Capital City Bank Group Inc: Form 10-Q for the period ended Sep 30, 2023

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 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 2023 compares with prior years.

Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively, is referred to as “CCBG,” “Company,” “we,”

“us,” or “our.”

CAUTION CONCERNING FORWARD -LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains “forward-looking statements” within the meaning of the

Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our

beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are

subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,”

“believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “vision,” “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 of this quarterly report on Form 10-Q as well

as the Introductory Note and

See “Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of

Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are

necessary to assess changes in information about market risk that have occurred since December 31, 2022.

Evaluation of Disclosure Controls and Procedures

At September 30, 2023, the end of the period covered by this Form 10-Q, our management, including our Chief Executive Officer and

Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the

Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded

that, as of the end of the period covered by this report these disclosure controls and procedures were ineffective as of September 30,

2023 due to the identification of the material weakness discussed below.

Previously Reported Material Weakness in Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is

defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. As reported in our 2022 Form 10-K/A, we did not maintain

effective internal control as of December 31, 2022 as a result of a material weakness in our internal control over financial reporting for

the review of certain inter-company mortgage sales and servicing. A material weakness is a deficiency, or a combination of

deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the

Company’s annual interim financial statements will not be prevented or detected on a timely basis. Refer to our 2022 Form 10-K/A for

a description of our material weakness.

Ongoing Remediation Efforts to Address Material Weakness

Our material weakness was not remediated as of September 30, 2023. Since identifying the material weakness described above,

management, with oversight from the Audit Committee and input from the Board of Directors, has devoted substantial resources to the

ongoing implementation of remediation efforts. These remediation efforts, summarized below, which either have already been

implemented or are continuing to be implemented, are intended to address both the identified material weakness and to enhance the

Company’s overall internal control over financial reporting and disclosure controls and procedures.

Certain internal control and procedural enhancements and remedial actions are in the process of completion, including:

Enhance the precision level for the review of existing accounts subject to elimination and confirmation of proper elimination

in consolidation;

Enhance the procedures for identifying new inter-company accounts and activities subject to elimination in consolidation;

Increase the granularity of general ledger mapping for inter-company accounts subject to elimination in consolidation; and

Enhance financial close checklist and pre-close meeting agenda to ensure proper and timely identification of inter-company

activities subject to elimination.

Management believes the foregoing effects will effectively remediate the material weakness described above. As the Company

continues to evaluate and improve its internal control over financial reporting and disclosure controls and procedures, management

may determine to take additional measures to improve controls and determine to modify the remediation plan described above. The

Company is working to remediate the material weakness as efficiently and effectively as possible. Procedures to implement the

remediation plan have required significant amounts of time, allocation of internal resources and external costs, and remaining

remediation efforts will continue to place significant demands on financial and operational resources until this plan is completed.

The material weakness described above cannot be considered remediated until the applicable controls have operated for a sufficient

period of time and management has concluded, through testing, that these controls are designed and operating effectively.

Accordingly, management will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in

the activities affected by the material weakness described above.

Changes in Internal Control

Except as identified above with respect to remediation of the material weakness, during the quarter ended on September 30, 2023,

there have been no significant changes in our internal control over financial reporting during our most recently completed fiscal

quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

of our 2022 Form 10-K/A, as updated in our subsequent quarterly reports filed on

Form 10-Q/A, 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

We are a financial holding company headquartered in Tallahassee, Florida, and we are the parent of our wholly owned subsidiary,

Capital City Bank (the “Bank” or “CCB”). We offer a broad array of products and services through a total of 62 full-service offices

located in Florida, Georgia, and Alabama. We provide a full range of banking services, including traditional deposit and credit

services, mortgage banking, asset management, trust, merchant services, bankcards, securities brokerage services and financial

advisory services, including life insurance products, risk management and asset protection services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference

between the interest and fees received on interest 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 credit losses, operating

expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest

income such as mortgage banking revenues, wealth management fees, deposit fees, and bank card fees.

We have included a detailed discussion of the economic conditions in our markets and our long-term strategic objectives as part of the

MD&A section of our 2022 Form 10-K/A.

NON-GAAP FINANCIAL MEASURES (UNAUDITED)

We present a tangible common equity ratio and a tangible book value per diluted share that, in each case, removes the effect of

goodwill and other intangibles that resulted from merger and acquisition activity. We believe these measures are useful to investors

because it allows investors to more easily compare our capital adequacy to other companies in the industry. The generally accepted

accounting principles (“GAAP”) to non-GAAP reconciliation for each quarter presented is provided below.

2023

2022

(Dollars in Thousands, except per share data)

Third

Second

First

Fourth

Third

Shareowners' Equity (GAAP)

419,706

412,422

403,260

387,281

368,485

Less: Goodwill and Other Intangibles (GAAP)

92,973

93,013

93,053

93,093

93,133

Tangible Shareowners' Equity (non-GAAP)

A

326,733

319,409

310,207

294,188

275,352

Total Assets (GAAP)

4,138,287

4,391,206

4,401,762

4,519,223

4,327,991

Less: Goodwill and Other Intangibles (GAAP)

92,973

93,013

93,053

93,093

93,133

Tangible Assets (non-GAAP)

B

4,045,314

4,298,193

4,308,709

4,426,130

4,234,858

Tangible Common Equity Ratio (non-GAAP)

A/B

8.08%

7.43%

7.20%

6.65%

6.50%

Actual Diluted Shares Outstanding (GAAP)

C

16,997,886

17,025,023

17,049,913

17,039,401

16,998,177

Tangible Book Value per Diluted Share (non-GAAP)

A/C

19.22

18.76

18.19

17.27

16.20

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

2023

2022

(Dollars in Thousands, Except Per Share Data)

Third

Second

First

Fourth

Third

Summary of Operations

Interest Income

45,753

45,205

43,926

41,218

35,442

Interest Expense

6,473

5,068

3,526

3,122

2,037

Net Interest Income

39,280

40,137

40,400

38,096

33,405

Provision for Credit Losses

2,393

2,197

3,099

3,616

2,154

Net Interest Income After

Provision for Credit Losses

36,887

37,940

37,301

34,480

31,251

Noninterest Income

16,728

19,967

17,758

15,296

18,509

Noninterest Expense

39,105

40,285

37,675

39,262

37,699

Income Before Income Taxes

14,510

17,622

17,384

10,514

12,061

Income Tax Expense

3,004

3,417

3,710

1,900

2,493

(Income) Loss Attributable to NCI

1,149

(31)

35

995

37

Net Income Attributable to CCBG

12,655

14,174

13,709

9,609

9,605

Net Interest Income (FTE)

(1)

39,367

40,224

40,500

38,185

33,488

Per Common Share

Net Income Basic

0.75

0.83

0.81

0.56

0.57

Net Income Diluted

0.74

0.83

0.80

0.56

0.57

Cash Dividends Declared

0.20

0.18

0.18

0.17

0.17

Diluted Book Value

24.69

24.21

23.65

22.73

21.68

Diluted Tangible Book Value

(2)

19.22

18.76

18.19

17.27

16.20

Market Price:

