ccbg-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,

D.C.

20549

FORM

10-Q

☒

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended

June 30, 2023

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number:

0-13358

Capital City Bank Group, Inc.

(Exact name of Registrant as specified in its charter)

Florida

59-2273542

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

217 North Monroe Street

Tallahassee

Florida

32301

(Address of principal executive office)

(Zip Code)

(

850

)

402-7821

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, Par value $0.01

CCBG

Nasdaq Stock Market

, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of

1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days.

Yes

[X] No [

]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405

of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit

such files).

Yes [

] No [

]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,

an emerging growth company.

See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth

company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any

new or revised financial accounting standards pursuant to Section 13(a) of The Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [

]

[X]

At July 27, 2023,

16,991,634

shares of the Registrant’s Common Stock, $.01 par value, were outstanding.

CAPITAL CITY BANK

GROUP,

INC.

QUARTERLY

REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2023

TABLE OF CONTENTS

PART I –

Financial Information

Page

Item 1.

Consolidated Financial Statements (Unaudited)

Consolidated Statements of Financial Condition – June 30, 2023 and December 31, 2022

Consolidated Statements of Income – Three and Six Months Ended June 30, 2023 and 2022

Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2023 and 2022

Consolidated Statements of Changes in Shareowners’ Equity – Three and Six Months Ended June 30, 2023 and 2022

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2023 and 2022

Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

Item 4.

Controls and Procedures

PART II –

Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosure

Item 5.

Other Information

Item 6.

Exhibits

Signatures

INTRODUCTORY NOTE

Caution Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform

Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations,

estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of

which are beyond our control.

The words “may,” “could,” “should,” “would,” “believe,”

“anticipate,” “estimate,” “expect,” “intend,” “plan,”

“target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties.

Our actual future results may differ materially from

those set forth in our forward-looking statements.

Our ability to

achieve our financial objectives

could be adversely affected

by the factors discussed

in detail in Part

I, Item 2. “Management’s

Discussion and

Analysis of Financial

Condition and

Results of Operations”

and Part II,

Item 1A. “Risk

Factors” in this

Quarterly Report on

Form 10-Q and

the following sections

of our Annual

Report on Form

10-K for the

year ended December

31, 2022

(the “2022 Form

10-K”):

(a) “Introductory

Note” in

Part I,

Item 1.

“Business”; (b)

“Risk Factors”

in Part

I, Item

1A, as

updated in

our subsequent

quarterly reports

filed on Form 10-Q; and (c)

“Introduction” in “Management’s

Discussion and Analysis of Financial Condition

and Results of Operations,” in

Part II, Item 7, as well as:

●

our ability to successfully manage credit risk, interest rate risk, liquidity risk, and other risks inherent to our industry;

●

legislative or regulatory changes;

●

adverse developments in the financial services industry generally, such as the recent bank failures and any related impact on depositor

behavior;

●

the effects of changes in the level of checking or savings account deposits and the competition for deposits on our funding costs, net

interest margin and ability to replace maturing deposits and advances, as necessary;

●

the effects of actions taken by governmental agencies to stabilize the recent volatility in the financial system and the effectiveness of such

actions;

●

changes in monetary and fiscal policies of the U.S. Government;

●

inflation, interest rate, market and monetary fluctuations;

●

the effects of security breaches and computer viruses that may affect our computer systems or fraud related to debit card products;

●

the accuracy of our financial statement estimates and assumptions, including the estimates used for our allowance for credit losses,

deferred tax asset valuation and pension plan;

●

changes in our liquidity position;

●

changes in accounting principles, policies, practices or guidelines;

●

the frequency and magnitude of foreclosure of our loans;

●

the effects of our lack of a diversified loan portfolio, including the risks of loan segments, geographic and industry concentrations;

●

the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

●

our ability to declare and pay dividends, the payment of which is subject to our capital requirements;

●

changes in the securities and real estate markets;

●

structural changes in the markets for origination, sale and servicing of residential mortgages;

●

uncertainty in the pricing of residential mortgage loans that we sell, as well as competition for the mortgage servicing rights related to these

loans and related interest rate risk or price risk resulting from retaining mortgage servicing rights and the potential effects of higher interest

rates on our loan origination volumes;

●

the effect of corporate restructuring, acquisitions or dispositions, including the actual restructuring and other related charges and the failure

to achieve the expected gains, revenue growth or expense savings from such corporate restructuring, acquisitions or dispositions;

●

the effects of natural disasters, harsh weather conditions (including hurricanes), widespread health emergencies (including pandemics, such

as the COVID-19 pandemic), military conflict, terrorism, civil unrest or other geopolitical events;

●

our ability to comply with the extensive laws and regulations to which we are subject, including the laws for each jurisdiction where we

operate;

●

the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

●

increased competition and its effect on pricing;

●

technological changes;

●

the outcomes of litigation or regulatory proceedings;

●

negative publicity and the impact on our reputation;

●

changes in consumer spending and saving habits;

●

growth and profitability of our noninterest income;

●

the limited trading activity of our common stock;

●

the concentration of ownership of our common stock;

●

anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;

●

other risks described from time to time in our filings with the Securities and Exchange Commission; and

●

our ability to manage the risks involved in the foregoing.

However, other factors besides those listed in

Item 1A Risk Factors

or discussed in this Form 10-Q also could adversely affect our results,

and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties.

Any forward-looking

statements made by us or on our behalf speak only as of the date they are made.

We do not undertake to update any forward-looking

statement, except as required by applicable law.

PART

FINANCIAL INFORMATION

Item 1.

CAPITAL CITY BANK

GROUP,

INC.

CONSOLIDATED STATEMENTS

OF FINANCIAL CONDITION

(Unaudited)

June 30,

December 31,

(Dollars in Thousands, Except Par Value)

2023

2022

ASSETS

Cash and Due From Banks

83,679

72,114

Federal Funds Sold and Interest Bearing Deposits

285,129

528,536

Total Cash and Cash Equivalents

368,808

600,650

Investment Securities, Available

for Sale, at fair value (amortized cost of $

424,220

and $

455,232

)

386,220

413,294

Investment Securities, Held to Maturity (fair value of $

595,219

and $

612,701

)

641,398

660,744

Equity Securities

1,703

Total Investment

Securities

1,029,321

1,074,048

Loans Held For Sale, at fair value

67,908

54,635

Loans Held for Investment

2,667,003

2,525,180

Allowance for Credit Losses

(27,964)

(24,736)

Loans Held for Investment, Net

2,639,039

2,500,444

Premises and Equipment, Net

82,062

82,138

Goodwill and Other Intangibles

93,013

93,093

Other Real Estate Owned

431

Other Assets

119,411

120,519

Total Assets

4,399,563

4,525,958

LIABILITIES

Deposits:

Noninterest Bearing Deposits

1,520,134

1,653,620

Interest Bearing Deposits

2,268,732

2,285,697

Total Deposits

3,788,866

3,939,317

Short-Term

Borrowings

50,673

56,793

Subordinated Notes Payable

52,887

Other Long-Term

Borrowings

414

513

Other Liabilities

77,192

73,675

Total Liabilities

3,970,032

4,123,185

Temporary Equity

8,752

8,757

SHAREOWNERS’ EQUITY

Preferred Stock, $

0.01

par value;

3,000,000

shares authorized;

shares issued and outstanding

Common Stock, $

0.01

par value;

90,000,000

shares authorized;

16,991,634

and

16,986,785

shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

170

Additional Paid-In Capital

36,853

37,331

Retained Earnings

417,128

393,744

Accumulated Other Comprehensive Loss, net of tax

(33,372)

(37,229)

Total Shareowners’

Equity

420,779

394,016

Total Liabilities, Temporary

Equity, and Shareowners’ Equity

4,399,563

4,525,958

The accompanying Notes to Consolidated Financial Statements are

an integral part of these statements.

CAPITAL CITY BANK

GROUP,

INC.

CONSOLIDATED STATEMENTS

OF INCOME

(Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

(Dollars in Thousands, Except Per Share

Data)

2023

2022

2023

2022

INTEREST INCOME

Loans, including Fees

37,477

24,072

72,357

46,205

Investment Securities:

Taxable

4,803

3,833

9,716

6,723

Tax Exempt

Funds Sold

2,782

1,408

6,893

1,817

Total Interest Income

45,074

29,320

88,989

54,758

INTEREST EXPENSE

Deposits

4,008

266

6,496

490

Short-Term

Borrowings

451

343

912

535

Subordinated Notes Payable

604

370

1,175

687

Other Long-Term

Borrowings

Total Interest Expense

5,068

987

8,594

1,729

NET INTEREST INCOME

40,006

28,333

80,395

53,029

Provision for Credit Losses

2,219

1,542

5,349

1,542

Net Interest Income After Provision For Credit Losses

37,787

26,791

75,046

51,487

NONINTEREST INCOME

Deposit Fees

5,326

5,447

10,565

10,638

Bank Card Fees

3,795

4,034

7,521

7,797

Wealth Management

Fees

4,149

4,403

8,077

10,473

Mortgage Banking Revenues

5,837

9,065

12,832

18,011

Other

3,766

1,954

6,126

3,802

Total Noninterest

Income

22,873

24,903

45,121

50,721

NONINTEREST EXPENSE

Compensation

24,884

25,383

50,520

50,239

Occupancy, Net

6,820

6,075

13,582

12,168

Other

10,830

9,040

18,887

17,324

Total Noninterest

Expense

42,534

40,498

82,989

79,731

INCOME BEFORE INCOME TAXES

18,126

11,196

37,178

22,477

Income Tax Expense

3,544

2,177

7,677

4,412

NET INCOME

14,582

9,019

29,501

18,065

(Income) Loss Attributable to Noncontrolling Interests

(31)

(306)

(897)

NET INCOME ATTRIBUTABLE

TO COMMON SHAREOWNERS

14,551

8,713

29,505

17,168

BASIC NET INCOME PER SHARE

0.86

0.51

1.73

1.01

DILUTED NET INCOME PER SHARE

0.85

0.51

1.73

1.01

Average Common

Basic Shares Outstanding

17,002

16,949

17,009

16,940

Average Common

Diluted Shares Outstanding

17,035

16,971

17,040

16,958

The accompanying Notes to Consolidated Financial Statements are

an integral part of these statements.

CAPITAL CITY BANK

GROUP,

INC.

CONSOLIDATED STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

NET INCOME ATTRIBUTABLE

TO COMMON SHAREOWNERS

14,551

8,713

29,505

17,168

Other comprehensive (loss) income, before

tax:

Investment Securities:

Change in net unrealized gain/loss on securities available for sale

(2,887)

(10,718)

3,921

(36,167)

Amortization of unrealized losses on securities transferred from

available for sale to held to maturity

876

1,741

Derivative:

Change in net unrealized gain on effective cash flow

derivative

585

1,161

(217)

2,997

Benefit Plans:

Pension plan settlement

(217)

169

(217)

378

Total Benefit Plans

(217)

169

(217)

378

Other comprehensive (loss) income, before

tax

(1,643)

(9,384)

5,228

(32,783)

Deferred tax (benefit) expense related to other comprehensive income

(347)

(2,362)

1,371

(8,232)

Other comprehensive (loss) income, net of tax

(1,296)

(7,022)

3,857

(24,551)

TOTAL COMPREHENSIVE

INCOME (LOSS)

13,255

1,691

33,362

(7,383)

The accompanying Notes to Consolidated Financial Statements are

an integral part of these statements.

CAPITAL CITY BANK

GROUP,

INC.

CONSOLIDATED STATEMENTS

OF CHANGES IN SHAREOWNERS’ EQUITY

(Unaudited)

Accumulated

Other

Additional

Comprehensive

Common

Paid-In

Retained

(Loss) Income,

(Dollars In Thousands, Except Share Data)

Outstanding

Stock

Capital

Earnings

Net of Taxes

Total

Balance, April 1, 2023

17,021,748

170

37,512

405,634

(32,076)

411,240

Net Income Attributable to Common Shareowners

14,551

Other Comprehensive Loss, net of tax

(1,296)

Cash Dividends ($

0.1800

per share)

(3,057)

Repurchase of Common Stock

(40,495)

(1,203)

Stock Based Compensation

228

Stock Compensation Plan Transactions, net

10,381

316

Balance, June 30, 2023

16,991,634

170

36,853

417,128

(33,372)

420,779

Balance, April 1, 2022

16,947,602

169

35,188

370,531

(33,743)

372,145

Net Income Attributable to Common Shareowners

8,713

Other Comprehensive Loss, net of tax

(7,022)

Cash Dividends ($

0.1600

per share)

(2,712)

Stock Based Compensation

244

Stock Compensation Plan Transactions, net

11,678

306

307

Balance, June 30, 2022

16,959,280

170

35,738

376,532

(40,765)

371,675

Balance, January 1, 2023

16,986,785

170

37,331

393,744

(37,229)

394,016

Net Income Attributable to Common Shareowners

29,505

Other Comprehensive Income, net of tax

3,857

Cash Dividends ($

0.3600

per share)

(6,121)

Repurchase of Common Stock

(65,736)

(2,022)

Stock Based Compensation

764

Stock Compensation Plan Transactions, net

70,585

780

Balance, June 30, 2023

16,991,634

170

36,853

417,128

(33,372)

420,779

Balance, January 1, 2022

16,892,060

169

34,423

364,788

(16,214)

383,166

Net Income Attributable to Common Shareowners

17,168

Other Comprehensive Loss, net of tax

(24,551)

Cash Dividends ($

0.3200

per share)

(5,424)

Stock Based Compensation

489

Stock Compensation Plan Transactions, net

67,220

826

827

Balance, June 30, 2022

16,959,280

170

35,738

376,532

(40,765)

371,675

The accompanying Notes to Consolidated Financial Statements are

an integral part of these statements.

CAPITAL CITY BANK

GROUP,

INC.

CONSOLIDATED STATEMENTS

OF CASH FLOWS

(Unaudited)

Six Months Ended June 30,

(Dollars in Thousands)

2023

2022

CASH FLOWS FROM OPERATING

ACTIVITIES

Net Income Attributable to Common Shareowners

29,505

17,168

Adjustments to Reconcile Net Income to

Cash Provided by Operating Activities:

Provision for Credit Losses

5,349

1,542

Depreciation

3,927

3,802

Amortization of Premiums, Discounts and Fees, net

2,260

5,545

Amortization of Intangible Asset

Pension Plan Settlement (Gain) Charge

(291)

378

Originations of Loans Held-for-Sale

(209,775)

(573,239)

Proceeds From Sales of Loans Held-for-Sale

209,334

595,074

Mortgage Banking Revenues

(12,832)

(18,011)

Net Additions for Capitalized Mortgage Servicing Rights

(859)

1,358

Stock Compensation

764

489

Net Tax Benefit From Stock-Based

Compensation

(19)

Deferred Income Taxes

(2,298)

(8,879)

Net Change in Operating Leases

(3)

(72)

Net Gain on Sales and Write-Downs of Other Real Estate Owned

(1,900)

(26)

Net Decrease in Other Assets

4,492

845

Net Increase in Other Liabilities

3,815

22,040

Net Cash Provided By Operating Activities

31,568

48,075

CASH FLOWS FROM INVESTING ACTIVITIES

Securities Held to Maturity:

Purchases

(218,548)

Proceeds from Payments, Maturities, and Calls

18,992

28,111

Securities Available for

Sale:

Purchases

(4,634)

(37,044)

Proceeds from Sale of Securities

3,365

Proceeds from Payments, Maturities, and Calls

32,490

47,413

Purchases of Loans Held for Investment

(201,000)

(174,779)

Net Decrease (Increase) in Loans Held for Investment

55,154

(109,806)

Proceeds From Sales of Other Real Estate Owned

3,772

Purchases of Premises and Equipment

(3,851)

(3,322)

Noncontrolling Interest Contributions

2,573

Net Cash Used In Investing Activities

(99,077)

(462,007)

CASH FLOWS FROM FINANCING ACTIVITIES

Net (Decrease) Increase in Deposits

(150,451)

73,396

Net (Decrease) Increase in Short-Term

Borrowings

(6,120)

4,784

Repayment of Other Long-Term

Borrowings

(99)

(150)

Dividends Paid

(6,121)

(5,424)

Payments to Repurchase Common Stock

(2,022)

Proceeds from Issuance of Common Stock Under Purchase Plans

480

496

Net Cash (Used In) Provided by Financing Activities

(164,333)

73,102

NET DECREASE IN CASH AND CASH EQUIVALENTS

(231,842)

(340,830)

Cash and Cash Equivalents at Beginning of Period

600,650

1,035,354

Cash and Cash Equivalents at End of Period

368,808

694,524

Supplemental Cash Flow Disclosures:

Interest Paid

8,720

1,617

Income Taxes Paid

3,860

3,765

Noncash Investing and Financing Activities:

Loans Transferred to Other Real Estate Owned

1,442

The accompanying Notes to Consolidated Financial Statements are

an integral part of these statements.

CAPITAL CITY BANK

GROUP,

INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

NOTE 1 –

BUSINESS AND BASIS OF PRESENTATION

Nature of Operations

Capital City Bank Group, Inc. (“CCBG” or the “Company”) provides a full range of

banking and banking-

related services to individual and corporate clients through its subsidiary,

Capital City Bank, with banking offices located in Florida,

Georgia, and Alabama.

The Company is subject to competition from other financial institutions, is subject to

regulation by certain

government agencies and undergoes periodic examinations

by those regulatory authorities.

Basis of Presentation

The consolidated financial statements in this Quarterly Report on Form

10-Q include the accounts of CCBG

and its wholly owned subsidiary,

Capital City Bank (“CCB” or the “Bank”).

