10-Q: Capital City Bank Group Reports Strong Net Interest Income and Capital Amidst Rising Nonperforming Assets in Q2 2025

Capital City Bank Group, Inc. reported increased net interest income and robust capital ratios for the second quarter of 2025, despite a sequential decline in net income and an uptick in nonperforming and classified loans.

Summary

• Net income attributable to common shareowners was $15.0 million ($0.88 diluted EPS) for Q2 2025, a decrease from $16.9 million ($0.99 diluted EPS) in Q1 2025, but an increase from $14.2 million ($0.83 diluted EPS) in Q2 2024.
• Year-to-date net income attributable to common shareowners reached $31.9 million ($1.87 diluted EPS) for the first six months of 2025, up from $26.7 million ($1.57 diluted EPS) for the same period in 2024.
• Tax-equivalent net interest income increased to $43.2 million in Q2 2025 from $41.6 million in Q1 2025 and $39.3 million in Q2 2024, driven by higher investment securities income and overnight funds income.
• The net interest margin improved to 4.30% in Q2 2025, an increase of eight basis points from Q1 2025 (4.22%) and 28 basis points from Q2 2024 (4.02%).
• Provision for credit losses decreased to $0.6 million in Q2 2025, down from $0.8 million in Q1 2025 and $1.2 million in Q2 2024.
• Noninterest income for Q2 2025 was $20.0 million, a slight increase from $19.9 million in Q1 2025 and $19.6 million in Q2 2024, primarily due to higher mortgage banking revenues and deposit fees, partially offset by lower wealth management fees sequentially.
• Noninterest expense rose to $42.5 million in Q2 2025 from $38.7 million in Q1 2025, mainly due to lower gains from the sale of banking facilities, but was comparable to $40.4 million in Q2 2024.
• Average loans held for investment decreased by 0.5% from Q1 2025 and 0.9% from Q4 2024, totaling $2.652 billion for Q2 2025.
• Nonperforming assets increased to $6.6 million (0.15% of total assets) at June 30, 2025, from $4.4 million (0.10% of total assets) at March 31, 2025.
• Nonaccrual loans increased by $2.2 million to $6.4 million at June 30, 2025, compared to March 31, 2025.
• Classified loans increased by $9.4 million to $28.6 million at June 30, 2025, compared to March 31, 2025, primarily due to downgrades of residential and commercial real estate loans.
• The allowance for credit losses for loans held for investment slightly increased to $29.9 million (1.13% of loans HFI) at June 30, 2025, from $29.7 million (1.12% of loans HFI) at March 31, 2025.
• Average total deposits increased to $3.681 billion in Q2 2025, up 0.4% from Q1 2025, but period-end deposits decreased by 2.1% from March 31, 2025, due to seasonal public funds decline.
• All regulatory capital ratios exceeded well-capitalized thresholds, with the total risk-based capital ratio at 19.60% and tangible common equity ratio at 10.09% at June 30, 2025.
• Unrealized pre-tax losses on investment securities totaled $33.0 million across 788 positions at June 30, 2025, though accumulated other comprehensive loss improved significantly to $(940) thousand from $(6.486) million at December 31, 2024.

Sentiment

Score: 5

Explanation: The company shows strong capital and an improving net interest margin, which are positive indicators. However, the sequential decline in net income, coupled with a notable increase in nonperforming and classified loans, raises concerns about asset quality and future profitability. The shrinking loan portfolio and vulnerability to falling interest rates also contribute to a neutral-to-slightly-negative outlook.

Positives

• Net income attributable to common shareowners increased to $31.9 million for the first six months of 2025, up from $26.7 million for the same period in 2024.
• Tax-equivalent net interest income consistently increased, reaching $43.2 million in Q2 2025, driven by higher investment securities income and overnight funds income.
• Net interest margin improved to 4.30% in Q2 2025, reflecting a higher yield in the investment portfolio and lower deposit costs.
• Provision for credit losses decreased to $0.6 million in Q2 2025, indicating a lower perceived need for loss reserves.
• Wealth management fees increased by $1.8 million for the first six months of 2025, driven by new business, higher account valuations, and fee increases.
• Mortgage banking revenues increased by $0.7 million for the first six months of 2025 due to a higher gain on sale margin.
• All regulatory capital ratios (Total Risk-Based Capital: 19.60%, Common Equity Tier 1: 16.81%, Leverage: 11.14%) exceeded well-capitalized thresholds at June 30, 2025.
• Tangible common equity ratio improved to 10.09% at June 30, 2025, from 9.61% at March 31, 2025.
• Accumulated other comprehensive loss significantly improved to $(940) thousand at June 30, 2025, from $(6.486) million at December 31, 2024, primarily due to a decrease in investment securities loss.