High

33.44

34.16

36.86

36.23

33.93

Low

28.64

28.03

28.18

31.14

27.41

Close

29.83

30.64

29.31

32.50

31.11

Selected Average Balances

Investment Securities

1,005,003

1,043,858

1,064,212

1,081,092

1,120,728

Loans Held for Investment

2,672,653

2,657,693

2,582,395

2,439,379

2,264,075

Earning Assets

3,876,980

3,974,803

4,062,688

4,032,733

4,009,951

Total Assets

4,218,855

4,320,601

4,411,865

4,381,825

4,357,678

Deposits

3,596,816

3,719,564

3,817,314

3,803,042

3,769,864

Shareowners’ Equity

427,580

418,757

404,067

380,570

379,305

Common Equivalent Average Shares:

Basic

16,985

17,002

17,016

16,963

16,960

Diluted

17,025

17,035

17,045

17,016

16,996

Performance Ratios:

Return on Average Assets (annualized)

1.19

1.32

1.26

0.87

0.87

Return on Average Equity (annualized)

11.74

13.58

13.76

10.02

10.05

Net Interest Margin (FTE)

4.03

4.06

4.04

3.76

3.32

Noninterest Income as % of Operating Revenue

29.87

33.22

30.53

28.65

35.65

Efficiency Ratio

69.88

66.93

64.67

73.41

72.51

Asset Quality:

Allowance for Credit Losses (“ACL”)

29,083

28,243

26,808

25,068

22,747

Nonperforming Assets (“NPAs”)

4,695

6,624

4,602

2,728

2,422

ACL to Loans HFI

1.08

1.05

1.01

0.98

0.96

NPAs to Total Assets

0.11

0.15

0.10

0.06

0.06

NPAs to Loans HFI plus OREO

0.17

0.25

0.17

0.11

0.10

ACL to Non-Performing Loans

619.58

426.44

584.18

1,091.33

944.36

Net Charge-Offs to Average Loans HFI

0.17

0.07

0.24

0.21

0.12

Capital Ratios:

Tier 1 Capital

15.11

14.56

14.23

14.27

14.59

Total Capital

16.30

15.68

15.29

15.30

15.58

Common Equity Tier 1

13.26

12.73

12.40

12.38

12.62

Leverage

9.98

9.54

9.09

8.91

8.80

Tangible Common Equity

(2)

8.08

7.43

7.20

6.65

6.50

(1)

Fully Tax Equivalent

(2)

Non-GAAP financial measure. See non-GAAP reconciliation on page 33.

FINANCIAL OVERVIEW

Results of Operations

Performance Summary.

Net income attributable to common shareowners totaled $12.7 million, or $0.74 per diluted share, for the

third quarter of 2023 compared to $14.2 million, or $0.83 per diluted share, for the second quarter of 2023, and $9.6 million, or $0.57

per diluted share, for the third quarter of 2022. For the first nine months of 2023, net income attributable to common shareowners

totaled $40.5 million, or $2.38 per diluted share, compared to net income of $23.8 million, or $1.40 per diluted share, for the same

period of 2022.

Net Interest Income.

Tax-equivalent net interest income for the third quarter of 2023 totaled $39.4 million, compared to $40.2 million

for the second quarter of 2023, and $33.5 million for the third quarter of 2022. Compared to the second quarter of 2023, the decrease

reflected higher deposit interest expense and a lower level of interest income from overnight funds, partially offset by higher loan

interest due to loan growth and higher interest rates. For the first nine months of 2023, tax-equivalent net interest income totaled

$120.1 million compared to $87.2 million for the same period of 2022. The increases over both prior year periods were driven by

strong loan growth and higher interest rates across a majority of our earning assets.

Provision and Allowance for Credit Losses.

We recorded a provision for credit losses of $2.4 million for the third quarter of 2023

compared to $2.2 million for the second quarter of 2023 and $2.2 million for the third quarter of 2022. The increase in the provision

compared to the second quarter of 2023 was primarily attributable to loan growth and an increase in net loan charge-offs. For the first

nine months of 2023, we recorded a provision for credit losses of $7.7 million compared to $3.9 million for the same period of 2022.

The higher level of provision in 2023 was primarily driven by loan growth and, also reflected the favorable impact in 2022 of the

release of reserves held for pandemic related losses that did not materialize to the extent projected. At September 30, 2023, the

allowance represented 1.08% of loans held for investment (“HFI”) compared to 1.05% at June 30, 2023, and 0.98% at December 31,

Noninterest Income.

Noninterest income for the third quarter of 2023 totaled $16.7 million compared to $20.0 million for the second

quarter of 2023 and $18.5 million for the third quarter of 2022. The $3.3 million decrease from the second quarter of 2023 reflected a

decrease in other income of $1.6 million (we realized a $1.4 million gain on sale of mortgage servicing rights in the second quarter of

2023), mortgage banking revenues of $1.5 million, wealth management fees of $0.2 million and bank card fees of $0.1 million,

partially offset by an increase in deposit fees of $0.1 million. For the first nine months of 2023, noninterest income totaled $54.5

million compared to $59.9 million for the same period of 2022 with the $5.4 million decrease primarily attributable to lower mortgage

banking revenues of $3.7 million, wealth management fees of $2.4 million, deposit fees of $0.6 million, and bank card fees of $0.4

million, partially offset by a $1.7 million increase in other income.

Noninterest Expense.

Noninterest expense for the third quarter of 2023 totaled $39.1 million compared to $40.3 million for the second

quarter of 2023 and $37.7 million for the third quarter of 2022. Compared to the second quarter of 2023, the $1.2 million decrease

was due to a $0.9 million decrease in other expense which reflected a $0.8 million non-recurring expense in the second quarter of

2023 related to a consulting engagement. For the first nine months of 2023, noninterest expense totaled $117.1 million compared to

$112.4 million for the same period of 2022 with the $4.7 million increase attributable to increases in occupancy expense of $2.2

million, compensation expense of $1.5 million, and other expense of $1.0 million. The increase in occupancy expense reflected the

addition of banking offices in 2022, higher insurance premiums, and investment in network and security upgrades. The increase in

compensation expense was primarily driven by higher salary expense due to the addition of staffing in new banking offices added in

2022. The increase in other expense was driven by higher pension plan expense (non-service related component), the aforementioned

non-recurring consulting expense, and increases in FDIC insurance fees, partially offset by lower OREO expense of $1.8 million

related to a gain from the sale of a banking office.

Financial Condition

Earning Assets.

Average earning assets totaled $3.877 billion for the third quarter of 2023, a decrease of $97.8 million, or 2.5%, from

the second quarter of 2023, and a decrease of $155.8 million, or 3.9%, from the fourth quarter of 2022. The decrease from both prior

periods was attributable to lower deposit balances. The mix of earning assets continues to improve as overnight funds are being

utilized to fund loan growth.

Loans.

Average loans “HFI” increased $15.0 million, or 0.6%, over the second quarter of 2023 and $233.3 million, or 9.6%, over the

fourth quarter of 2022. Period end loans increased $21.7 million, or 0.81%, over the second quarter of 2023 and $157.5 million, or

6.2%, over the fourth quarter of 2022. Compared to both prior periods, the loan growth was primarily in the residential real estate

category and was partially offset by lower indirect auto and construction loan balances.

Credit Quality.

