# CAPITAL CITY BANK GROUP INC (CCBG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CAPITAL CITY BANK GROUP INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/726601/000072660122000005/ccbg20211231.htm
Accession: 0000726601-22-000005
Filing date: 2022-03-01
Report date: 2021-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/CCBG/
All MD&A years: /company/CCBG/mda/
Next year: /company/CCBG/mda/fy2022/ (FY 2022)

Management’s Discussion and Analysis of
 
Financial Condition and Results of Operations under the section captioned

“Net Interest Income” and “Market Risk and Interest Rate Sensitivity” elsewhere
 
in this report for further discussion related to

interest rate sensitivity and our management of interest rate risk.

The fair value of our investments could decline which would cause a reduction
 
in shareowners’ equity.

A large portion of our investment securities portfolio
 
at December 31, 2021 has been designated as available-for-sale
 
pursuant to

U.S. generally accepted accounting principles relating to
 
accounting for investments. Such principles require that unrealized gains

and losses in the estimated value of the available-for-sale portfolio
 
be “marked to market” and reflected as a separate item in

shareowners’ equity (net of tax) as accumulated other comprehensive
 
income/losses. Shareowners’ equity will continue to reflect

the unrealized gains and losses (net of tax) of these investments. The
 
fair value of our investment portfolio may decline, causing a

corresponding decline in shareowners’ equity.

Management believes that several factors will affect
 
the fair values of our investment portfolio. These include, but are not limited

to, changes in interest rates or expectations of changes in interest rates, the
 
degree of volatility in the securities markets, inflation

rates or expectations of inflation and the slope of the interest rate yield
 
curve (the yield curve refers to the differences between

short-term and long-term interest rates; a positively sloped yield curve means short
 
-term rates are lower than long-term rates).

These and other factors may impact specific categories of the portfolio differently,
 
and we cannot predict the effect these factors

may have on any specific category.

20

Shares of our common stock are not an insured
 
deposit and may lose value.

The shares of our common stock are not a bank deposit and will not be insured or guaranteed
 
by the FDIC or any other

government agency.
 
Your
 
investment will be subject to investment risk, and you must be capable of affording
 
the loss of your

entire investment.

Limited trading activity for shares of our common
 
stock may contribute to price volatility.

While our common stock is listed and traded on the Nasdaq Global Select Market,
 
there has historically been limited trading

activity in our common stock.
 
The average daily trading volume of our common stock over the 12-month
 
period ending

December 31, 2021 was approximately 29,919 shares. Due to the limited
 
trading activity of our common stock, relativity small

trades may have a significant impact on the price of our common stock.

Securities analysts may not initiate coverage or continue to cover our common
 
stock, and this may have a negative impact

on its market price.

The trading market for our common stock will depend in part on the research
 
and reports that securities analysts publish about us

and our business. We do
 
not have any control over securities analysts, and they may not initiate coverage
 
or continue to cover our

common stock. If securities analysts do not cover our common stock,
 
the lack of research coverage may adversely affect its

market price. If we are covered by securities analysts, and our common stock is the subject of
 
an unfavorable report, our stock

price would likely decline. If one or more of these analysts ceases to cover
 
our Company or fails to publish regular reports on us,

we could lose visibility in the financial markets, which may cause our
 
stock price or trading volume to decline.

We may be adversely impacted by
 
the transition from LIBOR as a reference
 
rate.

The United Kingdom’s Financial
 
Conduct Authority and the administrator of LIBOR have announced
 
that the publication of the

most commonly used U.S. dollar London Interbank Offered Rate (“LIBOR”)
 
settings will cease to be published or cease to be

representative after June 30, 2023.
 
The publication of all other LIBOR settings ceased to be published as of December
 
31, 2021.

Given
 
consumer
 
protection, litigation, and reputation
 
risks, the bank regulatory
 
agencies
 
have
 
indicated
 
that entering
 
into

new
 
contracts that use LIBOR as a reference rate after December 31, 2021, would
 
create safety and soundness risks and that they

will examine bank practices accordingly.
 
Therefore, the agencies encouraged banks to cease entering into new contracts that use

LIBOR as a reference rate as soon as practicable and in any event by December 31,
 
2021.
 
Prior to December 31, 2021, we

discontinued originating LIBOR-based loans.

At December 31, 2021, we have 108 loans totaling approximately $77 million
 
that are indexed to LIBOR.
 
We believe our
 
current

portfolio of LIBOR based loan contracts contain the necessary fallback langu
 
age, however, the timing and manner in which each

customer’s contract transitions to a replacement index will vary
 
on a case-by-case basis.
 
We also have
 
$34 million in floating rate

investment securities that are indexed
 
to LIBOR.
 
We are currently
 
evaluating fallback language for each investment security.

Lastly, we have two
 
floating rate subordinated debenture notes totaling $53 million and a related interest
 
rate swap contract for

$30 million that are indexed to LIBOR (Refer to Note 12 – Long Term
 
Borrowings and Note 5 – Derivatives in our Consolidated

Financial Statements).
 
The subordinated debenture notes do not contain fallback language allowing
 
for a replacement rate, but

will convert to a fixed rate (LIBOR plus margin) at the time of
 
LIBOR cessation.
 
The interest rate swap contract adheres to ISDA

protocol which requires conversion to the fallback SOFR rate at the time of
 
LIBOR cessation.
 
There continues to be substantial

uncertainty as to the ultimate effects of the LIBOR transition,
 
including with respect to the acceptance and use of other

benchmark rates.
 
Since replacement rates are calculated differently,
 
payments under contracts referencing new rates will differ

from those referencing LIBOR, which may lead to increased volatility as compared
 
to LIBOR.

