Edgar Filing: CAPITAL CITY BANK GROUP INC

form10q_0608.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2008

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

For the transition period from ____________ to ____________

Commission File Number: 0-13358

CAPITAL CITY BANK GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

(850) 402-7000

(Registrant's telephone number, including area code)

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

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

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

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

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

CAPITAL CITY BANK GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2008

TABLE OF CONTENTS

PART I – Financial Information		Page

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition – June 30, 2008 and December 31, 2007	4
	Consolidated Statements of Income – Three and Six Months Ended June 30, 2008 and 2007	5
	Consolidated Statement of Changes in Shareowners’ Equity – Six Months Ended June 30, 2008	6
	Consolidated Statements of Cash Flow – Six Months Ended June 30, 2008 and 2007	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	34

Item 4.	Controls and Procedures	34

PART II – Other Information

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures		37

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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, 2007 (the “2007 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”; (b) “Risk Factors” in Part I, Item 1A., as updated in our subsequent quarterly reports filed on Form 10-Q, and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7. as well as:

§	the frequency and magnitude of foreclosure of our loans;

§	the adequacy of collateral underlying collateralized loans and our ability to resell the collateral if we foreclose on the loans;

§	the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;

§	the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision;

§	the extent to which our nonperforming loans increase or decrease as a percentage of our total loan portfolio;

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

§	our need and our ability to incur additional debt or equity financing;

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

§	the effects of harsh weather conditions, including hurricanes;

§	inflation, interest rate, market and monetary fluctuations;

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

§	legislative or regulatory changes;

§	our ability to comply with the extensive laws and regulations to which we are subject;

§	the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

§	changes in the securities and real estate markets;

§	increased competition and its effect on pricing;

§	technological changes;

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

§	the effects of security breaches and computer viruses that may affect our computer systems;

§	changes in consumer spending and saving habits;

§	growth and profitability of our noninterest income;

§	changes in accounting principles, policies, practices or guidelines;

§	the limited trading activity of our common stock;

§	the concentration of ownership of our common stock;

§	anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;

§	other risks described from time to time in our filings with the Securities and Exchange Commission; and

§	our ability to manage the risks involved in the foregoing.

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

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PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007

(Dollars In Thousands, Except Share Data)	June 30, 2008			December 31, 2007
ASSETS
Cash and Due From Banks	$	108,672		$	93,437
Funds Sold and Interest Bearing Deposits		192,786			166,260
Total Cash and Cash Equivalents		301,458			259,697

Investment Securities, Available-for-Sale		185,971			190,719

Loans, Net of Unearned Interest		1,916,815			1,915,850
Allowance for Loan Losses		(22,518	)		(18,066	)
Loans, Net		1,894,297			1,897,784

Premises and Equipment, Net		102,559			98,612
Goodwill		84,811			84,811
Other Intangible Assets		10,840			13,757
Other Assets		69,479			70,947
Total Assets	$	2,649,415		$	2,616,327

LIABILITIES
Deposits:
Noninterest Bearing Deposits	$	416,992		$	432,659
Interest Bearing Deposits		1,745,934			1,709,685
Total Deposits		2,162,926			2,142,344

Short-Term Borrowings		51,783			53,131
Subordinated Notes Payable		62,887			62,887
Other Long-Term Borrowings		36,857			26,731
Other Liabilities		38,382			38,559
Total Liabilities		2,352,835			2,323,652

SHAREOWNERS' EQUITY
Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares outstanding		-			-
Common Stock, $.01 par value, 90,000,000 shares authorized; 17,111,439 and 17,182,553 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		171			172
Additional Paid-In Capital		36,382			38,243
Retained Earnings		266,171			260,325
Accumulated Other Comprehensive Loss, Net of Tax		(6,144	)		(6,065	)
Total Shareowners' Equity		296,580			292,675
Total Liabilities and Shareowners' Equity	$	2,649,415		$	2,616,327

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

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CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30

