Capital City Bank Group - 10-Q quarterly report FY

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, 2007

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, 2007, 17,560,064 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, 2007

TABLE OF CONTENTS

PART I – Financial Information		Page

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2007 and 2006	4
	Consolidated Balance Sheets – September 30, 2007, December 31, 2006, and September 30, 2006	5
	Consolidated Statements of Changes in Shareowners’ Equity – Nine Months Ended September 30, 2007 and 2006	6
	Consolidated Statements of Cash Flow – Nine Months Ended September 30, 2007 and 2006	7
	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	29

Item 4.	Controls and Procedures	31

PART II – Other Information

Item 1.	Legal Proceedings	31

Item 1.A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

Signatures		33

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, 2006 (the “2006 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;

§	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 accuracy of our financial statement estimates and assumptions;

§	the effects of harsh weather conditions, including hurricanes;

§	inflation, interest rate, market and monetary fluctuations;

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

§	the frequency and magnitude of foreclosure of our loans;

§	effect of changes in the real estate market, 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;

§	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.

PART I. FINANCIAL INFORMATION

Item 1.

CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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)	2007		2006		2007		2006
INTEREST INCOME
Interest and Fees on Loans	$	38,692	$	40,260	$	116,838	$	116,570
Investment Securities:
U.S. Treasury		143		132		425		310
U.S. Govt. Agencies		906		929		2,762		2,672
States and Political Subdivisions		743		650		2,127		1,672
Other Securities		176		203		536		606
Funds Sold		639		338		1,849		1,463
Total Interest Income		41,299		42,512		124,537		123,293

INTEREST EXPENSE
Deposits		11,266		9,985		33,364		26,423
Short-Term Borrowings		734		753		2,232		2,352
Subordinated Notes Payable		936		936		2,794		2,789
Other Long-Term Borrowings		453		615		1,451		2,189
Total Interest Expense		13,389		12,289		39,841		33,753

NET INTEREST INCOME		27,910		30,223		84,696		89,540
Provision for Loan Losses		1,552		711		4,464		1,499
Net Interest Income After Provision For Loan Losses		26,358		29,512		80,232		88,041

NONINTEREST INCOME
Service Charges on Deposit Accounts		6,387		6,450		18,874		18,226
Data Processing		775		673		2,280		2,014
Asset Management Fees		1,200		1,215		3,600		3,420
Securities Transactions		-		-		7		(4)
Mortgage Banking Revenues		642		824		2,171		2,448
Other		5,427		4,982		16,545		15,089
Total Noninterest Income		14,431		14,144		43,477		41,193

NONINTEREST EXPENSE
Salaries and Associate Benefits		15,096		15,277		45,807		45,912
Occupancy, Net		2,409		2,354		6,969		6,935
Furniture and Equipment		2,513		2,492		7,356		7,652
Intangible Amortization		1,459		1,536		4,376		4,601
Other		8,442		8,763		25,870		26,484
Total Noninterest Expense		29,919		30,422		90,378		91,584

INCOME BEFORE INCOME TAXES		10,870		13,234		33,331		37,650
Income Taxes		3,699		4,554		11,312		13,234

NET INCOME	$	7,171	$	8,680	$	22,019	$	24,416

Basic Net Income Per Share	$	.41	$	.47	$	1.22	$	1.31
Diluted Net Income Per Share	$	.41	$	.47	$	1.22	$	1.31

Average Basic Shares Outstanding		17,709,119		18,529,926		18,066,393		18,604,488
Average Diluted Share Outstanding		17,719,436		18,564,932		18,076,916		18,627,167

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

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2007, DECEMBER 31, 2006, AND SEPTEMBER 30, 2006

(Unaudited)

(Dollars In Thousands, Except Share Data)	September 30, 2007			December 31, 2006			September 30, 2006
ASSETS
Cash and Due From Banks	$	91,378		$	98,769		$	100,781
Funds Sold and Interest Bearing Deposits		19,599			78,795			35,631
Total Cash and Cash Equivalents		110,977			177,564			136,412

Investment Securities, Available-for-Sale		184,609			191,894			190,617

Loans, Net of Unearned Interest		1,903,888			1,999,721			2,009,459
Allowance for Loan Losses		(18,001	)		(17,217	)		(17,311	)
Loans, Net		1,885,887			1,982,504			1,992,148

Premises and Equipment, Net		95,816			86,538			84,915
Goodwill		84,811			84,811			84,810
Other Intangible Assets		15,215			19,591			21,076
Other Assets		62,611			55,008			48,895
Total Assets	$	2,439,926		$	2,597,910		$	2,558,873

LIABILITIES
Deposits:
Noninterest Bearing Deposits	$	419,242		$	490,014		$	506,331
Interest Bearing Deposits		1,518,171			1,591,640			1,542,908
Total Deposits		1,937,413			2,081,654			2,049,239

Short-Term Borrowings		63,817			65,023			54,171
Subordinated Notes Payable		62,887			62,887			62,887
Other Long-Term Borrowings		29,725			43,083			43,701
Other Liabilities		47,031			29,493			29,833
Total Liabilities		2,140,873			2,282,140			2,239,831

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; 17,628,499, 18,518,398, and 18,532,104 shares issued and outstanding at September 30, 2007, December 31, 2006, and September 30, 2006, respectively		176			185			185
Additional Paid-In Capital		50,789			80,654			80,938
Retained Earnings		255,876			243,242			238,870
Accumulated Other Comprehensive Loss, Net of Tax		(7,788	)		(8,311	)		(951	)
Total Shareowners' Equity		299,053			315,770			319,042
Total Liabilities and Shareowners' Equity	$	2,439,926		$	2,597,910		$	2,558,873

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

CAPITAL CITY BANK GROUP, INC. (Unaudited)

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, January 1, 2006	$	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 (net of tax)		-		-		-		295
Total Comprehensive Income		-		-		-		-		24,711
Cash Dividends ($.3250 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


Balance, January 1, 2007	$	185	$	80,654	$	243,242	$	(8,311)	$	315,770
Comprehensive Income:
Net Income		-		-		22,019		-
Net Change in Unrealized Loss On Available-for-Sale Securities (net of tax)		-		-		-		523
Total Comprehensive Income		-		-		-		-		22,542
Cash Dividends ($.5250 per share)		-		-		(9,608)		-		(9,608)
Miscellaneous - Other		-		-		223		-		223
Stock Performance Plan Compensation		-		135		-		-		135
Issuance of Common Stock		1		544		-		-		545
Repurchase of Common Stock		(10)		(30,544)		-		-		(30,554)

Balance, September 30, 2007	$	176	$	50,789	$	255,876	$	(7,788)	$	299,053

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

CAPITAL CITY BANK GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30

(Unaudited)

(Dollars in Thousands)	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	22,019		$	24,416
Adjustments to Reconcile Net Income to Cash Provided by Operating Activities:
Provision for Loan Losses		4,464			1,499
Depreciation		4,673			5,251
Net Securities Amortization		226			480
Amortization of Intangible Assets		4,376			4,601
Securities Transactions		(7	)		4
Origination of Loans Held-for-Sale		(132,961	)		(144,719	)
Proceeds From Sales of Loans Held-for-Sale		136,973			148,330
Net Gain From Sales of Loans Held-for-Sale		(2,171	)		(2,448	)
Non-Cash Compensation		135			1,504
Deferred Income Taxes		549			3,704
Net (Increase) Decrease in Other Assets		(5,443	)		4,225
Net Increase in Other Liabilities		16,854			2,359
Net Cash Provided By Operating Activities		49,687			49,206

CASH FLOWS FROM INVESTING ACTIVITIES
Securities Available-for-Sale:
Purchases		(35,405	)		(95,807	)
Sales		-			283
Payments, Maturities, and Calls		43,292			75,872
Net Decrease in Loans		88,212			54,636
Purchase of Premises & Equipment		(14,394	)		(16,634	)
Proceeds From Sales of Premises & Equipment		443			286
Net Cash Provided By Investing Activities		82,148			18,636

CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposits		(144,241	)		(30,108	)
Net Decrease in Short-Term Borrowings		(1,580	)		(29,209	)
Decrease in Other Long-Term Borrowings		(8,499	)		(9,811	)
Repayment of Other Long-Term Borrowings		(4,485	)		(15,711	)
Dividends Paid		(9,608	)		(9,078	)
Repurchase of Common Stock		(30,554	)		(4,841	)
Issuance of Common Stock		545			969
Net Cash Used In Provided By Financing Activities		(198,422	)		(97,789	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(66,587	)		(29,947	)

Cash and Cash Equivalents at Beginning of Period		177,564			166,359
Cash and Cash Equivalents at End of Period	$	110,977		$	136,412

Supplemental Disclosure:
Interest Paid on Deposits	$	33,222		$	26,051
Interest Paid on Debt	$	6,540		$	7,523
Taxes Paid	$	8,643		$	11,530
Loans Transferred to Other Real Estate	$	2,828		$	638
Issuance of Common Stock as Non-Cash Compensation	$	1,159		$	1,504
Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings	$	10,199		$	13,061

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

CAPITAL CITY BANK GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - MANAGEMENT'S OPINION AND 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 customers through its subsidiary with banking offices located in Florida, Georgia, and Alabama. The Company is subject to competition from other financial institutions, is subject to regulations of 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 Company's 2006 Annual Report on Form 10-K.