COVID-19 Risks

The ongoing global COVID-19 outbreak could harm our
 
business and results of operations. The magnitude and duration

of the pandemic’s impact will depend on future
 
developments, which are highly uncertain and
 
are difficult to predict.

The COVID-19 pandemic continues to negatively impact economic
 
and commercial activity and financial markets, both globally

and within the United States. Stay-at-home orders, travel restrictions and
 
closure of non-essential businesses and similar orders

imposed across the United States to restrict the spread of COVID-19 in 2021
 
resulted in significant business and operational

disruptions, including business closures, supply chain disruptions,
 
and mass layoffs and furloughs. Although local jurisdictions

were not subject to stay-at-home orders, worker shortages, vaccine
 
and testing requirements, new variants of COVID-19 and

other health and safety recommendations have impacted the ability of
 
businesses to return to pre-pandemic levels of activity and

employment.

21

The COVID-19 pandemic has had a specific impact
 
on our business, including: (1) causing some of our borrowers to be unable
 
to

meet existing payment obligations, particularly borrowers disproportionately
 
affected by business shutdowns and travel

restrictions;
 
(2) requiring us to increase our allowance for loan losses; and (3) affecting
 
consumer and business spending,

borrowing and savings habits. The ultimate risk posed by the COVID-19 pandemic
 
remains highly uncertain; however, COVID-

19 poses a material risk to our business, financial condition and results of
 
operations. Other factors likely to have an adverse

effect on our results of operations include:

●

risks to the capital markets due to the volatility in financial markets that
 
may impact the performance of our investment

securities portfolio;

●

effects on key employees, including operational management
 
personnel and those charged with preparing, monitoring

and evaluating our financial reporting and internal controls;

●

declines in demand for loans and other banking services and products, as well as increases
 
in our non-performing loans,

owing to the effects of COVID-19 in the markets served by the Bank
 
and on the business of borrowers of the Bank;

●

declines in demand resulting from adverse impacts of the virus on businesses deemed
 
to be “non-essential” by

governments in the markets served by the Bank;

●

reduced fees as we waive certain fees for our customers impacted by
 
the COVID-19 pandemic; and

●

higher operating costs, increased
 
cybersecurity risks and potential loss of productivity while some of our associates work

remotely.

Lastly, our commercial
 
real estate and multi-family loans are dependent on the profitable operation and mana
 
gement of the

properties securing such loans. The longer the pandemic persists, the
 
stronger the likelihood that COVID-19 could have a

significant adverse impact by reducing the revenue and cash flows of
 
our borrowers, impacting the borrowers’ ability to repay

their loans, increasing the risk of delinquencies and defaults, and reducing
 
the collateral value underlying the loans.

The extent to which the COVID-19 pandemic will ultimately affect
 
our financial condition and results of operations is unknown

and will depend, among other things, on the duration of the pandemic,
 
the actions undertaken by national, state and local

governments and health officials to contain the virus or mitigate
 
its effects, the safety and effectiveness of
 
the vaccines that have

been developed and the ability of pharmaceutical companies and governments
 
to continue to manufacture and distribute those

vaccines, changes to interest rates, and how quickly and to what extent economic
 
conditions improve and normal business and

operating conditions resume. Any one or a combination of these factors could
 
negatively impact our business, financial condition

and results of operations and prospects.

Credit Risks

Our loan portfolio includes loans with a higher risk of loss which could lead to higher loan
 
losses and nonperforming

assets.

We originate
 
commercial real estate loans, commercial loans, construction loans, vacant
 
land loans, consumer loans, and

residential mortgage loans primarily within our market area. Commercial
 
real estate, commercial, construction, vacant land, and

consumer loans may expose a lender to greater credit risk than traditional
 
fixed-rate fully amortizing loans secured by single-

family residential real estate because the collateral securing these loans may
 
not be sold as easily as single-family residential real

estate. In addition, these loan types tend to involve larger
 
loan balances to a single borrower or groups of related borrowers and

are more susceptible to a risk of loss during a downturn in the business cycle.
 
These loans also have historically had greater credit

risk than other loans for the following reasons:

●

Commercial Real Estate Loans

. Repayment is dependent on income being generated in amounts
 
sufficient to cover

operating expenses and debt service. These loans also involve greater risk because
 
they are generally not fully amortizing

over the loan period, but rather have a balloon payment due at maturity.
 
A borrower’s ability to make a balloon payment

typically will depend on the borrower’s ability to either
 
refinance the loan or timely sell the underlying property.
 
At

December 31, 2021, commercial mortgage loans comprised approximately
 
34.4% of our total loan portfolio.

●

Commercial Loans

. Repayment is generally dependent upon the successful operation
 
of the borrower’s business. In

addition, the collateral securing the loans may depreciate over time, be
 
difficult to appraise, be illiquid, or fluctuate in

value based on the success of the business. At December 31, 2021, commercial
 
loans comprised approximately 11.6%
 
of

our total loan portfolio.

22

●

Construction Loans

. The risk of loss is largely dependent on our initial estimate of
 
whether the property’s value at

completion equals or exceeds the cost of property construction and the
 
availability of take-out financing. During the

construction phase, a number of factors can result in delays or cost overruns.
 
If our estimate is inaccurate or if actual

construction costs exceed estimates, the value of the property securing
 
our loan may be insufficient to ensure full

repayment when completed through a permanent loan, sale of the property,
 
or by seizure of collateral.
 
At December 31,

2021, construction loans comprised approximately 9.0% of our total loan
 
portfolio.

●

Vacant
 
Land Loans

. Because vacant or unimproved land is generally held by the borrower
 
for investment purposes or

future use, payments on loans secured by vacant or unimproved land will typically
 
rank lower in priority to the borrower

than a loan the borrower may have on their primary residence or business. These
 
loans are susceptible to adverse

conditions in the real estate market and local economy.
 