	Three Months Ended				Six Months Ended
(Dollars in Thousands, Except Per Share Data)	2008		2007		2008		2007
INTEREST INCOME
Interest and Fees on Loans	$	33,422	$	39,092	$	68,677	$	78,145
Investment Securities:
U.S. Treasury		182		142		349		283
U.S. Govt. Agencies		665		916		1,426		1,856
States and Political Subdivisions		781		708		1,567		1,384
Other Securities		182		177		361		360
Funds Sold		1,028		689		2,603		1,210
Total Interest Income		36,260		41,724		74,983		83,238

INTEREST EXPENSE
Deposits		7,162		11,098		17,643		22,098
Short-Term Borrowings		296		737		817		1,498
Subordinated Notes Payable		931		932		1,862		1,858
Other Long-Term Borrowings		396		496		727		998
Total Interest Expense		8,785		13,263		21,049		26,452

NET INTEREST INCOME		27,475		28,461		53,934		56,786
Provision for Loan Losses		5,432		1,675		9,574		2,912
Net Interest Income After Provision For Loan Losses		22,043		26,786		44,360		53,874

NONINTEREST INCOME
Service Charges on Deposit Accounts		7,060		6,442		13,825		12,487
Data Processing		812		790		1,625		1,505
Asset Management Fees		1,125		1,175		2,275		2,400
Securities Transactions		30		0		95		7
Mortgage Banking Revenues		506		850		1,000		1,529
Bank Card Fees		3,908		3,504		7,869		6,991
Other		2,277		2,323		6,828		4,127
Total Noninterest Income		15,718		15,084		33,517		29,046

NONINTEREST EXPENSE
Salaries and Associate Benefits		15,318		14,992		30,922		30,711
Occupancy, Net		2,491		2,324		4,853		4,560
Furniture and Equipment		2,583		2,494		5,165		4,843
Intangible Amortization		1,459		1,458		2,917		2,917
Other		8,905		8,629		16,697		17,428
Total Noninterest Expense		30,756		29,897		60,554		60,459

INCOME BEFORE INCOME TAXES		7,005		11,973		17,323		22,461
Income Taxes		2,195		4,082		5,233		7,613

NET INCOME	$	4,810	$	7,891	$	12,090	$	14,848

Basic Net Income Per Share	$	.28	$	.43	$	.70	$	.81
Diluted Net Income Per Share	$	.28	$	.43	$	.70	$	.81

Average Basic Shares Outstanding		17,146,395		18,089,022		17,158,312		18,247,991
Average Diluted Shares Outstanding		17,146,837		18,089,223		17,159,052		18,248,245

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

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CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREOWNERS' EQUITY

(Dollars In Thousands, Except Share Data)	Shares Outstanding			Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss, Net of Taxes			Total

Balance, December 31, 2007	17,182,553		$	172	$	38,243		$	260,325		$	(6,065	)	$	292,675
Cumulative Effect of Adoption of EITF 06-4	-			-		-			(30	)		-			(30	)
Comprehensive Income:
Net Income	-			-		-			12,090			-			12,090
Net Change in Unrealized Gain On Available-for-Sale Securities (net of tax)	-			-		-			-			(79	)		(79	)
Total Comprehensive Income	-			-		-			-			-			12,011
Cash Dividends ($.3700 per share)	-			-		-			(6,214)			-			(6,214	)
Stock Performance Plan Compensation	-			-		17			-			-			17
Issuance of Common Stock	18,927			-		535			-			-			535
Repurchase of Common Stock	(90,041	)		(1)		(2,413	)		-			-			(2,414	)

Balance, June 30, 2008	17,111,439		$	171	$	36,382		$	266,171		$	(6,144	)	$	296,580

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

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CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30