In the opinion of management, the consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of September 30, 2007, December 31, 2006, and September 30, 2006, the results of operations for the three and nine month periods ended September 30, 2007 and 2006, and cash flows for the nine month periods ended September 30, 2007 and 2006.

NOTE 2 - INVESTMENT SECURITIES

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

	September 30, 2007
(Dollars in Thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
U.S. Treasury	$	12,146	$	48	$	-	$	12,194
U.S. Government Agencies		53,124		147		185		53,086
States and Political Subdivisions		86,183		9		329		85,863
Mortgage-Backed Securities		21,364		55		297		21,122
Other Securities⁽¹⁾		12,307		37		-		12,344
Total Investment Securities	$	185,124	$	296	$	811	$	184,609

	December 31, 2006
(Dollars in Thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
U.S. Treasury	$	12,098	$	16	$	49	$	12,065
U.S. Government Agencies		61,619		37		593		61,063
States and Political Subdivisions		83,621		16		415		83,222
Mortgage-Backed Securities		23,244		23		371		22,896
Other Securities⁽¹⁾		12,648		-		-		12,648
Total Investment Securities	$	193,230	$	92	$	1,428	$	191,894

⁽¹⁾	FederalHome LoanBank and FederalReserve Bank stock recorded at cost.

NOTE 3 - LOANS

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

(Dollars in Thousands)	September 30, 2007		December 31, 2006
Commercial, Financial and Agricultural	$	205,628	$	229,327
Real Estate-Construction		145,343		179,072
Real Estate-Commercial		631,418		643,885
Real Estate-Residential		485,612		531,968
Real Estate-Home Equity		183,620		173,597
Real Estate-Loans Held-for-Sale		3,615		4,170
Consumer		248,652		237,702
Loans, Net of Unearned Interest	$	1,903,888	$	1,999,721

Net deferred fees included in loans at September 30, 2007 and December 31, 2006 were $1.4 million and $1.5 million, respectively.

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)	2007		2006
Balance, Beginning of Period	$	17,217	$	$ 17,410
Provision for Loan Losses		4,464		1,499
Recoveries on Loans Previously Charged-Off		1,465		1,309
Loans Charged-Off		(5,145)		(2,907)
Balance, End of Period	$	18,001	$	$ 17,311

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

	September 30, 2007				December 31, 2006
(Dollars in Thousands)	Balance		Valuation Allowance		Balance		Valuation Allowance
Impaired Loans:
With Related Valuation Allowance	$	17,595	$	3,375	$	6,085	$	2,255
Without Related Valuation Allowance		5,558		-		4,574		-

NOTE 5 - INTANGIBLE ASSETS

The Company had net intangible assets of $100.0 million and $104.4 million at September 30, 2007 and December 31, 2006, respectively. Intangible assets were as follows:

	September 30, 2007				December 31, 2006
(Dollars in Thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Core Deposit Intangibles	$	47,176	$	33,188	$	47,176	$	28,955
Goodwill		84,811		-		84,811		-
Customer Relationship Intangible		1,867		640		1,867		497
Total Intangible Assets	$	133,854	$	33,828	$	133,854	$	29,452

Net Core Deposit Intangibles: As of September 30, 2007 and December 31, 2006, the Company had net core deposit intangibles of $14.0 million and $18.2 million, respectively. Amortization expense for the first nine months of 2007 and 2006 was $4.2 million. Estimated annual amortization expense is $5.7 million.

Goodwill: As of September 30, 2007 and December 31, 2006, 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 (“SFAS 142”).

Other: As of September 30, 2007 and December 31, 2006, the Company had a customer relationship intangible, net of accumulated amortization, of $1.2 million and $1.4 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 2007 and 2006 was $143,000. Estimated annual amortization expense is $191,000 based on use of a 10-year useful life.

NOTE 6 - DEPOSITS

The composition of the Company's interest bearing deposits at September 30, 2007 and December 31, 2006 was as follows:

(Dollars in Thousands)	September 30, 2007		December 31, 2006
NOW Accounts	$	530,619	$	599,433
Money Market Accounts		399,578		384,568
Savings Deposits		115,955		125,500
Other Time Deposits		472,019		482,139
Total Interest Bearing Deposits	$	1,518,171	$	1,591,640

NOTE 7 – INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Income Tax Uncertainties" ("FIN 48"), on January 1, 2007. There was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company had unrecognized tax benefits of approximately $2.3 million at September 30, 2007, all of which, if recognized, would affect the effective tax rate. In addition, interest and penalties associated with these unrecognized tax benefits was approximately $244,000.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. In addition, no state jurisdictions remain subject to examination before 2003. No material change to the Company’s unrecognized tax positions is expected over the next 12 months. As a policy, the Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

NOTE 8 - 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 “Share-Based Payment” (Revised). 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, 2007, 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, 2007 and 2006 was approximately $135,000 and $1.5 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 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, in the form of performance shares, on an annual basis. Annual awards are tied to an internally established annual earnings target. The grant-date fair value of an annual compensation award is approximately $1.5 million. 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 43,437 shares are eligible for issuance annually.

At the end of each calendar year, the Compensation Committee of the Company’s Board of Directors 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. A total of 32,799 shares were issued under this plan during the first quarter of 2007 related to the 2006 award.

The Company did not recognize any expense for the first nine months of 2007 related to the Incentive Plan as the Company’s performance did not achieve the earnings performance goal. The Company recognized expense of $1.1 million for the first nine months of 2006 for the Incentive Plan. A total of 875,000 shares of common stock have been reserved for issuance under the AIP. To date, the Company has issued 60,892 shares of common stock under the AIP.

Executive Stock Option Agreement. In 2006 and 2005, under the provisions of the AIP, the Company's Board of Directors approved stock option agreements for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG). Similar stock option agreements were approved in 2004 and 2003. 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 2006 and 2005 agreements, the earnings per share conditions were not met; therefore, no expense was recognized related to these agreements. In accordance with the provisions of SFAS 123R and SFAS 123, the Company recognized expense of approximately $94,000 and $146,000 for the first nine months of 2007 and 2006, 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 during the first nine months of 2007 as results fell short of the earnings performance goal.