At December 31, 2021, vacant land loans comprised

approximately 3.42% of our total loan portfolio.

●

HELOCs

. Our open-ended home equity loans have an interest-only draw period
 
followed by a five-year repayment

period of 0.75% of the principal balance monthly and a balloon payment
 
at maturity. Upon the commencement
 
of the

repayment period, the monthly payment can increase significantly,
 
thus, there is a heightened risk that the borrower will

be unable to pay the increased payment. Further,
 
these loans also involve greater risk because they are generally not fully

amortizing over the loan period, but rather have a balloon payment
 
due at maturity.
 
A borrower’s ability to make a

balloon payment may depend on the borrower’s ability
 
to either refinance the loan or timely sell the underlying property.

At December 31, 2021, HELOCs comprised approximately 9.7% of
 
our total loan portfolio.

●

Consumer Loans

. Consumer loans (such as automobile loans and personal lines of
 
credit) are collateralized, if at all,

with assets that may not provide an adequate source of payment of
 
the loan due to depreciation, damage, or loss. At

December 31, 2021, consumer loans comprised approximately 16.7
 
%
 
of our total loan portfolio, with indirect auto loans

making up a majority of this portfolio at approximately 93.1% of the total
 
balance.

The increased risks associated with these types of loans result in a correspondingly
 
higher probability of default on such loans (as

compared to fixed-rate fully amortizing single-family real estate loans).
 
Loan defaults would likely increase our loan losses and

nonperforming assets and could adversely affect our
 
allowance for loan losses and our results of operations.

Our loan portfolio is heavily concentrated in mortgage loans secured
 
by properties in Florida and Georgia which causes

our risk of loss to be higher than if we had a more geographically diversified
 
portfolio.

Our interest-earning assets are heavily concentrated in mortgage loans secured
 
by real estate, particularly real estate located in

Florida and Georgia.
 
At December 31, 2021, approximately 72% of our loans included real estate as a primary,
 
secondary, or

tertiary component of collateral. The real estate collateral in each case provides
 
an alternate source of repayment in the event of

default by the borrower; however, the value
 
of the collateral may decline during the time the credit is extended. If we
 
are required

to liquidate the collateral securing a loan during a period of reduced real
 
estate values to satisfy the debt, our earnings and capital

could be adversely affected.

Additionally, at
 
December 31, 2021, substantially all of our loans secured by real estate are secured by
 
commercial and residential

properties located in Northern Florida and Middle Georgia. The
 
concentration of our loans in these areas subjects us to risk that a

downturn in the economy or recession in these areas could result in a decrease
 
in loan originations and increases in delinquencies

and foreclosures, which would more greatly affect us than
 
if our lending were more geographically diversified. In addition, since

a large portion of our portfolio is secured by properties located
 
in Florida and Georgia, the occurrence of a natural disaster,
 
such

as a hurricane, or a man-made disaster could result in a decline in loan originations,
 
a decline in the value or destruction of

mortgaged properties and an increase in the risk of delinquencies, foreclosures
 
or loss on loans originated by us. We
 
may suffer

further losses due to the decline in the value of the properties underlying
 
our mortgage loans, which would have an adverse

impact on our results of operations and financial condition.

Our concentration in loans secured by real estate
 
may increase our credit losses, which would negatively
 
affect our

financial results.

Due to the lack of diversified industry within the markets served by CCB and the relatively
 
close proximity of our geographic

markets, we have both geographic concentrations as well as concentrations
 
in the types of loans funded. Specifically,
 
due to the

nature of our markets, a significant portion of the portfolio has historically been
 
secured with real estate. At December 31, 2021,

approximately 38% and 34% of our $1.931 billion loan portfolio was secured
 
by commercial real estate and residential real estate,

respectively. As of
 
this same date, approximately 9% was secured by property under construction.

23

In the event we are required to foreclose on a property securing one of our mortgage
 
loans or otherwise pursue our remedies in

order to protect our investment, we may be unable to recover funds in an amount
 
equal to our projected return on our investment

or in an amount sufficient to prevent a loss to us due to prevailing economic
 
conditions, real estate values and other factors

associated with the ownership of real property.
 
As a result, the market value of the real estate or other collateral underlying our

loans may not, at any given time, be sufficient to satisfy the outstanding
 
principal amount of the loans, and consequently,
 
we

would sustain loan losses.

An inadequate allowance for credit losses would reduce
 
our earnings.

We are exposed
 
to the risk that our clients may be unable to repay their loans according to their terms and
 
that any collateral

securing the payment of their loans may not be sufficient
 
to assure full repayment. This could result in credit losses that are

inherent in the lending business. We
 
evaluate the collectability of our loan portfolio and provide an allowance
 
for credit losses

that we believe is adequate based upon such factors as:

●

the risk characteristics of various classifications of loans;

●

previous loan loss experience;

●

specific loans that have loss potential;

●

delinquency trends;

●

estimated fair market value of the collateral;

●

current and future economic conditions; and

●

geographic and industry loan concentrations.

At December 31, 2021, our allowance for credit losses for loans held
 
for investment was $21.6 million, which represented

approximately 1.12% of our total loans held for investment.
 
We had $4.3
 
million in nonaccruing loans at December 31, 2021.

The allowance is based on management’s
 
reasonable estimate and may not prove sufficient to cover future
 
loan losses.
 
Although

management uses the best information available to make determinations
 
with respect to the allowance for credit losses, future

adjustments may be necessary if economic conditions differ
 
substantially from the assumptions used or adverse developments

arise with respect to our nonperforming or performing loans.
 
In addition, regulatory agencies, as an integral part of their

examination process, periodically review our estimated losses on loans.
 
