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," "Market Risk and Interest Rate Sensitivity, " "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Critical Accounting Policies." The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2012 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

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

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

Reconciliation of operating efficiency ratio to efficiency ratio:

                                           Three Months Ended                  Six Months Ended
                                  June 30,      March 31,      June 30,     June 30,      June 30,
                                    2012          2012           2011         2012          2011
Efficiency ratio                      91.18 %        92.03 %       81.69 %      91.60 %       82.97 %
Effect of intangible
amortization expense                  (0.30 )%       (0.30 )%      (0.28 )%     (0.29 )%      (0.60 )%
Operating efficiency ratio            90.88 %        91.73 %       81.41 %      91.31 %       82.37 %

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

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our 2011 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q, and in our other filings made from time to time with the SEC after the date of this report.

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

BUSINESS OVERVIEW

Our Business

We are a bank holding company headquartered in Tallahassee, Florida, and we 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 70 full-service offices located in Florida, Georgia, and Alabama. The Bank offers commercial and retail banking services, as well as trust and asset management, retail 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, retail securities brokerage fees, mortgage banking fees, bank card fees, and data processing fees.

A detailed discussion regarding the economic conditions in our markets and our long-term strategic objectives is included as part of the MD&A section of our 2011 Form 10-K.

A summary overview of our financial performance is provided below.

Results of Operations

† Net loss of $1.7 million, or $0.10 per diluted share for the second quarter of 2012 compared to a net loss of $1.2 million, or $0.07 per diluted share in the first quarter of 2012, and net income of $2.1 million, or $0.12 per diluted share for the second quarter of 2011. For the first six months of 2012, we realized a net loss of $2.9 million, or $0.17 per diluted share, compared to net income of $3.5 million, or $0.20 per diluted share, for the comparable period of 2011. Performance in 2011 reflects the sale of our Visa stock which resulted in a net pre-tax gain of $2.6 million.

† Total credit costs (loan loss provision plus other real estate owned ("OREO") costs) were $9.2 million, $8.3 million, and $6.6 million for the quarters ended June 30, 2012, March 31, 2012, and June 30, 2011, respectively. Total credit costs for the first half of 2012 were $17.5 million compared to $14.4 million for the same period of 2011.

† Tax equivalent net interest income for the second quarter of 2012 was $21.2 million compared to $21.8 million for the first quarter of 2012 and $23.7 million for the second quarter of 2011. For the first half of 2012, tax equivalent net interest income totaled $43.1 million compared to $47.0 million in 2011. The reduction from all prior periods was due to a reduction in loan income primarily attributable to declining loan balances and unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans.

† Noninterest income for the second quarter of 2012 totaled $13.9 million, an increase of $0.3 million, or 2.4%, over the first quarter of 2012 and a decrease of $0.5 million, or 3.8%, from the second quarter of 2011. The increase/decrease compared to both prior periods was due to higher/lower gains from the sale of OREO properties. For the first six months of 2012, noninterest income totaled $27.5 million, a decrease of $3.3 million, or 10.7%, from the same period of 2011 attributable to a $3.2 million gain from the sale of our Visa stock realized in 2011.

† Noninterest expense for the second quarter of 2012 totaled $32.3 million, a decrease of $0.3 million, or 0.9%, from the first quarter of 2012 and an increase of $1.1 million, or 3.6%, over the second quarter of 2011. The decrease from the first quarter of 2012 was primarily attributable to lower compensation expense. Higher OREO costs, professional fees, and miscellaneous expense drove the increase over the second quarter of 2011. For the first six months of 2012, noninterest expense totaled $64.9 million, an increase of $0.4 million, or 0.6%, over the same period of 2011 primarily attributable to higher compensation expense of $0.4 million.

† Average earning assets were $2.263 billion for the second quarter of 2012, an increase of $116.4 million, or 5.4%, over the fourth quarter of 2011 reflective of a higher level of overnight funds driven by higher deposit balances, primarily public funds.

† Nonperforming assets totaled $132.8 million at June 30, 2012, a decrease of $4.8 million from December 31, 2011 driven by a reduction in our OREO balance, reflecting continued progress in disposing of properties. Nonperforming assets represented 5.02% of total assets at June 30, 2012 compared to 5.21% at December 31, 2011.

† As of June 30, 2012, we are well-capitalized with a risk based capital ratio of 15.54% and a tangible common equity ratio of 6.40% compared to 15.32% and 6.51%, respectively, at December 31, 2011.