Negatives

• Net income attributable to common shareowners decreased sequentially to $15.0 million in Q2 2025 from $16.9 million in Q1 2025.
• Noninterest expense increased significantly by $3.8 million (9.9%) from Q1 2025 to Q2 2025, primarily due to lower gains from the sale of banking facilities.
• Average loans held for investment decreased by 0.5% from Q1 2025 and 0.9% from Q4 2024, indicating a shrinking loan portfolio.
• Nonperforming assets increased to $6.6 million at June 30, 2025, from $4.4 million at March 31, 2025.
• Nonaccrual loans increased by $2.2 million to $6.4 million at June 30, 2025, compared to March 31, 2025.
• Classified loans increased substantially by $9.4 million to $28.6 million at June 30, 2025, from March 31, 2025, due to downgrades of residential and commercial real estate loans.
• Period-end total deposits decreased by $79.0 million (2.1%) from March 31, 2025, primarily due to a seasonal decline in public funds balances.
• The allowance for credit losses to non-performing loans ratio decreased significantly from 692.10% in Q1 2025 to 463.01% in Q2 2025, indicating less coverage for non-performing loans.
• The company's net interest income at risk is outside of policy limits in scenarios where rates decline by 200 bps, 300 bps, and 400 bps, indicating vulnerability to falling interest rates.

Risks

• Changes in trade, monetary, and fiscal policies and laws, including Federal Reserve Board interest rate policies.
• Inflation, interest rate, market, and monetary fluctuations.
• Local, regional, national, and international economic conditions and their impact on the company and its clients.
• Costs and effects of legal and regulatory developments, outcomes of legal proceedings or regulatory inquiries, and results of regulatory examinations.
• Changes in laws and regulations (taxes, banking, securities, insurance) and their compliance requirements.
• Changes in accounting policies and practices adopted by regulatory agencies or standard setters.
• Accuracy of financial statement estimates and assumptions.
• Changes in the financial performance and/or condition of borrowers.
• Changes in the mix of loan geographies, sectors, and types, or the level of non-performing assets and charge-offs.
• Changes in estimates of future credit loss reserve requirements.
• Changes in the company's liquidity position.
• Timely development and acceptance of new products and services.
• Changes in consumer spending, borrowing, and saving habits.
• Greater than expected costs or difficulties related to the integration of new products and lines of business.
• Technological changes.
• Cost and effects of cyber incidents or other failures, interruptions, or security breaches of systems.
• Fraud or misconduct by internal or external parties.
• Acquisitions and integration of acquired businesses.
• Impairment of goodwill or other intangible assets.
• Changes in the reliability of vendors, internal control systems, or information systems.
• Ability to increase market share and control expenses.
• Ability to attract and retain qualified employees.
• Changes in organization, compensation, and benefit plans.
• Soundness of other financial institutions.
• Volatility and disruption in national and international financial and commodity markets.
• Changes in the competitive environment in markets and among banking organizations.
• Government intervention in the U.S. financial system.
• Deterioration of the credit rating for U.S. long-term sovereign debt, actions to avoid exceeding the debt ceiling, and uncertainties surrounding the federal budget and economic policy.
• Effects of natural disasters (including hurricanes), widespread health emergencies (including pandemics), military conflict, terrorism, civil unrest, climate change, or other geopolitical events.
• Ability to declare and pay dividends.
• Structural changes in the markets for origination, sale, and servicing of residential mortgages.
• Any inability to implement and maintain effective internal control over financial reporting and/or disclosure control.
• Potential claims, damages, penalties, fines, costs, and reputational damage from pending or future litigation, regulatory proceedings, and enforcement actions.
• Negative publicity and its impact on reputation.
• Limited trading activity and concentration of ownership of common stock.

Future Outlook

The company expects its annual effective tax rate to approximate 24% for 2025, absent discrete items or new tax credit investments. Capital expenditures are projected to be approximately $10.0 million over the next 12 months, primarily for new offices, remodeling, equipment, and technology, funded by existing resources. Management will continue to monitor liquidity and market conditions to determine if investment portfolio cash flow should be reinvested or flow into overnight funds, and will closely monitor deposit costs and mix in the current rate environment. Additional simulations will be analyzed to address the changing interest rate environment and the mix of financial assets and liabilities over multiple years.

