Edgar Filing: CAPITAL CITY BANK GROUP INC

Form 10-Q 3rd Quarter 2006

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, 2006

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) 671-0300

(Registrant's telephone number, including area code)

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

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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, 2006, 18,532,107 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, 2006

TABLE OF CONTENTS

PART I - Financial Information		Page

Item 1.	Consolidated Financial Statements	4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	26

Item 4.	Controls and Procedures	28

PART II - Other Information

Item 1.	Legal Proceedings	28

Item 1.A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Submission of Matters to a Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits	28

Signatures		29

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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, 2005 (the “2005 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:

our ability to integrate the business and operations of companies and banks that we have acquired, and those we may acquire in the future;

strength of the United States economy in general and the strength of the local economies in which we conduct operations;

effects of harsh weather conditions, including hurricanes;

inflation, interest rate, market and monetary fluctuations;

effect of changes in the stock market and other capital markets;

legislative or regulatory changes;

willingness of customers to accept third-party products and services for our products and services and vice versa;

changes in the securities and real estate markets;

increased competition and its effect on pricing;

technological changes;

changes in monetary and fiscal policies of the U.S. government;

changes in consumer spending and savings habits;

growth and profitability of our noninterest income;

changes in accounting principles, policies, practices or guidelines;

other risks described from time to time in 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.

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PART I.

FINANCIAL INFORMATION

Item 1.

CONSOLIDATED FINANCIAL STATEMENTS

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE PERIODS ENDED SEPTEMBER 30

(Unaudited)

	Three Months Ended				Nine Months Ended
(Dollars in Thousands, Except Per Share Data)	2006		2005		2006			2005
INTEREST INCOME
Interest and Fees on Loans	$	40,260	$	35,331	$	116,570		$	96,278
Investment Securities:
U.S. Treasury		132		89		310			347
U.S. Govt. Agencies and Corporations		929		788		2,672			2,442
States and Political Subdivisions		650		416		1,672			1,132
Other Securities		203		144		606			436
Funds Sold		338		121		1,463			638
Total Interest Income		42,512		36,889		123,293			101,273

INTEREST EXPENSE
Deposits		9,985		5,480		26,423			14,407
Short-Term Borrowings		753		691		2,352			1,875
Subordinated Notes Payable		936		931		2,789			2,039
Other Long-Term Borrowings		615		783		2,189			2,272
Total Interest Expense		12,289		7,885		33,753			20,593

NET INTEREST INCOME		30,223		29,004		89,540			80,680
Provision for Loan Losses		711		376		1,499			1,174
Net Interest Income After Provision For Loan Losses		29,512		28,628		88,041			79,506

NONINTEREST INCOME
Service Charges on Deposit Accounts		6,450		5,635		18,226			15,018
Data Processing		673		660		2,014			1,917
Asset Management Fees		1,215		1,050		3,420			3,175
Securities Transactions		0		9		(4	)		9
Mortgage Banking Revenues		824		1,317		2,448			3,116
Other		4,982		4,452		15,089			12,989
Total Noninterest Income		14,144		13,123		41,193			36,224

NONINTEREST EXPENSE
Salaries and Associate Benefits		15,277		14,046		45,912			39,793
Occupancy, Net		2,354		2,119		6,935			6,091
Furniture and Equipment		2,492		2,285		7,652			6,589
Intangible Amortization		1,536		1,430		4,601			3,922
Merger Expense		-		180		-			414
Other		8,763		8,549		26,484			23,663
Total Noninterest Expense		30,422		28,609		91,584			80,472

INCOME BEFORE INCOME TAXES		13,234		13,142		37,650			35,258
Income Taxes		4,554		4,565		13,234			12,436

NET INCOME	$	8,680	$	8,577	$	24,416		$	22,822
Basic Net Income Per Share	$	.47	$	.46	$	1.31		$	1.26
Diluted Net Income Per Share	$	.47	$	.46	$	1.31		$	1.26

Average Basic Shares Outstanding		18,529,926		18,623,037		18,604,488			18,142,502
Average Diluted Shares Outstanding		18,564,932		18,648,504		18,627,167			18,156,764

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

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CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

(Unaudited)

(Dollars In Thousands, Except Share Data)	September 30, 2006			December 31, 2005
ASSETS
Cash and Due From Banks	$	100,781		$	105,195
Funds Sold and Interest Bearing Deposits		35,631			61,164
Total Cash and Cash Equivalents		136,412			166,359
Investment Securities, Available-for-Sale		190,617			171,019

Loans, Net of Unearned Interest		2,009,459			2,067,494
Allowance for Loan Losses		(17,311	)		(17,410	)
Loans, Net		1,992,148			2,050,084

