Capital City Bank Group Inc.
Annual Report 2006

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Proud of Our Communities 2006 Annual Report Company Profile With 69 offices in Florida, Georgia and Alabama, our associates know what it takes to build successful relationships. We provide a full range of banking services, including traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bankcards, data processing and securities brokerage services. Proud of Our People At Capital City Bank, it’s all about building relationships. Each year our associates develop new ideas and innovative concepts that set us apart from our competitors. We are always thinking, strategizing and focusing on better ways to meet the needs of our clients and the communities we serve. A L A B A M A G E O R G I A F L O R I D A Building for the Future P R O J E C T 2 0 1 0 — T H E R O A D T O G R O W T H 69 Offices in Florida, Georgia and Alabama Capital City Bank Locations Alabama Chambers County Valley Florida Alachua County Alachua Gainesville High Springs Jonesville Newberry Bradford County Starke Citrus County Crystal River Citrus Springs Floral City Inverness Clay County Keystone Heights Dixie County Cross City Gadsen County Chattahoochee Havana Quincy Gilchrist County Bell Fanning Springs Trenton Gulf County Port St. Joe Hernando County Spring Hill Jefferson County 1.5 Monticello Leon County 1.2 Tallahassee Levy County 0.9 Bronson Cedar Key Chiefland 0.6 Inglis Williston 0.3 2600 2275 1950 1625 1300 975 650 325 0 *Mortgage Lending Offices 2001 2003 2005 2002 2004 2006 0.0 2001 2002 2003 2004 2005 2006 Madison County Madison Pasco County Port Richey Putnam County Palatka St. Johns County Hastings Suwannee County Branford Taylor County Perry 2100 Wakulla County Crawfordville Panacea* 1800 Georgia Bibb County Macon Burke County Waynesboro Grady County Cairo Whigham Laurens County Dublin East Dublin Thomas County Thomasville* Troup County West Point Washington County Chipley 1500 1200 900 600 300 0 2001 2002 2003 2004 2005 2006 Average Assets (in millions) Return on Assets (in percent) Average Deposits (in millions) 2001 $1,704 2002 $1,727 2003 $1,805 2004 $2,007 2005 $2,487 2006 $2,581 2001 0.99 2002 1.34 2003 1.40 2004 1.46 2005 1.22 2006 1.29 2001 $1,443 2002 $1,425 2003 $1,432 2004 $1,599 2005 $1,955 2006 $2,035 Proud of Our Communities | Proud of Our People 1 2006 2005 Percent Change $ 33,265 $ 30,281 9.9% 12,322 2,029,397 2,258,277 2,581,078 2,034,931 317,336 1.80 11,397 1,968,289 2,187,672 2,486,733 1,954,888 8.1 3.1 3.2 3.8 4.1 286,712 10.7 18,584,519 18,609,839 1.35 18,263,855 18,281,243 $ 1.79 0.90 1.79 0.663 17.01 0.45 $ 1.66 1.66 0.619 16.39 1.8 1.8 7.8 7.8 7.1 3.8 Financial Highlights (Dollars in Thousands, Except Per Share Data) FOR THE YEAR: Net Income Cash Dividends Declared Average Loans, Net of Unearned Interest Average Earning Assets Average Assets Average Deposits Average Equity 34000 29750 Basic Average Common Shares Outstanding Diluted Average Common Shares Outstanding 10.8 25500 21250 PER SHARE: 17000 12750 Basic Net Income Diluted Net Income Cash Dividends Declared 8500 Diluted Book Value 4250 RATIOS: 0 Return on Average Assets 2001 2003 Return on Average Equity 2002 2004 2005 2006 Equity to Assets, Year-End Dividend Payout Net Interest Margin(1) 8.1 5.4 2.7 0.0 2001 2002 2003 2004 2005 2006 1.29% 0.00 2001 2002 10.48 12.15 37.01 5.35 2005 2006 1.22% 2004 2003 10.56 11.65 37.35 5.09 Net Income (in millions) Return on Equity (in percent) Diluted Earnings per Share (in dollars) 2001 $16.9 2002 $23.1 2003 $25.2 2004 $29.4 2005 $30.3 2006 $33.3 2001 10.00 2002 12.85 2003 12.82 2004 13.31 2005 10.56 2006 10.48 2001 $1.02 2002 $1.39 2003 $1.52 2004 $1.74 2005 $1.66 2006 $1.79 (1) Taxable-Equivalent Net Interest Income Divided by Average Earning Assets 2 Capital City Bank Group | 2006 Annual Report Letter to Our Shareowners: For more than 111 years, Capital City Associates have earnings performance and contributed to a 21.9% lower continued to add value to client banking relationships loan loss provision for the year. as we have grown with the communities where we live Capital City Banc Investments strengthened its sales and work. As we report another record year for Capital force in 2006 and realized a 58.2% growth in revenues, City Bank Group, the strong performance is proof our a banner year for those hard-working investment rep- commitment to relationship banking and desire to resentatives. Capital City Trust Company grew assets build a strong foundation for the future continues to under management by 8.7% and fee revenue by 4.1%. serve clients, shareowners, communities, and associ- Both of these business lines are well-positioned to ates well. capitalize on a strong client referral system which Once again, Capital City Bank Group achieved perpetuates itself through satisfied clients. record profitability for the year, reporting earnings Capital City Services Company implemented several of $33.3 million, or $1.79 per share. These amounts initiatives aimed at improving client delivery and reflect increases of 9.9% and 7.8%, respectively, com- support systems. These dynamic associates provide a pared to 2005. The results produced a return on assets forward-looking focus that adds value to Capital City of 1.29% and a return on equity of 10.48%. The dividend clients and separates us from the competition. was increased 7.7% to $.175 per quarter in the fourth During 2006, we focused on strengthening the quarter of 2006. Capital City franchise by building on core competencies. As I look back on 2006, there are several accomplish- The development of new associate training programs ments that stand out. The talented team of bankers in and initiatives will continue to improve sales and Community Banking, Commercial Real Estate, Business service practices, adding value to client relationships. Banking, Residential Real Estate, and Institutional In addition, several profit enhancement initiatives Banking helped achieve a 9.8% growth in operating aimed at increasing noninterest income and improving revenues for the year. The growth in operating revenues operating efficiency were developed. These efforts will reflects an 8.3% increase in net interest income and a produce results this year. 13.0% increase in noninterest income. The net interest 2007 will offer challenges, but I have confidence in margin improved 26 basis points to 5.35% and reflects our team. I believe in what Capital City Bank Group the emphasis on adding value to client banking rela- and its associates represent: hard work, determination, tionships and maintaining a competitive advantage with and always doing the right thing. The right strategies a strong core deposit funding source. A strong client and talent are in place to improve organic growth, referral system and the incremental fees generated operate in a more efficient manner, take advantage of from the highly successful Absolutely Free Checking acquisition opportunities as they arise, and ultimately products enhanced the growth in noninterest income. meet our 2010 goal of $50 million in annual earnings. Emphasis on credit quality continues to improve the “The right strategies and talent are in place to improve organic growth, operate in a more efficient manner, take advantage of acquisition opportunities as they arise, and ultimately meet our 2010 goal of $50 million in annual earnings.” William G. Smith, Jr. Chairman, President and Chief Executive Officer Our Management Team Left to Right: Tom Barron President Flecia Braswell Executive Vice President and Chief Brand Officer Kim Davis Executive Vice President and Chief Financial Officer Left to Right: Randy Briley Executive Vice President Retail Credit Dale Thompson Executive Vice President Business Banking Ed Canup Executive Vice President Commercial Real Estate Proud of Our Communities | Proud of Our People 5 Left to Right: Eddie West Executive Vice President Community Banking Noel Ellis Executive Vice President Credit Administration Randy Pople President Capital City Trust Company Left to Right: Cindy Pyburn President Capital City Services Company Bill Colledge Executive Vice President Institutional Banking Beth Corum Executive Vice President and Chief People Officer Mitch Englert Executive Vice President Community Banking 6 Capital City Bank Group | 2006 Annual Report Building on Our Strengths For more than 111 years, the client has been at the center of every decision we make. We know our clients and their needs, but most importantly, we know how to make their dreams come true. Unlocking Opportunities As a cornerstone in the communities we serve, we realize how important our leadership efforts are to economic growth. P R O J E C T 2 0 1 0 — B U I L D I N G F O R T H E F U T U R E $70,600,000 Earning Asset Growth in 2006 Proud of Our Communities | Proud of Our People 9 Service with a Smile As one of the largest financial companies headquartered in Florida, our associates work tirelessly—sometimes behind the scenes—to provide the excellent service our clients have come to know and expect. State-of-the-art technology keeps Capital City Bank ahead of the game. More than one million transactions are processed daily by a highly dedicated team of associates located at Capital City Services Company. Connecting with Our Clients P R O J E C T 2 0 1 0 — B U I L D I N G F O R T H E F U T U R E 1,200 Calls answered daily by our friendly and knowledgeable direct bankers. 10 Capital City Bank Group | 2006 Annual Report Promoting Culture The Capital City Bank Group Foundation provides local not-for-profit organizations the funds to build stronger communities through arts and culture, education and health services. Strengthening Our Bench At Capital City Bank, we talk a lot about our future. Associates serve as both mentors and mentees within the bank and in the community. They are becoming the leaders of the future while making the communities we call home a better place to live. Building Relationships Proud of Our Communities | Proud of Our People 13 Developing Trust Every day brings new opportunities to make a difference in the lives of our clients. They tell us about their dreams and we listen. It’s up to us to see the big picture and create solutions that will make their dreams a reality. Left: Capital City Associates are taking our products to the streets and people are talking about what we have to offer. Absolutely Free Checking is opening doors for new clients and new accounts. Below: Whether it’s opening a child’s first savings account or helping a family purchase their first home, we want to be there for all of their needs. 14 Capital City Bank Group | 2006 Annual Report Driving Opportunity Kia Is Coming to West Point In just four short months, Community President Drew Ferguson helped secure an economic boom for the city of West Point, Ga. In a historic deal, Kia Autosports announced it is coming to the United States and plans to build an auto assembly plant estimated at $1.2 billion. Above: With the first U.S. plant anticipated to open in 2009, the agreement promises approximately 2,500 new jobs. Right: Community President Drew Ferguson drives up excitement about the economic future of West Point in a Kia Sorento. Our Board of Directors Henry Lewis III, PharmD, RPH John K. Humphress Professor Florida A&M University College of Pharmacy Frederick Carroll, III Managing Partner Carroll and Company, CPAs William G. Smith, Jr. Chairman, President and Chief Executive Officer Capital City Bank Group, Inc. Partner Wadsworth, Humphress, Hollar & Konrad, PA Lina S. Knox Community Volunteer Thomas A. Barron President Capital City Bank McGrath Keen, Jr. Private Investor Left to Right: DuBose Ausley Attorney Ausley & McMullen, PA J. Everitt Drew President SouthGroup Equities, Inc. Ruth Knox Attorney/President Wesleyan College Cader B. Cox, III President Riverview Plantation, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ____________________ (cid:58) (cid:134) FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ (Exact name of Registrant as specified in its charter) Florida (State of Incorporation) 0-13358 (Commission File Number) 59-2273542 (IRS Employer Identification No.) 217 North Monroe Street, Tallahassee, Florida (Address of principal executive offices) 32301 (Zip Code) (850) 671-0300 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $0.01 par value Name of Each Exchange on Which Registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ] 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] As of June 30, 2006, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $330,816,293 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System. Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Common Stock, $0.01 par value per share Outstanding at February 28, 2007 18,388,831 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of our Proxy Statement for the Annual Meeting of Shareowners to be held on April 24, 2007, are incorporated by reference in Part III. 1 CAPITAL CITY BANK GROUP, INC. ANNUAL REPORT FOR 2006 ON FORM 10-K TABLE OF CONTENTS PART I PAGE 4 14 18 19 19 19 19 21 22 47 49 82 82 84 84 84 84 85 85 86 88 Business Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Properties Legal Proceedings Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant’s Common Equity, Related Shareowner Matters, and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Financial Statements and Supplementary Data Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareowner Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures 2 INTRODUCTORY NOTE This Annual Report on Form 10-K 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. In addition to those risks discussed in this Annual Report under Item 1A Risk Factors, factors that could cause our actual results to differ materially from those in the forward-looking statements, include, without limitation: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) 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 stock market and other capital markets; legislative or regulatory changes; our ability to comply with the extensive laws and regulations to which we are subject; the willingness of clients to accept third-party products and services rather than our products and services and vice versa; changes in the securities and real estate markets; increased competition and its effect on pricing; technological changes; changes in monetary and fiscal policies of the U.S. Government; the effects of security breaches and computer viruses that may affect our computer systems; changes in consumer spending and saving habits; growth and profitability of our noninterest income; changes in accounting principles, policies, practices or guidelines; the limited trading activity of our common stock; the concentration of ownership of our common stock; anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our bylaws; other risks described from time to time in our filings with the Securities and Exchange Commission; and our ability to manage the risks involved in the foregoing. However, other factors besides those listed in Item 1A Risk Factors or discussed in this 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. 3 PART I Item 1. Business General Capital City Bank Group, Inc. (“CCBG”) is a financial holding company registered under the Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach-Bliley Act”). CCBG was incorporated under Florida law on December 13, 1982, to acquire five national banks and one state bank that all subsequently became part of CCBG’s bank subsidiary, Capital City Bank (“CCB” or the “Bank”). In this report, the terms “Company”, “we”, “us”, or “our” mean CCBG and all subsidiaries included in our consolidated financial statements. We provide traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bank cards, data processing, and securities brokerage services through 69 full-service banking locations in Florida, Georgia, and Alabama. CCB operates these banking locations. At December 31, 2006, our consolidated total assets were approximately $2.6 billion and shareowners’ equity was approximately $316 million. CCBG’s principal asset is the capital stock of the Bank. CCB accounted for approximately 100% of consolidated assets at December 31, 2006, and approximately 100% of consolidated net income for the year ended December 31, 2006. In addition to our banking subsidiary, we have seven indirect subsidiaries, Capital City Trust Company, Capital City Mortgage Company (inactive), Capital City Banc Investments, Inc., Capital City Services Company, First Insurance Agency of Grady County, Inc., Southern Oaks, Inc., and FNB Financial Services, Inc., all of which are wholly-owned subsidiaries of Capital City Bank, and two direct subsidiaries CCBG Capital Trust I and CCBG Capital Trust II, both wholly-owned subsidiaries of CCBG. Dividends and management fees received from the Bank are our only source of income. Dividend payments by the Bank to CCBG depend on the capitalization, earnings and projected growth of the Bank, and are limited by various regulatory restrictions. See the section entitled “Regulatory Considerations” in this Item 1 and Note 15 in the Notes to Consolidated Financial Statements for additional information. We had a total of 1,056 (full-time equivalent) associates at February 28, 2007. Page 21 contains other financial and statistical information about us. We have one reportable segment with the following principal services: Banking Services, Data Processing Services, Trust and Asset Management Services, and Brokerage Services. Banking Services CCB is a Florida chartered full-service bank engaged in the commercial and retail banking business. Significant services offered by the Bank include: (cid:131) Business Banking – The Bank provides banking services to corporations and other business clients. Credit products are available for a wide variety of general business purposes, including financing for commercial business properties, equipment, inventories and accounts receivable, as well as commercial leasing and letters of credit. Treasury management services and merchant credit card transaction processing services are also offered. (cid:131) Commercial Real Estate Lending – The Bank provides a wide range of products to meet the financing needs of commercial developers and investors, residential builders and developers, and community development. (cid:131) Residential Real Estate Lending – The Bank provides products to help meet the home financing needs of consumers, including conventional permanent and construction/permanent (fixed or adjustable rate) financing arrangements, and FHA/VA loan products. The bank offers both fixed-rate and adjustable rate mortgages (“ARM”) loans. As of December 31, 2006, approximately 33% of the Bank’s loan portfolio consisted of ARM loans. The Bank offers these products through its existing network of branch offices. Geographical expansion of the delivery of this product line has occurred over the past three years through the opening of mortgage lending offices in Gainesville, Florida (Alachua County), Panacea, Florida (Wakulla County), Steinhatchee, Florida (Taylor County), and Thomasville, Georgia (Thomas County). (cid:131) Retail Credit – The Bank provides a full range of loan products to meet the needs of consumers, including personal loans, automobile loans, boat/RV loans, home equity loans, and credit card programs. (cid:131) Institutional Banking – The Bank provides banking services to meet the needs of state and local governments, public schools and colleges, charities, membership and not-for-profit associations including customized checking and savings accounts, cash management systems, tax-exempt loans, lines of credit, and term loans. 4 (cid:131) Retail Banking - The Bank provides a full range of consumer banking services, including checking accounts, savings programs, automated teller machines (“ATMs”), debit/credit cards, night deposit services, safe deposit facilities, and PC/Internet banking. Clients can use the “Star-Line” system to gain 24-hour access to their deposit and loan account information, and transfer funds between linked accounts. The Bank is a member of the “Star” ATM Network that permits banking clients to access cash at ATMs or point of sale merchants. Data Processing Services Capital City Services Company provides data processing services to financial institutions (including CCB), government agencies and commercial clients located throughout North Florida and South Georgia. As of February 28, 2007, the Services Company is providing computer services to seven correspondent banks, which have relationships with CCB. Trust Services and Asset Management Capital City Trust Company (“CCTC’) is the investment management arm of CCB. The Trust Company provides asset management for individuals through agency, personal trust, IRAs and personal investment management accounts. Administration of pension, profit sharing and 401(k) plans is a significant product line. Associations, endowments and other non- profit entities hire CCTC to manage their investment portfolios. A staff of well-trained professionals serves individuals requiring the services of a trustee, personal representative or a guardian. The market value of trust assets under discretionary management exceeded $753 million as of December 31, 2006, with total assets under administration exceeding $823 million. Brokerage Services We offer access to retail investment products through Capital City Banc Investments, Inc., a wholly-owned subsidiary of CCB. These products are offered through INVEST Financial Corporation, a member of NASD and SIPC. Non-deposit investment and insurance products are: (1) not FDIC insured; (2) not deposits, obligations, or guaranteed by any bank; and (3) subject to investment risk, including the possible loss of principal amount invested. Capital City Banc Investments, Inc. offers a full line of retail securities products, including U.S. Government bonds, tax-free municipal bonds, stocks, mutual funds, unit investment trusts, annuities, life insurance and long-term health care. We are not affiliated with INVEST Financial Corporation. Expansion of Business Since 1984, we have completed 15 acquisitions totaling $1.6 billion in deposits within existing and new markets. In addition, since 2003, we opened six new offices - two in Tallahassee and one each in Crawfordville, Palatka (replacement office), Spring Hill and Starke (replacement office) - to improve service and product delivery within these Florida markets. Plans are currently being developed for new office sites in Macon, Georgia, Spring Hill, Florida, Brooksville, Florida, and Gainesville, Florida. Pursuant to our “Project 2010” strategy, we plan to continue our expansion, emphasizing a combination of growth in existing markets and acquisitions. Acquisitions will be focused on a three state area including Florida, Georgia, and Alabama with a particular focus on acquiring banks and banking offices, which are $100 million to $400 million in asset size, located on the outskirts of major metropolitan areas. We will 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. We anticipate that slightly more than half of our future earnings growth will be generated through growth in existing markets and slightly less than half through acquisitions. Recent Acquisitions. On May 20, 2005, we completed our acquisition of First Alachua Banking Corporation (“FABC”), headquartered in Alachua, Florida. FABC’s wholly-owned subsidiary, First National Bank of Alachua (“FNBA”) had $228.3 million in assets, seven offices located in Alachua County -- Gainesville (three), Alachua, High Springs, Jonesville, Newberry -- and an eighth office in Hastings, Florida, which is located in St. Johns County. FABC also had a mortgage lending office in Gainesville and a financial services division. We issued 88.9456 shares of CCBG Common Stock and $2,847.04 in cash for each of the 10,186 shares of FABC, resulting in the issuance of 906,000 shares of CCBG Common Stock and the payment of $29.0 million in cash for a total purchase price of approximately $58.0 million. On October 15, 2004, we completed our acquisition of Farmers and Merchants Bank in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. We issued 21.35 shares of CCBG Common Stock and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 1,067,500 shares of CCBG Common Stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. On March 19, 2004, our subsidiary, CCB, completed its merger with Quincy State Bank, a former subsidiary of Synovus Financial Corp. Quincy State Bank had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. Both markets adjoin Leon County, home to our Tallahassee headquarters. In addition, we acquired $208 million in trust and other fiduciary assets of Synovus Trust Company, an affiliate of Quincy State Bank. The purchase price was $28.1 million in cash. 5 Competition The banking business is rapidly changing. We operate in a highly competitive environment, especially with respect to services and pricing. The on-going consolidation of the banking industry has altered and continues to significantly alter the competitive environment within the Florida, Georgia, and Alabama markets. We believe this consolidation further enhances our competitive position and opportunities in many of our markets. Our primary market area is 20 counties in Florida, five counties in Georgia and one county in Alabama. In these markets, the Bank competes against a wide range of banking and nonbanking institutions including savings and loan associations, credit unions, money market funds, mutual fund advisory companies, mortgage banking companies, investment banking companies, finance companies and other types of financial institutions. All of Florida’s major banking concerns have a presence in Leon County. CCB’s Leon County deposits totaled $694.1 million, or 33.3%, of our consolidated deposits at December 31, 2006. The following table depicts our market share percentage within each respective county, based on total commercial bank deposits within the county. Florida Alachua County(2) Bradford County Citrus County Clay County Dixie County Gadsden County Gilchrist County Gulf County Hernando County Jefferson County Leon County Levy County Madison County Pasco County St. Johns County(2) Putnam County Suwannee County Taylor County Wakulla County(3) Washington County Georgia(4) Bibb County Burke County Grady County Laurens County(5) Troup County Alabama Chambers County Market Share as of June 30,(1) 2005 2004 2006 5.6% 44.6% 3.3% 2.0% 20.8% 64.9% 47.1% 14.3% 1.5% 24.6% 18.0% 34.4% 14.9% 0.2% 1.5% 12.3% 11.8% 28.6% 2.9% 17.4% 2.9% 9.2% 20.0% 23.8% 8.2% 6.3% 42.6% 3.5% 2.2% 17.3% 68.0% 49.5% 19.8% 1.4% 24.4% 17.5% 33.8% 15.1% 0.3% 2.0 12.3% 7.5% 27.9% -- 20.3% 2.8% 9.3% 19.7% 33.1% 7.5% 4.7% 3.9% -- 37.1% 3.6% 2.4% 16.9% 77.7% 49.4% 22.1% 1.3% 24.0% 17.2% 34.1% 17.8% 0.4% -- 12.5% 7.7% 27.4% -- 20.0% 2.8% 10.3% 23.6% 41.8% 8.2% 4.4% (1) Obtained from the June 30, 2006 FDIC/OTS Summary of Deposits Report. (2) CCB entered market in May 2005. (3) CCB entered market in December 2005. (4) Does not include Thomas County where Capital City Bank maintains a residential mortgage lending office only. (5) CCB entered market in October 2004. 6 The following table sets forth the number of commercial banks and offices, including our offices and our competitors' offices, within each of the respective counties. County Florida Alachua Bradford Citrus Clay Dixie Gadsden Gilchrist Gulf Hernando Jefferson Leon Levy Madison Pasco Putnam St. Johns Suwannee Taylor Wakulla Washington Georgia Bibb Burke Grady Laurens Troup Alabama Chambers Number of Commercial Banks Number of Commercial Bank Offices 14 3 15 11 3 4 3 4 12 2 13 3 6 18 5 19 4 3 4 4 10 5 5 9 8 4 64 3 46 26 4 6 5 6 36 2 78 13 6 96 11 60 5 4 9 4 52 10 8 19 17 8 Data obtained from the June 30, 2006 FDIC/OTS Summary of Deposits Report. 7 REGULATORY CONSIDERATIONS We must comply with state and federal banking laws and regulations that control virtually all aspects of our operations. These laws and regulations generally aim to protect our depositors, not our shareowners or our creditors. Any changes in applicable laws or regulations may materially affect our business and prospects. Such legislative or regulatory changes may also affect our operations. The following description summarizes some of the laws and regulations to which we are subject. References to applicable statutes and regulations are brief summaries, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. The Company CCBG is registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a financial holding company under the Gramm-Leach-Bliley Act and is registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act of 1956 (“BHCA”). As a result, we are subject to supervisory regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act, the BHCA, and other federal laws subject financial holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Permitted Activities. The Gramm-Leach-Bliley Act, enacted on November 12, 1999, amended the BHCA by (i) allowing bank holding companies that qualify as “financial holding companies” to engage in a broad range of financial and related activities; (ii) allowing insurers and other financial service companies to acquire banks; (iii) removing restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and (iv) establishing the overall regulatory scheme applicable to bank holding companies that also engage in insurance and securities operations. The general effect of the law was to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. Activities that are financial in nature are broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. In contrast to financial holding companies, bank holding companies are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Except for the activities relating to financial holding companies permissible under the Gramm-Leach-Bliley Act, these restrictions will apply to us. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity. Changes in Control. Subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. As a bank holding company, we are required to obtain prior approval from the Federal Reserve before (i) acquiring all or substantially all of the assets of a bank or bank holding company, (ii) acquiring direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless we own a majority of such bank’s voting shares), or (iii) merging or consolidating with any other bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act of 1977 (“CRA”). 8 Under Florida law, a person or entity proposing to directly or indirectly acquire control of a Florida bank must first obtain permission from the Florida Department of Financial Services (the “Florida Department”). Florida statutes define “control” as either (a) indirectly or directly owning, controlling or having power to vote 25% or more of the voting securities of a bank; (b) controlling the election of a majority of directors of a bank; (c) owning, controlling, or having power to vote 10% or more of the voting securities as well as directly or indirectly exercising a controlling influence over management or policies of a bank; or (d) as determined by the Florida Department. These requirements will affect us because the Bank is chartered under Florida law and changes in control of us are indirect changes in control of the Bank. Tying. Financial holding companies and their affiliates are prohibited from tying the provision of certain services, such as extending credit, to other services offered by the holding company or its affiliates. Capital; Dividends; Source of Strength. The Federal Reserve imposes certain capital requirements on us under the BHCA, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “Capital Regulations.” Subject to its capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to the Bank, and such loans may be repaid from dividends paid from the Bank to us. The ability of the Bank to pay dividends, however, will be subject to regulatory restrictions that are described below under “Dividends.” We are also able to raise capital for contributions to the Bank by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws. In accordance with Federal Reserve policy, we are expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which we might not otherwise do so. In furtherance of this policy, the Federal Reserve may require a financial holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the financial holding company. Further, federal bank regulatory authorities have additional discretion to require a financial holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. Capital City Bank CCB is a banking institution that is chartered by and headquartered in the State of Florida, and it is subject to supervision and regulation by the Florida Department. The Florida Department supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of branches. The Bank is also a member bank of the Federal Reserve System, which makes the Bank’s operations subject to broad federal regulation and oversight by the Federal Reserve. In addition, the Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law, and the FDIC has certain enforcement powers over the Bank. As a state chartered banking institution in the State of Florida, the Bank is empowered by statute, subject to the limitations contained in those statutes, to take and pay interest on savings and time deposits, to accept demand deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of banks and corporations and to provide various other banking services on behalf of the Bank’s clients. Various consumer laws and regulations also affect the operations of the Bank, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit opportunity laws, and fair credit reporting. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prohibits insured state chartered institutions from conducting activities as principal that are not permitted for national banks. A bank, however, may engage in an otherwise prohibited activity if it meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the deposit insurance funds. Reserves. The Federal Reserve requires all depository institutions to maintain reserves against some transaction accounts (primarily NOW and Super NOW checking accounts). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve Bank “discount window” as a secondary source of funds, provided that the institution meets the Federal Reserve Bank’s credit standards. Dividends. The Bank is subject to legal limitations on the frequency and amount of dividends that can be paid to us. The Federal Reserve may restrict the ability of the Bank to pay dividends if such payments would constitute an unsafe or unsound banking practice. These regulations and restrictions may limit our ability to obtain funds from the Bank for our cash needs, including funds for acquisitions and the payment of dividends, interest, and operating expenses. 9 In addition, Florida law also places certain restrictions on the declaration of dividends from state chartered banks to their holding companies. Pursuant to Section 658.37 of the Florida Banking Code, the board of directors of state chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for reasonably anticipated future losses on loans and other assets, may quarterly, semi-annually or annually declare a dividend of up to the aggregate net profits of that period combined with the bank’s retained net profits for the preceding two years and, with the approval of the Florida Department, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of the bank until this fund becomes equal to the amount of the bank’s common stock then issued and outstanding. A state chartered bank may not declare any dividend if (i) its net income from the current year combined with the retained net income for the preceding two years is a loss or (ii) the payment of such dividend would cause the capital account of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Department or a federal regulatory agency. Insurance of Accounts and Other Assessments. The FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund (the “DIF”) on March 31, 2006. The deposit accounts of the Bank are currently insured by the DIF generally up to a maximum of $100,000 per separately insured depositor, except for retirement accounts, which are insured up to $250,000. The Bank pays its deposit insurance assessments to the DIF. Effective January 1, 2007, the FDIC established a risk-based assessment system for determining the deposit insurance assessments to be paid by insured depository institutions. Under the assessment system, the FDIC assigns an institution to one of four risk categories, with the first category having two sub-categories based on the institution’s most recent supervisory and capital evaluations, designed to measure risk. Assessment rates currently range from 0.05% of deposits for an institution in the highest sub-category of the highest category to 0.43% of deposits for an institution in the lowest category. The FDIC is authorized to raise the assessment rates as necessary to maintain the minimum required 1.25% reserve ratio of premiums held to deposits insured. The FDIC allows the use of credits for assessments previously paid. We believe that we have credits that will offset certain of these assessments during 2007. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately 0.0122% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019. Transactions With Affiliates. Pursuant to Sections 23A and 23B of the Federal Reserve Act (“FRA”) and Regulation W, the authority of the Bank to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an “affiliate” generally must be collateralized and certain transactions between the Bank and its “affiliates”, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to the Bank, as those prevailing for comparable nonaffiliated transactions. In addition, the Bank generally may not purchase securities issued or underwritten by affiliates. Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank (“10% Shareholders”), or to any political or campaign committee the funds or services of which will benefit such executive officers, directors, or 10% Shareholders or which is controlled by such executive officers, directors or 10% Shareholders, are subject to Sections 22(g) and 22(h) of the FRA and the regulations promulgated thereunder (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the FRA. Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to such persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the FRA prohibits loans to any such individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all such extensions of credit outstanding to all such persons would exceed the bank’s unimpaired capital and unimpaired surplus. Section 22(g) identifies limited circumstances in which the Bank is permitted to extend credit to executive officers. Community Reinvestment Act. The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations provide for regulatory assessment of a bank’s record in meeting the needs of its service area. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. The Federal Reserve considers a bank’s CRA when the bank submits an application to establish branches, merge, or acquire the assets and assume the liabilities of another bank. In the case of a financial holding company, the CRA performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other financial holding company. An unsatisfactory record can substantially delay or block the transaction. 10 Capital Regulations. The Federal Reserve has adopted risk-based, capital adequacy guidelines for financial holding companies and their subsidiary state-chartered banks that are members of the Federal Reserve System. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, to minimize disincentives for holding liquid assets and to achieve greater consistency in evaluating the capital adequacy of major banks throughout the world. Under these guidelines assets and off-balance sheet items are assigned to broad risk categories each with designated weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The current guidelines require all financial holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I Capital. Tier I Capital, which includes common stockholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock and trust preferred securities, less certain goodwill items and other intangible assets, is required to equal at least 4% of risk-weighted assets. The remainder (“Tier II Capital”) may consist of (i) an allowance for loan losses of up to 1.25% of risk-weighted assets, (ii) excess of qualifying perpetual preferred stock, (iii) hybrid capital instruments, (iv) perpetual debt, (v) mandatory convertible securities, and (vi) subordinated debt and intermediate-term preferred stock up to 50% of Tier I Capital. Total capital is the sum of Tier I and Tier II Capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the appropriate regulator (determined on a case by case basis or as a matter of policy after formal rule making). In computing total risk-weighted assets, bank and financial holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. Most loans will be assigned to the 100% risk category, except for performing first mortgage loans fully secured by 1- to 4-family and certain multi-family residential property, which carry a 50% risk rating. Most investment securities (including, primarily, general obligation claims on states or other political subdivisions of the United States) will be assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk- weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In covering off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor. Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% conversion factor. Short-term commercial letters of credit are converted at 20% and certain short-term unconditionally cancelable commitments have a 0% factor. The federal bank regulatory authorities have also adopted regulations that supplement the risk-based guidelines. These regulations generally require banks and financial holding companies to maintain a minimum level of Tier I Capital to total assets less goodwill of 4% (the “leverage ratio”). The Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the bank achieves a 1 rating under the CAMELS rating system in its most recent examination, as long as the bank is not experiencing or anticipating significant growth. The CAMELS rating is a non-public system used by bank regulators to rate the strength and weaknesses of financial institutions. The CAMELS rating is comprised of six categories: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not satisfy the criteria described above, will be required to maintain a minimum leverage ratio ranging generally from 4% to 5%. The bank regulators also continue to consider a “tangible Tier I leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier I leverage ratio is the ratio of a banking organization’s Tier I Capital, less deductions for intangibles otherwise includable in Tier I Capital, to total tangible assets. Federal law and regulations establish a capital-based regulatory scheme designed to promote early intervention for troubled banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” To qualify as a “well-capitalized” institution, a bank must have a leverage ratio of no less than 5%, a Tier I risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a financial holding company to acquire or merge with a bank or bank holding company. 11 Under the regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates, and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or a part of their operations. Financial holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans. It should be noted that the minimum ratios referred to above are merely guidelines and the bank regulators possess the discretionary authority to require higher ratios. We currently exceed the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy, and are unaware of any material violation or alleged violation of these regulations, policies or directives. Interstate Banking and Branching. The BHCA was amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”). The Interstate Banking Act provides that adequately capitalized and managed financial holding companies are permitted to acquire banks in any state. State laws prohibiting interstate banking or discriminating against out-of-state banks are preempted. States are not permitted to enact laws opting out of this provision; however, states are allowed to adopt a minimum age restriction requiring that target banks located within the state be in existence for a period of years, up to a maximum of five years, before such bank may be subject to the Interstate Banking Act. The Interstate Banking Act establishes deposit caps which prohibit acquisitions that result in the acquiring company controlling 30% or more of the deposits of insured banks and thrift institutions held in the state in which the target maintains a branch or 10% or more of the deposits nationwide. States have the authority to waive the 30% deposit cap. State-level deposit caps are not preempted as long as they do not discriminate against out-of-state companies, and the federal deposit caps apply only to initial entry acquisitions. The Interstate Banking Act also provides that adequately capitalized and managed banks are able to engage in interstate branching by merging with banks in different states. Unlike the interstate banking provision discussed above, states were permitted to opt out of the application of the interstate merger provision by enacting specific legislation. Florida responded to the enactment of the Interstate Banking Act by enacting the Florida Interstate Branching Act (the “Florida Branching Act”). The purpose of the Florida Branching Act was to permit interstate branching through merger transactions under the Interstate Banking Act. Under the Florida Branching Act, with the prior approval of the Florida Department, a Florida bank may establish, maintain and operate one or more branches in a state other than the State of Florida pursuant to a merger transaction in which the Florida bank is the resulting bank. In addition, the Florida Branching Act provides that one or more Florida banks may enter into a merger transaction with one or more out-of-state banks, and an out-of-state bank resulting from such transaction may maintain and operate the branches of the Florida bank that participated in such merger. An out-of-state bank, however, is not permitted to acquire a Florida bank in a merger transaction unless the Florida bank has been in existence and continuously operated for more than three years. Anti-money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT ACT”) was enacted in response to the terrorist attacks occurring on September 11, 2001. The USA PATRIOT ACT is intended to strengthen the U.S. law enforcement and intelligence communities’ ability to work together to combat terrorism. Title III of the USA PATRIOT ACT, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, amended the Bank Secrecy Act and adopted additional provisions that increased the obligations of financial institutions, including the Bank, to identify their clients, watch for and report upon suspicious transactions, respond to requests for information by federal banking and law enforcement agencies, and share information with other financial institutions. In addition, the collected client identification information must be verified within a reasonable time after a new account is opened through documentary or non-documentary methods. All new clients must be screened against any Section 326 government lists of known or suspected terrorists within a reasonable time after opening an account. Securities Activities. The Financial Services Regulatory Relief Act of 2006 (“Regulatory Relief Act”) was signed into law on October 13, 2006, which among other things, requires the Securities and Exchange Commission and the Federal Reserve, in consultation with the other federal banking regulators, to jointly promulgate regulations to implement the bank broker-dealer exceptions enacted in the Gramm-Leach-Bliley Act. On December 13, 2006, the SEC voted to propose Regulation R, which would implement the bank broker-dealer exceptions. Regulation R is expected to impact the way Bank associates who are not registered with the SEC may be compensated for referrals to a third-party broker-dealer for which the Bank has entered into a networking arrangement. In addition, Regulation R will broaden the ability of the Bank to effect securities transactions in a trustee or fiduciary capacity without registering as a broker, permit banks to effect certain sweep account transactions, and accept orders for securities transactions from employee plan accounts, individual retirement plan accounts, and other similar accounts. Banks would be expected to comply on the first day of their fiscal year beginning on or after June 30, 2008. 12 Privacy. Under the Gramm-Leach-Bliley Act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. Consumer Laws and Regulations. The Check Clearing for the 21st Century Act, or “Check 21” as it is commonly known, became effective in October 2004. Check 21 facilitates check collection through a new negotiable instrument called a “substitute check,” which permits, but does not require, banks to replace original checks with substitute checks or information from the original check and process check information electronically. Banks that do use substitute checks must comply with certain notice and recredit rights. Check 21 cuts the time and cost involved in physically transporting paper items to reduce float (i.e., the time between the deposit of a check in a bank and payment) especially in cases in which items were not already being delivered same-day or overnight. The Bank is also subject to other federal and state consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits or making loans to such clients. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing client relations. Future Legislative Developments Various legislative acts are from time to time introduced in Congress and the Florida legislature. Such legislation may change banking statutes and the environment in which our banking subsidiary and we operate in substantial and unpredictable ways. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our banking subsidiary. Effect of Governmental Monetary Policies The commercial banking business in which the Bank engages is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign branches and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of the Bank cannot be predicted. Income Taxes We are subject to income taxes at the federal level and subject to state taxation based on the laws of each state in which we operate. We file a consolidated federal tax return with a fiscal year ending on December 31. We have filed tax returns for each state jurisdiction affected in 2005 and will do the same for 2006. Website Access to Company's Reports Our internet website is www.ccbg.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website is not incorporated by reference into this report. 13 Item 1A. Risk Factors You should consider carefully the following risk factors before deciding whether to invest in our common stock. Our business, including our operating results and financial condition, could be harmed by any of these risks. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks you should also refer to the other information contained in our filings with the SEC, including our financial statements and related notes. Risks Related to Our Business We may not be able to successfully manage our growth or implement our growth strategies, which may adversely affect our results of operations and financial condition. During the last five years, we have experienced significant growth, and a key aspect of our business strategy is our continued growth and expansion. The goal of our primary business strategy known as Project 2010 is to increase our annual earnings to $50 million by 2010. Our ability to manage our growth successfully will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any businesses we acquire into our organization. Our earnings growth relies, at least in part, on strategic acquisitions. Our ability to grow through selective acquisitions of financial institutions or branches will depend on successfully identifying, acquiring and integrating those institutions or branches. We may be unable to identify attractive acquisition candidates, make acquisitions on favorable terms or successfully integrate any acquired institutions or branches. In addition, we may fail to realize the growth opportunities and cost savings we anticipate to be derived from our acquisitions. Growth through acquisitions causes us to take on additional risks such as the risks of unknown or contingent liabilities, exposure to potential asset quality issues from acquired institutions, and the diversion of our management’s time and attention from our existing business and operations. Finally, it is possible that during the integration process of our acquisitions, we could lose key associates or the ability to maintain relationships with clients. As we continue to implement our growth strategy by opening new offices or through strategic acquisitions, we expect to incur increased personnel, occupancy and other operating expenses. In the case of new offices, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. We may need additional capital resources in the future and these capital resources may not be available when needed or at all. We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or for future growth. Such financing may not be available to us on acceptable terms or at all. We may incur losses if we are unable to successfully manage interest rate risk. Our profitability depends to a large extent on the Bank’s net interest income, which is the difference between income on interest- earning assets such as loans and investment securities, and expense on interest-bearing liabilities such as deposits and our borrowings. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining or (ii) more interest-bearing liabilities than interest- earning assets reprice or mature during a time when interest rates are rising. Changes in the difference between short- and long-term interest rates may also harm our business. For example, short-term deposits may be used to fund longer-term loans. When differences between short-term and long-term interest rates shrink or disappear, the spread between rates paid on deposits and received on loans could narrow significantly, decreasing our net interest income. If market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thus reducing our net interest income because we may need to pay the higher rates on our deposits and borrowings while being limited on the repricing of these loans due to the interest rate caps. 14 An inadequate allowance for loan losses would reduce our earnings. We are exposed to the risk that our clients will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment. This will result in credit losses that are inherent in the lending business. We evaluate the collectibility of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) the risk characteristics of various classifications of loans; previous loan loss experience; specific loans that have loss potential; delinquency trends; estimated fair market value of the collateral; current economic conditions; and geographic and industry loan concentrations. If our estimate of credit losses inherent in the loan portfolio is incorrect, our earnings could be significantly and adversely affected because our allowance may not be adequate. Additionally, we may experience losses in our loan portfolios or encounter adverse trends that require us to significantly increase our allowance for loan losses in the future, which could also have an adverse affect on our earnings. Our loan portfolio includes loans with a higher risk of loss. We originate commercial real estate loans, commercial loans, construction loans, consumer loans, and residential mortgage loans primarily within our market area. Commercial real estate, commercial, construction, and consumer loans may expose a lender to greater credit risk than loans secured by single-family residential real estate because the collateral securing these loans may not be sold as easily as single-family residential real estate. In addition, commercial real estate, commercial and construction/development loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans also have greater credit risk than residential real estate for the following reasons: (cid:131) Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. (cid:131) Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, illiquid, or fluctuate in value based on the success of the business. (cid:131) Construction Loans. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. (cid:131) Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results. Due to the lack of diversified industry within the markets served by the Bank and the relatively close proximity of our geographic markets, we have both geographic concentrations as well as concentrations in the types of loans funded. Specifically, due to the nature of our markets, a significant portion of the portfolio has historically been secured with real estate. As of December 31, 2006, approximately 32.2% and 35.5% of our $2.0 billion loan portfolio was secured by commercial real estate and residential real estate, respectively. As of this same date, approximately 9.0% was secured by property under construction. A major change in the real estate market, such as a deterioration in the value of the collateral, or in the local or national economy, could adversely affect our clients’ ability to repay their loans. In the event we are required to foreclose on a property securing one of our mortgage loans or otherwise pursue our remedies in order to protect our investment, there can be no assurance that we will recover funds in an amount equal to our projected return on our investment or in an amount sufficient to prevent a loss to us due to prevailing economic conditions, real estate values and other factors associated with the ownership of real property. As a result, the market value of the real estate or other collateral underlying our loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of the loans, and consequently, we would sustain loan losses. 15 An economic downturn in Florida and Georgia could hinder our ability to operate profitably and have an adverse impact on our operations. Our interest-earning assets are heavily concentrated in mortgage loans secured by properties located in Florida and Georgia. As of December 31, 2006, substantially all of our loans secured by real estate are secured by properties located in Florida and Georgia. The concentration of our loans in these areas subjects us to risk that a downturn in the economy or recession in those areas could result in a decrease in loan originations and increases in delinquencies and foreclosures, which would more greatly affect us than if our lending were more geographically diversified. In addition, since a large portion of our portfolio is secured by properties located in Florida, the occurrence of a natural disaster, such as a hurricane, could result in a decline in loan originations, a decline in the value or destruction of mortgaged properties and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us in that state. We may suffer losses if there is a decline in the value of the properties underlying our mortgage loans that would have an adverse impact on our operations. Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income. Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default, is dependent upon factors outside of our control, including, but not limited to: (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) (cid:131) general or local economic conditions; neighborhood values; interest rates; real estate tax rates; operating expenses of the mortgaged properties; supply of and demand for rental units or properties; ability to obtain and maintain adequate occupancy of the properties; zoning laws; governmental rules, regulations and fiscal policies; and acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss. Confidential client information transmitted through our online banking service is vulnerable to security breaches and computer viruses, which could expose us to litigation and adversely affect our reputation and our ability to generate deposits. We provide our clients the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of banking online. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our clients involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing clients to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits. 16 We must comply with the Bank Secrecy Act and other anti-money laundering statutes and regulations. Since September 11, 2001, banking regulators have intensified their focus on anti-money laundering and Bank Secrecy Act compliance requirements, particularly the anti-money laundering provisions of the USA PATRIOT Act. There is also increased scrutiny of our compliance with the rules enforced by the Office of Foreign Assets Control. In order to comply with regulations, guidelines and examination procedures in this area, we have been required to adopt new policies and procedures and to install new systems. We cannot be certain that the policies, procedures and systems we have in place will permit us to fully comply with these laws. Furthermore, financial institutions that we have already acquired or may acquire in the future may or may not have had adequate policies, procedures and systems to fully comply with these laws. Whether our own policies, procedures and systems are deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and to obtain regulatory approvals necessary to proceed with certain aspects of our business plan, including our acquisition plans. Our controls and procedures may fail or be circumvented. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition. We are exposed to operational risk as a result of providing certain services, which could adversely affect our results of operations. We are exposed to operational risk as a result of providing various fee-based services including electronic banking, item processing, data processing, correspondent banking, merchant services, and asset management. Operational risk is the risk of loss resulting from errors related to transaction processing, breaches of the internal control system and compliance requirements, fraud by employees or persons outside the company or business interruption due to system failures or other events. We continually assess and monitor operational risk in our business lines and provide for disaster and business recovery planning including geographical diversification of our facilities; however, the occurrence of various events including unforeseeable and unpreventable events such as hurricanes or other natural disasters could still damage our physical facilities or our computer systems or software, cause delay or disruptions to operational functions, impair our clients, vendors and counterparties and negatively impact our results of operations. Operational risk also includes potential legal or regulatory actions that could arise as a result of noncompliance with applicable laws and regulatory requirements which could have an adverse affect on our reputation. Our future success is dependent on our ability to compete effectively in the highly competitive banking industry. We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition. We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from the Bank. The Bank is subject to extensive regulation, supervision and examination by the Florida Department of Financial Services, the Federal Reserve, and the FDIC. As a member of the Federal Home Loan Bank (“FHLB”), the Bank must also comply with applicable regulations of the Federal Housing Finance Board and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareowners. The Bank’s activities are also regulated under consumer protection laws applicable to our lending, deposit and other activities. A sufficient claim against us under these laws could have a material adverse effect on our results. Please refer to the Section entitled “Business – Regulatory Considerations” of this Report. 