Credit quality metrics remained strong for the quarter. Nonperforming assets (nonaccrual loans and other real estate)

totaled $4.7 million at September 30, 2023 compared to $6.6 million at June 30, 2023 and $2.7 million at December 31, 2022. At

September 30, 2023, nonperforming assets as a percent of total assets equaled 0.11%, compared to 0.15% at June 30, 2023 and 0.06%

at December 31, 2022. Nonaccrual loans totaled $4.7 million at September 30, 2023, a $1.9 million decrease from June 30, 2023 and

a $2.4 million increase over December 31, 2022. Further, classified loans totaled $21.8 million at September 30, 2023, a $6.8 million

increase over June 30, 2023 and a $2.5 million increase over December 31, 2022.

Deposits.

Average total deposits were $3.597 billion for the third quarter of 2023, a decrease of $122.7 million, or 3.3%, from the

second quarter of 2023 and a decrease of $206.2 million, or 5.4%, from the fourth quarter of 2022. Compared to both prior periods,

the decreases were primarily attributable to lower noninterest bearing, savings, and NOW balances, primarily offset by higher money

market balances. Compared to the second quarter of 2023, the decrease in NOW account balances was primarily due to the seasonal

reduction in public fund balances held by our institutional and municipal clients.

Capital.

At September 30, 2023, we were well-capitalized with a total risk-based capital ratio of 16.30% and a tangible common

equity ratio (a non-GAAP financial measure) of 8.08% compared to 15.68% and 7.43%, respectively, at June 30, 2023 and 15.30%

and 6.65%, respectively, at December 31, 2022. At September 30, 2023, all of our regulatory capital ratios exceeded the threshold to

be well-capitalized under the Basel III capital standards.

RESULTS OF OPERATIONS

The following table provides a condensed summary of our results of operations - a discussion of the various components are discussed

in further detail below.

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

(Dollars in Thousands, except per share data)

2023

2023

2022

2023

2022

Interest Income

45,753

45,205

35,442

134,886

90,692

Taxable Equivalent Adjustments

87

87

83

274

237

Total Interest Income (FTE)

45,840

45,292

35,525

135,160

90,929

Interest Expense

6,473

5,068

2,037

15,067

3,766

Net Interest Income (FTE)

39,367

40,224

33,488

120,093

87,163

Provision for Credit Losses

2,393

2,197

2,154

7,689

3,878

Taxable Equivalent Adjustments

87

87

83

274

237

Net Interest Income After Provision for Credit Losses

36,887

37,940

31,251

112,130

83,048

Noninterest Income

16,728

19,967

18,509

54,452

59,885

Noninterest Expense

39,105

40,285

37,699

117,066

112,372

Income Before Income Taxes

14,510

17,622

12,061

49,516

30,561

Income Tax Expense

3,004

3,417

2,493

10,130

5,898

Pre-Tax (Income) Loss Attributable to Noncontrolling

Interest

1,149

(31)

37

1,153

(860)

Net Income Attributable to Common Shareowners

12,655

14,174

9,605

40,539

23,803

Basic Net Income Per Share

0.75

0.83

0.57

2.38

1.40

Diluted Net Income Per Share

0.74

0.83

0.57

2.38

1.40

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. This information is provided on a “taxable equivalent” basis to reflect

the tax-exempt status of income earned on certain loans and 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 45.

Tax-equivalent net interest income for the third quarter of 2023 totaled $39.4 million, compared to $40.2 million for the second

quarter of 2023, and $33.5 million for the third quarter of 2022. Compared to the second quarter of 2023, the decrease reflected

higher deposit interest expense and a lower level of interest income from overnight funds, partially offset by higher loan interest due to

loan growth and higher interest rates. For the first nine months of 2023, tax-equivalent net interest income totaled $120.1 million

compared to $87.2 million for the same period of 2022. The increases over both prior year periods were driven by strong loan growth

and higher interest rates across a majority of our earning assets.

Our net interest margin for the third quarter of 2023 was 4.03%, a decrease of three basis points from the second quarter of 2023 and

an increase of 71 basis points over the third quarter of 2022. For the month of September 2023, our net interest margin was 4.10%.

For the first nine months of 2023, our net interest margin was 4.04%, an increase of 111 basis points over the same period of 2022.

The increase compared to all prior periods reflected a combination of higher interest rates and loan growth, partially offset by a higher

cost of deposits. For the third quarter of 2023, our cost of funds was 66 basis points, an increase of 15 basis points over the second

quarter of 2023 and an increase of 46 basis points over the third quarter of 2022. Our total cost of deposits (including noninterest

bearing accounts) was 58 basis points, 43 basis points, and 11 basis points, respectively, for the same periods.

Provision for Credit Losses

We recorded a provision for credit losses of $2.4 million for the third quarter of 2023 compared to $2.2 million for the second quarter

of 2023 and $2.2 million for the third quarter of 2022. The increase in the provision compared to the second quarter of 2023 was

primarily attributable to loan growth and an increase in net loan charge -offs. For the first nine months of 2023, we recorded a

provision for credit losses of $7.7 million compared to $3.9 million for the same period of 2022. The higher level of provision in 2023

was primarily driven by loan growth and also reflected the favorable impact in 2022 of the release of reserves held for pandemic-

related losses that did not materialize to the extent projected. We discuss the allowance for credit losses further below. For more

information on charge-offs and recoveries, see Note 3 – Loans Held for Investment and Allowance for Credit Losses.

Noninterest Income

Noninterest income for the third quarter of 2023 totaled $16.7 million compared to $20.0 million for the second quarter of 2023 and

$18.5 million for the third quarter of 2022. The $3.3 million decrease from the second quarter of 2023 reflected a decrease in other

income of $1.6 million, mortgage banking revenues of $1.5 million, wealth management fees of $0.2 million and bank card fees of

$0.1 million, partially offset by an increase in deposit fees of $0.1 million. The decrease in other income was attributable to a $1.4

million gain from the sale of mortgage servicing rights realized in the second quarter of 2023. The decrease in mortgage banking

revenues was attributable to market driven lower gain on sale margins and a lower volume of mandatory delivery loan sales which

provide a higher gain on sale percentage.

Compared to the third quarter of 2022, the $1.8 million decrease in noninterest income reflected decreases in mortgage banking

revenues of $1.0 million, deposit fees of $0.5 million, bank card fees of $0.2 million, and other income of $0.1 million. For the first

nine months of 2023, noninterest income totaled $54.5 million compared to $59.9 million for the same period of 2022 with the $5.4

million decrease primarily attributable to lower mortgage banking revenues of $3.7 million, wealth management fees of $2.4 million,

deposit fees of $0.6 million, and bank card fees of $0.4 million, partially offset by a $1.7 million increase in other income.

Compared

to both prior year periods, the decrease in mortgage banking revenues was driven by lower production volume in 2023 reflective of the

rapid increase in interest rates, lower market driven gain on sale margins, and a lower level of mandatory delivery loan sales. The

decrease in deposit fees from both prior year periods was primarily attributable to a higher earnings credit rate for commercial deposit

accounts and lower service charge fees. For the nine-month period, the decrease in wealth management fees was attributable to lower

insurance commissions which reflected the sale of large policies in 2022. Further, the increase in other income was primarily due to a

$1.4 million gain from the sale of mortgage servicing rights and a $0.5 million increase in miscellaneous income.

Noninterest income represented 29.87% of operating revenues (net interest income plus noninterest income) in the third quarter of

2023 compared to 33.22% in the second quarter of 2023 and 35.65% in the third quarter of 2022. For the first nine months of 2023,

noninterest income represented 31.25% of operating revenues compared to 40.79% for the same period of 2022.

The table below reflects the major components of noninterest income.