A summary of the status of the Company’s option shares as of September 30, 2007 is presented below:

Options	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Term		Aggregate Intrinsic Value
Outstanding at January 1, 2007		60,384	$	32.79	$	8.3	$	151,355
Granted		-		-		-		-
Exercised		-		-		-		-
Forfeited or expired		-		-		-		-
Outstanding at September 30, 2007		60,384	$	32.79	$	3.09	$	(96,219	)
Exercisable at September 30, 2007		47,720	$	32.79	$	3.09	$	(77,351	)

As of September 30, 2007, there was approximately $31,000 of total unrecognized compensation cost related to the nonvested option shares granted under the agreements. That cost is expected to be recognized over the next three 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 cash compensation. The DSPP has 93,750 shares reserved for issuance. A total of 27,582 shares have been issued since the inception of the DSPP. For the first nine months of 2007, the Company issued 8,884 shares under the DSPP and recognized approximately $29,000 in expense related to this plan. For the first nine months of 2006, the Company issued 10,144 shares and recognized approximately $31,000 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 59,812 shares have been issued since inception of the ASPP. For the first nine months of 2007, the Company issued 8,895 shares under the ASPP and recognized $78,000 in expense related to this plan. For the first nine months of 2006, the Company issued 9,343 shares and recognized $67,000 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 Plan was $5.82 for the first nine months of 2007. For the first nine months of 2006, the weighted average fair value purchase right granted was $6.22. 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,
	2007			2006
Dividend yield		2.2	%		1.95	%
Expected volatility		27.0	%		23.5	%
Risk-free interest rate		4.7	%		4.5	%
Expected life (in years)		0.5			0.5

NOTE 9 - EMPLOYEE BENEFIT PLANS

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2007			2006			2007			2006

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

Service Cost	$	1,350		$	1,250		$	4,050		$	3,750
Interest Cost		1,025			875			3,075			2,625
Expected Return on Plan Assets		(1,300	)		(975	)		(3,900	)		(2,925	)
Prior Service Cost Amortization		100			50			300			150
Net Loss Amortization		250			375			750			1,125
Net Periodic Benefit Cost	$	1,425		$	1,575		$	4,275		$	4,725

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2007			2006			2007			2006

Discount Rate		6.00	%		5.75	%		6.00	%		5.75	%

Service Cost	$	25		$	30		$	75		$	90
Interest Cost		63			56			189			168
Prior Service Cost Amortization		3			15			9			45
Net Loss Amortization		18			19			54			57
Net Periodic Benefit Cost	$	109		$	120		$	327		$	360

NOTE 10 - 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 September 30, 2007, the amounts associated with the Company’s off-balance sheet obligations were as follows:

(Dollars in Millions)	Amount
Commitments to Extend Credit⁽¹⁾	$	425
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.

NOTE 11 - 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 $8.0 million and $22.5 million, respectively, for the three and nine months ended September 30, 2007, and $9.6 million and $24.7 million, respectively, for the comparable periods in 2006. The Company’s comprehensive income consists of net income and changes in unrealized gains (losses) on securities available-for-sale (net of income taxes) and changes in the pension liability (net of taxes). Changes in unrealized gains (losses), net of taxes, on securities totaled approximately $793,000 and $518,000, respectively, for the three and nine months ended September 2007, and $963,000 and $295,000, respectively, for the three and nine months ended September 30, 2006. 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, 2007 and 2006.

QUARTERLY FINANCIAL DATA (UNAUDITED)

	2007									2006												2005
(Dollars in Thousands, Except Per Share Data)	Third			Second			First			Fourth			Third			Second			First			Fourth
Summary of Operations:
Interest Income	$	41,299		$	41,724		$	41,514		$	42,600		$	42,512		$	41,369		$	39,412		$	38,780
Interest Expense		13,389			13,263			13,189			13,003			12,289			11,182			10,282			9,470
Net Interest Income		27,910			28,461			28,325			29,597			30,223			30,187			29,130			29,310
Provision for Loan Losses		1,552			1,675			1,237			460			711			121			667			1,333
Net Interest Income After Provision for Loan Losses		26,358			26,786			27,088			29,137			29,512			30,066			28,463			27,977
Noninterest Income		14,431			15,084			13,962			14,385			14,144			14,003			13,045			12,974
Merger Expense		-			-			-			-			-			-			-			24
Noninterest Expense		29,919			29,897			30,562			29,984			30,422			31,070			30,092			29,318
Income Before Provision for Income Taxes		10,870			11,973			10,488			13,538			13,234			12,999			11,416			11,609
Provision for Income Taxes		3,699			4,082			3,531			4,688			4,554			4,684			3,995			4,150
Net Income	$	7,171		$	7,891		$	6,957		$	8,850		$	8,680		$	8,315		$	7,421		$	7,459
Net Interest Income (FTE)	$	28,517		$	29,049		$	28,898		$	30,152		$	30,745		$	30,591		$	29,461		$	29,652

Per Common Share:
Net Income Basic	$	.41		$	.43		$	.38		$	.48		$	.47		$	.44		$	.40		$	.40
Net Income Diluted		.41			.43			.38			.48			.47			.44			.40			.40
Dividends Declared		.175			.175			.175			.175			.163			.163			.163			.163
Diluted Book Value		16.95			16.87			16.97			17.01			17.18			16.81			16.65			16.39
Market Price:
High		36.40			33.69			35.91			35.98			33.25			35.39			37.97			39.33
Low		27.69			29.12			29.79			30.14			29.87			29.51			33.79			33.21
Close		31.20			31.34			33.30			35.30			31.10			30.20			35.55			34.29

Selected Average
Balances:
Loans	$	1,907,235		$	1,944,969		$	1,980,224		$	2,003,719		$	2,025,112		$	2,040,656		$	2,048,642		$	2,062,775
Earning Assets		2,144,737			2,187,236			2,211,560			2,238,066			2,241,158			2,278,817			2,275,667			2,279,010
Assets		2,467,703			2,511,252			2,530,790			2,557,357			2,560,155			2,603,090			2,604,458			2,607,597
Deposits		1,954,160			1,987,418			2,003,726			2,028,453			2,023,523			2,047,755			2,040,248			2,027,017
Shareowners’ Equity		301,536			309,352			316,484			323,903			318,041			315,794			311,461			306,208
Common Equivalent Shares:
Basic		17,709			18,089			18,409			18,525			18,530			18,633			18,652			18,624
Diluted		17,719			18,089			18,420			18,569			18,565			18,653			18,665			18,654

Ratios:
ROA		1.15	%		1.26	%		1.11	%		1.37	%		1.35	%		1.28	%		1.16	%		1.14	%
ROE		9.44	%		10.23	%		8.91	%		10.84	%		10.83	%		10.56	%		9.66	%		9.67	%
Net Interest Margin (FTE)		5.27	%		5.33	%		5.29	%		5.35	%		5.45	%		5.38	%		5.25	%		5.16	%
Efficiency Ratio		66.27	%		64.44	%		67.90	%		63.99	%		64.35	%		66.23	%		67.20	%		65.22	%

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 2007 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 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 noninterest expense less intangible amortization 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 from noninterest income. Management uses these non-GAAP measures as part of its assessment of performance in managing noninterest expenses. We believe that excluding intangible amortization and one-time merger expenses in our calculations better reflects our periodic expenses and is more indicative 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,
	2007			2006
Efficiency ratio		69.55	%		69.39	%
Effect of intangible amortization expense		(3.28	)%		(3.49	)%
Operating efficiency ratio		66.27	%		65.90	%

Reconciliation of operating net noninterest expense ratio –

	Nine Months Ended September 30,
	2007			2006
Net noninterest expense as a percent of average assets		2.51	%		2.60	%
Effect of intangible amortization expense		(0.24	)%		(0.24	)%
Operating net noninterest expense as a percent of average assets		2.27	%		2.36	%

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 71 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 noninterest 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 2011", 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.

FINANCIAL OVERVIEW

A summary overview of our financial performance for 2007 versus 2006 is provided below.

2007 Financial Performance Highlights –

Earnings of $7.2 million and $22.0 million were down 17.4% and 9.8%, respectively, for the three and nine months ended September 30, 2007 as compared to the same periods in 2006.

Diluted earnings per share of $.41 for the third quarter of 2007 compared to $.47 for the comparable period in 2006, a decrease of 12.8%. Earnings per diluted share for the nine months ended September 30, 2007 of $1.22 compared to $1.31 for the same period in 2006, a decrease of 6.9%.

Decline in earnings for the three and nine month periods reflects lower net interest income and higher credit costs partially offset by stronger noninterest income and lower operating expenses.

Taxable equivalent net interest income declined 2.6% and 1.4% for the three and nine month periods, respectively, due to higher funding costs.

Loan loss provision increased $841,000 and $3.0 million for the three and nine month periods, respectively, reflecting a higher level of required reserves for impaired loans attributable to a slowdown in housing and real estate markets.

Noninterest income grew 2.0% and 5.5% for the three and nine month periods, respectively, due primarily to higher retail brokerage fees and card processing fees. Higher deposit service charge fees were also a major contributor to the increase for the nine month period.

Noninterest expense declined 1.7% and 1.3% for the three and nine month periods, respectively, due primarily to a reduction in incentive compensation and our continued focus on expense control and implementation of cost savings strategies.

We remain well-capitalized with a risk based capital ratio of 14.76%.

