PINX:CPTY Capitol City Bancshares Inc Quarterly Report 10-Q/A Filing - 3/31/2012

Effective Date 3/31/2012

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Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q/A

 

 

Amendment No. 2

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

 

¨ TRANSITION REPORT UNDER 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 000-25227

 

 

CAPITOL CITY BANCSHARES, INC.

(Exact name of issuer as specified in its charter)

 

 

 

Georgia   58 - 2452995

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

562 Lee Street, S.W.,

Atlanta, Georgia 30311

(Address of principal executive office)

(404) 752-6067

(Issuer’s telephone number)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 1, 2012; 10,262,069; $1.00 par value common shares

 

 

 


Index to Financial Statements

EXPLANATORY NOTE

This amendment to the Form 10-Q of Capitol City Bancshares, Inc. amends and restates the Company’s Form 10-Q for the quarter ended March 31, 2012 that was originally filed with the Securities and Exchange Commission on May 16, 2012 and Form 10-Q/A, Amendment No. 1 filed on August 10, 2012.

This amendment is filed to reflect revisions to Note 9 of the condensed consolidated financial statements to include additional information relating to the fair value of assets and liabilities and the valuation techniques for fair value measurements. In addition, Note 14 of the condensed consolidated financial statements has been added to include additional detail regarding the Company’s amended financial statements filed on August 10, 2012.


Index to Financial Statements

INDEX

 

     Page  

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011

     4   

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011

     5   

Condensed Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2012 and 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7 - 35   

Part II. Other Information

  

Item 6. Exhibits

     36   

Signatures

     37   

Certifications

  


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2012 (unaudited and restated) and December 31, 2011

 

     March 31, 2012*
(unaudited)
    December 31,
2011
 

Assets

    

Cash and due from banks

   $ 6,646,892      $ 7,029,604   

Interest-bearing deposits at other financial institutions

     600,299        635,511   

Federal funds sold

     —          595,000   

Securities available for sale*

     45,377,188        42,566,577   

Restricted equity securities, at cost

     792,900        792,900   

Loans, net of unearned income*

     221,837,035        220,172,602   

Less allowance for loan losses*

     5,111,792        5,154,505   
  

 

 

   

 

 

 

Loans, net*

     216,725,243        215,018,097   
  

 

 

   

 

 

 

Premises and equipment, net

     9,166,553        9,137,049   

Foreclosed real estate*

     17,245,600        18,151,601   

Other assets

     1,823,250        1,953,767   
  

 

 

   

 

 

 

Total assets*

   $ 298,377,925      $ 295,880,106   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 30,450,925      $ 28,433,587   

Interest-bearing

     247,478,664        248,465,195   
  

 

 

   

 

 

 

Total deposits

     277,929,589        276,898,782   

Federal funds purchased

     1,445,000        —     

Note payable

     275,250        275,250   

Federal Home Loan Bank advances

     5,500,000        5,500,000   

Company guaranteed trust preferred securities

     3,403,000        3,403,000   

Other liabilities

     1,646,215        1,601,390   
  

 

 

   

 

 

 

Total liabilities

   $ 290,199,054      $ 287,678,422   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, par value $100, 5,000,000 shares authorized

    

Series A, cumulative, non voting, 10,000 shares issued and outstanding

     1,000,000        1,000,000   

Series B, cumulative, non voting, 6,078 shares issued and outstanding

     607,800        607,800   

Common stock, par value $1.00; 80,000,000 shares authorized;

          10,056,069 and 9,833,430 shares issued and outstanding, respectively

     10,056,069        9,833,430   

Surplus

     447,398        130,036   

Retained deficit*

     (4,255,241     (3,442,584

Accumulated other comprehensive income

     322,845        73,002   
  

 

 

   

 

 

 

Total stockholders’ equity*

     8,178,871        8,201,684   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity*

   $ 298,377,925      $ 295,880,106   
  

 

 

   

 

 

 
* — See Note 14 for discussion on the restated items.

 

The accompanying notes are an integral part of these condensed consolidated financial statements

2


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Income

Three months ended March 31, 2012 and 2011 (unaudited and restated)

 

     Three Months Ended
March 31,
 
     2012*     2011  

Interest income:

    

Loans, including fees

   $ 3,302,339      $ 3,452,767   

Deposits in banks

     130        615   

Securities

     258,697        219,065   

Federal funds sold

     649        1,654   
  

 

 

   

 

 

 

Total interest income

     3,561,815        3,674,101   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     1,152,434        1,456,316   

Other borrowings

     45,149        44,172   
  

 

 

   

 

 

 

Total interest expense

     1,197,583        1,500,488   
  

 

 

   

 

 

 

Net interest income

     2,364,232        2,173,613   

Provision for loan losses*

     745,000        205,000   
  

 

 

   

 

 

 

Net interest income after provision for loan losses*

     1,619,232        1,968,613   
  

 

 

   

 

 

 

Other income:

    

Service charges on deposit accounts

     342,607        340,740   

Other fees and commissions

     27,541        23,353   

Gain on sales of available for sale securities

     115,694        —     

Other operating income

     134,481        118,854   
  

 

 

   

 

 

 

Total other income

     620,323        482,947   
  

 

 

   

 

 

 

Other expenses:

    

Salaries and employee benefits

     940,370        913,976   

Occupancy and equipment expenses, net

     272,341        322,119   

Other operating expenses*

     1,789,501        1,130,163   
  

 

 

   

 

 

 

Total other expenses*

     3,002,212        2,366,258   
  

 

 

   

 

 

 

Income (loss) before income tax benefits*

     (762,657     85,302   

Income tax benefits

     —          —     
  

 

 

   

 

 

 

Net income (loss)*

     (762,657     85,302   
  

 

 

   

 

 

 

Preferred stock dividends

     (50,000     (50,000
  

 

 

   

 

 

 

Net income (loss) available available to common shareholders*

     (812,657     35,302   

Other comprehensive income (loss):

    

Unrealized gains on securities available for sale arising during period, net of tax

     365,537        54,918   

Reclassification adjustment for realized gains on securities available for sale arising during the period, net of tax

     (115,694     —     
  

 

 

   

 

 

 

Comprehensive income (loss)*

   $ (562,814   $ 90,220   
  

 

 

   

 

 

 

Basic earnings (losses) per common share*

   $ (0.08   $ —     
  

 

 

   

 

 

 

Diluted earnings (losses) per common share*

   $ (0.08   $ —     
  

 

 

   

 

 

 

 

* — See Note 14 for discussion on the restated items.

 

The accompanying notes are an integral part of these condensed consolidated financial statements

3


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

Three months ended March 31, 2012 and 2011 (unaudited and restated)

 

     Three Months Ended
March 31,
 
     2012*     2011  

OPERATING ACTIVITIES

    

Net income (loss)*

   $ (762,657   $ 85,302   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation, amortization and accretion

     241,340        228,062   

Provision for loan losses*

     745,000        205,000   

Net gain on sale of securities available for sale

     (115,694     —     

Other-than-temporary impairment of securities available for sale*

     262,437        —     

Writedowns of foreclosed real estate*

     98,500        —     

Increase in dividends payable on preferred stock

     (50,000     (50,000

Net other operating activities

     175,342        (231,819
  

 

 

   

 

 

 

Net cash provided by operating activities

     594,268        236,545   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of securities available for sale

     (7,992,359     (5,147,408

Proceeds from sales of securities available for sale

     3,888,865        —     

Proceeds from maturities and paydowns of securities available for sale

     1,275,248        1,023,364   

Net (increase) decrease in interest-bearing deposits at other financial institutions

     35,212        (1,571

Net (increase) decrease in federal funds sold

     595,000        (5,585,000

Net (increase) decrease in loans

     (1,644,645     1,052,836   

Payments for construction in process

     (112,136     —     

Purchase of premises and equipment

     (37,973     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,992,788     (8,657,779
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net increase in deposits

     1,030,807        9,586,082   

Net increase in federal funds purchased

     1,445,000        —     

Proceeds from issuance of common stock

     530,000        78,500   

Proceeds from exercise of stock options

     10,001        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     3,015,808        9,664,582   
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     (382,712     1,243,348   

Cash and due from banks at beginning of year

     7,029,604        5,345,394   
  

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 6,646,892      $ 6,588,742   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid for:

    

Interest

   $ 1,214,518      $ 1,618,139   

NONCASH TRANSACTIONS

    

Principal balances of loans transferred to foreclosed real estate

   $ —        $ 550,524   

Financed sales of foreclosed real estate

   $ 994,792      $ —     

 

* — See Note 14 for discussion on the restated items.