All material inter-company transactions and accounts

have been eliminated.

Certain previously reported amounts have been reclassified to conform to the current year’s

presentation.

The accompanying unaudited consolidated financial statements have

been prepared in accordance with generally accepted accounting

principles for interim financial information and with the instructions to Form

10-Q and Article 10 of Regulation S-X.

Accordingly,

they do not include all of the information and notes required by generally accepted

accounting principles for complete financial

statements.

In the opinion of management, all adjustments (consisting of normal

recurring accruals) considered necessary for a fair

presentation have been included.

The Consolidated Statement of Financial Condition at December

31, 2022 has been derived from the audited consolidated financial

statements at that date, but does not include all of the information and notes

required by generally accepted accounting principles for

complete financial statements.

For further information, refer to the consolidated financial statements and notes

thereto included in the

Company’s annual report

on Form 10-K for the year ended December 31, 2022.

Accounting Standards Updates

Adoption of New Accounting Standard,

On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2022-02,

“Financial Instruments – Credit Losses (Topic

326), Troubled Debt Restructurings and Vintage

Disclosures.” ASU 2022-02 eliminates

the accounting guidance for troubled debt restructurings in Accounting

Standards Codification (“ASC”) 310-40, “Receivables -

Troubled Debt Restructurings by Creditors

”

for entities that have adopted the current expected credit loss model introduced

by ASU

2016-13, “Financial Instruments – Credit Losses (Topic

326), Measurement of Credit Losses on Financial Instruments.”

ASU 2022-

02 also requires that public business entities disclose current-period

gross charge-offs by year of origination for financing receivables

and net investments in leases within the scope of Subtopic 326-20, “Financial

Instruments—Credit Losses—Measured at Amortized

Cost.”

Proposed Accounting Standards

ASU

2023-01, “Leases (Topic

842)

Common Control Arrangements.” ASU 2023-01 requires

entities to amortize leasehold improvements associated with common control

leases over the useful life to the common control group.

ASU 2023-01 also provides certain practical expedients applicable to private

companies and not-for-profit organizations. ASU 2023-

01 will be effective for the Company on January 1, 2024, though

early adoption is permitted. The Company is evaluating the effect

that ASU 2023-01 will have on its consolidated financial statements and related disclosures.

ASU No.

2023-02, “Investments—Equity Method and Joint Ventures

(Topic

323)

: Accounting for Investments in Tax

Credit

Structures Using the Proportional Amortization Method.” ASU 2023-02

is intended to improve the accounting and disclosures for

investments in tax credit structures. ASU 2023-02 allows entities to elect to account

for qualifying tax equity investments using the

proportional amortization method, regardless of the program giving

rise to the related income tax credits. Previously,

this method was

only available for qualifying tax equity investments in low-income

housing tax credit structures. ASU 2023-02 will be effective for the

Company on January 1, 2024, though early adoption is permitted. The

Company is evaluating the effect that ASU 2023-02 will have

on its consolidated financial statements and related disclosures.

NOTE 2 –

INVESTMENT SECURITIES

Investment Portfolio Composition

. The following table summarizes the amortized cost and related fair value of investment

securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”)

and the corresponding amounts of gross

unrealized gains and losses.

Available for

Sale

Amortized

Unrealized

Allowance for

Fair

(Dollars in Thousands)

Cost

Gains

Losses

Credit Losses

Value

June 30, 2023

U.S. Government Treasury

22,047

1,797

20,250

U.S. Government Agency

175,515

11,303

164,240

States and Political Subdivisions

46,842

5,958

(5)

40,879

Mortgage-Backed Securities

(1)

77,144

11,014

66,132

Corporate Debt Securities

95,317

7,995

(19)

87,364

Other Securities

(2)

7,355

Total

424,220

38,067

(24)

386,220

December 31, 2022

U.S. Government Treasury

23,977

1,928

22,050

U.S. Government Agency

198,888

12,863

186,052

States and Political Subdivisions

47,197

6,855

(13)

40,329

Mortgage-Backed Securities

(1)

80,829

11,426

69,405

Corporate Debt Securities

97,119

8,874

(28)

88,236

Other Securities

(2)

7,222

Total

455,232

41,946

(41)

413,294

Held to Maturity

Amortized

Unrealized

Fair

(Dollars in Thousands)

Cost

Gains

Losses

Value

June 30, 2023

U.S. Government Treasury

457,522

25,365

432,157

Mortgage-Backed Securities

(1)

183,876

20,815

163,062

Total

641,398

46,180

595,219

December 31, 2022

U.S. Government Treasury

457,374

25,641

431,733

Mortgage-Backed Securities

(1)

203,370

22,410

180,968

Total

660,744

48,051

612,701

(1)

Comprised of residential mortgage-backed

securities

(2)

Includes Federal Home Loan Bank and Federal Reserve Bank stock,

recorded at cost of $

2.3

million and $

5.1

million,

respectively,

at June 30, 2023 and $

2.1

million and $

5.1

million, respectively,

at December 31, 2022.

At June 30, 2023 and December 31, 2022, the investment portfolio had $

1.7

million and $

0.01

million, respectively in equity

securities. These securities do not have a readily determinable fair value

and were not credit impaired.

Securities with an amortized cost of $

613.7

million and $

656.1

million at June 30, 2023 and December 31, 2022, respectively,

were

pledged to secure public deposits and for other purposes.

The Bank, as a member of the Federal Home Loan Bank of Atlanta (“FHLB”), is required

to own capital stock in the FHLB based

generally upon the balances of residential and commercial real estate loans and

FHLB advances.

FHLB stock, which is included in

other securities,

is pledged to secure FHLB advances.

No ready market exists for this stock, and it has no quoted fair value; however,

redemption of this stock has historically been at par value.

As a member of the Federal Reserve Bank of Atlanta, the Bank is required to maintain

stock in the Federal Reserve Bank of Atlanta

based on a specified ratio relative to the Bank’s

capital.

Federal Reserve Bank stock is carried at cost.

During the third quarter of 2022, the Company transferred certain securities from

the AFS to HTM classification.

Transfers are made

at fair value on the date of the transfer.

The

securities had an amortized cost basis and fair value of $

168.4

million and $

159.0

million, respectively at the time of transfer.

The net unamortized, unrealized loss on the transferred securities included

in accumulated

other comprehensive loss in the accompanying balance sheet at June 30, 2023

totaled $

6.2

million.

This amount will continue to be

amortized out of accumulated other comprehensive loss over the remaining

life of the underlying securities as an adjustment of the

yield on those securities.

Investment Sales.

There were no significant sales of investment securities for the three or six months

ended June 30, 2023. There were

no significant sales of investment securities for the three months ended

June 30, 2022 and $

3.4

million in sales for the six months

ended June 30, 2022.

Maturity Distribution

At June 30, 2023, the Company’s investment

securities had the following maturity distribution based on

contractual maturity.

Expected maturities may differ from contractual maturities because

borrowers may have the right to call or

prepay obligations.

Mortgage-backed securities (“MBS”) and certain amortizing U.S. government

agency securities are shown

separately because they are not due at a certain maturity date.

Available for

Sale

Held to Maturity

(Dollars in Thousands)

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due in one year or less

41,681

41,030

Due after one year through five years

153,275

139,764

457,522

432,157

Due after five year through ten years

49,673

41,410

Mortgage-Backed Securities

77,144

66,132

183,876

163,062

U.S. Government Agency

95,092

90,529

Other Securities

7,355

Total

424,220

386,220

641,398

595,219

Unrealized Losses on Investment Securities.

The following table summarizes the available for sale investment securities with

unrealized losses aggregated by major security type and length of time in a continuous

unrealized loss position:

Less Than

Greater Than

12 Months

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in Thousands)

Value

Losses

Value

Losses

Value

Losses

June 30, 2023

Available for

Sale

U.S. Government Treasury

19,271

1,797

19,271

1,797

U.S. Government Agency

18,020

191

122,553

11,112

140,573

11,303

States and Political Subdivisions

1,559

39,325

5,949

40,884

5,958

Mortgage-Backed Securities

66,016

11,014

66,040

11,014

Corporate Debt Securities

1,967

79,768

7,987

81,735

7,995

Total

21,570

208

326,933

37,859

348,503

38,067

Held to Maturity

U.S. Government Treasury

432,157

25,365

432,157

25,365

Mortgage-Backed Securities

3,265

141

159,566

20,674

162,831

20,815

Total

3,265

141

591,723

46,039

594,988

46,180

December 31, 2022

Available for

Sale

U.S. Government Treasury

983

19,189

1,928

20,172

1,928

U.S. Government Agency

63,112

2,572

113,004

10,291

176,116

12,863

States and Political Subdivisions

1,425

38,760

6,853

40,185

6,855

Mortgage-Backed Securities

6,594

959

60,458

10,467

67,052

11,426

Corporate Debt Securities

26,959

878

58,601

7,996

85,560

8,874

Total

99,073

4,411

290,012

37,535

389,085

41,946

Held to Maturity

U.S. Government Treasury

177,552

11,018

254,181

14,623

431,733

25,641

Mortgage-Backed Securities

88,723

6,814

91,462

15,596

180,185

22,410

Total

266,275

17,832

345,643

30,219

611,918

48,051

At June 30, 2023, there were

917

positions (combined AFS and HTM) with unrealized losses totaling $

84.2

million.

of these

positions are U.S. Treasury bonds and

carry the full faith and credit of the U.S. Government.

705

are U.S. government agency

securities issued by U.S. government sponsored entities.

We believe

the long history of no credit losses on government securities

indicates that the expectation of nonpayment of the amortized cost basis is effectively

zero.

The remaining

126

positions (municipal

securities and corporate bonds) have a credit component.

At June 30, 2023, all collateralized mortgage obligation securities (“CMO”),

MBS, Small Business Administration securities (“SBA”), U.S. Agency,

and U.S. Treasury bonds held were AAA rated.

At June 30,

2023, corporate debt securities had an allowance for credit losses of $

19,000

and municipal securities had an allowance of $

5,000

Credit Quality Indicators

The Company monitors the credit quality of its investment securities through

various risk management procedures, including the

monitoring of credit ratings.

A majority of the debt securities in the Company’s

investment portfolio were issued by a U.S.

government entity or agency and are either explicitly or implicitly guaranteed

by the U.S. government.

The Company believes the

long history of no credit losses on these securities indicates that the expectation

of nonpayment of the amortized cost basis is

effectively zero, even if the U.S. government were

to technically default.

Further, certain municipal securities held by the Company

have been pre-refunded and secured by government guaranteed treasuries.

Therefore, for the aforementioned securities, the Company

does

t assess or record expected credit losses due to the zero loss assumption.

The Company monitors the credit quality of its

municipal and corporate securities portfolio via credit ratings

which are updated on a quarterly basis.

On a quarterly basis, municipal

and corporate securities in an unrealized loss position are evaluated to determine

if the loss is attributable to credit related factors and

if an allowance for credit loss is needed.

NOTE 3 – LOANS HELD FOR INVESTMENT AND ALLOWANCE

FOR CREDIT LOSSES

Loan Portfolio Composition

The composition of the held for investment (“HFI”) loan portfolio was as follows:

(Dollars in Thousands)

June 30, 2023

December 31, 2022

Commercial, Financial and Agricultural

227,219

247,362

Real Estate – Construction

226,404

234,519

Real Estate – Commercial Mortgage

831,285

782,557

Real Estate – Residential

(1)

882,292

727,105

Real Estate – Home Equity

203,150

208,120

Consumer

(2)

296,653

325,517

Loans Held For Investment, Net of Unearned Income

2,667,003

2,525,180

(1)

Includes loans in process balance of $

6.1

million at both June 30, 2023 and December 31, 2022.

(2)

Includes overdraft balances of $

1.0

million and $

1.1

million at June 30, 2023 and December 31, 2022, respectively.

Net deferred loan costs, which include premiums on purchased loans,

included in loans were $

13.3

million at June 30, 2023 and $

10.8

million at December 31, 2022.

Accrued interest receivable on loans which is excluded from amortized

cost totaled $

9.2

million at June 30, 2023 and $

8.0

million at

December 31, 2022, and is reported separately in Other Assets.

The Company has pledged a blanket floating lien on all 1-4 family residential mortgage

loans, commercial real estate mortgage loans,

and home equity loans to support available borrowing capacity at the FHLB of

Atlanta and has pledged a blanket floating lien on all

consumer loans, commercial loans, and construction loans to support available

borrowing capacity at the Federal Reserve Bank of

Atlanta.

Loan Purchase and Sales

The Company will periodically purchase newly originated 1-4 family real estate secured

adjustable-rate

loans from Capital City Home Loans (“CCHL”), a related party.

Residential loan purchases from CCHL totaled $

199.5

million and

158.8

million for the six months ended June 30, 2023 and June 30, 2022, respectively,

and were not credit impaired.

For the three

months ended June 30, 2022, the Company also acquired commercial real

estate loans that were not credit impaired from a third-party

bank totaling $

15.0

million.

The Company did

t purchase any commercial real estate loans during the three months ended June 30,

2023.

Allowance for Credit Losses

The methodology for estimating the amount of credit losses reported in the

allowance for credit losses

(“ACL”) has two basic components: first, an asset-specific component

involving loans that do not share risk characteristics and the

measurement of expected credit losses for such individual loans; and second,

a pooled component for expected credit losses for pools

of loans that share similar risk characteristics.

This allowance methodology is discussed further in Note 1 – Significant

Accounting

Policies in the Company’s 2022 Form

10-K.

The following table details the activity in the allowance for credit losses by portfolio

segment.

Allocation of a portion of the

allowance to one category of loans does not preclude its availability to absorb

losses in other categories.

Commercial,

Real Estate

Financial,

Real Estate

Commercial

Real Estate

(Dollars in Thousands)

Agricultural

Construction

Mortgage

Residential

Home Equity

Consumer

Total

Three Months Ended

June 30, 2023

Beginning Balance

1,515

3,359

4,710

11,649

1,879

3,395

26,507

Provision for Credit Losses

(86)

(512)

732

1,328

(188)

670

1,944

Charge-Offs

(54)

(39)

(1,887)

(1,980)

Recoveries

132

131

1,147

1,493

Net (Charge-Offs) Recoveries

132

(740)

(487)

Ending Balance

1,446

2,848

5,453

13,109

1,783

3,325

27,964

Six Months Ended

June 30, 2023

Beginning Balance

1,506

2,654

4,815

10,409

1,864

3,488

24,736

Provision for Credit Losses

(8)

192

739

2,511

(198)

1,999

5,235

Charge-Offs

(218)

(120)

(39)

(4,253)

(4,630)

Recoveries

166

189

156

2,091

2,623

Net (Charge-Offs) Recoveries

(52)

(101)

189

117

(2,162)

(2,007)

Ending Balance

1,446

2,848

5,453

13,109

1,783

3,325

27,964

Three Months Ended

June 30, 2022

Beginning Balance

2,122

2,596

5,392

4,470

1,916

4,260

20,756

Provision for Credit Losses

564

542

(396)

1,060

(223)

123

1,670

Charge-Offs

(1,104)

(1,193)

(2,297)

Recoveries

115

855

1,152

Net Charge-Offs

(1,045)

115

(338)

(1,145)

Ending Balance

1,641

3,138

5,052

5,645

1,760

4,045

21,281

Six Months Ended

June 30, 2022

Beginning Balance

2,191

3,302

5,810

4,129

2,296

3,878

21,606

Provision for Credit Losses

403

(172)

(577)

1,374

(628)

1,191

1,591

Charge-Offs

(1,177)

(266)

(33)

(2,595)

(4,071)

Recoveries

224

142

125

1,571

2,155

Net Charge-Offs

(953)

(181)

142

(1,024)

(1,916)

Ending Balance

1,641

3,138

5,052

5,645

1,760

4,045

21,281

For the six months ended June 30, 2023, the allowance for HFI loans increased

by $

3.2

million and reflected a provision expense of

5.2

million and net loan charge-offs of $

2.0

million.

The increase was primarily driven by incremental reserves needed for

loan

growth.

For the six months ended June 30, 2022, the allowance decreased by $

0.3

million and reflected a provision expense of $

1.6

million and net loan charge-offs of $

1.9

million. The lower provision expense for the six months ended June 30, 2022 was primarily

due to the release of reserves held for potential pandemic-related losses that did

not materialize to the extent projected, partially offset

by growth in reserves for strong new loan origination volume. Four unemployment

forecast scenarios were utilized to estimate

probability of default and are weighted based on management’s

estimate of probability.

See Note 8 – Commitments and

Contingencies for information on the allowance for off-balance

sheet credit commitments.

Loan Portfolio Aging.

A loan is defined as a past due loan when one full payment is past due or a contractual maturity

is over 30 days

past due (“DPD”).

The following table presents the aging of the amortized cost basis in accruing

past due loans by class of loans.

30-59

60-89

90 +

Total

Nonaccrual

Total

(Dollars in Thousands)

DPD

Past Due

Current

Loans

June 30, 2023

Commercial, Financial and Agricultural

196

277

226,933

227,219

Real Estate – Construction

218

225,771

415

226,404

Real Estate – Commercial Mortgage

124

828,740

2,421

831,285

Real Estate – Residential

241

128

369

880,222

1,701

882,292

Real Estate – Home Equity

202,326

756

203,150

Consumer

2,409

742

3,151

292,181

1,321

296,653

Total

2,993

1,214

4,207

2,656,173

6,623

2,667,003

December 31, 2022

Commercial, Financial and Agricultural

109

126

235

247,086

247,362

Real Estate – Construction

359

234,143

234,519

Real Estate – Commercial Mortgage

158

149

307

781,605

645

782,557

Real Estate – Residential

845

530

1,375

725,491

239

727,105

Real Estate – Home Equity

207,314

771

208,120

Consumer

3,666

1,852

5,518

319,415

584

325,517

Total

5,137

2,692

7,829

2,515,054

2,297

2,525,180

Nonaccrual Loans

Loans are generally placed on nonaccrual status if principal or interest payments

become 90 days past due and/or

management deems the collectability of the principal and/or interest to

be doubtful.