17 Risks Related to an Investment in Our Common Stock Limited trading activity for shares of our common stock may contribute to price volatility. While our common stock is listed and traded on The NASDAQ Global Select Market, there has been limited trading activity in our common stock. The average daily trading volume of our common stock over the twelve-month period ending December 31, 2006 was approximately 20,449 shares. Due to the limited trading activity of our common stock, relativity small trades may have a significant impact on the price of our common stock. Our insiders have substantial control over matters requiring shareowner approval, including changes of control. Our shareowners who own more than 5% of our common stock, directors, and executive officers, beneficially owned approximately 46.4% of the outstanding shares of our stock as of December 31, 2006. Accordingly, these principal shareowners, directors, and executive officers, if acting together, may be able to influence or control matters requiring approval by our shareowners, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareowners of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock. Our Articles of Incorporation, Bylaws, and certain laws and regulations may prevent or delay transactions you might favor, including a sale or merger of CCBG. CCBG is registered with the Federal Reserve as a financial holding company under the Gramm-Leach-Bliley Act and is registered with the Federal Reserve as a bank holding company under the BHCA. As a result, we are subject to supervisory regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act, the BHCA, and other federal laws subject financial holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. Provisions of our Articles of Incorporation, Bylaws, certain laws and regulations and various other factors may make it more difficult and expensive for companies or persons to acquire control of us without the consent of our Board of Directors. It is possible, however, that you would want a takeover attempt to succeed because, for example, a potential buyer could offer a premium over the then prevailing price of our common stock. For example, our Articles of Incorporation permit our Board of Directors to issue preferred stock without shareowner action. The ability to issue preferred stock could discourage a company from attempting to obtain control of us by means of a tender offer, merger, proxy contest or otherwise. Additionally, our Articles of Incorporation and Bylaws divide our Board of Directors into three classes, as nearly equal in size as possible, with staggered three-year terms. One class is elected each year. The classification of our Board of Directors could make it more difficult for a company to acquire control of us. We are also subject to certain provisions of the Florida Business Corporation Act and our Articles of Incorporation that relate to business combinations with interested shareowners. Other provisions in our Articles of Incorporation or Bylaws that may discourage takeover attempts or make them more difficult include: (cid:131) Supermajority voting requirements to remove a director from office; (cid:131) Provisions regarding the timing and content of shareowner proposals and nominations; (cid:131) Supermajority voting requirements to amend Articles of Incorporation unless approval is received by a majority of “disinterested directors”; (cid:131) Absence of cumulative voting; and (cid:131) Inability for shareowners to take action by written consent. Item 1B. Unresolved Staff Comments None. 18 Item 2. Properties We are headquartered in Tallahassee, Florida. Our executive office is in the Capital City Bank building located on the corner of Tennessee and Monroe Streets in downtown Tallahassee. The building is owned by the Bank, but is located on land leased under a long-term agreement. The Bank's Parkway Office is located on land leased from the Smith Interests General Partnership L.L.P. in which several directors and officers have an interest. The annual lease provides for payments of approximately $109,000, to be adjusted for inflation in future years. As of February 28, 2007, the Bank had 69 banking locations. Of the 69 locations, the Bank leases the land, buildings, or both at 14 locations and owns the land and buildings at the remaining 55. Item 3. 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 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Equity, Related Shareowner Matters, and Issuer Purchases of Equity Securities Common Stock Market Prices and Dividends Our common stock trades on the NASDAQ Global Select Market under the symbol "CCBG." The following table presents the range of high and low closing sales prices reported on the NASDAQ Global Select Market and cash dividends declared for each quarter during the past two years, as adjusted for our 5-for-4 stock split effective July 1, 2005. We had a total of 1,805 shareowners of record as of February 28, 2007. 2006 2005 Fourth Qtr. Third Qtr. Second Qtr. First Qtr. Fourth Qtr. Third Qtr. Second Qtr. First Qtr. Common stock price: High Low Close Cash dividends declared per share $ 35.98 $ 30.14 35.30 .1750 33.25 $ 29.87 31.10 .1625 35.39 $ 29.51 30.20 .1625 37.97 $ 33.79 35.55 .1625 39.33 $ 33.21 34.29 .1625 38.72 $ 33.46 $ 31.78 28.02 37.71 32.32 .1520 .1520 33.60 29.30 32.41 .1520 Future payment of dividends will be subject to determination and declaration by our Board of Directors. Florida law limits our payment of dividends. There are also legal limits on the frequency and amount of dividends that CCB can pay us. See subsection entitled "Dividends" in the Business section on page 9, in the Management's Discussion and Analysis of Financial Condition and Operating Results on page 43 and Note 14 in the Notes to Consolidated Financial Statements. These restrictions may limit our ability to pay dividends to our shareowners. As of February 28, 2007, we do not believe these restrictions will impair our ability to declare and pay our routine and customary dividends. 19 Purchases of Equity Securities by the Issuer and Affiliated Purchasers 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 October 1, 2006 to October 31, 2006 November 1, 2006 to November 30, 2006 December 1, 2006 to December 31, 2006 Total number of shares purchased Average price paid per share - 11,581 4,139 - $32.98 32.90 Total 15,720 $32.96 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 - 879,837 883,976 883,976 307,758 296,177 292,038 292,038 (1) This balance represents the number of shares that were repurchased through the Capital City Bank Group, Inc. Share Repurchase Program, which was approved on March 30, 2000, and modified by our Board on January 24, 2002 (the "Program") under which we were authorized to repurchase up to 1,171,875 shares of our common stock. The Program is flexible and shares are acquired from the public markets and other sources with either free cash flow or borrowed funds. There is no predetermined expiration date for the Program. Performance Graph This performance graph compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return of the NASDAQ Composite Index and the SNL Financial LC $1B-$5B Bank Index for the past five years. The graph assumes that $100 was invested on December 31, 2001 in our common stock and each of the above indices, and that all dividends were reinvested. The shareholder return shown below represents past performance and should not be considered indicative of future performance. Total Return Performance 300 250 200 150 100 u al V x e d n I 50 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 Capital City Bank Group, Inc. NASDAQ Composite SNL $1B-$5B Bank Index Index Capital City Bank Group, Inc. NASDAQ Composite SNL $1B-$5B Bank Index 12/31/01 100.00 100.00 100.00 12/31/02 168.06 68.76 115.44 12/31/03 251.02 103.67 156.98 12/31/04 12/31/05 242.31 115.57 190.43 232.18 113.16 193.74 12/31/06 254.43 127.58 220.36 Period Ending 20 Item 6. Selected Financial Data (Dollars in Thousands, Except Per Share Data)(1) 2006 For the Years Ended December 31, 2003 2004 2005 2002 Interest Income Net Interest Income Provision for Loan Losses Net Income Per Common Share: Basic Net Income Diluted Net Income Cash Dividends Declared Book Value Key Performance Ratios: Return on Average Assets Return on Average Equity Net Interest Margin (FTE) Dividend Pay-Out Ratio Equity to Assets Ratio Asset Quality: Allowance for Loan Losses Allowance for Loan Losses to Loans Nonperforming Assets Nonperforming Assets to Loans + ORE Allowance to Nonperforming Loans Net Charge-Offs to Average Loans Averages for the Year: Loans, Net Earning Assets Total Assets Deposits Subordinated Notes Long-Term Borrowings Shareowners' Equity Year-End Balances: Loans, Net Earning Assets Total Assets Deposits Subordinated Notes Long-Term Borrowings Shareowners' Equity $ $ $ 165,893 $ 119,136 1,959 33,265 140,053 $ 109,990 2,507 30,281 101,525 $ 86,084 2,141 29,371 94,830 $ 79,991 3,436 25,193 104,165 81,662 3,297 23,082 1.79 $ 1.79 .663 17.01 1.29% 10.48 5.35 37.01 12.15 1.66 $ 1.66 .619 16.39 1.22% 10.56 5.09 37.35 11.65 1.74 $ 1.74 .584 14.51 1.53 $ 1.52 .525 15.27 1.46% 13.31 4.88 33.62 10.86 1.40% 12.82 5.01 34.51 10.98 1.40 1.39 .402 14.08 1.34% 12.85 5.35 28.87 10.22 17,217 $ 0.86% 8,731 0.44 214.09 0.11 17,410 $ 0.84% 5,550 0.27 331.11 0.13 16,037 $ 0.88% 5,271 0.29 345.18 0.22 12,429 $ 0.93% 7,301 0.54 529.80 0.27 12,495 0.97% 3,843 0.30 497.72 0.23 $ 2,029,397 $ 1,968,289 $ 1,538,744 $ 1,318,080 $ 1,256,107 1,556,500 1,789,843 1,727,180 2,006,745 1,424,999 1,599,201 5,155 - 30,423 59,462 179,652 220,731 2,258,277 2,187,672 2,581,078 2,486,733 2,034,931 1,954,888 50,717 70,216 286,712 1,624,680 1,804,895 1,431,808 - 55,594 196,588 62,887 57,260 317,336 $ 1,999,721 $ 2,067,494 $ 1,828,825 $ 1,341,632 $ 1,285,221 1,636,472 2,113,571 1,824,771 2,364,013 1,434,200 1,894,886 30,928 - 71,745 68,453 186,531 256,800 2,270,410 2,299,677 2,597,910 2,625,462 2,081,654 2,079,346 62,887 69,630 305,776 1,648,818 1,846,502 1,474,205 - 46,475 202,809 62,887 43,083 315,770 Other Data: Basic Average Shares Outstanding Diluted Average Shares Outstanding Shareowners of Record(2) Banking Locations(2) Full-Time Equivalent Associates(2) 18,584,519 18,263,855 18,609,839 18,281,243 1,716 69 1,013 1,805 69 1,056 16,805,696 16,810,926 1,598 60 926 16,528,109 16,563,986 1,512 57 795 16,531,606 16,592,944 1,457 54 781 (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005, and the 5-for-4 stock split effective June 13, 2003. (2) As of the record date. The record date is on or about March 1st of the following year. 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Results of Operations," "Financial Condition," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting Policies." Information therein should facilitate a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2006 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as "CCBG," "Company," "we," "us," or "our." In this MD&A, we present an operating efficiency ratio and an operating net noninterest expense as a percent of average assets, both of which are not calculated based on accounting principles generally accepted in the United States ("GAAP"), but that we believe provide important information regarding our results of operations. Our calculation of the operating efficiency ratio is computed by dividing noninterest expense less intangible amortization and one-time merger expenses, by the sum of tax equivalent net interest income and noninterest income. We calculate our operating net noninterest expense as a percent of average assets by subtracting noninterest expense excluding intangible amortization and one-time merger expenses from noninterest income. Management uses these non-GAAP measures as part of its assessment of its performance in managing noninterest expenses. We believe that excluding intangible amortization and one-time merger expenses in our calculations better reflect our periodic expenses and is more reflective of normalized operations. Although we believe the above-mentioned non-GAAP financial measures enhance investors’ understanding of our business and performance these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, there are material limitations associated with the use of these non-GAAP financial measures such as the risks that readers of our financial statements may disagree as to the appropriateness of items included or excluded in these measures and that our measures may not be directly comparable to other companies that calculate these measures differently. Our management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measure as detailed below. Reconciliation of operating efficiency ratio to efficiency ratio – Efficiency ratio Effect of intangible amortization and one-time merger expenses Operating efficiency ratio Reconciliation of operating net noninterest expense ratio – Net noninterest expense as a percent of average assets Effect of intangible amortization and one-time merger expenses Operating net noninterest expense ratio For the Years Ended December 31, 2004 2006 2005 64.73% 68.46% 68.87% (3.17%) (3.67)% (3.45)% 61.56% 64.79% 65.42% For the Years Ended December 31, 2004 2006 2005 1.93% 2.44% 2.56% (0.22)% (0.24)% (0.24)% 1.71% 2.20% 2.32% 22 The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, 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 this Annual Report for a discussion of factors that could cause our actual results to differ materially from those in the forward-looking statements. However, other factors besides those listed in Item 1A Risk Factors or discussed in this Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law. BUSINESS OVERVIEW We are a financial holding company headquartered in Tallahassee, Florida and are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or "CCB"). The Bank offers a broad array of products and services through a total of 69 full- service offices located in Florida, Georgia, and Alabama. The Bank also has mortgage lending offices in three additional Florida communities, and one Georgia community. The Bank offers commercial and retail banking services, as well as trust and asset management, merchant services, securities brokerage and data processing services. Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and 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 2010", we have continued our expansion, emphasizing a combination of growth in existing markets and acquisitions. Acquisitions will continue to be focused on a three state area including Florida, Georgia, and Alabama with a particular focus on financial institutions, which are $100 million to $400 million in asset size and generally located on the outskirts of major metropolitan areas. We continue to evaluate de novo expansion opportunities in attractive new markets in the event that acquisition opportunities are not feasible. Other expansion opportunities that will be evaluated include asset management, insurance, and mortgage banking. 23 Recent Acquisitions. On May 20, 2005, we completed our merger with First Alachua Banking Corporation ("FABC"), headquartered in Alachua, Florida. We issued approximately 906,000 shares of common stock and paid approximately $29.0 million in cash for a total purchase price of $58.0 million. FABC's wholly-owned subsidiary, First National Bank of Alachua, had $228.3 million in assets at closing with seven offices in Alachua County and an eighth office in Hastings, Florida, which is in St. Johns County. On October 15, 2004, we completed our acquisition of Farmers and Merchants Bank ("FMB") in Dublin, Georgia, a $395 million asset institution with three offices in Laurens County. We issued 21.35 shares and $666.50 in cash for each of the 50,000 shares of Farmers and Merchants Bank, resulting in the issuance of 1,067,500 shares of our common stock and the payment of $33.3 million in cash for a total purchase price of approximately $66.7 million. On March 19, 2004, our subsidiary, CCB, completed its merger with Quincy State Bank ("QSB"), a former subsidiary of Synovus Financial Corp. QSB had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. Both markets adjoin Leon County, home to our Tallahassee headquarters. In addition, we acquired $208 million in trust and other fiduciary assets from Synovus Trust Company, an affiliate of QSB. The purchase price was $28.1 million in cash. Throughout this section, we refer to the acquisitions of FABC, FMB, and QSB as the "Recent Acquisitions." FINANCIAL OVERVIEW A summary overview of our financial performance for 2006 versus 2005 is provided below. 2006 Financial Performance Highlights – (cid:131) 2006 earnings of $33.3 million, or $1.79 per diluted share, an increase of 9.9% and 7.8%, respectively, over 2005. (cid:131) Growth in earnings was attributable to strong growth in operating revenues led by an 8.3% improvement in net interest income and a 13.0% increase in noninterest income. (cid:131) Tax equivalent net interest income grew 8.8% over 2005 due to growth in average earnings assets attributable to the FABC acquisition and an improved net interest margin. (cid:131) Net interest margin percentage improved 26 basis points over 2005 driven by higher earning asset yields and a slight improvement in the earning asset mix. (cid:131) Noninterest income grew 13.0% over 2005 due primarily to higher deposit fees, retail brokerage fees, and card processing fees. (cid:131) Strong credit quality continues to be a key driver in the Bank’s earnings performance. Net charge-offs totaled $2.1 million, or .11% of average loans for 2006 compared to $2.5 million, or .13% in 2005. At year-end the allowance for loan losses was .86% of outstanding loans and provided coverage of 214% of nonperforming loans. (cid:131) We remain well-capitalized with a risk based capital ratio of 14.95%. 24 RESULTS OF OPERATIONS Net income for 2006 totaled $33.3 million, or $1.79 per diluted share. This compares to $30.3 million or $1.66 per diluted share in 2005, and $29.4 million, or $1.74 per diluted share in 2004. Results in 2006 reflect the acquisition of FABC in May 2005. Net income in 2004 included a one-time, after-tax gain of $4.2 million, or $.25 per diluted share, from the sale of the Bank’s credit card portfolio in August 2004. The growth in earnings for 2006 of $3.0 million, or $.13 per diluted share, was primarily attributable to growth in operating revenue (defined as the total of net interest income and noninterest income) of $15.5 million and a reduction in the loan loss provision of $0.5 million, partially offset by an increase in noninterest expense of $11.8 million and income taxes of $1.3 million. The increase in operating revenue was driven by an 8.3% increase in net interest income and a 13.0% increase in noninterest income. The growth in net interest income for 2006 reflects earning asset growth and an improved net interest margin. Higher deposit service charge fees, retail brokerage fees, and card processing fees drove the increase in noninterest income. The lower loan loss provision is reflective of a lower level of required reserves. The increase in noninterest expense is primarily attributable to higher compensation and occupancy costs. The integration of the FABC acquisition was the primary reason for the increase in compensation, and the addition of new banking offices, replacement offices, and renovations to existing properties drove the increase in occupancy. A condensed earnings summary for the last three years is presented in Table 1 below: Table 1 CONDENSED SUMMARY OF EARNINGS (Dollars in Thousands, Except Per Share Data)(1) Interest Income Taxable Equivalent Adjustments Total Interest Income (FTE) Interest Expense Net Interest Income (FTE) Provision for Loan Losses Taxable Equivalent Adjustments Net Interest Income After Provision for Loan Losses Noninterest Income Gain on Sale of Credit Card Portfolios Noninterest Expense Income Before Income Taxes Income Taxes Net Income Basic Net Income Per Share Diluted Net Income Per Share For the Years Ended December 31, 2005 2006 2004 $ $ $ $ 165,893 $ 1,812 167,705 46,757 120,948 1,959 1,812 117,177 55,577 - 121,568 51,186 17,921 33,265 $ 1.79 $ 1.79 $ 140,053 $ 1,222 141,275 30,063 111,212 2,507 1,222 107,483 49,198 - 109,814 46,867 16,586 30,281 $ 1.66 $ 1.66 $ 101,525 1,207 102,732 15,441 87,291 2,141 1,207 83,943 43,372 7,181 89,226 45,270 15,899 29,371 1.74 1.74 (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. 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. An analysis of our net interest income, including average yields and rates, is presented in Tables 2 and 3. This information is presented on a "taxable equivalent" basis to reflect the tax-exempt status of income earned on certain loans and investments, the majority of which are state and local government debt obligations. In 2006, taxable equivalent net interest income increased $9.7 million, or 8.8%. This follows an increase of $23.9 million, or 27.4%, in 2005, and an increase of $5.9 million, or 7.2%, in 2004. The favorable impact in 2006 resulted from a $70.6 million, or 3.2%, growth in average earning assets and a 26 basis point improvement in the net interest margin percentage. These increases reflect the integration of our acquisition of FABC, higher earning asset yields and a slight improvement in earning asset mix, partially offset by higher funding cost. The increase in yields and funding costs are a result of the higher interest rate environment. 25 Table 2 AVERAGE BALANCES AND INTEREST RATES (Taxable Equivalent Basis - Dollars in Thousands) ASSETS Loans, Net of Unearned Interest(1)(2) Taxable Investment Securities Tax-Exempt Investment Securities(2) Funds Sold Total Earning Assets Cash & Due From Banks Allowance for Loan Losses Other Assets TOTAL ASSETS LIABILITIES NOW Accounts Money Market Accounts Savings Accounts Other Time Deposits Total Int. Bearing Deposits Short-Term Borrowings Subordinated Notes Payable Other Long-Term Borrowings Total Int. Bearing Liabilities Noninterest Bearing Deposits Other Liabilities TOTAL LIABILITIES 2006 2005 2004 Balance Interest Rate Balance Interest Rate Balance Interest Rate 157,227 4,851 3,588 2,039 167,705 7.75% $ 4.31% 4.81% 4.81% 7.42% $ 1.48% $ 3.16% 0.21% 3.48% 2.43% 3.89% 5.92% 4.72% 2.70% 7,658 11,687 278 17,630 37,253 3,074 3,725 2,705 46,757 $ 2,029,397 $ 112,392 74,634 41,854 2,258,277 100,237 (17,486) 240,050 $ 2,581,078 $ 518,671 $ 370,257 134,033 507,283 1,530,244 78,700 62,887 57,260 1,729,091 504,687 29,964 2,263,742 1,968,289 $ 142,406 49,252 27,725 2,187,672 105,787 (17,081) 210,355 2,486,733 430,601 $ 275,830 152,890 550,821 1,410,142 97,863 50,717 70,216 1,628,938 544,746 26,337 2,200,021 133,665 4,250 2,369 991 141,275 6.79% $ 2.98% 4.81% 3.53% 6.46% 1,538,744 $ 131,842 51,979 67,278 95,796 3,138 2,965 833 1,789,843 102,732 6.23% 2.38% 5.70% 1.24% 5.74% $ .67% $ 1.57% 0.19% 2.48% 1.50% 2.92% 5.88% 4.41% 1.85% 2,868 4,337 292 13,637 21,134 2,854 2,981 3,094 30,063 93,070 (13,846) 137,678 2,006,745 292,492 $ 227,808 130,282 459,464 1,110,046 100,582 5,155 59,462 1,275,245 489,155 21,614 1,786,014 733 1,190 164 9,228 11,315 1,270 294 2,562 15,441 .25% .52% .13% 2.01% 1.02% 1.26% 5.71% 4.31% 1.21% SHAREOWNERS' EQUITY TOTAL SHAREOWNERS' EQUITY 317,336 286,712 220,731 TOTAL LIABILITIES & EQUITY $ 2,581,078 $ 2,486,733 $ 2,006,745 Interest Rate Spread Net Interest Income Net Interest Margin(3) $ 120,948 4.72% 5.35% $ 111,212 4.61% 5.09% $ 87,291 4.53% 4.88% (1) (2) (3) Average balances include nonaccrual loans. Interest income includes loan fees of $3.8 million, $3.1 million, and $1.7 million in 2006, 2005, and 2004, respectively. Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate. Taxable equivalent net interest income divided by average earning assets. 26 Table 3 RATE/VOLUME ANALYSIS (1) (Taxable Equivalent Basis - Dollars in Thousands) Earning Assets: Loans, Net of Unearned Interest (2) Investment Securities: Taxable Tax-Exempt (2) Funds Sold 2006 Changes From 2005 Due to Average Rate Volume Total 2005 Changes From 2004 Due to Average Total Calendar (3) Volume Rate $ 23,562 $ 5,760 $ 17,802 $ 37,870 $ (262) $ 27,706 $ 11,506 601 1,219 1,048 (689) 1,220 444 1,290 (1) 604 1,110 (597) 158 (3) - (2) 693 (156) (488) 420 (441) 648 Total 26,430 6,735 19,695 38,541 (267) 27,125 11,683 Interest Bearing Liabilities: NOW Accounts Money Market Accounts Savings Accounts Time Deposits Short-Term Borrowings Subordinated Notes Payable Long-Term Borrowings 4,790 7,350 (14) 3,993 221 744 (390) 586 1,485 (36) (1,078) (586) 715 (571) 4,204 5,865 22 5,071 807 29 181 2,134 3,148 128 4,408 1,585 2,687 532 (2) (3) (1) (25) (3) (1) (7) 347 251 28 1,840 83 2,609 465 1,789 2,900 101 2,593 1,505 79 74 Total 16,694 515 16,179 14,622 (42) 5,623 9,041 Changes in Net Interest Income $ 9,736 $ 6,220 $ 3,516 $ 23,919 $ (255) $ 21,502 $ 2,642 (1) (2) (3) This table shows the change in taxable equivalent net interest income for comparative periods based on either changes in average volume or changes in average rates for earning assets and interest bearing liabilities. Changes which are not solely due to volume changes or solely due to rate changes have been attributed to rate changes. Interest income includes the effects of taxable equivalent adjustments using a 35% tax rate to adjust interest on tax-exempt loans and securities to a taxable equivalent basis. Reflects the difference in 365 day year (2005) versus 366 day year (2004). 27 For the year 2006, taxable equivalent interest income increased $26.4 million, or 18.7%, over 2005, and increased $38.5 million, or 37.5%, in 2005 over 2004. Growth in 2006 was driven primarily by higher yields on earning assets and by the FABC acquisition. Rising interest rates during the first six months, coupled with the re-pricing of existing earning assets were the primary factors contributing to a 96 basis point improvement in the yield on earning assets, which increased from 6.46% in 2005 to 7.42% for 2006. This compares to a 72 basis point improvement in 2005 over 2004. As shown in Table 3, the loan portfolio was a significant contributor to the increase in interest income. Growth in interest income is expected to slow significantly in 2007, reflecting the current interest rate environment and the slowdown in loan activity over recent quarters. Interest expense increased $16.7 million, or 55.5%, over 2005, and $14.6 million, or 94.7%, in 2005 over 2004. Rising interest rates and growth in interest bearing liabilities drove the increase in 2006. However, the impact of rising rates was partially offset by a shift in mix, as certificates of deposit (generally a higher cost deposit product) declined relative to total deposits. Certificates of deposit, as a percent of total average deposits, declined from 28.2% in 2005 to 24.9% in 2006. The average rate paid on interest bearing liabilities in 2006 increased 85 basis points compared to 2005, reflecting both deposit competition and the Federal Reserve's increases in the federal funds target rate. Interest expense is expected to trend upward in the upcoming year driven by the higher rate environment and increasing competition for deposits. Our interest rate spread (defined as the taxable equivalent yield on average earning assets less the average rate paid on interest bearing liabilities) increased 11 basis points in 2006 and increased 8 basis points in 2005. The increase in 2006 was primarily attributable to the higher yields on earning assets. Our net interest margin (defined as taxable equivalent interest income less interest expense divided by average earning assets) was 5.35% in 2006, compared to 5.09% in 2005 and 4.88% in 2004. In 2006, the higher yields on earning assets (partially offset by higher rates paid on interest bearing liabilities) resulted in a 26 basis point improvement in the margin. During 2007, we anticipate some pressure on the net interest margin due to the increasing cost of deposits driven by the current rate environment and market conditions, and the slowdown in loan activity, which we have experienced over the last several quarters. A further discussion of our earning assets and funding sources can be found in the section entitled "Financial Condition." Provision for Loan Losses The provision for loan losses was $2.0 million in 2006, compared to $2.5 million in 2005 and $2.1 million in 2004. As discussed below, the analysis of our loan loss allowance resulted in a lower level of required reserves compared to 2005. The reduction in required reserves was driven by a decline in specific reserves held for several large previously identified impaired loans that were resolved during 2006. The loan loss provisions in both 2005 and 2004 were impacted by a re-assessment of the allowance for loan losses to reflect the changing risk profile associated with the Bank’s sale of its credit card portfolio during the third quarter of 2004 and the integration of our 2004 and 2005 acquisitions. Our net charge-offs continue to remain low as a percentage of our average loan portfolio. Net charge-offs for 2006 totaled $2.1 million, or .11% of average loans for the year compared to $2.5 million, or .13% for 2005 and $3.4 million, or .22% for 2004. At December 31, 2006, the allowance for loan losses totaled $17.2 million compared to $17.4 million in 2005 and $16.0 million in 2004. At year-end 2006, the allowance represented .86% of total loans and provided coverage of 214% of nonperforming loans. Management considers the allowance to be adequate based on the current level of nonperforming loans and the estimate of losses inherent in the portfolio at year-end. See the section entitled "Financial Condition" and Tables 7 and 8 for further information regarding the allowance for loan losses. 28 Noninterest Income Noninterest income increased $6.4 million, or 13.0%, over 2005 primarily due to higher deposit fees, retail brokerage fees, and card processing fees, which were slightly offset by the decrease in mortgage banking revenues. In 2005, noninterest income (excluding the before-tax gain of $6.9 million on the sale of the Bank's credit card portfolio in August 2004) increased $5.5 million, or 12.6%, over 2004 primarily due to higher deposit service charge fees, asset management fees, mortgage banking revenues, and merchant services fees. The table below reflects the major components of noninterest income. (Dollars in Thousands) Noninterest Income: Service Charges on Deposit Accounts Data Processing Asset Management Fees Retail Brokerage Fees (Loss)/Gain on Sale of Investment Securities Mortgage Banking Revenues Merchant Services Fees Interchange Fees Gain on Sale of Credit Card Portfolios ATM/Debit Card Fees Other Total Noninterest Income For the Years Ended December 31, 2005 2006 2004 $ $ 24,620 $ 2,723 4,600 2,091 (4) 3,235 6,978 3,105 - 2,519 5,710 55,577 $ 20,740 $ 2,610 4,419 1,322 9 4,072 6,174 2,239 - 2,206 5,407 49,198 $ 17,574 2,628 4,007 1,401 14 3,208 5,135 2,229 7,180 2,007 5,170 50,553 Various significant components of noninterest income are discussed in more detail below. Service Charges on Deposit Accounts. Deposit service charge fees increased $3.9 million, or 18.7%, in 2006, compared to an increase of $3.2 million, or 18.0%, in 2005. Deposit service charge revenues in any one year are dependent on the number of accounts, primarily transaction accounts, the level of activity subject to service charges, and the collection rate. The increase in deposit service charge fees in both 2006 and 2005 primarily reflects higher overdraft and nonsufficient funds ("NSF") fees due to growth in deposit accounts attributable to Recent Acquisitions and our "Absolutely Free” checking products. Improved fee collection efforts also contributed to the improvement in 2006. Asset Management Fees. In 2006, asset management fees increased $181,000, or 4.1%, versus an increase of $412,000, or 10.3%, in 2005. At year-end 2006, assets under management totaled $753.5 million, reflecting net growth of $60.5 million, or 8.7% over 2005. At year-end 2005, assets under management totaled $693.0 million, reflecting growth of $40.0 million, or 6.1% over 2004. The increase in both years reflects growth in new business and improved asset returns. Mortgage Banking Revenues. In 2006, mortgage banking revenues decreased $838,000, or 20.6%, compared to an increase of $864,000, or 26.9% in 2005. The decline in 2006 reflects lower production reflective of a general slow-down in home purchase and refinancing activity within Bank markets. The increase in 2005 reflects higher production over 2004 which was driven by increased home purchase and construction activity in Bank markets and lower interest rates for residential real estate financing. We generally sell all fixed rate residential loan production into the secondary market. The level of interest rates, origination volume, and the percent of fixed rate production have significant impacts on our mortgage banking revenues. Card Fees. Card processing fees (including merchant service fees, interchange fees, and ATM/debit card fees) increased $2.0 million, or 18.7% over 2005. Merchant services fees increased $805,000, or 13.0% in 2006 compared to a $1.0 million, or 20.2% increase in 2005. The improvement in both periods is directly related to growth in merchant card transaction volume primarily driven by growth in our client base. Interchange fees increased $866,000, or 38.7% compared to $10,000, or .45% in 2005, and ATM/debit card fees increased $313,000, or 14.2% compared to $199,000, or 9.9% in 2005. The higher interchange and ATM/debit card fees for both periods reflect an increase in our card base primarily associated with growth in deposit accounts. Noninterest income as a percent of average assets was 2.15% in 2006, compared to 1.98% in 2005, and 2.52% in 2004. A higher level of deposit fees drove the improvement from 2005 to 2006. The decline from 2004 to 2005 primarily reflects the impact of the one-time gain on sale of the Bank's credit card portfolio in August 2004. 