 

The accompanying notes are an integral part of these condensed consolidated financial statements

4


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1. BASIS OF PRESENTATION

The interim consolidated financial information included for Capitol City Bancshares, Inc. (the “Company”), Capitol City Bank & Trust Company (the “Bank”) and Capitol City Home Loans (the “Mortgage Company”) herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. These statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The results of operations for the three month periods ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

Management has evaluated all significant events and transactions that occurred after March 31, 2012, but prior to August 7, 2012, the date these condensed consolidated financial statements were issued, for potential recognition or disclosure in these condensed consolidated financial statements.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash, Due From Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks include cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, interest-bearing deposits at other financial institutions, federal funds sold, Federal Home Loan Bank advances, and deposits are reported net.

The Bank maintains certain cash deposits at the Federal Home Loan Bank which are used to secure borrowings and are, therefore, restricted. At March 31, 2012 and December 31, 2011, those restricted balances were $2,453,491 and $2,399,858, respectively.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

Management’s decision to charge off a loan is based on a loan by loan basis according to the facts and circumstances of each loan. The determination to charge off a loan is based on whether or not there is the possibility of full or partial collection from either liquidation of collateral or workout arrangement with the principal(s) or some other parameters. The number of days a loan is delinquent does not necessarily determine the basis for a loan being charged off but helps to determine when the loan will be placed on nonaccrual. If an impaired loan is considered collateral dependent based upon the fair value of the collateral, a partial charge off is recorded to the allowance for loan losses representing the collateral deficiency of the impaired loan. An impaired loan to be considered collateral dependent is when the only source of repayment is from the sale or liquidation of the collateral.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower’s ability to pay, estimated value of underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best

 

7


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make changes to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired. For impaired loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. Loans are identified as impaired through the Company’s internal loan review procedures and through the monitoring process of reviewing loans for appropriate risk rating assignment. A loan is considered impaired when it is probable, based on current information and events; the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. When current information and events exist that question whether the Company will collect all contractual payments, a loan will be assessed for impairment. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. For any impaired loans having a partial charge off, the amount of specific reserve will be reduced for those individual impaired loans.

The general components cover unimpaired loans and are based on historical loss experience adjusted for qualitative factors, such as the various risk characteristics of each loan segment. Historical losses are evaluated based on gross charge offs and/or partial charge offs for each loan grouping using a 24 month rolling average. The qualitative factors used in adjusting the historical loss ratio consist of two broad groups, external and internal factors. External factors include, but are not limited to: national and local economic conditions with an emphasis on unemployment rates, changes in the regulator climate, legal constraints, political action and competition. Internal factors considered are the lending policies and procedures, the nature and mix of the loan portfolio, the lending staff, credit concentrations, trends in loan analytics ( nonaccruals, past dues, charge off’s, etc.), changes in the value of underlying collateral and results of internal or external loan reviews. The pertinent data (the quantitative factors) are compiled and reviewed on a regular basis. As trends in the data or other changes are observed that indicate adjustments to the loss ratios are warranted, adjustments to the loss ratio are made through adjusting the ASC 450 factors.

Risk characteristics relevant to each portfolio segment are as follows:

Unsecured loans – Loans in this segment are any loans, whether guaranteed, endorsed or co-made, that are not fully collateralized. The overall health of the economy, including unemployment rates will have an effect on the credit quality in the segment.

Cash value loans – Loans in this segment are fully secured by cash or cash equivalents.

Residential real estate loans – Loans in this segment include all mortgages and other liens on residential real estate, as well as vacant land designated as residential real estate. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rate will have an effect on the credit quality in the segment.

Commercial real estate loans – Loans in this segment includes all mortgages and other liens on commercial real estate. The underlying cash flows generated by the properties are adversely impacted by a downtown in the economy as evidences by increased vacancy rates, which in turn will have an effect on the credit quality in this segment.

Business assets loans – Loans in this segment are made to businesses and are generally secured by business assets, equipment, inventory and accounts receivable. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending will have an effect on the credit quality in this segment.

 

8


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Vehicle loans – Loans in this segment are made to individuals and are secured by motor vehicles. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rate will have an effect on the credit quality in the segment.

Other loans – Loans in this segment are generally secured consumer loans, but include all loans that do not belong in one of the other segments. Loans in this segment are dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rate will have an effect on the credit quality in the segment.

Foreclosed Real Estate

Foreclosed real estate acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less selling costs. Any write-down to fair value at the time of transfer to foreclosed real estate is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs of improvements are capitalized, whereas costs relating to holding foreclosed real estate and subsequent adjustments to the value are expensed. When the foreclosed real estate property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Losses on sales of foreclosed real estate are recognized at the time of the sale. Gains on sales of foreclosed real estate are accounted for in accordance with the conditions set forth in ASC 360, which includes conditions for recognizing deferred gains in future periods. Financed sales of foreclosed real estate are accounted for in accordance with generally accepted accounting principles. Loans originated in relation to financed sales are subjected to the same underwriting standards applied to real estate loans which originate in the normal course of business.

Income Taxes (Benefits)

The Company accounts for income taxes in accordance with income tax accounting guidance (FASB ASC 740, Income Taxes). This guidance sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions.

The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets may be reduced by deferred tax liabilities and a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

In accordance with ASC 740-10 Income Taxes it is the Bank’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes and to disclose the recognized interest and penalties, if material. Management has evaluated all tax positions that could have a significant effect on the

 

9


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

financial statements and determined the Bank had no uncertain tax positions at March 31, 2012. Further, all years subsequent to 2008 remain subject to evaluation. The Company’s 2009 Federal tax return is currently subject to an ongoing audit. Such audit could result in additional amounts owed; however, at this time, any such amounts are not known or reasonably estimable.

 

NOTE 3. REGULATORY ORDER AND GOING CONCERN CONSIDERATIONS

Regulatory Actions

In January 2010, the Bank received a consent order (“order”) from the Federal Deposit Insurance Corporation (“FDIC”) and the Georgia Department of Banking and Finance (“The Department”).

The Order is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plan and policies designed to enhance the safety and soundness of the Bank. Contained in the order were various reporting requirements by management and the Board of Directors. In addition, the order requires that the Bank achieve and maintain the following minimum capital levels:

(i) Tier I capital at least equal to 8% of total average assets;

(ii) Total risk-based capital at least equal to 10% of total risk-weighted assets.

Additional requirements include, but are not limited to, reducing the levels of classified assets, prohibition of the acceptance, renewal, or rollover of brokered deposits, reducing concentrations of credit, prohibition of paying dividends, and maintaining an adequate allowance for loan losses.

The Bank is in substantial compliance with the terms of the Order, with exceptions including compliance with required capital and problem asset levels, specifically other material provisions have been addressed as follows:

 

  i. Prior to and since the Order, it has been and continues to be the primary focus of the Board of Directors and Bank’s management to get the Bank back on sound financial footing. The Board in general and each committee in particular are taking a more active role the affairs of the Bank.

 

  ii. The new Chief Operating Officer, John Turner, has taken on the role and responsibility of enforcement and oversight for compliance with the Order. A quarterly report is submitted on the status of the Bank’s compliance. Additionally, he had an immediate positive impact on the Bank’s overall financial position with the implementation of a number of new fee based products, including a new merchant services program, and organizational cost controls. These actions will obviously have a positive impact on the Bank’s bottom line.

 

  iii. The committee established for oversight of compliance with the Order is the Compliance Committee, that committee is active and ongoing.

 

  iv. The Bank is currently below the requisite minimum capital ratios of Tier 1 capital at 8% of total assets and total risk based capital at 10% of total risked based assets. The Bank continues to actively pursue those institutional investors that have made conditional commitments to us. Additionally, the Bank will continue to solicit on an ongoing basis investment from individuals. As these funds are infused, its capital ratios will improve to the required levels.

 

  v. The Bank’s lending and collection policy has been updated. Additionally, procedures and guidelines have been implemented that strengthens the Bank’s underwriting of loans, especially as relates to the Bank’s loan concentrations in church and c-store loans. The Bank believes these improvements will also positively impact the credit quality of our portfolio as new loans are written and existing credits are reevaluated.

 

10


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

  vi. The Bank has eliminated from its books those loans classified as “loss” and 50% of those classified as “doubtful”. This information is reflected in the Bank’s 2010 financial statements. These charge-offs had a significant impact on its overall allowance for loan losses calculation (ALLL). The Bank continues to evaluate the sufficiency of our allowance for loan losses based on its historical charge offs and related economic conditions.