Loans are returned to accrual status when the

principal and interest amounts contractually due are brought current

or when future payments are reasonably assured.

The following table presents the amortized cost basis of loans in nonaccrual

status and loans past due over 90 days and still on accrual

by class of loans.

June 30, 2023

December 31, 2022

Nonaccrual

With No

With

90 + Days

With No

With

90 + Days

(Dollars in Thousands)

ACL

Still Accruing

ACL

Still Accruing

Commercial, Financial and Agricultural

Real Estate – Construction

415

Real Estate – Commercial Mortgage

2,212

209

389

256

Real Estate – Residential

1,172

529

239

Real Estate – Home Equity

227

529

771

Consumer

1,321

584

Total Nonaccrual

Loans

4,026

2,597

389

1,908

Collateral Dependent Loans.

The following table presents the amortized cost basis of collateral-dependent

loans.

June 30, 2023

December 31, 2022

Real Estate

Non Real Estate

Real Estate

Non Real Estate

(Dollars in Thousands)

Secured

Commercial, Financial and Agricultural

Real Estate – Construction

415

Real Estate – Commercial Mortgage

2,212

389

Real Estate – Residential

1,098

160

Real Estate – Home Equity

227

130

Consumer

Total Collateral Dependent

Loans

3,952

700

A loan is collateral dependent when the borrower is experiencing

financial difficulty and repayment of the loan is dependent on

the

sale or operation of the underlying collateral.

The Bank’s collateral dependent

loan portfolio is comprised primarily of real estate secured loans, collateralized

by either residential

or commercial collateral types.

The loans are carried at fair value based on current values determined by

either independent appraisals

or internal evaluations, adjusted for selling costs or other amounts to be deducted

when estimating expected net sales proceeds.

Residential Real Estate Loans In Process of Foreclosure

At June 30, 2023 and December 31, 2022, the Company had $

0.7

million

and $

0.6

million, respectively, in 1-4 family

residential real estate loans for which formal foreclosure proceedings were in process.

For the six-month period ended June 30, 2023, the Company did

t modify any loans made to borrowers experiencing financial

difficulty.

Credit Risk Management

The Company has adopted comprehensive lending policies, underwriting standards and

loan review

procedures designed to maximize loan income within an acceptable level

of risk.

Management and the Board of Directors review and

approve these policies and procedures on a regular basis (at least annually).

Reporting systems are used to monitor loan originations, loan quality,

concentrations of credit, loan delinquencies and nonperforming

loans and potential problem loans.

Management and the Credit Risk Oversight Committee periodically review

our lines of business to

monitor asset quality trends and the appropriateness of credit policies.

In addition, total borrower exposure limits are established and

concentration risk is monitored.

As part of this process, the overall composition of the portfolio is reviewed to gauge diversification

of risk, client concentrations, industry group, loan type, geographic area, or

other relevant classifications of loans.

Specific segments

of the loan portfolio are monitored and reported to the Board on a quarterly basis and

have strategic plans in place to supplement

Board approved credit policies governing exposure limits and underwriting

standards.

Detailed below are the types of loans within

the Company’s loan portfolio

and risk characteristics unique to each.

Commercial, Financial, and Agricultural – Loans in this category

are primarily made based on identified cash flows of the borrower

with consideration given to underlying collateral and personal or

other guarantees.

Lending policy establishes debt service coverage

ratio limits that require a borrower’s cash flow to be sufficient

to cover principal and interest payments on all new and existing debt.

The majority of these loans are secured by the assets being financed or other business assets such

as accounts receivable, inventory,

equipment.

Collateral values are determined based upon third party appraisals and evaluations.

Loan to value ratios at origination are

governed by established policy guidelines.

Real Estate Construction – Loans in this category consist of short-term

construction loans, revolving and non-revolving credit lines

and construction/permanent loans made to individuals and investors to finance

the acquisition, development, construction or

rehabilitation of real property.

These loans are primarily made based on identified cash flows of the borrower

or project and generally

secured by the property being financed, including 1-4 family residential properties

and commercial properties that are either owner-

occupied or investment in nature.

These properties may include either vacant or improved property.

Construction loans are generally

based upon estimates of costs and value associated with the completed project.

Collateral values are determined based upon third

party appraisals and evaluations.

Loan to value ratios at origination are governed by established policy guidelines.

The disbursement

of funds for construction loans is made in relation to the progress of the project and

as such these loans are closely monitored by on-

site inspections.

Real Estate Commercial Mortgage – Loans in this category consists of commercial

mortgage loans secured by property that is either

owner-occupied or investment in nature.

These loans are primarily made based on identified cash flows of the borrower or

project

with consideration given to underlying real estate collateral and

personal guarantees.

Lending policy establishes debt service

coverage ratios and loan to value ratios specific to the property type.

Collateral values are determined based upon third party

appraisals and evaluations.

Real Estate Residential – Residential mortgage loans held in the Company’s

loan portfolio are made to borrowers that demonstrate the

ability to make scheduled payments with full consideration to underwriting

factors such as current income, employment status, current

assets, and other financial resources, credit history,

and the value of the collateral.

Collateral consists of mortgage liens on 1-4 family

residential properties.

Collateral values are determined based upon third party appraisals and evaluations.

The Company does not

originate sub-prime loans.

Real Estate Home Equity – Home equity loans and lines are made to qualified individuals

for legitimate purposes generally secured

by senior or junior mortgage liens on owner-occupied

1-4 family homes or vacation homes.

Borrower qualifications include

favorable credit history combined with supportive income and debt ratio

requirements and combined loan to value ratios within

established policy guidelines.

Collateral values are determined based upon third party appraisals and evaluations.

Consumer Loans – This loan portfolio includes personal installment loans,

direct and indirect automobile financing, and overdraft

lines of credit.

The majority of the consumer loan category consists of direct and indirect automobile

loans.

Lending policy

establishes maximum debt to income ratios, minimum credit scores, and includes

guidelines for verification of applicants’ income and

receipt of credit reports.

Credit Quality Indicators

As part of the ongoing monitoring of the Company’s

loan portfolio quality, management

categorizes loans

into risk categories based on relevant information about the ability of borrowers to

service their debt such as: current financial

information, historical payment performance, credit documentation,

and current economic and market trends, among other

factors.

Risk ratings are assigned to each loan and revised as needed through established monitoring

procedures for individual loan

relationships over a predetermined amount and review of smaller balance homogenous

loan pools.

The Company uses the definitions

noted below for categorizing and managing its criticized loans.

Loans categorized as “Pass” do not meet the criteria set forth below

and are not considered criticized.

Special Mention – Loans in this category are presently protected from loss, but

weaknesses are apparent which, if not corrected, could

cause future problems.

Loans in this category may not meet required underwriting criteria and

have no mitigating factors.

More than

the ordinary amount of attention is warranted for these loans.

Substandard – Loans in this category exhibit well-defined weaknesses that would

typically bring normal repayment into jeopardy.

These loans are no longer adequately protected due to well-defined

weaknesses that affect the repayment capacity of the

borrower.

The possibility of loss is much more evident and above average supervision is required for

these loans.

Doubtful – Loans in this category have all the weaknesses inherent in a loan categorized

as Substandard, with the characteristic that

the weaknesses make collection or liquidation in full, on the basis of

currently existing facts, conditions, and values, highly

questionable and improbable.

Performing/Nonperforming – Loans within certain homogenous

loan pools (home equity and consumer) are not individually reviewed,

but are monitored for credit quality via the aging status of the loan and by payment

activity.

The performing or nonperforming status

is updated on an on-going basis dependent upon improvement and

deterioration in credit quality.

The following table summarizes gross loans held for investment at June

30, 2023 and current period gross write-offs for the six

months ended June 30, 2023 by years of origination and internally assigned

credit risk ratings (refer to Credit Risk Management

section for detail on risk rating system).

Term

Loans by Origination Year

Revolving

(Dollars in Thousands)

2023

2022

2021

2020

2019

Prior

Loans

Total

Commercial, Financial,

Agriculture:

Pass

25,879

77,944

36,236

14,631

10,016

10,518

46,644

221,868

Special Mention

1,490

516

986

126

149

1,909

5,245

Substandard

106

Total

27,375

78,506

37,243

14,774

10,085

10,683

48,553

227,219

Current-Period Gross

Writeoffs

129

218

Real Estate -

Construction:

Pass

59,976

121,631

32,667

1,807

189

123

7,855

224,248

Special Mention

478

375

853

Substandard

218

1,085

1,303

Total

60,454

121,631

33,260

2,892

189

123

7,855

226,404

Real Estate -

Commercial Mortgage:

Pass

62,928

261,333

165,145

128,342

47,330

130,477

19,554

815,109

Special Mention

4,343

793

948

239

1,483

2,461

439

10,706

Substandard

806

831

1,920

628

632

653

5,470

Total

67,271

262,932

166,924

130,501

49,441

133,570

20,646

831,285

Current-Period Gross

Writeoffs

120

Real Estate - Residential:

Pass

211,696

418,730

89,049

41,916

26,818

75,872

8,323

872,404

Special Mention

269

228

517

560

1,666

Substandard

1,320

1,253

1,571

935

3,073

8,222

Total

212,035

420,142

90,530

44,004

27,753

79,505

8,323

882,292

Real Estate - Home

Equity:

Performing

129

392

1,122

200,689

202,393

Nonperforming

757

Total

129

392

1,122

201,446

203,150

Current-Period Gross

Writeoffs

Consumer:

Performing

39,592

109,461

88,648

28,133

14,878

8,976

5,645

295,333

Nonperforming

633

418

179

1,320

Total

39,592

110,094

89,066

28,312

14,959

8,983

5,647

296,653

Current-Period Gross

Writeoffs

1,571

1,486

763

138

143

4,253

NOTE 4 – MORTGAGE BANKING ACTIVITIES

The Company’s mortgage

banking activities include mandatory delivery loan sales, forward sales contracts used

to manage residential

loan pipeline price risk, utilization of warehouse lines to fund secondary

market residential loan closings, and residential mortgage

servicing.

Residential Mortgage Loan Production

The Company originates, markets, and services conventional and government

-sponsored residential mortgage loans.

Generally,

conforming fixed rate residential mortgage loans are held for sale in the secondary

market and non-conforming and adjustable-rate

residential mortgage loans may be held for investment.

The volume of residential mortgage loans originated for sale and secondary

market prices are the primary drivers of origination revenue.

Residential mortgage loan commitments are generally outstanding for 30

to 90 days, which represents the typical period from

commitment to originate a residential mortgage loan to when the closed

loan is sold to an investor.

Residential mortgage loan

commitments are subject to both credit and price risk.

Credit risk is managed through underwriting policies and procedures,

including

collateral requirements, which are generally accepted by the secondary

loan markets.

Price risk is primarily related to interest rate

fluctuations and is partially managed through forward sales of residential mortgage

-backed securities (primarily to-be announced

securities, or TBAs) or mandatory delivery commitments with investors.

The unpaid principal balance of residential mortgage loans held for sale, notional

amounts of derivative contracts related to residential

mortgage loan commitments and forward contract sales and their related fair values

are set- forth below.

June 30, 2023

December 31, 2022

Unpaid Principal

(Dollars in Thousands)

Balance/Notional

Fair Value

Balance/Notional

Fair Value

Residential Mortgage Loans Held for Sale

68,127

67,908

54,488

54,635

Residential Mortgage Loan Commitments ("IRLCs")

(1)

61,126

1,270

36,535

819

Forward Sales Contracts

(2)

29,000

100

15,500

187

69,278

55,641

(1)

Recorded in other assets at fair value

(2)

Recorded in other assets at fair value at June 30,2023

and December 31, 2022, respectively

At June 30, 2023, the Company had

residential mortgage loans held for sale 30-89 days past due and $

0.1

million of loans were on

nonaccrual status. At December 31, 2022, the Company had $

0.6

million of residential mortgage loans held for sale 30-89 days past

due and $

0.1

million of loans were on nonaccrual status.

Mortgage banking revenue was as follows:

Three Months Ended

June 30,

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Net realized gains on sales of mortgage loans

3,547

4,800

6,739

9,935

Net change in unrealized gain on mortgage loans held for sale

(894)

(365)

(895)

Net change in the fair value of mortgage loan commitments (IRLCs)

(75)

(183)

452

(324)

Net change in the fair value of forward sales contracts

316

(896)

(86)

(38)

Pair-Offs on net settlement of forward sales contracts

1,954

4,209

Mortgage servicing rights additions

632

1,457

1,666

2,088

Net origination fees

2,215

1,854

4,331

3,036

Total mortgage banking

revenues

5,837

9,065

12,832

18,011

Residential Mortgage Servicing

The Company may retain the right to service residential mortgage loans

sold.

The unpaid principal balance of loans serviced for

others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights.

(Dollars in Thousands)

June 30, 2023

December 31, 2022

Number of residential mortgage loans serviced for others

1,956

2,975

Outstanding principal balance of residential mortgage loans serviced

for others

735,091

895,145

Weighted average

interest rate

4.93%

4.19%

Remaining contractual term (in months)

351

345

Conforming conventional loans serviced by the Company are sold to Federal

National Mortgage Association (“FNMA”) on a non-

recourse basis, whereby foreclosure losses are generally

the responsibility of FNMA and not the Company.

The government loans

serviced by the Company are secured through the Government National

Mortgage Association (“GNMA”), whereby the Company is

insured against loss by the Federal Housing Administration or partially

guaranteed against loss by the Veterans

Administration.

June 30, 2023, the servicing portfolio balance consisted of the following

loan types: FNMA (

%), GNMA (

%), and private investor

(

%).

FNMA and private investor loans are structured as actual/actual payment remittance.

The Company had

delinquent residential mortgage loans in GNMA pools serviced by the Company

at June 30, 2023 and $

0.3

December 31, 2022, respectively.

The right to repurchase these loans and the corresponding liability has

been recorded in other assets

and other liabilities, respectively,

in the Consolidated Statement of Financial Condition.

For the three and six months ended June 30,

2023, the Company repurchased $

0.5

million and $

1.5

million, respectively, in

delinquent residential loans that were in GNMA pools.

For the three and six months ended June 30, 2022, the Company repurchased $

0.6

million and $

1.0

million, respectively, in delinquent

residential loans from the GNMA pools. When delinquent residential loans

are repurchased, the Company has the intention to modify

their terms and include the loans in new GNMA pools.

Activity in the capitalized mortgage servicing rights was as follows:

Three Months Ended

June 30,

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Beginning balance

6,801

4,001

6,067

3,774

Additions due to loans sold with servicing retained

632

1,457

1,767

2,088

Deletions and amortization

(406)

(372)

(807)

(776)

Sale of servicing rights

(1)

(2,287)

Ending balance

4,740

5,086

4,740

5,086

The Company sold an MSR portfolio with an unpaid principal balance of $

334

million for a sales price of $

4.0

million,

recognizing a $

1.38

million gain on sale, recorded

in other noninterest income on the Consolidated

Statement of Income.

The Company did

t record any permanent impairment losses on mortgage servicing rights for the

three months ended June 30, 2023

or 2022.

The key unobservable inputs used in determining the fair value of

the Company’s mortgage servicing rights were

as follows:

June 30, 2023

December 31, 2022

Minimum

Maximum

Minimum

Maximum

Discount rates

9.51%

12.00%

9.50%

12.00%

Annual prepayment speeds

11.26%

17.07%

12.33%

20.45%

Cost of servicing (per loan)

Changes in residential mortgage interest rates directly affect

the prepayment speeds used in valuing the Company’s

mortgage

servicing rights.

A separate third party model is used to estimate prepayment speeds based on interest rates, housing

turnover rates,

estimated loan curtailment, anticipated defaults, and other relevant factors.

The weighted average annual prepayment speed was

16.42

% at June 30, 2023 and

17.22

% at December 31, 2022.

Warehouse

Line Borrowings

The Company has the following warehouse lines of credit and master repurchase

agreements with various financial institutions at June

30, 2023.

Amounts

(Dollars in Thousands)

Outstanding

million master repurchase agreement without defined expiration.

Interest is at the SOFR rate plus

2.00%

3.00%

, with a floor rate of

3.25%

A cash pledge deposit of $

0.5

million is required by the lender.

11,105

million warehouse line of credit agreement expiring in

December 2023

Interest is at the SOFR plus

2.25%

3.25%

16,948

Total Warehouse

Borrowings

28,053

Warehouse

line borrowings are classified as short-term borrowings.

At December 31, 2022, warehouse line borrowings totaled $

50.2

million. At June 30, 2023, the Company had residential

mortgage loans held for sale and construction loans held for investment

pledged as collateral under the above warehouse lines of credit and master repurchase

agreements.

The above agreements also contain

covenants which include certain financial requirements, including

maintenance of minimum tangible net worth, minimum liquid

assets, and maximum debt to net worth ratio, as defined in the agreements.

The Company was in compliance with all significant debt

covenants at June 30, 2023.

The Company has extended a $

million warehouse line of credit to CCHL, a

% owned subsidiary entity.

Balances and

transactions under this line of credit are eliminated in the Company’s

consolidated financial statements and thus not included in the

total short term borrowings noted on the Consolidated Statement of

Financial Condition.

The balance of this line of credit at June 30,

2023 and December 31, 2022 was $

42.8

million and $

22.9

million, respectively.