Premises and Equipment, Net		84,915			73,818
Goodwill		84,810			84,829
Other Intangible Assets		21,076			25,622
Other Assets		48,895			53,731
Total Assets	$	2,558,873		$	2,625,462

LIABILITIES
Deposits:
Noninterest Bearing Deposits	$	506,331		$	559,492
Interest Bearing Deposits		1,542,908			1,519,854
Total Deposits		2,049,239			2,079,346

Short-Term Borrowings		54,171			82,973
Subordinated Notes Payable		62,887			62,887
Other Long-Term Borrowings		43,701			69,630
Other Liabilities		29,833			24,850
Total Liabilities		2,239,831			2,319,686

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; 18,532,104 and 18,631,706 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		185			186
Additional Paid-In Capital		80,938			83,304
Retained Earnings		238,870			223,532
Accumulated Other Comprehensive Loss, Net of Tax		(951	)		(1,246	)
Total Shareowners' Equity		319,042			305,776
Total Liabilities and Shareowners' Equity	$	2,558,873		$	2,625,462

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

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY

(Dollars in Thousands, Except Per Share Data)

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total
Balance, December 31, 2005	$	186		$	83,304		$	223,532		$	(1,246	)	$	305,776
Comprehensive Income:
Net Income		-			-			24,416			-
Net Change in Unrealized Loss On Available-for-Sale Securities		-			-			-			295
Total Comprehensive Income		-			-			-			-			24,711
Cash Dividends ($.4875 per share)		-			-			(9,078	)		-			(9,078	)
Stock Performance Plan Compensation		-			1,504			-			-			1,504
Issuance of Common Stock		1			969			-			-			970
Repurchase of Common Stock		(2	)		(4,839	)		-			-			(4,841	)

Balance, September 30, 2006	$	185		$	80,938		$	238,870		$	(951	)	$	319,042

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

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CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30

(Unaudited)

(Dollars in Thousands)	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	24,416		$	22,822
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Provision for Loan Losses		1,499			1,174
Depreciation		5,251			4,324
Net Securities Amortization		480			1,133
Amortization of Intangible Assets		4,601			3,922
Loss (Gain) on Sale of Investment Securities		4			(9	)
Origination of Loans Held-for-Sale		(144,719	)		(167,172	)
Proceeds From Sales of Loans Held-for-Sale		148,330			170,667
Net Gain From Sales of Loans Held-for-Sale		(2,448	)		(3,116	)
Non-Cash Compensation		1,504			1,083
Deferred Income Taxes		3,704			1,450
Net Decrease (Increase) in Other Assets		4,225			(3,447	)
Net Increase in Other Liabilities		2,359			10,974
Net Cash Provided By Operating Activities		49,206			43,805

CASH FLOWS FROM INVESTING ACTIVITIES
Securities Available-for-Sale:
Purchases		(95,807	)		(78,748	)
Sales		283			35,142
Payments, Maturities, and Calls		75,872			94,723
Net Decrease (Increase) in Loans		54,636			(107,237	)
Net Cash Acquired in Acquisition		-			37,412
Purchase of Premises & Equipment		(16,634	)		(13,264	)
Proceeds From Sales of Premises & Equipment		286			175
Net Cash Provided By (Used In) Investing Activities		18,636			(31,797	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits		(30,108	)		(70,983	)
Net Decrease in Short-Term Borrowings		(42,271	)		(88,311	)
Proceeds from Subordinated Note Payable		-			31,959
Increase in Other Long-Term Borrowings		3,250			88,116
Repayment of Other Long-Term Borrowings		(15,711	)		-
Dividends Paid		(9,078	)		(8,371	)
Repurchase of Common Stock		(4,841	)		-
Issuance of Common Stock		969			785
Net Cash Used In Financing Activities		(97,790	)		(46,805	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(29,948	)		(35,316	)

Cash and Cash Equivalents at Beginning of Period		166,359			161,545
Cash and Cash Equivalents at End of Period	$	136,412		$	126,229

Supplemental Disclosure:
Interest Paid on Deposits	$	26,051		$	13,685
Interest Paid on Debt		7,523			6,034
Taxes Paid		11,530			11,129
Loans Transferred to Other Real Estate		638			2,391
Issuance of Common Stock as Non-Cash Compensation		1,504			339
Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings		13,061			42,649

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

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CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - MANAGEMENT'S OPINION AND ACCOUNTING POLICES

Basis of Presentation

The consolidated financial statements included herein have been prepared by the Company, without audit, 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/or amounts reclassified, as necessary, to conform with the current presentation.

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, 2006 and December 31, 2005, the results of operations for the three and nine month periods ended September 30, 2006 and 2005, and cash flows for the nine month periods ended September 30, 2006 and 2005.