RESULTS OF OPERATIONS

Net Income

Earnings for the three and nine months ended September 30, 2007 were $7.2 million, or $.41 per diluted share, and $22.0 million, or $1.22 per diluted share, respectively. This compared to $8.7 million or $.47 per diluted share and $24.4 million, or $1.31 per diluted share in 2006.

The decline in earnings for the third quarter of 2007 of $1.5 million, or 17.4% was attributable to a reduction in net interest income of $2.3 million and a $0.8 million increase in the loan loss provision, partially offset by an increase in noninterest income of $0.3 million, a decrease in noninterest expense of $0.5 million, and a reduction in income taxes of $0.8 million.

The decline in earnings for the nine month period of $2.4 million, or 9.8% reflects a $4.8 million decrease in net interest income and a $3.0 million increase in the loan loss provision, partially offset by higher noninterest income of $2.3 million, lower noninterest expense of $1.2 million, and a decline in income taxes of $1.9 million.

A condensed earnings summary is presented below:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2007			2006			2007			2006
Interest Income	$	41,299		$	42,512		$	124,537		$	123,293
Taxable Equivalent Adjustment⁽¹⁾		607			522			1,769			1,256
Interest Income (FTE)		41,906			43,034			126,306			124,549
Interest Expense		(13,389)			(12,289)			(39,841)			(33,753)
Net Interest Income (FTE)		28,517			30,745			86,465			90,796
Provision for Loan Losses		(1,552)			(711)			(4,464)			(1,499)
Taxable Equivalent Adjustment		(607)			(522)			(1,769)			(1,256)
Net Interest Income After Provision		26,358			29,512			80,232			88,041
Noninterest Income		14,431			14,144			43,477			41,193
Noninterest Expense		(29,919)			(30,422)			(90,378)			(91,584)
Income Before Income Taxes		10,870			13,234			33,331			37,650
Income Taxes		(3,699)			(4,554)			(11,312)			(13,234)
Net Income	$	7,171		$	8,680		$	22,019		$	24,416

Return on Average Assets⁽²⁾		1.15	%		1.35	%		1.18	%		1.26	%
Return on Average Equity⁽²⁾		9.44	%		10.83	%		9.53	%		10.36	%

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

⁽²⁾	Annualized

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 2007 taxable-equivalent net interest income decreased $2.2 million, or 7.2%, over the comparable quarter in 2006. During the first nine months of 2007, taxable-equivalent net interest income decreased $4.3 million, or 4.8%, respectively, over the first nine months of 2006. The decrease in the third quarter reflects a decline in earning assets and a higher level of interest expense driven by a rising cost of funds. The decline for the nine month period ended September 30, 2007 reflects the higher level of interest expense, partially offset by an improvement in our yield on earning assets, which was driven by a favorable repricing variance. Table I provides a comparative analysis of our average balances and interest rates.

For the three month period ended September 30, 2007, taxable-equivalent interest income decreased $1.1 million or 2.6%, over the comparable period in 2006. During the first nine months of 2007, taxable-equivalent interest income improved $1.8 million, or 1.4% over the comparable period in 2006. A lower level of earning assets and a change in mix primarily attributable to a decline in the loan portfolio during the third quarter more than offset a favorable rate variance in the loan and securities portfolio, resulting in a net decrease quarter over quarter. For the first nine months of 2007, a favorable repricing variance in both the loan and securities portfolios, more than offset the overall reduction in the level of earning assets, specifically, the loan portfolio, resulting in a net increase over the comparable nine month period in 2006. The decline in the loan portfolio is attributable to the slowdown in real estate activity and, more specifically, the residential real estate sector.

Earning asset yields improved 13 basis points to 7.75% in the third quarter of 2007 from 7.62% in the third quarter of 2006 and was slightly lower than the prior quarter of 7.76%. The improvement is attributable to favorable repricing in a higher interest rate environment. It is anticipated that our income on earning assets will decrease slightly during the fourth quarter reflecting recent reductions (50 and 25 basis points) in the Federal Reserve’s target rate..

Interest expense for the three and nine month periods ended September 30, 2007 increased $1.1 million, or 9.09% and $6.1 million, or 18.0%, respectively, from the comparable prior year periods. The increase is attributable to higher rates paid on interest bearing deposits and a change in mix to higher rate accounts, partially offset by a decrease in long-term debt costs. The decline in long-term borrowings reflects maturing Federal Home Loan Bank (“FHLB”) advances throughout 2007 that were not renewed. The average rate paid on interest bearing liabilities of 3.15% in the second quarter of 2007 represents an increase of 31 and 3 basis points, respectively, over the third quarter of 2006 and third quarter of 2007. We anticipate the rate of growth in our average cost of funds will continue to slow in the fourth quarter, especially given the recent federal funds interest rate reductions.

Our interest rate spread (defined as the average federal taxable-equivalent yield on earning assets less the average rate paid on interest bearing liabilities) decreased from 4.75% for the first nine months of 2006 to 4.61% for the comparable period in 2007, reflecting the higher costs of funds.

Our net interest margin (defined as federal taxable-equivalent net interest income divided by average earning assets) was 5.27% and 5.30%, respectively, for the three and nine month periods of 2007, versus 5.45% and 5.36%, respectively, for the comparable periods in 2006. The third quarter margin decrease is primarily attributable to higher costs of funds. We anticipate that current market conditions, including overall loan activity, a flat yield curve and robust competition will continue to place pressure on net interest income during the fourth quarter.

Provision for Loan Losses

The provision for loan losses was $1.6 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 2007, compared to $711,000 and $1.5 million for the same periods in 2006. The increase in the provision for both periods was due primarily to a higher level of impaired loan reserves reflective of a slowdown in housing and real estate markets.

Net charge-offs totaled $1.0 million, or .21% of average loans for the third quarter of 2007 compared to $664,000, or .13% for the third quarter of 2006. For the nine month period ended September 30, 2007, net charge-offs totaled $3.7 million, or .25% of average loans compared to $1.6 million or .10% of average loans for the comparable period in 2006. At quarter-end, the allowance for loan losses was .95% of outstanding loans (net of overdrafts) and provided coverage of 145% 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)	2007			2006			2007			2006
CHARGE-OFFS
Commercial, Financial and Agricultural	$	279		$	294		$	1,092		$	760
Real Estate – Construction		-			-			108			-
Real Estate – Commercial		245			-			576			291
Real Estate – Residential		161			81			1,220			127
Consumer		854			690			2,149			1,729
Total Charge-offs		1,539			1,065			5,145			2,907

RECOVERIES
Commercial, Financial and Agricultural		44			43			127			168
Real Estate – Construction		-			-			-			-
Real Estate – Commercial		2			4			12			9
Real Estate – Residential		2			2			29			11
Consumer		471			352			1,297			1,121
Total Recoveries		519			401			1,465			1,309

Net Charge-offs	$	1,020		$	664		$	3,680		$	1,598

Net Charge-offs (Annualized) as a
Percent of Average Loans Outstanding,
Net of Unearned Interest		.21	%		.13	%		.25	%		.10	%

Noninterest Income

Noninterest income increased $287,000, or 2.0%, and $2.3 million, or 5.6%, respectively, over the comparable three and nine month periods in 2006. The increase for the three month period reflects higher retail brokerage and card fees. The improvement for the nine month period was primarily attributable to higher deposit service charge fees, data processing fees, retail brokerage fees, and interchange fees.

Noninterest income represented 34.1% and 33.9% of operating revenue, respectively, for the three and nine month periods of 2007 compared to 31.9% and 31.5%, respectively, for the same periods in 2006. The improvement reflects both the aforementioned increase in noninterest income and the lower level of net interest income contribution.

The table below reflects the major components of noninterest income.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2007		2006		2007		2006
Noninterest Income:
Service Charges on Deposit Accounts	$	6,387	$	6,450	$	18,873	$	18,226
Data Processing		775		674		2,280		2,014
Fees for Trust Services		1,200		1,215		3,600		3,420
Retail Brokerage Fees		625		520		1,892		1,505
Investment Security Gain (Loss)		-		-		7		(4)
Mortgage Banking Revenues		642		824		2,171		2,448
Merchant Service Fees		1,686		1,766		5,514		5,284
Interchange Fees		934		797		2,795		2,261
ATM/Debit Card Fees		685		635		1,987		1,861
Other		1,497		1,263		4,358		4,178

Total Noninterest Income	$	14,431	$	14,144	$	43,477	$	41,193

Significant components of noninterest income are discussed in more detail below.