Net Income

For the second quarter of 2012, we realized a net loss of $1.7 million, or $0.10 per diluted share, compared to a net loss of $1.2 million, or $0.07 per diluted share for the first quarter of 2012, and net income of $2.1 million, or $0.12 per diluted share, for the second quarter of 2011. For the first six months of 2012, we realized a net loss of $2.9 million, or $0.17 per diluted share, compared to net income of $3.5 million, or $0.20 per diluted share for the same period in 2011.

Compared to the first quarter of 2012, performance reflects lower operating revenues (net interest income plus noninterest income) of $0.3 million and a higher loan loss provision of $0.9 million, partially offset by lower noninterest expense of $0.3 million and income taxes of $0.4 million.

Compared to the second quarter of 2011, the reduction in earnings was due to lower operating revenues of $2.9 million, a higher loan loss provision of $2.2 million, and an increase in noninterest expense of $1.1 million, partially offset by lower income taxes of $2.4 million.

The decrease in earnings for the first half of 2012 is attributable to lower operating revenues of $7.0 million, a higher loan loss provision of $2.9 million, and an increase in noninterest expense of $0.3 million, partially offset by lower income taxes of $3.8 million. Earnings for the first half of 2011 reflect the sale of our Visa Class B shares of stock which resulted in a net pre-tax gain of $2.6 million ($3.2 million pre-tax gain included in noninterest income and recognition of a $0.6 million swap liability included in noninterest expense).

A condensed earnings summary of each major component of our financial performance is provided below:

                                         Three Months Ended                   Six Months Ended
(Dollars in Thousands,          June 30,      March 31,      June 30,      June 30,      June 30,
except per share data)            2012          2012           2011          2012          2011
Interest Income                $   22,437    $    23,130    $   25,467    $   45,567    $   50,656
Taxable equivalent
Adjustments                           154            172           265           326           536
Total Interest Income (FTE)        22,591         23,302        25,732        45,893        51,192
Interest Expense                    1,372          1,469         2,028         2,841         4,231
Net Interest Income (FTE)          21,219         21,833        23,704        43,052        46,961
Provision for Loan Losses           5,743          4,793         3,545        10,536         7,678
Taxable Equivalent
Adjustments                           154            172           265           326           536
Net Interest Income After
provision for Loan Losses          15,322         16,868        19,894        32,190        38,747
Noninterest Income                 13,906         13,586        14,448        27,492        30,782
Noninterest Expense                32,293         32,597        31,167        64,890        64,498
(Loss) Income Before Income
Taxes                              (3,065 )       (2,143 )       3,175        (5,208 )       5,031
Income Tax (Benefit)
Expense                            (1,339 )         (981 )       1,030        (2,320 )       1,576
Net (Loss) Income              $   (1,726 )  $    (1,162 )  $    2,145    $   (2,888 )  $    3,455

Basic Net (Loss) Income Per
Share                          $    (0.10 )  $     (0.07 )  $     0.12    $    (0.17 )  $     0.20
Diluted Net (Loss) Income
Per Share                      $    (0.10 )  $     (0.07 )  $     0.12    $    (0.17 )  $     0.20

Return on Average Equity            (2.75 )%       (1.84 )%       3.28 %       (2.29 )%       2.66 %
Return on Average Assets            (0.26 )%       (0.18 )%       0.33 %       (0.22 )%       0.26 %

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. This information is provided 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. We provide an analysis of our net interest income including average yields and rates in Table I on page 42.

Tax equivalent net interest income for the second quarter of 2012 was $21.2 million compared to $21.8 million for the first quarter of 2012 and $23.7 million for the second quarter of 2011. For the first six months of 2012, tax equivalent net interest income totaled $43.1 million compared to $47.0 million for the same period of 2011.

The declines of $0.6 million and $2.5 million in tax equivalent net interest income from the first quarter of 2012 and second quarter of 2011, respectively, were due to a reduction in loan income primarily attributable to declining loan balances and continued unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans. The lower interest expense is primarily attributable to certificates of deposit and reflects both lower balances and favorable repricing.

Tax equivalent interest income for the second quarter of 2012 was $22.6 million compared to $23.3 million for the first quarter of 2012 and $25.7 million for the second quarter of 2011. The decrease when compared to both periods is specifically attributable to both the shift in earning asset mix and lower yields. The declining loan portfolio has resulted in the higher yielding earning assets being replaced with lower yielding federal funds or investment securities. Additionally, low yields on new loan and investment production and loan portfolio repricing continue to unfavorably affect net interest income.