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

(Dollars in Thousands)

2023

2023

2022

2023

2022

Deposit Fees

5,456

5,326

5,947

16,021

16,585

Bank Card Fees

3,684

3,795

3,860

11,205

11,657

Wealth Management Fees

3,984

4,149

3,937

12,061

14,410

Mortgage Banking Revenues

1,839

3,363

2,895

8,072

11,807

Other

1,765

3,334

1,870

7,093

5,426

Total Noninterest Income

16,728

19,967

18,509

54,452

59,885

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

Deposit Fees

. Deposit fees for the third quarter of 2023 totaled $5.5 million, an increase of $0.2 million, or 2.5%, over the second

quarter of 2023, and a decrease of $0.5 million, or 8.3%, from the third quarter of 2022. For the first nine months of 2023, deposit

fees totaled $16.0 million, a decrease of $0.6 million, or 3.4%, from the same period of 2022. Compared to the second quarter of

2023, the increase reflected higher overdraft fees. The decrease from both prior year periods was primarily attributable to a higher

earnings credit rate for commercial deposit accounts and lower service charge fees.

Bank Card Fees

. Bank card fees for the third quarter of 2023 totaled $3.7 million, a decrease of $0.1 million, or 2.9%, from the

second quarter of 2023, and a decrease of $0.2 million, or 4.6%, from the third quarter of 2022. For the first nine months of 2023,

bank card fees totaled $11.2 million, a decrease of $0.5 million, or 3.9%, from the same period of 2022. Compared to all prior

periods, the decline reflected lower debit card usage related to lower consumer spending.

Wealth Management Fees

. Wealth management fees include trust fees through Capital City Trust (i.e., managed accounts and

trusts/estates), retail brokerage fees through Capital City Investments (i.e., investment, insurance products, and retirement accounts),

and financial advisory fees through Capital City Strategic Wealth (i.e., including the sale of life insurance, risk management and asset

protection services). Wealth management fees for the third quarter of 2023 totaled $4.0 million, a decrease of $0.2 million, or 4.0%

from the second quarter of 2023, and comparable to the third quarter of 2022. For the first nine months of 2023, wealth management

fees totaled $12.1 million, a decrease of $2.3 million, or 16.3%, from the same period of 2022, attributable to lower insurance

commissions which reflected the sale of large policies in 2022. At September 30, 2023, total assets under management were

approximately $2.420 billion compared to $2.462 billion at June 30, 2023 and $2.273 billion at December 31, 2022.

Mortgage Banking Revenues.

Mortgage banking revenues totaled $1.8 million for the third quarter of 2023, a decrease of $1.5 million,

or 45.3%, from the second quarter of 2023 and a decrease of $1.1 million, or 36.5%, from the third quarter of 2022. For the first nine

months of 2023, revenues totaled $8.1 million compared to $11.8 million for the same period of 2022. Compared to the second

quarter of 2023, the decrease was attributable to market driven lower gain on sale margins and a lower volume of mandatory delivery

loan sales which provide a higher gain on sale percentage. Compared to both prior year periods, the decrease was driven by lower

production volume in 2023 reflective of the rapid increase in interest rates, lower market driven gain on sale margins, and a lower

level of mandatory delivery loan sales. We provide a detailed overview of our mortgage banking operation, including a detailed

break-down of mortgage banking revenues, mortgage servicing activity, and warehouse funding within Note 4 – Mortgage Banking

Activities in the Notes to Consolidated Financial Statements.

Other

. Other income totaled $1.8 million for the third quarter of 2023, a decrease of $1.6 million, or 47.1%, from the second quarter

of 2023 and a decrease of $0.1 million, or 5.6%, from the third quarter of 2022. For the first nine months of 2023, other income

totaled $7.1 million compared to $5.4 million for the same period of 2022. Compared to the second quarter of 2023, the decrease was

attributable to a $1.4 million gain from the sale of mortgage servicing rights realized in the second quarter of 2023. For the nine-

month period, the increase was primarily due to a $1.4 million gain from the sale of mortgage servicing rights and a $0.5 million

increase in miscellaneous income.

Noninterest Expense

Noninterest expense for the third quarter of 2023 totaled $39.1 million compared to $40.3 million for the second quarter of 2023 and

$37.7 million for the third quarter of 2022. Compared to the second quarter of 2023, the $1.2 million decrease was primarily due to a

$0.8 million non-recurring expense in the second quarter of 2023 related to a consulting engagement to assist in negotiating a multi-

year contract for the outsourcing of our core processing system.

Compared to the third quarter of 2022, the $1.4 million increase in noninterest expense was primarily due to increases in other

expense of $0.5 million and occupancy expense of $0.8 million. The increase in other expense was largely driven by a $0.7 million

increase in pension plan expense (non-service-related component) and the increase in occupancy reflected the addition of four new

banking offices in mid-to-late 2022 and higher property/equipment insurance premiums. For the first nine months of 2023,

noninterest expense totaled $117.1 million compared to $112.4 million for the same period of 2022 with the $4.7 million increase

attributable to increases in occupancy expense of $2.2 million, compensation expense of $1.5 million, and other expense of $1.0

million. The increase in occupancy expense reflected the addition of banking offices in 2022, higher insurance premiums, and

investment in network and security upgrades. The unfavorable variance in compensation expense reflected a $3.0 million increase in

salary expense (primarily, the addition of staffing in our new markets and annual merit) that was partially offset by a $1.5 million

decrease in associate benefit expense. The variance in associate benefit expense was primarily due to a $2.2 million decrease in

pension plan expense (service cost) that was partially offset by increases in associate insurance expense of $0.5 million and stock-

based compensation of $0.1 million. The increase in other expense was primarily due to a $1.6 million increase in pension plan

expense (non-service related component), the aforementioned consulting engagement expense of $0.8 million, and a $0.6 million

increase in FDIC insurance expense, partially offset by lower OREO expense of $1.8 million related to a gain from the sale of a

banking office.

The table below reflects the major components of noninterest expense.

Three Months Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

(Dollars in Thousands)

2023

2023

2022

2023

2022

Salaries

19,459

20,044

18,604

59,020

56,010

Associate Benefits

3,544

3,394

4,363

10,945

12,477

Total Compensation

23,003

23,438

22,967

69,965

68,487

Premises

3,217

3,170

2,784

9,632

8,278

Equipment

3,763

3,650

3,369

10,930

10,043

Total Occupancy

6,980

6,820

6,153

20,562

18,321

Legal Fees

366

419

357

1,147

1,022

Professional Fees

1,254

2,039

1,258

4,617

3,996

Processing Services

1,874

1,872

1,777

5,488

5,166

Advertising

756

959

726

2,590

2,479

Telephone

658

679

730

2,044

2,162

Insurance – Other

703

872

656

2,406

1,760

Other Real Estate Owned, net

9

(28)

(92)

(1,846)

(96)

Pension - Other

32

6

(761)

45

(2,283)

Pension Settlement (Gain) Charge

(291)

102

(291)

480

Miscellaneous

3,470

3,500

3,826

10,339

10,878

Total Other

9,122

10,027

8,579

26,539

25,564

Total Noninterest Expense

39,105

40,285

37,699

117,066

112,372

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

Compensation

. Compensation expense totaled $23.0 million for the third quarter of 2023 compared to $23.4 million for the second

quarter of 2023 and $23.0 million for the third quarter of 2022. The $0.4 million decrease from the second quarter of 2023 reflected a

$0.6 million decrease in salary expense partially offset by a $0.2 million increase in associate benefit expense. The decrease in salary

expense was primarily attributable to higher realized loan cost (which are accounted for as a credit offset to salary expense) and lower

payroll taxes. The increase in associate benefit expense was due to higher stock based compensation expense. For the first nine

months of 2023, compensation expense totaled $70.0 million compared to $68.5 million for the same period of 2022 with the $1.5

million increase attributable to an increase in salary expense of $3.0 million (primarily the addition of staffing in our new markets and

annual merit) that was partially offset by a $1.5 million decrease in associate benefit expense, primarily pension plan expense (service

cost) due to an increased level of retirements in 2022. Compared to the third quarter of 2022, the same factors above drove the

variances in salary and associate benefit expense.