 

  vii. The Bank recognizes that it continues to have a high concentration of church and c-store loans. Accordingly, the Bank prepares, on a quarterly basis, a risk analysis not only on those loans but on the entire loan portfolio of the Bank. The report is presented to the Board and submitted to the FDIC as part of the Order.

 

  viii. The Bank is no longer accepting brokered deposits. The Bank is making every effort to increase our core deposit base through enforcement of loan agreements and offering new and improved depository accounts. The Bank is accepting internet deposits.

 

  ix. It is the Bank’s practice to comply with all regulatory and accounting guidelines as relates to the ALLL’s methodology and its adequacy. However, a formal and comprehensive policy is still in the developmental stages.

 

  x. The Bank’s budget plan has been revised.

 

  xi. Progress reports are submitted to the Federal Deposit Insurance Corporation and Georgia Department of Banking and Finance on a quarterly basis.

Going Concern Considerations

The condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. The events and circumstances described herein create a substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include an adjustment to reflect possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon its ability to obtain the capital necessary to sustain profitable operations, implement a management plan to develop a profitable operation, overcoming and satisfying the requirements of the regulatory order described above and lower the level of problem assets.

The Bank has not achieved the required capital levels mandated by the Order. To date the Bank’s capital preservation activities have included balance sheet restructuring that has included curtailed lending activity, including working to reduce overall concentrations in certain lending areas; working to reduce adversely classified assets; and continuing efforts to raise additional capital. The Company has engaged external advisors and has pursued various capital enhancing transactions and strategies throughout 2011 and the first three months of 2012. The continuing level of problem loans as of the quarter ended March 31, 2012 and capital levels continuing to be in the “significantly under capitalized” category of the regulatory framework for prompt corrective action as of March 31, 2012 continue to create substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that any capital raising activities or other measures will allow the Bank to meet the capital levels required in the Order. Non-compliance with the capital requirements of the Order and other provisions of the Order may cause the Bank to be subject to further enforcement actions by the FDIC or the Department.

 

NOTE 4. CONTINGENCIES

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company’s consolidated financial statements.

While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the reserves may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances for losses on loans or valuation of foreclosed real estate based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and valuation of foreclosed real estate may change materially in the near term.

During the Bank’s most recent regulatory examination a loan relationship, with total outstanding principal balances of $5,564,146 as of March 31, 2012, was criticized and management is currently evaluating its collateral position. Each of the loans in the relationship were assigned a credit rating of substandard, were on nonaccrual status, and were considered impaired at March 31, 2012 by management, and are disclosed as such in Note 5. Management’s most recent evaluation of collateral values resulted in no specific reserves for this relationship as of March 31, 2012. During the recent regulatory examination, examiners raised various issues related to the valuation of this relationship. Management disagrees with the examiners’ positions, and continues to utilize current appraisals and internal evaluations on this relationship. Additionally, management has retained a nationally recognized firm to perform further valuation analysis, which management believes will further support their position. Any potential losses or additional specific reserves are not known or reasonably estimable.

 

11


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 5. SECURITIES

The amortized cost and fair value of securities with gross unrealized gains and losses are summarized as follows:

 

                                                                                   
            Gross      Gross        
     Amortized      Unrealized      Unrealized        
     Cost      Gains      Losses     Fair Value  

March 31, 2012

          

State, county and municipals

   $ 14,552,071       $ 142,081       $ (77,937   $ 14,616,215   

Mortgage-backed securities GSE residential

     30,086,834         258,701         —          30,345,535   

Trust preferred securities

     365,438         —           —          365,438   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     45,004,343         400,782         (77,937     45,327,188   

Equity securities

     50,000         —           —          50,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 45,054,343       $ 400,782       $ (77,937   $ 45,377,188   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

                                                                                   
            Gross      Gross        
     Amortized      Unrealized      Unrealized        
     Cost      Gains      Losses     Fair Value  

December 31, 2011

          

State, county and municipals

   $ 16,076,970       $ 73,281       $ (186,020   $ 15,964,231   

Mortgage-backed securities GSE residential

     25,738,730         201,977         (16,236     25,924,471   

Trust preferred securities

     627,875         —           —          627,875   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     42,443,575         275,258         (202,256     42,516,577   

Equity securities

     50,000         —           —          50,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 42,493,575       $ 275,258       $ (202,256   $ 42,566,577   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of debt securities as of March 31, 2012 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized         
     Cost      Fair Value  

Due from one to five years

   $ 979,117       $ 981,245   

Due from five to ten years

     6,379,491         6,420,792   

Due after ten years

     7,558,901         7,579,616   

Mortgage-backed securities

     30,086,834         30,345,535   
  

 

 

    

 

 

 
   $ 45,004,343       $ 45,327,188   
  

 

 

    

 

 

 

Securities with a carrying value of $14,902,720 and $17,070,932 at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

 

12


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Temporarily Impaired Securities

The following table shows the gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011.

 

     Less Than Twelve Months     Twelve Months or More         
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
     Total
Unrealized
Losses
 

March 31, 2012

             

State, county and municipals

   $ 7,259,797       $ (77,937   $ —         $ —         $ (77,937
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities

   $ 7,259,797       $ (77,937   $ —         $ —         $ (77,937
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2011

             

State, county and municipals

   $ 9,161,795       $ (186,020   $ —         $ —         $ (186,020

Mortgage-backed securities GSE residential

     2,464,959         (16,236     —           —           (16,236
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities

   $ 11,626,754       $ (202,256   $ —         $ —         $ (202,256
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

State, county and municipal securities. There were unrealized losses on nine state and municipal securities resulting from temporary changes in the interest rate market. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of its amortized cost bases, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at March 31, 2012.

Other-Than-Temporary Impairment

The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. While all securities are considered, the securities primarily impacted by other-than-temporary impairment considerations have been trust preferred. For each security in the investment portfolio, a regular review is conducted to determine if an other-than-temporary impairment has occurred. Various factors are considered to determine if an other-than-temporary impairment has occurred. However, the most significant factors are default rates or interest deferral rates and the creditworthiness of the issuer. Other factors may include geographic concentrations, credit ratings, and other performance indicators of the underlying asset.

During the first and third quarters of 2010, the Company recorded an other than temporary impairment charge of $97,500 and $27,625, respectively, on one of its investments in a trust preferred security. During the first quarter of 2012, the Company recognized an additional other than temporary impairment on the same investment of $262,437. As of December 31, 2009, the value of that particular trust preferred security for which other than temporary impairment was recognized was $650,000. Management determined the value of this security declined significantly due to the deteriorating capital levels of the subsidiary banks owned by the owner of the trust preferred security, deteriorating asset quality at the subsidiary institutions, and the subordinated nature of the debt the Company held. The owner of the trust preferred security guarantees the securities; however, its primary assets are its subsidiary institutions. The security has a new cost basis of $262,438 as of March 31, 2012.

 

13


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 6. LOANS

The composition of loans is summarized as follows:

 

     March 31,     December 31,  
     2012     2011  

Unsecured

   $ 685,879      $ 848,418   

Cash Value

     3,433,686        3,927,837   

Residential Real Estate

     30,707,550        31,146,880   

Commercial Real Estate

     183,854,884        181,117,917   

Business Assets

     1,902,240        1,821,587   

Vehicles

     1,916,680        1,948,661   

Other

     103,589        104,200   
  

 

 

   

 

 

 
     222,604,508        220,915,500   

Unearned loan fees

     (767,473     (742,898

Allowance for loan losses

     (5,111,792     (5,154,505
  

 

 

   

 

 

 

Loans, net

   $ 216,725,243      $ 215,018,097   
  

 

 

   

 

 

 

For purposes of the disclosures required pursuant to the adoption of amendments to ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which the entity develops and documents a systematic method for determining its allowance for loan losses. There are seven loan portfolio segments that include unsecured, cash value, residential real estate, commercial real estate, business assets, vehicles, and other.

Unsecured – Loans in this segment are any loans, whether guaranteed, endorsed or co-made, that are not fully collateralized. Unsecured loans are subject to the lending policies and procedures described in Note 2. Total unsecured loans as of March 31, 2012 were 0.3% of the total loan portfolio.

Cash Value – These are loans fully secured by cash or cash equivalents. Cash value loans are subject to the lending policies and procedures described in Note 2. Total cash value loans as of March 31, 2012 were 1.5% of the total loan portfolio.