The Company and its subsidiary follow accounting principles generally accepted in the United States of America 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 Company's 2005 Annual Report on Form 10-K.

Stock-based Compensation

On January 1, 2006, the Company changed its accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment (Revised 2004)" ("SFAS 123R"). See Note 7 - Stock-Based Compensation for additional information.

NOTE 2 - INVESTMENT SECURITIES

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

	September 30, 2006
(Dollars in Thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
U.S. Treasury	$	12,083	$	29	$	33	$	12,079
U.S. Government Agencies and Corporations		60,043		47		669		59,421
States and Political Subdivisions		83,007		19		485		82,541
Mortgage-Backed Securities		24,358		31		461		23,928
Other Securities⁽¹⁾		12,648		-		-		12,648
Total Investment Securities	$	192,139	$	126	$	1,648	$	190,617

	December 31, 2005
(Dollars in Thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
U.S. Treasury	$	9,065	$	-	$	50	$	9,015
U.S. Government Agencies and Corporations		75,233		-		1,017		74,216
States and Political Subdivisions		53,611		44		512		53,143
Mortgage-Backed Securities		20,948		35		452		20,531
Other Securities⁽¹⁾		14,114		-		-		14,114
Total Investment Securities	$	172,971	$	79	$	2,031	$	171,019

(1)	FHLB and FRB stock recorded at cost.

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NOTE 3 - LOANS

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

(Dollars in Thousands)	September 30, 2006		December 31, 2005
Commercial, Financial and Agricultural	$	218,442	$	218,434
Real Estate-Construction		183,237		160,914
Real Estate-Commercial		647,302		718,741
Real Estate-Residential		539,828		553,124
Real Estate-Home Equity		174,577		165,337
Real Estate-Loans Held-for-Sale		3,780		4,875
Consumer		242,293		246,069
Loans, Net of Unearned Interest	$	2,009,459	$	2,067,494

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

(Dollars in Thousands)	2006			2005
Balance, Beginning of Period	$	17,410		$	16,037
Acquired Reserves		-			1,385
Provision for Loan Losses		1,499			1,174
Recoveries on Loans Previously Charged-Off		1,309			1,361
Loans Charged-Off		(2,907	)		(2,533	)
Balance, End of Period	$	17,311		$	17,424

Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Selected information pertaining to impaired loans is depicted in the table below:

	September 30, 2006				December 31, 2005
Impaired Loans:
With Related Valuation Allowance	$	5,554	$	2,143	$	5,612	$	2,915
Without Related Valuation Allowance		3,455		-		1,658		-

NOTE 5 - INTANGIBLE ASSETS

The Company had intangible assets of $105.9 million and $110.5 million at September, 2006 and December 31, 2005, respectively. Intangible assets were as follows:

	September 30, 2006				December 31, 2005
(Dollars in Thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Core Deposit Intangibles	$	47,176	$	27,544	$	47,176	$	23,312
Goodwill		88,596		3,786		88,615		3,786
Customer Relationship Intangible		1,867		449		1,867		305
Non-Compete Agreement		539		513		483		287
Total Intangible Assets	$	138,178	$	32,292	$	138,141	$	27,690

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Net Core Deposit Intangibles: As of September 30, 2006 and December 31, 2005, the Company had net core deposit intangibles of $19.6 million and $23.9 million, respectively. Amortization expense for the first nine months of 2006 and 2005 was $4.2 million and $3.6 million, respectively. Estimated annual amortization expense is $5.6 million.

Goodwill: As of September 30, 2006 and December 31, 2005, the Company had goodwill, net of accumulated amortization, of $84.8 million. Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets."

Other: As of September 30, 2006 and December 31, 2005, the Company had a customer relationship intangible, net of accumulated amortization, of $1.4 million and $1.6 million, respectively. This intangible was recorded as a result of the March 2004 acquisition of trust customer relationships from Synovus Trust Company. Amortization expense for the first nine months of 2006 and 2005 was $144,000. Estimated annual amortization expense is $191,000 based on use of a 10-year useful life.

As of September 30, 2006 and December 31, 2005, the Company also had a non-compete intangible, net of accumulated amortization, of $26,000 and $196,000, respectively. This intangible was recorded as a result of the October 2004 acquisition of Farmers and Merchants Bank of Dublin, Georgia. Amortization expense for the first nine months of 2006 and 2005 was $226,000 and $178,000, respectively. Estimated amortization expense for the remainder of 2006 is $26,000.