Our regulators may require us to recognize additional

losses based on their judgments about information available to them at the
 
time of their examination.
 
Accordingly, the allowance

for credit losses may not be adequate to cover all future loan losses and significant
 
increases to the allowance may be required in

the future if, for example, economic conditions worsen.
 
A material increase in our allowance for credit losses would adversely

impact our net income and capital in future periods, while having the effect
 
of overstating our current period earnings.

We may incur significant costs associated
 
with the ownership of real property as a
 
result of foreclosures, which could

reduce our net income.

Since we originate loans secured by real estate, we may have to foreclose on
 
the collateral property to protect our investment and

may thereafter own and operate such property,
 
in which case we would be exposed to the risks inherent in the ownership of
 
real

estate.

The amount that we, as a mortgagee, may realize after a foreclosure is dependent
 
upon factors outside of our control, including,

but not limited to:

●

general or local economic conditions;

●

environmental cleanup liability;

●

neighborhood values;

●

interest rates;

●

real estate tax rates;

●

operating expenses of the mortgaged properties;

●

supply of and demand for rental units or properties;

●

ability to obtain and maintain adequate occupancy of the properties;

●

zoning laws;

●

governmental rules, regulations and fiscal policies; and

●

acts of God.

Certain expenditures associated with the ownership of real estate, including
 
real estate taxes, insurance and maintenance costs,

may adversely affect the income from the real estate. Furthermore,
 
we may need to advance funds to continue to operate or to

protect these assets. As a result, the cost of operating real property
 
assets may exceed the rental income earned from such

properties or we may be required to dispose of the real property at a loss.

24

Liquidity Risks

Liquidity risk could impair our ability to fund operations and jeopardize our
 
financial condition.

Effective liquidity management is essential for the operation
 
of our business. We require
 
sufficient liquidity to meet client loan

requests, client deposit maturities and withdrawals, payments on our
 
debt obligations as they come due and other cash

commitments under both normal operating conditions and other
 
unpredictable circumstances causing industry or general financial

market stress. If we are unable to raise funds through deposits, borrowings,
 
earnings and other sources, it could have a substantial

negative effect on our liquidity.
 
In particular, a majority of our liabilities during
 
2021 were checking accounts and other liquid

deposits, which are generally payable on demand or upon short notice.
 
By comparison, a substantial majority of our assets were

loans, which cannot generally be called or sold in the same time frame.
 
Although we have historically been able to replace

maturing deposits and advances as necessary,
 
we might not be able to replace such funds in the future, especially if
 
a large

number of our depositors seek to withdraw their accounts at the same time,
 
regardless of the reason. Our access to funding

sources in amounts adequate to finance our activities on terms that are acceptable
 
to us could be impaired by factors that affect us

specifically or the financial services industry or economy in general.
 
Factors that could negatively impact our access to liquidity

sources include a decrease in the level of our business activity as a result of
 
a downturn in the markets in which our loans are

concentrated, adverse regulatory action against us, or our inability to attract
 
and retain deposits. Our ability to borrow could also

be impaired by factors that are not specific to us, such as a disruption
 
in the financial markets or negative views and expectations

about the prospects for the financial services industry.
 
If we are unable to maintain adequate liquidity,
 
it could materially and

adversely affect our business, results of operations or
 
financial condition.

We may be unable to pay dividends in the
 
future.

In 2021, our Board of Directors declared four quarterly cash dividends.
 
Declarations of any future dividends will be contingent on

our ability to earn sufficient profits and to remain well capitalized,
 
including our ability to hold and generate sufficient
 
capital to

comply with the CET1 conservation buffer requirement.
 
In addition, due to our contractual obligations with the holders of our

trust preferred securities, if we defer the payment of accrued interest owed to the holders
 
of our trust preferred securities, we may

not make dividend payments to our shareowners.

Further, under applicable statutes and regulations,
 
CCB’s board of directors,
 
after charging-off bad debts, depreciation and
 
other

worthless assets, if any,
 
and making provisions for reasonably anticipated future losses on loans and other
 
assets, may quarterly,

semi-annually, or
 
annually declare and pay dividends to CCBG of up to the aggregate net income
 
of that period combined with

the CCB’s retained net income
 
for the preceding two years and, with the approval of the Florida Office
 
of Financial Regulation

and Federal Reserve, declare a dividend from retained net income which
 
accrued prior to the preceding two years.
 
Additional

state laws generally applicable to Florida corporations may also limit our ability
 
to declare and pay dividends. Thus, our ability to

fund future dividends may be restricted by state and federal laws and regulations.

Regulatory and Compliance Risks

We are subject to
 
extensive regulation, which could restrict our
 
activities and impose financial requirements or limitations

on the conduct of our business.

We are subject
 
to extensive regulation, supervision and examination by our regulators,
 
including the Florida Office of Financial

Regulation, the Federal
 
Reserve, and the FDIC. Our compliance with these industry regulations is costly
 
and restricts certain of

our activities, including payment of dividends, mergers
 
and acquisitions, investments, lending and interest rates charged on
 
loans,

interest rates paid on deposits, access to capital and brokered deposits and
 
locations of banking offices. If we are unable to meet

these regulatory requirements, our financial condition, liquidity and
 
results of operations would be materially and adversely

affected.

Our activities are also regulated under consumer protection laws applicable
 
to our lending, deposit and other activities. Many of

these regulations are intended primarily for the protection of our
 
depositors and the Deposit Insurance Fund and not for the

benefit of our shareowners. In addition to the regulations of the bank
 
regulatory agencies, as a member of the Federal Home Loan

Bank, we must also comply with applicable regulations of the Federal Housing
 
Finance Agency and the Federal Home Loan

Bank.