Occupancy

. Occupancy expense totaled $7.0 million for the third quarter of 2023 compared to $6.8 million for the second quarter of

2023 and $6.2 million for the third quarter of 2022. For the first nine months of 2023, occupancy expense totaled $20.6 million

compared to $18.3 million for the same period of 2022. The addition of four new banking offices since mid to late 2022, higher

property and equipment insurance premiums, and investment in network and security upgrades drove the increase for both prior year

comparisons.

Other

. Other expense totaled $9.1 million for the third quarter of 2023 compared to $10.0 million for the second quarter of 2023 and

$8.6 million for the third quarter of 2022. For the first nine months of 2023, other expense totaled $26.5 million compared to $25.6

million for the same period of 2022. Compared to the second quarter of 2023, the $0.9 million decrease was primarily due to a $0.8

million non-recurring expense in the second quarter of 2023 related to a consulting engagement to assist in negotiating a multi-year

contract for the outsourcing of our core processing system. For the nine month period, the $1.0 million increase was primarily

attributable to the aforementioned $0.8 million non-recurring consulting expense and increases in pension plan expense (non-service-

related component) of $1.6 million, and FDIC insurance fees of $0.6 million, partially offset by lower OREO expense of $1.7 million

related to a $1.8 million gain from the sale of a banking office in the first quarter of 2023. Compared to the third quarter of 2022, the

same factors above drove the variance, excluding the $0.8 million non -recurring consulting expense.

Our operating efficiency ratio (expressed as noninterest expense as a percentage of the sum of taxable-equivalent net interest income

plus noninterest income) was 69.88% for the third quarter of 2023 compared to 66.93% for the second quarter of 2023 and 72.51% for

the third quarter of 2022. The increase for the third quarter reflected a lower level of profitability from our mortgage banking

operation. For the first nine months of 2023, this ratio was 67.07% compared to 76.42% for the same period of 2022.

Income Taxes

We realized income tax expense of $3.0 million (effective rate of 20.7%) for the third quarter of 2023 compared to $3.4 million

(effective rate of 19.4%) for the second quarter of 2023 and $2.5 million (effective rate of 20.7%) for the third quarter of 2022. For

the first nine months of 2023, we realized income tax expense of $10.1 million (effective rate of 20.5%) compared to $5.9 million

(effective rate of 19.3%) for the same period of 2022. The increase in our effective tax rate for the third quarter of 2023 was primarily

due to a lower level of pre-tax income from Capital City Home Loans (“CCHL”) in relation to our consolidated income as the non-

controlling interest adjustment for CCHL is accounted for as a permanent tax adjustment. Further, the second quarter of 2023

effective rate reflected a higher level of tax benefit accrued from an investment in a solar tax credit equity fund. Absent discrete items

or unexpected variance in the timing of the tax benefit accrued from our solar tax credit equity fund investment, we expect our annual

effective tax rate to approximate 20-21% for 2023.

FINANCIAL CONDITION

Average earning assets totaled $3.877 billion for the third quarter of 2023, a decrease of $97.8 million, or 2.5%, from the second

quarter of 2023, and a decrease of $155.8 million, or 3.9%, from the fourth quarter of 2022. The decrease from both prior periods was

attributable to lower deposit balances (see below –

Deposits

). The mix of earning assets continues to improve as overnight funds are

being utilized to fund loan growth.

Investment Securities

Average investments decreased $38.9 million, or 3.7%, from the second quarter of 2023 and decreased $76.1 million, or 7.0%, from

the fourth quarter of 2022. Our investment portfolio represented 25.9% of our average earning assets for the third quarter of 2023

compared to 26.3% for the second quarter of 2023 and 26.8% for the fourth quarter of 2022. For the remainder of 2023, we will

continue to monitor our overall liquidity position and allow cash flow from the investment portfolio to run-off to overnight funds.

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. Two types of classifications are approved for investment securities which are Available -for-Sale (“AFS”)

and Held-to-Maturity (“HTM”). At September 30, 2023, $325.8 million, or 33.6%, of our investment portfolio was classified as AFS,

and $632.1 million, or 65.2%, classified as HTM. The average maturity of our total portfolio at September 30, 2023 was 2.90 years

compared to 3.07 years at June 30, 2023 and 3.57 years at December 31, 2022. The duration of our investment portfolio at September

30, 2023 was 2.61 years. Additional information on unrealized gains/losses in the AFS and HTM portfolios is provided in Note 2 –

Investment Securities.

We determine the classification of a security at the time of acquisition based on how the purchase will affect our asset/liability strategy

and future business plans and opportunities. We consider multiple factors in determining classification, including regulatory capital

requirements, volatility in earnings or other comprehensive income, and liquidity needs. Securities in the AFS portfolio are recorded

at fair value with unrealized gains and losses associated with these securities recorded net of tax, in the accumulated other

comprehensive income component of shareowners’ equity. HTM securities are acquired or owned with the intent of holding them to

maturity. HTM investments are measured at amortized cost. We do not trade, nor do we presently intend to begin trading investment

securities for the purpose of recognizing gains and therefore we do not maintain a trading portfolio.

At September 30, 2023, there were 894 positions (combined AFS and HTM) with unrealized losses totaling $90.8 million. 86 of these

positions are U.S. Treasuries and carry the full faith and credit of the U.S. Government. 705 were U.S. government agency securities

issued by U.S. government sponsored entities. The remaining 103 positions (municipal securities and corporate bonds) have a credit

component. At September 30, 2023, corporate debt securities had an allowance for credit losses of $31,000 and municipal securities

had an allowance of $12,000. At September 30, 2023, all CMO, MBS, SBA, U.S. Agency, and U.S. Treasury bonds held were AAA

rated.

Loans HFI

Average loans HFI increased $15.0 million, or 0.6%, over the second quarter of 2023 and $233.3 million, or 9.6%, over the fourth

quarter of 2022. Period end loans increased $21.7 million, or 0.8%, over the second quarter of 2023 and $157.5 million, or 6.2%, over

the fourth quarter of 2022. Compared to both prior periods, the loan growth was primarily in the residential real estate category and

was partially offset by lower indirect auto and construction loan balances.

Without compromising our credit standards , changing our underwriting standards, or taking on inordinate interest rate risk, we

continue to closely monitor our markets and make minor adjustments as necessary.