(Dollars in Thousands)	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	12,090		$	14,848
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Provision for Loan Losses		9,574			2,912
Depreciation		3,447			3,087
Net Securities Amortization		337			170
Amortization of Intangible Assets		2,917			2,917
Gain on Securities Transactions		(95	)		(7	)
Origination of Loans Held-for-Sale		(32,269	)		(94,830	)
Proceeds From Sales of Loans Held-for-Sale		35,931			93,254
Net Gain From Sales of Loans Held-for-Sale		(1,000	)		(1,529	)
Non-Cash Compensation		17			63
Deferred Income Taxes		(730	)		76
Net Decrease (Increase) in Other Assets		7,922			(3,508	)
Net (Decrease) Increase in Other Liabilities		(1,387	)		11,271
Net Cash Provided By Operating Activities		36,754			28,724

CASH FLOWS FROM INVESTING ACTIVITIES
Securities Available-for-Sale:
Purchases		(49,001	)		(27,582	)
Sales		3,508			-
Payments, Maturities, and Calls		49,846			29,186
Net (Increase) Decrease in Loans		(13,216	)		67,966
Purchase of Premises & Equipment		(7,395	)		(9,540	)
Proceeds From Sales of Premises & Equipment		-			335
Net Cash (Used In) Provided By Investing Activities		(16,258	)		60,365

CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Deposits		20,582			(72,064	)
Net (Decrease) Increase in Short-Term Borrowings		(1,343	)		9,101
Increase in Other Long-Term Borrowings		11,623			1,700
Repayment of Other Long-Term Borrowings		(1,504	)		(3,323	)
Dividends Paid		(6,214	)		(6,475	)
Repurchase of Common Stock		(2,414	)		(23,219	)
Issuance of Common Stock		535			497
Net Cash Provided By (Used In) Financing Activities		21,265			(93,783	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		41,761			(4,694	)

Cash and Cash Equivalents at Beginning of Period		259,697			177,564
Cash and Cash Equivalents at End of Period	$	301,458		$	172,870

Supplemental Disclosure:
Interest Paid on Deposits	$	18,607		$	22,103
Interest Paid on Debt	$	3,391		$	4,377
Taxes Paid	$	8,961		$	6,601
Loans Transferred to Other Real Estate Owned	$	4,467		$	1,490
Issuance of Common Stock as Non-Cash Compensation	$	-		$	1,158

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

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CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

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

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

NOTE 2 - INVESTMENT SECURITIES

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

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

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

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

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NOTE 3 - LOANS

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

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

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

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

NOTE 4 - ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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NOTE 5 - INTANGIBLE ASSETS

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

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

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

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

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

NOTE 6 - DEPOSITS

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

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

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NOTE 7 - STOCK-BASED COMPENSATION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 8 - EMPLOYEE BENEFIT PLANS

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Thousands)	2008			2007			2008			2007

Discount Rate		6.00	%		6.00	%		6.00	%		6.00	%
Long-Term Rate of Return on Assets		8.00	%		8.00	%		8.00	%		8.00	%

Service Cost	$	1,279		$	1,350		$	2,558		$	2,700
Interest Cost		1,063			1,025			2,126			2,050
Expected Return on Plan Assets		(1,253	)		(1,300	)		(2,506	)		(2,600	)
Prior Service Cost Amortization		75			100			151			200
Net Loss Amortization		280			250			561			500
Net Periodic Benefit Cost	$	1,444		$	1,425		$	2,890		$	2,850

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Thousands)	2008			2007			2008			2007

Discount Rate		6.00	%		6.00	%		6.00	%		6.00	%

Service Cost	$	22		$	25		$	44		$	50
Interest Cost		56			63			111			126
Prior Service Cost Amortization		2			3			4			6
Net Loss Amortization		1			18			3			36
Net Periodic Benefit Cost	$	81		$	109		$	162		$	218

NOTE 9 - COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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

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

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

NOTE 10 - COMPREHENSIVE INCOME

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

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NOTE 11 – FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

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

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

(Dollars in Thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value

Securities Available for Sale	$	44,627	$	128,718	$	1,054	$	174,399

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

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

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

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

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

NOTE 12 – SUBSEQUENT EVENT

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

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QUARTERLY FINANCIAL DATA (UNAUDITED)