29 Noninterest Expense Noninterest expense grew by $11.8 million, or 10.7%, over 2005. Higher expense for compensation, occupancy, intangible amortization, and interchange fees were the primary reasons for the increase. Noninterest expense increased $20.6 million, or 23.1%, in 2005 due to higher expense for compensation, occupancy, professional fees, advertising, and intangible amortization. The table below reflects the major components of noninterest expense. (Dollars in Thousands) Noninterest Expense: Salaries Associate Benefits Total Compensation Premises Equipment Total Occupancy Legal Fees Professional Fees Processing Services Advertising Travel and Entertainment Printing and Supplies Telephone Postage Intangible Amortization Merger Expense Interchange Fees Courier Service Miscellaneous Total Other For the Years Ended December 31, 2005 2006 2004 $ 46,604 $ 14,251 60,855 40,978 $ 12,709 53,687 9,395 9,911 19,306 1,734 3,402 1,863 4,285 1,664 2,472 2,323 1,145 6,085 - 6,010 1,307 9,117 41,407 8,293 8,970 17,263 1,827 3,825 1,481 4,275 1,414 2,372 2,493 1,195 5,440 438 5,402 1,360 7,342 38,864 33,968 10,377 44,345 7,074 8,393 15,467 1,301 2,858 997 2,001 1,023 1,854 2,048 1,007 3,824 550 4,741 1,143 6,067 29,414 Total Noninterest Expense $ 121,568 $ 109,814 $ 89,226 Compensation. Salaries and associate benefits expense increased $7.2 million, or 13.4% over 2005. For the year, we experienced increases in associate salaries of $5.4 million, payroll tax expense of $300,000, associate insurance expense of $329,000, pension plan expense of $378,000, and stock-based compensation of $705,000. The increase in associate salaries and payroll tax expense reflects the addition of FABC associates, annual merit/market based raises for associates, and lower realized loan cost. Realized loan cost reflects the impact of Statement of Financial Accounting Standard (“SFAS”) No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Acquiring Loans", which requires deferral and amortization of loan costs that are accounted for as a credit offset to salary expense. The decrease in the number of loans originated reduced the amount of this offset as compared to 2005. The increase in expense for insurance and pension benefits is reflective of an increase in eligible participants. The higher pension expense is also due to a lower discount rate used for the 2006 expense projection. Higher stock based compensation reflects an increase in plan participants and higher target awards due to the adoption of our new Stock-based Incentive Compensation Plan, which rewards our senior management team for meeting certain milestones toward our Project 2010 earnings goal. In 2005, compensation increased $9.3 million, or 21.1%, over 2004. The increase in compensation was driven by higher expense for associate salaries, pension, and insurance benefits, primarily reflective of the integration of associates from acquisitions in late 2004 and mid-2005. 30 Occupancy. Occupancy expense (including furniture, fixtures and equipment) increased by $2.0 million, or 11.8%, in 2006, compared to $1.8 million, or 11.6% in 2005. For 2006, we experienced increases in depreciation of $895,000, maintenance and repairs (for our buildings as well as furniture, fixtures, and equipment) of $276,000, utilities of $343,000, maintenance agreements of $364,000, and building insurance of $143,000. The increase in depreciation is related to the addition of FABC offices as well as renovations. An increase in our general maintenance service expense associated with new and existing banking offices, core processing/networking systems and ATM’s drove the increase in maintenance and repairs. Utility expense increased due to a mid-year rate hike and the addition of FABC offices in mid-2005. The increase in expense for maintenance agreements is primarily due to an increase in core processing and networking costs partially attributable to enhancement of our back-up and recovery capabilities. The addition of new and replacement offices, renovations of existing offices, and an insurance premium increase drove the increase in building insurance. The increase in 2005 was driven by higher expense for depreciation, maintenance and repair, and property taxes, primarily attributable to the increase in the number of banking offices, and higher expense for core processing and other software maintenance agreements. Other. Other noninterest expense increased $2.5 million, or 6.5%, in 2006, compared to $9.4 million, or 32.1% in 2005. The increase in 2006 was primarily attributable to higher expense for the following categories: 1) processing services - $382,000, 2) travel and entertainment - $250,000, 3) intangible amortization - $645,000, 4) interchange fees - $608,000, and 5) miscellaneous - $1.4 million. The increase in processing services is due to the addition of core processing system applications and system upgrade and enhancements. The higher expense for travel and entertainment is linked primarily to an increase in associate training and company events during the year. The increase in intangible amortization reflects new core deposit amortization from the FABC acquisition. The increase in interchange fees is due to increased merchant card transaction volume. Miscellaneous expense grew due to increases in other losses, ATM/debit card production, associate hiring expense, and associate training expense. The increase in 2005 was attributable primarily to: (1) higher legal expense of $526,000; (2) higher professional fees of $967,000; (3) increased processing service cost of $484,000; (4) higher advertising costs of $2.3 million, related to our “Absolutely Free” checking program; (5) increased printing and supply expense of $518,000; (6) higher intangible amortization of $1.6 million; (7) increased interchange fees of $661,000; and (8) higher miscellaneous expense of $1.3 million. The operating net noninterest expense ratio (defined as noninterest income minus noninterest expense, net of intangible amortization and one-time merger expenses, as a percent of average assets) was 2.32% in 2006 compared to 2.20% in 2005, and 1.71% in 2004. Our operating efficiency ratio (expressed as noninterest expense, net of intangible amortization and one-time merger expenses, as a percent of taxable equivalent net interest income plus noninterest income) was 65.4%, 64.8%, and 61.6% in 2006, 2005 and 2004, respectively. The increase in these operating ratios is due to the expense growth noted above. Management has recently taken steps to strengthen our expense control procedures, including enhancement of current expense policies, creation of an expense control committee, which will focus on identifying cost savings strategies, and implementation of a new software system to improve accountability for expense management across our various divisions. Management believes it has been successful in identifying in excess of $3.5 million in either new incremental revenue or cost savings. A portion of these profit enhancement initiatives were implemented during the later half of 2006 while the remainder will be implemented during 2007. Income Taxes The consolidated provision for federal and state income taxes was $17.9 million in 2006, compared to $16.6 million in 2005, and $15.9 million in 2004. The increase in all three years was due to higher taxable income driven by earnings growth. Lower tax- exempt income also contributed to the increase in 2005. The effective tax rate was 35.0% in 2006, 35.4% in 2005, and 35.1% in 2004. These rates differ from the combined federal and state statutory tax rates due primarily to tax-exempt income on loans and securities. 31 FINANCIAL CONDITION Our balance sheet reflects the acquisition of FABC in May 2005. Average assets totaled $2.6 billion, an increase of $94.3 million, or 3.8%, in 2006 versus the comparable period in 2005. Average earning assets for 2006 were $2.3 billion, representing an increase of $70.6 million, or 3.2%, over 2005. Growth in average loans of $61.1 million, or 3.1% and average funds sold of $14.1 million, or 51.0% were the reasons for the earning asset increase in 2006. Partially offsetting these increases was a decrease in average investment securities of $4.6 million, or 2.4%. We discuss these variances in more detail below. Table 2 provides information on average balances and rates, Table 3 provides an analysis of rate and volume variances, and Table 4 highlights the changing mix of our earning assets over the last three years. Loans Average loans increased $61.1 million, or 3.1%, over the comparable period in 2005. Loans as a percent of average earning assets were 90.0% in both 2006 and 2005. Our loan growth reflects the acquisition of FABC in May 2005. A high level of principal pay-downs and loan pay-offs, and a general slowdown in existing markets negatively impacted loan growth. The average loan portfolio declined in each of the last four quarters and was down $59.1 million, or 2.9% from the fourth quarter of 2005 to the fourth quarter of 2006. Although management is continually evaluating alternative sources of revenue, lending is a major component of our business and is key to our profitability. While we strive to identify opportunities to increase loans outstanding and enhance the portfolio's overall contribution to earnings, we will only do so by adhering to sound lending principles applied in a prudent and consistent manner. Thus, we will not relax our underwriting standards in order to achieve designated growth goals. Table 4 SOURCES OF EARNING ASSET GROWTH (Average Balances – Dollars In Thousands) Loans: Commercial, Financial, and Agricultural Real Estate – Construction Real Estate – Commercial Real Estate – Residential Consumer Total Loans Investment Securities: Taxable Tax-Exempt Total Securities 2005 to 2006 Change Percentage Of Total Change Components of Average Earning Assets 2004 2005 2006 $ 11,642 23,811 (20,392) 42,022 4,025 61,108 (30,014) 25,382 (4,632) 16.0% 34.0% (29.0%) 60.0% 6.0% 87.0% (43.0%) 36.0% (7.0%) 9.7% 7.8% 29.5% 32.2% 10.7% 89.9% 9.5% 6.9% 31.4% 31.3% 10.9% 90.0% 10.3% 6.2% 27.3% 29.1% 13.1% 86.0% 5.0% 3.2% 8.2% 6.5% 2.3% 8.8% 7.4% 2.9% 10.3% Funds Sold 14,129 20.0% 1.9% 1.2% 3.7% Total Earning Assets $ 70,605 100.0% 100.0% 100.0% 100.0% Our average loan-to-deposit ratio decreased to 99.7% in 2006 from 100.7% in 2005. This compares to an average loan-to-deposit ratio in 2004 of 96.2%. The lower loan-to-deposit ratio in 2006 reflects strong deposit growth in relation to the loan growth. The higher average loan-to-deposit ratio in 2005 reflects strong loan growth. The composition of our loan portfolio at December 31, for each of the past five years is shown in Table 5. Table 6 arrays our total loan portfolio as of December 31, 2006, based upon maturities. As a percent of the total portfolio, loans with fixed interest rates represent 35.7% as of December 31, 2006, versus 34.9% at December 31, 2005. 32 Table 5 LOANS BY CATEGORY (Dollars in Thousands) Commercial, Financial and Agricultural Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Total Loans, Net of Unearned Interest Table 6 LOAN MATURITIES (Dollars in Thousands) Commercial, Financial and Agricultural Real Estate Consumer(1) Total Loans with Fixed Rates Loans with Floating or Adjustable Rates Total $ 2006 229,327 $ 179,072 643,885 709,735 237,702 2002 141,459 91,110 356,807 474,069 221,776 $ 1,999,721 $ 2,067,494 $ 1,828,825 $ 1,341,632 $ 1,285,221 2003 160,048 $ 89,149 391,250 467,790 233,395 2005 218,434 $ 160,914 718,741 723,336 246,069 As of December 31, 2004 206,474 $ 140,190 655,426 600,375 226,360 Maturity Periods Over One Through Five Years Over Five Years One Year or Less $ $ $ $ 96,103 456,980 31,788 584,871 301,995 282,876 584,871 96,313 225,088 201,772 523,173 421,040 102,133 523,173 36,911 850,624 4,142 891,677 95,952 795,725 891,677 Total 229,327 1,532,692 237,702 1,999,721 818,987 1,180,734 1,999,721 (1) Demand loans and overdrafts are reported in the category of one year or less. Allowance for Loan Losses Management believes it maintains the 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 the 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. As such, all related risks of lending are considered when assessing the adequacy of the allowance. 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 credit 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 and other risk factors both internal and external to us. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. Loans that have been identified as impaired are reviewed for adequacy of collateral, with a specific reserve assigned to those loans when necessary. Impaired loans are defined as those in which the full collection of principal and interest in accordance with the contractual terms is improbable. Impaired loans generally include those that are past due for 90 days or more and those classified as doubtful in accordance with our risk rating system. Loans classified as doubtful have a high possibility of loss, but because of certain factors that may work to strengthen the loan, its classification as a loss is deferred until a more exact status may be determined. Not all loans are considered in the review for impairment; only loans that are for business purposes exceeding $25,000 are considered. The evaluation is based on current financial condition of the borrower or current payment status of the loan. 33 The method used to assign a specific reserve depends on whether repayment of the loan is dependent on liquidation of collateral. If repayment is dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the fair value of the collateral after estimated sales expenses. If repayment is not dependent on the sale of collateral, the reserve is equivalent to the recorded investment in the loan less the estimated cash flows discounted using the loan’s effective interest rate. The discounted value of the cash flows is based on the anticipated timing of the receipt of cash payments from the borrower. The reserve allocations assigned to impaired loans are sensitive to the extent market conditions or the actual timing of cash receipts change. Once specific reserves have been assigned to impaired loans, general reserves are assigned to the remaining portfolio. General reserves are assigned to commercial purpose loans of $100,000 or more that are not impaired and large groups of smaller-balance homogenous loans, including commercial loans less than $100,000, consumer loans, and residential mortgage loans. Commercial purpose loans exceeding $100,000 that are not impaired, but exhibit specific weaknesses are detailed in a monthly Problem Loan Report. These loans are divided into seven different pools based on various risk characteristics and the underlying value of collateral taken to secure specific loans within the pools. These classified loans are monitored for changes in risk ratings that are assigned based on the Bank’s Asset Classification Policy, and for the ultimate disposition of the loan. The ultimate disposition may include upgrades in risk ratings, payoff of the loan, or charge-off of the loan. This migration analysis results in a loan loss ratio by loan pool of classified loans that is applied to the balance of the pool to determine general reserves for specifically identified pools of problem loans. This charge-off ratio is adjusted for various environmental factors including past due and nonperforming trends in the loan portfolio, the micro- and macro-economic outlook, and credit administration practices as determined by independent parties. General reserves are assigned to smaller balance homogenous loan pools, including commercial loans less than $100,000, consumer loans, and residential mortgage loans based on calculated overall loan loss ratios for the past three years. The loan loss ratios applied are adjusted for various environmental factors. The allowance for loan losses is compared against the sum of the specific reserves assigned to impaired loans plus the general reserves assigned to the remaining portfolio. Adjustments are made when appropriate. A most likely reserve value is determined within the computed range of required calculated reserve, with the actual allowance for loan losses compared to the most likely reserve value. The unallocated reserve is monitored on a regular basis and adjusted based on management’s determination of estimation risk and other existing conditions that are not included in the allocated allowance determination. Table 7 analyzes the activity in the allowance over the past five years. The allowance for loan losses of $17.2 million at December 31, 2006 is similar to the allowance of $17.4 million at year-end 2005. As a percent of total loans, the allowance was .86% in 2006 and .84% in 2005. The allowance for loan losses reflects management’s current estimation of the credit quality of our loan portfolio. 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, management’s assessment of the loan portfolio does not indicate a likelihood of this occurrence. It is management’s opinion that the allowance at December 31, 2006 is adequate to absorb losses inherent in the loan portfolio at year-end. Table 8 provides an allocation of the allowance for loan losses to specific loan types for each of the past five years. The reserve allocations, as calculated using the above methodology, are assigned to specific loan categories corresponding to the type represented within the components discussed. There was a significant change in the reserve allocation in 2004 as noted by reserves held for the consumer loan, commercial real estate, and commercial portfolios. The Bank's credit card portfolio, which previously accounted for up to one-third of net loan losses annually, was sold in August 2004, thus reducing the reserves required to support consumer loans. The large increase in 2004 for reserves held for commercial real estate and commercial loans was due to the acquisition of loans from FMB in late 2004. Additionally, FABC was acquired during 2005, which pushed total reserves higher. 34 Table 7 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Dollars in Thousands) Balance at Beginning of Year Acquired Reserves Reserve Reversal(1) Charge-Offs: Commercial, Financial and Agricultural Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Total Charge-Offs Recoveries: Commercial, Financial and Agricultural Real Estate - Construction Real Estate - Commercial Real Estate - Residential Consumer Total Recoveries 2006 For the Years Ended December 31, 2003 2004 2005 2002 $ 17,410 $ - - 16,037 $ 1,385 - 12,429 $ 5,713 (800) 12,495 $ - - 12,096 - - 841 - 346 280 2,516 3,983 246 - 17 11 1,557 1,831 1,287 - 255 321 2,380 4,243 180 - 3 37 1,504 1,724 873 - 48 191 3,946 5,058 81 - 14 188 1,329 1,612 426 - 91 228 3,794 4,539 142 - - 18 877 1,037 818 - - 175 3,279 4,272 136 - 20 37 1,181 1,374 Net Charge-Offs 2,152 2,519 3,446 3,502 2,898 Provision for Loan Losses 1,959 2,507 2,141 3,436 3,297 Balance at End of Year $ 17,217 $ 17,410 $ 16,037 $ 12,429 $ 12,495 Ratio of Net Charge-Offs to Average Loans Outstanding Allowance for Loan Losses as a Percent of Loans at End of Year Allowance for Loan Losses as a Multiple of Net Charge-Offs .11% .13% .22% .27% .23% .86% .84% .88% .93% .97% 8.00x 6.91x 4.65x 3.55x 4.31x (1) Reflects recapture of reserves allocated to the credit card portfolio sold in August 2004. 35 Table 8 ALLOCATION OF ALLOWANCE FOR LOAN LOSSES 2006 2005 2004 2003 2002 Percent of Loans in Each Category To Total Loans Percent of Loans in Each Category To Total Loans Percent of Loans in Each Category To Total Loans Percent of Loans in Each Category To Total Loans Allowance Amount Allowance Amount Allowance Amount Percent of Loans in Each Category To Total Loans Allowance Amount (Dollars in Thousands) Allowance Amount Commercial, Financial and Agricultural Real Estate: Construction Commercial Residential Consumer Not Allocated $ 3,900 11.5% $ 3,663 10.6% $ 4,341 11.3% $ 2,824 11.9% $ 2,740 11.0% 745 5,996 1,050 3,081 2,445 9.0 32.2 35.5 11.8 - 762 6,352 1,019 3,105 2,509 7.8 34.7 35.0 11.9 - 578 6,296 705 2,966 1,151 7.7 35.8 32.8 12.4 - 313 2,831 853 4,169 1,439 6.6 29.2 34.9 17.4 - 348 2,559 1,021 4,210 1,617 7.1 27.8 36.9 17.2 - Total $ 17,217 100.0% $ 17,410 100.0% $ 16,037 100.0% $ 12,429 100.0% $ 12,495 100.0% 36 Risk Element Assets Risk element assets consist of nonaccrual loans, renegotiated loans, other real estate, loans past due 90 days or more, potential problem loans and loan concentrations. Table 9 depicts certain categories of our risk element assets as of December 31 for each of the last five years. We discuss potential problem loans and loan concentrations within the narrative portion of this section. Our nonperforming loans increased $2.8 million, or 52.9%, from a level of $5.3 million at December 31, 2005, to $8.0 million at December 31, 2006. During 2006 we added loans totaling approximately $13.0 million to non-accruing status, while removing loans totaling $10.3 million. Of the $10.3 million removed, $3.1 million consisted of principal reductions and loan payoffs, $1.3 million represented loans transferred to other real estate, $5.3 million consisted of loans brought current and returned to an accrual status, and $.6 million was charged off. The increase in nonaccrual loans is partly attributable to the addition of one large commercial real estate loan to nonaccrual status during the fourth quarter of 2006 for which no material loss is expected. Where appropriate, management has allocated specific reserves to absorb anticipated losses on nonperforming loans. We review non-accrual loans exceeding $25,000 not secured by 1-4 family residential properties quarterly for impairment. A loan is considered impaired when the full collection of principal and interest in accordance with the contractual terms is improbable. When a loan is considered impaired, we review our exposure to credit loss. If credit loss is probable, a specific reserve is allocated to absorb the anticipated loss. We had $10.7 million in loans considered impaired at December 31, 2006. The anticipated loss in those impaired loans is $2.3 million. Table 9 RISK ELEMENT ASSETS (Dollars in Thousands) Nonaccruing Loans Restructured Total Nonperforming Loans Other Real Estate Total Nonperforming Assets 2006 2005 As of December 31, 2004 2003 2002 $ $ 8,042 $ - 8,042 689 8,731 $ 5,258 $ - 5,258 292 5,550 $ 4,646 $ - 4,646 625 5,271 $ 2,346 $ - 2,346 4,955 7,301 $ 2,510 - 2,510 1,333 3,843 Past Due 90 Days or More 135 309 605 $ 328 $ 2,453 Nonperforming Loans/Loans Nonperforming Assets/Loans Plus Other Real Estate Nonperforming Assets/Capital(1) .40% .44% .25% .27% .25% .29% .17% .54% .20% .30% 2.62% 1.72% 1.93% 3.39% 1.93% Allowance/Nonperforming Loans 214.09% 331.11% 345.18% 529.80% 497.72% (1) For computation of this percentage, "Capital" refers to shareowners' equity plus the allowance for loan losses. We generally recognize interest on non-accrual loans only when received. We apply cash collected on non-accrual loans against the principal balance or recognize it as interest income based upon management’s expectations as to the ultimate collectibility of principal and interest in full. If interest on non-accruing loans had been recognized on a fully accruing basis, we would have recorded an additional $483,000 of interest income for the year ended December 31, 2006. Other real estate totaled $689,000 at December 31, 2006, versus $292,000 at December 31, 2005. This category includes property owned by the Bank that was acquired either through foreclosure procedures or by receiving a deed in lieu of foreclosure. During 2006, we added properties totaling $1.3 million, and partially or completely liquidated properties totaling $903,000, resulting in a net increase in other real estate of approximately $397,000. 37 Potential problem loans are defined as those loans which are now current but where management has doubt as to the borrower’s ability to comply with present loan repayment terms. Potential problem loans totaled $11.8 million at December 31, 2006, compared to $9.8 million at year-end 2005. Loans past due 90 days or more and still on accrual status totaled $135,000 at year-end, down from $309,000 at the previous year- end. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which cause them to be similarly impacted by economic or other conditions and such amount exceeds 10% of total loans. Due to the lack of diversified industry within the markets served by the Bank and the relatively close proximity of the markets, we have both geographic concentrations as well as concentrations in the types of loans funded. Specifically, due to the nature of our markets, a significant portion of the portfolio has historically been secured with real estate. While we have a majority of our loans (76.7%) secured by real estate, the primary types of real estate collateral are commercial properties and 1-4 family residential properties. At December 31, 2006, commercial real estate mortgage loans and residential real estate mortgage loans accounted for 32.2% and 35.5%, respectively, of the loan portfolio. Our real estate loan portfolio, while subject to cyclical pressures, is not unusually speculative in nature and is originated at amounts that are within or exceed regulatory guidelines for collateral values. Management anticipates no significant reduction in the percentage of real estate loans to total loans outstanding. Management is continually analyzing its loan portfolio in an effort to identify and resolve problem assets as quickly and efficiently as possible. As of December 31, 2006, management believes it has identified and adequately reserved for such problem assets. However, management recognizes that many factors can adversely impact various segments of our markets, creating financial difficulties for certain borrowers. As such, management continues to focus its attention on promptly identifying and providing for potential losses as they arise. Investment Securities In 2006, our average investment portfolio decreased $4.6 million, or 2.4%, from 2005 and increased $7.8 million, or 4.3%, from 2004 to 2005. As a percentage of average earning assets, the investment portfolio represented 8.3% in 2006, compared to 8.8% in 2005. In 2006, the average balance of our investment portfolio declined due to the timing of reinvesting investments that had matured. In 2005, the increase in the portfolio was due to additional securities obtained through an acquisition in late 2004, and the increase in required holdings of Federal Home Loan Bank stock. Throughout 2007, we will closely monitor liquidity levels to assess the need to purchase additional investments. In 2006, average taxable investments decreased $30.0 million, or 21.1%, while tax-exempt investments increased $25.4 million, or 51.5%. This change in mix was attributable to the attractive spread offered by tax-exempt securities compared to taxable securities during the year. Management will continue to purchase municipal issues when it considers the yield to be attractive and we can do so without adversely impacting our tax position. As of December 31, 2006, we have the ability to purchase additional tax-exempt securities without adverse tax consequences. The 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 December 31, 2006, all securities are classified as available-for-sale. The classification of securities as available-for-sale offers management full flexibility in managing our liquidity, and interest rate sensitivity without adversely impacting our regulatory capital levels. Securities in the available-for-sale portfolio are recorded at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other comprehensive loss component of shareowners' equity. At December 31, 2006, shareowners' equity included a net unrealized loss in the investment portfolio of $0.8 million, compared to a net unrealized loss of $1.2 million at December 31, 2005. It is neither management's intent nor practice to participate in the trading of investment securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio. The average maturity of the total portfolio at December 31, 2006 and 2005 was 1.75 and 1.65 years, respectively. Table 10 below provides a breakdown of maturities by investment type. The weighted average taxable equivalent yield of our investment portfolio at December 31, 2006 was 4.72%, versus 3.57% in 2005. The increase in yield was due to purchases of securities with yields higher than those of maturing bonds. Purchases of shorter-term securities resulted in higher yields due to the yield curve being inverted for a majority of 2006. The quality of the municipal portfolio at year-end is depicted on page 40. There were no investments in obligations, other than U.S. Governments, of any one state, municipality, political subdivision or any other issuer that exceeded 10% of our shareowners' equity at December 31, 2006. Table 10 and Note 2 in the Notes to Consolidated Financial Statements present a detailed analysis of our investment securities as to type, maturity and yield. 38 Table 10 MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (Dollars in Thousands) U.S. GOVERNMENTS Due in 1 year or less Due over 1 year through 5 years Due over 5 years through 10 years Due over 10 years TOTAL Amortized Cost $ 17,329 $ 56,388 - - 73,717 STATES & POLITICAL SUBDIVISIONS Due in 1 year or less Due over 1 year through 5 years Due over 5 years through 10 years Due over 10 years TOTAL MORTGAGE-BACKED SECURITIES(2) Due in 1 year or less Due over 1 year through 5 years Due over 5 years through 10 years Due over 10 years TOTAL OTHER SECURITIES Due in 1 year or less Due over 1 year through 5 years Due over 5 years through 10 years Due over 10 years(3) TOTAL 31,438 52,183 - - 83,621 3,568 14,942 4,734 - 23,244 - - - 12,648 12,648 2006 Market Value Weighted(1) Average Yield As of December 31, 2005 Amortized Cost Market Value Weighted(1) Average Yield Amortized Cost 2004 Market Value Weighted(1) Average Yield 17,150 55,978 - - 73,128 31,300 51,922 - - 83,222 3,571 14,732 4,593 - 22,896 - - - 12,648 12,648 3.45% $ 4.64 - - 4.36 58,032 $ 24,296 1,970 - 84,298 4.21 5.25 - - 4.86 5.37 4.58 5.02 - 4.79 - - - 5.78 5.78 21,097 32,130 384 - 53,611 339 14,958 5,651 - 20,948 - - - 14,114 14,114 57,621 23,662 1,948 - 83,231 21,048 31,702 393 - 53,143 337 14,685 5,509 - 20,531 - - - 14,114 14,114 2.30% $ 3.52 3.57 - 2.68 48,553 $ 66,863 7,684 - 123,100 48,327 66,204 7,589 - 122,120 4.66 4.11 6.53 - 4.34 3.97 4.12 5.09 - 4.38 - - - 4.75 4.75 27,916 21,076 897 - 49,889 489 22,719 3,085 - 26,293 - - - 11,514 11,514 28,090 21,200 916 - 50,206 493 22,839 3,068 - 26,400 - - - 11,514 11,514 2.08% 2.38 3.75 - 2.35 5.94 4.56 5.36 - 5.35 5.13 3.96 4.83 - 4.09 - - - 4.31 4.31 TOTAL INVESTMENT SECURITIES $ 193,230 $ 191,894 4.72% $ 172,971 $ 171,019 3.57% $ 210,796 $ 210,240 3.38% (1) Weighted average yields are calculated on the basis of the amortized cost of the security. The weighted average yields on tax-exempt obligations are computed on a taxable equivalent basis using a 35% tax rate. (2) (3) Based on weighted average life. Federal Home Loan Bank Stock and Federal Reserve Bank Stock are included in this category for weighted average yield, but do not have stated maturities. 39 AVERAGE MATURITY (In Years) U.S. Governments States and Political Subdivisions Mortgage-Backed Securities Other Securities TOTAL As of December 31, 2005 1.01 1.31 5.05 - 1.65 2004 1.54 1.32 2.67 - 1.63 2006 1.76 1.39 3.05 - 1.75 MUNICIPAL PORTFOLIO QUALITY (Dollars in Thousands) Moody's Rating AAA AA-1 AA-2 AA-3 AA Not Rated(1) Total Amortized Cost $ 77,122 0 500 501 20 4,983 83,126 Percentage 92.79% 0.00 .60 .60 .02 5.99 100.00% $ (1) All of the securities not rated by Moody's are rated "A-" or higher by S&P. Deposits and Funds Purchased Average total deposits of $2.03 billion in 2006, increased $80.0 million, or 4.1%, from the prior year. Deposit growth for the year was driven primarily by the integration of deposits from FABC, growth in balances related to "Absolutely Free Checking" products, and our “Cash Power” money market product. Increases realized in NOW accounts ($88.1 million) and money market account ($94.4 million) were partially offset by a reduction in DDA accounts ($40.1 million), savings accounts ($20.9 million), and certificates of deposit ($43.5 million). Average noninterest bearing deposits as a percent of average total deposits declined from 27.9% in 2005 to 24.8% in 2006. This was primarily a result of the growth in interest bearing "Absolutely Free Checking" balances and “Cash Power” money market balances partly attributable to the higher interest rate environment. The decrease in certificates of deposit reflects management’s strategy to manage the overall mix of deposits and not compete with higher rate paying competitors for this funding source unless the relationship is profitable and warrants retention. In 2007, growth is anticipated to continue in nonmaturity deposits primarily associated with our "Absolutely Free Checking" products, and our “Cash Power” money market product. Table 2 provides an analysis of our average deposits, by category, and average rates paid thereon for each of the last three years. Table 11 reflects the shift in our deposit mix over the last three years and Table 12 provides a maturity distribution of time deposits in denominations of $100,000 and over. Average short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase, Federal Home Loan Bank advances (maturing in less than one year), and other borrowings, decreased $19.2 million, or 19.6%. The decrease is attributable to a $15.0 million decrease in federal funds purchased and a $5.4 million decrease in repurchase agreements, partially offset by a $2.7 million increase in short-term Federal Home Loan Bank advances. See Note 8 in the Notes to Consolidated Financial Statements for further information on short-term borrowings. 