Credit Quality

Credit quality metrics remained strong for the quarter. Nonperforming assets (nonaccrual loans and other real estate) totaled $4.7

million at September 30, 2023 compared to $6.6 million at June 30, 2023 and $2.7 million at December 31, 2022. At September 30,

2023, nonperforming assets as a percent of total assets equaled 0.11%, compared to 0.15% at June 30, 2023 and 0.06% at December

31, 2022. Nonaccrual loans totaled $4.7 million at September 30, 2023, a $1.9 million decrease from June 30, 2023 and a $2.4 million

increase over December 31, 2022. Further, classified loans totaled $21.8 million at September 30, 2023, a $6.8 million increase over

June 30, 2023 and a $2.5 million increase over December 31, 2022. The increase in the current period was primarily attributable to

the downgrade of one hotel loan that is performing as agreed on scheduled payments.

Allowance for Credit Losses

The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount

expected to be collected on the loans. The allowance for credit losses is adjusted by a credit loss provision which is reported in

earnings, and reduced by the charge-off of loan amounts (net of recoveries). Loans are charged off against the allowance when

management believes the uncollectability of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts

previously charged-off and expected to be charged -off. Expected credit loss inherent in non-cancellable off-balance sheet credit

exposures is provided through the credit loss provision, but recorded as a separate liability included in other liabilities.

Management estimates the allowance balance using relevant available information, from internal and external sources relating to past

events, current conditions, and reasonable and supportable forecasts. Historical loan default and loss experience provides the basis for

the estimation of expected credit losses. Adjustments to historical loss information incorporate management’s view of current

conditions and forecasts.

At September 30, 2023, the allowance for credit losses for HFI loans totaled $29.1 million compared to $28.2 million at June 30, 2023

and $25.1 million at December 31, 2022. Activity within the allowance is provided in Note 3 – Loans Held for Investment and

Allowance for Credit Losses in the Consolidated Financial Statements. The increase in the allowance over both prior periods was

driven primarily by loan growth. Further, the increase from December 31, 2022 reflected a higher loss rate for the residential real

estate portfolio due to slower prepayment speeds. At September 30, 2023, the allowance represented 1.08% of HFI loans compared to

1.05% at June 30, 2023, and 0.98% at December 31, 2022.

At September 30, 2023, the allowance for credit losses for unfunded commitments totaled $3.5 million compared to $3.1 million at

June 30, 2023 and $3.0 million at December 31, 2022. The allowance for unfunded commitments is recorded in other liabilities.

Deposits

Average total deposits were $3.597 billion for the third quarter of 2023, a decrease of $122.7 million, or 3.3%, from the second quarter

of 2023 and a decrease of $206.2 million, or 5.4%, from the fourth quarter of 2022. Compared to both prior periods, the decreases

were primarily attributable to lower noninterest bearing, savings, and NOW balances, partially offset by higher money market

balances. Compared to the second quarter of 2023, the decrease in NOW account balances was primarily due to the seasonal

reduction in public fund balances held by our institutional and municipal clients.

At September 30, 2023, total deposits were $3.540 billion, a decrease of $248.4 million, or 6.6%, from June 30, 2023 and a decrease

of $398.9 million, or 10.1%, from December 31, 2022. Our public fund deposit balances declined $205 million and $245 million from

June 30, 2023 and December 31, 2022, respectively, and reflected the seasonal decline in those balances which will begin to increase

in the fourth quarter as municipal tax receipts are received. In addition, the decrease from June 30, 2023 reflected a short-term deposit

of $103 million (in the NOW category) made late in June by a municipal client that was subsequently moved in mid-July. The

remaining portion of the decrease reflected continued client spend of stimulus savings and clients seeking higher yielding investment

products outside the Bank, a portion of which have moved to our wealth division. Additionally, compared to both prior periods, we

realized a remix of deposit balances of $32 million and $99 million, respectively, as noninterest bearing accounts migrated into

interest bearing accounts (primarily NOW and money market accounts).

Business deposit transaction accounts classified as repurchase agreements averaged $25.4 million for the third quarter of 2023, an

increase of $7.5 million over the second quarter of 2023 and $16.9 million over the fourth quarter of 2022. At September 30, 2023,

repurchase agreement balances were $22.9 million compared to $22.6 million at June 30, 2023 and $6.6 million at December 31,

We continue to closely monitor our cost of deposits and deposit mix as we manage through the current rising rate environment.

MARKET RISK AND INTEREST RATE SENSITIVITY

Market Risk and Interest Rate Sensitivity

Overview.

Market risk arises from changes in interest rates, exchange rates, commodity prices, and equity prices. We have risk

management policies designed to monitor and limit exposure to market risk and we 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, our

policies are designed to minimize structural interest rate risk.

Interest Rate Risk Management.

Our net income is largely dependent on net interest income. Net interest income is susceptible to

interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When

interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in

market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more

quickly than interest-bearing liabilities, falling market interest rates could result in a decrease in net interest income. Net interest

income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by

other sources of funds, such as noninterest-bearing deposits and shareowners’ equity.

We have established what we believe to be a comprehensive interest rate risk management policy, which is administered by

management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits of risk, which are quantitative

measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital

(a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change in interest rates for maturities from one

day to 30 years. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-

term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures

optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with

any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by

us. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan

prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the

methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their

debts, or the impact of rate changes on demand for loan and deposit products.

The statement of financial condition is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk.

We prepare a current base case and several alternative interest rate simulations (-400, -300, -200, -100, +100, +200, +300, and +400

basis points (bp)), at least once per quarter, and report the analysis to ALCO, our Market Risk Oversight Committee (“MROC”), our

Enterprise Risk Oversight Committee (“EROC”) and the Board of Directors. We augment our interest rate shock analysis with

alternative interest rate scenarios on a quarterly basis that may include ramps, parallel shifts, and a flattening or steepening of the yield

curve (non-parallel shift). In addition, more frequent forecasts may be produced when interest rates are particularly uncertain or when

other business conditions so dictate.

Our goal is to structure the statement of financial condition so that net interest earnings at risk over 12-month and 24-month periods

and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. We attempt to

achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets,

by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by managing the mix of our core

deposits, and by adjusting our rates to market conditions on a continuing basis.

Analysis.

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term

performance in alternative rate environments. These measures are typically based upon a relatively brief period, and do not

necessarily indicate the long-term prospects or economic value of the institution.

ESTIMATED CHANGES IN NET INTEREST INCOME

(1)

Percentage Change (12-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-15.0%

-12.5%

-10.0%

-7.5%

-7.5%

-10.0%

-12.5%

-15.0%

September 30, 2023

3.2%

2.3%

1.4%

0.7%

-1.3%

-3.8%

-7.7%

-12.5%

June 30, 2023

4.1%

3.0%

1.9%

1.0%

-1.5%

-4.4%

-9.6%

-15.3%

Percentage Change (24-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-17.5%

-15.0%

-12.5%

-10.0%

-10.0%

-12.5%

-15.0%

-17.5%

September 30, 2023

30.6%

25.6%

20.4%

15.9%

5.2%

-2.3%

-12.0%

-22.0%

June 30, 2023

28.4%

23.5%

18.4%

13.9%

3.4%

-4.4%

-15.1%

-25.6%

The Net Interest Income (“NII”) at Risk position indicates that in the short-term (over the next 12 months), all rising rate environments

will positively impact the net interest margin of the Company, while declining rate environments will have a negative impact on the

net interest margin. Compared to the second quarter of 2023, these metrics became less favorable in the rising rate scenarios primarily

due to loan growth, which reduced our level of overnight funds and made us slightly less asset sensitive. The converse applies in the

down rate scenarios where the metrics became more favorable due to loan growth which increased asset duration and therefore

protection against falling rates. The percent change over the 24-month shock is outside of policy in the rates down 400 bps scenario

due to our limited ability to lower our deposit rates relative to the decline in market rate.