Management Comments

• The increase in net interest income compared to the first quarter of 2025 was driven by a $0.9 million increase in investment securities income and a $0.4 million increase in overnight funds income, with one additional calendar day also contributing.
• The increase in net interest income compared to the second quarter of 2024 was primarily due to a $2.7 million increase in investment securities income and a $1.2 million decrease in deposit interest expense.
• The increase in net interest margin over all prior periods reflected a higher yield in the investment portfolio driven by new purchases at higher yields, and lower deposit cost also contributed to the improvement.
• The increase in noninterest expense over the first quarter of 2025 reflected a $3.3 million increase in other expense (primarily lower gains from sale of banking facilities), a $0.3 million increase in occupancy expense, and a $0.2 million increase in compensation expense.
• The increase in noninterest expense compared to the second quarter of 2024 was primarily due to a $2.1 million increase in compensation expense.
• The increase in nonperforming assets over the first quarter of 2025 was primarily attributable to two home equity loans totaling $1.8 million.
• The increase in classified loans over the prior periods was primarily due to the downgrade of four residential real estate loans totaling $4.2 million and two commercial real estate loans totaling $4.3 million.
• The slight increase in the allowance for credit losses over March 31, 2025, and December 31, 2024, was primarily attributable to qualitative factor adjustments that were partially offset by lower loan balances.
• The decrease in the allowance for unfunded commitments from March 31, 2025, and December 31, 2024, reflected a lower level of unfunded loan commitments.
• The increase in average total deposits over the first quarter of 2025 was attributable to higher core deposit balances, partially offset by a decline in public funds balances due to seasonal reduction.
• The decrease in period-end total deposits from March 31, 2025, was primarily due to a seasonal decline in public funds balances.
• The Net Interest Income (NII) at Risk position indicates that in the short-term (over the next 12 months), all rising rate environments will positively impact the net interest margin, while declining rate environments will have a negative impact.
• The instantaneous parallel rate shock results over the next 12-month and 24-month periods are outside of policy in the rates down 200 bps, 300 bps, and 400 bps scenarios largely due to the limited ability to decrease deposit rates the full extent of this rate change, and to a lesser extent the increase in variable rate overnight funds.
• The liquidity available at June 30, 2025, was sufficient to meet ongoing needs and execute the business strategy.

Industry Context

The company operates within a broader financial services industry influenced by the Federal Reserve Board's interest rate policies, inflation, and market fluctuations. Its performance is sensitive to economic conditions, consumer spending habits, and the competitive landscape among banking organizations. The discussion of managing deposit costs and mix, as well as the impact of interest rate changes on net interest margin, reflects the current challenging interest rate environment for banks. The mention of structural changes in the residential mortgage market indicates adaptation to evolving industry dynamics. The company's focus on maintaining strong capital ratios and liquidity aligns with broader regulatory and market expectations for financial institutions.

Comparison to Industry Standards

• The company states that its non-GAAP tangible common equity ratio is useful to investors for comparing capital adequacy to other companies in the industry, but does not provide specific comparable company data or benchmarks.
• The Chief Operating Decision Maker (CODM) evaluates financial performance by benchmarking the company against peers, but no specific peer group or comparative results are detailed in the filing.

Corporate Governance

Legal Proceedings

• The company is a party to lawsuits and claims arising out of the normal course of business.
• Management's opinion is that there are no 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.

Related Party Transactions

• A related party is the lessor in a land lease with the company, requiring annual lease payments of approximately $0.1 million through December 2033.
• After December 2033, annual lease payments increase by 5% every 10 years until 2053, at which time the rent amount will adjust based on reappraisal of the parcel rental value.
• The company has four successive options to extend the lease for five years each, with rental increases of 5% at each extension.
• The aggregate remaining obligation of this lease totaled $2.1 million at June 30, 2025.

Stakeholder Impact

• Shareholders: Net income decreased sequentially, but year-to-date performance is strong, and capital ratios are robust, supporting financial stability. However, increasing nonperforming assets and a shrinking loan book could impact future earnings and share value.
• Customers: The company continues to offer a full range of banking and banking-related services, including traditional deposit and credit services, mortgage banking, and wealth management, across Florida, Georgia, and Alabama.
• Employees: Compensation expense increased, reflecting higher salary and associate benefit expenses, which could indicate continued investment in the workforce.
• Creditors: Strong capital ratios and liquidity position indicate the company's ability to meet its financial obligations, including short-term and long-term borrowings.

Next Steps

• Continue to monitor overall liquidity position and market conditions to determine if cash flow from the investment portfolio should be reinvested or allowed to flow into overnight funds for the remainder of 2025.
• Closely monitor the cost of deposits and deposit mix while managing through the current rate environment.
• Analyze additional interest rate simulations to address changing rate environments and the mix of financial assets and liabilities over multiple years.
• Fund approximately $10.0 million in capital expenditures over the next 12 months for new offices, remodeling, equipment, and technology purchases.

Key Dates

Recommendation

While Capital City Bank Group demonstrates strong capital adequacy and an expanding net interest margin, the sequential decline in net income and, more critically, the notable increase in nonperforming and classified loans, signal potential headwinds for asset quality. The shrinking loan portfolio also suggests limited organic growth. The company's vulnerability to falling interest rates, as indicated by its NII at risk analysis, adds another layer of concern. Given these mixed signals—solid financial foundation but deteriorating credit metrics and loan growth challenges—a 'hold' recommendation is prudent. Investors should monitor asset quality trends closely in upcoming quarters.

Keywords

Banking, Financial Services, Regional Bank, Community Bank, SEC Filing, 10-Q, Financial Results, Net Interest Income, Loan Portfolio, Deposits, Credit Quality, Nonperforming Assets, Capital Ratios, Wealth Management, Mortgage Banking, Interest Rate Risk, Liquidity, Florida, Georgia, Alabama