414
      
236,193
  
                 
Investment Securities, Available-for-Sale
    
306,038
      
309,731
  
                 
Loans, Net of Unearned Interest
    
1,657,699
      
1,758,671
  
Allowance for Loan Losses
    
(29,658
)
    
(35,436
)
Loans, Net
    
1,628,041
      
1,723,235
  
                 
Premises and Equipment, Net
    
111,471
      
115,356
  
Goodwill
    
84,811
      
84,811
  
Other Intangible Assets
    
780
      
1,348
  
Other Real Estate Owned
    
61,196
      
57,937
  
Other Assets
    
85,221
      
93,442
  
Total Assets
  
$
2,523,972
    
$
2,622,053
  
                 
LIABILITIES
                
Deposits:
                
Noninterest Bearing Deposits
  
$
584,628
    
$
546,257
  
Interest Bearing Deposits
    
1,459,170
      
1,557,719
  
Total Deposits
    
2,043,798
      
2,103,976
  
                 
Short-Term Borrowings
    
47,508
      
92,928
  
Subordinated Notes Payable
    
62,887
      
62,887
  
Other Long-Term Borrowings
    
45,389
      
50,101
  
Other Liabilities
    
63,465
      
53,142
  
Total Liabilities
    
2,263,047
      
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; 17,156,571 and 17,100,081 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    
172
      
171
  
Additional Paid-In Capital
    
38,074
      
36,920
  
Retained Earnings
    
237,969
      
237,679
  
Accumulated Other Comprehensive Loss, Net of Tax
    
(15,290
)
    
(15,751
)
Total Shareowners' Equity
    
260,925
      
259,019
  
Total Liabilities and Shareowners' Equity
  
$
2,523,972
    
$
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 NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
   
Three Months Ended
    
Nine Months Ended
    
(Dollars in Thousands, Except Per Share Data)
  
2011
    
2010
    
2011
    
2010
  
INTEREST INCOME
                        
Interest and Fees on Loans
  
$
23,777
    
$
26,418
    
$
72,029
    
$
80,054
  
Investment Securities:
                                
U.S. Treasuries
    
393
      
315
      
1,199
      
748
  
U.S. Government Agencies
    
352
      
274
      
1,044
      
893
  
States and Political Subdivisions
    
150
      
339
      
562
      
1,235
  
Other Securities
    
83
      
86
      
261
      
242
  
Federal Funds Sold
    
136
      
144
      
452
      
492
  
Total Interest Income
    
24,891
      
27,576
      
75,547
      
83,664
  
                                 
INTEREST EXPENSE
                                
Deposits
    
907
      
1,820
      
3,248
      
7,121
  
Short-Term Borrowings
    
78
      
31
      
299
      
            60
  
Subordinated Notes Payable
    
339
      
376
      
1,022
      
1,666
  
Other Long-Term Borrowings
    
467
      
565
      
1,453
      
1,642
  
Total Interest Expense
    
1,791
      
2,792
      
6,022
      
10,489
  
                                 
NET INTEREST INCOME
    
23,100
      
24,784
      
69,525
      
73,175
  
Provision for Loan Losses
    
3,718
      
5,668
      
11,396
      
20,041
  
Net Interest Income After Provision For Loan Losses
    
19,382
      
19,116
      
58,129
      
53,134
  
                                 
NONINTEREST INCOME
                                
Service Charges on Deposit Accounts
    
6,629
      
6,399
      
18,921
      
20,066
  
Data Processing
    
749
      
911
      
2,487
      
2,730
  
Asset Management Fees
    
1,080
      
1,040
      
3,240
      
3,140
  
Retail Brokerage Fees
    
807
      
671
      
2,475
      
2,082
  
Securities Transactions
    
-
      
3
      
-
      
8
  
Mortgage Banking Fees
    
645
      
772
      
1,830
      
1,921
  
Bank Card Fees
    
2,590
      
2,327
      
7,644
      
6,864
  
Other
    
1,693
      
1,326
      
8,378
      
5,279
  
Total Noninterest Income
    
14,193
      
13,449
      
44,975
      
42,090
  
                                 
NONINTEREST EXPENSE
                                
Salaries and Associate Benefits
    
15,805
      
15,003
      
48,382
      
47,366
  
Occupancy, Net
    
2,495
      
2,611
      
7,338
      
7,604
  
Furniture and Equipment
    
2,118
      
2,288
      
6,461
      
6,661
  
Intangible Amortization
    
108
      
709
      
568
      
2,129
  
Other Real Estate
    
2,542
      
3,306
      
9,252
      
10,213
  
Other
    
7,579
      
8,446
      
23,144
      
26,403
  
Total Noninterest Expense
    
30,647
      
32,363
      
95,145
      
100,376
  
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    
2,928
      
202
      
7,959
      
(5,152
)
Income Tax Expense (Benefit)
    