Residential Real Estate – These loans include all mortgages and other liens on residential real estate, as well as vacant land designated as residential real estate. Residential real estate loans are subject to the lending policies and procedures described in Note 2. Total residential real estate loans as of March 31, 2012 were 13.8% of the total loan portfolio.

Commercial Real Estate – The commercial real estate portfolio represents the largest category of the Company’s loan portfolio. These loans include all mortgages and other liens on commercial real estate. Commercial real estate loans are subject to the lending policies and procedures described in Note 2. Total commercial real estate loans as of March 31, 2012 were 82.6% of the total loan portfolio.

Business Assets – Loans in this segment are made to businesses and are generally secured by business assets, equipment, inventory, and accounts receivable. Business assets loans are subject to the lending policies and procedures described in Note 2. Total business assets loans as of March 31, 2012 were 0.9% of the total loan portfolio.

Vehicles – Loans in this segment are secured by motor vehicles. Vehicle loans are subject to the lending policies and procedures described in Note 2. Total vehicle loans as of March 31, 2012 were 0.9% of the total loan portfolio.

 

14


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Other – Loans in this segment are generally secured by consumer loans, but include all loans that do not belong in one of the other segments. Other loans are subject to the lending policies and procedures described in Note 2. Total other loans as of March 31, 2012 were less than 0.1% of the total loan portfolio.

The allowance for loan losses and loans evaluated for impairment for the three months ended March 31, 2012, by portfolio segment, is as follows:

 

    Unsecured     Cash Value     Residential
Real Estate
    Commercial
Real Estate
    Business
Assets
    Vehicles     Other     Unallocated     Total  

Allowance for loan losses:

                 

March 31, 2012

                 

Beginning balance

  $ 97,961      $ 16,727      $ 2,083,285      $ 2,480,770      $ 299,741      $ 176,021      $ —        $ —        $ 5,154,505   

Charge-offs

    (14,325     —          (446,389     (412,564     (2,087     (9,633     —          —          (884,998

Recoveries

    1,940        —          5,004        81,491        8,850        —          —          —          97,285   

Provision

    (11,026     327        608,023        10,412        45,363        51,966        —          39,935        745,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 74,550      $ 17,054      $ 2,249,923      $ 2,160,109      $ 351,867      $ 218,354      $ —        $ 39,935      $ 5,111,792   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - individually evaluated impairment

  $ 8,641      $ 17,054      $ 1,306,594      $ 359,680      $ 285,119      $ 84,344      $ —        $ —        $ 2,061,432   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance (1)

  $ 685,879      $ 3,433,686      $ 30,707,550      $ 183,854,884      $ 1,902,240      $ 1,916,680      $ 103,589      $ —        $ 222,604,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - Loans individually evaluated for impairment

  $ 8,641      $ 17,054      $ 11,883,876      $ 33,905,837      $ 629,091      $ 129,096      $ —        $ —        $ 46,573,595   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Loan balances presented are gross of unearned loan fees of $767,473.

 

15


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The allowance for loan losses and loans evaluated for impairment for the year ended December 31, 2011, by portfolio segment, is as follows:

 

    Unsecured     Cash Value     Residential
Real Estate
    Commercial
Real Estate
    Business
Assets
    Vehicles     Other     Unallocated     Total  

Allowance for loan losses:

                 

December 31, 2011

                 

Beginning balance

  $ 63,020      $ 5,210      $ 2,258,833      $ 2,234,925      $ 316,844      $ 141,759      $ 5      $ 203,168      $ 5,223,764   

Charge-offs

    (68,717     —          (1,532,779     (1,058,851     (219,264     (174,728     —          —          (3,054,339

Recoveries

    9,199        —          190,046        26,853        11,807        1,175        —          —          239,080   

Provision

    94,459        11,517        1,167,185        1,277,843        190,354        207,815        (5     (203,168     2,746,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 97,961      $ 16,727      $ 2,083,285      $ 2,480,770      $ 299,741      $ 176,021      $ —        $ —        $ 5,154,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - individually evaluated impairment

  $ 37,861      $ 17,054      $ 1,559,888      $ 942,959      $ 287,819      $ 67,891      $ —        $ —        $ 2,913,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance (1)

  $ 848,418      $ 3,927,837      $ 31,146,880      $ 181,117,917      $ 1,821,587      $ 1,948,661      $ 104,200      $ —        $ 220,915,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - Loans individually evaluated for impairment

  $ 65,080      $ 17,054      $ 12,180,496      $ 35,582,735      $ 650,392      $ 145,395      $ —        $ —        $ 48,641,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Loan balances presented are gross of unearned loan fees of $742,898.

 

16


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The allowance for loan losses and loans evaluated for impairment for the three months ended March 31, 2011, by portfolio segment, is as follows:

 

                Residential     Commercial     Business                          
    Unsecured     Cash Value     Real Estate     Real Estate     Assets     Vehicles     Other     Unallocated     Total  

Allowance for loan losses:

                 

March 31, 2011

                 

Beginning balance

  $ 63,020      $ 5,210      $ 2,258,833      $ 2,234,925      $ 316,844      $ 141,759      $ 5      $ 203,168      $ 5,223,764   

Charge-offs

    (14,872     —          (32,498     (92,438     —          (8,056     —          —          (147,864

Recoveries

    3,986        —          —          5,976        1,175        —          —          —          11,137   

Provision

    53,887        9,052        (396,368     662,175        10,766        (1,542     —          (132,970     205,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 106,021      $ 14,262      $ 1,829,967      $ 2,810,638      $ 328,785      $ 132,161      $ 5      $ 70,198      $ 5,292,037   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - individually evaluated impairment

  $ 49,867      $ —        $ 329,197      $ 791,528      $ 200,015      $ 79,612      $ —        $ —        $ 1,450,219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance (1)

  $ 926,926      $ 5,080,850      $ 39,994,058      $ 182,718,582      $ 3,474,344      $ 2,363,273      $ 106,066      $ —        $ 234,664,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance - Loans individually evaluated for impairment

  $ 83,744      $ 622,851      $ 17,564,036      $ 32,929,702      $ 2,151,222      $ 101,624      $ —        $ —        $ 53,453,179   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Loan balances presented are gross of unearned loan fees of $858,414.

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual term of the loan. Impaired loans include loans modified in trouble debt restructuring where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

17


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Impaired loans by portfolio segment are as follows:

 

                                                                                                                                                
     As of March 31, 2012  
            Recorded                       
     Unpaid Total      Investment      Recorded                
     Principal      With No      Investment      Total Recorded      Related  
     Balance      Allowance      With Allowance      Investment      Allowance  

Unsecured

   $ 8,641       $ —         $ 8,641       $ 8,641       $ 8,641   

Cash value

     17,054         —           17,054         17,054         17,054   

Residential real estate

     12,778,097         8,679,738         3,204,138         11,883,876         1,306,594   

Commercial real estate

     35,772,569         16,442,181         17,463,656         33,905,837         359,680   

Business assets

     629,091         316,972         312,119         629,091         285,119   

Vehicles

     129,095         5,833         123,262         129,095         84,344   

Other

     —           —           —           —           —     

 

                                                                                                                                                
     As of December 31, 2011  
            Recorded                       
     Unpaid Total      Investment      Recorded                
     Principal      With No      Investment      Total Recorded      Related  
     Balance      Allowance      With Allowance      Investment      Allowance  

Unsecured

   $ 65,080       $ 27,219       $ 37,861       $ 65,080       $ 37,861   

Cash value

     17,054         —           17,054         17,054         17,054   

Residential real estate

     13,754,238         7,738,672         4,441,824         12,180,496         1,559,888   

Commercial real estate

     37,035,387         18,762,620         16,820,115         35,582,735         942,959   

Business assets

     650,392         334,973         315,419         650,392         287,819   

Vehicles

     145,395         62,344         83,051         145,395         67,891   

Other

     —           —           —           —           —     

When the Company measures impairment based on the present value of expected cash flows the changes in the present value of these cash flows on impaired loans are recognized as part of bad-debt expense. Interest income from impaired loans for the three months ended March 31, 2012 and 2011 and for the year ended December 31, 2011, by portfolio segment, is as follows:

 

     Three months ended March 31, 2012      Three months ended March 31, 2011  
     Average Recorded      Interest Income      Average Recorded      Interest Income  
     Investment      Recognized      Investment      Recognized  

Unsecured

   $ 36,861       $ —         $ 83,772       $ 1,182   

Cash value

     17,054         —           311,426         4,671   

Residential real estate

     12,032,186         58,683         18,135,952         46,155   

Commercial real estate

     34,744,286         229,310         31,180,145         76,866   

Business assets

     639,742         316         2,045,778         31,678   

Vehicles

     137,245         566         170,285         107   

Other

     —           —           —           —     

 