	2008						2007													2006
(Dollars in Thousands, Except Per Share Data)	Second			First			Fourth			Third			Second			First			Fourth				Third
Summary of Operations:
Interest Income	$	36,260		$	38,723		$	40,786		$	41,299		$	41,724		$	41,514		$		42,600		$	42,512
Interest Expense		8,785			12,264			13,241			13,389			13,263			13,189				13,003			12,289
Net Interest Income		27,475			26,459			27,545			27,910			28,461			28,325				29,597			30,223
Provision for Loan Losses		5,432			4,142			1,699			1,552			1,675			1,237				460			711
Net Interest Income After Provision for Loan Losses		22,043			22,317			25,846			26,358			26,786			27,088				29,137			29,512
Noninterest Income		15,718			17,799			15,823			14,431			15,084			13,962				14,385			14,144
Noninterest Expense		30,756			29,798			31,614			29,919			29,897			30,562				29,984			30,422
Income Before Provision for Income Taxes		7,005			10,318			10,055			10,870			11,973			10,488				13,538			13,234
Provision for Income Taxes		2,195			3,038			2,391			3,699			4,082			3,531				4,688			4,554
Net Income	$	4,810		$	7,280		$	7,664		$	7,171		$	7,891		$	6,957		$		8,850		$	8,680
Net Interest Income (FTE)	$	28,081		$	27,077		$	28,196		$	28,517		$	29,050		$	28,898		$		30,152		$	30,745

Per Common Share:
Net Income Basic	$	0.28		$	0.42		$	0.44		$	0.41		$	0.43		$	0.38		$		0.48		$	0.47
Net Income Diluted		0.28			0.42			0.44			0.41			0.43			0.38				0.48			0.47
Dividends Declared		.185			.185			.185			.175			.175			.175				.175			.163
Diluted Book Value		17.33			17.33			17.03			16.95			16.87			16.97				17.01			17.18
Market Price:
High		30.19			29.99			34.00			36.40			33.69			35.91				35.98			33.25
Low		21.76			24.76			24.60			27.69			29.12			29.79				30.14			29.87
Close		21.76			29.00			28.22			31.20			31.34			33.30				35.30			31.10

Selected Average
Balances:
Loans	$	1,908,802		$	1,909,574		$	1,908,069		$	1,907,235		$	1,944,969		$	1,980,224		$		2,003,719		$	2,025,112
Earning Assets		2,303,971			2,301,463			2,191,230			2,144,737			2,187,236			2,211,560				2,238,066			2,241,158
Assets		2,634,771			2,646,474			2,519,682			2,467,703			2,511,252			2,530,790				2,557,357			2,560,155
Deposits		2,140,546			2,148,874			2,016,736			1,954,160			1,987,418			2,003,726				2,028,453			2,023,523
Shareowners’ Equity		300,890			296,804			299,342			301,536			309,352			316,484				323,903			318,041
Common Equivalent Shares:
Basic		17,146			17,170			17,444			17,709			18,089			18,409				18,525			18,530
Diluted		17,147			17,178			17,445			17,719			18,089			18,420				18,569			18,565

Ratios:
ROA		.73	%		1.11	%		1.21	%		1.15	%		1.26	%		1.11	%			1.37	%		1.35	%
ROE		6.43	%		9.87	%		10.16	%		9.44	%		10.23	%		8.91	%			10.84	%		10.83	%
Net Interest Margin (FTE)		4.90	%		4.73	%		5.10	%		5.27	%		5.33	%		5.29	%			5.35	%		5.45	%
Efficiency Ratio		66.89	%		63.15	%		68.51	%		66.27	%		64.44	%		67.90	%			63.99	%		64.35	%

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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." The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2008 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

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

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

Reconciliation of operating efficiency ratio to efficiency ratio:

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

Reconciliation of operating net noninterest expense ratio:

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

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