951
      
(199
) 
    
2,527
      
(2,821
)
                                 
NET INCOME (LOSS)
  
$
1,977
    
$
401
    
$
5,432
    
$
(2,331
)
                                 
Basic Net Income (Loss) Per Share
  
$
0.12
    
$
0.02
    
$
0.32
    
$
(0.14
)
Diluted Net Income (Loss) Per Share
  
$
0.12
    
$
0.02
    
$
0.32
    
$
(0.14
)
                                 
Average Basic Shares Outstanding
    
17,152,148
      
17,087,196
      
17,133,796
      
17,069,255
  
Average Diluted Shares Outstanding
    
17,167,173
      
17,087,927
      
17,142,773
      
17,070,087
  


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
-
    
-
    
-
    
5,432
      
-
      
5,432
  
Net Change in Unrealized Gain On
   Available-for-Sale Securities (net of tax)
-
    
-
    
-
    
-
      
461
      
461
  
Total Comprehensive Income
-
    
-
    
-
                    
5,893
  
Cash Dividends ($0.30 per share)
-
    
-
    
-
    
(5,142
)
    
-
      
(5,142
)
Stock Performance Plan Compensation
-
    
-
    
430
    
-
      
-
      
430
  
Issuance of Common Stock
56,490
    
1
    
724
    
-
      
-
      
725
  
                                       
Balance, September 30, 2011
17,156,571
  
$
 172
  
$
38,074
  
$
237,969
    
$
(15,290
)
  
$
260,925
  


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 NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)

(Dollars in Thousands)
  
2011
    
2010
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net Income (Loss)
  
$
5,432
    
$
(2,331
) 
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
                
Provision for Loan Losses
    
        11,396
      
         20,041
  
Depreciation
    
           5,127
      
           5,306
  
Net Securities Amortization
    
           2,856
      
           2,421
  
Amortization of Intangible Assets
    
         568
      
           2,129
  
Gain (Loss) on Securities Transactions
    
              -
      
              (8
)
Loss on Impaired Security
    
-
      
61
  
Origination of Loans Held-for-Sale
    
     (84,773
)
    
     (99,508
)
Proceeds From Sales of Loans Held-for-Sale
    
       84,694
      
       94,857
  
Net Gain From Sales of Loans Held-for-Sale
    
         (1,830
)
    
         (1,921
)
Non-Cash Compensation
    
                  430
      
                  -
  
Decrease in Deferred Income Taxes
    
          (586
)
    
           (661
)
Net Decrease in Other Assets
    
        36,547
      
           17,063
  
Net Increase in Other Liabilities
    
10,323
      
12,111
  
Net Cash Provided By Operating Activities
    
         70,184
      
         49,560
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Securities Available-for-Sale:
                
Purchases
    
       (60,672
)
    
       (121,609
)
Sales
    
           -
      
           505
  
Payments, Maturities, and Calls
    
         62,257
      
         65,185
  
Net Decrease in Loans
    
       54,420
      
       63,048
  
Purchase of Premises & Equipment
    
(1,242
)
    
(5,556
)
Net Cash Provided By Investing Activities
    
              54,763
      
               1,573
  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Decrease in Deposits
    
       (60,178
)
    
       (136,791
)
Net Decrease (Increase) in Short-Term Borrowings
    
         (45,419
) 
    
         2,298
  
Increase (Decrease) in Other Long-Term Borrowings
    
                 789
      
                 (1,969
) 
Repayment of Other Long-Term Borrowings
    
         (5,501
)
    
       (956
)
Dividends Paid
    
         (5,142
)
    
         (6,658
)
Issuance of Common Stock
    
        725
      
         766
  
Net Cash Used by Financing Activities
    
              (114,726
) 
    
             (143,310
) 
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    
10,221
      
(92,177
)
                 
