# CAPITAL CITY BANK GROUP INC (CCBG) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CAPITAL CITY BANK GROUP INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/726601/000072660123000009/ccbg20221231.htm
Accession: 0000726601-23-000009
Filing date: 2023-03-01
Report date: 2022-12-31
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/
Previous year: /company/CCBG/mda/fy2021/ (FY 2021)
Next year: /company/CCBG/mda/fy2023/ (FY 2023)

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 portion of our investment securities portfolio
 
(38.5%) at December 31, 2022 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.

21

Inflationary pressures and rising prices may
 
affect our results of operations and financial condition.

Inflation rose sharply at the end of 2021 and continued rising in 2022 at levels not
 
seen for over 40 years. Inflationary pressures

are currently expected to remain elevated throughout 2023. Small to medium
 
-sized businesses may be impacted more during

periods of high inflation as they are not able to leverage economics of scale to
 
mitigate cost pressures compared to larger

businesses. Consequently,
 
the ability of our business customers to repay their loans may deteriorate, and in some
 
cases this

deterioration may occur quickly,
 
which would adversely impact our results of operations and financial condition.
 
Furthermore, a

prolonged period of inflation could cause wages and other costs to further
 
increase which could adversely affect our results of

operations and financial condition. Sustained higher interest rates by
 
the Federal Reserve may be needed to tame persistent

inflationary price pressures, which could push down asset prices and weaken
 
economic activity. A deterioration
 
in economic

conditions in the United States and our markets could result in an increas
 
e
 
in loan delinquencies and non-performing assets,

decreases in loan collateral values and a decrease in demand for our products and
 
services, all of which, in turn, would adversely

affect our business, financial condition and results of operations.

The impact of interest rates on our mortgage banking business can
 
have a significant impact on revenues.

Changes in interest rates can impact our mortgage-related revenues and net revenues
 
associated with our mortgage activities.
 
A

decline in mortgage rates generally increases the demand for mortgage loans
 
as borrowers refinance, but also generally leads to

accelerated payoffs. Conversely,
 
in a constant or increasing rate environment, we would expect fewer loans to be refinanced
 
and a

decline in payoffs. Although we use models to assess the impact
 
of interest rates on mortgage-related revenues, the estimates of

revenues produced by these models are dependent on estimates and assumptions
 
of future loan demand, prepayment speeds and

other factors which may differ from actual subsequent
 
experience.

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, 2022 was approximately 27,987 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.

22

At December 31, 2022, we have 112 loans
 
totaling approximately $71 million that are indexed to LIBOR.
 
We believe our
 
current

portfolio of LIBOR based loan contracts contain the necessary fallback language,
 
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 $33
 
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).
 
Effective June 30, 2023, in accordance with the trust agreement
 
and the Adjustable Interest Rate (LIBOR)

Act of 2021, LIBOR will be replaced with 3-month CME term SOFR (secured overnight
 
financing rate) as the interest rate index

for these notes.
 
The interest rate swap contract adheres to the International Swaps and Derivatives
 
Association’s protocol which

requires conversion to the fallback SOFR rate at the time of LIBOR cessation.
 
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.

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, 2022, commercial mortgage loans comprised approximately
 
31.0% 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, 2022, commercial loans
 
comprised approximately 9.8% of

our total loan portfolio.

●

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,

2022, construction loans comprised approximately 9.3% 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, 2022, vacant land loans comprised

approximately 3.28% 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, 2022, HELOCs comprised approximately 8.2% of
 
our total loan portfolio.

23

●

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, 2022, consumer loans comprised approximately 12.9%
 
of our total loan portfolio, with indirect auto loans

making up a majority of this portfolio at approximately 93.3% 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, 2022, approximately 77% 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, 2022, a significant number of our loans secured by real estate are secured by commercial and

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

downturn in the economy or recession in 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 some of 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, 2022, approximately 33% and 44% of our $2.525 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.

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.

24

At December 31, 2022, our allowance for credit losses for loans held for
 
investment was $24.7 million, which represented

approximately 0.982% of our total loans held for investment.
 
We had $2.3
 
million in nonaccruing loans at December 31, 2022.

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.

25

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
 
2022 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 access to deposits may be

negatively impacted by,
 
among other factors, periods of low interest rates or high interest rates.
 
Periods of high interest rates

could promote increased competition for deposits, including from new
 
financial technology competitors, or provide customers

with alternative investment options.
 
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 2022, 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 Common Equity Tier 1 Capital
 
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 of Atlanta (“FHLB”), we must also comply with applicable regulations
 
of the Federal Housing Finance Agency and the

Federal Home Loan Bank.

26

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.

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.

27

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 consumers represent a

significant portion of our noninterest income. In 2022, the Company collected
 
approximately $10.6 million in net consumer

overdraft transaction fees.

In 2022, certain members of Congress and the leadership of the CFPB have expressed
 
a heightened interest in bank consumer

overdraft protection programs. In 2022, the CFPB piloted a supervision
 
effort to collect key metrics from some supervised

institutions regarding the consumer impact of their overdraft and
 
non-sufficient fund practices, with the intent of using this

information to identify institutions for further examination and review.
 
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, and indeed took action against a large bank for charging
 
“surprise” overdraft fees known as authorized positive fee. In

October of 2022, the CFPB issued guidance to help banks avoid charging
 
illegal surprise overdraft fees. 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.

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.

28

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.

We are subject to
 
credit and/or settlement risk arising from
 
the soundness of other financial institutions and

counterparties which may have a material adverse effect on our business, financial condition,
 
and results of operations.

Financial services institutions are interrelated as a result of trading,
 
clearing, counterparty, or other
 
relationships. We
 
have

exposure to many different industries and counterparties,
 
and routinely execute transactions with counterparties in the financial

services industry, including
 
commercial banks, brokers and dealers, investment banks, other institutional
 
clients, and certain

vendors.
 
Many of these transactions expose us to credit or settlement risk in the event of
 
a default or other failure to adhere to

contractual obligations by a counterparty or client. In addition, our credit
 
or settlement risk may be exacerbated when any

collateral held by us cannot be realized upon or is liquidated at prices not sufficient
 
to recover the full amount of the credit or

derivative exposure due to us. Increased interconnectivity amongst
 
financial institutions also increases the risk of cyber-attacks

and information system failures for financial institutions. Any such losses could
 
have a material adverse effect on our business,

financial condition,
 
and results of operations.

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

our business and operations.

Pandemics (such as the 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.

29

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 governmental
 
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 23.3% of the outstanding
 
shares of

our common stock at December 31, 2022.
 
William G. Smith, Jr.,
 
our Chairman, President and Chief Executive Officer

beneficially owned 17.1% 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 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.

30

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.

31

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, 2022, Capital City Bank had 58 banking offices.
 
Of these locations, we lease the land, buildings, or both at

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

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