40 Table 11 SOURCES OF DEPOSIT GROWTH (Average Balances - Dollars in Thousands) Noninterest Bearing Deposits NOW Accounts Money Market Accounts Savings Time Deposits Total Deposits 2005 to 2006 Change $ (40,059) 88,070 94,427 (18,857) (43,538) 80,043 $ Percentage of Total Change Components of Total Deposits 2005 2006 2004 (50.0) % 24.8 % 27.9 % 30.6 % 110.0 118.0 (23.6) (54.4) 100.0 % 100.0 % 100.0 % 100.0 % 18.3 14.3 8.1 28.7 22.0 14.1 7.8 28.2 25.5 18.2 6.6 24.9 Table 12 MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR OVER December 31, 2006 (Dollars in Thousands) Three months or less Over three through six months Over six through twelve months Over twelve months Total LIQUIDITY AND CAPITAL RESOURCES Liquidity Time Certificates of Deposit $ 40,910 28,448 44,515 21,107 134,980 $ Percent 30.31 % 21.08 32.98 15.63 100.00 % Liquidity for a banking institution is the availability of funds to meet increased loan demand and excessive deposit withdrawals. Management monitors our financial position in an effort to ensure we have ready access to sufficient liquid funds to meet normal transaction requirements, can 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 (e.g., 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 Federal Home Loan Bank advances. We ended 2006 with $78.8 million in liquidity, an increase of $17.6 million from the previous year-end. On a year-to-date average basis, liquidity increased $14.1 million from 2005. The increase in average liquidity was primarily the result of the aforementioned deposit growth. Borrowings At December 31, 2006, we had $55.5 million in borrowings outstanding to the Federal Home Loan Bank of Atlanta ("FHLB") consisting of 35 notes. Three notes totaling $13.0 million are classified as short-term borrowings with the remaining notes classified as long-term borrowings. The interest rates are fixed and the weighted average rate at December 31, 2006 was 4.57%. Required annual principal reductions approximate $2.7 million, with the remaining balances due at maturity ranging from 2007 to 2024. During 2006, we obtained one advance from the FHLB totaling $3.2 million with a fixed rate of 5.25% and maturing in 2022. The FHLB notes are collateralized by a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans. See Note 9 in the Notes to Consolidated Financial Statements for additional information on these borrowings. 41 Table 13 CONTRACTUAL CASH OBLIGATIONS Table 13 sets forth certain information about contractual cash obligations at December 31, 2006. (Dollars in Thousands) Federal Home Loan Bank Advances Subordinated Notes Payable Operating Lease Obligations Total Contractual Cash Obligations 1 Year or Less Payments Due By Period 4 - 5 Years After 5 Years 1 - 3 Years $ $ 15,585 $ - 1,503 17,088 $ 16,985 $ - 2,600 19,585 $ 5,225 $ - 2,036 7,261 $ 17,669 $ 62,887 6,071 86,627 $ Total 55,464 62,887 12,210 130,561 We issued two junior subordinated deferrable interest notes to 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. See Note 9 in the Notes to Consolidated Financial Statements for additional information on these borrowings. 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 Farmers and Merchants Bank of Dublin acquisition. 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 FABC acquisition. We anticipate that our capital expenditures will approximate $26.6 million over the next twelve months. These capital expenditures are expected to consist primarily of several new offices in existing markets, office equipment and furniture, and technology purchases. Management believes that these capital expenditures can be funded with existing resources internally without impairing our ability to meet our on-going obligations. Capital We continue to maintain a strong capital position. The ratio of shareowners' equity to total assets at year-end was 12.15%, 11.65%, and 10.86%, in 2006, 2005, and 2004, respectively. We are subject to risk-based capital guidelines that measure capital relative to risk weighted assets and off-balance sheet financial instruments. Capital guidelines issued by the Federal Reserve Board require bank holding companies to have a minimum total risk-based capital ratio of 8.00%, with at least half of the total capital in the form of Tier 1 capital. As of December 31, 2006, we exceeded these capital guidelines with a total risk-based capital ratio of 14.95% and a Tier 1 ratio of 14.00%, compared to 13.56% and 12.61%, respectively, in 2005. As allowed by 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 previously noted. See Note 9 in the Notes to Consolidated Financial Statements for additional information on our two trust preferred security offerings. See Note 14 in the Notes to Consolidated Financial Statements for additional information as to our capital adequacy. A tangible leverage ratio is also used in connection with the risk-based capital standards and is defined as Tier 1 capital divided by average assets. The minimum leverage ratio under this standard is 3% for the highest-rated bank holding companies which are not undertaking significant expansion programs. An additional 1% to 2% may be required for other companies, depending upon their regulatory ratings and expansion plans. On December 31, 2006, we had a leverage ratio of 11.30% compared to 10.27% in 2005. Shareowners' equity as of December 31, for each of the last three years is presented below: Shareowners' Equity (Dollars in Thousands) Common Stock Additional Paid-in Capital Retained Earnings Subtotal Accumulated Other Comprehensive (Loss), Net of Tax Total Shareowners' Equity $ 2006 2005 2004 185 80,654 243,242 324,081 (8,311) 315,770 $ 186 83,304 223,532 307,022 (1,246) 305,776 $ 177 52,328 204,648 257,153 (353) 256,800 42 At December 31, 2006, our common stock had a book value of $17.01 per diluted share compared to $16.39 in 2005. Book value is impacted by the net unrealized gains and losses on investment securities available-for-sale. At December 31, 2006, the net unrealized loss was $.8 million compared to a net unrealized loss of $1.2 million in 2005. Beginning in 2006, book value has been impacted by the recording of our unfunded pension liability through other comprehensive income in accordance with SFAS 158. At December 31, 2006, the net pension liability reflected in other comprehensive income was $7.5 million. Our Board of Directors has authorized the repurchase of up to 1,171,875 shares of our outstanding common stock. The purchases are made in the open market or in privately negotiated transactions. Through December 31, 2006, we have repurchased a total of 879,837 shares at an average purchase price of $18.55 per share. During 2006, we repurchased 164,596 shares at an average purchase price of $32.56. We offer an Associate Incentive Plan under which certain associates are eligible to earn shares of our common stock based upon achieving established performance goals. In 2006, we issued 19,643 shares, valued at approximately $644,290 under this plan. We also offer stock purchase plans, which permit our associates and directors to purchase shares at a 10% discount. In 2006, 31,584 shares, valued at approximately $969,000 (before 10% discount), were issued under these plans. Dividends Adequate capital and financial strength is paramount to our stability and the stability of our subsidiary bank. Cash dividends declared and paid should not place unnecessary strain on our capital levels. When determining the level of dividends the following factors are considered: (cid:131) Compliance with state and federal laws and regulations; (cid:131) Our capital position and our ability to meet our financial obligations; (cid:131) Projected earnings and asset levels; and (cid:131) The ability of the Bank and us to fund dividends. Although we believe a consistent dividend payment is favorably viewed by the financial markets and our shareowners, our 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 totaled $.6625 per share in 2006. For the first through third quarters of 2006 we declared and paid a dividend of $.1625 per share. The dividend was raised 7.7% in the fourth quarter of 2006 from $.1625 per share to $.1750 per share. We paid dividends of $.6185 per share in 2005 and $.5840 per share in 2004. The dividend payout ratio was 37.01%, 37.35%, and 33.62% for 2006, 2005 and 2004, respectively. Total cash dividends declared per share in 2006 represented an 8.1% increase over 2005. All share and per share data has been adjusted to reflect the five-for-four stock split effective July 1, 2005. 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 December 31, 2006, we had $419.0 million in commitments to extend credit and $17.5 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 our 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, investment security maturities and our revolving credit facility provide a sufficient source of funds to meet these commitments. 43 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. 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. The discount rate utilized in 2006 was 5.75%. The estimated impact to 2006 pension expense of a 25 basis point increase or decrease in the discount rate would have been a decrease of approximately $291,000 and an increase of approximately $305,000, respectively. 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). The weighted-average expected long-term rate of return on plan assets utilized for 2006 was 8.0%. The estimated impact to pension expense of a 25 basis point increase or decrease in the rate of return would have been an approximate $126,000 decrease or increase, respectively. We anticipate using a rate of return on plan assets for 2007 of 8.0%. The assumed rate of annual compensation increases of 5.50% in 2006 is based on expected trends in salaries and the employee base. This assumption is not expected to change materially in 2007. Detailed information on the pension plan, the actuarially determined disclosures, and the assumptions used are provided in Note 12 of the Notes to Consolidated Financial Statements. 44 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 is effective for us on January 1, 2007, and is not expected to 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 for us on January 1, 2008 and is not expected to have a significant impact on our financial statements. SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of Financial Accounting Standards Board (“FASB”) Statements No. 87, 88 106, and 132(R)." SFAS 158 requires an employer to recognize the over-funded or under-funded status of defined benefit postretirement plans as an asset or a liability in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other postretirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation. We have recognized the funded status of our defined benefit pension plan in our financial statements for the year ended December 31, 2006. See Note 12 to the Consolidated Financial Statements for additional information regarding the impact of adopting this standard. Financial Accounting Standards Board Interpretations In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48 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 is effective for fiscal years beginning after December 15, 2006 and is not expected to have a significant impact on our financial statements. SEC Staff Accounting Bulletin Staff Accounting Bulletin (“SAB”) No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements." SAB 108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. We adopted SAB 108 in December 2006 and analyzed the impact of prior uncorrected misstatements under the guidance set forth in the pronouncement. Two techniques are used by companies in practice to accumulate and quantify misstatements — the “rollover” approach and the “iron curtain” approach. The rollover approach, which is the approach we previously used, quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. Subsequent to adoption, SAB No. 108 requires registrants to begin using both approaches to evaluate prior year misstatements. 45 Use of the rollover approach resulted in an accumulation of misstatements to our statements of financial condition that were deemed immaterial to the financial statements because the amounts that originated in each year were quantitatively and qualitatively immaterial. Under the iron curtain approach, the accumulation of misstatements, when aggregated, were deemed to be material to our financial statements in the current reporting period. We elected, as allowed under SAB 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted accounts as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of retained earnings in 2006. We recorded a cumulative effect adjustment to decrease retained earnings by $1.2 million (after-tax) for the adoption of SAB 108. We evaluated the impact of these adjustments on previous periods presented in the consolidated financial statements, individually and in the aggregate, under the rollover method and concluded that they were immaterial to those periods’ consolidated financial statements. The following table presents a description of the two adjustments included in the cumulative adjustment to retained earnings. These adjustments were identified by us in the normal course of performing our internal control activities: Adjustment Description Years Impacted Operating Leases $ 715,000 Establish deferred rent payable due to difference in using straight-line accounting method for operating leases (required per SFAS 13) versus cash-basis accounting 1990 - 2006 Supplies $ 518,000 Overstatement of prepaid supply account due to improper recognition of sales tax and freight charges when supplies were used 1998 - 2006 Total $ 1,233,000 46 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 that 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 14. This table presents our consolidated interest rate sensitivity position as of year-end 2006 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 14 may not necessarily be indicative of our interest rate sensitivity over an extended period of time. We expect rising rates to have a favorable impact on the net interest margin, subject to the magnitude and timeframe over which the rate changes occur. However, as general interest rates rise or fall, other factors such as current market conditions and competition may 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. 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." 47 Table 14 FINANCIAL ASSETS AND LIABILITIES MARKET RISK ANALYSIS (1) Other Than Trading Portfolio (Dollars in Thousands) Loans Fixed Rate Average Interest Rate Floating Rate(2) Average Interest Rate Investment Securities(3) Fixed Rate Average Interest Rate Floating Rate Average Interest Rate Other Earning Assets Floating Rate Average Interest Rate Total Financial Assets Average Interest Rate Deposits(4) Fixed Rate Deposits Average Interest Rate Floating Rate Deposits Average Interest Rate Other Interest Bearing Liabilities Fixed Rate Debt Average Interest Rate Floating Rate Debt Average Interest Rate Total Financial Liabilities Average interest Rate Year 1 Year 2 As of December 31, 2006 Year 4 Year 3 Year 5 Beyond Total Fair Value(5) $ 318,728 $ 154,370 7.68% 163,095 7.07% 6.55% 1,055,362 7.04% $ 100,627 7.89% 94,883 7.66% $ 46,290 7.83% 8,636 7.54% $ 23,988 7.47% 5,861 7.90% $ 17,314 6.69% 10,567 8.14% $ 661,317 7.15% 1,338,404 7.11% 56,247 3.13% 1,035 5.21% 79,065 4.34% - - 40,900 4.10% - - 8,248 4.09% - - 4,767 4.25% - - 1,630 4.84% - - 190,859 3.93% 1,035 5.21% $ 660,438 1,348,804 190,859 1,035 78,795 5.22% - - $ 1,510,167 $ 396,530 6.77% 6.70% - - $ 236,410 7.14% - - $ 63,174 7.30% - - $ 34,616 7.10% - - $ 29,511 7.11% 78,795 5.22% $ 2,270,409 6.78% 78,795 $ 2,279,930 $ 397,418 4.00% 1,108,495 2.35% $ 57,172 4.10% - - $ 20,695 4.26% - - $ 5,713 3.94% - - $ 2,147 4.17% - - - - - - $ 483,145 4.02% 1,108,495 2.35% $ 408,799 1,108,495 4,397 4.64% 65,023 4.22% $ 1,575,333 2.85% 14,004 4.41% - - $ 71,176 4.16% 3,218 4.77% 30,928 5.71% $ 54,841 5.11% 2,970 4.90% 31,959 6.07% $ 40,642 5.68% 2,915 4.98% - - $ 5,062 4.63% 15,579 4.98% - - $ 15,579 4.98% 43,083 4.74% 127,910 5.04% $ 1,762,633 3.06% 42,256 127,983 $ 1,687,533 (1) Based upon expected cash flows unless otherwise indicated. (2) Based upon a combination of expected maturities and re-pricing 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 re-priced at any time, therefore, all such balances are included as floating rate deposits. Time deposit balances are classified according to maturity. (5) Fair value of loans does not include a reduction for the allowance for loan losses. 48 Item 8. Financial Statements and Supplementary Data Table 15 QUARTERLY FINANCIAL DATA (Dollars in Thousands, Except Per Share Data) Summary of Operations: Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision for Loan Losses Noninterest Income Merger Expense Noninterest Expense Income Before Provision for Income Taxes Provision for Income Taxes Net Income Net Interest Income (FTE) Per Common Share: Net Income Basic Net Income Diluted Dividends Declared Diluted Book Value Market Price: High Low Close Selected Average Balances: Loans Earning Assets Assets Deposits Shareowners’ Equity Common Equivalent Average Shares: Basic Diluted Ratios: ROA ROE Net Interest Margin (FTE) Efficiency Ratio 2006 2005 Fourth Third Second First Fourth Third Second First $ $ $ $ 42,600 $ 13,003 29,597 460 29,137 14,385 - 29,984 13,538 4,688 8,850 $ 30,152 $ .48 $ .48 .175 17.01 35.98 30.14 35.30 42,512 $ 12,289 30,223 711 29,512 14,144 - 30,422 13,234 4,554 8,680 $ 30,745 $ .47 $ .47 .163 17.18 33.25 29.87 31.10 41,369 $ 11,182 30,187 121 30,066 14,003 - 31,070 12,999 4,684 8,315 $ 30,591 $ .44 $ .44 .163 16.81 35.39 29.51 30.20 39,412 10,282 29,130 667 28,463 13,045 - 30,092 11,416 3,995 7,421 29,461 .40 .40 .163 16.65 37.97 33.79 35.55 $ 2,003,719 $ 2,238,066 2,557,357 2,028,453 323,903 2,025,112 $ 2,241,158 2,560,155 2,023,523 318,041 2,040,656 $ 2,278,817 2,603,090 2,047,755 315,794 2,048,642 2,275,667 2,604,458 2,040,248 311,461 $ $ $ $ $ 38,780 $ 9,470 29,310 1,333 36,889 $ 7,885 29,004 376 27,977 12,974 24 29,318 28,628 13,123 180 28,429 11,609 4,150 7,459 $ 29,652 $ 13,142 4,565 8,577 $ 29,329 $ .40 $ .40 .163 16.39 39.33 33.21 34.29 .46 $ .46 .152 16.17 38.72 31.78 37.71 33,910 $ 6,788 27,122 388 26,734 12,041 234 26,362 12,179 4,311 7,868 $ 27,396 $ .44 $ .44 .152 15.87 33.46 28.02 32.32 30,474 5,920 24,554 410 24,144 11,060 - 25,267 9,937 3,560 6,377 24,835 .36 .36 .152 14.69 33.60 29.30 32.41 2,062,775 $ 2,046,968 $ 2,279,010 2,607,597 2,027,017 306,208 2,250,902 2,569,524 2,013,427 300,931 1,932,637 $ 2,170,483 2,458,788 1,932,144 278,107 1,827,327 2,047,049 2,306,807 1,847,378 260,946 18,525 18,569 18,530 18,565 18,633 18,653 18,652 18,665 18,624 18,654 18,623 18,649 18,094 18,102 17,700 17,708 1.37% 10.84% 5.35% 63.99% 1.35% 10.83% 5.45% 64.35% 1.28% 10.56% 5.38% 66.23% 1.16% 9.66% 5.25% 67.20% 1.14% 9.67% 5.16% 65.22% 1.32% 11.31% 5.17% 63.60% 1.28% 11.35% 5.07% 63.56% 1.12% 9.91% 4.92% 67.06% (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. 49 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS PAGE 51 Report of Independent Registered Public Accounting Firm 52 Consolidated Statements of Income 53 Consolidated Statements of Financial Condition 54 Consolidated Statements of Changes in Shareowners' Equity 55 Consolidated Statements of Cash Flows 56 Notes to Consolidated Financial Statements 50 Report of Independent Registered Public Accounting Firm The Board of Directors Capital City Bank Group, Inc.: We have audited the accompanying consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareowners’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital City Bank Group, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment, as of January 1, 2006, SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R, as of December 31, 2006 and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, as of January 1, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. /s/ KPMG LLP Orlando, Florida March 14, 2007 Certified Public Accountants 51 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Data)(1) INTEREST INCOME Interest and Fees on Loans Investment Securities: U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Other Securities Funds Sold Total Interest Income INTEREST EXPENSE Deposits Short-Term Borrowings Subordinated Notes Payable Other Long-Term Borrowings Total Interest Expense NET INTEREST INCOME Provision for Loan Losses Net Interest Income After Provision for Loan Losses NONINTEREST INCOME Service Charges on Deposit Accounts Data Processing Asset Management Fees (Loss)/Gain on Sale of Investment Securities Mortgage Banking Revenues Gain on the Sale of Credit Card Portfolios Other Total Noninterest Income NONINTEREST EXPENSE Salaries and Associate Benefits Occupancy, Net Furniture and Equipment Intangible Amortization Merger Expense Other Total Noninterest Expense INCOME BEFORE INCOME TAXES Income Taxes NET INCOME BASIC NET INCOME PER SHARE DILUTED NET INCOME PER SHARE Average Basic Common Shares Outstanding Average Diluted Common Shares Outstanding For the Years Ended December 31, 2005 2004 2006 $ 156,666 $ 133,268 $ 95,607 453 3,605 2,337 793 2,039 165,893 37,253 3,075 3,725 2,704 46,757 412 3,223 1,545 614 991 140,053 21,134 2,854 2,981 3,094 30,063 119,136 1,959 109,990 2,507 759 2,111 1,944 271 833 101,525 11,315 1,270 294 2,562 15,441 86,084 2,141 117,177 107,483 83,943 24,620 2,723 4,600 (4) 3,235 - 20,403 55,577 60,855 9,395 9,911 6,085 - 35,322 121,568 51,186 17,921 20,740 2,610 4,419 9 4,072 - 17,348 49,198 53,687 8,293 8,970 5,440 438 32,986 109,814 46,867 16,586 17,574 2,628 4,007 14 3,208 7,181 15,941 50,553 44,345 7,074 8,393 3,824 550 25,040 89,226 45,270 15,899 $ $ $ 33,265 $ 30,281 $ 29,371 1.79 $ 1.79 $ 1.66 $ 1.66 $ 18,585 18,610 18,264 18,281 1.74 1.74 16,806 16,811 (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 52 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in Thousands, Except Per Share Data)(1) ASSETS Cash and Due From Banks Funds Sold and Interest Bearing Deposits Total Cash and Cash Equivalents Investment Securities, Available-for-Sale Loans, Net of Unearned Interest Allowance for Loan Losses Loans, Net Premises and Equipment, Net Goodwill Other Intangible Assets Other Assets Total Assets LIABILITIES Deposits: Noninterest Bearing Deposits Interest Bearing Deposits Total Deposits Short-Term Borrowings Subordinated Notes Payable Other Long-Term Borrowings Other Liabilities Total Liabilities SHAREOWNERS' EQUITY Preferred Stock, $.01 par value; 3,000,000 shares authorized; no shares issued and outstanding Common Stock, $.01 par value; 90,000,000 shares authorized; 18,518,398 and 18,631,706 shares issued and outstanding at December 31, 2006 and December 31, 2005, respectively Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss, Net of Tax Total Shareowners' Equity Commitments and Contingencies (See Note 18) Total Liabilities and Shareowners' Equity As of December 31, 2006 2005 $ $ 98,769 $ 78,795 177,564 191,894 1,999,721 (17,217) 1,982,504 86,538 84,811 19,591 55,008 2,597,910 $ $ 490,014 $ 1,591,640 2,081,654 65,023 62,887 43,083 29,493 2,282,140 105,195 61,164 166,359 171,019 2,067,494 (17,410) 2,050,084 73,818 84,829 25,622 53,731 2,625,462 559,492 1,519,854 2,079,346 82,973 62,887 69,630 24,850 2,319,686 - - 185 80,654 243,242 (8,311) 315,770 186 83,304 223,532 (1,246) 305,776 $ 2,597,910 $ 2,625,462 (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 53 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (Dollars in Thousands, Except Per Share Data)(1) Balance, December 31, 2003 Comprehensive Income: Net Income Net Change in Unrealized Loss On Available-for- Sale Securities (net of tax) Total Comprehensive Income Cash Dividends ($.525 per share) Stock Performance Plan Compensation Issuance of Common Stock Balance, December 31, 2004 Comprehensive Income: Net Income Net Change in Unrealized Loss On Available-for- Sale Securities (net of tax) Total Comprehensive Income Cash Dividends ($.584 per share) Stock Performance Plan Compensation Issuance of Common Stock Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Taxes Total $ 165 $ 16,124 185,134 $ 1,386 $ 202,809 - - - - - 12 - 29,371 - - - 193 36,011 - - (9,857) - - (1,739) - - - - 27,632 (9,857) 193 36,023 177 52,328 204,648 (353) 256,800 - - - - - 9 - 30,281 - - - 968 30,008 - - (11,397) - - (893) - - - - 29,388 (11,397) 968 30,017 Balance, December 31, 2005 186 83,304 223,532 (1,246) 305,776 Cumulative Effect Adjustment upon adoption of SAB No. 108 (net of tax) Balance (adjusted), December 31, 2005 Comprehensive Income: Net Income Net Change in Unrealized Loss On Available-for- Sale Securities (net of tax) Establish Pension Liability upon adoption of SFAS No. 158 (net of tax) Total Comprehensive Income Cash Dividends ($.663 per share) Stock Performance Plan Compensation Issuance of Common Stock Repurchase of Common Stock - 186 - 83,304 (1,233) 222,299 - (1,246) (1,233) 304,543 - - - - - - 1 (2) - - 33,265 - 412 - - - 1,673 1,035 (5,358) - - (12,322) - - - (7,477) - - - - - 26,200 (12,322) 1,673 1,036 (5,360) Balance, December 31, 2006 $ 185 $ 80,654 $ 243,242 $ (8,311) $ 315,770 (1) All share, per share, and shareowners' equity data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005, and the 5-for-4 stock split effective June 13, 2003. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 54 CAPITAL CITY BANK GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Provision for Loan Losses Depreciation Net Securities Amortization Amortization of Intangible Assets Loss/(Gain) on Sale of Investment Securities Origination of Loans Held-for-Sale Proceeds From Sales of Loans Held-for-Sale Net Gain From Sales of Loans Held-for Sale Non-Cash Compensation Deferred Income Taxes Net Increase in Other Assets Net Increase (Decrease) in Other Liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Securities Available-for-Sale: Purchases Sales Payments, Maturities, and Calls Net Decrease (Increase) in Loans Net Cash Acquired (Used In) Acquisitions Purchase of Premises & Equipment Proceeds From Sales of Premises & Equipment Net Cash Provided By (Used In) Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits Net Decrease in Short-Term Borrowings Proceeds from Subordinated Notes Payable Increase in Other Long-Term Borrowings Repayment of Other Long-Term Borrowings Dividends Paid Repurchase of Common Stock Issuance of Common Stock Net Cash (Used In) Provided By Financing Activities For the Years Ended December 31, 2005 2006 2004 $ 33,265 $ 30,281 $ 29,371 1,959 6,795 582 6,085 4 (190,945) 194,569 (3,235) 1,673 1,614 (11,327) 5,148 46,187 (102,628) 283 81,500 64,213 - (20,145) 630 23,853 2,308 (31,412) - 3,250 (16,335) (12,322) (5,360) 1,036 (58,835) 2,507 5,899 1,454 5,440 (9) (219,171) 227,853 (4,072) 968 182 (11,839) 9,264 48,757 (45,717) 35,142 81,783 (127,715) 37,412 (18,336) 897 (36,534) (17,125) (33,085) 31,959 23,600 (2,380) (11,397) - 1,019 (7,409) 2,141 5,288 2,117 3,824 (14) (181,068) 178,248 (3,208) 1,707 765 (4,210) (3,182) 31,779 (88,028) 3,466 128,617 (127,115) (31,743) (5,576) 1,155 (119,224) 23,776 (33,559) 30,928 59,741 (41,815) (9,857) - 1,184 30,398 NET CHANGE IN CASH AND CASH EQUIVALENTS 11,205 4,814 (57,047) Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year 166,359 177,564 $ 161,545 166,359 $ 218,592 161,545 $ SUPPLEMENTAL DISCLOSURES: Interest Paid on Deposits Interest Paid on Debt Taxes Paid Loans Transferred to Other Real Estate Cumulative Effect Adjustment to Beginning Retained Earnings – SAB 108 Cumulative Effect Adjustment to Other Comprehensive Income to Record Minimum Pension Liability – SFAS 158 Issuance of Common Stock as Non-Cash Compensation Transfer of Current Portion of Long-Term Borrowings to Short-Term Borrowings $ $ $ $ $ $ $ 36,509 $ 19,964 $ 9,688 $ 8,754 $ 16,797 $ 15,923 $ 1,018 $ 1,233 $ 7,477 $ 711 $ 2,689 $ - $ - $ 339 $ 10,661 4,066 12,606 1,351 - - 1,707 $ 13,061 $ 20,043 $ 16,002 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 55 Notes to Consolidated Financial Statements Note 1 SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Capital City Bank Group, Inc. ("CCBG"), and its wholly-owned subsidiary, Capital City Bank ("CCB" or the "Bank" and together with CCBG, the "Company"). All material inter-company transactions and accounts have been eliminated. The Company, which operates in a single reportable business segment comprised of commercial banking within the states of Florida, Georgia, and Alabama, follows accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. The principles which materially affect the financial position, results of operations and cash flows are summarized below. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provide the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in an entity is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. CCBG's wholly-owned subsidiaries, CCBG Capital Trust I (established November 1, 2004) and CCBG Capital Trust II (established May 24, 2005) are VIEs for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements. Certain items in prior financial statements have been reclassified to conform to the current presentation. All acquisitions during the reported periods were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition. On July 1, 2005, the Company executed a five-for-four stock split in the form of a 25% stock dividend, payable to shareowners of record as of the close of business on June 17, 2005. All share, per share, and shareowners' equity data have been adjusted to reflect the stock split. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses, income taxes, and valuation of goodwill and other intangibles and their respective analysis of impairment. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods and all other cash equivalents have a maturity of 90 days or less. Investment Securities Investment securities available-for-sale are carried at fair value and represent securities that are available to meet liquidity and/or other needs of the Company. Gains and losses are recognized and reported separately in the Consolidated Statements of Income upon realization or when impairment of values is deemed to be other than temporary. Gains or losses are recognized using the specific identification method. Unrealized holding gains and losses for securities available-for-sale are excluded from the Consolidated Statements of Income and reported net of taxes in the accumulated other comprehensive (loss) income component of shareowners' equity until realized. Accretion and amortization are recognized on the effective yield method over the life of the securities. 56 Loans Loans are stated at the principal amount outstanding, net of unearned income. Interest income is generally accrued on the effective yield method based on outstanding balances. Fees charged to originate loans and direct loan origination costs are deferred and amortized over the life of the loan as a yield adjustment. The Company defines loans as past due when one full payment is past due or a contractual maturity is over 30 days late. The accrual of interest is generally suspended on loans more than 90 days past due with respect to principal and interest. When a loan is placed on nonaccrual status, all previously accrued and uncollected interest is reversed against current income. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectibility is no longer considered doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are charged-off (if unsecured) or written-down (if secured) when losses are reasonably quantifiable. Loans Held For Sale Certain residential mortgage loans are originated for sale in the secondary mortgage loan market. Additionally, certain other loans are periodically identified to be sold. These loans are classified as loans held for sale and carried at the lower of cost or estimated fair value. Fair value is determined on the basis of rates quoted in the respective secondary market for the type of loan held for sale. Loans are generally sold at a premium or discount from the carrying amount of the loans. Such premium or discount is recognized as mortgage banking revenue at the date of sale. Fixed commitments may be used at the time loans are originated or identified for sale to mitigate interest rate risk. The fair value of fixed commitments to originate and sell loans held for sale is not material. Allowance for Loan Losses The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance is that amount considered adequate to absorb losses inherent in the loan portfolio based on management’s evaluation of credit risk as of the balance sheet date. The allowance for loan losses includes allowance allocations calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS 118, and allowance allocations calculated in accordance with SFAS 5, "Accounting for Contingencies." The level of the allowance reflects management’s continuing evaluation of specific credit risks, loan loss experience, current loan portfolio quality, present economic conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The Company’s allowance for loan losses consists of four elements: (i) specific valuation allowances established for probable losses on specific loans deemed impaired; (ii) general valuation allowances calculated based on historical loan loss experience for specifically identified problem loans and other loans with similar characteristics and trends; (iii) judgmental allowance reflective of quantitative and qualitative risk factors both internal and external to the Company; and (iv) an unallocated allowance that reflects management’s determination of estimation risk and other existing conditions that are not included in the allocated allowance determination. Long-Lived Assets Premises and equipment are stated at cost less accumulated depreciation, computed on the straight-line method over the estimated useful lives for each type of asset with premises being depreciated over a range of 10 to 40 years, and equipment being depreciated over a range of 3 to 10 years. Major additions are capitalized and depreciated in the same manner. Repairs and maintenance are charged to noninterest expense as incurred. Intangible assets, other than goodwill, consist of core deposit intangible assets, and client relationship and non-compete assets that were recognized in connection with various acquisitions. Core deposit intangible assets are amortized on the straight-line method over various periods, with the majority being amortized over an average of 5 to 10 years. Other identifiable intangibles are amortized on the straight-line method over their estimated useful lives. Long-lived assets are evaluated for impairment if circumstances suggest that their carrying value may not be recoverable, by comparing the carrying value to estimated undiscounted cash flows. If the asset is deemed impaired, an impairment charge is recorded equal to the carrying value less the fair value. 57 Goodwill Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") prohibits the Company from amortizing goodwill and requires the Company to identify reporting units to which the goodwill relates for purposes of assessing potential impairment of goodwill on an annual basis, or more frequently, if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In accordance with the guidelines in SFAS 142, the Company determined it has one reporting unit with goodwill. As of December 31, 2006, the Company performed its annual impairment review and concluded that no impairment adjustment was necessary. Income Taxes The Company files a consolidated federal income tax return and each subsidiary files a separate state income tax return. The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities on the Company’s consolidated statement of financial position and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Stock Based Compensation On January 1, 2006, the Company changed its accounting policy related to stock-based compensation in connection with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment (Revised 2004)" ("SFAS 123R"). See Note 11 – Stock-Based Compensation for additional information. 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 is effective on January 1, 2007, and is not expected to have a significant impact on the Company’s 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 the Company’s financial statements. SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88 106, and 132(R)." SFAS 158 requires an employer to recognize the over-funded or under-funded status of defined benefit postretirement plans as an asset or a liability in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation (the projected benefit obligation for pension plans or the accumulated benefit obligation for other postretirement benefit plans). An employer is also required to measure the funded status of a plan as of the date of its year-end statement of financial position with changes in the funded status recognized through comprehensive income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of gains or losses, prior service costs or credits, and the transition asset or obligation. The Company recognized the funded status of its defined benefit pension plan in its financial statements for the year ended December 31, 2006. See Note 12 for additional discussion. 58 Financial Accounting Standards Board Interpretations In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48 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 is effective for fiscal years beginning after December 15, 2006 and is not expected to have a significant impact on the Company’s financial statements. SEC Staff Accounting Bulletin Staff Accounting Bulletin (“SAB”) No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements." SAB 108 addresses how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. The effects of prior year uncorrected errors include the potential accumulation of improper amounts that may result in a material misstatement on the balance sheet or the reversal of prior period errors in the current period that result in a material misstatement of the current period income statement amounts. Adjustments to current or prior period financial statements would be required in the event that after application of various approaches for assessing materiality of a misstatement in current period financial statements and consideration of all relevant quantitative and qualitative factors, a misstatement is determined to be material. The Company adopted SAB 108 in December 2006 and analyzed the impact of prior uncorrected misstatements under the guidance set forth in the pronouncement. Two techniques are used by companies in practice to accumulate and quantify misstatements — the “rollover” approach and the “iron curtain” approach. The rollover approach, which is the approach the Company previously used, quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. Subsequent to adoption, SAB No. 108 requires registrant’s to begin using both approaches to evaluate prior year misstatements. Use of the rollover approach by the Company resulted in an accumulation of misstatements to the Company’s statements of financial condition that were deemed immaterial to the financial statements because the amounts that originated in each year were quantitatively and qualitatively immaterial. Under the iron curtain approach, the accumulation of misstatements, when aggregated, were deemed to be material to the Company’s financial statements in the current reporting period. The Company elected, as allowed under SAB 108, to reflect the effect of initially applying this guidance by adjusting the carrying amount of the impacted accounts as of the beginning of 2006 and recording an offsetting adjustment to the opening balance of retained earnings in 2006. The Company recorded a cumulative effect adjustment to decrease retained earnings by $1.2 million (after-tax) for the adoption of SAB 108. The Company evaluated the impact of these adjustments on previous periods presented in the consolidated financial statements, individually and in the aggregate, under the rollover method and concluded that they were immaterial to those periods’ consolidated financial statements. The following table presents a description of the two adjustments included in the cumulative adjustment to retained earnings. These adjustments were identified by management in the normal course of performing their internal control activities: Adjustment Description Years Impacted Operating Leases $ 715,000 Establish deferred rent payable due to difference in using straight-line accounting for operating leases (required per SFAS 13) versus cash- basis accounting 1990 - 2006 Supplies $ 518,000 Overstatement of prepaid supply account due to improper recognition of sales tax and freight charges when supplies were used 1998 - 2006 Total $ 1,233,000 59 Note 2 INVESTMENT SECURITIES Investment Portfolio Composition. The amortized cost and related market value of investment securities available-for-sale at December 31, were as follows: (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Other Securities(1) Total Investment Securities (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Other Securities(1) Total Investment Securities (1) FHLB and FRB stock recorded at cost. Amortized Cost Unrealized Gains Unrealized Losses Market Value 2006 $ $ $ $ 12,098 $ 61,619 83,621 23,244 12,648 193,230 $ 49 $ 593 415 371 - 1,428 $ 12,065 61,063 83,222 22,896 12,648 191,894 16 $ 37 16 23 - 92 $ 2005 Amortized Cost Unrealized Gains Unrealized Losses Market Value 9,065 $ 75,233 53,611 20,948 14,114 172,971 $ - $ - 44 35 - 79 $ 50 $ 1,017 512 452 - 2,031 $ 9,015 74,216 53,143 20,531 14,114 171,019 Securities with an amortized cost of $87.6 million and $70.5 million at December 31, 2006 and 2005, respectively, were pledged to secure public deposits and for other purposes. The Company’s subsidiary, Capital City Bank, as a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of residential and commercial real estate loans, and FHLB advances. FHLB stock, which is included in other securities, is pledged to secure FHLB advances. No ready market exists for this stock, and it has no quoted market value. However, redemption of this stock has historically been at par value. Investment Sales. The total proceeds from the sale of investment securities and the gross realized gains and losses from the sale of such securities for each of the last three years are as follows: (Dollars in Thousands) Year 2006 2005 2004 $ $ $ Total Proceeds Gross Realized Gains Gross Realized Losses 283 $ 35,142 $ 3,466 $ - $ 9 $ 17 $ 4 - 3 Maturity Distribution. As of December 31, 2006, the Company's investment securities had the following maturity distribution based on contractual maturities: (Dollars in Thousands) Due in one year or less Due after one through five years Due after five through ten years No Maturity Total Investment Securities Amortized Cost Market Value $ $ 52,337 123,511 4,734 12,648 193,230 $ $ 52,020 122,631 4,595 12,648 191,894 Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 60 Other Than Temporarily Impaired Securities. Securities with unrealized losses at year-end not recognized in income by period of time unrealized losses have existed are as follows: Less Than 12 months December 31, 2006 Greater Than 12 Months Total (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Total Investment Securities $ Market Value $ 12,065 $ 29,308 46,576 9,156 97,105 $ Unrealized Losses Market Value Unrealized Losses Market Value Unrealized Losses 49 $ 172 219 1 441 $ - $ - $ 12,065 $ 30,242 30,087 13,560 73,889 $ 421 196 370 987 $ 59,550 76,663 22,716 170,994 $ 49 593 415 371 1,428 (Dollars in Thousands) U.S. Treasury U.S. Government Agencies and Corporations States and Political Subdivisions Mortgage-Backed Securities Total Investment Securities $ Less Than 12 months December 31, 2005 Greater Than 12 Months Total Market Value $ Unrealized Losses Market Value Unrealized Losses Market Value Unrealized Losses - $ - $ 9,015 $ 50 $ 9,015 $ 50 7,907 34,640 7,680 50,227 $ 98 348 179 625 $ 66,309 10,926 9,741 95,991 $ 919 164 273 1,406 $ 74,216 45,566 17,421 146,218 $ 1,017 512 452 2,031 At December 31, 2006, the Company had securities of $193.0 million with net unrealized losses of $1.3 million on these securities. Of the total, $97.1 million with net unrealized losses of $0.4 million, have been in a loss position for less than 12 months and $74.0 million, with unrealized losses of $1.0 million, have been in a loss position for longer than 12 months. The Company believes that these securities are only temporarily impaired and that the full principle will be collected as anticipated. Of the total, $71.6 million, or 41.9%, are either a direct obligation of the U.S. Government or its agencies and are in a loss position because they were acquired when the general level of interest rates was lower than that on December 31, 2006. As of December 31, 2006, $22.7 million, or 13.3% are mortgage-backed securities that are guaranteed by the U.S. Government or its agencies. The mortgage-backed securities are in a loss position due to either the lower interest rate at time of purchase or due to accelerated prepayments driven by the low rate environment. The remaining $76.7 million, or 44.8%, of the securities in a loss position are municipal bonds which all maintain satisfactory ratings by a credit rating agency. The municipal bonds are also in a loss position due to the lower interest rate environment at the time of purchase. Because the declines in the market value of these investments are attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until there is a recovery in fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2006. 61 Note 3 LOANS Loan Portfolio Composition. At December 31, the composition of the Company's loan portfolio was as follows: $ (Dollars in Thousands) Commercial, Financial and Agricultural Real Estate - Construction Real Estate - Commercial Mortgage Real Estate – Residential(1) Real Estate - Home Equity Real Estate - Loans Held-for-Sale Consumer Total Loans, Net of Unearned Interest $ 2006 229,327 179,072 643,885 531,968 173,597 4,170 237,702 1,999,721 $ $ 2005 218,434 160,914 718,741 553,124 165,337 4,875 246,069 2,067,494 Net deferred fees included in loans at December 31, 2006 and December 31, 2005 were $1.5 million and $1.6 million, respectively. (1) Includes loans in process with outstanding balances of $11.5 million and $26.3 million for 2006 and 2005, respectively. Concentrations of Credit. Substantially all of the Company's lending activity occurs within the states of Florida, Georgia, and Alabama. A large majority of the Company's loan portfolio (76.6%) consists of loans secured by real estate, the primary types of collateral being commercial properties and residential properties. At December 31, 2006, commercial real estate mortgage loans and residential real estate mortgage loans accounted for 32.2% and 35.3% of the loan portfolio, respectively. As of December 31, 2006, there were no concentrations of loans related to any single borrower or industry in excess of 10% of total loans. Nonperforming/Past Due Loans. Nonaccruing loans amounted to $8.0 million and $5.3 million, at December 31, 2006 and 2005, respectively. There were no restructured loans at December 31, 2006 or 2005. Interest on nonaccrual loans is generally recognized only when received. Cash collected on nonaccrual loans is applied against the principal balance or recognized as interest income based upon management's expectations as to the ultimate collectibility of principal and interest in full. If interest on nonaccruing loans had been recognized on a fully accruing basis, interest income recorded would have been $483,000, $186,000, and $189,000 higher for the years ended December 31, 2006, 2005, and 2004, respectively. Accruing loans past due more than 90 days totaled $135,000 at December 31, 2006 and $309,000 at December 31, 2005. Note 4 ALLOWANCE FOR LOAN LOSSES An analysis of the changes in the allowance for loan losses for the years ended December 31, is as follows: (Dollars in Thousands) Balance, Beginning of Year Acquired Reserves Reserve Reversal(1) Provision for Loan Losses Recoveries on Loans Previously Charged-Off Loans Charged-Off Balance, End of Year 2006 2005 2004 $ $ 17,410 $ - - 1,959 1,830 (3,982) 17,217 $ 16,037 $ 1,385 - 2,507 1,724 (4,243) 17,410 $ 12,429 5,713 (800) 2,141 1,612 (5,058) 16,037 (1) Reflects recapture of reserves allocated to the Bank's credit card portfolio, which was sold in August 2004. 62 Impaired Loans. Selected information pertaining to impaired loans, at December 31, is as follows: (Dollars in Thousands) Impaired Loans: With Related Credit Allowance Without Related Credit Allowance 2006 2005 Valuation Balance Valuation Allowance Valuation Balance Valuation Allowance $ 6,085 $ 4,574 2,255 $ - 5,612 $ 1,658 2,915 - (Dollars in Thousands) Average Recorded Investment in Impaired Loans 2006 2005 2004 $ 12,782 $ 9,786 $ 5,382 Interest Income on Impaired Loans Recognized Collected in Cash $ 398 $ 398 218 $ 218 140 120 Interest payments received on impaired loans are recorded as interest income unless collection of the remaining recorded investment is doubtful, at which time payments received are recorded as reduction of principal. Note 5 INTANGIBLE ASSETS The Company had intangible assets of $104.4 million and $110.5 million at December 31, 2006 and December 31, 2005, respectively. Intangible assets at December 31, were as follows: 2006 2005 (Dollars in Thousands) Core Deposits Intangibles Goodwill Customer Relationship Intangible Non-Compete Agreement Total Intangible Assets Gross Amount Accumulated Amortization Gross Amount $ $ 47,176 $ 84,811 1,867 537 134,391 $ 28,955 $ - 497 537 29,989 $ Accumulated Amortization 23,312 - 305 287 23,904 47,176 $ 84,829 1,867 483 134,355 $ Net Core Deposit Intangibles. As of December 31, 2006 and December 31, 2005, the Company had net core deposit intangibles of $18.2 million and $23.9 million, respectively. Amortization expense for the twelve months of 2006, 2005 and 2004 was $5.6 million, $5.0 million, and $3.7 million, respectively. The estimated annual amortization expense (in millions) for the next five years is expected to be approximately $5.7, $5.5, $3.9, $2.5, and $0.5 per year. Goodwill. As of December 31, 2006 and December 31, 2005, the Company had goodwill of $84.8 million. Goodwill is the Company's only intangible asset that is no longer subject to amortization under the provisions of SFAS 142. On December 31, 2006, the Company performed its annual impairment review and concluded that no impairment adjustment was necessary. Other. As of December 31, 2006, the Company had a client relationship intangible, net of accumulated amortization, of $1.4 million. This intangible was booked as a result of the March 2004 acquisition of trust client relationships from Synovus Trust Company. Amortization expense for 2006 was $192,000. Estimated annual amortization expense is $192,000 based on use of a 10-year useful life. The Company also had a non-compete intangible during the year which became fully amortized at the end of the year. This intangible was booked as a result of the October 2004 acquisition of Farmers and Merchants Bank of Dublin. Amortization expense for this intangible during 2006 was $250,000. 63 Note 6 PREMISES AND EQUIPMENT The composition of the Company's premises and equipment at December 31, was as follows: (Dollars in Thousands) Land Buildings Fixtures and Equipment Total Accumulated Depreciation Premises and Equipment, Net Note 7 DEPOSITS 2006 2005 $ $ 22,597 $ 78,676 52,129 153,402 (66,864) 86,538 $ 16,503 69,924 46,293 132,720 (58,902) 73,818 Interest bearing deposits, by category, as of December 31, were as follows: (Dollars in Thousands) NOW Accounts Money Market Accounts Savings Accounts Time Deposits Total 2006 2005 $ $ 599,433 $ 384,568 125,500 482,139 1,591,640 $ 520,878 331,094 144,296 523,586 1,519,854 At December 31, 2006 and 2005, $3.1 million and $3.6 million, respectively, in overdrawn deposit accounts were reclassified as loans. Deposits from certain directors, executive officers, and their related interests totaled $30.7 million and $34.1 million at December 31, 2006 and 2005, respectively. Time deposits in denominations of $100,000 or more totaled $135.0 million and $143.4 million at December 31, 2006 and 2005, respectively. At December 31, 2006, the scheduled maturities of time deposits were as follows: (Dollars in Thousands) 2007 2008 2009 2010 2011 and thereafter Total $ $ 396,507 56,790 20,955 5,452 2,435 482,139 Interest expense on deposits for the three years ended December 31, was as follows: (Dollars in Thousands) NOW Accounts Money Market Accounts Savings Accounts Time Deposits < $100,000 Time Deposits > $100,000 Total 2006 2005 2004 $ $ 7,658 $ 11,687 278 12,087 5,543 37,253 $ 2,868 $ 4,337 292 9,247 4,390 21,134 $ 733 1,189 164 6,683 2,546 11,315 64 Note 8 SHORT-TERM BORROWINGS Short-term borrowings included the following: (Dollars in Thousands) 2006 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings 2005 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings 2004 Balance at December 31, Maximum indebtedness at any month end Daily average indebtedness outstanding Average rate paid for the year Average rate paid on period-end borrowings Federal Funds Purchased Securities Sold Under Repurchase Agreements Other Short-Term Borrowings $ $ $ 11,950 $ 39,225 16,645 4.82% 4.61% 11,925 $ 26,825 31,644 3.36% 3.88% 19,800 $ 27,875 22,291 1.27% 1.97% 38,022 $ 55,321 34,335 3.79% 3.79% 38,702 $ 65,206 39,784 2.30% 3.21% 58,431 $ 77,087 54,607 0.71% 1.12% 15,051 (1) 34,738 27,720 3.47% 3.90% 32,346 67,122 26,435 3.32% 3.48% 17,783 41,941 23,683 2.52% 3.19% (1) Includes FHLB debt of $13.0 million and TT&L (client tax deposits) balance of $2.0 million at December 31, 2006. 65 Note 9 LONG-TERM BORROWINGS Federal Home Loan Bank Notes. At December 31, Federal Home Loan Bank advances included: (Dollars in Thousands) 2006 2005 10 10,000 20,000 3,000 80 10,000 98 357 10,000 2,270 638 749 864 5,000 589 638 888 92 1,776 915 1,246 634 482 3,412 1,252 325 722 805 986 875 2,076 612 3,627 639 1,566 713 850 - 967 8,845 98,598 Due on February 15, 2006, fixed rate of 3.00% Due on September 8, 2006, fixed rate of 4.28% Due on September 11, 2006, fixed rate of 2.93% Due on February 13, 2007, fixed rate of 3.05%(1) Due on April 24, 2007, fixed rate of 7.30%(1) Due on September 10, 2007, fixed rate of 4.29%(1) Due on May 30, 2008, fixed rate of 2.50% Due on June 13, 2008, fixed rate of 5.40% Due on September 8, 2008, fixed rate of 4.32% Due on November 10, 2008, fixed rate of 4.12% Due on October 19, 2009, fixed rate of 3.69% Due on November 10, 2010, fixed rate of 4.72% Due on December 31, 2010, fixed rate of 3.85% Due on April 4, 2011, fixed rate of 4.00%(2) Due on December 18, 2012, fixed rate of 4.84% Due on March 18, 2013, fixed rate of 6.37% Due on June 17, 2013, fixed rate of 3.53% Due on June 17, 2013, fixed rate of 3.85% Due on June 17, 2013, fixed rate of 4.11% Due on September 23, 2013, fixed rate of 5.64% Due on January 27, 2014, fixed rate of 5.79% Due on March 10, 2014, fixed rate of 4.21% Due on May 27, 2014, fixed rate of 5.92% Due on June 2, 2014, fixed rate of 4.52% Due on July 20, 2016, fixed rate of 6.27% Due on October 3, 2016, fixed rate of 5.41% Due on October 31, 2016, fixed rate of 5.16% Due on June 27, 2017, fixed rate of 5.53% Due on October 31, 2017, fixed rate of 4.79% Due on December 11, 2017, fixed rate of 4.78% Due on February 26, 2018, fixed rate of 4.36% Due on September 18, 2018, fixed rate of 5.15% Due on November 5, 2018, fixed rate of 5.10% Due on December 3, 2018, fixed rate of 4.87% Due on December 17, 2018, fixed rate of 6.33% Due on December 24, 2018, fixed rate of 6.29% Due on February 16, 2021, fixed rate of 3.00% Due on January 18, 2022, fixed rate of 5.25% Due on May 30, 2023, fixed rate of 2.50% Due on May 21, 2024, fixed rate of 5.94% - - - 3,000 23 10,000 61 214 10,000 2,189 470 722 699 - 566 571 793 89 1,720 824 1,191 571 435 3,078 1,134 295 656 735 903 802 1,906 564 3,499 590 1,486 681 814 3,250 933 - Total outstanding $ 55,464 $ (1) $13.0 million is classified as short-term borrowings. (2) This advance was callable quarterly at the option of the FHLB. The contractual maturities of FHLB debt for the five years succeeding December 31, 2006, are as follows: (Dollars in Thousands) 2007 2008 2009 2010 2011 2012 and thereafter Total $ $ (1) $13.0 million is classified as short-term borrowings. 15,585 (1) 14,567 2,418 2,971 2,254 17,669 55,464 66 The Federal Home Loan Bank advances are collateralized by a blanket floating lien on all 1-4 family residential mortgage loans, commercial real estate mortgage loans, and home equity mortgage loans. Interest on the Federal Home Loan Bank advances is paid on a monthly basis. Repurchase Agreements - Term. At December 31, the Company maintained three long-term repurchase agreements totaling $0.6 million collateralized by bank-owned securities. The agreements have maturities as follows (in millions): 2008-$0.4; 2009-$0.2. Interest is payable upon maturity. Junior Subordinated Deferrable Interest Notes. The Company has issued two junior subordinated deferrable interest notes to wholly owned Delaware statutory trusts. The first note for $30.9 million was issued to CCBG Capital Trust I. The second note for $32.0 million was issued to CCBG Capital Trust II. The two trusts are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, the accounts of the trusts are not included in the Company’s consolidated financial statements. See Note 1 - Summary of Significant Accounting Policies for additional information about the Company’s consolidation policy. Details of the Company’s transaction with the two trusts are provided below. In November 2004, CCBG Capital Trust I issued $30.0 million of trust preferred securities which represent beneficial interest in the assets of the trust. The interest rate is fixed at 5.71% for a period of five years, then adjustable annually to LIBOR plus a margin of 1.90%. The trust preferred securities will mature on December 31, 2034, and are redeemable upon approval of the Federal Reserve in whole or in part at the option of the Company at any time after December 31, 2009 and in whole at any time upon occurrence of certain events affecting their tax or regulatory capital treatment. Distributions on the trust preferred securities are payable quarterly on March 31, June 30, September 30, and December 31 of each year. CCBG Capital Trust I also issued $928,000 of common equity securities to CCBG. The proceeds of the offering of trust preferred securities and common equity securities were used to purchase a $30.9 million junior subordinated deferrable interest note issued by the Company, which has terms substantially similar to the trust preferred securities. In May 2005, CCBG Capital Trust II issued $31.0 million of trust preferred securities which represent beneficial interest in the assets of the trust. The interest rate is fixed at 6.07% for a period of five years, then adjustable quarterly to LIBOR plus a margin of 1.80%. The trust preferred securities will mature on June 15, 2035, and are redeemable upon approval of the Federal Reserve in whole or in part at the option of the Company at any time after May 20, 2010 and in whole at any time upon occurrence of certain events affecting their tax or regulatory capital treatment. Distributions on the trust preferred securities are payable quarterly on March 15, June 15, September 15, and December 15 of each year. CCBG Capital Trust II also issued $959,000 of common equity securities to CCBG. The proceeds of the offering of trust preferred securities and common equity securities were used to purchase a $32.0 million junior subordinated deferrable interest note issued by the Company, which has terms substantially similar to the trust preferred securities. The Company has the right to defer payments of interest on the two notes at any time or from time to time for a period of up to twenty consecutive quarterly interest payment periods. Under the terms of each note, in the event that under certain circumstances there is an event of default under the note or the Company has elected to defer interest on the note, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. The Company is current on the interest payment obligations and has not executed the right to defer interest payments on the notes. The Company has entered into agreements to guarantee the payments of distributions on the trust preferred securities and payments of redemption of the trust preferred securities. Under these agreements, the Company also agrees, on a subordinated basis, to pay expenses and liabilities of the two trusts other than those arising under the trust preferred securities. The obligations of the Company under the two junior subordinated notes, the trust agreements establishing the two trusts, the guarantee and agreement as to expenses and liabilities, in aggregate, constitute a full and conditional guarantee by the Company of the two trusts' obligations under the two trust preferred security issuances. Despite the fact that the accounts of CCBG Capital Trust I and CCBG Capital Trust II are not included in the Company’s consolidated financial statements, the $30.0 million and $31.0 million, respectively, in trust preferred securities issued by these subsidiary trusts are included in the Tier 1 capital of Capital City Bank Group, Inc. as allowed by Federal Reserve guidelines. 67 Note 10 INCOME TAXES The provision for income taxes reflected in the statements of income is comprised of the following components: (Dollars in Thousands) Current: Federal State Deferred: Federal State Total 2006 2005 2004 $ $ 14,780 $ 1,527 1,384 230 17,921 $ 15,114 $ 1,290 156 26 16,586 $ 13,753 1,381 656 109 15,899 Income taxes provided were different than the tax expense computed by applying the statutory federal income tax rate of 35% to pre-tax income as a result of the following: (Dollars in Thousands) Tax Expense at Federal Statutory Rate Increases (Decreases) Resulting From: Tax-Exempt Interest Income State Taxes, Net of Federal Benefit Other Actual Tax Expense 2006 2005 2004 $ 17,915 $ 16,403 $ (1,334) 1,142 198 17,921 $ (1,054) 856 381 16,586 $ $ 15,845 (992) 969 77 15,899 Deferred income tax liabilities and assets result from differences between assets and liabilities measured for financial reporting purposes and for income tax return purposes. These assets and liabilities are measured using the enacted tax rates and laws that are currently in effect. The net deferred tax asset and the temporary differences comprising that balance at December 31, 2006 and 2005 are as follows: (Dollars in Thousands) Deferred Tax Assets attributable to: Allowance for Loan Losses Associate Benefits Unrealized Losses on Investment Securities Accrued Pension/SERP Market Value of Loans Interest on Nonperforming Loans Net Operating Loss Carry Forwards Intangible Assets Accrued Expense Other Total Deferred Tax Assets Deferred Tax Liabilities attributable to: Depreciation on Premises and Equipment Deferred Loan Costs Core Deposit Intangible Assets Intangible Assets Securities Accretion Other Total Deferred Tax Liabilities Net Deferred Tax Assets 2006 2005 $ $ $ $ 6,659 $ 700 503 2,474 (122) 170 399 70 612 835 12,300 $ 4,434 $ 2,550 (278) 1,319 25 223 8,273 4,027 $ 6,733 650 706 (133) 19 170 228 44 592 251 9,260 4,676 1,752 1,173 1,019 17 243 8,880 380 In the opinion of management, it is more likely than not that all of the deferred tax assets will be realized; therefore, a valuation allowance is not required. 68 Changes in net deferred income tax assets were: (Dollars in Thousands) Balance at Beginning of Year Purchase Accounting Acquisitions 2006 2005 $ 380 $ - Change in Accounting Method – Adoption of SFAS No. 158 and SAB No. 108 5,463 Income Tax (Expense) Benefit From Change in Unrealized Losses on Available-for-Sale Securities Deferred Income Tax Expense on Continuing Operations (202) (1,614) Balance at End of Year $ 4,027 $ Note 11 STOCK-BASED COMPENSATION 2,463 (2,403) - 502 (182) 380 In accordance with the Company’s adoption of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in the first quarter of 2003, the cost related to stock-based associate compensation included in net income has been accounted for under the fair value method in all reported periods. On January 1, 2006, the Company adopted SFAS 123R. The Company continues to include the cost of its share-based compensation plans in net income under the fair value method. The impact of SFAS 123R to the Company’s financial statements upon adoption was not material. As of December 31, 2006, the Company had three stock-based compensation plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP"). Total compensation expense associated with these plans for 2004-2006 was approximately $0.4 million, $0.8 million and $1.2 million, respectively. AIP. The Company's AIP allows the Company's Board of Directors to award key associates various forms of equity-based incentive compensation. Under the AIP, the Company has adopted the Stock-Based Incentive Plan (the "Incentive Plan"), effective January 1, 2006, which is a performance-based equity bonus plan for selected members of management, including all executive officers. Under the Incentive Plan, all participants are eligible to earn an equity award, consisting of performance shares, in each year of the five-year period ending December 31, 2010. Annual awards are tied to the annual earnings progression necessary to achieve the Project 2010 goal of $50.0 million in annual net income. The grant-date fair value of an annual compensation award is approximately $1.5 million. A total of 43,437 shares are eligible for issuance annually. 