18


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

     Year ended December 31, 2011  
     Average Recorded      Interest Income  
     Investment      Recognized  

Unsecured

   $ 65,096       $ 3,582   

Cash value

     127,981         1,314   

Residential real estate

     15,630,196         390,773   

Commercial real estate

     32,650,297         1,243,184   

Business assets

     1,251,354         31,742   

Vehicles

     160,830         12,539   

Other

     —           —     

A primary credit quality indicator for financial institutions is delinquent balances. Following are the delinquent amounts, by portfolio segment, as of March 31, 2012:

 

                                                                                                                                         
                   Greater Than                       
                   90 Days And      Total Accruing             Total Financing  
     Current      30-89 Days      Still Accruing      Past Due      Non-accrual      Receivables  

Unsecured

   $ 612,946       $ 38,738       $ 975       $ 39,713       $ 33,220       $ 685,879   

Cash value

     3,203,964         212,668         —           212,668         17,054         3,433,686   

Residential real estate

     24,861,899         1,001,943         477,231         1,479,174         4,366,477         30,707,550   

Commercial real estate

     156,324,246         10,816,543         —           10,816,543         16,714,095         183,854,884   

Business assets

     1,086,419         313,419         —           313,419         502,402         1,902,240   

Vehicles

     1,714,954         16,806         —           16,806         184,920         1,916,680   

Other

     103,589         —           —           —           —           103,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 187,908,017       $ 12,400,117       $ 478,206       $ 12,878,323       $ 21,818,168       $ 222,604,508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Following are the delinquent amounts, by portfolio segment, as of December 31, 2011:

 

                                                                                                                                         
                   Greater Than                       
                   90 Days And      Total Accruing             Total Financing  
     Current      30-89 Days      Still Accruing      Past Due      Non-accrual      Receivables  

Unsecured

   $ 680,215       $ 96,348       $ 25,358       $ 121,706       $ 46,497       $ 848,418   

Cash value

     3,627,793         282,990         —           282,990         17,054         3,927,837   

Residential real estate

     24,875,203         1,340,826         —           1,340,826         4,930,851         31,146,880   

Commercial real estate

     149,663,226         10,485,170         2,271,985         12,757,155         18,697,536         181,117,917   

Business assets

     997,810         308,062         —           308,062         515,715         1,821,587   

Vehicles

     1,679,728         91,771         —           91,771         177,162         1,948,661   

Other

     104,200         —           —           —           —           104,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 181,628,175       $ 12,605,167       $ 2,297,343       $ 14,902,510       $ 24,384,815       $ 220,915,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. When a loan becomes 90 days past due, it is evaluated to determine if the loan is well-secured and in the process of collection of past due amounts. Loans disclosed as included on nonaccrual status are generally past due over 90 days. However, as of March 31, 2012 three residential real estate loans totaling $119,562, two commercial real estate loans totaling $135,634 and one unsecured loan totaling $4,524 were past due less than 90 days and carried as nonaccrual at management’s discretion based on the afore mentioned qualifications. As of March 31, 2012 loans past due over 90 and still accruing have been examined by management to ensure they are well-secured and in the process of collection of past due amounts.

The Company uses an eight-grade internal loan rating system for its loan portfolio as follows:

Grade 1 – Prime (Excellent) – Loans to borrowers with unquestionable financial strength and a solid earning history. This category includes national, international, regional, local entities, and individuals with commensurate capitalization, profitability, income, or ready access to capital markets as well as loans collateralized by cash equivalents. These loans are considered substantially risk free.

Grade 2 – Good (Superior) – Loans which exhibit a strong earnings record, and liquidity and leverage ratios that compare favorably with the industry. There are excellent prospects for continued growth. This category also includes those loans secured within margins with marketable collateral. Limited risk. The elements for risk for these borrowers are slightly greater than those associated with risk grade Prime.

Grade 3 – Acceptable (Average) – Loans to borrowers with a satisfactory financial condition, liquidity, and earnings history which indications that the trend will continue. Working capital is considered adequate and income is sufficient to repay debt as scheduled. Handles normal credit needs in a satisfactory manner.

Grade 4 – Fair (Watch) – Loans to borrowers which may show at least one of the following: start-up operation or venture capital, financial condition, adverse events which have not yet become trends such as sporadic profitability, occasional overdrafts, instances of slow pay, documentation deficiencies. Borrower may also exhibit substantial grantor support. Debt is being handled as agreed, and the primary source of repayment remains available. Circumstances may warrant more than normal monitoring, but are not serious enough to warrant criticism of classification.

Grade 5 – Special Mention – Loans with potential weaknesses which may, if not checked and corrected, would weaken the assets or inadequately protect the Bank’s credit position at some future date. These loans may require resolution of specific pending events before the associated risk can be adequately evaluated. These are criticized loans.

Grade 6 – Substandard – Loans, which are inadequately protected by the net worth and cash flow capacity of the borrower or the collateral pledged. The credit risk in this situation relates to the possibility of some loss of principal or interest if the deficiencies are not corrected. These loans are considered classified.

Grade 7 – Doubtful – Loans, which are inadequately protected by the net worth of the borrower or the collateral pledged and repayment in full is improbable on the basis of existing facts, values and conditions. The possibility of loss is high, but because of certain important and reasonable specific pending factors, which may work to the advantage and strengthening of the facility, its classification as an estimated loss is deferred until its more exact status may be determined. These loans are considered classified, as value is impaired. A full or partial reserve is warranted.

Grade 8 – Loss – Loans, which are considered uncollectible and continuance as an unacceptable asset are not warranted. These loans are considered classified and are either charged off or fully reserved against.

 

20


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the Company’s loans by risk rating, before unearned loan fees, at March 31, 2012:

 

                Residential     Commercial     Business                    
Rating:   Unsecured     Cash Value     Real Estate     Real Estate     Assets     Vehicles     Other     Total  

Grade 1 (Prime)

  $ —        $ 27,516      $ —        $ —        $ —        $ —        $ —        $ 27,516   

Grade 2 (Superior)

    18,133        224,374        —          351,200        —          14,776        —          608,483   

Grade 3 (Acceptable-Average)

    519,150        3,093,430        11,947,491        123,300,246        651,168        1,409,696        —          140,921,181   

Grade 4 - Fair (Watch)

    58,564        71,312        1,884,695        6,024,077        308,062        29,279        103,589        8,479,578   

Grade 5 (Special Mention)

    14,382        —          2,916,303        10,662,076        298,373        234,645        —          14,125,779   

Grade 6 (Substandard)

    75,650        17,054        13,853,747        43,517,285        644,637        228,284        —          58,336,657   

Grade 7 (Doubtful)

    —          —          105,314        —          —          —          —          105,314   

Grade 8 (Loss)

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 685,879      $ 3,433,686      $ 30,707,550      $ 183,854,884      $ 1,902,240      $ 1,916,680      $ 103,589      $ 222,604,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2011:

 

                Residential     Commercial     Business                    
Rating:   Unsecured     Cash Value     Real Estate     Real Estate     Assets     Vehicles     Other     Total  

Grade 1 (Prime)

  $ 15,490      $ 27,296      $ —        $ —        $ —        $ —        $ —        $ 42,786   

Grade 2 (Superior)

    20,127        190,867        —          354,446        —          18,929        —          584,369   

Grade 3 (Acceptable-Average)

    575,653        3,574,692        12,193,364        119,006,553        539,117        1,389,332        —          137,278,711   

Grade 4 - Fair (Watch)

    63,473        72,988        1,940,701        6,166,739        308,062        55,803        104,200        8,711,966   

Grade 5 (Special Mention)

    14,162        —          3,013,965        12,125,628        301,423        253,112        —          15,708,290   

Grade 6 (Substandard)

    159,513        61,994        13,892,036        43,464,551        672,985        231,381        —          58,482,460   

Grade 7 (Doubtful)

    —          —          106,814        —          —          104        —          106,918   

Grade 8 (Loss)

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 848,418      $ 3,927,837      $ 31,146,880      $ 181,117,917      $ 1,821,587      $ 1,948,661      $ 104,200      $ 220,915,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Each loan is assigned a risk rating at origination, and grades are continuously assessed as part of the Bank’s loan grading system based on loan review results as well as internal evaluations. Grades are changed as necessary based on the most recent information and indications available for each loan.