NOTE 5 – DERIVATIVES

The Company enters into derivative financial instruments to manage exposures

that arise from business activities that result in the

receipt or payment of future known and uncertain cash amounts, the value of

which are determined by interest rates.

The Company’s

derivative financial instruments are used to manage differences in

the amount, timing, and duration of the Company’s

known or

expected cash receipts and its known or expected cash payments principally

related to the Company’s subordinated

debt.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps with notional amounts totaling $

million at June 30, 2023 were designed as a cash flow hedge for subordinated

debt.

Under the swap arrangement, the Company will pay a fixed interest rate of

2.50

% and receive a variable interest rate based on

three-month CME Term

SOFR (secured overnight financing rate).

For derivatives designated and that qualify as cash flow hedges of interest

rate risk, the gain or loss on the derivative is recorded in

accumulated other comprehensive income (“AOCI”) and subsequently

reclassified into interest expense in the same period(s) during

which the hedged transaction affects earnings. Amounts reported

in accumulated other comprehensive income related to derivatives

will be reclassified to interest expense as interest payments are made on the

Company’s variable-rate subordinated

debt.

The following table reflects the cash flow hedges included in the consolidated

statements of financial condition

Statement of Financial

Notional

Fair

Weighted Average

(Dollars in Thousands)

Condition Location

Amount

Value

Maturity (Years)

June 30, 2023

Interest rate swaps related to subordinated debt

Other Assets

30,000

5,979

7.0

December 31, 2022

Interest rate swaps related to subordinated debt

Other Assets

30,000

6,195

7.5

The following table presents the net gains (losses) recorded in AOCI and the

consolidated statements of income related to the cash

flow derivative instruments (interest rate swaps related to subordinated

debt) for the three and six months ended June 30, 2023.

Amount of (Loss)

Amount of Gain

Gain Recognized

(Loss) Reclassified

(Dollars in Thousands)

Category

in AOCI

from AOCI to Income

Three months ended June 30, 2023

Interest expense

437

332

Three months ended June 30, 2022

Interest expense

867

Six months ended June 30, 2023

Interest expense

(161)

641

Six months ended June 30, 2022

Interest expense

2,237

(2)

The Company estimates there will be approximately $

1.4

million reclassified as a decrease to interest expense within the next 12

months.

The Company had a collateral liability of $

5.9

million and $

5.8

million at June 30, 2023 and December 31, 2022, respectively.

NOTE 6 – LEASES

Operating leases in which the Company is the lessee are recorded as operating

lease right of use (“ROU”) assets and operating

liabilities, included in other assets and liabilities, respectively,

on its Consolidated Statement of Financial Condition.

The Company’s operating

leases primarily relate to banking offices with remaining lease terms

from

years.

The Company’s

leases are not complex and do not contain residual value guarantees, variable

lease payments, or significant assumptions or judgments

made in applying the requirements of Topic

842.

Operating leases with an initial term of 12 months or less are not recorded on the

Consolidated Statement of Financial Condition and the related lease expense is recognized on a straight-line basis over the lease term.

At June 30, 2023, the operating lease ROU assets and liabilities were $

24.3

million and $

24.6

million, respectively. At December

31,

2022, ROU assets and liabilities were $

22.3

million and $

22.7

million, respectively.

The Company does not have any finance leases

or any significant lessor agreements.

The table below summarizes our lease expense and other information related

to the Company’s operating leases.

Three Months Ended

Six Months Ended

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Operating lease expense

705

391

1,405

775

Short-term lease expense

132

159

271

337

Total

lease expense

837

550

1,676

1,112

Other information:

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

706

435

1,411

864

Right-of-use assets obtained in exchange for new operating lease liabilities

600

2,993

1,192

Weighted average

remaining lease term — operating leases (in years)

18.5

24.5

18.5

24.5

Weighted average

discount rate — operating leases

3.3%

2.2%

3.3%

2.2%

The table below summarizes the maturity of remaining lease liabilities:

(Dollars in Thousands)

June 30, 2023

2023

1,664

2024

2,697

2025

2,469

2026

2,333

2027

2,245

2028 and thereafter

21,045

Total

32,453

Less: Interest

(7,808)

Present Value

of Lease liability

24,645

At June 30, 2023, the Company had

additional operating lease obligations for banking offices that have

not yet commenced.

A related party is the lessor in an operating lease with the Company.

The Company’s minimum

payment is $

0.1

million annually

through 2052, for an aggregate remaining obligation of $

2.4

million at June 30, 2023.

NOTE 7 - EMPLOYEE BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all full-time

and eligible part-time associates and a

Supplemental Executive Retirement Plan (“SERP”) and a Supplemental

Executive Retirement Plan II (“SERP II”) covering its

executive officers.

The defined benefit plan was amended in December 2019 to remove plan eligibility

for new associates hired after

December 31, 2019.

The SERP II was adopted by the Company’s

Board on May 21, 2020 and covers certain executive officers that

were not covered by the SERP.

The components of the net periodic benefit cost for the Company’s

qualified benefit pension plan were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Service Cost

872

1,572

1,744

3,145

Interest Cost

1,458

1,166

2,916

2,333

Expected Return on Plan Assets

(1,701)

(2,675)

(3,403)

(5,351)

Prior Service Cost Amortization

Net Loss Amortization

234

428

467

857

Pension Settlement Charge

169

378

Net Periodic Benefit Cost

864

664

1,727

1,370

Discount Rate

5.63%

3.11%

5.63%

3.11%

Long-term Rate of Return on Assets

6.75%

The components of the net periodic benefit cost for the Company’s

SERP and SERP II were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Service Cost

Interest Cost

130

261

158

Prior Service Cost Amortization

138

Net Loss Amortization

(155)

180

(309)

360

Pension Settlement Gain

(291)

Net Periodic Benefit Cost

(274)

336

(254)

672

Discount Rate

5.45%

2.80%

5.45%

2.80%

During the month of June 2023, lump sum payments made under the SERP triggered

settlement accounting and remeasurement of the

plan at June 30, 2023.

In accordance with applicable accounting guidance for retirement benefit plans,

the Company recorded a

settlement gain of $

0.3

million in June 2023.

The service cost component of net periodic benefit cost is reflected in

compensation expense in the accompanying statements of

income.

The other components of net periodic cost are included in “other” within the noninterest

expense category in the statements

of income.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Lending Commitments

The Company is a party to financial instruments with off-balance

sheet risks in the normal course of business

to meet the financing needs of its clients.

These financial instruments consist of commitments to extend credit and standby

letters of

credit.

The Company’s maximum exposure

to credit loss under standby letters of credit and commitments to extend credit is represented

the contractual amount of those instruments.

The Company uses the same credit policies in establishing commitments

and issuing

letters of credit as it does for on-balance sheet instruments.

The amounts associated with the Company’s

off-balance sheet

obligations were as follows:

June 30, 2023

December 31, 2022

(Dollars in Thousands)

Fixed

Variable

Total

Fixed

Variable

Total

Commitments to Extend Credit

(1)

206,057

569,036

775,093

243,614

531,873

775,487

Standby Letters of Credit

6,297

5,619

Total

212,354

569,036

781,390

249,233

531,873

781,106

(1)

Commitments include unfunded loans, revolving

lines of credit, and off-balance sheet residential

loan commitments.

Commitments to extend credit are agreements to lend to a client so long as there is no violation of

any condition established in the

contract.

Commitments generally have fixed expiration dates or other termination

clauses and may require payment of a fee.

Since

many of the commitments are expected to expire without being drawn upon,

the total commitment amounts do not necessarily

represent future cash requirements.

Standby letters of credit are conditional commitments issued by the

Company to guarantee the performance of a client to a third

party.

The credit risk involved in issuing letters of credit is essentially the same as that involved

in extending loan facilities. In

general, management does not anticipate any material losses as a result of

participating in these types of transactions.

However, any

potential losses arising from such transactions are reserved for in the same manner

as management reserves for its other credit

facilities.

For both on- and off-balance sheet financial instruments, the Company

requires collateral to support such instruments when it is

deemed necessary.

The Company evaluates each client’s

creditworthiness on a case-by-case basis.

The amount of collateral

obtained upon extension of credit is based on management’s

credit evaluation of the counterparty.

Collateral held varies, but may

include deposits held in financial institutions; U.S. Treasury

securities; other marketable securities; real estate; accounts receivable;

property, plant and

equipment; and inventory.

The allowance for credit losses for off-balance sheet credit commitments

that are not unconditionally cancellable by the bank is

adjusted as a provision for credit loss expense and is recorded in other liabilities.

The following table shows the activity in the

allowance.

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Beginning Balance

2,833

2,976

2,989

2,897

Provision for Credit Losses

287

(123)

131

(44)

Ending Balance

3,120

2,853

3,120

2,853

Other Commitments.

In the normal course of business, the Company enters into lease commitments

which are classified as operating

leases. See Note 6 – Leases for additional information on the maturity of the

Company’s operating lease commitments.

Furthermore,

the Company has a commitment of up to $

1.0

million in a bank tech venture capital fund focused on finding and funding

technology

solutions for community banks and a commitment of up to $

7.4

million in a solar tax credit equity fund.

For the six months ended

June 30, 2023, the Company had contributed $

0.4

million of the bank tech commitment and $

2.9

million of the solar fund

commitment.

At December 31, 2022, the Company had contributed $

0.2

million of the bank tech commitment and $

1.0

million of the

solar fund commitment.

Contingencies

The Company is a party to lawsuits and claims arising out of the normal course of business.

In management's opinion,

there are

known pending claims or litigation, the outcome of which would, individually or in

the aggregate, have a material effect

on the consolidated results of operations, financial position, or cash flows

of the Company.

Indemnification Obligation

The Company is a member of the Visa U.S.A. network.

Visa U.S.A member banks are

required to

indemnify the Visa U.S.A.

network for potential future settlement of certain litigation (the “Covered Litigation”)

that relates to several

antitrust lawsuits challenging the practices of Visa

and MasterCard International.

In 2008, the Company, as a member

of the Visa

U.S.A. network, obtained Class B shares of Visa,

Inc. upon its initial public offering.

Since its initial public offering, Visa,

Inc. has

funded a litigation reserve for the Covered Litigation resulting in a reduction

in the Class B shares held by the Company.

During the

first quarter of 2011, the Company sold its remaining

Class B shares.

Associated with this sale, the Company entered into a swap

contract with the purchaser of the shares that requires a payment to the

counterparty in the event that Visa, Inc. makes

subsequent

revisions to the conversion ratio for its Class B shares.

Conversion ratio payments and ongoing fixed quarterly charges

are reflected in

earnings in the period incurred.

Fixed charges included in the swap liability are payable quarterly

until the litigation reserve is fully

liquidated and at which time the aforementioned swap contract will be terminated.

Quarterly fixed payments approximate $

0.2

million.

NOTE 9 – FAIR VALUE

MEASUREMENTS

The fair value of an asset or liability is the price that would be received to sell that asset or paid

to transfer that liability in an orderly

transaction occurring in the principal market (or most advantageous market in

the absence of a principal market) for such asset or

liability.

In estimating fair value, the Company utilizes valuation techniques that are consistent with

the market approach, the income

approach and/or the cost approach.

Such valuation techniques are consistently applied.

Inputs to valuation techniques include the

assumptions that market participants would use in pricing an asset or liability.

ASC Topic 820

establishes a fair value hierarchy for

valuation inputs that gives the highest priority to quoted prices in active markets

for identical assets or liabilities and the lowest

priority to unobservable inputs.

The fair value hierarchy is as follows:

●

Level 1 Inputs -

Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting

entity has the

ability to access at the measurement date

●

Level 2 Inputs -

Inputs other than quoted prices

included in Level 1 that are observable for the asset or liability,

either directly

or indirectly. These might

include quoted prices for similar assets or liabilities in active markets, quoted prices

for identical

or similar assets or liabilities in markets that are not active, inputs other

than quoted prices that are observable for the asset or

liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.)

or inputs that are derived principally from, or

corroborated, by market data by correlation or other means

●

Level 3 Inputs -

Unobservable inputs for determining the fair values of assets or liabilities that reflect

an entity’s own

assumptions about the assumptions that market participants would

use in pricing the assets or liabilities.

Assets and Liabilities Measured at Fair Value

on a Recurring Basis

Securities Available for Sale.

U.S. Treasury securities are reported

at fair value utilizing Level 1 inputs.

Other securities classified as

available for sale are reported at fair value utilizing Level 2 inputs.

For these securities, the Company obtains fair value measurements

from an independent pricing service.

The fair value measurements consider observable data that may include dealer

quotes, market

spreads, cash flows, the U.S. Treasury yield curve,

live trading levels, trade execution data, credit information and the bond’s

terms

and conditions, among other things.

In general, the Company does not purchase securities that have a complicated structure.

The Company’s entire portfolio consists

traditional investments, nearly all of which are U.S. Treasury

obligations, federal agency bullet or mortgage pass-through

securities, or

general obligation or revenue-based municipal bonds.

Pricing for such instruments is easily obtained.

At least annually, the Company

will validate prices supplied by the independent pricing service by compari

ng them to prices obtained from an independent third-party

source.

Equity Securities.

Investment securities classified as equity securities are measured at

fair value of the investment with changes in fair

value recorded in earnings.

Loans Held for Sale

The fair value of residential mortgage loans held for sale based on Level 2 inputs is determined,

when possible,

using either quoted secondary-market prices or investor commitments.

If no such quoted price exists, the fair value is determined

using quoted prices for a similar asset or assets, adjusted for the specific attributes of

that loan, which would be used by other market

participants.

The Company has elected the fair value option accounting for its held for sale loans.

Mortgage Banking Derivative Instruments.

The fair values of interest rate lock commitments (“IRLCs”) are derived by valuation

models incorporating market pricing for instruments with similar characteristics,

commonly referred to as best execution pricing, or

investor commitment prices for best effort IRLCs which have

unobservable inputs, such as an estimate of the fair value of the

servicing rights expected to be recorded upon sale of the loans, net estimated costs to originate

the loans, and the pull-through rate,

and are therefore classified as Level 3 within the fair value hierarchy.

The fair value of forward sale commitments is based on

observable market pricing for similar instruments and are therefore

classified as Level 2 within the fair value hierarchy.

Interest Rate Swap.

The Company’s derivative positions are

classified as Level 2 within the fair value hierarchy and are valued using

models generally accepted in the financial services industry and that

use actively quoted or observable market input values from

external market data providers.

The fair value derivatives are determined using discounted cash flow models.

Fair Value

Swap

The Company entered into a stand-alone derivative contract with the purchaser of

its Visa Class B shares.

The

valuation represents the amount due and payable to the counterparty based upon

the revised share conversion rate, if any,

during the

period. At June 30, 2023, there were

amounts payable and at December 31, 2022, there was a $

0.1

million payable.

A summary of fair values for assets and liabilities recorded at fair

value on a recurring basis consisted of the following:

Level 1

Level 2

Level 3

Total

Fair

(Dollars in Thousands)

Inputs

Value

June 30, 2023

ASSETS:

Securities Available for

Sale:

U.S. Government Treasury

20,250

U.S. Government Agency

164,240

States and Political Subdivisions

40,879

Mortgage-Backed Securities

66,132

Corporate Debt Securities

87,364

Equity Securities

460

Loans Held for Sale

67,908

Interest Rate Swap Derivative

5,979

Mortgage Banking Hedge Derivative

100

Mortgage Banking IRLC Derivative

1,270

LIABILITIES:

December 31, 2022

ASSETS:

Securities Available for

Sale:

U.S. Government Treasury

22,050

U.S. Government Agency

186,052

States and Political Subdivisions

40,329

Mortgage-Backed Securities

69,405

Corporate Debt Securities

88,236

Loans Held for Sale

54,635

Interest Rate Swap Derivative

6,195

Mortgage Banking Hedge Derivative

187

Mortgage Banking IRLC Derivative

819

Mortgage Banking Activities

The Company had Level 3 issuances and transfers related to mortgage banking

activities of $

7.9

million

and $

11.8

million, respectively, for the

six months ended June 30, 2023, and $

7.7

million and $

16.8

million, respectively, for the

six

months ended June 30, 2022.

Issuances are valued based on the change in fair value of the underlying

mortgage loan from inception

of the IRLC to the Consolidated Statement of Financial Condition date,

adjusted for pull-through rates and costs to originate.

IRLCs

transferred out of Level 3 represent IRLCs that were funded and moved

to mortgage loans held for sale, at fair value.

Assets Measured at Fair Value

on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis (i.e.,

the assets are not measured at fair value on an ongoing basis

but are subject to fair value adjustments in certain circumstances).

An example would be assets exhibiting evidence of impairment.

The following is a description of valuation methodologies used for assets measured

on a non-recurring basis.

Collateral Dependent Loans

Impairment for collateral dependent loans is measured using the fair

value of the collateral less selling

costs.

The fair value of collateral is determined by an independent valuation

or professional appraisal in conformance with banking

regulations.

Collateral values are estimated using Level 3 inputs due to the volatility in the real estate market,

and the judgment and

estimation involved in the real estate appraisal process.

Collateral dependent loans are reviewed and evaluated on at least a quarterly

basis for additional impairment and adjusted accordingly.

Valuation

techniques are consistent with those techniques applied in prior

periods.

Collateral-dependent loans had a carrying value of $

4.0

million with

valuation allowance at June 30, 2023 and a carrying

value of $

0.7

million and a $

0.1

million valuation allowance at December 31, 2022.

Other Real Estate Owned

During the first six months of 2023, certain foreclosed assets, upon initial recognition,

were measured and

reported at fair value through a charge-off

to the allowance for credit losses based on the fair value of the foreclosed asset less

estimated cost to sell.