NOTE 6 - DEPOSITS

The composition of the Company's interest bearing deposits at September 30, 2006 and December 31, 2005 was as follows:

(Dollars in Thousands)	September 30, 2006		December 31, 2005
NOW Accounts	$	533,549	$	520,878
Money Market Accounts		387,906		331,094
Savings Deposits		129,884		144,296
Other Time Deposits		491,569		523,586
Total Interest Bearing Deposits	$	1,542,908	$	1,519,854

NOTE 7 - STOCK-BASED COMPENSATION

In accordance with the Company’s adoption of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in the first quarter of 2003, the cost related to stock-based associate compensation included in net income has been accounted for under the fair value method in all reported periods.

On January 1, 2006, the Company adopted SFAS 123R. The Company continues to include the cost of its share-based compensation plans in net income under the fair value method.

As of September 30, 2006, the Company had three stock-based compensation plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP"). Total compensation expense associated with these plans for the nine months ended September 30, 2006 and 2005, was approximately $1.5 million and $1.1 million, respectively.

AIP. The Company's AIP allows the Company's Board of Directors to award key associates various forms of equity-based incentive compensation. Under the AIP, the Company has adopted the Stock-Based Incentive Plan (the "Incentive Plan"), effective January 1, 2006, which is a performance-based equity bonus plan for selected members of management, including all executive officers. Under the Incentive Plan, all participants are eligible to earn an equity award, consisting of performance shares, in each year of the five-year period ending December 31, 2010. Annual awards are tied to the annual earnings progression necessary to achieve the Project 2010 goal of $50.0 million in annual net income. The grant-date fair value of an annual compensation award is approximately $1.5 million. A total of 43,437 shares are eligible for issuance annually.

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At the end of each calendar year, the Compensation Committee of the Company’s Board of Directos will confirm whether the performance goals have been met prior to the payout of any awards. Any performance shares earned under the Incentive Plan will be issued in the calendar quarter following the calendar year in which the shares were earned.

In accordance with the provisions of SFAS 123R, the Company recognized expense of approximately $1.1 million for the first nine months of 2006 related to the Incentive Plan. Under a substantially similar predecessor plan, the Company recognized expense of $581,000 for the first nine months of 2005. A total of 875,000 shares of common stock have been reserved for issuance under the AIP. To date, the Company has issued 28,093 shares of common stock.

Executive Stock Option Agreement. In 2006, under the provisions of the AIP, the Company's Board of Directors approved a stock option agreement for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG). Similar stock option agreements were approved in 2003-2005. These agreements grant a non-qualified stock option award upon achieving certain annual earnings per share conditions set by the Board, subject to certain vesting requirements. The options granted under the agreements have a term of ten years and vest at a rate of one-third on each of the first, second, and third anniversaries of the date of grant. Under the 2004 and 2003 agreements, 37,246 and 23,138 options, respectively, were issued, none of which have been exercised. The fair value of a 2004 option was $13.42, and the fair value of a 2003 option was $11.64. The exercise prices for the 2004 and 2003 options are $32.69 and $32.96, respectively. Under the 2005 agreement, the earnings per share conditions were not met; therefore, no economic value was earned by the executive. In accordance with the provisions of SFAS 123R and SFAS 123, the Company recognized expense of approximately $146,000 and $145,000 for the first nine months of 2006 and 2005, respectively, related to the aforementioned agreements.

A summary of the status of the Company’s option shares as of September 30, 2006 is presented below:

Options	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Term		Aggregate Intrinsic Value
Outstanding at January 1, 2006		60,384	$	32.79		8.3	$	88,161
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited or expired		-		-		-		-
Outstanding at September 30, 2006		60,384	$	32.79		7.8	$	-
Exercisable at September 30, 2006		35,977	$	32.79		7.8	$	-

As of September 30, 2006, there was $173,000 of total unrecognized compensation cost related to the nonvested option shares granted under the agreements. That cost is expected to be recognized over a remaining weighted-average period of 10 months.

DSPP. The Company's DSPP allows the directors to purchase the Company's common stock at a price equal to 90% of the closing price on the date of purchase. Stock purchases under the DSPP are limited to the amount of the directors' annual retainer and meeting fees. The DSPP has 93,750 shares reserved for issuance. A total of 16,733 shares have been issued since the inception of the DSPP. For the first nine months of 2006, the Company issued 10,144 shares under the DSPP and recognized $31,000 in expense related to this plan. For the first nine months of 2005, the Company issued 5,418 shares and recognized $21,000 in expense related to the DSPP.