Service Charges on Deposit Accounts. Deposit service charge fees decreased $64,000, or .98%, for the three month period, and increased $647,000, or 3.6%, for the nine month period. The decrease for the three month period was due to a slightly lower level of analysis fees and higher overdraft charge-offs. The improvement for the nine month period reflects a higher level of overdraft and nonsufficient funds activity and an increase in fees for deposit accounts initiated during the second quarter of 2007.

Asset Management Fees. Income from asset management activities decreased $15,000, or 1.2%, and increased $180,000, or 5.3%, compared to the three and nine month periods in 2006. The improvement for the nine month period is primarily due to an increase in new business within existing and new markets and improved asset valuations. At September 30, 2007, assets under management totaled $765.2 million, representing an increase of $52.2 million, or 7.3% from the comparable period in 2006.

Retail Brokerage Fees. Income from retail brokerage activities increased $105,000, or 20.2%, and $387,000, or 25.7%, respectively, from the comparable three and nine month periods in 2006. The improvement for both periods reflects a higher level of activity by existing clients and improvement in the internal referral system, each of which enhanced sales production.

Mortgage Banking Revenues. Mortgage banking revenues decreased $183,000, or 22.2%, and $277,000, or 11.3%, respectively, from the comparable three and nine month periods in 2006. The decrease is due to lower production, which is reflective of the slower housing market.

Card Fees. Card processing fees (including merchant services fees, interchange fees, and ATM/debit card fees) increased $107,000, or 3.3%, and $890,000, or 9.5%, respectively, over the comparable three and nine periods in 2006. For both periods, interchange fees and ATM/debit card fees were driven higher due to an increase in our active card base primarily associated with growth in transaction deposit accounts. The increase in merchant service fees was primarily due to higher transaction volume reflective of growth in merchant accounts.

Noninterest Expense

Noninterest expense decreased $503,000, or 1.7%, and $1.2 million, or 1.3%, respectively, over the comparable three and nine month periods in 2006. For the three month period, lower expense for compensation ($182,000) and advertising were the primary reasons for the decrease. For the nine month period, the decrease was primarily attributable to lower expense for advertising ($620,000), travel and entertainment ($202,000), printing/supplies ($321,000) and courier service ($414,000). In general, the overall decline in operating expenses reflects the strengthening of cost control procedures and implementation of cost savings strategies during 2006 and 2007.

The table below reflects the major components of noninterest expense.

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in Thousands)	2007		2006		2007		2006
Noninterest Expense:
Salaries	$	11,935	$	11,709	$	36,563	$	34,868
Associate Benefits		3,161		3,568		9,244		11,044
Total Compensation		15,096		15,277		45,807		45,912

Premises		2,409		2,354		6,969		6,935
Equipment		2,513		2,492		7,356		7,652
Total Occupancy		4,922		4,846		14,325		14,587

Legal Fees		383		323		1,318		1,285
Professional Fees		963		851		2,826		2,470
Processing Services		444		490		1,447		1,344
Advertising		799		1,036		2,667		3,288
Travel and Entertainment		338		413		1,083		1,284
Printing and Supplies		459		601		1,557		1,878
Telephone		594		559		1,677		1,769
Postage		476		257		1,125		859
Intangible Amortization		1,459		1,536		4,376		4,601
Interchange Fees		1,424		1,531		4,665		4,571
Courier Service		47		327		571		985
Miscellaneous		2,515		2,375		6,934		6,751

Total Noninterest Expense	$	29,919	$	30,422	$	90,378	$	91,584

Various significant components of noninterest expense are discussed in more detail below.

Compensation. Salaries and associate benefits expense decreased $182,000, or 1.2%, and $105,000, or .23%, respectively, for the three and nine month months ended September 30, 2007. For both periods, increases in associate salaries of $226,000, or 1.9%, and $1.7 million, or 4.9%, were offset by decreased associate benefit expense of $408,000 and $1.8 million, respectively. The higher level of associate salaries primarily reflects merit and market salary adjustments for associates and officers. The lower level of associate benefit expense is attributable to a reduction in the projected payout under our stock compensation plans, including both the AIP for 2007 and our Project 2011 associate stock award for which the expense accrual was adjusted to reflect a revision to the performance target date.

Occupancy. Occupancy expense (including premises and equipment) increased $76,000, or 1.6%, and decreased $262,000, or 1.8%, respectively compared to the three and nine month periods in 2006. For the three month period, the increase is primarily attributable to higher software license expense and the decline for the nine month period is due to lower depreciation expense. The higher software license expense is reflective of recent software purchases. The lower depreciation expense primarily reflects the full depreciation of several larger fixed assets, including both premises and components of our core processing system.

Other. Other noninterest expense decreased $503,000, or 1.7%, and $1.2 million, or 1.3%, respectively from the three and nine month periods in 2006. Lower expense for advertising, travel and entertainment, printing and supplies, and courier service drove the decline for both periods. All of the aforementioned decreases are reflective of improved cost control procedures and other cost saving strategies initiated in 2006 and 2007.

Operating net noninterest expense (noninterest income minus noninterest expense, excluding intangible amortization expenses) as a percent of average assets was 2.27% for the first nine months of 2007 compared to 2.36% for the same period in 2006. Our operating efficiency ratio (noninterest expense, excluding intangible amortization expense, expressed as a percent of the sum of taxable-equivalent net interest income plus noninterest income) was 66.18% for the first nine months of 2007 compared to 65.90% for the same period in 2006. The increase in the operating efficiency ratio was due to a reduction in net interest income for 2007.

Income Taxes

The provision for income taxes decreased $855,000, or 18.8%, and $1.9 million, or 14.5%, respectively, from the comparable three and nine month periods in 2006, reflecting lower taxable income. Our effective tax rate for the three and nine months ended September 30, 2007 was 34.03% and 33.78% compared to 34.41% and 35.15% for the same periods in 2006. The decrease in the effective tax rate for the nine month period is primarily attributable to: 1) a higher level of tax-free loan and securities income, 2) full amortization of certain deferred taxes related to a purchase accounting adjustment from a prior acquisition, and 3) the favorable impact of disallowed interest payments for a Federal Home Loan Bank (“FHLB”) advance.

FINANCIAL CONDITION

Average assets decreased $89.7 million, or 3.5%, to $2.468 billion for the quarter ended September 30, 2007 from $2.557 billion in the fourth quarter of 2006. Average earning assets of $2.144 billion decreased $93.3 million, or 4.2%, from the fourth quarter of 2006. We discuss these variances in more detail below.

Funds Sold

We ended the third quarter with $31.9 million in average net overnight funds sold, compared to $26.1 million net overnight funds sold in the fourth quarter of 2006. The improvement is reflective of the decline in the loan portfolio partially offset by the decline in deposits and the repurchase of common stock each of which are discussed in further detail below.

Investment Securities

Our investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management. As of September 30, 2007, the average investment portfolio decreased $2.5 million, or 1.3%, from the fourth quarter of 2006. We will continue to evaluate the need to purchase securities for the investment portfolio for the remainder of 2007, taking into consideration the Bank’s overall liquidity position and pledging requirements.

Securities classified as available-for-sale are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareowners’ equity. At September 30, 2007 and December 31, 2006, shareowners’ equity included a net unrealized loss of $311,000 and $834,000, respectively. The decrease in the unrealized loss is attributable to lower interest rates. Losses in the investment portfolio are attributable to changes in interest rates and not credit quality and because we have the ability and intent to hold these investments until there is a recovery in fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2007.

Loans

Average loans for the third quarter decreased $96.5 million, or 4.8%, from the fourth quarter, due to a general slowing of lending activity within Bank markets, and a high level of principal pay-downs and pay-offs, including the pay-off of several larger commercial loans. Loan production and the pipeline improved slightly from the second quarter. Although the outflow slowed during the latter part of the quarter, normal portfolio amortization, paydowns on lines of credit and payoffs of some larger commercial and commercial real estate loans more than offset new production resulting in a net decline in the portfolio.