The fair value of the foreclosed asset is determined by an independent valuation or

professional appraisal in

conformance with banking regulations.

On an ongoing basis, we obtain updated appraisals on foreclosed assets and

realize valuation

adjustments as necessary.

The fair value of foreclosed assets is estimated using Level 3 inputs due to the judgment

and estimation

involved in the real estate valuation process.

Mortgage Servicing Rights

Residential mortgage loan servicing rights are evaluated for impairment

at each reporting period based

upon the fair value of the rights as compared to the carrying amount.

Fair value is determined by a third party valuation model using

estimated prepayment speeds of the underlying mortgage loans serviced and

stratifications based on the risk characteristics of the

underlying loans (predominantly loan type and note interest rate).

The fair value is estimated using Level 3 inputs, including a

discount rate, weighted average prepayment speed, and the cost of loan

servicing.

Further detail on the key inputs utilized are

provided in Note 4 – Mortgage Banking Activities.

At each of June 30, 2023 and December 31, 2022, there was

valuation

allowance for loan servicing rights.

Assets and Liabilities Disclosed at Fair Value

The Company is required to disclose the estimated fair value of financial instruments,

both assets and liabilities, for which it is

practical to estimate fair value and the following is a description of valuation

methodologies used for those assets and liabilities.

Cash and Short-Term

Investments.

The carrying amount of cash and short-term investments is used to approximate

fair value, given

the short time frame to maturity and as such assets do not present unanticipated

credit concerns.

Equity Securities.

Investment securities classified as equity securities that do not have readily determinable

fair values are measured at

cost and remeasured to fair value when impaired or upon observable transaction

prices.

Other Equity Securities.

Investment securities classified as other equity securities that do not have

readily determinable fair values, are

measured at cost, remeasured to fair value when impaired or upon observable

transaction prices and accounted for under the equity

method of accounting and reflected in other assets.

Securities Held to Maturity

Securities held to maturity are valued in accordance with the methodology previously

noted in the

caption “Assets and Liabilities Measured at Fair Value

on a Recurring Basis – Securities Available

for Sale.”

Loans.

The loan portfolio is segregated into categories and the fair value of each loan category is calculated

using present value

techniques based upon projected cash flows and estimated discount

rates.

Pursuant to the adoption of ASU 2016-01,

Recognition and

Measurement of Financial Assets and Financial

Liabilities

, the values reported reflect the incorporation of a liquidity discount to meet

the objective of “exit price” valuation.

Deposits.

The fair value of Noninterest Bearing Deposits, NOW Accounts, Money Market

Accounts and Savings Accounts are the

amounts payable on demand at the reporting date. The fair value of fixed maturity

certificates of deposit is estimated using present

value techniques and rates currently offered for deposits of

similar remaining maturities.

Subordinated Notes Payable.

The fair value of each note is calculated using present value techniques,

based upon projected cash

flows and estimated discount rates as well as rates being offered

for similar obligations.

Short-Term

and Long-Term

Borrowings.

The fair value of each note is calculated using present value techniques,

based upon

projected cash flows and estimated discount rates as well as rates being offered

for similar debt.

A summary of estimated fair values of significant financial instruments not

recorded at fair value consisted of the following:

June 30, 2023

Carrying

Level 1

Level 2

Level 3

(Dollars in Thousands)

Value

Inputs

ASSETS:

Cash

83,679

Short-Term Investments

285,129

Investment Securities, Held to Maturity

641,398

432,157

163,062

Equity Securities

(1)

1,243

Other Equity Securities

(2)

2,848

Mortgage Servicing Rights

4,740

7,053

Loans, Net of Allowance for Credit Losses

2,639,039

2,462,116

LIABILITIES:

Deposits

3,788,866

3,289,733

Short-Term

Borrowings

50,673

Subordinated Notes Payable

52,887

45,563

Long-Term Borrowings

414

412

December 31, 2022

Carrying

Level 1

Level 2

Level 3

(Dollars in Thousands)

Value

Inputs

ASSETS:

Cash

72,114

Short-Term Investments

528,536

Investment Securities, Held to Maturity

660,774

431,733

180,968

Equity Securities

(1)

Other Equity Securities

(2)

2,848

Mortgage Servicing Rights

6,067

8,503

Loans, Net of Allowance for Credit Losses

2,500,444

2,357,533

LIABILITIES:

Deposits

3,939,317

3,310,383

Short-Term

Borrowings

56,793

Subordinated Notes Payable

52,887

45,763

Long-Term Borrowings

513

(1)

Not readily marketable securities - reflected

in other assets.

(2)

Accounted for under the equity method – not readily

marketable securities – reflected in other assets.

All non-financial instruments are excluded from the above table.

The disclosures also do not include goodwill.

Accordingly, the

aggregate fair value amounts presented do not represent the underlying

value of the Company.

NOTE 10 – ACCUMULATED

OTHER COMPREHENSIVE INCOME (LOSS)

The amounts allocated to accumulated other comprehensive income

(loss) are presented in the table below.

Accumulated

Securities

Other

Available

Interest Rate

Retirement

Comprehensive

(Dollars in Thousands)

for Sale

Swap

Plans

(Loss) Income

Balance as of January 1, 2023

(37,349)

4,625

(4,505)

(37,229)

Other comprehensive income (loss) during the period

4,236

(162)

(217)

3,857

Balance as of June 30, 2023

(33,113)

4,463

(4,722)

(33,372)

Balance as of January 1, 2022

(4,588)

1,530

(13,156)

(16,214)

Other comprehensive (loss) income during the period

(27,071)

2,237

283

(24,551)

Balance as of June 30, 2022

(31,659)

3,767

(12,873)

(40,765)

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS

OPERATIONS

Management’s discussion

and analysis (“MD&A”) provides supplemental information, which sets forth

the major factors that have

affected our financial condition and results of operations

and should be read in conjunction with the Consolidated Financial

Statements and related notes.

The following information should provide a better understanding of

the major factors and trends

that

affect our earnings performance and financial condition,

and how our performance during 2023 compares with prior years.

Throughout this section, Capital City Bank Group, Inc., and subsidiaries, collectively,

is referred to as “CCBG,” “Company,”

“we,”

“us,” or “our.”

CAUTION CONCERNING FORWARD

-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains

“forward-looking statements”

within the meaning of the

Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, among others, statements about

our

beliefs, plans, objectives, goals, expectations, estimates and intentions that are

subject to significant risks and uncertainties and are

subject to change based on various factors, many of which are beyond

our control.

The words “may,”

“could,” “should,” “would,”

“believe,” “anticipate,”

“estimate,” “expect,”

“intend,” “plan,”

“target,”

“vision,” “goal,”

and similar expressions are intended to

identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties.

Our actual future results may differ materially

from those set forth in our forward-looking statements.

Please see the Introductory Note of this quarterly report on Form 10-Q as well

as the Introductory Note and

Item 1A. Risk Factors

of our 2022 Report on Form 10-K, as updated in our subsequent quarterly reports

filed on Form 10-Q, and in our other filings made from time to time with the SEC after

the date of this report.

However, other factors besides those listed in our

Quarterly Report or in our Annual Report also could adversely affect

our results,

and you should not consider any such list of factors to be a complete set of all potential risks or

uncertainties.

Any forward-looking

statements made by us or on our behalf speak only as of the date they are made.

We do not undertake

to update any forward-looking

statement, except as required by applicable law.

BUSINESS OVERVIEW

We are a financial

holding company headquartered in Tallahassee,

Florida, and we are the parent of our wholly owned subsidiary,

Capital City Bank (the “Bank” or “CCB”).

We offer

a broad array of products and services through a total of 62 full-service offices

located in Florida, Georgia, and Alabama.

We provide a full range of

banking services, including traditional deposit and credit

services, mortgage banking, asset management, trust, merchant services,

bankcards, securities brokerage services and financial

advisory services, including life insurance products,

risk management and asset protection services.

Our profitability, like

most financial institutions, is dependent to a large extent upon net

interest income, which is the difference

between the interest and fees received on interest earning assets, such as loans and

securities, and the interest paid on interest-bearing

liabilities, principally deposits and borrowings.

Results of operations are also affected by the provision for credit losses, operating

expenses such as salaries and employee benefits, occupancy and other

operating expenses including income taxes, and noninterest

income such as mortgage banking revenues, wealth management fees,

deposit fees, and bank card fees.

We have included

a detailed discussion of the economic conditions in our markets and our long-term

strategic objectives as part of the

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

NON-GAAP FINANCIAL MEASURES (UNAUDITED)

We present a tangible

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

effect of

goodwill and other intangibles that resulted from merger

and acquisition activity. We

believe these measures are useful to investors

because it allows investors to more easily compare our capital adequacy

to other companies in the industry.

The generally accepted

accounting principles (“GAAP”) to non-GAAP reconciliation for

each quarter presented is provided below.

2023

2022

(Dollars in Thousands, except per share data)

Second

First

Fourth

Third

Second

Shareowners' Equity (GAAP)

420,779

411,240

394,016

373,165

371,675

Less: Goodwill and Other Intangibles (GAAP)

93,013

93,053

93,093

93,133

93,173

Tangible Shareowners' Equity (non-GAAP)

327,766

318,187

300,923

280,032

278,502

Total Assets (GAAP)

4,399,563

4,409,742

4,525,958

4,332,671

4,354,297

Less: Goodwill and Other Intangibles (GAAP)

93,013

93,053

93,093

93,133

93,173

Tangible Assets (non-GAAP)

4,306,550

4,316,689

4,432,865

4,239,538

4,261,124

Tangible Common Equity Ratio (non-GAAP)

A/B

7.61%

7.37%

6.79%

6.61%

6.54%

Actual Diluted Shares Outstanding (GAAP)

17,025,023

17,049,913

17,039,401

16,998,177

16,981,614

Tangible Book Value

per Diluted Share (non-GAAP)

A/C

19.25

18.66

17.66

16.47

16.40

SELECTED QUARTERLY

FINANCIAL DATA

(UNAUDITED)

2023

2022

(Dollars in Thousands, Except Per Share Data)

Second

First

Fourth

Third

Second

Summary of Operations

Interest Income

45,074

43,915

41,226

35,364

29,320

Interest Expense

5,068

3,526

3,122

2,037

987

Net Interest Income

40,006

40,389

38,104

33,327

28,333

Provision for Credit Losses

2,219

3,130

3,521

2,099

1,542

Net Interest Income After

Provision for Credit Losses

37,787

37,259

34,583

31,228

26,791

Noninterest Income

22,873

22,248

20,972

22,934

24,903

Noninterest Expense

42,534

40,455

42,287

39,810

40,498

Income Before Income Taxes

18,126

19,052

13,268

14,352

11,196

Income Tax Expense

3,544

4,133

2,599

3,074

2,177

(Income) Loss Attributable to NCI

(31)

995

(306)

Net Income Attributable to CCBG

14,551

14,954

11,664

11,315

8,713

Net Interest Income (FTE)

(1)

40,093

40,489

38,192

33,410

28,409

Per Common Share

Net Income Basic

0.86

0.88

0.69

0.67

0.51

Net Income Diluted

0.85

0.88

0.68

0.67

0.51

Cash Dividends Declared

0.18

0.17

0.16

Diluted Book Value

24.72

24.12

23.12

21.95

21.89

Diluted Tangible Book Value

(2)

19.25

18.66

17.66

16.47

16.40

Market Price:

High

34.16

36.86

36.23

33.93

28.55

Low

28.03

28.18

31.14

27.41

24.43

30.64

29.31

32.50

31.11

27.89

Selected Average Balances

Investment Securities

1,043,858

1,064,212

1,081,092

1,120,728

1,144,757

Loans Held for Investment

2,657,693

2,582,395

2,439,379

2,264,075

2,084,679

Earning Assets

3,974,803

4,062,688

4,032,733

4,009,951

3,974,221

Total Assets

4,320,601

4,411,865

4,381,825

4,357,678

4,321,388

Deposits

3,719,564

3,817,314

3,803,042

3,769,864

3,765,329

Shareowners’ Equity

418,757

404,067

380,570

379,305

373,365

Common Equivalent Average Shares:

Basic

17,002

17,016

16,963

16,960

16,949

Diluted

17,035

17,045

17,016

16,996

16,971

Performance Ratios:

Return on Average Assets (annualized)

1.35

1.37

1.06

1.03

0.81

Return on Average Equity (annualized)

13.94

15.01

12.16

11.83

9.36

Net Interest Margin (FTE)

4.05

4.04

3.76

3.31

2.87

Noninterest Income as % of Operating Revenue

36.38

35.52

35.50

40.76

46.78

Efficiency Ratio

67.55

64.48

71.47

70.66

75.96

Asset Quality:

Allowance for Credit Losses (“ACL”)

27,964

26,507

24,736

22,510

21,281

Nonperforming Assets (“NPAs”)

6,624

4,602

2,728

2,422

3,231

ACL to Loans HFI

1.05

1.01

0.98

0.96

NPAs to Total

Assets

0.15

0.10

0.06

0.07

NPAs to Loans HFI plus OREO

0.25

0.17

0.11

0.10

0.15

ACL to Non-Performing Loans

422.23

577.63

1,076.89

934.53

677.57

Net Charge-Offs to Average Loans HFI

0.07

0.24

0.21

0.12

0.22

Capital Ratios:

Tier 1 Capital

14.84

14.51

14.53

14.80

15.13

Total Capital

15.95

15.53

15.52

15.75

16.07

Common Equity Tier 1

13.02

12.68

12.64

12.83

13.07

Leverage

9.74

9.28

9.06

8.91

8.77

Tangible Common Equity

(2)

7.61

7.37

6.79

6.61

6.54

(1)

Fully Tax Equivalent

(2)

Non-GAAP financial measure.

See non-GAAP reconciliation on page 31.

FINANCIAL OVERVIEW

Results of Operations

Performance Summary.

Net income attributable to common shareowners of $14.6 million, or $0.85 per diluted

share, for the second

quarter of 2023 compared to $15.0 million, or $0.88 per diluted share,

for the first quarter of 2023, and $8.7 million, or $0.51 per

diluted share, for the second quarter of 2022.

For the first six months of 2023, net income attributable to common shareowners totaled

$29.5 million, or $1.73 per diluted share, compared to net income of $17.2

million, or $1.01 per diluted share, for the same period of

2022.

Net Interest Income.

Tax-equivalent net

interest income for the second quarter of 2023 totaled $40.1 million, compared

to $40.5

million for the first quarter of 2023, and $28.4 million for the second quarter

of 2022.

Compared to the first quarter of 2023, the

decrease reflected higher deposit interest expense and a lower level of

interest income from overnight funds, partially offset by higher

loan interest due to loan growth and higher interest rates.

For the first six months of 2023, tax-equivalent net interest income totaled

$80.6 million compared to $53.2 million for the same period of 2022.

The increases over both prior year periods were driven by

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

earning assets.

Provision and Allowance for Credit

Losses.

We recorded

a provision for credit losses of $2.2 million for the second quarter of 2023

compared to $3.1 million for the first quarter of 2023 and $1.5 million

for the second quarter of 2022.

The decrease in the provision

compared to the first quarter of 2023 was primarily attributable to a lower

level of loan growth and a decrease in net loan charge-offs.

For the first six months of 2023, we recorded a provision for credit losses of $5.3

million compared to $1.5 million for the same period

of 2022.

The release of reserves held for pandemic-related losses favorably impacted

our provision in 2022. At June 30, 2023, the

allowance represented 1.05% of HFI loans compared to 1.01% at March 31, 2023,

and 0.98% at December 31, 2022.

Noninterest Income.

Noninterest income for the second quarter of 2023 totaled $22.9 million compared

to $22.2 million for the first

quarter of 2023 and $24.9 million for the second quarter of 2022.

The $0.7 million increase over the first quarter of 2023 reflected an

increase in other income of $1.4 million, wealth management fees of $0.2 million,

deposit fees of $0.1 million, and bankcard fees of

$0.1 million, partially offset by a decrease in mortgage banking

revenues of $1.1 million.

The increase in other income was

attributable to a $1.4 million gain from the sale of mortgage servicing rights.

The decrease in mortgage banking revenues was

attributable to a lower gain on sale margin. For the first six months

of 2023, noninterest income totaled $45.1 million compared

$50.7 million for the same period of 2022 with the $5.6 million decrease primarily

attributable to lower mortgage banking revenues of

$5.2 million and wealth management fees of $2.4 million, partially offset

by a $2.3 million increase in other income. The decrease in

mortgage banking revenues was attributable to a lower gain on sale margin.

The decrease in wealth management fees was driven by a

decrease in insurance commissions due to the sale of large policies in 2022.

We discuss noninterest

income in further detail below.

Noninterest Expense.

Noninterest expense for the second quarter of 2023 totaled $42.5 million compared

to $40.5 million for the first

quarter of 2023 and $40.5 million for the second quarter of 2022.

Compared to the first quarter of 2023, the $2.1 million increase was

primarily due to an increase in other expense of $2.8 million that was partially offset

by a $0.8 million decrease in compensation

expense.

The unfavorable variance in other expense reflected a $1.8 million gain from the sale of a banking

office in the first quarter

of 2023.

Further, the second quarter of 2023 includes a non-routine

consulting expense of $0.8

million related to our core processing

system outsourcing contract negotiation.

For the first six months of 2023, noninterest expense totaled $83.0 million compared

$79.7 million for the same period of 2022 with the $3.3 million increase

attributable to an increase in other expense of $1.6 million,

occupancy expense of $1.4 million, and compensation expense of $0.3 million.