Cash and Cash Equivalents at Beginning of Period
    
236,193
      
334,293
  
Cash and Cash Equivalents at End of Period
  
$
246,414
    
$
242,116
  
                 
Supplemental Disclosure:
                
Interest Paid on Deposits
  
$
3,548
    
$
7,884
  
Interest Paid on Debt
    
2,892
      
3,383
  
Taxes Paid
    
6,402
      
485
  
Loans Transferred to Other Real Estate Owned
    
31,287
      
31,907
  
Issuance of Common Stock as Non-Cash Compensation
    
725
      
765
  
Transfer of Current Portion of Long-Term Borrowings
  
$
-
    
$
10,000
  

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 September 30, 2011 and December 31, 2010, the results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 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:

 
September 30, 2011
  
(Dollars in Thousands)
Amortized
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Market
Value
  
U.S. Treasury
$
  168,294
    
$
    1,677
    
$
-
    
$
       169,971
  
U.S. Government Agencies and Corporations
  
      9,989
      
  36
      
18
      
        10,007
  
States and Political Subdivisions
  
58,457
      
217
      
54
      
     58,620
  
Mortgage-Backed Securities
  
    55,186
      
730
      
175
      
      55,741
  
Other Securities(1)
  
    12,299
      
-
      
600
      
       11,699
  
Total Investment Securities
$
  304,225
    
$
2,660
    
$
847
    
$
306,038
  

 
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 $6.8 million and $4.8 million, respectively, at September 30, 2011 and $7.2 million and $4.8 million, respectively, at December 31, 2010.

 
 
-8-
 

Securities with an amortized cost of $128.5 million and $131.6 million at September 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 $6.8 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 September 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
  
$
               120,431
    
$
                120,775
  
Due after one through five years
    
               168,026
      
                170,033
  
Due after five through 10 years
    
                 1,906
      
                  1,992
  
Due after 10 years
    
1,563
      
1,539
  
No Maturity
    
                   12,299
      
11,699
  
Total Investment Securities
  
$
304,225
    
$
306,038
  

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 September 30, 2011 aggregated by major security type and length of time in a continuous unrealized loss position:

     
September 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
  
$
3,696
    
$
18
    
$
-
    
$
-
    
$
3,696
    
$
18
  
    U.S. Government Agencies and Corporations
    
-
      
-
      
-
      
-
      
-
      
-
  
    States and Political Subdivisions
    
7,510
      
54
      
-
      
-
      
7,510
      
54
  
    Mortgage-Backed Securities 
    
 15,757
      
175
      
-
      
-
      
15,757
      
175
  
    Other Securities
    
-
      
-
      
-
      
600
      
-
      
600
  
    Total Investment Securities
  
$
26,963
    
$
247
    
$
  -
    
$
 600
    
$
26,963
    
$
847
  

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 September 30, 2011, the Company had securities of $309.7 million with net pre-tax unrealized gains of $1.8 million on these securities, of which $27.0 million have unrealized losses totaling $247,000 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 September 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 September 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

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

(Dollars in Thousands)
  
September 30, 2011
    
December 31, 2010
  
Commercial, Financial and Agricultural
  
$
142,511
    
$
157,394
  
Real Estate-Construction
    
31,991
      
43,239
  
Real Estate-Commercial
    
644,128
      
671,702
  
Real Estate-Residential(1)
    
393,624
      
424,229
  
Real Estate-Home Equity
    
245,438
      
251,565
  
Real Estate-Loans Held-for-Sale
    
8,782
      
6,312
  
Consumer
    
191,225
      
204,230
  
Loans, Net of Unearned Interest
  
$
1,657,699
    
$
1,758,671
  

(1)  
Includes loans in process with outstanding balances of $14.5 million and $10.2 million for September 30, 2011 and December 31, 2010, respectively.