Nonperforming Assets

Our nonperforming loans were $12.3 million at September 30, 2007 compared to $8.0 million at December 31, 2006. As a percent of nonperforming loans, the allowance for loan losses represented 145% at September 30, 2007 and 214% at December 31, 2006. Nonperforming loans include nonaccruing and restructured loans. Other real estate, which includes property acquired either through foreclosure or by receiving a deed in lieu of foreclosure, was $1.7 million at September 30, 2007 versus $0.7 million at December 31, 2006. The ratio of nonperforming assets as a percent of loans plus other real estate was .74% at September 30, 2007, compared to .44% at December 31, 2006, with the increase being attributable to the slowdown in housing and overall stress on Florida real estate markets. Strong loan monitoring procedures are in place which allows us to timely identify problem assets, develop effective collection plans, and limit loss exposure. As a result of these strong monitoring and loan work-out procedures and the diversified nature of our real estate loan portfolio, we anticipate our loan losses will remain at manageable levels.

Allowance for Loan Losses

We maintain an allowance for loan losses at a level sufficient to provide for the estimated credit losses inherent in the loan portfolio as of the balance sheet date. Credit losses arise from borrowers’ inability or unwillingness to repay, and from other risks inherent in the lending process, including collateral risk, operations risk, concentration risk and economic risk. All related risks of lending are considered when assessing the adequacy of the loan loss reserve. The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance for loan losses is based on management's judgment of overall loan quality. This is a significant estimate based on a detailed analysis of the loan portfolio. The balance can and will change based on changes in the assessment of the portfolio's overall credit quality. We evaluate the adequacy of the allowance for loan losses on a quarterly basis.

The allowance for loan losses at September 30, 2007 was $18.0 million, compared to $17.2 million at December 31, 2006. At September 30, 2007, the allowance represented 0.95% of outstanding loans (net of overdrafts) and provided coverage of 145% of nonperforming loans, compared to 0.86% and 214%, respectively at December 31, 2006. The increase in the allowance for loan losses is driven by a higher level of reserves for impaired loans. While there can be no assurance that we will not sustain loan losses in a particular period that are substantial in relation to the size of the allowance, our assessment of the loan portfolio does not indicate a likelihood of this occurrence. It is management’s opinion that the allowance at September 30, 2007 is adequate to absorb losses inherent in the loan portfolio at quarter-end.

Deposits

Average deposits for the third quarter decreased $74.3 million, or 3.7% from the fourth quarter of 2006 due to a reduction in all deposit categories except money markets. The decline is primarily due to reductions in demand deposit account balances of $46.4 million, or 9.6%, and certificates of deposit of $12.9 million, or 2.67%. The decline in demand deposit accounts reflects a seasonal variance in public fund and tax deposit balances which typically spike at year-end, and the disintermediation that generally occurs when market rates increase. The decline in certificates of deposit reflects our efforts to balance our funding strategy with investment opportunities and, given the current operating environment, an unwillingness to compete aggressively for high cost deposits.

The ratio of average noninterest bearing deposits to total deposits was 22.3% for the third quarter of 2007, compared to 23.7% for the fourth quarter of 2006. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 78.6% and 76.8%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

General. Liquidity for a banking institution is the availability of funds to meet increased loan demand, excessive deposit withdrawals, and the payment of other contractual cash obligations. Management monitors our financial position in an effort to ensure we have sufficient access to liquid funds to meet normal transaction requirements and take advantage of investment opportunities and cover unforeseen liquidity demands. In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities (i.e., collection of interest and fees), federal funds sold, loan and investment maturities, our bank lines of credit, approved lines for the purchase of federal funds by CCB, and (FHLB) advances.

Average liquidity, defined as funds sold and interest bearing deposits with other banks, for the third quarter of 2007 was $49.4 million compared to $43.7 million in the fourth quarter of 2006. The increase reflects the decline in our loan portfolio, partially offset by a decline in deposit balances. Liquidity was further impacted by share repurchase activity, an activity which management expects to continue in the fourth quarter. Share repurchase activity for the first nine months of 2007 is discussed in more detail below.

Borrowings. At September 30, 2007, advances from the FHLB consisted of $39.6 million in outstanding debt and 33 notes. For the first nine months of the year, the Bank made FHLB advance payments totaling approximately $17.6 million and obtained one new FHLB advance for $1.7 million. The FHLB notes are collateralized by a blanket floating lien on all of our 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans.

We have issued two junior subordinated, deferrable interest notes to two wholly-owned Delaware statutory trusts. The first note for $30.9 million was issued to CCBG Capital Trust I in November 2004. The second note for $32.0 million was issued to CCBG Capital Trust II in May 2005. The interest payments for the CCBG Capital Trust I borrowing are due quarterly at a fixed rate of 5.71% for five years, then adjustable annually to LIBOR plus a margin of 1.90%. This note matures on December 31, 2034. The proceeds of this borrowing were used to partially fund the acquisition of Farmers and Merchants Bank of Dublin. The interest payments for the CCBG Capital Trust II borrowing are due quarterly at a fixed rate of 6.07% for five years, then adjustable quarterly to LIBOR plus a margin of 1.80%. This note matures on June 15, 2035. The proceeds of this borrowing were used to partially fund the First Alachua Banking Corporation acquisition.

Contractual Cash Obligations. We maintain certain contractual arrangements to make future cash payments. The table below details those future cash payment obligations as of September 30, 2007. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.

	Payments Due By Period
(Dollars in Thousands)	1 Year or Less		1 – 3 Years		4 – 5 Years		After 5 Years		Total
Federal Home Loan Bank Advances	$	656	$	17,074	$	5,364	$	16,500	$	39,594
Subordinated Notes Payable		-		-		-		62,887		62,887
Operating Lease Obligations		374		2,643		2,071		6,071		11,159
Total Contractual Cash Obligations	$	1,030	$	19,717	$	7,435	$	85,458	$	113,640

Capital

Equity capital was $299.1 million as of September 30, 2007 compared to $315.8 million as of December 31, 2006. Management continues to monitor our capital position in relation to our level of assets with the objective of maintaining a strong capital position. The leverage ratio was 11.49% at September 30, 2007 compared to 11.30% at December 31, 2006. Further, the risk-adjusted capital ratio of 14.76% at September 30, 2007 exceeds the 8.0% minimum requirement under the risk-based regulatory guidelines. As allowed by the Federal Reserve Board capital guidelines the trust preferred securities issued by CCBG Capital Trust I and CCBG Capital Trust II are included as Tier 1 capital in our capital calculations.

Adequate capital and financial strength is paramount to the stability of CCBG and the Bank. Cash dividends declared and paid should not place unnecessary strain on our capital levels. Although a consistent dividend payment is believed to be favorably viewed by the financial markets and shareowners, the Board of Directors will declare dividends only if we are considered to have adequate capital. Future capital requirements and corporate plans are considered when the Board considers a dividend payment. Dividends declared and paid during the first nine months of 2007 totaled $.525 per share compared to $.4875 per share for the first nine months of 2006, an increase of 7.7%. The dividend payout ratios for the nine months of 2007 and 2006 were 44.5% and 36.4%, respectively.

State and federal regulations place certain restrictions on the payment of dividends by both CCBG and the Bank. At September 30, 2007, these regulations and covenants did not impair CCBG or the Bank's ability to declare and pay dividends or to meet other existing obligations in the normal course of business.

During the first nine months of 2007, shareowners’ equity decreased $16.7 million, or 7.1%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of $22.0 million, the issuance of common stock of $0.5 million, stock-based compensation accretion of $0.1 million, a decrease in the net unrealized loss on available-for-sale securities of $0.5 million, and a miscellaneous adjustment to retained earnings of $0.3 million related to the correction of a SAB No. 108 entry made in 2006. Equity was reduced by dividends paid during the first nine months of the year by $9.6 million, or $.525 per share, and the repurchase/retirement of common stock of $30.5 million. At September 30, 2007, our common stock had a book value of $16.87 per diluted share compared to $17.01 at December 31, 2006.

Our Board of Directors has authorized the repurchase of up to 2,171,875 shares of our outstanding common stock. The purchases are made in the open market or in privately negotiated transactions. To date, we have repurchased a total of 1,836,378 shares at an average purchase price of $25.50 per share. We repurchased 250,533 shares of our common stock in the third quarter of 2007 at an average purchase price of $30.26 per share.

OFF-BALANCE SHEET ARRANGEMENTS

We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.