Our failure to comply with these laws and regulations could subject us to restrictions
 
on our business activities, fines and other

penalties, any of which could adversely affect our results
 
of operations, capital base and the price of our securities. Further,
 
any

new laws, rules and regulations could make compliance more difficult
 
or expensive or otherwise adversely affect our business and

financial condition. Please refer to the Section entitled “Business – Regulatory
 
Considerations” on page 10.

25

U.S. federal banking agencies may require us to
 
increase our regulatory capital, long-term
 
debt or liquidity requirements,

which could result in the need to issue additional qualifying securities or
 
to take other actions, such as to sell company

assets.

We are subject
 
to U.S. regulatory capital and liquidity rules. These rules, among other things,
 
establish minimum requirements to

qualify as a well-capitalized institution. If CCB fails to maintain its status as well
 
capitalized under the applicable regulatory

capital rules, the Federal Reserve will require us to agree to bring the bank
 
back to well-capitalized status. For the duration of

such an agreement, the Federal Reserve may impose restrictions on our
 
activities. If we were to fail to enter into or comply with

such an agreement or fail to comply with the terms of such agreement, the Federal
 
Reserve may impose more severe restrictions

on our activities, including requiring us to cease and desist activities permitted
 
under the Bank Holding Company Act of 1956.

Capital and liquidity requirements are frequently introduced and
 
amended. It is possible that regulators may increase regulatory

capital requirements, change how regulatory capital is calculated or increase
 
liquidity requirements.

In 2013, the Federal Reserve Board released its final rules which implement
 
in the United States the Basel III regulatory capital

reforms from the Basel Committee on Banking Supervision and certain
 
changes required by the Dodd-Frank Act. Under the final

rule, minimum requirements increased for both the quality and quantity of capital
 
held by banking organizations. Consistent with

the international Basel framework, the rule includes a new minimum
 
ratio of Common Equity Tier 1 Capital, or CET1, to
 
Risk-

Weighted Assets, or
 
RWA,
 
of 4.5% and a CET1 conservation buffer of 2.5% of

RWA

(which was fully phased-in in 2019) that

apply to all supervised financial institutions.
 
The CET1 conservation buffer requirement requires
 
us to hold additional CET1

capital in excess of the minimum required to meet the CET1 to

RWA

ratio requirement. The rule also, among other things, raised

the minimum ratio of Tier 1 Capital to

RWA

from 4% to 6% and included a minimum leverage ratio of 4% for all banking

organizations. The impact of the new capital rules requires
 
us to maintain higher levels of capital, which we expect will lower our

return on equity.
 
Additionally, if our CET1 to

RWA

ratio does not exceed the minimum required plus the additional CET1

conservation buffer,
 
we may be restricted in our ability to pay dividends or make other distributions of capital to our
 
shareowners.

Further changes to and compliance with the regulatory capital and liquidity
 
requirements may impact our operations by requiring

us to liquidate assets, increase borrowings, issue additional equity or other
 
securities, cease or alter certain operations, sell

company assets or hold highly liquid assets, which may adversely affect
 
our results of operations. We
 
may be prohibited from

taking capital actions such as paying or increasing dividends or repurchasing
 
securities.

Changes in accounting standards or assumptions in applying accounting
 
policies could adversely affect us.

Our accounting policies and methods are fundamental to how we record
 
and report our financial condition and results of

operations. Some of these policies require use of estimates and assumptions
 
that may affect the reported value of our assets or

liabilities and results of operations and are critical because they require management
 
to make difficult, subjective and complex

judgments about matters that are inherently uncertain. If those assumptions,
 
estimates or judgments were incorrectly made, we

could be required to correct and restate prior-period financial statements. Accounting
 
standard-setters and those who interpret the

accounting standards, the SEC, banking regulators and our independent
 
registered public accounting firm may also amend or even

reverse their previous interpretations or positions on how various standards
 
should be applied. These changes may be difficult to

predict and could impact how we prepare and report our financial statements. In
 
some cases, we could be required to apply a new

or revised standard retrospectively,
 
resulting in us revising prior-period financial statements.

Florida financial institutions, such as CCB, face a higher risk of noncompliance
 
and enforcement actions with the Bank

Secrecy Act and other anti-money laundering statutes and regulations.

Since September 11, 2001, banking regulators
 
have intensified their focus on anti-money laundering and Bank Secrecy Act

compliance requirements, particularly the anti-money laundering
 
provisions of the USA PATRIOT
 
Act. There is also increased

scrutiny of compliance with the rules enforced by the Office of Foreign
 
Assets Control, or OFAC. Since 2004,
 
federal banking

regulators and examiners have been extremely aggressive in their supervision
 
and examination of financial institutions located in

the State of Florida with respect to the institution’s
 
Bank Secrecy Act/anti-money laundering compliance. Consequently,

numerous formal enforcement actions have been instituted against financial
 
institutions. If CCB’s policies, procedures
 
and

systems are deemed deficient or the policies, procedures and systems of
 
the financial institutions that it has already acquired or

may acquire in the future are deficient, CCB would be subject to liability,
 
including fines and regulatory actions such as

restrictions on its ability to pay dividends and the necessity to obtain regulatory
 
approvals to proceed
 
with certain aspects of its

business plan, including its acquisition plans.

26

Fee revenues from overdraft protection
 
programs constitute a significant portion of our noninterest income
 
and may be

subject to increased supervisory scrutiny.