The measures of equity value at risk indicate our ongoing economic value by considering the effects of changes in interest rates on all

of our cash flows by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these

discounted values of the assets and liabilities is the economic value of equity, which in theory approximates the fair value of our net

assets.

ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY

(1)

Changes in Interest Rates

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-30.0%

-25.0%

-20.0%

-15.0%

-15.0%

-20.0%

-25.0%

-30.0%

September 30, 2023

9.2%

7.7%

5.6%

3.3%

-5.2%

-12.9%

-21.2%

-31.7%

June 30, 2023

10.7%

9.1%

6.7%

3.9%

-7.1%

-18.0%

-30.2%

-32.6%

EVE Ratio (policy minimum 5.0%)

20.9%

20.2%

19.4%

18.6%

16.4%

14.7%

13.1%

11.2%

(1) The down 400 bp rate scenario was added in the fourth quarter of 2022.

At September 30, 2023, the economic value of equity was favorable in all rising rate environments and unfavorable in the falling rate

environments. Compared to the second quarter of 2023, EVE metrics were slightly less favorable in the rising rate environment and

more favorable in falling rate environments. EVE is currently in compliance with policy in all rate scenarios as the EVE ratio in each

rate scenario exceeds 5.0%.

As the interest rate environment and the dynamics of the economy continue to change, additional simulations will be analyzed to

address not only the changing rate environment, but also the change in mix of our financial assets and liabilities, measured over

multiple years, to help assess the risk to the Company.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to

maintain our ability to meet loan commitments, purchase securities or repay deposits and other liabilities in accordance with their

terms, without an adverse impact on our current or future earnings. Our liquidity strategy is guided by policies that are formulated and

monitored by our ALCO and senior management, which take into account the marketability of assets, the sources and stability of

funding and the level of unfunded commitments. We regularly evaluate all of our various funding sources with an emphasis on

accessibility, stability, reliability and cost-effectiveness. Our principal source of funding has been our client deposits, supplemented

by our short-term and long-term borrowings, primarily from securities sold under repurchase agreements, federal funds purchased and

FHLB borrowings. We believe that the cash generated from operations, our borrowing capacity and our access to capital resources are

sufficient to meet our future operating capital and funding requirements.

At September 30, 2023, we had the ability to generate approximately $1.587 billion (excludes overnight funds position of $95 million)

in additional liquidity through various sources including various federal funds purchased lines, Federal Home Loan Bank borrowings,

the Federal Reserve Discount Window, and brokered deposits. We recognize the importance of maintaining liquidity and have

developed a Contingent Liquidity Plan, which addresses various liquidity stress levels and our response and action based on the level

of severity. We periodically test our credit facilities for access to the funds, but also understand that as the severity of the liquidity

level increases that certain credit facilities may no longer be available. We conduct a liquidity stress test on a quarterly basis based on

events that could potentially occur at the Bank and report results to ALCO, our Market Risk Oversight Committee, Risk Oversight

Committee, and the Board of Directors. At September 30, 2023, we believe the liquidity available to us was sufficient to meet our on-

going needs and execute our business strategy.

We also view our investment portfolio as a liquidity source and have the option to pledge securities in our portfolio as collateral for

borrowings or deposits, and/or to sell selected securities. Additional information on our investment portfolio is provided within Note

2 –

Investment Securities

The Bank maintained an average net overnight funds (deposits with banks plus FED funds sold less FED funds purchased) sold

position of $136.6 million in the third quarter of 2023 compared to $218.9 million in the second quarter of 2023 and $469.4 million in

the fourth quarter of 2022. The declining overnight funds position reflected growth in average loans and lower average deposit

balances.

We expect our capital expenditures will be approximately $8.0 million over the next 12 months, which will primarily consist of

construction of new offices, office remodeling, office equipment/furniture, and technology purchases. Management expects that these

capital expenditures will be funded with existing resources without impairing our ability to meet our on-going obligations.

Borrowings

Average short -term borrowings totaled $49.7 million for the third quarter of 2023 compared to $35.7 million for the second quarter of

2023 and $50.8 million for the fourth quarter of 2022. The variance compared to both prior periods was primarily attributable to an

increase in short-term repurchase agreements and the fluctuation in CCHL’s warehouse line. Additional detail on these warehouse

borrowings is provided in Note 4 – Mortgage Banking Activities in the Consolidated Financial Statements.

We have issued two junior subordinated deferrable interest notes to our wholly owned Delaware statutory trusts. The first note for

$30.9 million was issued to CCBG Capital Trust I in November 2004, of which $10 million was retired in April 2016. The second

note for $32.0 million was issued to CCBG Capital Trust II in May 2005. The interest payment for the CCBG Capital Trust I

borrowing is due quarterly and adjusts quarterly to a variable rate of three-month CME Term SOFR (secured overnight financing rate)

plus a margin of 1.90%. This note matures on December 31, 2034. The interest payment for the CCBG Capital Trust II borrowing is

due quarterly and adjusts quarterly to a variable interest rate based on three-month CME Term SOFR plus a margin of 1.80%. This

note matures on June 15, 2035. The proceeds from these borrowings were used to partially fund acquisitions. Under the terms of each

junior subordinated deferrable interest note, in the event of default or if we elect to defer interest on the note, we may not, with certain

exceptions, declare or pay dividends or make distributions on our capital stock or purchase or acquire any of our capital stock.

During the second quarter of 2020, we entered into a derivative cash flow hedge of our interest rate risk related to our subordinated

debt. The notional amount of the derivative is $30 million ($10 million of the CCBG Capital Trust I borrowing and $20 million of the

CCBG Capital Trust II borrowing). The interest rate swap agreement requires CCBG to pay fixed and receive variable (three-month

CME Term SOFR plus spread) and has an average all-in fixed rate of 2.50% for 10 years. Additional detail on the interest rate swap

agreement is provided in Note 5 – Derivatives in the Consolidated Financial Statements.

Capital

Our capital ratios are presented in the Selected Quarterly Financial Data table on page 34. At September 30, 2023, our regulatory

capital ratios exceeded the threshold to be designated as “well-capitalized” under the Basel III capital standards.

Shareowners’ equity was $419.7 million at September 30, 2023 compared to $412.4 million at June 30, 2023 and $387.3 million at

December 31, 2022. For the first nine months of 2023, shareowners’ equity was positively impacted by net income attributable to

common shareowners of $40.5 million, a $2.4 million decrease in the unrealized loss on investment securities, the issuance of stock of

$2.2 million, stock compensation accretion of $1.0 million, and a $0.4 million increase in the fair value of the interest rate swap

related to subordinated debt. Shareowners’ equity was reduced by common stock dividends of $9.5 million ($0.56 per share), the

repurchase of stock of $3.1 million (102,147 shares), and net adjustments totaling $1.5 million related to transactions under our stock

compensation plans.