In this current real estate environment it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructures or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. The Company has not forgiven any material principal amounts on any loan modifications to date.

At the time a loan is restructured, the Company considers the existing and anticipated cash flows and recent payment history to determine whether a restructured loan will accrue interest. Once a loan is restructured, missed payment under the revised note is an indication the customer is experiencing further cash flow difficulties, and therefore a restructure would immediately go to nonaccrual status. From time to time the Company has modified loans and not accounted for them as troubled debt restructurings. Given the current economic environment, especially with respect to interest rates, there have been instances where a good customer has come in to renegotiate for a more favorable rate or one more in line with market rates. Given this and similar circumstances we have made concessions to keep the relationship. In such cases these are not and will not be accounted for or reported as a TDR. Before any loan is modified and considered as a Troubled Debt Restructure, a thorough

 

21


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

analysis is performed on current financial information and collateral valuation to derive a payment schedule that is supported by cash flows. The existing and anticipated cash flows and recent payment history will determine whether the loan will accrue interest or not.

The Company’s TDRs as of March 31, 2012 and December 31, 2011 are presented below based on their status as performing or non-performing in accordance with the restructured terms:

 

     March 31,      December 31,  
     2012      2011  

Performing TDRs

   $ 13,686,259       $ 13,360,284   

Non-performing TDRs

     7,351,951         7,832,091   
  

 

 

    

 

 

 

Total TDRs

   $ 21,038,210       $ 21,192,375   
  

 

 

    

 

 

 

TDRs quantified by loan type and classified separately as accrual and non-accrual are presented below:

 

     March 31, 2012  
     Accruing      Non-Accrual      Total  

Unsecured

   $ —         $ —         $ —     

Cash value

     —           —           —     

Residential real estate

     5,227,278         —           5,227,278   

Commercial real estate

     11,696,280         4,098,963         15,795,243   

Business assets

     11,592         —           11,592   

Vehicles

     1,008         3,089         4,097   

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 16,936,158       $ 4,102,052       $ 21,038,210   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Accruing      Non-Accrual      Total  

Unsecured

   $ —         $ 13,604       $ 13,604   

Cash value

     —           —           —     

Residential real estate

     4,935,018         —           4,935,018   

Commercial real estate

     11,142,281         5,083,439         16,225,720   

Business assets

     12,205         —           12,205   

Vehicles

     5,828         —           5,828   

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 16,095,332       $ 5,097,043       $ 21,192,375   
  

 

 

    

 

 

    

 

 

 

The Company’s policy is to return non-accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. The policy also considers payment history of the borrower, but is not dependent upon a specific number of payments.

The Company recorded $455,494 and $726,270 in specific reserves related to TDR loans as of March 31, 2012 and December 31, 2011, respectively. The Company recognized $121,532 in charge offs on TDR loans during the three months ended March 31, 2012 and no charge offs for the year ended December 31, 2011.

 

22


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Loans are modified to minimize loan losses when the Company believes the modification will improve the borrower’s financial condition and ability to repay the loan. The Company typically does not forgive principal. The Company generally either defers, or decreases monthly payments for a temporary period of time. A summary of the types of concessions made as of March 31, 2012 and December 31, 2011 are presented in the table below:

 

     March 31,
2012
     December 31,
2011
 

Lowered interest rate and/or payment amount

   $ 5,547,945       $ 5,767,702   

Interest only payment terms

     1,551,145         3,476,659   

Interest only & rate reduction

     1,726,354         935,697   

Waived interest and/or late fees

     5,476,063         5,478,899   

A&B note structure

     2,232,310         1,015,693   

Substitution of debtor

     4,504,393         4,517,725   
  

 

 

    

 

 

 

Total TDRs

   $ 21,038,210       $ 21,192,375   
  

 

 

    

 

 

 

The following table presents loans modified as TDRs by class and related recorded investment, which includes accrued interest and fees on accruing loans, in those loans as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012      December 31, 2011  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 

Unsecured

     0       $ —           1       $ 13,604   

Cash value

     0         —           0         —     

Residential real estate

     6         5,240,966         5         4,949,688   

Commercial real estate

     24         15,869,235         22         16,320,317   

Business assets

     2         12,254         2         12,799   

Vehicles

     3         4,101         2         6,017   

Other

     0         —           0         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

     35       $ 21,126,556         32       $ 21,302,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

There have been no loans modified as TDRs within the past three months for which there was a payment default within the three month period ended March 31, 2012. There have been no loans modified as TDRs within the past twelve months for which there was a payment default within the twelve month period ended December 31, 2011.

 

23


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 7. EARNINGS PER COMMON SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings per common share for the three months ended March 31, 2012 and 2011.

 

     Three Months Ended
March 31
 
     2012     2011  

Net income (loss) available to common shareholders

   $ (812,657   $ 35,302   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     9,868,856        9,794,472   

Net effect of the assumed exercise of stock options based on the treasury stock method using the average market price for the period

     104,842        111,482   
  

 

 

   

 

 

 

Average number of common shares outstanding used to calculate diluted earnings per common share

     9,973,698        9,905,954   
  

 

 

   

 

 

 

 

NOTE 8. STOCK BASED COMPENSATION

The Company has a stock option plan in which the Company can grant to directors, emeritus directors, and employees options for an aggregate of 2,553,600 shares of the Company’s stock. For incentive stock options, the option price shall be not less than the fair market value of such shares on the date the option is granted. If the participant owns shares of the Company representing more than 10% of the total combined voting power, then the price shall not be less than 110% of the fair market value of such shares on the date the option is granted. With respect to nonqualified stock options, the option price shall be set at the Board’s sole and absolute discretion. The option period for all grants will not exceed ten years from the date of grant.

At December 31, 2011, all outstanding options were fully vested and there were no options granted during the three month periods ended March 31, 2012 and 2011. Therefore, there was no compensation cost related to share-based payments for the three months ended March 31, 2012 and 2011.

The following table represents stock option activity for the three months ended March 31, 2012:

 

     Three Months Ended
March 31, 2012
 
     Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term (Years)
 

Options outstanding beginning of period

     178,656      $ 0.94      

Options forfeited

     —          —        

Options exercised

     (10,639     0.94      
  

 

 

   

 

 

    

Options outstanding end of period

     168,017      $ 0.94         0.7   
  

 

 

   

 

 

    

 

 

 

Outstanding exercisable end of period

     168,017      $ 0.94         0.7   
  

 

 

   

 

 

    

 

 

 

The option price for all options outstanding and exercisable at March 31, 2012 was $0.94.

Shares available for future stock options grants to employees and directors under existing plans were 633,600 at March 31, 2012. At March 31, 2012, the aggregate intrinsic value of options outstanding and exercisable was $262,527.

 

24


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic (FASB ASC 820), the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traced in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3—Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:

Cash, Due From Banks, Interest-Bearing Deposits at Other Financial Institutions, and Federal Funds Sold: The carrying amounts of cash, due from banks, interest-bearing deposits at other financial institutions, and federal funds sold approximates fair value.

 

25


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Securities: Where quoted prices are available in an active market, we classify the securities within level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds and exchange-traded equities.

If quoted market prices are not available, we estimate fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in level 3.

Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. Fair value of fixed rate loans is estimated using discounted contractual cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation using market interest rates currently being offered for certificates of similar maturities.

Federal Home Loan Bank (“FHLB”) advances and other borrowings: Fair values of fixed rate FHLB advances and other borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying values of variable rate FHLB advances and other borrowings approximate fair value.

Trust Preferred Securities: The fair value of the Company’s variable rate trust preferred securities approximates the carrying value.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

 

26


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Assets and Liabilities Measured at Fair Value:

Assets and liabilities measured at fair value are summarized below:

 

                                                                                    
     March 31, 2012  
     Total      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Assets

              

Recurring fair value measurements:

              

Debt securities available for sale:

              

State, county and municipals

   $ 14,616,215       $ —         $ 14,616,215       $ —        

Mortgage-backed securities GSE residential

     30,345,535         —           30,345,535         —        

Trust preferred securities

     365,438         —           —           365,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Total debt securities available for sale

     45,327,188         —           44,961,750         365,438      

Equity securities

     50,000         —           —           50,000      
  

 

 

    

 

 

    

 

 

    

 

 

    

Investment securities available for sale

   $ 45,377,188       $ —         $ 44,961,750       $ 415,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Nonrecurring fair value measurements:

              

Impaired loans

   $ 24,769,502       $ —         $ —         $ 24,769,502       $ (694,741

Foreclosed real estate

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

   $ 24,769,502       $ —         $ —         $ 24,769,502       $ (694,741
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value at March 31, 2012:

 

     Quantitative Information About Level 3 Fair Value Measurements
Asset Description    Fair Value Estimate      Valuation
Techniques
  Unobservable
Input
  Range (Weighted
Average)

Impaired loans

   $ 24,769,502       Appraisal of collateral(1)   Liquidation expenses(2)   0.0% to -10.0% (-6.89%)
        Discount for lack of
marketability and
age of appraisal
  0.0% to -65.0% (-0.71%)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors including estimated liquidation expenses. The range of adjustments including liquidation expenses is presented as a percent of the appraisal.