The increase in other expense over both prior year

periods was primarily related to the previously mentioned consulting payment

of $0.8 million and increases in pension plan expense

(non-service-related component), FDIC insurance fees, and loan servicing (for

residential loans).

We discuss noninterest expense

further detail below.

Financial Condition

Earning Assets.

Average earning assets totaled

$3.975 billion for the second quarter of 2023, a decrease of $87.9 million, or 2.2%,

from the first quarter of 2023, and a decrease of $57.9 million, or 1.4%, from

the fourth quarter of 2022.

The decrease from both prior

periods was attributable to lower deposit balances.

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

utilized to fund loan growth.

Loans.

Average loans HFI increased

$75.3 million, or 2.9%, over the first quarter of 2023 and $218.3 million, or

9.0%, over the

fourth quarter of 2022.

Period end loans increased $30.1 million, or 1.1%, over the first quarter of 2023

and $141.8 million, or 5.6%,

over the fourth quarter of 2022. Compared to both prior periods, the growth was primarily

in the residential real estate and commercial

real estate categories and was partially offset by lower indirect auto

and home equity loan balances.

Credit Quality

Credit quality metrics remained strong for the quarter.

Nonperforming assets (nonaccrual loans and other real estate)

totaled $6.6 million at June 30, 2023, compared to $4.6 million at March 31, 2023

and $2.7 million at December 31, 2022.

At June

30, 2023, nonperforming assets as a percent of total assets equaled 0.15%,

compared to 0.10% at March 31, 2023 and 0.06% at

December 31, 2022.

Nonaccrual loans totaled $6.6 million at June 30, 2023, a $2.0 million increase

over March 31, 2023 and a $4.3

million increase over December 31, 2022.

The increase was primarily due to the addition of one large residential loan

($1.1 million)

to nonaccrual status which was adequately secured and reserved for.

Further, classified loans totaled $15.0 million at June

30, 2023, a

$2.8 million increase over March 31, 2023 and a $4.4 million decrease from

December 31, 2022.

Deposits

Average total

deposits were $3.720 billion for the second quarter of 2023, a decrease of $97.8 million,

or 2.6%, from the

first quarter of 2023 and a decrease of $83.5 million, or 2.2%, from the fourth quarter

of 2022.

Compared to both prior periods, the

decreases were primarily attributable to lower noninterest bearing and savings

balances, primarily offset by higher money market

balances.

Compared to the first quarter of 2023, the decrease in NOW account balances reflected the

seasonal decline in our public

funds balances.

Compared to the fourth quarter of 2022, the increase in NOW accounts reflected higher

average public funds balances

which began to build in December 2022 and affect the

average comparison.

Capital

At June 30, 2023, we were well-capitalized with a total risk-based capital ratio

of 15.95% and a tangible common equity

ratio (a non-GAAP financial measure) of 7.61% compared to 15.53%

and 7.37%, respectively,

at March 31, 2023 and 15.52% and

6.79%, respectively, at December

31, 2022.

At June 30, 2023, all of our regulatory capital ratios exceeded the threshold to be

well-

capitalized under the Basel III capital standards.

RESULTS

OF OPERATIONS

The following table provides a condensed summary of our results of operations

- a discussion of the various components are discussed

in further detail below.

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

(Dollars in Thousands, except per share data)

2023

2022

2023

2022

Interest Income

45,074

43,915

29,320

88,989

54,758

Taxable Equivalent Adjustments

100

187

154

Total Interest Income (FTE)

45,161

44,015

29,396

89,176

54,912

Interest Expense

5,068

3,526

987

8,594

1,729

Net Interest Income (FTE)

40,093

40,489

28,409

80,582

53,183

Provision for Credit Losses

2,219

3,130

1,542

5,349

1,542

Taxable Equivalent Adjustments

100

187

154

Net Interest Income After Provision for Credit Losses

37,787

37,259

26,791

75,046

51,487

Noninterest Income

22,873

22,248

24,903

45,121

50,721

Noninterest Expense

42,534

40,455

40,498

82,989

79,731

Income Before Income Taxes

18,126

19,052

11,196

37,178

22,477

Income Tax Expense

3,544

4,133

2,177

7,677

4,412

Pre-Tax (Income) Loss Attributable to Noncontrolling

Interest

(31)

(306)

(897)

Net Income Attributable to Common Shareowners

14,551

14,954

8,713

29,505

17,168

Basic Net Income Per Share

0.86

0.88

0.51

1.73

1.01

Diluted Net Income Per Share

0.85

0.88

0.51

1.73

1.01

Net Interest Income

Net interest income represents our single largest source of earnings

and is equal to interest income and fees generated by earning

assets less interest expense paid on interest bearing liabilities.

This information is provided on a “taxable equivalent”

basis to reflect

the tax-exempt status of income earned on certain loans and state and local

government debt obligations.

We provide an analysis of

our net interest income including average yields and rates in Table

I on page 45.

Tax-equivalent net

interest income for the second quarter of 2023 totaled $40.1 million, compared

to $40.5 million for the first quarter

of 2023, and $28.4 million for the second quarter of 2022.

Compared to the first quarter of 2023, the decrease reflected higher deposit

interest expense and a lower level of interest income from overnight funds, partially

offset by higher loan interest due to loan growth

and higher interest rates.

For the first six months of 2023, tax-equivalent net interest income totaled $80.6 million

compared to $53.2

million for the same period of 2022.

The increases over both prior year periods were driven by strong loan growth

and higher interest

rates across a majority of our earning assets.

Our net interest margin for the second quarter of 2023 was 4.05%,

an increase of one basis point over the first quarter of 2023 and an

increase of 118 basis points over the second quarter

of 2022.

For the month of June 2023, our net interest margin was 4.06%.

For the

first six months of 2023, our net interest margin was 4.04%, an increase

of 133 basis points over the same period of 2022.

The

increase compared to all prior periods reflected a combination of higher

interest rates and loan growth, partially offset by a higher cost

of deposits.

For the second quarter of 2023, our cost of funds was 51 basis points, an increase of

16 basis points over the first quarter

of 2023 and 41 basis points over the second quarter of 2022.

Our total cost of deposits (including noninterest bearing accounts)

was

43 basis points, 26 basis points, and 3 basis points, respectively,

for the same periods.

Provision for Credit Losses

We recorded

a provision for credit losses of $2.2 million for the second quarter of 2023 compared

to $3.1 million for the first quarter

of 2023 and $1.5 million for the second quarter of 2022.

The decrease in the provision compared to the first quarter of 2023 was

primarily attributable to a lower level of loan growth and a decrease in net loan

charge-offs.

For the first six months of 2023, we

recorded a provision for credit losses of $5.3 million compared to $1.5 million for

the same period of 2022.

The release of reserves

held for pandemic-related losses favorably impacted our provision in 2022.

We discuss the allowance

for credit losses further

below. For more information

on charge-offs and recoveries, see Note 3 – Loans

Held for Investment and Allowance for Credit Losses.

Noninterest Income

Noninterest income for the second quarter of 2023 totaled $22.9 million

compared to $22.2 million for the first quarter of 2023 and

$24.9 million for the second quarter of 2022.

The $0.7 million increase over the first quarter of 2023 reflected an increase in other

income of $1.4 million, wealth management fees of $0.2 million, deposit fees of

$0.1 million, and bankcard fees of $0.1 million,

partially offset by a decrease in mortgage banking revenues of

$1.1 million.

The increase in other income was attributable to a $1.4

million gain from the sale of mortgage servicing rights.

The decrease in mortgage banking revenues was attributable to a lower

gain

on sale margin. Compared to the second quarter of 2022,

the $2.0 million decrease in noninterest income reflected decreases in

mortgage banking revenues of $3.2 million, wealth management fees of $0.3

million, deposit fees of $0.1 million, and bank card fees

of $0.2 million, partially offset by an increase in other income

of $1.8 million.

The decrease in mortgage banking revenues was

attributable to a lower gain on sale margin.

The increase in other income was primarily related to a $1.4 million gain from

the sale of

mortgage servicing rights.

For the first six months of 2023, noninterest income totaled $45.1 million compared to $50.7 million

for

the same period of 2022 with the $5.6 million decrease primarily attributable

to lower mortgage banking revenues of $5.2 million and

wealth management fees of $2.4 million, partially offset by

a $2.3 million increase in other income.

The decrease in mortgage

banking revenues was attributable to a lower gain on sale margin.

The decrease in wealth management fees was driven by a decrease

in insurance commissions due to the sale of large policies in 2022.

The increase in other income was primarily due to a $1.4 million

gain from the sale of mortgage servicing rights, and increases in miscellaneous income

of $0.4 million, loan servicing fees of $0.2

million, and miscellaneous loan fees of $0.1 million.

Noninterest income represented 36.38% of operating revenues (net interest

income plus noninterest income) in the second quarter of

2023

compared to 35.52% in the first quarter of 2023 and 46.78% in the second quarter of 2022.

For the first six months

of 2023,

noninterest income represented 35.95% of operating revenues compared

to 48.89% for the same period of 2022.

The table below reflects the major components of noninterest income.

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Deposit Fees

5,326

5,239

5,447

10,565

10,638

Bank Card Fees

3,795

3,726

4,034

7,521

7,797

Wealth Management

Fees

4,149

3,928

4,403

8,077

10,473

Mortgage Banking Revenues

5,837

6,995

9,065

12,832

18,011

Other

3,766

2,360

1,954

6,126

3,802

Total

Noninterest Income

22,873

22,248

24,903

45,121

50,721

Significant components of noninterest income are discussed in more

detail below.

Deposit Fees

Deposit fees for the second quarter of 2023

totaled $5.3

million, an increase of $0.1 million, or 1.7%, over the first

quarter of 2023, and a decrease of $0.1 million, or 2.2%, from the second quarter

of 2022.

For the first six months of 2023, deposit

fees totaled $10.6 million, a decrease of $0.1 million, or 0.7%, from

the same period of 2022.

Compared to the first quarter of 2023,

the increase reflected higher overdraft fees.

The decrease from both prior year periods was attributable to lower

service charge and

ATM

fees.

Bank Card Fees

Bank card fees for the second quarter of 2023 totaled $3.8 million, an increase of $0.1

million, or 1.8%, over the

first quarter of 2023, and a decrease of $0.2 million, or 5.9%, from the

second quarter of 2022.

For the first six months of 2023, bank

card fees totaled $7.5 million, a decrease of $0.3

million, or 3.5%, from the same period of 2022.

Compared to the first quarter of

2023,

the increase reflected one more day of processing. Compared to both prior periods, the decline

reflected lower debit card usage

related to lower consumer spending.

Wealth

Management Fees

Wealth management fees

include trust fees through Capital City Trust (i.e., managed

accounts and

trusts/estates), retail brokerage fees through Capital City Investments (i.e.,

investment, insurance products, and retirement accounts),

and financial advisory fees through Capital City Strategic Wealth

(i.e., including the sale of life insurance, risk management and asset

protection services).

Wealth management

fees for the second quarter of 2023 totaled $4.1 million, an increase of $0.

million, or

5.6%, over the first quarter of 2023, and a decrease of $0.3 million, or 5.8%,

from the second quarter of 2022.

For the first six months

of 2023, wealth management fees totaled $8.1 million, a decrease of

$2.4 million, or 22.9%, from the same period of 2022.

The

decrease reflected lower insurance commission revenues due to the sale of large

policies in 2022.

Mortgage Banking Revenues.

Mortgage banking revenues totaled $5.8 million for the second quarter

of 2023, compared to $7.0

million for the first quarter of 2023 and $9.1 million for the second quarter

of 2022.

For the first six months of 2023, revenues totaled

$12.8 million compared to $18.0 million for the same period of 2022.

The decrease in mortgage banking revenues compared to all

prior periods was attributable to lower rate lock volume and gain on sale margin

We provide a detailed

overview of our mortgage

banking operation, including a detailed break-down of mortgage banking

revenues, mortgage servicing activity,

and warehouse

funding within Note 4 – Mortgage Banking Activities in the Notes to Consolidated

Financial Statements.

Other

Other income totaled $3.8 million for the second quarter of 202

compared to $2.4 million for the first quarter of 2023

and

$2.0 million for the second quarter of 2022.

For the first six months of 2023, other income totaled $6.1 million compared to

$3.8

million for the same period of 2022.

The increase over all prior periods was primarily due to a $1.4 million gain from

the sale of

mortgage servicing rights.

Higher miscellaneous income of $0.4 million, loan servicing fees of $0.2 million,

and miscellaneous loan

fees of $0.1 million also contributed to the increase for the six-month period.

Noninterest Expense

Noninterest expense for the second quarter of 2023 totaled $42.5 million

compared to $40.5 million for the first quarter of 2023 and

$40.5 million for the second quarter of 2022.

Compared to the first quarter of 2023, the $2.1 million increase was primarily due to an

increase in other expense of $2.8 million that was partially offset by

a $0.8 million decrease in compensation expense.

The

unfavorable variance in other expense reflected a $1.8 million gain from

the sale of a banking office in the first quarter of 2023.

Further, the second quarter of 2023

included a $0.8 million expense related to a consulting engagement to assist in negotiating a multi-

year contract for the outsourcing of our core processing system, a higher

expense for advertising and travel/entertainment totaling $0.3

million, and a $0.2 million expense related to our VISA (class B shares) swap.

Partially offsetting these increases was a $0.3 million

gain related to our SERP.

The decrease in compensation expense was primarily attributable to a $0.5

million decrease in stock-based

compensation expense and a $0.2 million decrease in other associate benefit

expense.

Compared to the second quarter of 2022, the $2.0 million increase in noninterest

expense reflected a $1.8 million increase in other

expense and occupancy expense of $0.7 million, partially offset

by a decrease in compensation expense of $0.5 million.

For the first

six months of 2023, noninterest expense totaled $83.0 million compared

to $79.7 million for the same period of 2022 with the $3.3

million increase attributable to an increase in other expense of $1.6 million,

occupancy expense of $1.4 million, and compensation

expense of $0.3 million.

The increase in other expense over both prior year periods was primarily related

to the previously mentioned

consulting payment of $0.8 million made in the second quarter of 2023 and

increases in pension plan expense (non-service-related

component), FDIC insurance fees (rate increase), and loan servicing

(for residential loans).

The aforementioned gain from the sale of

a banking office in the first quarter of 2023 partially offset

these increases for the six-month period comparison.

The addition of four

new banking offices since mid/late 2022 and higher property/equipment

insurance premiums drove the increase in occupancy expense

for both prior period comparisons.

The favorable variance in compensation expense versus the second quarter of 2022

was primarily

due to a $0.7 million decrease in pension plan expense (service cost) that was partially

offset by a $0.3 million increase in associate

insurance expense which reflected an increase in premiums.

The slight unfavorable variance in compensation expense versus the six-

month period of 2022 reflected an increase in salary expense of $1.0

million (primarily the addition of staffing in our new markets),

associate insurance expense of $0.3 million, and stock-based compensation

of $0.3 million that was partially offset by a $1.4 million

decrease in pension plan expense (service cost).

The table below reflects the major components of noninterest expense.

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

(Dollars in Thousands)

2023

2022

2023

2022

Salaries

21,490

21,629

21,461

43,119

42,125

Associate Benefits

3,394

4,007

3,922

7,401

8,114

Total Compensation

24,884

25,636

25,383

50,520

50,239

Premises

3,170

3,245

2,734

6,414

5,493

Equipment

3,650

3,517

3,341

7,168

6,675

Total Occupancy

6,820

6,762

6,075

13,582

12,168

Legal Fees

419

362

316

781

665

Professional Fees

2,039

1,324

1,406

3,363

2,738

Processing Services

1,872

1,742

1,752

3,614

3,389

Advertising

959

874

980

1,833

1,753

Telephone

679

706

703

1,385

1,431

Insurance – Other

872

831

593

1,703

1,103

Other Real Estate Owned, net

(28)

(1,827)

(29)

(1,855)

(4)

Pension - Other

(761)

(1,522)

Pension Settlement (Gain) Charge

(291)

169

(291)

378

Miscellaneous

4,303

4,038

3,911

8,341

7,393

Total Other

10,830

8,057

9,040

18,887

17,324

Total

Noninterest Expense

42,534

40,455

40,498

82,989

79,731

Significant components of noninterest expense are discussed in more detail

below.

Compensation

Compensation expense totaled $24.9 million for the second quarter of 2023 compared

to $25.6 million for the first

quarter of 2023 and $25.4

million for the second quarter of 2022.

The $0.7 million decrease from the first quarter of 2023 reflected a

$0.1 million decrease in salary expense and a $0.6 million decrease in associate benefit

expense.

The decrease in associate benefit

expense was primarily due to a decrease in stock-based compensation

expense.

Compared to the second quarter of 2022, the $0.5

million decrease was primarily due to a $0.7 million decrease in pension

plan expense (service cost) that was partially offset by a $0.3

million increase in associate insurance expense.

The decline in pension plan expense (service cost) was generally due to a lower

benefit obligation which reflected an increased level of retirements in 2022.

The increase in associate insurance expense reflected

higher premiums at our annual renewal.

For the first six months of 2023, compensation expense totaled $50.5 million

compared to $50.2 million for the same period of 2022

with the $0.3 million increase attributable to an increase in salary expense of

$1.0 million (primarily the addition of staffing in our

new markets) that was partially offset by a $0.3 million decrease in associate benefit

expense, primarily pension plan expense (service

cost) due to an increased level of retirements in 2022.

Occupancy

Occupancy expense totaled $6.8

million for the second quarter of 2023 compared to $6.8

million for the first quarter of

2023

and $6.1 million for the second quarter of 2022.

For the first six months of 2023, occupancy expense totaled $13.6 million

compared to $12.2 million for the same period of 2022.