At September 30, 2023, our total risk-based capital ratio was 16.30% compared to 15.68% at June 30, 2023 and 15.30% at December

31, 2022. Our common equity tier 1 capital ratio was 13.26%, 12.73%, and 12.38%, respectively, on these dates. Our leverage ratio

was 9.98%, 9.54%, and 8.91%, respectively, on these dates. At September 30, 2023, all our regulatory capital ratios exceeded the

threshold to be designated as “well-capitalized” under the Basel III capital standards. Further, our tangible common equity ratio was

8.08% at September 30, 2023 compared to 7.43% and 6.65% at June 30, 2023 and December 31, 2022, respectively. If our unrealized

held-to-maturity securities losses of $33.1 million (after-tax) were recognized in accumulated other comprehensive loss, our adjusted

tangible capital ratio would be 7.26%.

Our tangible capital ratio is also impacted by the recording of our unfunded pension liability through other comprehensive income in

accordance with ASC Topic 715. At September 30, 2023, the net pension liability reflected in other comprehensive loss was $4.7

million compared to $4.7 million at June 30, 2023 and $4.5 million at December 31, 2022. This liability is re-measured annually on

December 31

st

based on an actuarial calculation of our pension liability. Significant assumptions used in calculating the liability

include the weighted average discount rate used to measure the present value of the pension liability, the weighted average expected

long-term rate of return on pension plan assets, and the assumed rate of annual compensation increases, all of which will vary when

re-measured. The discount rate assumption used to calculate the pension liability is subject to long -term corporate bond rates at

December 31

st

. These assumptions and sensitivities are discussed in our 2022 Form 10-K/A “Critical Accounting Policies and

Estimates”.

OFF-BALANCE SHEET ARRANGEMENTS

We are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our

clients.

At September 30, 2023, we had $774.7 million in commitments to extend credit and $6.8 million in standby letters of credit.

Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the

contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since

many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily

represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance

of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-

balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not

anticipate that such funding will adversely impact our ability to meet our on-going obligations. In the event these commitments

require funding in excess of historical levels, management believes current liquidity, advances available from the FHLB and the

Federal Reserve, and investment security maturities provide a sufficient source of funds to meet these commitments.

Certain agreements provide that the commitments are unconditionally cancellable by the bank and for those agreements no allowance

for credit losses has been recorded. We have recorded an allowance for credit losses on loan commitments that are not

unconditionally cancellable by the bank, which is included in other liabilities on the consolidated statements of financial condition and

totaled $3.5 million at September 30, 2023.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in our 2022 Form 10-

K/A. The preparation of our Consolidated Financial Statements in accordance with GAAP and reporting practices applicable to the

banking industry requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and

expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.

We have identified accounting for (i) the allowance for credit losses, (ii) goodwill, (iii) pension assumptions, and (iv) income taxes as

our most critical accounting policies and estimates in that they are important to the portrayal of our financial condition and results, and

they require our subjective and complex judgment as a result of the need to make estimates about the effects of matters that are

inherently uncertain. These accounting policies, including the nature of the estimates and types of assumptions used, are described

throughout this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 7,

Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2022 Form 10-K/A.

TABLE I

AVERAGE BALANCES & INTEREST RATES (UNAUDITED)

Three Months Ended September 30,

Nine Months Ended September 30,

2023

2022

2023

2022

Average

Average

Average

Average

Average

Average

Average

Average

(Dollars in Thousands)

Balances

Interest

Rate

Balances

Interest

Rate

Balances

Interest

Rate

Balances

Interest

Rate

Assets:

Loans Held for Sale

62,768

971

6.14

55,164

486

3.49

57,438

2,416

5.62

50,387

1,594

4.23

Loans Held for Investment

(1)(2)

2,672,653

38,455

5.71

2,264,075

27,432

4.81

2,637,911

109,688

5.56

2,105,211

73,168

4.65

Taxable Securities

1,002,547

4,549

1.80

1,117,789

4,359

1.55

1,034,825

14,265

1.84

1,105,822

11,082

1.34

Tax-Exempt Securities

(2)

2,456

17

2.66

2,939

17

2.30

2,649

50

2.49

2,614

37

1.90

Federal Funds Sold and Interest Bearing

Deposits

136,556

1,848

5.37

569,984

3,231

2.25

237,987

8,741

4.91

710,559

5,048

0.95

Total Earning Assets

3,876,980

45,840

4.69

4,009,951

35,525

3.52

3,970,810

135,160

4.55

3,974,593

90,929

3.06

Cash & Due From Banks

75,941

79,527

75,483

77,856

Allowance For Credit Losses

(29,172)

(21,509)

(27,581)

(21,382)

Other Assets

295,106

289,709

297,688

284,546

TOTAL ASSETS

4,218,855

4,357,678

4,316,400

4,315,613

Liabilities:

Noninterest Bearing Deposits

1,474,574

1,726,918

1,538,268

1,700,800

NOW Accounts

1,125,171

3,489

1.23

1,016,475

868

0.34

1,184,453

8,679

0.98

1,042,958

1,074

0.14

Money Market Accounts

322,623

1,294

1.59

288,758

71

0.10

293,089

2,249

1.03

286,804

140

0.07

Savings Accounts

579,245

200

0.14

643,640

80

0.05

603,643

396

0.09

623,986

229

0.05

Other Time Deposits

95,203

231

0.96

94,073

33

0.14

90,970

386

0.57

95,408

99

0.14

Total Interest Bearing Deposits

2,122,242

5,214

0.97

2,042,946

1,052

0.20

2,172,155

11,710

0.72

2,049,156

1,542

0.10

Total Deposits

3,596,816

5,214

0.58

3,769,864

1,052

0.11

3,710,423

11,710

0.42

3,749,956

1,542

0.05

Repurchase Agreements

25,356

190

2.98

11,665

5

0.18

17,588

314

2.39

7,971

6

0.11

Other Short-Term Borrowings

24,306

440

7.17

35,014

531

6.01

26,586

1,228

6.17

29,020

1,065

4.90

Subordinated Notes Payable

52,887

625

4.62

52,887

443

3.28

52,887

1,800

4.49

52,887

1,130

2.82

Other Long-Term Borrowings

387

4

4.73

580

6

4.74

433

15

4.78

710

23

4.58

Total Interest Bearing Liabilities

2,225,178

6,473

1.15

2,143,092

2,037

0.38

2,269,649

15,067

0.89

2,139,744

3,766

0.24

Other Liabilities

83,099

98,501

82,877

86,055

TOTAL LIABILITIES

3,782,851

3,968,511

3,890,794

3,926,599

Temporary Equity

8,424

9,862

8,719

10,156

TOTAL SHAREOWNERS’ EQUITY

427,580

379,305

416,887

378,858

TOTAL LIABILITIES, TEMPORARY

AND SHAREOWNERS’ EQUITY

4,218,855

4,357,678

4,316,400

4,315,613

Interest Rate Spread

3.54

3.14

3.66

2.82

Net Interest Income

39,367

33,488

120,093

87,163

Net Interest Margin

(3)

4.03

3.32

4.04

2.93

(1)

Average Balances include net loan fees, discounts and premiums and nonaccrual loans. Interest income includes loans fees of $0.1 million and less than $0.1 million for the three month periods ended September 30, 2023 and

2022, respectively, and $0.1 million and $0.6 million for the nine month periods ended September 30, 2023 and 2022, respectively.

(2)

Interest income includes the effects of taxable equivalent adjustments using a 21% Federal tax rate.

(3)

Taxable equivalent net interest income divided by average earning assets.