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. In accordance with the provisions of SFAS 123R, the Company recognized expense of approximately $1.1 million in 2006 related to the Incentive Plan. Under a substantially similar predecessor plan, the Company recognized expense of $0.6 million in 2005 and $0.3 million in 2004. A total of 875,000 shares of common stock have been reserved for issuance under the AIP. To date, the Company has issued 28,093 shares of common stock. 69 Executive Stock Option Agreement. In 2006, under the provisions of the AIP, the Company's Board of Directors approved a stock option agreement for a key executive officer (William G. Smith, Jr. - Chairman, President and CEO, CCBG). Similar stock option agreements were approved in 2003-2005. These agreements grant a non-qualified stock option award upon achieving certain annual earnings per share conditions set by the Board, subject to certain vesting requirements. The options granted under the agreements have a term of ten years and vest at a rate of one-third on each of the first, second, and third anniversaries of the date of grant. Under the 2004 and 2003 agreements, 37,246 and 23,138 options, respectively, were issued, none of which have been exercised. The fair value of a 2004 option was $13.42, and the fair value of a 2003 option was $11.64. The exercise prices for the 2004 and 2003 options are $32.69 and $32.96, respectively. Under the 2005 and 2006 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 $205,000 and $193,000 for 2006 and 2005, respectively, related to the 2004 and 2003 agreements. A summary of the status of the Company’s option shares as of December 31, 2006 is presented below: Options Outstanding at January 1, 2006 Granted Exercised Forfeited or expired Outstanding at December 31, 2006 Exercisable at December 31, 2006 Shares 60,384 - - - 60,384 27,840 $ $ $ Weighted- Average Exercise Price 32.79 - - - 32.79 32.79 $ $ $ Weighted- Average Remaining Months To Vest 29.4 - - - 17.4 17.4 Aggregate Intrinsic Value 88,161 - - - 151,355 68,497 $ $ $ As of December 31, there was $125,000 of total unrecognized compensation cost related to the non-vested option shares granted under the 2004 agreement. That cost is expected to be recognized over the next 12 months. DSPP. The Company's DSPP allows the directors to purchase the Company's common stock at a price equal to 90% of the closing price on the date of purchase. Stock purchases under the DSPP are limited to the amount of the directors' annual retainer and meeting fees. The DSPP has 93,750 shares reserved for issuance. A total of 18,738 shares have been issued since the inception of the DSPP. For 2006, the Company issued 12,149 shares under the DSPP and recognized approximately $37,000 in expense related to this plan. For 2005, the Company issued 6,589 shares and recognized approximately $26,000 in expense related to the DSPP. For 2004, the Company issued 9,211 shares and recognized approximately $27,000 in expense under a substantially similar predecessor plan. ASPP. Under the Company's ASPP, substantially all associates may purchase the Company's common stock through payroll deductions at a price equal to 90% of the lower of the fair market value at the beginning or end of each six-month offering period. Stock purchases under the ASPP are limited to 10% of an associate's eligible compensation, up to a maximum of $25,000 (fair market value on each enrollment date) in any plan year. Shares are issued at the beginning of the quarter following each six- month offering period. The ASPP has 593,750 shares of common stock reserved for issuance. A total of 36,281 shares have been issued since inception of the ASPP. For 2006, the Company issued 19,435 shares under the ASPP and recognized approximately $90,000 in expense related to this plan. For 2005, the Company issued 16,846 shares and recognized approximately $90,000 in expense related to the ASPP. For 2004, the Company issued 25,070 shares and recognized approximately $125,000 in expense under a substantially similar predecessor plan. Based on the Black-Scholes option pricing model, the weighted average estimated fair value of the purchase rights granted under the ASPP Plan was $5.65 for in 2006. For 2005 and 2004, the weighted average fair value of the purchase rights granted was $5.77 and $5.90, respectively. In calculating compensation, the fair value of each stock purchase right was estimated on the date of grant using the following weighted average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) 2006 2005 2004 1.9% 23.5% 4.5% 0.5 1.9% 28.0% 2.6% 0.5 1.7% 30.0% 1.1% 0.5 70 Note 12 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 selected executive officers. Adoption of SFAS 158 On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158 (“SFAS 158”). This statement required the Company to recognize the funded status of its defined benefit pension and SERP plans in the December 31, 2006 consolidated statement of financial condition, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligation remaining from the initial adoption of SFAS No. 87 (“SFAS 87”), “Employers’ Accounting for Pensions,” which was previously netted against the plans’ funded status in the Company’s consolidated balance sheet pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS 158. The following table illustrates the incremental effect of adopting the provisions of SFAS 158 on the Company’s consolidated statement of financial condition at December 31, 2006. The adoption of SFAS 158 had no impact on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not affect the Company’s operating results in future periods. Incremental Effect of Applying SFAS 158 On Individual Line Items of the Consolidated Statement of Financial Condition (Dollars in Thousands) Other Assets Total Assets Other Liabilities Total Liabilities Prior to Adoption of SFAS 158 Effect of Adopting SFAS 158 As Reported at December 31, 2006 $ 59,707 $ (4,699) $ 55,008 2,602,609 (4,699) 2,597,910 26,716 2,279,363 2,777 2,777 29,493 2,282,140 (7,477) Accumulated Other Comprehensive Loss - (7,477) Total Shareowners' Equity $ 323,247 $ (7,477) $ 315,770 Included in accumulated other comprehensive income at December 31, 2006 are the following amounts that have not yet been recognized in net periodic cost: unrecognized prior service costs of $2.0 million ($1.2 million net of tax) and unrecognized actuarial losses of $10.2 million ($6.3 million net of tax). The prior service cost and actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the year-ended December 31, 2007 is $308,000 ($191,000 net of tax) and $1.1 million ($661,000 net of tax), respectively. Pension Plan The Company sponsors a noncontributory pension plan covering substantially all of its associates. Benefits under this plan generally are based on the associate's years of service and compensation during the years immediately preceding retirement. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. The defined benefit pension plan for the Farmers and Merchants Bank of Dublin was merged into the Company's pension plan as of December 31, 2005. The following table details on a consolidated basis the components of pension expense, the funded status of the plan, amounts recognized in the Company's consolidated statements of financial condition, and major assumptions used to determine these amounts. 71 (Dollars in Thousands) Change in Projected Benefit Obligation: Benefit Obligation at Beginning of Year Service Cost Interest Cost Actuarial Loss Benefits Paid Expenses Paid Plan Change Acquisitions Projected Benefit Obligation at End of Year Accumulated Benefit Obligation at End of Year Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year Actual Return on Plan Assets Employer Contributions Benefits Paid Expenses Paid Acquisitions Fair Value of Plan Assets at End of Year Reconciliation of Funded Status: Funded Status Unrecognized Net Actuarial Losses Unrecognized Prior Service Cost Unrecognized Net Transition Obligation Prepaid (Accrued) Benefit Cost Components of Net Periodic Benefit Costs: Service Cost Interest Cost Expected Return on Plan Assets Amortization of Prior Service Costs Transition Obligation Recognition Recognized Net Actuarial Loss Net Periodic Benefit Cost *Not Applicable due to adoption of SFAS No. 158 Assumptions: Weighted-average used to determine benefit obligations: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase Measurement Date Weighted-average used to determine net cost: Discount Rate Expected Return on Plan Assets Rate of Compensation Increase $ $ $ $ $ 2006 2005 2004 64,131 $ 4,930 3,622 (1,421) (3,267) (149) 825 - 68,671 $ 54,529 $ 4,352 3,253 2,752 (3,501) (75) - 2,821 64,131 $ 46,227 3,776 2,893 2,890 (1,092) (165) - - 54,529 49,335 $ 45,645 $ 38,325 52,277 $ 6,342 11,350 (3,267) (149) - 66,553 $ $ (2,117) $ * * - * $ 4,930 $ 3,622 (4,046) 215 - 1,598 6,319 $ $ $ $ 41,125 $ 1,737 10,500 (3,501) (75) 2,491 52,277 $ (11,853) $ 14,823 1,302 - 4,272 $ 4,352 $ 3,410 (3,373) 215 11 1,324 5,939 $ 34,784 2,710 4,888 (1,092) (165) - 41,125 (13,404) 11,676 1,517 - (211) 3,776 2,893 (2,665) 215 1 1,163 5,383 6.00% 8.00% 5.50% 5.75% 8.00% 5.50% 12/31/06 12/31/05 6.00% 8.00% 5.50% 12/31/04 5.75% 8.00% 5.50% 6.00% 8.00% 5.50% 6.25% 8.00% 5.50% 72 Return on Plan Assets. The overall expected long-term rate of return on assets is a weighted-average expectation for the return on plan assets. The Company considers historical performance and current benchmarks to arrive at expected long-term rates of return in each asset category. The Company assumed that 65% of its portfolio would be invested in equity securities, with the remainder invested in debt securities. Plan Assets. The Company’s pension plan asset allocation at year-end 2006 and 2005, and the target asset allocation for 2007 are as follows: Equity Securities Debt Securities Real Estate Cash Equivalent Total Target Allocation 2007 65% 30% - 5% 100% Percentage of Plan Assets at Year-End(1) 2005 51% 23% - 26% 100% 2006 55% 18% 1% 26% 100% (1) Represents asset allocation at year-end which may differ from the average target allocation for the year due to the year-end cash contribution to the plan. The Company’s pension plan assets are overseen by the CCBG Retirement Committee. Capital City Trust Company acts as the investment manager for the plan. The investment strategy is to maximize return on investments while minimizing risk. The Company believes the best way to accomplish this goal is to take a conservative approach to its investment strategy by investing in high-grade equity and debt securities. Expected Benefit Payments. As of December 31, 2006, expected benefit payments related to the Company's defined benefit pension plan were as follows: 2007 2008 2009 2010 2011 2012 through 2016 $ $ 3,249,113 4,350,617 4,249,471 3,979,390 5,153,436 35,397,040 56,379,067 Contributions. The following table details the amounts contributed to the pension plan in 2006 and 2005, and the expected amount to be contributed in 2007. Actual Contributions 2006 $ 11,350,000 2005 $ 10,500,000 Expected 2007(1) $ 10,000,000 (1) Estimate of 2007 maximum allowable contribution. Supplemental Executive Retirement Plan The Company has a Supplemental Executive Retirement Plan ("SERP") covering selected executive officers. Benefits under this plan generally are based on the executive officer's years of service and compensation during the years immediately preceding retirement. The Company recognized expense during 2006, 2005 and 2004 of approximately $514,000, $478,000, and $491,000, respectively. 73 The following table details the components of the SERP’s periodic benefit cost, the funded status of the plan, amounts recognized in the Company's consolidated statements of financial condition, and major assumptions used to determine these amounts. (Dollars in Thousands) Change in Projected Benefit Obligation: Benefit Obligation at Beginning of Year Service Cost Interest Cost Actuarial (Gain) Loss Plan Change Projected Benefit Obligation at End of Year Accumulated Benefit Obligation at End of Year Reconciliation of Funded Status: Funded Status Unrecognized Net Actuarial Loss Unrecognized Prior Service Cost Accrued Benefit Cost Components of Net Periodic Benefit Costs: Service Cost Interest Cost Amortization of Prior Service Cost Recognized Net Actuarial Loss (Gain) Net Periodic Benefit Cost *Not applicable due to adoption of SFAS No. 158 Assumptions: Weighted-average used to determine the benefit obligations: Discount Rate Rate of Compensation Increase Weighted-average used to determine the net cost: Discount Rate Rate of Compensation Increase 2006 2005 2004 $ $ $ 3,878 $ 123 230 62 (274) 4,019 $ 3,601 $ 133 207 (63) - 3,878 $ 1,880 147 198 1,376 - 3,601 2,252 $ 2,295 $ 1,894 $ (4,018) $ $ $ $ * * * $ 123 $ 230 61 100 514 $ 6.00% 5.50% 5.75% 5.50% (3,878) $ 734 388 (2,756) $ (3,601) 874 449 (2,278) 133 $ 207 61 77 478 $ 5.75% 5.50% 6.00% 5.50% 147 198 62 84 491 6.00% 5.50% 6.25% 5.50% Expected Benefit Payments. As of December 31, 2006, expected benefit payments related to the Company's SERP were as follows: 2007 2008 2009 2010 2011 2012 through 2016 $ $ 19,665 96,715 204,356 269,559 358,692 3,548,890 4,497,877 74 401(k) Plan The Company has a 401(k) Plan which enables associates to defer a portion of their salary on a pre-tax basis. The plan covers substantially all associates of the Company who meet minimum age requirements. The plan is designed to enable participants to elect to have an amount from 1% to 15% of their compensation withheld in any plan year placed in the 401(k) Plan trust account. Matching contributions from the Company are made up to 6% of the participant's compensation for eligible associates. During 2006, 2005, and 2004, the Company made matching contributions of $273,000, $154,000 and $66,000, respectively. The participant may choose to invest their contributions into sixteen investment funds available to 401(k) participants, including the Company’s common stock. A total of 50,000 shares of CCBG common stock have been reserved for issuance. These shares have historically been purchased from the public markets. Other Plans The Company has a Dividend Reinvestment and Optional Stock Purchase Plan. A total of 250,000 shares have been reserved for issuance. In recent years, shares for the Dividend Reinvestment and Optional Stock Purchase Plan have been acquired in the open market and, thus, the Company did not issue any shares under this plan in 2006, 2005 and 2004. Note 13 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (Dollars in Thousands, Except Per Share Data) Numerator: Net Income Denominator: 2006 2005 2004 $ 33,265 $ 30,281 $ 29,371 Denominator for Basic Earnings Per Share Weighted-Average Shares Effects of Dilutive Securities Stock Compensation Plans 18,584,519 25,320 18,263,855 17,388 16,805,696 5,230 Denominator for Diluted Earnings Per Share Adjusted Weighted- Average Shares and Assumed Conversions 18,609,839 18,281,243 16,810,926 Basic Earnings Per Share Diluted Earnings per Share $ $ 1.79 $ 1.66 $ 1.79 $ 1.66 $ 1.74 1.74 75 Note 14 CAPITAL The Company is subject to various regulatory capital requirements which involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items. The Company's capital amounts and classification are subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require that the Company maintain amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 2006, the Company met all capital adequacy requirements to which it is subject. A summary of actual, required, and capital levels necessary to be considered well-capitalized for Capital City Bank Group, Inc. consolidated and its banking subsidiary, Capital City Bank, as of December 31, 2006 and December 31, 2005 are as follows: (Dollars in Thousands) As of December 31, 2006: Tier I Capital: CCBG CCB Total Capital: CCBG CCB Tier I Leverage: CCBG CCB As of December 31, 2005: Tier I Capital: CCBG CCB Total Capital: CCBG CCB Tier I Leverage: CCBG CCB Actual Amount Ratio Required For Capital Adequacy Purposes Ratio Amount To Be Well- Capitalized Under Prompt Corrective Action Provisions Ratio Amount $ 280,679 273,425 14.00% $ 13.66% 80,191 80,055 4.00% 4.00% * 120,082 * 6.00% 299,783 290,642 14.95% 14.52% 160,382 160,109 8.00% 8.00% * 200,137 * 10.00% 280,679 273,425 11.30% 11.03% 80,191 80,055 4.00% 4.00% * 100,068 * 5.00% $ 257,572 252,096 12.61% $ 12.36% 81,675 81,599 4.00% 4.00% * 122,398 * 6.00% 276,869 269,506 13.56% 13.21% 163,349 163,198 8.00% 8.00% * 203,997 * 10.00% 257,572 252,096 10.27% 10.07% 61,256 61,199 4.00% 4.00% * 101,999 * 5.00% *Not applicable to bank holding companies. Note 15 DIVIDEND RESTRICTIONS Substantially all the Company’s retained earnings are undistributed earnings of its banking subsidiary which are restricted by various regulations administered by federal and state bank regulatory authorities. The approval of the appropriate regulatory authority is required if the total of all dividends declared by a subsidiary bank in any calendar year exceeds the bank’s net profits (as defined under Florida law) for that year combined with its retained net profits for the preceding two calendar years. In 2007, the bank subsidiary may declare dividends without regulatory approval of $39.7 million plus an additional amount equal to the net profits of the Company’s subsidiary bank for 2007 up to the date of any such dividend declaration. 76 Note 16 RELATED PARTY INFORMATION DuBose Ausley, a Director of the Company, is employed by and is the former Chairman of Ausley & McMullen, the Company's general counsel. Fees paid by the Company and its subsidiary for legal services, in aggregate, approximated $907,000, $813,000, and $797,000 during 2006, 2005, and 2004, respectively. Under a lease agreement expiring in 2024, the Bank leases land from a partnership in which several directors and officers have an interest. The lease agreement with Smith Interests General Partnership L.L.P., provides for annual lease payments of approximately $109,000, to be adjusted for inflation in future years. Amounts paid in 2004-2006 were $91,000, $109,000, and $109,000, respectively. At December 31, 2006 and 2005, certain officers and directors were indebted to the Company’s bank subsidiary in the aggregate amount of $12.6 million and $17.7 million, respectively. During 2006, $17.9 million in new loans were made and repayments totaled $23.0 million. In the opinion of management, these loans were made on similar terms as loans to other individuals of comparable creditworthiness and were all current at year-end. Note 17 SUPPLEMENTARY INFORMATION Components of other noninterest income and noninterest expense in excess of 1% of the sum of total interest income and noninterest income, which are not disclosed separately elsewhere, are presented below for each of the respective years. (Dollars in Thousands) Noninterest Income: Merchant Fee Income Interchange Commission Fees ATM/Debit Card Fees Noninterest Expense: Professional Fees Printing & Supplies Interchange Service Fees Telephone Advertising (1) <1% of appropriate threshold. 2006 2005 2004 $ 6,978 $ 3,105 2,519 6,174 $ 2,239 2,206(1) 3,402 2,472 6,010 2,323 4,285 3,825 2,372 5,402 2,493 4,275 5,135 2,229 2,007(1) 2,858(1) 1,854 4,741 2,048 2,001(1) 77 Note 18 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 December 31, 2006, the amounts associated with the Company’s off-balance sheet obligations were as follows: (Dollars in Thousands) Commitments to Extend Credit(1) Standby Letters of Credit Amount $ $ 418,952 17,537 (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. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities. In general, management does not anticipate any material losses as a result of participating in these types of transactions. However, any potential losses arising from such transactions are reserved for in the same manner as management reserves for its other credit facilities. For both on- and off-balance sheet financial instruments, the Company requires collateral to support such instruments when it is deemed necessary. The Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include deposits held in financial institutions; U.S. Treasury securities; other marketable securities; real estate; accounts receivable; property, plant and equipment; and inventory. Other Commitments. In the normal course of business, the Company enters into lease commitments which are classified as operating leases. Rent expense incurred under these leases was approximately $1.5 million in 2006, $1.3 million in 2005, and $1.3 million in 2004. Minimum lease payments under these leases due in each of the five years subsequent to December 31, 2006, are as follows (in millions): 2007, $1.5; 2008, $1.4; 2009, $1.2; 2010, $1.0; 2011, $1.0; thereafter, $6.1. 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. 78 Note 19 FAIR VALUE OF FINANCIAL INSTRUMENTS Many of the Company’s assets and liabilities are short-term financial instruments whose carrying values approximate fair value. These items include Cash and Due From Banks, Interest Bearing Deposits with Other Banks, Federal Funds Sold, Federal Funds Purchased, Securities Sold Under Repurchase Agreements, and Short-Term Borrowings. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The resulting fair values may be significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. The methods and assumptions used to estimate the fair value of the Company’s other financial instruments are as follows: Investment Securities - Fair values for investment securities are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Loans - The loan portfolio is segregated into categories and the fair value of each loan category is calculated using present value techniques based upon projected cash flows and estimated discount rates. The calculated present values are then reduced by an allocation of the allowance for loan losses against each respective loan category. Deposits - The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market Accounts and Savings Accounts are the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using present value techniques and rates currently offered for deposits of similar remaining maturities. Subordinated Notes Payable - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar obligations. Long-Term Borrowings - The fair value of each note is calculated using present value techniques, based upon projected cash flows and estimated discount rates as well as rates being offered for similar debt. Commitments to Extend Credit and Standby Letters of Credit - The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the present creditworthiness of the counterparties. The fair value of these fees is not material. The Company’s financial instruments that have estimated fair values are presented below: (Dollars in Thousands) Financial Assets: Cash Short-Term Investments Investment Securities Loans, Net of Allowance for Loan Losses Total Financial Assets Financial Liabilities: Deposits Short-Term Borrowings Subordinated Notes Payable Long-Term Borrowings Total Financial Liabilities At December 31, 2006 2005 Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value $ $ $ $ 98,769 $ 78,795 191,894 1,982,504 2,351,962 $ 98,769 $ 78,795 191,894 1,992,025 2,361,483 $ 105,195 $ 61,164 171,019 2,050,084 2,387,462 $ 2,081,654 $ 65,023 62,887 43,083 2,252,647 $ 2,007,308 $ 64,970 63,013 42,256 2,177,547 $ 2,079,346 $ 82,973 62,887 69,630 2,294,836 $ 105,195 61,164 171,019 2,044,954 2,382,332 1,953,576 82,748 63,049 69,295 2,168,668 Certain financial instruments and all non-financial instruments are excluded from the above table. The disclosures also do not include certain intangible assets such as client relationships, deposit base intangibles and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 79 Note 20 PARENT COMPANY FINANCIAL INFORMATION The operating results of the parent company for the three years ended December 31, are shown below: Parent Company Statements of Income (Dollars in Thousands) OPERATING INCOME Income Received from Subsidiary Bank: Dividends Overhead Fees Other Income Total Operating Income OPERATING EXPENSE Salaries and Associate Benefits Interest on Long-Term Borrowings Interest on Subordinated Notes Payable Professional Fees Advertising Legal Fees Other Total Operating Expense 2006 2005 2004 $ 20,166 $ 3,524 112 23,802 10,597 $ 2,716 87 13,400 2,360 - 3,725 741 403 604 649 8,482 2,191 - 2,981 1,399 467 701 471 8,210 12,716 3,232 2 15,950 2,257 33 294 895 286 468 480 4,713 11,237 (581) 11,818 17,553 29,371 Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiary Bank Income Tax Benefit Income Before Equity in Undistributed Earnings of Subsidiary Bank Equity in Undistributed Earnings of Subsidiary Bank Net Income $ 15,320 (1,835) 17,155 16,110 33,265 $ 5,190 (2,060) 7,250 23,031 30,281 $ The following are condensed statements of financial condition of the parent company at December 31: Parent Company Statements of Financial Condition (Dollars in Thousands, Except Per Share Data)(1) ASSETS Cash and Due From Subsidiary Bank Investment in Subsidiary Bank Other Assets Total Assets LIABILITIES Subordinated Notes Payable Other Liabilities Total Liabilities SHAREOWNERS' EQUITY Preferred Stock, $.01 par value, 3,000,000 shares authorized; no shares issued and outstanding Common Stock, $.01 par value; 90,000,000 shares authorized; 18,518,398 and 18,631,706 shares issued and outstanding at December 31,2006 and December 31, 2005, respectively Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss, Net of Tax Total Shareowners' Equity Total Liabilities and Shareowners' Equity 2006 2005 8,921 $ 373,278 1,550 383,749 $ 5,434 364,898 1,447 371,779 62,887 $ 5,092 67,979 $ 62,887 3,116 66,003 - - 185 80,654 243,242 (8,311) 315,770 383,749 $ 186 83,304 223,532 (1,246) 305,776 371,779 $ $ $ $ $ (1) All share and per share data have been adjusted to reflect the 5-for-4 stock split effective July 1, 2005. 80 The cash flows for the parent company for the three years ended December 31, were as follows: Parent Company Statements of Cash Flows (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating $ 2006 2005 2004 33,265 $ 30,281 $ 29,371 Activities: Equity in Undistributed Earnings of Subsidiary Bank Non-Cash Compensation Increase in Other Assets Increase in Other Liabilities Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Cash Paid for Investment in: CCBG Capital Trust I and CCBG Capital Trust II Cash Paid for Acquisitions Net Cash Used in Investing Activities CASH FROM FINANCING ACTIVITIES: Proceeds from Subordinated Notes Increase in Other Long-Term Borrowings Repayments of Long-Term Borrowings Payment of Dividends Repurchase of Common Stock Issuance of Common Stock Net Cash (Used in) Provided by Financing Activities Net Increase (Decrease) in Cash Cash at Beginning of Period Cash at End of Period Note 21 COMPREHENSIVE INCOME (16,110) 1,673 (670) 1,976 20,134 (23,031) 110 131 381 7,872 (17,553) 1,707 (189) 68 13,404 - - - (959) (29,953) (30,912) (928) (35,688) (36,616) - - - (12,322) (5,360) 1,035 (16,647) 3,487 5,434 8,921 $ $ 31,959 - - (11,397) - 1,019 21,581 (1,459) 6,893 5,434 $ 30,928 30,000 (30,000) (9,857) - 1,184 22,255 (957) 7,850 6,893 SFAS No. 130, "Reporting Comprehensive Income," requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income (loss). Total comprehensive income is reported in the accompanying statements of changes in shareowners’ equity. Information related to net comprehensive income (loss) is as follows: Other Comprehensive Income (Loss): Securities available for sale: Change in net unrealized gain/loss during period: Change in funded status of defined benefit pension plan and SERP plan (net of tax) Net Other Comprehensive Loss The components of accumulated other comprehensive income, net of tax, as of year-end were as follows: Net unrealized gain (loss) on securities available for sale Net unfunded liability for defined benefit pension plan and SERP plan 2006 2005 2004 $ 412 $ (893) $ (1,739) (7,477) (7,065) $ - (893) $ - (1,739) (834) $ (7,477) (8,311) $ (1,246) $ - (1,246) $ (353) - (353) $ $ $ 81 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9 A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. As of December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, 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 December 31, 2006, the end of the period covered by this Annual Report on Form 10-K, we maintained effective disclosure controls and procedures. Management's Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control - Integrated Framework, our management has concluded we maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rule 13a-15(f), as of December 31, 2006. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management. KPMG LLP, an independent registered public accounting firm, has audited our consolidated financial statements as of and for the year ended December 31, 2006, and management's assessment as to the effectiveness of internal control over financial reporting as of December 31, 2006, as stated in its attestation report, which is included herein on page 83. Change in Internal Control. 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. 82 Attestation Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm The Board of Directors Capital City Bank Group, Inc.: We have audited management's assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Capital City Bank Group, Inc. maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Capital City Bank Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that Capital City Bank Group, Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Capital City Bank Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareowners’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated March 14, 2007 expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP Orlando, Florida March 14, 2007 Certified Public Accountants 83 Item 9B. Other Information None. Part III Item 10. Directors, Executive Officers, and Corporate Governance Incorporated herein by reference to the subsection entitled “Codes of Conduct and Ethics” under the section entitled “Corporate Governance,” “Nominees for Election as Directors,” “Continuing Directors and Executive Officers,” “Share Ownership” and the subsection entitled “Committees of the Board” under the section “Board and Committee Membership” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 24, 2007. Item 11. Executive Compensation Incorporated herein by reference to the sections entitled “Executive Compensation” and “Director Compensation” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 24, 2007. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareowners Matters Equity Compensation Plan Information Our 2005 Associate Incentive Plan, 2005 Associate Stock Purchase Plan, and 2005 Director Stock Purchase Plan were approved by our shareowners. The following table provides certain information regarding our equity compensation plans. Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 60,384(1) $32.83 1,479,388(2) - 60,384 - - $ 32.83 1,479,388 Plan Category Equity Compensation Plans Approved by Securities Holders Equity Compensation Plans Not Approved by Securities Holders Total (1) Includes 60,384 shares that may be issued upon exercise of outstanding options under the terminated 1996 Associate Incentive Plan. (2) Consists of 846,907 shares available for issuance under our 2005 Associate Incentive Plan, 557,469 shares available for issuance under our 2005 Associate Stock Purchase Plan, and 75,012 shares available for issuance under our 2005 Director Stock Purchase Plan. Of these plans, the only plan under which options may be granted in the future is our 2005 Associate Incentive Plan. For additional information about our equity compensation plans, see Stock Based Compensation in Note 11 in the Notes to the Consolidated Financial Statements. The other information required by Item 12 is incorporated herein by reference to the section entitled “Share Ownership” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 24, 2007. 