ASPP. Under the Company's ASPP, substantially all associates may purchase the Company's common stock through payroll deductions at a price equal to 90% of the lower of the fair market value at the beginning or end of each six-month offering period. Stock purchases under the ASPP are limited to 10% of an associate's eligible compensation, up to a maximum of $25,000 (fair market value on each enrollment date) in any plan year. Shares are issued at the beginning of the quarter following each six-month offering period. The ASPP has 593,750 shares of common stock reserved for issuance. A total of 36,281 shares have been issued since inception of the ASPP. For the first nine months of 2006, the Company issued 9,343 shares under the ASPP and recognized $67,000 in expense related to this plan. For the first nine months of 2005, the Company issued 8,928 shares and recognized $66,000 in expense related to the ASPP.

Based on the Black-Scholes option pricing model, the weighted average estimated fair value of the purchase rights granted under the ASPP Plan was $6.22 for the first nine months of 2006. For the first nine months of 2005, the weighted average fair value of the purchase rights granted was $6.48. In calculating compensation, the fair value of each stock purchase right was estimated on the date of grant using the following weighted average assumptions:

	Nine Months Ended September 30,
	2006			2005
Dividend yield		1.95	%		1.9	%
Expected volatility		23.5	%		28.0	%
Risk-free interest rate		4.5	%		2.6	%
Expected life (in years)		0.5			0.5

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NOTE 8 - EMPLOYEE BENEFIT PLANS

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)	2006			2005			2006			2005
Discount Rate		5.75	%		6.00	%		5.75	%		6.00	%
Long-Term Rate of Return on Assets		8.00	%		8.00	%		8.00	%		8.00	%

Service Cost	$	1,250		$	1,183		$	3,750		$	3,263
Interest Cost		875			838			2,625			2,438
Expected Return on Plan Assets		(975	)		(782	)		(2,925	)		(2,378	)
Prior Service Cost Amortization		50			55			150			165
Net Loss Amortization		375			400			1,125			990
Net Periodic Benefit Cost	$	1,575		$	1,694		$	4,725		$	4,478

The components of the net periodic benefit costs for the Company's Supplemental Executive Retirement Plan ("SERP") were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2006			2005			2006			2005
Discount Rate		5.75	%		6.00	%		5.75	%		6.00	%
Long-Term Rate Of Return On Assets		N/A			N/A			N/A			N/A

Service Cost	$	30		$	35		$	90		$	105
Interest Cost		56			54			168			162
Expected Return On Plan Assets		N/A			N/A			N/A			N/A
Prior Service Cost Amortization		15			15			45			45
Net Loss Amortization		19			21			57			63
Net Periodic Benefit Cost	$	120		$	125		$	360		$	375

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 customers. These financial instruments consist of commitments to extend credit and standby letters of credit.

The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments. As of September 30, 2006, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Millions)	Amount
Commitments to Extend Credit⁽¹⁾	$	443.3
Standby Letters of Credit	$	17.8

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

Commitments to extend credit are agreements to lend to a customer 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.

NOTE 10 - COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income," requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income (loss). Comprehensive income totaled $9.6 million and $24.7 million, respectively, for the three and nine months ended September 30, 2006, and $8.4 million and $22.3 million, respectively, for the comparable periods in 2005. The Company’s comprehensive income consists of net income and changes in unrealized gains (losses) on securities available-for-sale, net of income taxes. Changes in unrealized gains (losses), net of taxes, on securities totaled $963,000 and $295,000, respectively, for the three and nine months ended September, 2006, and $(195,000) and $(540,000), respectively, for the three and nine months ended September 30, 2005. Reclassification adjustments consist only of realized gains and losses on sales of investment securities and were not material for the nine months ended September 30, 2006 and 2005.

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QUARTERLY FINANCIAL DATA (UNAUDITED)

	2006									2005												2004
(Dollars in Thousands, Except Per Share Data)	Third			Second			First			Fourth			Third			Second			First			Fourth
Summary of Operations:
Interest Income	$	42,512		$	41,369		$	39,412		$	38,780		$	36,889		$	33,910		$	30,474		$	29,930
Interest Expense		12,289			11,182			10,282			9,470			7,885			6,788			5,920			5,634
Net Interest Income		30,223			30,187			29,130			29,310			29,004			27,122			24,554			24,296
Provision for Loan Losses		711			121			667			1,333			376			388			410			300
Net Interest Income After Provision for Loan Losses		29,512			30,066			28,463			27,977			28,628			26,734			24,144			23,996
Gain on Sale of Credit Card Portfolios		-			-			-			-			-			-			-			324
Noninterest Income		14,144			14,003			13,045			12,974			13,123			12,041			11,060			11,596
Conversion/Merger Expense		-			-			-			24			180			234			-			436
Noninterest Expense		30,422			31,070			30,092			29,318			28,429			26,362			25,267			24,481
Income Before Provision for Income Taxes		13,234			12,999			11,416			11,609			13,142			12,179			9,937			10,999
Provision for Income Taxes		4,554			4,684			3,995			4,150			4,565			4,311			3,560			3,737
Net Income	$	8,680		$	8,315		$	7,421		$	7,459		$	8,577		$	7,868		$	6,377		$	7,262
Net Interest Income (FTE)	$	30,745		$	30,591		$	29,461		$	29,652		$	29,329		$	27,396		$	24,835		$	24,619