 

                                                                                    
     December 31, 2011  
     Total      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Assets

              

Recurring fair value measurements:

              

Debt securities available for sale:

              

State, county and municipals

   $ 15,964,231       $ —         $ 15,964,231       $ —        

Mortgage-backed securities GSE residential

     25,924,471         —           25,924,471         —        

Trust preferred securities

     627,875         —           —           627,875      
  

 

 

    

 

 

    

 

 

    

 

 

    

Total debt securities available for sale

     42,516,577         —           41,888,702         627,875      

Equity securities

     50,000         —           —           50,000      
  

 

 

    

 

 

    

 

 

    

 

 

    

Investment securities available for sale

   $ 42,566,577       $ —         $ 41,888,702       $ 677,875      
  

 

 

    

 

 

    

 

 

    

 

 

    

Nonrecurring fair value measurements:

              

Impaired loans

   $ 21,155,090       $ —         $ —         $ 21,155,090       $ (2,844,797

Foreclosed real estate

     998,820         —           —           998,820         (166,680
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

   $ 22,153,910       $ —         $ —         $ 22,153,910       $ (3,011,477
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In relation to the securities classified as available-for-sale which are reported at fair value utilizing Level 2 inputs, 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, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

 

27


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The available-for-sale securities which are reported at fair value using Level 3 inputs are evaluated on a regular basis by management using unobservable inputs developed through consideration of the financial condition of the issuer.

Presented below are the changes in the individual securities, balances or fair values of those available-for-sale securities reported using Level 3 inputs during the three months ended March 31, 2012 and for the year ended December 31, 2011.

 

     March 31, 2012     December 31, 2011  
     Debt Securities     Equity            Debt Securities      Equity         
     Available for Sale     Securities      Total     Available for Sale      Securities      Total  

Opening balance

   $ 627,875      $ 50,000       $ 677,875      $ 627,875       $ 50,000       $ 677,875   

Total gains or losses for the period

               

Loss on OTTI Impairment included in earnings

     (262,437     —           (262,437     —           —           —     

Included in other comprehensive income

     —          —           —          —           —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Closing balance

   $ 365,438      $ 50,000       $ 415,438      $ 627,875       $ 50,000       $ 677,875   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy. Collateral may include real estate, or business assets including equipment, inventory and accounts receivable. Write downs of impaired loans are estimated using the present value of the expected cash flows or the appraised value of the underlying collateral discounted as necessary due to the unobservable inputs of management’s estimates of changes in economic conditions, and estimates related to the cost of selling or holding the collateral. The unobservable inputs can range widely based on the market for the underlying collateral.

Foreclosed real estate is adjusted to fair value upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed real estate as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed real estate as nonrecurring Level 3. Valuation of foreclosed real estate presented as nonrecurring Level 3 is based upon unobservable inputs developed by management through consideration of changes in the real estate market and estimates of cost associated with selling or holding the property. Due to fluctuations in market conditions, these inputs can range widely.

The Company did not identify any liabilities that are required to be presented at fair value as of March 31, 2012 and as of December 31, 2011.

 

28


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The carrying amount and fair value for other financial instruments that are not measured at fair value on a recurring basis at March 31, 2012, December 31, 2011, and March 31, 2011 are as follows:

 

     March 31, 2012  
     Carrying      Fair Value Level  
     Amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Interest-bearing deposits at other financial institutions

   $ 698,809       $ 698,809       $ —         $ —         $ 698,809   

Restricted equity securities

     792,900         —           792,900         —           792,900   

Loans, net

     216,725,243         —           —           217,474,261         217,474,261   

Financial liabilities:

              

Deposits

     277,929,589         —           275,759,685         —           275,759,685   

Federal funds purchased

     1,445,000         1,445,000         —           —           1,445,000   

Note payable

     275,250         —           —           275,250         275,250   

Federal Home Loan Bank advances

     5,500,000         —           5,499,878         —           5,499,878   

Company guaranteed trust preferred securities

     3,403,000         —           —           3,403,000         3,403,000   

 

     December 31, 2011      March 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Interest-bearing deposits at other financial institutions

   $ 635,511       $ 635,511       $ 456,539       $ 456,539   

Federal funds sold

     595,000         595,000         6,315,000         6,315,000   

Restricted equity securities

     792,900         792,900         1,025,300         1,025,300   

Loans, net

     215,018,097         217,575,824         228,513,648         228,466,648   

Financial liabilities:

           

Deposits

     276,898,782         276,218,543         284,868,377         288,272,377   

Note payable

     275,250         275,250         275,250         275,250   

Federal Home Loan Bank advances

     5,500,000         5,499,756         5,500,000         5,486,000   

Company guaranteed trust preferred securities

     3,403,000         3,403,000         3,403,000         3,403,000   

 

29


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date of Amendments to the Presentation of Comprehensive Income in Update No. 2011-05 (“ASU No. 2011-12”). ASU 2011-12 temporarily delays the effective date of eliminating the option of presenting comprehensive income as part of the statement of changes in stockholders’ equity for public companies. ASU 2011-12 is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to impact the Company’s disclosures, financial position or results of operations.

 

NOTE 11. STOCK OFFERING

On May 8, 2008, the Company filed an S-1 registration statement for a stock offering of up to 1,500,000 shares of the Company’s common stock at a price of $2.50 per share. The offering was terminated on May 8, 2011.

On March 19, 2012, the Company began accepting the subscriptions of several investors in a private placement offering to accredited investors under an exemption from registration contained in Section 4(2) of the Securities Act of 1933 and Rule 505 and 506 of Regulation D under the Securities Act. The Company is offering a maximum of 1,000,000 shares of its common stock at a price of $2.50 per share. If all of the shares are purchased, the total raised would be $2.5 million, less offering expenses of approximately $10,000. The offering is ongoing.

 

NOTE 12. FEDERAL HOME LOAN BANK ADVANCES

As of March 31, 2012, the Company had outstanding Federal Home Loan Bank (FHLB) advances of $5,500,000. These advances are fixed rate and mature on various dates between April 1, 2012 and July 19, 2012.

On May 10, 2010, the Company was notified by the FHLB that, based on the current financial and operating condition of the Company, all credit availability of the Company with the FHLB had been rescinded. Additionally, the Company is also now required to provide all collateral underlying existing advances outstanding for safekeeping at the FHLB. On March 23, 2011, the Company was notified that its credit availability had been reinstated, for a maximum of 4% of the total assets of the Bank. At March 31, 2012, the Company had credit availability with FHLB of $6,348,725.

 

30


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 13. SUBSEQUENT EVENTS

Subsequent to March 31, 2012, the Company has issued 206,000 shares of its common stock under the private placement offering described in Note 11 to these condensed consolidated financial statements. Total proceeds from issuance under the offering were $515,000.

During the second quarter of 2012, the Company also issued 10,000 shares of Series C Preferred Stock for total proceeds of $1,000,000. The Series C Preferred Stock has a par value of $100, is subordinate to previous issuances of preferred stock, and the holder is entitled to dividends at an annual rate of 3% payable on every fifth anniversary of the date of issuance.

 

31


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 14. RESTATEMENT OF FINANCIAL STATEMENTS

During the second quarter of 2012, the Company made certain adjustments to its books based upon the final results of a regulatory examination that concluded during this time. After a review of its loan portfolio, it was determined that an additional allowance for loan loss should be established of $550,000 and certain partial charge-offs of $784,367 should be made of several residential and commercial real estate nonaccrual loans. Each loan with a corresponding charge-off was considered impaired at March 31, 2012 and all amounts charged-off were included in the specific reserves as of March 31, 2012. The regulatory examination also required that a portion of one of the Company’s investments be considered an other than temporary impairment and a corresponding charge of $262,437 is reflected in the Company’s amended financial statements for the first quarter of 2012. A third adjustment was required by the examiners to increase the valuation reserve for foreclosed real estate. These adjustments were based on the regulatory examiners’ judgments about information that was available to them at the time of their examination. The adjustments pursuant to the regulatory examination were required to be effective as of March 31, 2012. Due to this required effective date, the Company has amended its quarterly information filed with regulatory authorities.