The addition of four new banking offices since mid/late 2022

and higher

property/equipment insurance premiums drove the increase in occupancy

expense for both prior year comparisons.

Other

Other expense totaled $10.8 million for the second quarter of 2023

compared to $8.1 million for the first quarter of 2023 and

$9.0 million for the second quarter of 2022.

Compared to the first quarter of 2023, the $2.7 million decrease reflected a $1.8 million

gain from the sale of a banking office in the first quarter of 2023.

Further, the second quarter of 2023 included a $0.8 million

expense

related to a consulting engagement to assist in negotiating a multi-year

contract for the outsourcing of our core processing system, a

higher expense for advertising and travel/entertainment totaling $0.3

million, and a $0.2 million expense related to our VISA (class B

shares) swap.

Partially offsetting these increases was a $0.3 million gain

related to our SERP.

The increase in other expense over

both prior year periods was primarily related to the previously mentioned consulting

payment of $0.8 million made in the second

quarter of 2023 and increases in pension plan expense (non-service-related

component), FDIC insurance fees, and loan servicing (for

residential loans).

The aforementioned gain from the sale of a banking office in the first quarter

of 2023 partially offset these

increases for the six-month period comparison.

Our operating efficiency ratio (expressed as noninterest

expense as a percentage of the sum of taxable-equivalent net interest income

plus noninterest income) was 67.55%

for the second quarter of 2023 compared to 64.48% for the first quarter of 2023

and 75.96% for

the second quarter of 2022.

For the first six months of 2023, this ratio was 66.02% compared to 76.73% for

the same period of 2022.

Income Taxes

We realized income

tax expense of $3.5 million (effective rate of 19.6%) for the second

quarter of 2023 compared to $4.1 million

(effective rate of 21.7%) for the first quarter of 2023 and $2.2

million (effective rate of 19.4%) for the second quarter of 2022.

For the

first six months of 2023, we realized income tax expense of $7.7 million (effective

rate of 20.6%) compared to $4.4 million (effective

rate of 19.6%) for the same period of 2022. The decrease in our effective

tax rate for the second quarter of 2023 reflected tax benefit

accrued from an investment in a solar tax credit equity fund. Absent discrete items, we

expect our annual effective tax rate to

approximate 20-21% for 2023.

FINANCIAL CONDITION

Average earning

assets totaled $3.975 billion for the second quarter of 2023, a decrease of $87.9 million, or

2.2%, from the first

quarter of 2023, and a decrease of $57.9 million, or 1.4%, from the fourth quarter of 2022.

The decrease from both prior periods was

attributable to lower deposit balances (see below –

Deposits

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

being utilized to fund loan growth.

Investment Securities

Average investments

decreased $20.4 million, or 1.9%, from the first quarter of 2023

and decreased $37.2 million, or 3.4%, from the

fourth quarter of 2022.

Our investment portfolio represented 26.3% of our average earning assets for the second

quarter of 2023

compared to 26.2% for the first quarter of 2023 and 26.8% for the fourth

quarter of 2022.

For the remainder of 2023, we will continue

to monitor our overall liquidity position and allow cash flow from

the investment portfolio to run-off to overnight funds.

The investment portfolio is a significant component of our operations and, as such,

it functions as a key element of liquidity and

asset/liability management.

Two types of classifications are approved

for investment securities which are Available

-for-Sale (“AFS”)

and Held-to-Maturity (“HTM”).

At June 30, 2023, $386.2 million, or 37.5%, of our investment portfolio was classified

as AFS, and

$641.4 million, or 62.3%, classified as HTM.

The average maturity of our total portfolio at June 30, 2023 was 3.07 years compared

3.34 years at March 31, 2023 and 3.57 years at December 31, 2022.

The duration of our investment portfolio at June 30, 2023 was

2.76 years.

Additional information on unrealized gains/losses in the AFS and HTM portfolios is provided

in Note 2 – Investment

Securities.

We determine

the classification of a security at the time of acquisition based on how the purchase will affect

our asset/liability strategy

and future business plans and opportunities.

We consider multiple

factors in determining classification, including regulatory capital

requirements, volatility in earnings or other comprehensive income,

and liquidity needs.

Securities in the AFS portfolio are recorded

at fair value with unrealized gains and losses associated with these securities recorded

net of tax, in the accumulated other

comprehensive income component of shareowners’ equity.

HTM securities are acquired or owned with the intent of holding them

maturity.

HTM investments are measured at amortized cost.

We do not

trade, nor do we presently intend to begin trading investment

securities for the purpose of recognizing gains and therefore we do not maintain

a trading portfolio.

At June 30, 2023, there were 917 positions (combined AFS and HTM)

with unrealized losses totaling $84.2 million. 86 of these

positions are U.S. Treasuries and carry the full faith

and credit of the U.S. Government.

705 were U.S. government agency securities

issued by U.S. government sponsored entities. The remaining 126 positions

(municipal securities and corporate bonds) have a credit

component. At June 30, 2023, corporate debt securities had

an allowance for credit losses of $19,000 and municipal securities had an

allowance of $5,000.

At June 30, 2023, all CMO, MBS, SBA, U.S. Agency,

and U.S. Treasury bonds held were AAA rated.

Loans HFI

Average loans

HFI increased $75.3 million, or 2.9%, over the first quarter of 2023 and $218.3 million,

or 9.0%, over the fourth quarter

of 2022.

Period end loans increased $30.1 million, or 1.1%, over the first quarter of 2023 and

$141.8 million, or 5.6%, over the fourth

quarter of 2022.

Compared to both prior periods, the growth was primarily in the residential real estate

and commercial real estate

categories and was partially offset by lower indirect auto

and home equity loan balances.

Without compromising our credit standards

changing our underwriting standards, or taking on inordinate interest rate risk,

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

Credit Quality

Credit quality metrics remained strong for the quarter.

Nonperforming assets (nonaccrual loans and other real estate) totaled $6.6

million at June 30, 2023 compared to $4.6 million at March 31, 2023

and $2.7 million at December 31, 2022.

At June 30, 2023,

nonperforming assets as a percent of total assets equaled 0.15%, compared

to 0.10% at March 31, 2023 and 0.06% at December 31,

2022.

Nonaccrual loans totaled $6.6 million at June 30, 2023, a $2.0 million increase over March 31, 2023

and a $4.3 million increase

over December 31, 2022.

The increase was primarily due to the addition of one large residential loan

($1.1 million) to nonaccrual

status which was adequately secured and reserved for.

Further, classified loans totaled $15.0 million at June 30,

2023, a $2.8 million

increase over March 31, 2023 and a $4.4 million decrease from December 31,

2022.

Allowance for Credit Losses

The allowance for credit losses is a valuation account that is deducted from the

loans’ amortized cost basis to present the net amount

expected to be collected on the loans.

The allowance for credit losses is adjusted by a credit loss provision which is reported in

earnings, and reduced by the charge-off

of loan amounts (net of recoveries).

Loans are charged off against the allowance when

management believes the uncollectability of a loan balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts

previously charged-off and expected to be charged

-off.

Expected credit loss inherent in non-cancellable off-balance sheet credit

exposures is provided through the credit loss provision, but recorded

as a separate liability included in other liabilities.

Management estimates the allowance balance using relevant available information,

from internal and external sources relating to past

events, current conditions, and reasonable and supportable forecasts.

Historical loan default and loss experience provides the basis for

the estimation of expected credit losses.

Adjustments to historical loss information incorporate management’s

view of current

conditions and forecasts.

At June 30, 2023, the allowance for credit losses for HFI loans totaled $28.0

million compared to $26.5 million at March 31, 2023 and

$24.7 million at December 31, 2022.

Activity within the allowance is provided in Note 3 to the consolidated financial statements

The increase in the allowance in 2023 has primarily been driven by loan growth.

At June 30, 2023, net charge-offs totaled $0.5

million, a decrease of $1.0 million from the first quarter of 2023, and $0.8 million

from the fourth quarter of 2022.

At June 30, 2023,

the allowance represented 1.05% of HFI loans compared to 1.01% at March 31, 2023,

and 0.98% at December 31, 2022.

At June 30, 2023, the allowance for credit losses for unfunded commitments

totaled $3.1 million compared to $2.8 million at March

31, 2023 and $3.0 million at December 31, 2022. The allowance for unfunded

commitments is recorded in other liabilities.

Deposits

Average total

deposits were $3.720 billion for the second quarter of 2023, a decrease of $97.8 million, or 2.6%,

from the first quarter

of 2023 and a decrease of $83.5 million, or 2.2%, from the fourth quarter

of 2022.

Compared to both prior periods, the decreases were

primarily attributable to lower noninterest bearing and savings balances,

primarily offset by higher money market balances.

Compared to the first quarter of 2023, the decrease in NOW account balances

reflected the seasonal decline in our public funds

balances.

Compared to the fourth quarter of 2022, the increase in NOW accounts reflected higher

average public funds balances

which began to build in December 2022 and affect the

average comparison.

At June 30, 2023, total deposits were $3.789 billion, a decrease of $35.1

million, or 0.9%, from March 31, 2023 and $150.5 million, or

3.8%, from December 31, 2022.

The June 30, 2023 deposit balance included a $103 million short-term deposit (in the NOW

category) made late in June by a municipal client.

Compared to both prior periods, the decreases were primarily attributable to lower

noninterest bearing balances, savings balances, and NOW balances (primarily

public funds, excluding the previously mentioned large

municipal client deposit), primarily offset by higher

money market balances.

For comparison to the prior periods, both the average and period-end

balance variances in noninterest bearing and savings balances

generally reflected annual tax payments made by clients in April, continued

client spend of stimulus savings, the migration (re-mix) of

balances to an interest-bearing product type (primarily money market

accounts), and clients seeking higher yielding investment

products outside of the Bank, including the migration of $13 million in the

second quarter of 2023 and $43 million for the first six

months of 2023 to our wealth management division.

Repurchase agreement balances averaged $17.9 million for the second quarter

of 2023, an increase of $8.5 million over the first

quarter of 2023 and $9.4 million over the fourth quarter of 2022.

At June 30, 2023, repurchase agreement balances were $22.6 million

compared to $4.4 million at March 31, 2023 and $6.6 million at December 31, 2022.

These balances consist of client operating

deposit accounts that we have secured by various securities we own and

are reflected in our balance sheet under short-term

borrowings.

We continue

to closely monitor our cost of deposits and deposit mix as we manage through the current

rising rate environment.

MARKET RISK AND INTEREST RATE

SENSITIVITY

Market Risk and Interest Rate Sensitivity

Overview.

Market risk arises from changes in interest rates, exchange rates,

commodity prices, and equity prices.

We have risk

management policies designed to monitor and limit exposure to market

risk and we do not participate in activities that give rise to

significant market risk involving exchange rates, commodity prices, or

equity prices.

In asset and liability management activities, our

policies are designed to minimize structural interest rate risk.

Interest Rate Risk Management.

Our net income is largely dependent on net interest income.

Net interest income is susceptible to

interest rate risk to the degree that interest-bearing liabilities mature or reprice

on a different basis than interest-earning assets.

When

interest-bearing liabilities mature or reprice more quickly

than interest-earning assets in a given period, a significant increase in

market rates of interest could adversely affect net interest

income.

Similarly, when interest-earning

assets mature or reprice more

quickly than interest-bearing liabilities, falling market interest rates could

result in a decrease in net interest income.

Net interest

income is also affected by changes in the portion of interest-earning

assets that are funded by interest-bearing liabilities rather than by

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

equity.

We have established

what we believe to be a comprehensive interest rate risk management policy,

which is administered by

management’s Asset Liability Management

Committee (“ALCO”).

The policy establishes limits of risk, which are quantitative

measures of the percentage change in net interest income (a measure of net

interest income at risk) and the fair value of equity capital

(a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change

in interest rates for maturities from one

day to 30 years.

We measure the potential

adverse impacts that changing interest rates may have on our short-term

earnings, long-

term value, and liquidity by employing simulation analysis through the use of

computer modeling.

The simulation model captures

optionality factors such as call features and interest rate caps and floors imbedded

in investment and loan portfolio contracts.

As with

any method of gauging interest rate risk, there are certain shortcomings

inherent in the interest rate modeling methodology used by

us.

When interest rates change, actual movements in different categories

of interest-earning assets and interest-bearing liabilities, loan

prepayments, and withdrawals of time and other deposits, may deviate

significantly from assumptions used in the model.

Finally, the

methodology does not measure or reflect the impact that higher rates may have

on adjustable-rate loan clients’ ability to service their

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

The statement of financial condition is subject to testing for interest rate shock

possibilities to indicate the inherent interest rate risk.

We prepare

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

-100, +100, +200, +300, and +400

basis points (bp)), at least once per quarter, and

report the analysis to ALCO, our Market Risk Oversight Committee (“MROC”), our

Enterprise Risk Oversight Committee (“EROC”) and the Board of Directors.

We augment our interest rate

shock analysis with

alternative interest rate scenarios on a quarterly basis that may include ramps,

parallel shifts, and a flattening or steepening of the yield

curve (non-parallel shift).

In addition, more frequent forecasts may be produced when interest rates are particularly

uncertain or when

other business conditions so dictate.

Our goal is to structure the statement of financial condition so that net interest earnings at risk over

12-month and 24-month periods

and the economic value of equity at risk do not exceed policy guidelines

at the various interest rate shock levels. We

attempt to

achieve this goal by balancing, within policy limits, the volume of floating-rate

liabilities with a similar volume of floating-rate assets,

by keeping the average maturity of fixed-rate asset and liability contracts

reasonably matched, by managing the mix of our core

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

basis.

Analysis.

Measures of net interest income at risk produced by simulation analysis are

indicators of an institution’s short-term

performance in alternative rate environments.

These measures are typically based upon a relatively brief period, and do not

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

ESTIMATED CHANGES

IN NET INTEREST INCOME

(1)

Percentage Change (12-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-15.0%

-12.5%

-10.0%

-7.5%

-10.0%

-12.5%

-15.0%

June 30, 2023

4.1%

3.0%

1.9%

1.0%

-1.5%

-4.4%

-9.6%

-15.3%

March 31, 2023

7.1%

5.2%

3.4%

1.8%

-3.3%

-8.8%

-15.5%

-21.2%

Percentage Change (24-month shock)

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-17.5%

-15.0%

-12.5%

-10.0%

-12.5%

-15.0%

-17.5%

June 30, 2023

28.4%

23.5%

18.4%

13.9%

3.4%

-4.4%

-15.1%

-25.6%

March 31, 2023

28.0%

22.7%

17.2%

12.2%

-0.5%

-10.9%

-22.5%

-31.2%

The Net Interest Income (“NII”) at Risk position indicates

that in the short-term, all rising rate environments will positively impact

the

net interest margin of the Company,

while declining rate environments

will have a negative impact on the net interest margin.

Compared to the first quarter of 2023, these metrics became less favorable in

the rising rate scenarios primarily due to loan growth,

which reduced our level of overnight funds and made us slightly less asset sensitive.

The converse is applicable in the down rate

scenarios where the metrics became more favorable due to loan growth which

increased asset duration and therefore protection against

falling rates.

The percent change over the 12-month shock is outside of policy in the down 400 bps

scenario, and the percent change

over the 24-month shock is outside of policy in the rates down 300 bps and

400 bps scenarios

due to our limited ability to lower our

deposit rates relative to the decline in market rate.

The measures of equity value at risk indicate our ongoing economic value

by considering the effects of changes in interest rates on all

of our cash flows by discounting the cash flows to estimate the present value of

assets and liabilities. The difference between these

discounted values of the assets and liabilities is the economic value of equity,

which in theory approximates the fair value of our net

assets.

ESTIMATED CHANGES

IN ECONOMIC VALUE

OF EQUITY

(1)

Changes in Interest Rates

+400 bp

+300 bp

+200 bp

+100 bp

-100 bp

-200 bp

-300 bp

-400 bp

Policy Limit

-30.0%

-25.0%

-20.0%

-15.0%

-20.0%

-25.0%

-30.0%

June 30, 2023

10.7%

9.1%

6.7%

3.9%

-7.1%

-18.0%

-30.2%

-32.6%

March 31, 2023

11.6%

9.6%

7.0%

4.0%

-7.1%

-17.9%

-31.3%

-35.7%

EVE Ratio (policy minimum 5.0%)

18.8%

18.2%

17.4%

16.6%

14.3%

12.4%

10.4%

9.9%

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

At June 30, 2023, the economic value of equity was favorable in all rising

rate environments and unfavorable in the falling rate

environments. Compared to the first quarter of 2023, EVE metrics were slightly

more favorable in the rising and declining rate

environments.

EVE is currently in compliance with policy in all rate scenarios as the EVE ratio in each rate scenario

exceeds 5.0%.

As the interest rate environment and the dynamics of the economy continue to change,

additional simulations will be analyzed to

address not only the changing rate environment, but also the change

in mix of our financial assets and liabilities, measured over

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

LIQUIDITY AND CAPITAL

RESOURCES

Liquidity

In general terms, liquidity is a measurement of our ability to meet our

cash needs.

Our objective in managing our liquidity is to

maintain our ability to meet loan commitments, purchase securities or repay deposits and

other liabilities in accordance with their

terms, without an adverse impact on our current or future earnings.

Our liquidity strategy is guided by policies that are formulated and

monitored by our ALCO and senior management, which take into account

the marketability of assets, the sources and stability of

funding and the level of unfunded commitments.

We regularly evaluate

all of our various funding sources with an emphasis on

accessibility, stability,

reliability and cost-effectiveness.

Our principal source of funding has been our client deposits, supplemented

by our short-term and long-term borrowings, primarily from securities sold under

repurchase agreements, federal funds purchased and

FHLB borrowings.