Interest expense for the second quarter of 2012 was $1.4 million compared to $1.5 million for the first quarter of 2012 and $2.0 million for the second quarter in 2011. The lower cost of funds when compared to both periods was a result of continued rate reductions on all deposit products except savings accounts. The rate reductions on deposits reflect our response to a historically low interest rate environment and desire to continue our focus on core banking relationships.

The decline in the loan portfolio, coupled with the low rate environment continues to put pressure on our net interest income. The loan portfolio yield has been declining because the average rate on new loans is lower than the loans being paid off and the existing variable rate loans reprice lower. Lowering our cost of funds, to the extent we can, and continuing to shift the mix of our deposits will help to partially mitigate the unfavorable impact of weak loan demand and repricing, although the impact is expected to be minimal.

The net interest margin for the second quarter of 2012 was 3.77%, a decrease of 10 basis points from the first quarter of 2012 and a decline of 44 basis points from the second quarter of 2011. Year-to-date net interest margin of 3.82% declined 35 basis points from the comparable period in 2011. The decrease in the margin for all comparable periods is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

As experienced since at least 2010, historically low interest rates, foregone interest, lower loan fees, unfavorable asset repricing without the flexibility to significantly adjust deposit rates, and core deposit growth (which has strengthened our liquidity position, but contributed to an unfavorable shift in our earning asset mix), have all placed pressure on our net interest margin. Our current strategy, as well as our historic strategy, is to not accept greater interest rate risk by reaching further out the curve for yield, particularly given the fact that short term rates are at historical lows. We continue to maintain short duration portfolios on both sides of the balance sheet and believe we are well positioned to respond to changing market conditions. As this strategy in the current environment has unfavorably impacted our net interest margin, over time this strategy has consistently resulted in our net interest margins significantly exceeding those in our peer group comparisons. Given the unfavorable asset repricing and low rate environment, we anticipate continued pressure on the margin for the remainder of 2012.

The provision for loan losses for the second quarter of 2012 was $5.7 million compared to $4.8 million in the first quarter of 2012 and $3.5 million for the second quarter of 2011. The increase over both periods was driven by higher loan loss experience and the associated impact on our general reserve needs. For the first six months of 2012, the loan loss provision totaled $10.5 million compared to $7.7 million for the same period in 2011 with the increase primarily attributable to an increase in impaired loans. Net charge-offs for the second quarter of 2012 totaled $7.0 million, or 1.80% (annualized), of average loans compared to $4.6 million, or 1.16%, for the first quarter of 2012 and $6.3 million, or 1.49%, for the second quarter of 2011. For the first half of 2012, net charge-offs totaled $11.6 million, or 1.48% (annualized), of average loans compared to $12.0 million, or 1.41%, for the same period of 2011. At quarter-end, the allowance for loan losses of $29.9 million was 1.93% of outstanding loans (net of overdrafts) and provided coverage of 40% of nonperforming loans compared to 1.98% and 40%, respectively, at March 31, 2012, and 1.91% and 41%, respectively, at December 31, 2011.

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

                                            Three Months Ended                  Six Months Ended
(Dollars in Thousands, except      June 30,      March 31,      June 30,     June 30,     June 30,
per share data)                      2012          2012           2011         2012         2011

CHARGE-OFFS
Commercial, Financial and
Agricultural                      $       57    $       268    $      301    $     325    $   1,022
Real Estate - Construction               275              -            14          275           14
Real Estate - Commercial
Mortgage                               3,519          1,532         2,808        5,051        3,238
Real Estate - Residential              3,894          1,967         2,371        5,861        5,828
Real Estate - Home Equity                425            892           944        1,317        1,932
Consumer                                 550            732           606        1,282        1,226
Total Charge-offs                      8,720          5,391         7,044       14,111       13,260

RECOVERIES
Commercial, Financial and
Agricultural                              83             67            43          150          106
Real Estate - Construction                27              -             5           27           14
Real Estate - Commercial
Mortgage                                  42            138           115          180          127
Real Estate - Residential                969            163           113        1,132          173
Real Estate - Home Equity                116             18            57          134           93
Consumer                                 452            394           373          846          713
Total Recoveries                       1,689            780           706        2,469        1,226

Net Charge-offs                   $    7,031    $     4,611    $    6,338    $  11,642    $  12,034

Net Charge-offs (Annualized)            1.80 %         1.16 %        1.49 %       1.48 %       1.41 %
as a percent of Average
Loans Outstanding, Net of
Unearned Interest