Revenues derived from transaction fees associated with overdraft protection
 
programs offered to our customers represent a

significant portion of our noninterest income. In 2021, the Company
 
collected approximately $9.9 million in net overdraft

transaction fees. In recent months, certain members of Congress and
 
the leadership of the CFPB have expressed a heightened

interest in bank overdraft protection programs. In December 2021,
 
the CFPB published a report providing data on banks’

overdraft and non-sufficient funds fee revenues as well as observations
 
regarding consumer protection issues relating to

participation in such programs. The CFPB has indicated that it intends to
 
pursue enforcement actions against banking

organizations, and their executives, that oversee
 
overdraft practices that are deemed to be unlawful. In addition, the Comptroller

of the Currency has identified potential options for reform of national
 
bank overdraft protection practices, including providing a

grace period before the imposition of a fee, refraining from charging
 
multiple fees in a single day and eliminating fees altogether.

In response to this increased congressional and regulatory scrutiny,
 
and in anticipation of enhanced supervision and enforcement

of overdraft protection practices in the future, certain banking organizations
 
have begun to modify their overdraft protection

programs, including by discontinuing the imposition of overdraft transaction
 
fees. These competitive pressures from our peers, as

well as any adoption by our regulators of new rules or supervisory guidance
 
or more aggressive examination and enforcement

policies in respect of banks’ overdraft protection practices, could cause
 
us to modify our program and practices in ways that may

have a negative impact on our revenue and earnings, which, in turn, could
 
have an adverse effect on our financial condition and

results of operations. In addition, as supervisory expectations and industry
 
practices regarding overdraft

Operational Risks

Many types of operational risks can affect our earnings negatively.

We regularly
 
assess and monitor operational risk in our businesses. Despite our efforts
 
to assess and monitor operational risk, our

risk management framework may not be effective in
 
all cases. Factors that can impact operations and expose us to risks varying in

size, scale and scope include:

●

failures of technological systems or breaches of security measures, including,
 
but not limited to, those resulting from

computer viruses or cyber-attacks;

●

unsuccessful or difficult implementation of computer
 
systems upgrades;

●

human errors or omissions, including failures to comply with applicable
 
laws or corporate policies and procedures;

●

theft, fraud or misappropriation of assets, whether arising from the intentional
 
actions of internal personnel or external

third parties;

●

breakdowns in processes, breakdowns in internal controls or failures
 
of the systems and facilities that support our

operations;

●

deficiencies in services or service delivery;

●

negative developments in relationships with key counterparties, third-party
 
vendors, or employees in our day-to-day

operations; and

●

external events that are wholly or partially beyond our control, such
 
as pandemics, geopolitical events, political unrest,

natural disasters or acts of terrorism.

While we have in place many controls and business continuity plans designed
 
to address these factors and others, these plans may

not operate successfully to mitigate these risks effectively.
 
If our controls and business continuity plans do not mitigate the

associated risks successfully,
 
such factors may have a negative impact on our business, financial condition
 
or results of

operations. In addition, an important aspect of managing our operational
 
risk is creating a risk culture in which all employees

fully understand that there is risk in every aspect of our business and the
 
importance of managing risk as it relates to their job

functions. We
 
continue to enhance our risk management program to support our risk culture. Nonetheless,
 
if we fail to provide the

appropriate environment that sensitizes all of our employees to managing
 
risk, our business could be impacted adversely.

27

We are subject to
 
certain operational risks, including, but not limited to, customer,
 
employee or third-party fraud and

data processing system failures and errors.

We rely on
 
the ability of our employees and systems to process a high number of transactions. Operational
 
risk is the risk of loss

resulting from our operations, including but not limited to, the risk of
 
fraud by employees or persons outside our company,
 
the

execution of unauthorized transactions by employees, errors relating
 
to transaction processing and technology,
 
breaches of our

internal control systems and compliance requirements. Insurance coverage
 
may not be available for such losses, or where

available, such losses may exceed insurance limits. This risk of loss also includes
 
the potential legal actions that could arise as a

result of operational deficiencies or as a result of non-compliance with applicable
 
regulatory standards, adverse business decisions

or their implementation, or customer attrition due to potential negative
 
publicity. In the event of a breakdown
 
in our internal

control systems, improper operation of systems or improper employee
 
actions, we could suffer financial loss, face regulatory

action, and/or suffer damage to our reputation.

Pandemics, natural disasters, global climate change, acts of
 
terrorism and global conflicts may have a negative impact
 
on

our business and operations.

Pandemics, including the continuing COVID-19 pandemic, natural
 
disasters, global climate change, acts of terrorism, global

conflicts or other similar events have in the past, and may in the future have,
 
a negative impact on our business and operations.

These events impact us negatively to the extent that they result in reduced capital
 
markets activity, lower asset price
 
levels, or

disruptions in general economic activity in the United States or abroad,
 
or in financial market settlement functions. In addition,

these or similar events may impact economic growth negatively,
 
which could have an adverse effect on our business and

operations and may have other adverse effects on us in
 
ways that we are unable to predict.

Our business operations could be disrupted if significant portions of
 
our workforce were unable to work effectively,
 
including

because of illness, quarantines, government actions, or other restrictions
 
in connection with the pandemic. Further,
 
work-from-

home and other modified business practices may introduce additional
 
operational risks, including cybersecurity and execution

risks, which may result in inefficiencies or delays, and may affect
 
our ability to, or the manner in which we, conduct our business

activities. Disruptions to our clients could result in increased risk of
 
delinquencies, defaults, foreclosures and losses on our loans.

The escalation of the pandemic may also negatively impact regional economic
 
conditions for a period of time, resulting in

declines in local loan demand, liquidity of loan guarantors, loan collateral
 
(particularly in real estate), loan originations and

deposit availability.

Litigation may adversely affect our results.

We are subject
 
to litigation in the ordinary course of business. Claims and legal actions, including
 
supervisory actions by our

regulators, could involve large monetary claims and significant
 
defense costs. The outcome of litigation and regulatory matters as

well as the timing of ultimate resolution are inherently difficult
 
to predict.

