Executive Summary / Key Takeaways

• Resilient Core Business & Net Interest Income Growth: Capital City Bank Group (CCBG) demonstrates robust financial health, with net interest income and net interest margin expanding significantly in the first half of 2025, driven by strategic investment portfolio management and disciplined deposit cost control.
• Strategic Diversification & Wealth Management Strength: While core banking remains paramount, CCBG's noninterest income streams, particularly wealth management, are showing strong growth, diversifying revenue and enhancing profitability.
• Prudent Asset Quality & Strong Capitalization: Despite some increases in nonperforming and classified loans, CCBG maintains a healthy allowance for credit losses and boasts capital ratios well above "well-capitalized" thresholds, underpinning its financial stability.
• Focused Regional Expansion & Tech Investment: CCBG continues its targeted physical expansion within its Florida, Georgia, and Alabama footprint, complemented by a strategic investment in a bank tech venture capital fund, signaling a forward-looking approach to enhance community banking solutions.
• Attractive Shareholder Returns: The company's consistent dividend increases, including a recent 4.35% hike, underscore its commitment to shareholder value, supported by a favorable payout ratio and solid earnings per share.

The Enduring Strength of Community Banking

Capital City Bank Group, Inc. (CCBG), founded in 1895 and headquartered in Tallahassee, Florida, has cultivated a deep-rooted presence in the Southeastern United States. Operating through its wholly-owned subsidiary, Capital City Bank, CCBG provides a comprehensive suite of banking and banking-related services to individual and corporate clients across 62 full-service offices and 107 ATMs/ITMs in Florida, Georgia, and Alabama. This extensive network, complemented by 27 specialized offices for its mortgage banking arm, Capital City Home Loans, LLC (CCHL), underscores CCBG's enduring strategy: to deliver personalized, relationship-based financial services within its regional markets.

The company's history is marked by measured expansion and strategic diversification. Early borrowings, such as junior subordinated deferrable interest notes issued in 2004 and 2005, partially funded acquisitions that broadened its footprint and service capabilities. More recently, CCBG reinforced its physical presence by opening a new banking office in Panama City Beach, Florida, in March 2025, strategically located to tap into growing communities. This blend of historical stability and targeted growth defines CCBG's approach to the dynamic financial services industry.

Competitive Dynamics and Strategic Positioning

CCBG operates in a competitive landscape dominated by both larger regional players and agile fintech innovators. Its primary direct competitors include established regional banks such as Regions Financial Corporation (RF), Synovus Financial Corp. (SNV), and Truist Financial Corporation (TFC). While these larger institutions benefit from greater scale, broader geographic reach, and often more diversified revenue streams, CCBG distinguishes itself through its deep community ties and a focus on personalized service.

CCBG's competitive advantages are rooted in its strong local brand and long-standing customer relationships. This fosters significant customer loyalty, which can translate into stable deposit bases and recurring revenue from long-term accounts. The company's regulatory licenses also provide a defensive moat, limiting new entrants and helping to preserve its market share, particularly in niche segments like institutional banking for state and local governments, public schools, and non-profit associations.

However, CCBG's smaller scale compared to its larger rivals presents certain vulnerabilities. This can lead to higher operational costs and potentially limit the pace of investment in cutting-edge technology. For instance, while CCBG's net profit margin of 21.41% (TTM) is robust and compares favorably to SNV's 14% and TFC's 20%, it is similar to RF's 20%, indicating competitive pressure on profitability. Similarly, CCBG's debt-to-equity ratio of 0.15 (TTM) is lower than RF's 0.36, SNV's 0.36, and TFC's 0.98, suggesting a more conservative capital structure, which can be both a strength in terms of risk management and a potential limitation on aggressive growth.

Investing in the Future: Technology and Innovation

While CCBG's core strength lies in its traditional, relationship-based banking model, the company recognizes the imperative of technological evolution in the modern financial landscape. Rather than developing proprietary, differentiated technology internally, CCBG has adopted a strategic approach to technology adoption. The company has an outstanding commitment of up to $1.00 million in a bank tech venture capital fund, with $0.30 million remaining to be funded as of June 30, 2025.

This investment signals a proactive stance to find and fund technology solutions specifically tailored for community banks. The strategic intent is to leverage external innovation to enhance operational efficiency, improve customer experience, and maintain competitiveness without the heavy R&D burden of developing solutions from scratch. While specific quantifiable benefits from this fund are not yet publicly detailed, the initiative aims to bring modern digital capabilities to CCBG's operations, potentially improving service delivery, streamlining processes, and attracting new customer segments. This strategic foresight is crucial for a community bank to remain relevant and efficient in an increasingly digital world, helping to bridge any technological gaps compared to larger, more resource-rich competitors.

Financial Performance: A Story of Expanding Margins and Diversified Income

CCBG's financial performance in the first half of 2025 reflects a compelling narrative of expanding net interest income and growing noninterest revenue streams. For the second quarter of 2025, net income attributable to common shareowners stood at $15.04 million, or $0.88 per diluted share. While this represented a sequential decrease from $16.90 million ($0.99 per diluted share) in the first quarter of 2025, it marked a significant increase from $14.20 million ($0.83 per diluted share) in the second quarter of 2024. Year-to-date, net income for the first six months of 2025 totaled $31.90 million ($1.87 per diluted share), a substantial improvement from $26.70 million ($1.57 per diluted share) in the same period of 2024.