At September 30, 2007, we had $425.4 million in commitments to extend credit and $16.8 million in standby letters of credit. 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. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the FHLB, and investment security maturities provide a sufficient source of funds to meet these commitments.

ACCOUNTING POLICIES

Critical Accounting Policies

The consolidated financial statements and accompanying Notes to Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make various estimates and assumptions (see Note 1 in the Notes to Consolidated Financial Statements). We believe that, of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Allowance for Loan Losses. The allowance for loan losses is established through a charge to the provision for loan losses. Provisions are made to reserve for estimated losses in loan balances. The allowance for loan losses is a significant estimate and is evaluated quarterly by us for adequacy. The use of different estimates or assumptions could produce a different required allowance, and thereby a larger or smaller provision recognized as expense in any given reporting period. A further discussion of the allowance for loan losses can be found in the section entitled "Allowance for Loan Losses" and Note 1 in the Notes to Consolidated Financial Statements in our 2006 Annual Report on Form 10-K.

Intangible Assets. Intangible assets consist primarily of goodwill, core deposit assets, and other identifiable intangibles that were recognized in connection with various acquisitions. Goodwill represents the excess of the cost of acquired businesses over the fair market value of their identifiable net assets. We perform an impairment review on an annual basis to determine if there has been impairment of our goodwill. We have determined that no impairment existed at December 31, 2006. Impairment testing requires management to make significant judgments and estimates relating to the fair value of its identified reporting units. Significant changes to these estimates may have a material impact on our reported results.

Core deposit assets represent the premium we paid for core deposits. Core deposit intangibles are amortized on the straight-line method over various periods ranging from 5-10 years. Generally, core deposits refer to nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW, money market and savings. We make certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the client bases acquired. If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment. Any changes in the original estimates may materially affect reported earnings.

Pension Assumptions. We have a defined benefit pension plan for the benefit of substantially all of our associates. Our funding policy with respect to the pension plan is to contribute amounts to the plan sufficient to meet minimum funding requirements as set by law. Pension expense, reflected in the Consolidated Statements of Income in noninterest expense as "Salaries and Associate Benefits," is determined by an external actuarial valuation based on assumptions that are evaluated annually as of December 31, the measurement date for the pension obligation. The Consolidated Statements of Financial Condition reflect an accrued pension benefit cost due to funding levels and unrecognized actuarial amounts. The most significant assumptions used in calculating the pension obligation are the weighted-average discount rate used to determine the present value of the pension obligation, the weighted-average expected long-term rate of return on plan assets, and the assumed rate of annual compensation increases. These assumptions are re-evaluated annually with the external actuaries, taking into consideration both current market conditions and anticipated long-term market conditions.

The weighted-average discount rate is determined by matching the anticipated Retirement Plan cash flows to a long-term corporate Aa-rated bond index and solving for the underlying rate of return, which investing in such securities would generate. This methodology is applied consistently from year-to-year. We anticipate using a 6.00% discount rate in 2007.

The weighted-average expected long-term rate of return on plan assets is determined based on the current and anticipated future mix of assets in the plan. The assets currently consist of equity securities, U.S. Government and Government Agency debt securities, and other securities (typically temporary liquid funds awaiting investment). We anticipate using a rate of return on plan assets of 8.0% for 2007.

The assumed rate of annual compensation increases is based on expected trends in salaries and the employee base. We used a rate of 5.50% in 2006 and do not expect this assumption to change materially in 2007.

Information on components of our net periodic benefit cost is provided in Note 9 of the Notes to Consolidated Financial Statements included herein and Note 12 of the Notes to Consolidated Financial Statements in our 2006 Annual Report on Form 10-K.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards

SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 became effective on January 1, 2007, and did not have a significant impact on our financial statements.

SFAS No. 157, "Fair Value Measurements." 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 is effective on January 1, 2008 and is not expected to have a significant impact on our financial statements.

SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for us on January 1, 2008 and is not expected to have a significant impact on our financial statements.

Financial Accounting Standards Board Interpretations

In July 2006, the FASB issued FIN 48 which defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. FIN 48 became effective for us in the first quarter of 2007 and did not have a material impact on our consolidated financial statements.

Emerging Issues Task Force

In March 2007, the FASB ratified the consensus the Emerging Issues Task Force (“EITF”) reached regarding EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“Issue 06-10”), which provides accounting guidance for postretirement benefits related to collateral assignment split-dollar life insurance arrangements, whereby the employee owns and controls the insurance policies. The consensus concludes that an employer should recognize a liability for the postretirement benefit in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“Statement 106”) or Accounting Principles Board Opinion No. 12 (“APB 12”), as well as recognize an asset based on the substance of the arrangement with the employee. Issue 06-10 is effective for fiscal years beginning after December 15, 2007 with early application permitted. The Company is in the process of reviewing the potential impact of Issue 06-10.

In September 2006, the FASB ratified the consensus the EITF reached regarding EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“Issue 06-4”), which provides accounting guidance for postretirement benefits related to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policies. The consensus concludes that an employer should recognize a liability for the postretirement benefit in accordance with Statement 106 or APB 12. In addition, the consensus states that an employer should also recognize an asset based on the substance of the arrangement with the employee. Issue 06-4 is effective for fiscal years beginning after December 15, 2007 with early application permitted. The Company is in the process of reviewing the potential impact of Issue 06-4.

TABLE I

AVERAGE BALANCES & INTEREST RATES

(Taxable Equivalent Basis - Dollars in Thousands)

	Three Months Ended September 30,																Nine Months Ended September 30,
	2007								2006								2007								2006
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate
ASSETS
Loans, Net of Unearned Interest⁽¹⁾⁽²⁾	$	1,907,235		$	38,901		8.09	%	$	2,025,112		$	40,433		7.92	%	$	1,943,874		$	117,465		8.08	%	$	2,038,050		$	116,931		7.67	%
Taxable Investment Securities		102,618			1,224		4.75			109,097			1,264		4.62			105,453			3,723		4.70			113,859			3,588		4.19
Tax-Exempt Investment Securities⁽²⁾		85,446			1,142		5.35			81,409			998		4.90			84,003			3,269		5.19			71,960			2,568		4.76
Funds Sold		49,438			639		5.06			25,540			339		5.19			47,602			1,849		5.12			41,219			1,463		4.72
Total Earning Assets		2,144,737			41,906		7.75			2,241,158			43,034		7.62			2,180,932			126,306		7.74			2,265,088			124,550		7.35
Cash & Due From Banks		84,477								96,969								87,062								102,188
Allowance for Loan Losses		(17,664	)							(17,420	)							(17,336	)							(17,481	)
Other Assets		256,153								239,448								252,359								239,277
TOTAL ASSETS	$	2,467,703							$	2,560,155							$	2,503,017							$	2,589,072

LIABILITIES
NOW Accounts	$	525,795		$	2,531		1.91	%	$	511,299		$	2,026		1.57	%	$	539,777		$	7,768		1.92	%	$	510,556		$	5,136		1.34	%
Money Market Accounts		403,957			3,565		3.50			381,628			3,259		3.39			394,762			10,450		3.54			363,150			8,199		3.02
Savings Accounts		117,451			70		0.24			132,421			72		0.22			121,781			222		0.24			136,058			202		0.20
Other Time Deposits		471,868			5,100		4.29			504,121			4,627		3.64			475,831			14,924		4.19			514,857			12,886		3.35
Total Int. Bearing Deposits		1,519,071			11,266		2.94			1,529,469			9,984		2.59			1,532,151			33,364		2.91			1,524,621			26,423		2.32
Short-Term Borrowings		65,130			734		4.45			73,078			753		4.07			66,921			2,232		4.44			83,187			2,352		3.77
Subordinated Notes Payable		62,887			936		5.91			62,887			936		5.91			62,887			2,794		5.94			62,887			2,789		5.93
Other Long-Term Borrowings		38,269			453		4.70			52,367			615		4.66			41,212			1,451		4.71			61,912			2,189		4.73
Total Int. Bearing Liabilities		1,685,357			13,389		3.15			1,717,801			12,288		2.84			1,703,171			39,841		3.13			1,732,607			33,753		2.60
Noninterest Bearing Deposits		435,089								494,054								449,436								512,493
Other Liabilities		45,721								30,259								41,341								28,849
TOTAL LIABILITIES		2,166,167								2,242,114								2,193,948								2,273,949

SHAREOWNERS' EQUITY
TOTAL SHAREOWNERS' EQUITY		301,536								318,041								309,069								315,123

TOTAL LIABILITIES & EQUITY	$	2,467,703							$	2,560,155							$	2,503,017							$	2,589,072

Interest Rate Spread							4.60	%							4.78	%							4.61	%							4.75	%
Net Interest Income				$	28,517							$	30,746							$	86,465							$	90,797
Net Interest Margin⁽³⁾							5.27	%							5.45	%							5.30	%							5.36	%

⁽¹⁾	Average balances include nonaccrual loans. Interest income includes fees on loans of $665,000 and $2.2million, for the three and nine months ended September 30, 2007, versus $979,000 and $2.9 million for the comparable periods ended September 30, 2006.