We believe that the cash

generated from operations, our borrowing capacity and our access to capital resources

are

sufficient to meet our future operating capital and funding requirements.

At June 30, 2023, we had the ability to generate approximately $1.506 billion

(excludes overnight funds position of $285 million) in

additional liquidity through various sources including various federal funds

purchased lines, Federal Home Loan Bank borrowings, the

Federal Reserve Discount Window,

and through brokered deposits. We

recognize the importance of maintaining liquidity and have

developed a Contingent Liquidity Plan, which addresses various liquidity

stress levels and our response and action based on the level

of severity.

We periodically test our credit

facilities for access to the funds, but also understand that as the severity of the liquidity

level increases that certain credit facilities may no longer be available.

We conduct a liquidity

stress test on a quarterly basis based on

events that could potentially occur at the Bank and report results to ALCO, our

Market Risk Oversight Committee, Risk Oversight

Committee, and the Board of Directors.

At June 30, 2023, we believe the liquidity available to us was sufficient

to meet our on-going

needs and execute our business strategy.

We also view our

investment portfolio as a liquidity source and have the option to pledge securities in our

portfolio as collateral for

borrowings or deposits, and/or to sell selected securities.

Additional information on our investment portfolio is provided within

Note

2 –

Investment Securities

The Bank maintained an average net overnight funds (deposits with banks

plus FED funds sold less FED funds purchased) sold

position of $218.9 million in the second quarter of 2023 compared

to $361.0 million in the first quarter of 2023 and $469.4 million in

the fourth quarter of 2022.

The declining overnight funds position reflected growth in average loans and lower

average deposit

balances.

We expect our

capital expenditures will be approximately $8.0 million over the next 12 months, which

will primarily consist of

construction of new offices, office remodeling,

office equipment/furniture, and technology purchases.

Management expects that these

capital expenditures will be funded with existing resources without impairing

our ability to meet our on-going obligations.

Borrowings

Average short

-term borrowings totaled $35.7 million for the second quarter of 2023 compared to

$47.1 million for the first quarter of

2023 and $50.8 million for the fourth quarter of 2022.

The variance compared to both prior periods was primarily attributable to an

increase in repurchase agreement balances (discussed under

Deposits

) and fluctuation in warehouse line borrowings that support our

mortgage banking operations.

Additional detail on these warehouse borrowings is provided in Note 4 –

Mortgage Banking Activities

in the Consolidated Financial Statements.

We have issued two

junior subordinated deferrable interest notes to our wholly owned

Delaware statutory trusts.

The first note for

$30.9 million was issued to CCBG Capital Trust I in

November 2004, of which $10 million was retired in April 2016.

The second

note for $32.0 million was issued to CCBG Capital Trust II

in May 2005.

The interest payment for the CCBG Capital Trust I

borrowing is due quarterly and adjusts quarterly to a variable rate of three-month

CME Term SOFR (secured overnight

financing rate)

plus a margin of 1.90%.

This note matures on December 31, 2034.

The interest payment for the CCBG Capital Trust II borrowing

due quarterly and adjusts quarterly to a variable interest rate based on three-month

CME Term SOFR plus a margin

of 1.80%.

This

note matures on June 15, 2035.

The proceeds from these borrowings were used to partially fund acquisitions.

Under the terms of each

junior subordinated deferrable interest note, in the event of default or

if we elect to defer interest on the note, we may not, with certain

exceptions, declare or pay dividends or make distributions on our capital

stock or purchase or acquire any of our capital stock.

During the second quarter of 2020, we entered into a derivative cash

flow hedge of our interest rate risk related to our subordinated

debt.

The notional amount of the derivative is $30 million ($10 million of the CCBG Capital Trust

I borrowing and $20 million of the

CCBG Capital Trust II borrowing).

The interest rate swap agreement requires CCBG to pay fixed and receive variable (three-month

CME Term SOFR plus spread)

and has an average all-in fixed rate of 2.50% for 10 years.

Additional detail on the interest rate swap

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

Statements.

Capital

Our capital ratios are presented in the Selected Quarterly Financial Data

table on page 32.

At June 30, 2023, our regulatory capital

ratios exceeded the threshold to be designated as “well-capitalized”

under the Basel III capital standards.

Shareowners’ equity was $420.8 million at June 30, 2023 compared to

$411.2 million at March 31, 2023 and $394.0 million at

December 31, 2022.

For the first six months of 2023, shareowners’ equity was positively impacted by net income

attributable to

common

shareowners of $29.5 million, a $4.2 million decrease in the unrealized loss on investment

securities, the issuance of stock of

$2.1 million, and stock compensation accretion of $0.5 million.

Shareowners’ equity was reduced by common stock dividends of $6.1

million ($0.36 per share), the repurchase of stock of $2.0 million (65,736 shares),

net adjustments totaling $1.2 million related to

transactions under our stock compensation plans, and a $0.2 million decrease

in the fair value of the interest rate swap related to

subordinated debt.

At June 30, 2023, our total risk-based capital ratio was 15.95% compared to 15.53%

at March 31, 2023 and 15.52% at December 31,

2022.

Our common equity tier 1 capital ratio was 13.02%, 12.68%, and 12.64%, respectively,

on these dates.

Our leverage ratio was

9.74%, 9.28%, and 9.06%, respectively,

on these dates.

At June 30, 2023, all our regulatory capital ratios exceeded the threshold to be

designated as “well-capitalized” under the Basel III capital standards.

Further, our tangible common equity ratio was 7.61% at June

30, 2023 compared to 7.37% and 6.79% at March 31, 2023 and December

31, 2022, respectively.

If our unrealized HTM securities

losses of $30.0 million (after-tax) were recognized in accumulated other

comprehensive loss, our adjusted tangible capital ratio would

be 6.91%.

Our tangible capital ratio is also impacted by the recording of our unfunded pension

liability through other comprehensive income in

accordance with ASC Topic

715.

At June 30, 2023, the net pension liability reflected in other comprehensive loss was $4.7

million

compared to $4.5 million at March 31, 2023 and $4.5 million at December 31,

2022.

This liability is re-measured annually on

December 31

based on an actuarial calculation of our pension liability.

Significant assumptions used in calculating the liability

include the weighted average discount rate used to measure the present

value of the pension liability, the

weighted average expected

long-term rate of return on pension plan assets, and the assumed rate of annual compensation

increases, all of which will vary when

re-measured.

The discount rate assumption used to calculate the pension liability is subject to long

-term corporate bond rates at

December 31

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

Policies and

Estimates”.

OFF-BALANCE SHEET ARRANGEMENTS

We are a party

to financial instruments with off-balance sheet risks in the normal

course of business to meet the financing needs of our

clients.

At June 30, 2023, we had $775.1 million in commitments to extend credit

and $6.3 million in standby letters of credit.

Commitments

to extend credit are agreements to lend to a client so long as there is no violation of any

condition established in the contract.

Commitments generally have fixed expiration dates or other termination

clauses and may require payment of a fee.

Since many of the

commitments are expected to expire without being drawn upon,

the total commitment amounts do not necessarily represent future

cash requirements.

Standby letters of credit are conditional commitments issued by us to guarantee the performance

of a client to a

third party.

We use the same credit policies

in establishing commitments and issuing letters of credit as we do for on-balance

sheet

instruments.

If commitments arising from these financial instruments continue to require

funding at historical levels, management does not

anticipate that such funding will adversely impact our ability to meet our on-going

obligations.

In the event these commitments

require funding in excess of historical levels, management believes current

liquidity, advances available from the

FHLB and the

Federal Reserve, and investment security maturities provide a sufficient

source of funds to meet these commitments.

Certain agreements provide that the commitments are unconditionally

cancellable by the bank and for those agreements no allowance

for credit losses has been recorded.

We have recorded

an allowance for credit losses on loan commitments that are not

unconditionally cancellable by the bank, which is included in other

liabilities on the consolidated statements of financial condition and

totaled $3.1 million at June 30, 2023.

CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are described in Note 1 to the Consolidated

Financial Statements included in our 2022 Form 10-K.

The preparation of our Consolidated Financial Statements

in accordance with GAAP and reporting practices applicable to the banking

industry requires us to make estimates and assumptions that affect

the reported amounts of assets, liabilities, revenues and expenses,

and to disclose contingent assets and liabilities.

Actual results could differ from those estimates.

We have identified

accounting for (i) the allowance for credit losses, (ii) goodwill,

(iii) pension assumptions, and (iv) income taxes as

our most critical accounting policies and estimates in that they are important

to the portrayal of our financial condition and results, and

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

the effects of matters that are

inherently uncertain.

These accounting policies, including the nature of the estimates and types of

assumptions used, are described

throughout this Item 2, Management’s

Discussion and Analysis of Financial Condition and Results of Operations, and

Part II, Item 7,

Management’s Discussion and Analysis

of Financial Condition and Results of Operations included

in our 2022 Form 10-K.

TABLE I

AVERAGE BALANCES & INTEREST RATES (UNAUDITED)

Three Months Ended June 30,

Six Months Ended June 30,

2023

2022

2023

2022

Average

(Dollars in Thousands)

Balances

Interest

Rate

Balances

Interest

Rate

Balances

Interest

Rate

Balances

Interest

Rate

Assets:

Loans Held for Sale

54,350

801

5.90

52,860

711

4.44

54,728

1,445

5.32

47,959

1,108

4.66

Loans Held for Investment

(1)(2)

2,657,693

36,758

5.55

2,084,679

23,433

4.53

2,620,252

71,089

5.47

2,024,463

45,244

4.51

Taxable Securities

1,041,202

4,804

1.84

1,142,269

3,834

1.34

1,051,232

9,716

1.85

1,099,739

6,723

1.22

Tax-Exempt Securities

(2)

2,656

2.47

2,488

1.73

2,747

2.41

2,449

1.67

Funds Sold

218,902

2,782

5.10

691,925

1,408

0.82

289,543

6,893

4.80

782,011

1,817

0.47

Total Earning Assets

3,974,803

45,161

4.56

3,974,221

29,396

2.97

4,018,502

89,176

4.47

3,956,621

54,912

2.80

Cash & Due From Banks

75,854

79,730

75,250

77,007

Allowance For Credit Losses

(27,893)

(20,984)

(26,771)

(21,318)

Other Assets

297,837

288,421

298,999

281,922

TOTAL ASSETS

4,320,601

4,321,388

4,365,980

4,294,232

Liabilities:

Noninterest Bearing Deposits

1,539,877

1,722,325

1,570,642

1,687,524

NOW Accounts

1,200,400

3,038

1.01

1,033,190

120

0.05

1,214,585

5,190

0.86

1,056,419

206

0.04

Money Market Accounts

288,466

747

1.04

286,210

0.05

278,077

955

0.69

285,810

0.05

Savings Accounts

602,848

120

0.08

628,472

0.05

616,045

196

0.06

613,996

149

0.05

Other Time Deposits

87,973

103

0.47

95,132

0.14

88,819

155

0.35

96,088

0.14

Total Interest Bearing Deposits

2,179,687

4,008

0.74

2,043,004

266

0.05

2,197,526

6,496

0.60

2,052,313

490

0.05

Total Deposits

3,719,564

4,008

0.43

3,765,328

266

0.03

3,768,168

6,496

0.35

3,739,837

490

0.03

Repurchase Agreements

17,888

115

2.58

5,064

0.03

13,639

124

1.83

6,093

0.03

Other Short-Term Borrowings

17,834

336

7.54

26,718

343

5.15

27,745

788

5.73

25,973

534

4.14

Subordinated Notes Payable

52,887

604

4.52

52,887

370

2.76

52,887

1,175

4.42

52,887

687

2.58

Other Long-Term Borrowings

431

4.80

722

4.54

455

4.80

777

4.51

Total Interest Bearing Liabilities

2,268,727

5,068

0.90

2,128,395

987

0.19

2,292,252

8,594

0.76

2,138,043

1,729

0.16

Other Liabilities

84,305

87,207

82,765

79,728

TOTAL LIABILITIES

3,892,909

3,937,927

3,945,659

3,905,295

Temporary Equity

8,935

10,096

8,869

10,306

TOTAL SHAREOWNERS’ EQUITY

418,757

373,365

411,452

378,631

TOTAL LIABILITIES, TEMPORARY

AND SHAREOWNERS’ EQUITY

4,320,601

4,321,388

4,365,980

4,294,232

Interest Rate Spread

3.66

2.78

3.72

2.64

Net Interest Income

40,093

28,409

80,582

53,183

Net Interest Margin

(3)

4.05

2.87

4.04

2.71

(1)

Average Balances include net loan fees, discounts and premiums and nonaccrual loans.

Interest income includes loans fees of $0.3 million

and $0.4 million for the three month periods ended June 30,

2023 and

2022, respectively, and $0.6 million and $0.5 million for the six month periods ended

June 30, 2023 and 2022, respectively.

(2)

Interest income includes the effects of taxable equivalent adjustments

using a 21% Federal tax rate.

(3)

Taxable equivalent net interest income divided by average earning assets.

Item 3.

QUANTITATIVE

AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISK

See “Market Risk and Interest Rate Sensitivity” in Management’s

Discussion and Analysis of Financial Condition and Results of

Operations, above, which is incorporated herein by reference.

Management has determined that no additional disclosures are

necessary to assess changes in information about market risk that have occurred

since December 31, 2022.

Item 4.

CONTROLS AND PROCEDURES

At June 30, 2023, the end of the period covered by this Form 10-Q, our management,

including our Chief Executive Officer and Chief

Financial Officer, evaluated

the effectiveness of our disclosure controls and procedures (as defined

in Rule 13a-15(e) under the

Securities Exchange Act of 1934).

Based upon that evaluation, the Chief Executive Officer and Chief Financial

Officer concluded

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

were effective.

Our management, including our Chief Executive Officer

and Chief Financial Officer, has reviewed

our internal control over financial

reporting (as defined in Rule 13a-15(f) under the Securities Exchange

Act of 1934).

During the quarter ended on June 30, 2023, there

have been no significant changes in our internal control over financial reporting

during our most recently completed fiscal quarter that

have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting.

PART

II.

OTHER INFORMATION

Item 1.

Legal Proceedings

We are party

to lawsuits arising out of the normal course of business.

In management's opinion, there is no known pending litigation,

the outcome of which would, individually or in the aggregate, have a material effect

on our consolidated results of operations,

financial position, or cash flows.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider

the factors discussed in Part I,

Item 1A. “Risk Factors” in our 2022 Form 10-K, as updated in our subsequent

quarterly reports. The risks described in our 2022 Form

10-K and our subsequent quarterly reports are not the only risks facing us. Additional risks

and uncertainties not currently known to us

or that we currently deem to be immaterial also may materially adversely affect

our business, financial condition and/or operating

results.

Item 2.

Unregistered Sales of Equity Securities and Use of

Proceeds

Purchases of Equity Securities by the Issuer and

Affiliated Purchasers

The following table contains information about all purchases made by,

or on behalf of, us and any affiliated purchaser (as defined

Rule 10b-18(a)(3) under the Exchange Act) of shares or other units of any

class of our equity securities that is registered pursuant to

Section 12 of the Exchange Act.

Total

number

Average

Total

number of shares

Maximum Number of shares

of shares

price paid

purchased under our

remaining for purchase under

Period

purchased

per share

share repurchase program

(1)

our share repurchase program

April 1, 2023 to

April 30, 2023

4,000

$30.49

4,000

543,807

May 1, 2023 to

May 31, 2023

36,495

29.70

36,495

507,312

June 1, 2023 to

June 30, 2023

507,312

Total

40,495

$29.78

40,495

507,312

(1)

This amount represents the number of shares that were repurchased during

the second quarter of 2023 through the Capital City

Bank Group, Inc. Share Repurchase Program (the “Program”), which

was approved on January 31, 2019

for a five-year period,

under which we were authorized to repurchase up to 750,000 shares of

our common stock.

The Program is flexible and shares are

acquired from the public markets and other sources using free cash flow.

No shares are repurchased outside of the Program.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosure

Not Applicable.

Item 5.

Other Information

During the three months ended June 30, 2023, none of our directors or officers

(as defined in Rule 16a-1(f) under the Exchange Act)

adopted or terminated any contract, instruction or written plan for

the purchase or sale of our securities that was intended to satisfy the

affirmative defense conditions of Rule 10b5-1(c) under

the Exchange Act or any “non-Rule 10b5-1 trading arrangement” as defined

Item 408(c) of Regulation S-K.

Item 6.

Exhibits

(A)

Exhibits

31.1

Certification of William G Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc.,

Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2

Certification of Jeptha E. Larkin, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc.,

Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32.1

Certification of William G. Smith, Jr., Chairman, President and Chief Executive Officer of Capital City Bank Group, Inc.,

Pursuant to 18 U.S.C. Section 1350.

32.2

Certification of Jeptha E. Larkin, Executive Vice President and Chief Financial Officer of Capital City Bank Group, Inc.,

Pursuant to 18 U.S.C. Section 1350.

101.SCH

XBRL Taxonomy

Extension Schema Document

101.CAL

XBRL Taxonomy

Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy

Extension Label Linkbase Document

101.PRE

XBRL Taxonomy

Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy

Extension Definition Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has

duly caused this Report to be signed on its

behalf by the undersigned Chief Financial Officer hereunto duly

authorized.

CAPITAL CITY

BANK GROUP,

INC.

(Registrant)

/s/ Jeptha E. Larkin

Jeptha E. Larkin

Executive Vice President

and Chief Financial Officer

(Mr. Larkin is the Principa

Financial Officer and has

been duly authorized to sign on behalf of the Registrant)

Date: July 31, 2023