Net deferred fees included in loans at September 30, 2011 and December 31, 2010 were $1.6 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 September 30, 2011 and December 31, 2010 by class of loans:

September 30, 2011
(Dollars in Thousands)
  
30-59
DPD
    
60-89
DPD
    
90 +
DPD
    
Total
Past Due
    
Total
Current
    
Total
Loans
  
Commercial, Financial and Agricultural
   $ 320       140       -       460       141,010     $ 142,511  
Real Estate - Construction
     148       -       -       148       30,704       31,991  
Real Estate - Commercial Mortgage
     1,712       3,847       -       5,559       612,337       644,128  
Real Estate -  Residential
     3,771       2,957       26       6,754       374,377       388,686  
Real Estate - Home Equity
     1,460       446       -       1,906       240,758       245,438  
Consumer
     1,986       265       -       2,251       188,039       204,945  
Total Past Due Loans
   $ 9,397       7,655       26       17,078       1,587,225     $ 1,657,699  

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
    
1,445
      
698
    
39
    
2,182
    
244,579
      
251,565
  
Consumer
    
2,867
      
356
    
-
    
3,223
    
200,139
      
204,230
  
Total Past Due Loans
 
 $
18,019
      
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 September 30, 2011 and December 31, 2010:

   
September 30, 2011
    
December 31, 2010
(Dollars in Thousands)
  
Nonaccrual
    
90 + DPD
    
Nonaccrual
     90+ DPD
Commercial, Financial and Agricultural
   $ 1,041       -     $ 1,059     $ -  
Real Estate - Construction
     1,140       -       1,907       -  
Real Estate - Commercial Mortgage
     26,230       -       26,874       -  
Real Estate -  Residential
     21,276       26       30,189       120  
Real Estate - Home Equity
     2,773       -       4,803       39  
Consumer
     936       -       868       -  
Total Nonaccrual Loans
   $ 53,396       26     $ 65,700     $ 159  

Restructured Loans (“TDR’s”).  The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.  Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.  Effective July 1, 2011, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  As such, the Company reassessed all loan modifications occurring since January 1, 2011 for identification as troubled debt restructurings.

The following table presents loans classified as TDR’s as of September 30, 2011 and December 31, 2010:

(Dollars in Thousands)
  
September 30, 2011
    
December 31, 2010
  
Commercial, Financial and Agricultural
  
$
623
    
$
768
  
Real Estate-Construction
    
1,352
      
660
  
Real Estate-Commercial
    
14,116
      
10,635
  
Real Estate-Residential
    
11,547
      
8,884
  
Real Estate-Home Equity
    
766
      
648
  
Consumer
    
-
      
54
  
Loans, Net of Unearned Interest
  
$
28,404
    
$
21,649
  

Loans classified as TDR’s during the three and nine months ended September 30, 2011 are presented in the table below:
 
 
   
Three Months Ended,
    
Nine Months Ended,
  
   
September 30, 2011
    
September 30, 2011
  
(Dollars in Thousands)
  
 
Number of Contracts
    
Pre-Modify
Recorded
Investment
    
Post-Modify
Recorded
Investment
    
 
Number of Contracts
      
Pre-Modify
Recorded
Investment
    
Post-Modify
Recorded
Investment
  
Commercial, Financial and Agricultural
  
3
    
$
338
    
$
318
    
7
    
$
568
  
$
547
  
Real Estate-Construction
  
2
      
1,176
      
1,175
    
3
      
1,352
    
1,330
  
Real Estate-Commercial
  
16
      
5,094
      
5,347
    
39
      
13,658
    
13,768
  
Real Estate-Residential
  
22
      
5,355
      
5,325
    
70
      
10,540
    
10,824
  
Real Estate-Home Equity
  
5
      
461
      
472
    
9
      
639
    
660
  
Consumer
  
-
      
-
      
-
    
2
      
24
    
23
  
Total
  
48
    
$
12,424
    
$
12,637
    
130
    
$
26,781
  
$
27,152
  


 
-11-
 
 
Loan modifications made within the last 12 months that were classified as TDR’s that have subsequently defaulted are presented in the table below:
(Dollars in Thousands)
 
Number of
Contracts
  
Post-Modify
Recorded
Investment
  
Commercial, Financial and Agricultural
2
  
$
161
  
Real Estate-Construction
-
    
-
  
Real Estate-Commercial
7
    
2,323
  
Real Estate-Residential
9
    
1,967
  
Real Estate-Home Equity
-
    
-
  
Consumer
-
    
-
  
Total
18
  
$
4,451
  

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 definitions noted below for categorizing and managing its criticized loans.  Loans categorized as “Pass” do not meet the criteria set forth for the Special Mention, Substandard, or Doubtful categories and are not considered criticized.

Special Mention – Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems.  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.

Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the risk category of loans by segment as of September 30, 2011 and December 31, 2010:
 
 
 September 30, 2011
(Dollars in Thousands)
  
Commercial,
Financial,
Agriculture
    
 
Real Estate
    
 
Consumer
    
 
Total
  
Special Mention
   $ 6,882     $ 47,532     $ 33     $ 54,447  
Substandard
     10,196       191,395       1,517       203,108  
Doubtful
     16       5,280       -        5,296  
Total Loans
   $ 17,094     $ 244,207     $ 1,550     $ 262,851  

December 31, 2010
(Dollars in Thousands)
  
Commercial,
Financial,
Agriculture
    
 
Real Estate
    
 
Consumer
    
 
Total
  
Special Mention
   $ 20,539     $ 100,008     $ 102     $ 120,649  
Substandard
     11,540       221,671       1,584       234,795  
Doubtful
     119       7,245       2       7,366  
Total Loans
   $ 32,198     $ 328,924     $ 1,688     $ 362,810  

During the third quarter of 2011, the Company performed a review of its Special Mention loan portfolio to determine proper alignment of its loan grading practices with the regulatory definition of loans for this category.  As a result of this review, a new loan risk category was added to reflect loans that currently meet existing credit underwriting guidelines, but warrant a greater level of monitoring due to certain manageable credit policy exceptions or exposure to an industry segment that is experiencing higher than normal risk levels.  Loans of this nature were reflected as Pass Watch loans within the Pass category as of September 30, 2011 and are not considered criticized.  The decline in the balance of Special Mention loans from December 31, 2010 to September 30, 2011, reflects the impact of this reclassification process.


 
-12-
 
 
NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

(Dollars in Thousands)
2011
    
2010
  
Balance, Beginning of Year
$
35,436
    
$
43,999
  
Provision for Loan Losses
  
11,396
      
20,041
  
Recoveries on Loans Previously Charged-Off
  
2,077
      
2,653
  
Loans Charged-Off
  
(19,251
)
    
(28,973
)
Balance, End of Period
$
29,658
    
$
37,720
  

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 September 30, 2011 and December 31, 2010:

September 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
  
$
 
419
  
 
484
  
 
5,931
  
 
4,062
  
 
103
  
 
-
  
 
-
 
 
 $ 
 
10,999
Loans Collectively
Evaluated for Impairment
    
 
1,195
  
656
  
 
4,823
  
7,426
  
 
2,029
  
1,530
  
1,000
    
18,659
Total
  
$
1,614
  
1,140
  
10,754
  
11,488
  
2,132
  
1,530
  
1,000
 
 $ 
29,658
                                     
Total Loans:
                                    
Individually Evaluated
for Impairment
  
$
 
1,435
  
2,690
  
 
44,911
  
26,063
  
 
1,756
  
-
  
-
 
 
 $
76,855
Collectively Evaluated
for Impairment
    
 
141,076
  
29,301
  
 
599,217
  
376,343
  
 
243,682
  
191,225
  
-
    
1,580,844
Total
  
$
142,511
  
31,991
  
644,128
  
402,406
  
245,438
  
191,225
  
-
 
 $ 
1,657,699


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



 
-13-
 
 
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.

The following table presents loans individually evaluated for impairment by class of loans as of September 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(1)
  
September 30, 2011:
                              
Commercial, Financial and Agricultural
   $ 1,435     $ 330     $ 1,105     $ 419     $ 1,582  
Real Estate - Construction
     2,690       148       2,542       484       2,000  
Real Estate - Commercial Mortgage
     44,911       16,477       28,434       5,931       43,722  
Real Estate -  Residential
     26,063       4,016       22,047       4,062       27,946  
Real Estate - Home Equity
     1,756       406       1,350       103       2,054  
Consumer
     -       -       -       -       39  
Total
   $ 76,855     $ 21,377     $ 55,478     $ 10,999     $ 77,343  
                                         
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  

(1) Reflects quarter-to-date average balance

Interest income recognized on impaired loans was approximately $2.8 million for the nine month periods ended September 30, 2011 and September 30, 2010, respectively.