⁽²⁾	Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate.

⁽³⁾	Taxable equivalent net interest income divided by average earning assets.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Overview

Market risk management arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk management policies to monitor and limit exposure to market risk and do not participate in activities that give rise to significant market risk involving exchange rates, commodity prices, or equity prices. In asset and liability management activities, policies are in place which are designed to minimize structural interest rate risk.

Interest Rate Risk Management

The normal course of business activity exposes us to interest rate risk. Fluctuations in interest rates may result in changes in the fair market value of our financial instruments, cash flows and net interest income. We seek to avoid fluctuations in our net interest margin and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. Accordingly, our interest rate sensitivity and liquidity are monitored on an ongoing basis by our Asset and Liability Committee ("ALCO"), which oversees market risk management and establishes risk measures, limits and policy guidelines for managing the amount of interest rate risk and its effects on net interest income and capital. A variety of measures are used to provide for a comprehensive view of the magnitude of interest rate risk, the distribution of risk, the level of risk over time and the exposure to changes in certain interest rate relationships.

ALCO continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. ALCO's objective is to manage the impact of fluctuating market rates on net interest income within acceptable levels. In order to meet this objective, management may adjust the rates charged/paid on loans/deposits or may shorten/lengthen the duration of assets or liabilities within the parameters set by ALCO.

Our financial assets and liabilities are classified as other-than-trading. An analysis of the other-than-trading financial components including the fair values, are presented in Table II. This table presents our consolidated interest rate sensitivity position as of September 30, 2007 based upon certain assumptions as set forth in the Notes to the Table. The objective of interest rate sensitivity analysis is to measure the impact on our net interest income due to fluctuations in interest rates. The asset and liability values presented in Table II may not necessarily be indicative of our interest rate sensitivity over an extended period of time.

As general interest rates rise or fall, factors such as current market conditions and competition impact how we respond to changing rates and thus impact the magnitude of change in net interest income. Non-maturity deposits offer management greater discretion as to the direction, timing, and magnitude of interest rate changes and can have a material impact on our interest rate sensitivity. In addition, the relative level of interest rates as compared to the current yields/rates of existing assets/liabilities can impact both the direction and magnitude of the change in net interest margin as rates rise and fall from one period to the next. In light of the recent Federal Reserve decreases in its target rate, we have made adjustments to our non-maturity deposit rates in an attempt to neutralize the overall impact on our net interest income.

Inflation

The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.

Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail in the section entitled "Results of Operations."

Table II

FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS⁽¹⁾

(Other Than Trading Portfolio)

	As of September 30, 2007
(Dollars in Thousands)	Year 1			Year 2			Year 3			Year 4			Year 5			Beyond			Total			Fair Value
Loans
Fixed Rate	$	279,095		$	160,188		$	106,838		$	42,941		$	22,526		$	22,382		$	633,970		$	655,812
Average Interest Rate		6.70	%		8.12	%		7.99	%		8.15	%		8.62	%		6.68	%		7.44	%
Floating Rate⁽²⁾		1,023,444			146,032			70,109			8,929			6,340			15,064			1,269,918			1,313,669
Average Interest Rate		6.89	%		7.59	%		7.78	%		7.89	%		8.12	%		8.18	%		7.05	%
Investment Securities⁽³⁾
Fixed Rate		79,988			61,523			33,377			4,302			2,444			2,040			183,674			183,674
Average Interest Rate		3.65	%		4.07	%		3.84	%		4.63	%		4.90	%		5.20	%		3.88	%
Floating Rate		935			-			-			-			-			-			935			935
Average Interest Rate		5.19	%		-			-			-			-			-			5.19	%
Other Earning Assets
Floating Rate		19,599			-			-			-			-			-			19,599			19,599
Average Interest Rate		5.01	%		-			-			-			-			-			5.01	%
Total Financial Assets	$	1,403,061		$	367,743		$	210,324		$	56,172		$	31,310		$	39,486		$	2,108,096		$	2,173,699
Average Interest Rate		6.64	%		7.23	%		7.26	%		7.84	%		8.23	%		7.17	%		6.87	%

Deposits⁽⁴⁾
Fixed Rate Deposits	$	403,837		$	49,829		$	13,996		$	3,184		$	1,716		$	257		$	472,819		$	418,189
Average Interest Rate		4.32	%		4.42	%		4.17	%		4.08	%		3.97	%		4.93	%		4.32	%
Floating Rate Deposits		1,045,352			-			-			-			-			-			1,045,352			1,045,352
Average Interest Rate		2.31	%		-			-			-			-			-			2.31	%
Other Interest Bearing
Liabilities
Fixed Rate Debt		4,753			3,662			3,075			3,092			3,185			11,958			29,725			30,370
Average Interest Rate		4.55	%		4.76	%		4.89	%		4.95	%		4.97	%		4.91	%		4.85	%
Floating Rate Debt		63,817			-			62,887			-			-			-			126,704			126,564
Average Interest Rate		4.23	%		-			5.89	%		-	%		-	%		-			5.06	%
Total Financial Liabilities	$	1,517,759		$	53,491		$	79,958		$	6,276		$	4,901		$	12,215		$	1,674,600		$	1,620,475
Average interest Rate		2.93	%		4.45	%		5.55	%		4.51	%		4.62	%		4.91	%		3.13	%

⁽¹⁾	Based upon expected cash flows, unless otherwise indicated.

⁽²⁾	Based upon a combination of expected maturities and repricing opportunities.

⁽³⁾	Based upon contractual maturity, except for callable and floating rate securities, which are based on expected maturity and weighted average life, respectively.

⁽⁴⁾	Savings, NOW and money market accounts can be repriced at any time, therefore, all such balances are included as floating rate deposits in Year 1. Other time deposit balances are classified according to maturity.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2007, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that as of September 30, 2007, the end of the period covered by this Form 10-Q, we maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

Our management, including the Chief Executive Officer and Chief Financial Officer, has reviewed our internal control. There have been no significant changes in our internal control during our most recently completed fiscal quarter, nor subsequent to the date of their evaluation, that could significantly affect our internal control over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

We are 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 our consolidated results of operations, financial position, or cash flows.

Item 1.A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table contains information about all purchases made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any class of our equity securities that is registered pursuant to Section 12 of the Exchange Act.

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of our share repurchase program⁽¹⁾		Maximum Number of shares that may yet be purchased under our share repurchase program

July 1, 2007 to July 31, 2007		190,882	$	30.09		1,785,262		386,613
August 1, 2007 to August 31, 2007		25,220		30.85		1,810,482		361,393
September 1, 2007 to September 30, 2007		34,451		30.82		1.844,933		326,942
Total		250,533	$	30.26		1,844,933		326,942

(1)

This balance represents the number of shares that were repurchased through the Capital City Bank Group, Inc. Share Repurchase Program (the “Program”), which was approved on March 30, 2000, and modified by our Board on January 24, 2002 and March 22, 2007, under which we were authorized to repurchase up to 2,171,875 shares of our common stock. The Program is flexible and shares are acquired from the public markets and other sources using free cash flow. There is no predetermined expiration date for the Program. No shares are repurchased outside of the Program.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

(A)

Exhibits

31.1	Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2	Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1	Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

32.2	Certification of J. Kimbrough Davis, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc., Pursuant to 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned Chief Financial Officer hereunto duly authorized.

CAPITAL CITY BANK GROUP, INC.

(Registrant)

/s/ J. Kimbrough Davis
J. Kimbrough Davis
Executive Vice President and Chief Financial Officer

Date: November 9, 2007

Capital City Bank Group - 10-Q quarterly report FY

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