Per Common Share:
Net Income Basic	$	.47		$	.44		$	.40		$	.40		$	.46		$	.44		$	.36		$	.40
Net Income Diluted		.47			.44			.40			.40			.46			.44			.36			.40
Dividends Declared		.163			.163			.163			.163			.152			.152			.152			.152
Diluted Book Value		17.18			16.81			16.65			16.39			16.17			15.87			14.69			14.51
Market Price:
High		33.25			35.39			37.97			39.33			38.72			33.46			33.60			36.78
Low		29.87			29.51			33.79			33.21			31.78			28.02			29.30			30.17
Close		31.10			30.20			35.55			34.29			37.71			32.32			32.41			33.44

Selected Average
Balances:
Loans	$	2,025,112		$	2,040,656		$	2,048,642		$	2,062,775		$	2,046,968		$	1,932,637		$	1,827,327		$	1,779,736
Earning Assets		2,241,158			2,278,817			2,275,667			2,279,010			2,250,902			2,170,483			2,047,049			2,066,111
Assets		2,560,155			2,603,090			2,604,458			2,607,597			2,569,524			2,458,788			2,306,807			2,322,870
Deposits		2,023,523			2,047,755			2,040,248			2,027,017			2,013,427			1,932,144			1,847,378			1,853,588
Shareowners’ Equity		318,041			315,794			311,461			306,208			300,931			278,107			260,946			248,773
Common Equivalent Average Shares:
Basic		18,530			18,633			18,652			18,624			18,623			18,094			17,700			17,444
Diluted		18,565			18,653			18,665			18,654			18,649			18,102			17,708			17,451

Ratios:
ROA		1.35	%		1.28	%		1.16	%		1.14	%		1.32	%		1.28	%		1.12	%		1.24	%
ROE		10.83	%		10.56	%		9.66	%		9.67	%		11.31	%		11.35	%		9.91	%		11.61	%
Net Interest Margin (FTE)		5.45	%		5.38	%		5.25	%		5.16	%		5.17	%		5.07	%		4.92	%		4.75	%
Efficiency Ratio		64.35	%		66.23	%		67.20	%		65.22	%		63.60	%		63.56	%		67.06	%		63.85	%

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Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Results of Operations," "Financial Condition," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting Policies." Information therein should facilitate a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2006 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

The period-to-date averages used in this report are based on daily balances for each respective period. In certain circumstances, comparing average balances for the comparable quarters of consecutive years may be more meaningful than simply analyzing year-to-date averages. Therefore, where appropriate, quarterly averages have been presented for analysis and have been noted as such. See Table I for average balances and interest rates presented on a quarterly basis.

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

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

Reconciliation of operating efficiency ratio to efficiency ratio -

	Nine Months Ended September 30
	2006			2005
Efficiency ratio		69.39	%		68.32	%
Effect of intangible amortization and one-time merger expenses		(3.49	)%		(3.68	)%
Operating efficiency ratio		65.90	%		64.64	%

Reconciliation of operating net noninterest expense to net noninterest expense -

	Nine Months Ended September 30
	2006			2005
Net noninterest expense as a percent of average assets		2.60	%		2.42	%
Effect of intangible amortization and one-time merger expenses		(0.24	)%		(0.24	)%
Operating net noninterest expense as a percent of average assets		2.36	%		2.18	%

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

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

BUSINESS OVERVIEW

We are a financial holding company headquartered in Tallahassee, Florida and are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or "CCB"). The Bank offers a broad array of products and services through a total of 69 full-service offices located in Florida, Georgia, and Alabama. The Bank also has mortgage lending offices in three additional Florida communities, and one Georgia community. The Bank offers commercial and retail banking services, as well as trust and asset management, merchant services, securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and non-interest income such as service charges on deposit accounts, asset management and trust fees, mortgage banking revenues, merchant service fees, brokerage and data processing revenues.

Our philosophy is to grow and prosper, building long-term relationships based on quality service, high ethical standards, and safe and sound banking practices. We are a super-community bank in the relationship banking business with a locally oriented, community-based focus, which is augmented by experienced, centralized support in select specialized areas. Our local market orientation is reflected in our network of banking office locations, experienced community executives, and community advisory boards which support our focus on responding to local banking needs. We strive to offer a broad array of sophisticated products and to provide quality service by empowering associates to make decisions in their local markets.