Actual legal and other costs of resolving claims may be greater than
 
our legal reserves. The ultimate resolution of a pending legal

proceeding, depending on the remedy sought and granted,
 
could materially adversely affect our results of operations and financial

condition.

In addition, governmental authorities have, at times, sought criminal
 
penalties against companies in the financial services sector

for violations, and, at times, have required an admission of wrongdoing
 
from financial institutions in connection with resolving

such matters. Criminal convictions or admissions of wrongdoing in
 
a settlement with the government can lead to greater exposure

in civil litigation and reputational harm.

Substantial legal liability or significant regulatory action against us could
 
have material adverse financial effects or cause

significant reputational harm, which adversely impact our business prospects.
 
Further, we may be exposed to substantial

uninsured liabilities, which could adversely affect
 
our results of operations and financial condition.

28

Strategic Risks

Our future success is dependent on our ability to compete effectively
 
in the highly competitive banking industry.

We face vigorous
 
competition for deposits, loans and other financial services in our market area
 
from other banks and financial

institutions, including savings and loan associations, savings banks,
 
finance companies and credit unions. A number of our

competitors are significantly larger than we are and have greater
 
access to capital and other resources. Many of our competitors

also have higher lending limits, more expansive branch networks, and
 
offer a wider array of financial products and services. To
 
a

lesser extent, we also compete with other providers of financial services, such
 
as money market mutual funds, brokerage firms,

consumer finance companies, insurance companies and gov
 
ernmental organizations, which may offer financial
 
products and

services on more favorable terms than we are able to. Many of our non-bank
 
competitors are not subject to the same extensive

regulations that govern our activities. As a result, these non-bank competitors have
 
advantages over us in providing certain

services. The effect of this competition may reduce or
 
limit our margins or our market share and may adversely affect
 
our results

of operations and financial condition.

Our directors, executive officers, and principal shareowners,
 
if acting together,
 
have substantial control over all matters

requiring shareowner approval,
 
including changes of control. Because Mr.
 
William G. Smith, Jr.
 
is a principal

shareowner and our Chairman, President, and Chief
 
Executive Officer and Chairman of CCB, he has substantial
 
control

over all matters on a day-to-day basis.

Our directors, executive officers, and principal shareowners
 
beneficially owned approximately 23.7%
 
of the outstanding shares of

our common stock at December 31, 2021.
 
William G. Smith, Jr.,
 
our Chairman, President and Chief Executive Officer

beneficially owned 17.2% of our shares as of that date.
 
Accordingly, these directors, executive
 
officers, and principal

shareowners, if acting together, may
 
be able to influence or control matters requiring approval by our shareowners,
 
including the

election of directors and the approval of mergers, acquisitions
 
or other extraordinary transactions. Moreover,
 
because William G.

Smith, Jr. is the Chairman, President,
 
and Chief Executive Officer of CCBG and Chairman of CCB, he has substantial
 
control

over all matters on a day-to-day basis, including the nomination and election
 
of directors.

These directors, executive officers, and principal
 
shareowners may also have interests that differ from yours and may
 
vote in a

way with which you disagree, and which may be adverse to your interests. The
 
concentration of ownership may have the effect of

delaying, preventing or deterring a change of control of our company,
 
could deprive our shareowners of an opportunity to receive

a premium for their common stock as part of a sale of our Company and might
 
ultimately affect the market price of our common

stock. You
 
may also have difficulty changing management, the composition
 
of the Board of Directors, or the general direction of

our Company.

Our Articles of Incorporation, Bylaws, and certain laws and regulations
 
may prevent or delay transactions you might

favor,
 
including a sale or merger of CCBG.

CCBG is registered with the Federal Reserve as a financial holding
 
company under the Bank Holding Company Act, or BHC Act.

As a result, we are subject to supervisory regulation and examination
 
by the Federal Reserve. The Gramm-Leach-Bliley Act, the

BHC Act, and other federal laws subject financial holding companies
 
to particular restrictions on the types of activities in which

they may engage, and to a range of supervisory requirements and activities, including
 
regulatory enforcement actions for

violations of laws and regulations.

Provisions of our Articles of Incorporation, Bylaws, certain laws and
 
regulations and various other factors may make it more

difficult and expensive for companies or persons to acquire control
 
of us without the consent of our Board of Directors. It is

possible, however, that you would want
 
a takeover attempt to succeed because, for example, a potential buyer could offer
 
a

premium over the then prevailing price of our common stock.

For example, our Articles of Incorporation permit our Board of Directors
 
to issue preferred stock without shareowner action. The

ability to issue preferred stock could discourage a company from
 
attempting to obtain control of us by means of a tender offer,

merger, proxy contest or
 
otherwise. We are also subject
 
to certain provisions of the Florida Business Corporation Act and our

Articles of Incorporation that relate to business combinations with interested
 
shareowners. Other provisions in our Articles of

Incorporation or Bylaws that may discourage takeover attempts or make them
 
more difficult include:

●

Supermajority voting requirements to remove a director from office;

●

Provisions regarding the timing and content of shareowner proposals
 
and nominations;

●

Supermajority voting requirements to amend Articles of Incorporation
 
unless approval is received by a majority of

“disinterested directors”;

●

Absence of cumulative voting; and

●

Inability for shareowners to take action by written consent.

29

Reputational Risks

Damage to our reputation could harm our businesses, including
 
our competitive position and business prospects.