Noninterest income for the second quarter of 2012 totaled $13.9 million, an increase of $0.3 million, or 2.4%, over the first quarter of 2012 and a decrease of $0.5 million, or 3.8%, from the second quarter of 2011. The increase over the first quarter of 2012 was driven primarily by higher retail brokerage fees of $0.1 million and an increase in other income of $0.2 million, primarily gains from the sale of OREO properties. Compared to the second quarter of 2011, the decrease primarily reflects a $0.9 million reduction in other income attributable to a lower level of gains realized from the sale of OREO properties partially offset by higher mortgage banking fees of $0.3 million and bank card fees of $0.2 million.

For the first six months of 2012, noninterest income totaled $27.5 million, a decrease of $3.3 million, or 10.7%, from the same period of 2011 attributable to the Visa gain realized in the first quarter of 2011. Higher deposit fees, mortgage banking fees, and bank card fees partially offset by lower data processing fees and a reduction in other income, primarily lower gains from the sale of OREO properties, also contributed to the variance.

Noninterest income represented 39.88% of operating revenues (net interest income plus noninterest income) in the second quarter of 2012 compared to 38.64% in the first quarter of 2012 and 38.13% in the second quarter of 2011. For the first six months of 2012, noninterest income represented 39.3% of operating revenues compared to 39.9% for the same period of 2011. The decrease for the first six months of 2012 compared to 2011 is attributable to the gain from the sale of our Visa stock in the 2011. In addition to the Visa gain, this metric has also been impacted by the lower level of net interest income.

The table below reflects the major components of noninterest income.

                                                Three Months Ended                 Six Months Ended
                                       June 30,      March 31,     June 30,     June 30,     June 30,
(Dollars in Thousands)                   2012          2012          2011         2012         2011

Noninterest Income:
Service Charges on Deposit Accounts    $   6,313    $     6,309    $   6,309    $  12,622    $  12,292
Data Processing Fees                         680            675          764        1,355        1,738
Asset Management Fees                      1,020          1,015        1,080        2,035        2,160
Retail Brokerage Fees                        884            758          939        1,642        1,668
Mortgage Banking Fees                        864            848          568        1,712        1,185
Interchange Fees (1)                       1,580          1,526        1,443        3,106        2,803
ATM/Debit Card Fees (1)                    1,204          1,245        1,115        2,449        2,251
Gain on Visa Stock                             -              -            -            -        3,172
Other                                      1,361          1,210        2,230        2,571        3,513

Total Noninterest Income               $  13,906    $    13,586    $  14,448    $  27,492    $  30,782

(1) Together referred to as "Bank Card Fees"

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

Service Charges on Deposit Accounts. Deposit service charge fees for the second quarter of 2012 totaled $6.3 million, comparable to both the first quarter of 2012 and second quarter of 2011. For the first six months of 2012, deposit service charge fees totaled $12.6 million, an increase of $330,000, or 2.7%, over the comparable period in 2011 driven by a lower level of overdraft charge-offs.

Data Processing Fees. Fees from data processing services for the second quarter of 2012 totaled $680,000, comparable to the first quarter of 2012. Fees decreased by $84,000, or 11.0%, compared to the second quarter of 2011, attributable to lower processing volume for our state government contract. For the first six months of 2012, fees totaled $1.4 million, a decrease of $383,000, or 22.0%, primarily due to a reduction in the number of banks that we provide processing services to as two of our user banks were acquired and discontinued service in mid 2011.

Retail Brokerage Fees. Fees from the sale of retail investment and insurance products totaled $884,000 for the second quarter of 2012, an increase of $126,000, or 16.6%, over the first quarter of 2012 and a decrease of $55,000, or 5.9%, from the second quarter of 2011. For the first six months of 2012, fees totaled $1.6 million, a $26,000 decrease from the comparable period of 2011. The change for each period reflects fluctuation in trading activity by our clients.

Mortgage Banking Fees. Mortgage banking fees totaled $864,000 for the second quarter of 2012, an increase of $15,000, or 1.8%, over the first quarter of 2012 and $296,000, or 52.1%, over the second quarter of 2011. For the first six months of 2012, fees totaled $1.7 million, an increase of $528,000, or 44.5%, over the same period of 2011. The increase for all respective periods is attributable to increased home purchase activity in our markets and an increase in refinance activity due to the lower rate environment. The mix of refinance and home purchase new loan production for the first half of 2012 was 38% and . . .