 

32


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following financial statements for the quarter ended March 31, 2012 are shown below, including the effect of the adjustments between the original financial statements and the restated financial statements.

Consolidated Balance Sheet

 

     March 31, 2012        
     Original
(unaudited)
    Restated
(unaudited)
    Effect of
Change
 

Assets

      

Cash and due from banks

   $ 6,646,892      $ 6,646,892      $ —     

Interest-bearing deposits at other financial institutions

     600,299        600,299        —     

Federal funds sold

     —          —          —     

Securities available for sale

     45,639,625        45,377,188        (262,437

Restricted equity securities, at cost

     792,900        792,900        —     

Loans, net of unearned income

     222,621,402        221,837,035        (784,367

Less allowance for loan losses

     5,346,159        5,111,792        (234,367
  

 

 

   

 

 

   

 

 

 

Loans, net

     217,275,243        216,725,243        (550,000
  

 

 

   

 

 

   

 

 

 

Premises and equipment, net

     9,166,553        9,166,553        —     

Foreclosed real estate

     17,344,100        17,245,600        (98,500

Other assets

     1,823,250        1,823,250        —     
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 299,288,862      $ 298,377,925      $ (910,937
  

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

      

Liabilities:

      

Deposits:

      

Noninterest-bearing

   $ 30,450,925      $ 30,450,925      $ —     

Interest-bearing

     247,478,664        247,478,664        —     
  

 

 

   

 

 

   

 

 

 

Total deposits

     277,929,589        277,929,589        —     

Federal funds purchased

     1,445,000        1,445,000        —     

Note payable

     275,250        275,250        —     

Federal Home Loan Bank advances

     5,500,000        5,500,000        —     

Company guaranteed trust preferred securities

     3,403,000        3,403,000        —     

Other liabilities

     1,646,215        1,646,215        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

   $ 290,199,054      $ 290,199,054      $ —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity

      

Preferred stock, par value $100, 5,000,000 shares authorized

      

Series A, cumulative, non voting, 10,000 shares issued and outstanding

     1,000,000        1,000,000        —     

Series B, cumulative, non voting, 6,078 shares issued and outstanding

     607,800        607,800        —     

Common stock, par value $1.00; 80,000,000 shares authorized;

          10,056,069 shares issued and outstanding, respectively

     10,056,069        10,056,069        —     

Surplus

     447,398        447,398        —     

Retained deficit

     (3,344,304     (4,255,241     (910,937

Accumulated other comprehensive income

     322,845        322,845        —     
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     9,089,808        8,178,871        (910,937
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 299,288,862      $ 298,377,925      $ (910,937
  

 

 

   

 

 

   

 

 

 

 

33


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Consolidated Statement of Operations and Comprehensive Income

 

     Three Months Ended
March 31, 2012
       
     Original
(unaudited)
    Restated
(unaudited)
    Effect of
Change
 

Interest income:

      

Loans, including fees

   $ 3,302,339      $ 3,302,339      $ —     

Deposits in banks

     130        130        —     

Securities

     258,697        258,697        —     

Federal funds sold

     649        649        —     
  

 

 

   

 

 

   

 

 

 

Total interest income

     3,561,815        3,561,815        —     
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits

     1,152,434        1,152,434        —     

Other borrowings

     45,149        45,149        —     
  

 

 

   

 

 

   

 

 

 

Total interest expense

     1,197,583        1,197,583        —     
  

 

 

   

 

 

   

 

 

 

Net interest income

     2,364,232        2,364,232        —     

Provision for loan losses

     195,000        745,000        550,000   
  

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     2,169,232        1,619,232        (550,000
  

 

 

   

 

 

   

 

 

 

Other income:

      

Service charges on deposit accounts

     342,607        342,607        —     

Other fees and commissions

     27,541        27,541        —     

Gain on sales of available for sale securities

     115,694        115,694        —     

Other operating income

     134,481        134,481        —     
  

 

 

   

 

 

   

 

 

 

Total other income

     620,323        620,323        —     
  

 

 

   

 

 

   

 

 

 

Other expenses:

      

Salaries and employee benefits

     940,370        940,370        —     

Occupancy and equipment expenses, net

     272,341        272,341        —     

Other operating expenses

     1,428,564        1,789,501        360,937   
  

 

 

   

 

 

   

 

 

 

Total other expenses

     2,641,275        3,002,212        360,937   
  

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefits

     148,280        (762,657     (910,937

Income tax benefits

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     148,280        (762,657     (910,937
  

 

 

   

 

 

   

 

 

 

Preferred stock dividends

     (50,000     (50,000     —     
  

 

 

   

 

 

   

 

 

 

Net income (loss) available available to common shareholders

     98,280        (812,657     (910,937

Other comprehensive income (loss):

      

Unrealized gains on securities available for sale arising during period, net of tax

     365,537        365,537        —     

Reclassification adjustment for realized gains on securities available for sale arising during the period, net of tax

     (115,694     (115,694     —     
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 348,123      $ (562,814   $ (910,937
  

 

 

   

 

 

   

 

 

 

Basic earnings (losses) per common share

   $ 0.01      $ (0.08   $ (0.09
  

 

 

   

 

 

   

 

 

 

Diluted earnings (losses) per common share

   $ 0.01      $ (0.08   $ (0.09
  

 

 

   

 

 

   

 

 

 

 

34


Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Consolidated Statement of Cash Flows

 

     Three Months Ended
March 31, 2012
       
     Original
(unaudited)
    Restated
(unaudited)
    Effect of
Change
 

OPERATING ACTIVITIES

      

Net income (loss)

   $ 148,280      $ (762,657   $ (910,937

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation, amortization and accretion

     241,340        241,340        —     

Provision for loan losses

     195,000        745,000        550,000   

Net gain on sale of securities available for sale

     (115,694     (115,694     —     

Other-than-temporary impairment of securities available for sale

     —          262,437        262,437   

Writedowns of foreclosed real estate

     —          98,500        98,500   

Increase in dividends payable on preferred stock

     (50,000     (50,000     —     

Net other operating activities

     175,342        175,342        —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     594,268        594,268        —     
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Purchases of securities available for sale

     (7,992,359     (7,992,359     —     

Proceeds from sales of securities available for sale

     3,888,865        3,888,865        —     

Proceeds from maturities and paydowns of securities available for sale

     1,275,248        1,275,248        —     

Net decrease in interest-bearing deposits at other financial institutions

     35,212        35,212        —     

Net decrease in federal funds sold

     595,000        595,000        —     

Net increase in loans

     (1,644,645     (1,644,645     —     

Payments for construction in process

     (112,136     (112,136     —     

Purchase of premises and equipment

     (37,973     (37,973     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (3,992,788     (3,992,788     —     
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net increase in deposits

     1,030,807        1,030,807        —     

Net increase in federal funds purchased

     1,445,000        1,445,000        —     

Proceeds from issuance of common stock

     530,000        530,000        —     

Proceeds from exercise of stock options

     10,001        10,001        —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     3,015,808        3,015,808        —     
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and due from banks

     (382,712     (382,712     —     

Cash and due from banks at beginning of year

     7,029,604        7,029,604        —     
  

 

 

   

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 6,646,892      $ 6,646,892      $ —     
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

      

Cash paid for:

      

Interest

   $ 1,214,518      $ 1,214,518      $ —     

NONCASH TRANSACTIONS

      

Principal balances of loans transferred to foreclosed real estate

   $ —        $ —        $ —     

Financed sales of foreclosed real estate

   $ 994,792      $ 994,792      $ —     

 

35


Index to Financial Statements

PART II—Other Information

ITEM 6. EXHIBITS

 

  31.1 Section 302 Certification of Principal Executive Officer

 

  31.2 Section 302 Certification of Principal Financial and Accounting Officer

 

  32.1 Section 906 Certification of Principal Executive Officer

 

  32.2 Section 906 Certification of Principal Financial and Accounting Officer

 

  101 Interactive data file

 

36


Index to Financial Statements

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CAPITOL CITY BANCSHARES, INC.
Date: October 16, 2012     /s/ George G. Andrews
    George G. Andrews
    CEO, President and Director
Date: October 16, 2012     /s/ Tatina Brooks
    Tatina Brooks
    Senior Vice President of Accounting and
    Financial Reporting (Principal Financial and
    Accounting Officer)

 

37

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