Our ability to attract and retain customers, clients, investors and employees
 
is impacted by our reputation. Harm to our reputation

can arise from various sources, including officer,
 
director or employee fraud, misconduct and unethical behavior,
 
security

breaches, litigation or regulatory outcomes, compensation practices, lending
 
practices, the suitability or reasonableness of

recommending particular trading or investment strategies,
 
including the reliability of our research and models, prohibiting clients

from engaging in certain transactions and employee sales practices. Additionally,
 
our reputation may be harmed by failing to

deliver products, subpar standards of service and quality expected by
 
our customers, clients and the community,
 
compliance

failures, the inability to manage technology change or maintain effective
 
data management, cyber incidents, internal and external

fraud, inadequacy of responsiveness to internal controls, unintended
 
disclosure of personal, proprietary or confidential

information, conflicts of interest and breach of fiduciary obligations,
 
the handling of health emergencies or pandemics, and the

activities of our clients, customers, counterparties and third parties, including
 
vendors. Our reputation may also be negatively

impacted by our environmental, social, and governance practices and
 
disclosures,
 
our businesses and our customers, including

practices and disclosures related to climate change. Actions by the financial
 
services industry generally or by certain members or

individuals in the industry also can adversely affect our reputation.
 
In addition, adverse publicity or negative information posted

on social media by employees, the media or otherwise, whether or not
 
factually correct, may adversely impact our business

prospects or financial results.

We are subject
 
to complex and evolving laws and regulations regarding privacy,
 
know-your-customer requirements, data

protection, cross-border data movement and other matters. Principles
 
concerning the appropriate scope of consumer and

commercial privacy vary considerably in different
 
jurisdictions, and regulatory and public expectations regarding the definition

and scope of consumer and commercial privacy may remain fluid.
 
It is possible that these laws may be interpreted and applied by

various jurisdictions in a manner inconsistent with our current or future practices,
 
or that is inconsistent with one another.
 
If

personal, confidential or proprietary information of customers or
 
clients in our possession, or in the possession of third parties

(including their downstream service providers) or financial data aggregators,
 
is mishandled, misused or mismanaged, or if we do

not timely or adequately address such information, we may face regulatory,
 
reputational and operational risks which could

adversely affect our financial condition and
 
results of operations.

We could
 
suffer reputational harm if we fail to properly identify and manage
 
potential conflicts of interest. Management of

potential conflicts of interest has become increasingly complex as we expand
 
our business activities through more numerous

transactions, obligations and interests with and among our clients. The failure
 
to adequately address, or the perceived failure to

adequately address, conflicts of interest could affect the
 
willingness of clients to use our products and services, or give rise to

litigation or enforcement actions, which could adversely affect
 
our business.

Our actual or perceived failure to address these and other issues, such
 
as operational risks, gives rise to reputational risk that could

harm us and our business prospects. Failure to appropriately address
 
any of these issues could also give rise to additional

regulatory restrictions, legal risks and reputational harm,
 
which could, among other consequences, increase the size and number

of litigation claims and damages asserted or subject us to enforcement
 
actions, fines and penalties, and cause us to incur related

costs and expenses.

Technology
 
Risks

We process, maintain,
 
and transmit confidential client information through
 
our information technology systems, such as

our online banking service.
 
Cybersecurity issues, such as security breaches and computer viruses,
 
affecting our

information technology systems or fraud related
 
to our debit card products could disrupt our business, result in the

unintended disclosure or misuse of confidential or proprietary
 
information, damage our reputation, increase our
 
costs,

and cause losses.

We collect and
 
store sensitive data, including our proprietary business
 
information and that of our clients, and personally

identifiable information of our clients and employees, in our

information technology systems

.

We also provide
 
our clients the

ability to bank online.

The secure processing, maintenance, and transmission of this information
 
is critical to our operations.

Our

network, or those of our clients, could be vulnerable to unauthorized
 
access, computer
 
viruses, phishing schemes and other

security problems.
 
Financial institutions and companies engaged in data processing have
 
increasingly reported breaches in the

security of their websites or other systems, some of which have involved sophisticated
 
and targeted attacks intended to obtain

unauthorized access to confidential information, destroy data, disrupt
 
or degrade service, sabotage systems or cause other damage.

30

We may be
 
required to spend significant capital and other resources to protect
 
against the threat of security breaches and

computer viruses or to alleviate problems caused by security breaches
 
or viruses. Security breaches and viruses could expose us to

claims, litigation and other possible liabilities. Any inability to prevent
 
security breaches or computer viruses could also cause

existing clients to lose confidence in our systems and could adversely
 
affect our reputation and our ability to generate deposits.

Additionally, fraud
 
losses related to debit and credit cards have risen in recent years due in large part
 
to growing and evolving

schemes to illegally use cards or steal consumer credit card information
 
despite risk management practices employed by the debit

and credit card industries. Many issuers of debit and credit cards have suffered
 
significant losses in recent years due to the theft of

cardholder data that has been illegally exploited for personal gain.

The potential for debit and credit card fraud against us or our clients and our third-party
 
service providers is a serious issue. Debit

and credit card fraud is pervasive, and the risks of cybercrime are complex
 
and continue to evolve. In view of the recent high-

profile retail data breaches involving client personal and financial information,
 
the potential impact on us and any exposure to

consumer losses and the cost of technology investments to improve security
 
could cause losses to us or our clients, damage to our

brand, and an increase in our costs.

Item 1B.

Unresolved Staff Comments

None.

Item 2.
 
Properties

We are headquartered
 
in Tallahassee, Florida.
 
Our executive office is in the Capital City Bank building located
 
on the corner of

Tennessee and
 
Monroe Streets in downtown Tallahassee.
 
The building is owned by CCB, but is located on land leased under a

long-term agreement.

At December 31, 2021, Capital City Bank had 57 banking offices.
 
Of these locations, we lease the land, buildings, or both at six

locations and own the land and buildings at the remaining 51. CCHL had 26
 
loan production offices, all of which were leased.

Capital City Strategic Wealth,
 
Inc. maintained five offices, all of which were leased.