Pursuant to our long-term strategic initiative, "Project 2010", we have continued our expansion, emphasizing a combination of growth in existing markets and acquisitions. Acquisitions will continue to be focused on a three state area including Florida, Georgia, and Alabama with a particular focus on financial institutions, which are $100 million to $400 million in asset size and generally located on the outskirts of major metropolitan areas. We continue to evaluate de novo expansion opportunities in attractive new markets in the event that acquisition opportunities are not feasible. Other expansion opportunities that will be evaluated include asset management, insurance, and mortgage banking.

Recent Acquisition. On May 20, 2005, we completed our merger with First Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. We issued approximately 906,000 shares of common stock and paid approximately $29.0 million in cash for a total purchase price of $58.0 million. FABC's wholly-owned subsidiary, First National Bank of Alachua, had $228.3 million in assets at closing with seven offices in Alachua County and an eighth office in Hastings, Florida, which is in St. Johns County.

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FINANCIAL OVERVIEW

A summary overview of our financial performance for 2006 versus 2005 is provided below.

2006 Financial Performance Highlights -

Earnings of $8.7 million, up 1.2% and $24.4 million, up 7.0% for the three and nine months ended September 30, 2006 as compared to the same periods in 2005.

Ÿ Diluted earnings per share of $.47 for the third quarter of 2006 compared to $.46 for the comparable period in 2005. Earnings per diluted share for the nine months ended

September 30, 2006 of $1.31 represents a 4.0% increase over the same period in 2005.

Growth in earnings was attributable to improvement in operating revenues of 5.3% and 11.8% for the three and nine month periods, respectively, driven primarily by higher net interest income and noninterest income.

Taxable equivalent net interest income grew 4.8% and 11.3% for the three and nine month periods, respectively, due to an improved net interest margin.

Net interest margin percentage improved 28 basis points and 31 basis points for the three and nine month periods, respectively, driven by favorable re-pricing spread and higher yield on new loan production.

Noninterest income grew 7.8% and 13.7% for the three and nine month periods, respectively, due primarily to higher deposit fees, asset management fees, retail brokerage fees, and card processing fees.

Continued strong credit quality as reflected by a nonperforming asset ratio of .34% and an annualized net charge-off ratio of .13% for the third quarter of 2006 compared to .08% for the same period in 2005. At quarter-end the allowance for loan losses was .86% of outstanding loans and provided coverage of 269% of nonperforming loans compared to .85% and 343%, respectively, for the same period in 2005.

We remain well-capitalized with a risk based capital ratio of 14.72%.

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RESULTS OF OPERATIONS

Net Income

Earnings for the three and nine months ended September 30, 2006 were $8.7 million, or $.47 per diluted share, and $24.4 million, or $1.31 per diluted share, respectively. This compared to $8.6 million, or $.46 per diluted share and $22.8 million, or $1.26 per diluted share in 2005. Results include the impact of the acquisition of FABC in May 2005.

The growth in earnings for the third quarter of 2006 was primarily attributable to an increase in operating revenues (defined as net interest income plus noninterest income) of $2.2 million, partially offset by increases in noninterest expense of $1.8 million and loan loss provision of $335,000. The increase in operating revenues is reflective of a 4.2% increase in net interest income and a 7.8% increase in noninterest income.

The growth in earnings for the nine month period of $1.6 million, or 7.0% was primarily attributable to an increase in operating revenues of $13.8 million, or 11.8%, partially offset by an increase in noninterest expense of $11.1 million, or 13.8%, and income taxes of $797,000, or 6.4%. The increase in operating revenue reflects an 11.0% increase in net interest income and a 13.7% increase in noninterest income.

A condensed earnings summary is presented below:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2006			2005			2006			2005
Interest Income	$	42,512		$	36,889		$	123,293		$	101,273
Taxable Equivalent Adjustment⁽¹⁾		522			325			1,256			879
Interest Income (FTE)		43,034			37,214			124,549			102,152
Interest Expense		(12,289	)		(7,885	)		(33,753	)		(20,593	)
Net Interest Income (FTE)		30,745			29,329			90,796			81,559
Provision for Loan Losses		(711	)		(376	)		(1,499	)		(1,174	)
Taxable Equivalent Adjustment		(522	)		(325	)		(1,256	)		(879	)
Net Interest Income After Provision		29,512			28,628			88,041			79,506
Noninterest Income		14,144			13,123			41,193			36,224
Merger Expense		-			(180	)		-			(414	)
Noninterest Expense		(30,422	)		(28,429	)		(91,584	)		(80,058	)
Income Before Income Taxes		13,234			13,142			37,650			35,258
Income Taxes		(4,554	)		(4,565	)		(13,234	)		(12,436	)
Net Income	$	8,680		$	8,577		$	24,416		$	22,822