84 Item 13. Certain Relationships and Related Transactions, and Director Independence Incorporated herein by reference to the subsections entitled “Related Person Transaction Policy” and “Transactions With Related Persons” under the section entitled “Executive Officers and Transactions with Related Persons” and the subsection entitled “Independent Directors” under the section entitled “Corporate Governance” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 24, 2007. Item 14. Principal Accounting Fees and Services Incorporated herein by reference to the section entitled “Audit Fees and Related Matters” in the Registrant’s Proxy Statement relating to its Annual Meeting of Shareowners to be held April 24, 2007. 85 PART IV The following documents are filed as part of this report 1. Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Statements of Income for Fiscal Years 2006, 2005, and 2004 Consolidated Statements of Financial Condition at the end of Fiscal Years 2006 and 2005 Consolidated Statements of Changes in Shareowners’ Equity for Fiscal Years 2006, 2005, and 2004 Consolidated Statements of Cash Flows for Fiscal Years 2006, 2005, and 2004 Notes to Consolidated Financial Statements 2. Financial Statement Schedules Other schedules and exhibits are omitted because the required information either is not applicable or is shown in the financial statements or the notes thereto. 3. Exhibits Required to be Filed by Item 601 of Regulation S-K Reg. S-K Exhibit Table Item No. 2.1 2.2 2.3 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 Description of Exhibit Agreement and Plan of Merger, dated as of January 7, 2004, by and among Capital City Bank Group, Inc., Capital City Bank, Synovus Financial Corp. and Quincy State Bank - incorporated herein by reference to the Registrant’s Form 8-K (filed 1/13/04) (No. 0-13358). Agreement and Plan of Merger, dated as of May 12, 2004, by and among Capital City Bank Group, Inc., Capital City Bank, and Farmers and Merchants Bank - incorporated herein by reference to the Registrant’s Form 10-Q/A (filed 8/10/04) (No. 0-13358). Agreement and Plan of Merger, dated as of February 3, 2005, by and among Capital City Bank Group, Inc., First Alachua Banking Corporation, and First National Bank of Alachua (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) - incorporated herein by reference to the Registrant’s Form 8-K (filed 2/9/05) (No. 0-13358). Amended and Restated Articles of Incorporation - incorporated herein by reference to Exhibit 3 of the Registrant’s 1996 Proxy Statement (filed 4/11/96) (No. 0-13358). Amended and Restated Bylaws - incorporated herein by reference to Exhibit 3(b) of the Registrant’s Form 10-Q (filed 1/13/97) (No. 0-13358). Capital City Bank Group, Inc. 2005 Director Stock Purchase Plan - incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242). Capital City Bank Group, Inc. 2005 Associate Stock Purchase Plan - incorporated herein by reference to Exhibit 4.4 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242). Capital City Bank Group, Inc. 2005 Associate Incentive Plan - incorporated herein by reference to Exhibit 4.5 of the Registrant’s Form S-8 (filed 11/5/04) (No. 333-120242). Junior Subordinated Indenture between the Registrant and Wilmington Trust Company, dated as of November 1, 2004 - incorporated herein by reference to Exhibit 4.1 of the Registrant’s Form 8-K (filed 11/4/04) (No. 0-13358). Guarantee Agreement between the Registrant and Wilmington Trust Company, dated as of November 1, 2004 - incorporated herein by reference to Exhibit 4.2 of the Registrant’s Form 8-K (filed 11/4/04) (No. 0-13358). Amended and Restated Trust Agreement among the Registrant, Wilmington Trust Company and certain Administrative Trustees, dated as of November 1, 2004 - incorporated herein by reference to Exhibit 4.3 of the Registrant’s Form 8-K (filed 11/4/04) (No. 0-13358). 86 10.1 10.2 10.3 10.4 10.5 10.6 10.7 11 14 21 23 31.1 31.2 32.1 32.2 Capital City Bank Group, Inc. 1996 Dividend Reinvestment and Optional Stock Purchase Plan - incorporated herein by reference to Exhibit 10 of the Registrant’s Form S-3 (filed 01/30/97) (No. 333- 20683). Capital City Bank Group, Inc. Supplemental Executive Retirement Plan - incorporated herein by reference to Exhibit 10(d) of the Registrant’s Form 10-K (filed 3/27/03) (No. 0-13358). Capital City Bank Group, Inc. 401(k) Profit Sharing Plan – incorporated herein by reference to Exhibit 4.3 of Registrant’s Form S-8 (filed 09/30/97) (No. 333-36693). 2005 Stock Option Agreement by and between Capital City Bank Group, Inc. and William G. Smith, Jr., dated March 24, 2005 – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/31/05) (No. 0-13358). 2006 Stock Option Agreement by and between Capital City Bank Group, Inc. and William G. Smith, Jr., dated March 23, 2006 – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K (filed 3/29/06) (No. 0-13358). Capital City Bank Group, Inc. Non-Employee Director Plan, as amended – incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 8-K (filed 3/29/06) (No. 0-13358). Form of Participant Agreement for the Capital City Bank Group, Inc. Long-Term Incentive Plan – incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q (filed 8/10/06) (No. 0- 13358). Statement re Computation of Per Share Earnings.* Capital City Bank Group, Inc. Code of Ethics for the Chief Financial Officer and Senior Financial Officers - incorporated herein by reference to Exhibit 14 of the Registrant’s Form 8-K (filed 3/11/05) (No. 0-13358). Capital City Bank Group, Inc. Subsidiaries, as of December 31, 2006.** Consent of Independent Registered Public Accounting Firm.** Certification of CEO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002.** Certification of CFO pursuant to Securities and Exchange Act Section 302 of the Sarbanes-Oxley Act of 2002.** Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** * ** Information required to be presented in Exhibit 11 is provided in Note 13 to the consolidated financial statements under Part II, Item 8 of this Form 10-K in accordance with the provisions of FASB Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Filed electronically herewith. 87 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 15, 2007, on its behalf by the undersigned, thereunto duly authorized. CAPITAL CITY BANK GROUP, INC. /s/ William G. Smith, Jr. William G. Smith, Jr. Chairman, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 15, 2007 by the following persons in the capacities indicated. /s/ William G. Smith, Jr. William G. Smith, Jr. Chairman, President and Chief Executive Officer (Principal Executive Officer) /s/ J. Kimbrough Davis J. Kimbrough Davis Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 88 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on March 15, 2007, on its behalf by the undersigned, thereunto duly authorized. Directors: /s/ Dubose Ausley DuBose Ausley /s/ Thomas A. Barron Thomas A. Barron /s/ Frederick Carroll, III Frederick Carroll, III /s/ Cader B. Cox, III Cader B. Cox, III /s/ J. Everitt Drew J. Everitt Drew /s/ John K. Humphress John K. Humphress /s/ L. McGrath Keen, Jr. L. McGrath Keen, Jr. /s/ Lina S. Knox Lina S. Knox /s/ Ruth A. Knox Ruth A. Knox /s/ Henry Lewis III Henry Lewis III /s/ William G. Smith, Jr. William G. Smith, Jr. 89 Exhibit 21. Capital City Bank Group, Inc. Subsidiaries, as of December 31, 2006. Direct Subsidiaries: Capital City Bank CCBG Capital Trust I (Delaware) CCBG Capital Trust II (Delaware) Indirect Subsidiaries: Capital City Banc Investments, Inc. (Florida) Capital City Services Company (Florida) Capital City Trust Company (Florida) First Insurance Agency of Grady County, Inc. (Georgia) FNB Financial Services, Inc. (Georgia) Southern Oaks, Inc. (Delaware) Capital City Mortgage Company (Florida) - Inactive 90 Exhibit 23. Consent of Independent Registered Public Accounting Firm The Board of Directors Capital City Bank Group, Inc.: We consent to the incorporation by reference in the registration statements (No. 333-18557, No. 033-60113, No. 333-18543, No. 333-120242, and No. 333-36693) on Form S-8 and No. 333-20683 on Form S-3D of Capital City Bank Group, Inc. of our reports dated March 14, 2007, with respect to the consolidated statements of financial condition of Capital City Bank Group, Inc. and subsidiary (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareowners’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006, annual report on Form 10-K of Capital City Bank Group, Inc. Our report with respect to the consolidated financial statements of the Company refers to the Company’s adoption of the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment, as of January 1, 2006, SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R, as of December 31, 2006 and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, as of January 1, 2006. /s/ KPMG LLP Orlando, Florida March 14, 2007 Certified Public Accountants 91 Certification of CEO Pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, William G. Smith, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Capital City Bank Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ William G. Smith, Jr. William G. Smith, Jr. Chairman, President and Chief Executive Officer Date: March 15, 2007 92 Certification of CFO Pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, J. Kimbrough Davis, certify that: 1. I have reviewed this annual report on Form 10-K of Capital City Bank Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. /s/ J. Kimbrough Davis J. Kimbrough Davis Executive Vice President and Chief Financial Officer Date: March 15, 2007 93 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual Report of Capital City Bank Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company and its results of operations as of and for the periods covered therein. /s/ William G. Smith, Jr. William G. Smith, Jr. Chairman, President and Chief Executive Officer Date: March 15, 2007 94 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual Report of Capital City Bank Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (this “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition of the Company and its results of operations as of and for the periods covered therein. /s/ J. Kimbrough Davis J. Kimbrough Davis Executive Vice President and Chief Financial Officer Date: March 15, 2007 95 Officers, Directors and Community Boards CAPITAL CITY BANK GROUP, INC. Officers William G. Smith, Jr. Chairman, President and Chief Executive Officer Thomas A. Barron Treasurer J. Kimbrough Davis Executive Vice President and Chief Financial Officer Flecia Braswell Executive Vice President and Chief Brand Officer Randall Sharpton Senior Vice President Directors DuBose Ausley Attorney Ausley & McMullen, PA Thomas A. Barron President Capital City Bank Frederick Carroll, III Managing Partner Carroll and Company, CPAs Cader B. Cox, III President Riverview Plantation, Inc. J. Everitt Drew President SouthGroup Equities, Inc. John K. Humphress Partner Wadsworth, Humphress, Hollar & Konrad, PA McGrath Keen, Jr. Private Investor Lina S. Knox Community Volunteer Ruth A. Knox Attorney/President Wesleyan College Henry Lewis III, PharmD, RPH Professor Florida A&M University College of Pharmacy William G. Smith, Jr. Chairman, President and Chief Executive Officer Capital City Bank Group, Inc. CAPITAL CITY BANK Officers William G. Smith, Jr. Chairman of the Board Thomas A. Barron President J. Kimbrough Davis Executive Vice President and Chief Financial Officer Flecia Braswell Executive Vice President and Chief Brand Officer Randolph K. Briley Executive Vice President Edward G. Canup Executive Vice President William D. Colledge Executive Vice President Bethany H. Corum Executive Vice President and Chief People Officer Noel A. Ellis Executive Vice President Mitchell R. Englert Executive Vice President Karen H. Love Executive Vice President Cynthia Y. Pyburn Executive Vice President Dale A. Thompson Executive Vice President Edwin N. West, Jr. Executive Vice President William H. Brimacombe Senior Vice President Charles J. Davis Senior Vice President Judy Getts Senior Vice President John M. Hutchison Senior Vice President, Compliance Ray A. Johnson Senior Vice President, Finance Executive Jep Larkin Senior Vice President, Controller Robert K. Mayer Senior Vice President Richard C. McCollister Senior Vice President Walter McPherson Senior Vice President William L. Moor, Jr. Senior Vice President Michael Penney Senior Vice President Helen Proctor Senior Vice President Ruben Ramos Senior Vice President David Sanda Senior Vice President James Y. Scarboro Senior Vice President William P. Smith, Jr. Senior Vice President Mark W. Strickland Senior Vice President Emory F. Sullivan Senior Vice President Drew Ferguson, III Chairman, West Point Gerald B. Andrews, Jr. Community President Troup and Chambers Counties Beverly Hickman-Black Community President Burke County Clifton E. Bradley Community President Dixie, Gilchrist, Levy and Suwannee Counties Roy L. Carter Community President Washington County Don L. Davis Community President Gainesville Susan E. Everett Community President Taylor County Amy Geiger Community President Wakulla County W.W. Gunnels, Jr. Community President Jefferson and Madison Counties Donald L. James Community President NW Alachua County Stephen L. Jukes Community President Bibb County C. Stephen Martin Community President Citrus County/Inglis Terry McRae Community President Grady County Jeffrey L. Oody Community President Bradford and Clay Counties Samuel Shrieves Community President Hernando/Pasco Counties Stephen Stabler Community President Laurens County James R. Suber Community President Gadsden County Gregory J. Walker Community President Putnam County Johanna White Community President Gulf County Directors Daniel M. Ausley Owner MASK Development Thomas A. Barron President Capital City Bank Gregory V. Beauchamp Attorney Gregory V. Beauchamp, PA Robert J. Beauchamp Certified Public Accountant Beauchamp & Edwards, PA Donald T. Bennink Dairy Farmer/Owner North Florida Holsteins Kenneth R. Hart President Ausley & McMullen, PA E. Cantey Higdon Investor John B. Higdon Investor Higdon Investment Co. Harold M. Knowles Attorney/Managing Shareholder Knowles & Randolph, PA Blucher B. Lines Partner Lines, Hinson & Lines S. Craig McMillan President, Pat Thomas & Associates Insurance, Inc. William G. Smith, Jr. Chairman, President and Chief Executive Officer Capital City Bank Group, Inc. Ben H. Wilkinson, Jr. Partner Tallahassee Land Company Fred M. Williams, Jr. President Williams Timber, Inc. P. Graves Williams President Q. L. Enterprises, Inc. Officers, Directors and Community Boards SUBSIDIARIES Capital City Banc Investments William L. Moor, Jr. President Capital City Services Company Cynthia Y. Pyburn President Randall H. Lashua Senior Vice President Mark Newman Senior Vice President Capital City Trust Company Randolph M. Pople President Robert A. Barnett Senior Vice President R. David Maloy, Jr. Senior Vice President COMMUNITY BOARDS Bibb County Community Board Marilyn L. Ashmore Museum of Aviation Foundation Leonard Bevill CEO/Co-owner Macon Occupational Medicine Charles K. Buafo, MD Medical Center of Central Georgia Dudley B. Christie, Jr., OD Investor, Optometrist Robert J. Cleveland, Jr. President, Vantage Homes, Inc. Guy B. Eberhardt, Sr. President, Eberhardt Industries, Inc. J. Milton Heard, IV President, Hart’s Mortuary T. Baldwin Martin, Jr. Retired Attorney Paul R. Nagle United Way of Central Georgia, Inc. Edmund E. Olson President Sports Towne/Macon Knights James A. Upshaw, MD Partner Internal Medicine Associates, P.C. Bradford/Clay Counties Community Board Steve Denmark Owner, Denmark Furniture Store Susan Faulkner-O’Neal Owner, Faulkner Realty William Marchese, DMD Owner, Bradford Family Dentistry John M. Miller Owner/Publisher, Bradford County Telegraph Douglas E. Reddish Partner, Reddish & White CPAs Burke County Community Board Rickie Blackburn Owner, Delta Termite & Pest Control Gregory Coursey Sheriff of Burke County William E. Edwards Area Distribution Manager Georgia Power Company John Lee Fulcher CPA/Owner, John L. Fulcher, CPA William H. Harper, Jr. Owner, Harper Consulting, Inc. C.W. Hopper Retired, Burke County Commission Robert H. McKinney Owner McKinney Wholesale Company, Inc. Bonnie Taylor General Manager, The True Citizen Citrus County Community Board C.L. Calloway District Manager Withlacoochee River Electric Cooperative, Inc. Dolores H. Clark President/Owner R&R Clark Construction, Inc. William M. Lyons Semi-Retired, Real Estate Alana F. Rich Publisher Nature Coast Visitors Guide Magazine, Inc. Gadsden County Community Board John N. Bert Owner/Editor, Havana Herald, Twin City News, and Havana Publishing John Shaw Curry Retired Attorney Michael Dooner President Southern Forestry Consultants George Hackney Owner/President Hackney Nursery, Inc. Harold J. Henderson, PhD President Henderson Care Centers, Inc. E.W. Hinson, Jr. Owner/President Hinson Oil Company Alma Littles, MD Professor/Associate Dean for Academic Affairs FSU College of Medicine Terrance L. Massey President Massey Drugs William M. Maxwell President Maxwell & Suber Co. Fount H. May, Jr. President, May Nursery, Inc. W. Dale Summerford Tax Collector Gadsden County Bruce H. Thomas President Thomas Motor Cars Pat M. Woodward, MD Retired Gainesville Community Board Norma B. Adams Realtor, Prudential Preferred Property Alan A. Goldblatt, MD President/CEO Alan A. Goldblatt, MD, PA William F. McDavid Managing Shareholder/President McDavid & Company, CPAs Lee C. McGriff President McGriff Williams Insurance Frank P. Saier Vice President/Partner Scruggs & Carmichael Dempsey R. Sapp, Jr. President/CEO Florida Pest Control Gilchrist County Community Board Theodore M. Burt Attorney, Theodore M. Burt, PA Howell E. Lancaster, Jr. President, Lancaster Oil Gary E. Rexroat Physician’s Assistant Chiefland Medical Center Jimmie L. Troke Co-Owner/REALTOR®, Troke Realty, Inc. Grady County Community Board John P. Bell, Jr. President/Owner, Bell Irrigation, Inc. Jo Ann Butler Owner, Joe McNair, Inc. Phillip Drew President, Drew Oil Company, Inc. Michael L. Gainous Owner, Triple L. Timber Ken LeGette President, Graco Fertilizer, Inc. Sidney Pridgen Owner, Center Drugs Ray Prince Owner, Prince Farms Earl Stuckey Owner/President, Stuckey Construction, Inc. John B. Wight, Jr. Retired nursery owner Reverend Sylvester Williams Pastor, Beulah Missionary Baptist Church Gulf County Community Board Mark H. Costin Owner, St. Joe Ace Hardware B. Phillip Earley Owner/Operator, St. Joe Rental J. Patrick Farrell, Jr. Owner/REALTOR®, St. Joe Realty Shirley Jenkins Tax Collector, Gulf County Paula R. Pickett Director, Gulf County Tourist Development Council Tommy Pitts Port Director, Port St. Joe Port Authority Eugene Raffield Vice President, Raffield Fisheries, Inc. Clay Smallwood President, St. Joe Timberland Hernando/Pasco County Community Board David T. Alberson Retired, Capital City Bank George M. Allen, Jr. Board of Trustees, Hernando Health Care David R. Carter Attorney, Law Offices of David R. Carter, PA Carl A. Feddeler President, CA Feddeler, Inc., Real Estate Brokerage/Krysher-Delzer, Inc. Michael J. Kierzynski Certified Public Accountant Kierzynski & Associates, PA Deborah G. Kilgore Retired G. Frank Parker Certified Public Accountant Stone, Parker & Company, PA Officers, Directors and Community Boards Jefferson County Community Board Frank Blow Owner Fantasia Enterprises Teresa Diane Freeman President, Jefferson Builders Mart and Hardware, Inc. Brian T. Hayes Attorney, Brian T. Hayes, PA Felix R. Joyner Owner, Joyner’s Travel Center George W. Miller Owner, Miller Accounting Thomas B. Scott Owner, Scott Septic Tank Service Jerry P. Walton, Jr. Managing Partner Big Bend Timber Services, LLC Leon County Community Board Lawrence Carter, PhD Associate Dean, Cooperative Extension & Outreach, Florida A&M University J. Marshall Conrad Attorney, Ausley & McMullen, PA Kevin M. Davis REALTOR®, Real Estate Investor, Blue Chip Realty Erin Ennis Investor Fincher W. Smith Restaurant Owner, McFinch Management Co., K2 Urban Corporation Roger C. Smith Chairman, Prime Credit Corporation Glenda L. Thornton Partner, Foley & Lardner LLP Levy County Community Board Sharon C. Brannan Owner, Sharon C. Brannan, CPA, PA Donald M. McCoy, Jr., DO Physician, Nature Coast Medical Group Robert E. Mount, Jr., DDS Owner, Robert E. Mount, Jr., DDS, PA Madison County Community Board Henry N. Davis President, Davis Enterprises Frederick M. Norfleet, Sr. Pharmacist/Investor Pam Schoelles President, Schoelles & Associates, Inc. Lucas M. Waring Owner, Lucas Waring Enterprises, Inc. Odiorne Insurance Agency Gary L. Williams Owner, Williams Electric NW Alachua County Community Board Jerry M. Smith Chairman NW Alachua County Community Board Ronald F. Andrews President/Owner Andrews Paving, Inc. Gary D. Grunder Attorney Grunder & Petteway, PA Robert Alan Hitchcock President/CEO Hitchcock & Sons, Inc. Patricia A. Moser President Horizon Realty of Alachua, Inc. Marilyn Bishop Shaw Literacy Coach Oak View Middle School Putnam County Community Board Bruce A. Baldwin CEO, Putnam Community Medical Center U.D. Floyd Owner, U.D. Floyd Farms Mildred G. Horton Retired, St. John’s Water Management District Suwannee County Community Board Charles E. Hatch President, Hatch Brothers Farms, Inc. Charles D. Hurst President, C & D Farms, Inc. Brian L. McAdams, DVM Co-Owner/President McAdams Dairy Farm, Inc. Robbie Suggs Co-Owner, North Florida Bio-Med Taylor County Community Board James C. Bassett President, Bassett Dairy Products, Inc. Donald R. Everett, Sr. President, Ware Oil & Supply Company William R. Grant President, Perry Auto Supply, Inc. Carl Gross President, CG Contractors, Inc. Michael R. Lynn President, Michael Lynn, Inc. Grady C. Moore, Jr. President, Grady C. Moore Real Estate, Inc. Joe R. Roberts, III Chief Financial Officer, Roberts Lumber Co. & RDS Manufacturing Co. Michael S. Smith Attorney, Smith, Smith & Moore, PA Troup/Chambers County Community Board Carter Brown Real Estate Broker, Coldwell Banker Spinks Brown Durand Realtors Daniel A. Martinez Retired, Georgia Pacific Corporation Randall S. Mathews President/CEO Mathews’ Moving & Storage, Inc., et al. Jerry Cash Owner, Greene Super Drug Thomas Ray Edwards Owner, Valley Resale R. L. McLendon, Jr., PhD President, St. Johns River Community College E. David Risch, MD Orthopedic Surgeon E. David Risch, MD, PA Q. Irving Roberts President/Owner, Roberts Communications, Inc. Communications Products, Inc./ Roberts Land & Timber Company, Inc. Preston Breck Sloan President, Beck Auto Sales, Inc. A. Drew Ferguson, IV, DMD Owner, A. Drew Ferguson, IV, DMD, PC L. Foy Fisher, III Vice President/Human Resources, West Point Stevens Edmund C. Glover Chairman/CEO Batson Cook Company William L. Nix Attorney/Owner, Morrow & Nix C. Y. Wood, Jr. Editor/Publisher, Valley Times News Wakulla County Community Board Tony C. Benton President, Sperry & Associates Traci B. Cash CPA, Traci B. Cash CPA, LLC Sonya Hall Owner/Broker, Wakulla Realty, Inc. & Wakulla Property Management George Johnston Realtor/Real estate development consultant, Coastwise Realty, Inc. Frances Casey Lowe Attorney, Frances Casey Lowe, PA Washington County Community Board James Edwin Davis Owner, Davis Angus, Inc. Margaret Gilmore Secretary/Treasurer Blackburn Properties, Inc. Rebecca J. Harris Branch Manager, Associated Land Title Group, Inc. Robert W. Snare, MD Physician, Robert W. Snare, MD Lamar L. Townsend Owner, L. Townsend Mini Storage Emeritus Board Ashley P. Beggs Ned P. Brafford R. Spencer Burress C. Bob Butler Donald E. Grant Sumpter James Damon D. King William W. Mahaffey James T. McNeill Payne H. Midyette, Jr. G. Ulmer Miller John L. Miller M. William Miller Harold Mills John T. Mitchell, Sr. William L. Moor John B. Mowell Millard J. Noblin James M. Pafford John H. Parker, Jr., MD Wesley Ramsey Jack G. Rich Rodney L. Scarboro George A. Stephens Giles C. Toole, Jr. Mary M. Whatley Earlene U. Wheeler Warren Winkler Locations ALABAMA Chambers County Fob James 375 Fob James Dr. Valley, AL 36854 334.756.8550 Shawmut 3503 20th Ave. Valley, AL 36854 334.768.5410 FLORIDA Alachua County Alachua 15000 NW 140th St. Alachua, FL 32615 386.462.1041 High Springs 660 NE Santa Fe Blvd. High Springs, FL 32643 386.454.5500 Jonesville 14009 W. Newberry Rd. Newberry, FL 32669 352.331.2605 Main Street 4000 N. Main St. Gainesville, FL 32609 352.375.6991 Millhopper 4040 NW 16th Blvd. Gainesville, FL 32605 352.336.1041 Newberry 24202 W. Newberry Rd., Suite F Newberry, FL 32669 352.472.9950 Northwood 6360 NW 13th St. Gainesville, FL 32653 352.371.1041 Gainesville Residential Mortgage Lending 3760 NW 83rd St., Suite #2 Gainesville, FL 32606 352.395.1330 Commerical Real Estate Lending 4041 NW 37th Place, Suite A Gainesville, FL 32606 Bradford County Starke 350 N. Temple Ave. Starke, FL 32091 904.964.7050 Citrus County Citrus Springs 10241 N. Florida Ave. Citrus Springs, FL 34434 352.465.0035 Crystal River 101 SE US Hwy. 19 Crystal River, FL 34429 352.795.6100 Floral City 7697 S. Florida Ave. Floral City, FL 34436 352.344.1555 Inverness 1500 N US Hwy. 41 Inverness, FL 34450 352.726.3200 Clay County Keystone Heights 500 Green Way Keystone Heights, FL 32656 352.473.4952 Dixie County Cross City 294 NE 210th Ave. Cross City, FL 32628 352.498.5536 Gadsden County Chattahoochee 316 W. Washington St. Chattahoochee, FL 32324 850.663.4355 Havana 102 S. Main St. Havana, FL 32333 850.539.5805 Quincy 4 E. Washington St. Quincy, FL 32351 850.875.1000 Gilchrist County Bell 690 S. US 129 Bell, FL 32619 352.463.7660 Fanning Springs 7240 US Hwy. 19 Fanning Springs, FL 32693 352.463.6537 Trenton 109 W. Wade St. Trenton, FL 32693 352.463.2329 Gulf County Port St. Joe 504 Monument Ave. Port St. Joe, FL 32456 850.229.8282 Hernando County Mariner 7101 Mariner Blvd. Spring Hill, FL 34609 352.597.2707 Suncoast Spring Hill 14302 Spring Hill Dr. Spring Hill, FL 34609 352.797.6700 Jefferson County Monticello 800 S. Jefferson St. Monticello, FL 32344 850.671.0589 Leon County Apalachee Parkway 1801 Apalachee Pkwy. Tallahassee, FL 32301 850.671.0579 Apalachee Parkway East 3513 Apalachee Pkwy. Tallahassee, FL 32311 850.942.3100 Bradfordville Road 6691 Thomasville Rd. Tallahassee, FL 32312 850.906.5760 Capital Circle NW 1456 Capital Circle NW Tallahassee, FL 32303 850.575.1705 Centerville Road 2375 Centerville Rd. Tallahassee, FL 32308 850.671.0665 Human Resources 625 E. Tennessee St. Suite 100 Tallahassee, FL 32308 850.402.2520 Lake Jackson 3815 N. Monroe St. Tallahassee, FL 32303 850.671.0647 Mahan Drive 3255 Mahan Dr. Tallahassee, FL 32308 850.671.0384 Main 217 N. Monroe St. Tallahassee, FL 32301 850.671.0300 Metropolitan Blvd. 1301 Metropolitan Blvd. Tallahassee, FL 32308 850.671.0570 North Monroe 2111 N. Monroe Tallahassee, FL 30303 850.671.0655 South Monroe 3404 S. Monroe St. Tallahassee, FL 32301 850.671.0625 Tharpe Street 1108 W. Tharpe St. Tallahassee, FL 32303 850.671.0428 Thomasville Road 3528 Thomasville Rd. Tallahassee, FL 32308 850.671.0650 West Tennessee 1828 W. Tennessee St. Tallahassee, FL 32304 850.671.0430 Westwood 2020 W. Pensacola St. Tallahassee, FL 32304 850.671.0445 Levy County Bronson 140 E. Hathaway Bronson, FL 32621 352.486.2103 Cedar Key 390 2nd St. Cedar Key, FL 32626 352.543.5174 Chiefland 2012 N. Young Blvd. Chiefland, FL 32626 352.493.2571 Inglis 95 Hwy. 40 West Inglis, FL 34449 352.447.2231 Williston 144 E. Noble Ave. Willison, FL 32696 352.528.5389 Madison County Madison 343 W. Base St. Madison, FL 32340 850.973.4161 2111 N. Monroe Tallahassee, FL 30303 850.671.0419 615 Liberty St. Waynesboro, GA 30830 706.437.2006 410 W. 10th St. West Point, GA 31833 706.645.6262 Capital City Services Company 1860 Capital Circle NE Tallahassee, FL 32308 850.671.0300 Capital City Trust Company 4041 NW 37th Place, Suite A Gainesville, FL 32606 352.372.2384 455 Walnut St. Macon, GA 31201 478.749.6701 4 E. Washington St. Quincy, FL 32351 850.875.1000 14302 Spring Hill Dr. Spring Hill, FL 34609 352.797.6704 217 N. Monroe St. Tallahassee, FL 32301 850.671.0315 Locations Pasco County Port Richey 10290 Regency Park Port Richey, FL 34668 727.842.8467 Putnam County Palatka West 4120 Crill Ave. N. Palatka, FL 32177 386.329.1155 Palatka 200 Reid St. Palatka, FL 32177 386.329.1150 St. Johns County Hastings 207 N. Main St. Hastings, FL 32145 904.692.1221 Suwannee County Branford 814 Suwannee Ave. Branford, FL 32008 386.935.1112 Taylor County Perry 115 W. Green St. Perry, FL 32347 850.584.2057 Wakulla County Crawfordville 2592 Crawfordville Hwy. Crawfordville, FL 32327 850.926.6740 Wakulla Residential Mortgage Lending 91 Coastal Hwy. Panacea, FL 32346 850.638.0510 Washington County Chipley 1242 Jackson Ave. Chipley, FL 32428 850.638.0510 GEORGIA Bibb County Macon Bass Rd. 1601 Bass Rd. Macon, GA 31208 Macon Main 455 Walnut St. Macon, GA 31201 478.749.6701 Macon Mall 3535 Mercer University Dr. Macon, GA 31204 478.749.8021 Macon Northside 3710 Northside Dr. Macon, GA 31210 478.749.8071 Burke County Waynesboro 615 Liberty St. Waynesboro, GA 30830 706.437.2000 Waynesboro (Remote) 243 E. Sixth St. Waynesboro, GA 30830 706.437.2017 Grady County Cairo 420 N. Broad St. Cairo, GA 39828 229.377.3002 Cairo (Remote) 397 38th Blvd., NE Cairo, GA 39828 229.377.3003 Whigham 126 E. Broad Ave. Whigham, GA 39897 229.762.4151 Laurens County Dublin East 220 Central Dr. Dublin, GA 31027 478.272.3100 Dublin Main 600 Bellevue Ave. Dublin, GA 31021 478.272.3100 Dublin Westgate 1957 Veterans Blvd. Dublin, GA 31021 478.272.3100 Thomas County Thomasville Residential Mortgage Lending 2024-D E. Pinetree Blvd. Thomasville, GA 31757 229.227.0824 Troup County West Point 410 W 10th St. West Point, GA 31833 706.645.2944 West Point (Remote) 110 3rd Ave. West Point, GA 31833 706.645.6227 SUBSIDIARIES Capital City Banc Investments 420 N. Broad St. Cairo, GA 39828 229.378.8409 2012 N. Young Blvd. Chiefland, FL 32626 352.490.9004 294 NE 210th Ave. Cross City, FL 32628 352.498.5442 600 Bellevue Ave. Dublin, GA 1500 N. US Hwy. 41 Inverness, FL 34450 352.726.3673 455 Walnut St. Macon, GA 31201 478.749.6735 200 Reid St. Palatka, FL 32177 386.312.9904 4 E. Washington St. Quincy, FL 32351 850.875.1000 710 Mariner Blvd. Spring Hill, FL 34609 105 W. Jefferson St. Starke, FL 32091 904.964.7056 1801 Apalachee Pkwy. Tallahassee, FL 32301 850.671.0505 6691 Thomasville Rd. Tallahassee, FL 32312 850.906.5760 1301 Metropolitan Blvd. Tallahassee, FL 32308 850.671.0505 217 N. Monroe St. Tallahassee, FL 32301 850.671.0450 Noel A. Ellis Executive Vice President Credit Administration Mitchell R. Englert Executive Vice President Community Banking Karen H. Love Executive Vice President Residential Lending Randolph M. Pople President Capital City Trust Company Cynthia Pyburn Executive Vice President President, Capital City Services Company Dale A. Thompson Executive Vice President Business Banking Edwin N. West, Jr. Executive Vice President Community Banking Independent Public Accountants KPMG LLP Jacksonville, FL General Counsel Ausley & McMullen, PA Tallahassee, FL Investor Relations Contact J. Kimbrough Davis Executive Vice President and Chief Financial Officer or Robert H. Smith, Vice President Capital City Bank Group, Inc. 850.671.0300 P.O. Box 11248 Tallahassee, FL 32302 Annual Meeting April 24, 2007, 10:00 a.m. University Center Club, Tallahassee, FL Management Team William G. Smith, Jr. Chairman, President and CEO Capital City Bank Group, Inc. Thomas A. Barron President Capital City Bank J. Kimbrough Davis Executive Vice President and Chief Financial Officer Flecia Braswell Executive Vice President and Chief Brand Officer Randolph K. Briley Executive Vice President Retail Credit Edward G. Canup Executive Vice President Commercial Real Estate Lending William D. Colledge Executive Vice President Institutional Banking Bethany H. Corum Executive Vice President and Chief People Officer Shareholder Information How to Communicate with Capital City Bank Group, Inc. Telephone: 850.671.0300 Mailing address: P.O. Box 11248, Tallahassee, FL 32302 Internet address: www.ccbg.com Direct automated: Tallahassee area 850.671.0400—toll free 888.671.0400 Direct client service center: Tallahassee area 850.671.0400—toll free 888.671.0400 Trust and Investment Management services: 850.671.0315 Corporate Headquarters Capital City Bank Group, Inc. 217 North Monroe Street Tallahassee, FL 32301 850.671.0300 Transfer Agent American Stock Transfer & Trust Co. 59 Maiden Lane Plaza Level New York, NY 10038 800.937.5449 Trading Symbol: CCBG Exchange: NASDAQ m o c . s r o n n o c - n a r r u c . w w w / . c n i , s r o n n o c & n a r r u c y b d e n g i s e d 2 17 N O R T H M O N R O E S T R E E T TA L L A H A S S E E , F LO R I DA 3 2 3 0 1 8 5 0 . 671. 0 3 0 0 W W W.C C B G .C O M

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