Net interest income, the cornerstone of CCBG's profitability, saw robust growth. Tax-equivalent net interest income reached $43.20 million in Q2 2025, up from $41.60 million in Q1 2025 and $39.30 million in Q2 2024. This increase was primarily driven by a $0.90 million rise in investment securities income and a $0.40 million increase in overnight funds income compared to the prior quarter. The company's net interest margin (FTE) expanded to 4.30% in Q2 2025, an eight-basis-point improvement over Q1 2025 and a 28-basis-point increase over Q2 2024. This margin expansion was largely attributable to new investment purchases at higher yields and a strategic reduction in deposit interest expense, as short-term rates began to normalize in the latter half of 2024.

Noninterest income also contributed positively to the overall revenue picture, totaling $20.00 million in Q2 2025. Wealth management fees emerged as a significant growth driver, increasing by 17.28% year-over-year to $5.206 million in Q2 2025 and by 20.26% to $10.969 million for the first six months of 2025. This growth was fueled by new retail brokerage accounts and managed trust accounts, pushing total assets under management to approximately $3.19 billion at June 30, 2025. Mortgage banking revenues, while experiencing a slight year-over-year decline in Q2 2025, showed a strong 10.35% increase for the six-month period, driven by higher gain-on-sale margins. Deposit fees and bank card fees saw minor fluctuations, reflecting normalizing consumer spending patterns and shifts in account activity.

Operating efficiency, as measured by the efficiency ratio, was 67.26% for Q2 2025. While this represented an increase from 62.93% in Q1 2025, primarily due to lower gains from the sale of banking facilities (including the operations center building sold in Q1 2025), it was an improvement from 68.61% in Q2 2024. For the first six months of 2025, the efficiency ratio improved to 65.13% from 69.81% in the prior year period, indicating effective cost management despite increased compensation expenses related to incentive plans and base salaries.

Robust Capitalization and Liquidity Management

CCBG maintains a strong capital position and ample liquidity, providing a solid foundation for future growth and resilience against market fluctuations. At June 30, 2025, shareowners' equity increased to $526.40 million, a positive trend driven by net income, a decrease in accumulated other comprehensive loss (primarily from a $6.40 million reduction in investment securities loss), and common stock issuance. The company's regulatory capital ratios, including a total risk-based capital ratio of 19.60% and a common equity tier 1 capital ratio of 16.81%, significantly exceed the "well-capitalized" thresholds under Basel III standards. The tangible common equity ratio, a non-GAAP measure, stood at a healthy 10.09%. Even if unrealized losses on held-to-maturity securities were recognized, this ratio would remain strong at 9.86%.

Liquidity remains a key focus, with CCBG reporting approximately $1.60 billion in additional liquidity capacity available through various sources, including federal funds purchased lines, Federal Home Loan Bank borrowings, and the Federal Reserve Discount Window. This substantial capacity ensures the company can meet its ongoing obligations and fund future growth initiatives. Management views its investment portfolio, comprising U.S. Treasury, U.S. governmental agency, municipal, and corporate debt, as a vital liquidity source, with the flexibility to pledge or sell securities as needed.

Outlook and Risk Considerations

CCBG's outlook for 2025 appears stable, with management expecting an annual effective tax rate of approximately 24.00%, absent discrete items or new tax credit investments. The company anticipates capital expenditures of around $10.00 million over the next 12 months, primarily for new offices, remodeling, and technology purchases, which are expected to be funded from existing resources without impairing ongoing operations.

However, like all financial institutions, CCBG is exposed to market risks, particularly interest rate sensitivity. While rising rate environments are projected to positively impact net interest income, the company's simulation analysis indicates that significant declines in interest rates (e.g., 200-400 basis points down) could negatively affect net interest margin. This is largely due to the limited ability to decrease deposit rates to the full extent of such a change and the impact on variable-rate overnight funds. The economic value of equity (EVE) is also more sensitive to falling rates, though it currently remains within policy minimums.

Asset quality, while generally strong, requires continuous monitoring. Nonperforming assets increased to $6.60 million at June 30, 2025, up from $4.40 million in March 2025, primarily due to an increase in nonaccrual loans from two home equity loans. Classified loans also saw a notable increase to $28.60 million, driven by downgrades of residential and commercial real estate loans. Despite these movements, the allowance for credit losses for loans held for investment remains robust at 1.13% of loans HFI, and management's provision for credit losses has decreased, reflecting a proactive approach to risk management. The company also manages significant off-balance sheet commitments, such as $672.30 million in commitments to extend credit, which management believes can be met with current liquidity.

Conclusion

Capital City Bank Group stands as a testament to the enduring value of community banking, strategically blending its century-old foundation of personalized service with a forward-looking approach to financial management and technological integration. Its recent financial performance, marked by expanding net interest margins and robust wealth management growth, underscores its operational effectiveness in a dynamic economic environment. The company's strong capital position and ample liquidity provide a solid buffer against market volatility and support its continued, measured expansion within its core Southeastern markets.

While CCBG faces competitive pressures from larger, more technologically advanced institutions, its strategic investment in a bank tech venture capital fund demonstrates a commitment to leveraging innovation to enhance its service offerings and operational efficiency. This, coupled with its consistent shareholder returns through dividends and a prudent approach to asset quality, positions CCBG as a compelling consideration for investors seeking a financially stable regional bank with a clear strategic vision and a deep commitment to its community-centric model. The company's ability to maintain its strong local brand and adapt to evolving industry trends will be key to its continued success.