Percent Change		1.20	%		(20.72	)%		6.98	%		3.22	%
Return on Average Assets⁽²⁾		1.35	%		1.32	%		1.26	%		1.25	%
Return on Average Equity⁽²⁾		10.83	%		11.31	%		10.36	%		10.89	%

⁽¹⁾	Computed using a statutory tax rate of 35%

⁽²⁾	Annualized

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Net Interest Income

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities. Third quarter of 2006 taxable-equivalent net interest income increased $1.4 million, or 4.8%, over the comparable quarter in 2005. During the first nine months of 2006, taxable-equivalent net interest income increased $9.3 million, or 11.3%, respectively, over the first nine months of 2005. This increase was caused by the effect of our acquisition of FABC, higher earning asset yields and a slight improvement in earning asset mix, partially offset by higher funding costs and a change in deposit mix. The increase in yields and funding costs are a result of the higher interest rate environment. The combination of these factors resulted in a 28 basis point improvement in the net interest margin as compared to the third quarter of 2005. Table I provides a comparative analysis of our average balances and interest rates.

For the three month period ended September 30, 2006, taxable-equivalent interest income increased $5.8 million or 15.6%, over the comparable period in 2005. During the first nine months of 2006, taxable-equivalent interest income improved $22.4 million, or 21.9%, respectively, over the comparable period in 2005. The increase was attributable to a change in earning asset mix and higher yields on earning assets. Earning asset yields improved 106 basis points to 7.62% in the third quarter of 2006 from 6.56% in the third quarter of 2005 and 7.35% in the prior quarter, primarily attributable to the higher interest rate environment. Relative to the third quarter, we anticipate income on earning assets will remain down slightly for the fourth quarter resulting from a slight decline in the net interest margin and an anticipated lower level of earning assets.

Interest expense for the three and nine month periods ended September 30, 2006 increased $4.4 million, or 55.9% and $13.2 million, or 63.9%, respectively, from the comparable prior year periods. The increased expense is attributable to higher rates paid on all interest bearing liabilities and an increase in long-term debt costs resulting from debt secured to fund the FABC acquisition. The average rate paid on interest bearing liabilities of 2.84% in the third quarter of 2006 represents an increase of 98 and 26 basis points, respectively, over the third quarter of 2005 and second quarter of 2006. We anticipate that our interest expense will continue to increase in the fourth quarter due to continued upward pressure on our funding costs driven by the higher rate environment, shifting deposit mix, and increased competition for deposits.

Our interest rate spread (defined as the average federal taxable-equivalent yield on earning assets less the average rate paid on interest bearing liabilities) increased from 4.60% for the first nine months of 2005 to 4.75% for the comparable period in 2006.

Our net interest margin (defined as federal taxable-equivalent net interest income divided by average earning assets) was 5.45% and 5.36%, respectively, for the three and nine month periods of 2006, versus 5.17% and 5.05%, respectively, for the comparable periods in 2005. The increase in margin reflects higher asset yields driven by rising interest rates. The net interest margin is expected to decline during the fourth quarter, which is attributable to factors noted above.

Provision for Loan Losses

The provision for loan losses was $711,000 and $1.5 million, respectively, for the three and nine month periods ended September 30, 2006, compared to $376,000 and $1.2 million for the same periods in 2005. The increase in the provision for both periods was due to a higher level of required reserves.

Net charge-offs totaled $664,000, or .13% of average loans for the third quarter of 2006 compared to $403,000, or .08% for the third quarter of 2005. For the nine-month period ended September 30, 2006, net charge-offs totaled $1.6 million, or .10% of average loans compared to $1.2 million, or .08% of average loans for the comparable period in 2005. At quarter-end the allowance for loan losses was .86% of outstanding loans and provided coverage of 269% of nonperforming loans.

Charge-off activity for the respective periods is set forth below:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2006		2005		2006		2005
CHARGE-OFFS
Commercial, Financial and Agricultural	$	294	$	151	$	760	$	541
Real Estate - Construction		-		-		-		-
Real Estate - Commercial		-		4		291		10
Real Estate - Residential		81		115		127		177
Consumer		690		551		1,729		1,805
Total Charge-offs		1,065		821		2,907		2,533

RECOVERIES
Commercial, Financial and Agricultural		43		43		168		150
Real Estate - Construction		-		-		-		-
Real Estate - Commercial		4		1		9		1
Real Estate - Residential		2		20		11		36
Consumer		352		354		1,121		1,174
Total Recoveries		401		418		1,309		1,361

Net Charge-offs	$	664	$	403	$	1,598	$	1,172