NOTE 5 - INTANGIBLE ASSETS

The Company had net intangible assets of $85.6 million and $86.2 million at September 30, 2011 and December 31, 2010, respectively.  Intangible assets were as follows:

   
September 30, 2011
    
December 31, 2010
  
 
(Dollars in Thousands)
  
Gross
Amount
    
Accumulated
Amortization
    
Gross
Amount
    
Accumulated
Amortization
  
Core Deposit Intangibles
  
$
47,176
    
$
46,858
    
$
47,176
    
$
46,434
  
Goodwill
    
84,811
      
-
      
84,811
      
-
  
Customer Relationship Intangible
    
1,867
      
1,405
      
1,867
      
1,261
  
Total Intangible Assets
  
$
133,854
    
$
48,263
    
$
133,854
    
$
47,695
  

Net Core Deposit Intangibles:  As of September 30, 2011 and December 31, 2010, the Company had net core deposit intangibles of $0.3 million and $0.7 million, respectively.  Amortization expense for the first nine months of 2011 and 2010 was approximately $0.6 million and $2.0 million, respectively.  Estimated annual amortization expense for 2011 is $0.7 million.  All of our core deposit intangibles will be fully amortized in January 2013.

Goodwill:  As of September 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.
 
 
-14-
 
 
As of September 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 September 30, 2011.  The Company will continue to test goodwill as defined by ASC Topic 350.

Other:  As of September 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 nine months of 2011 and 2010 was approximately $144,000.  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 September 30, 2011 and December 31, 2010 was as follows:

(Dollars in Thousands)
  
September 30, 2011
    
December 31, 2010
  
NOW Accounts
  
$
708,066
    
$
770,149
  
Money Market Accounts
    
280,001
      
275,416
  
Savings Deposits
    
154,136
      
139,888
  
Other Time Deposits
    
316,967
      
372,266
  
Total Interest Bearing Deposits
  
$
1,459,170
    
$
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 September 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 nine months ended September 30, 2011 and 2010 was $508,000 and $101,000, 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 nine months of 2011, the Company recognized approximately $336,000 in expense related to the ASIP.  No expense related to this plan was recognized for the first nine months of 2010.
 
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 nine months of 2011, the Company recognized $94,000 in expense related this plan.  No expense was recognized under this plan for the first nine months of 2010.

A summary of the status of the Company’s options as of September 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 September 30, 2011
     60,384     $ 32.79       3.1     $ -  
Exercisable at September 30, 2011
     60,384     $ 32.79       3.1     $ -  

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

 
-15-
 
 
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 nine months 2011 and 2010, the Company recognized approximately $20,000 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 nine months of 2011, the Company recognized approximately $59,000 in expense related to the ASPP or its processor plan, the 2005 Associate Stock Purchase Plan, compared to approximately $81,000 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 September 30,
    
Nine Months Ended September 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
  
$
1,507
    
$
1,423
    
$
4,521
    
$
4,268
  
Interest Cost
    
1,311
      
1,183
      
3,932
      
3,550
  
Expected Return on Plan Assets
    
(1,639
)
    
(1,549
)
    
(4,917
)
    
(4,646
)
Prior Service Cost Amortization
    
116
      
127
      
347
      
382
  
Net Loss Amortization
    
555
      
522
      
1,667
      
1,566
  
Net Periodic Benefit Cost
  
$
1,850
    
$
1,706
    
$
5,550
    
$
5,120
  

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

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
(Dollars in Thousands)
  
2011
    
2010
    
2011
    
2010
  
                         
Discount Rate
    
5.55
%
    
5.75
%
    
5.55
%
    
5.75
%
                                 
Interest Cost
  
$
37
    
$
38
    
$
111
    
$
113
  
Prior Service Cost Amortization
    
45
      
45
      
134
      
135
  
Net Loss Amortization
    
(104
) 
    
(106
) 
    
(310
)
    
(319
)
Net Periodic Benefit Cost
  
$
(22
) 
  
$
(23
) 
  
$
(65
) 
  
$
(71
) 


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.


 
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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 September 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)
  
$
317
  
Standby Letters of Credit
  
$
12
  

(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.

 
-17-
 
 
Financial Assets and Financial Liabilities.  The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 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
  
                         
September 30, 2011
                        
ASSETS:
                        
Securities available for sale:
                        
    US Treasury
   $ 169,971     $ -     $ -     $ 169,971  
    States and Political Subdivisions
     6,321       52,299       -       58,620  
    Mortgage-Backed Securities     -       65,749       -       65,749  
    Other Securities     -