10-Q/A 1 d561778d10qa.htm 10-Q/A 10-Q/A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q/A

 

 

Amendment No. 1

 

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

For the quarterly period ended March 31, 2013

 

¨ 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   (I.R.S. Employer
incorporation or organization)   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 July 1, 2013; 10,292,069; $1.00 par value common shares.

 

 

 


Table of Contents

INDEX

 

     Page  

Part I. Financial Information

  

Item 1. Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012

     1   

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012

     2   

Condensed Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2013 and 2012

     3   

Notes to Condensed Consolidated Financial Statements

     4-30   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31-43   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4. Controls and Procedures

     43   

Part II. Other Information

  

Item 1. Legal Proceedings

     44   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     44   

Item 3. Defaults Upon Senior Securities

     44   

Item 4. Mine Safety Disclosures

     44   

Item 5. Other Information

     44   

Item 6. Exhibits

     45   

Signatures

     46   

Certifications

     47-50   


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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, 2013 that was originally filed with the Securities and Exchange Commission on May 14, 2013.

This amendment is filed to reflect an adjustment to the Company’s books based upon management’s continuing investigation of the previously disclosed employee fraud loss. After further consideration regarding receivables for an insurance claim on employee fraud loss, it was determined the amount included as a receivable for $833,000 should be written off and recorded as an expense, until the validity and amount of the receivable is confirmed by our insurance carrier. Developments in the ongoing investigation and review of insurance policies during the second quarter resulted in our decision to no longer recognize a receivable for the amount of loss at this time. Management continues to believe based on existing facts and circumstances that these amounts will be collected, however, the future timing of such collection is not currently known. Due to this determination, the Company has amended its quarterly information filed with regulatory authorities. Accordingly, the Company has made appropriate revisions in Items 1 and 2 of Part I to reflect this development.

Management has reevaluated its conclusion on the effectiveness of the Company’s disclosure controls and procedures in light of this amendment and restatement and has concluded that the disclosure controls and procedures are effective. Reevaluation noted that the cause for this restatement is the discovery of information during an ongoing investigation, not a lapse in control. The established disclosure controls and procedures facilitated the timely identification, evaluation and reporting necessary to ensure the Company’s financial statements and related disclosures are reliable.

This amendment also includes an additional subsequent event disclosure reflecting material additional provisions for loan losses and charge offs that will be required as of June 30, 2013. Please see Note 14. Subsequent Events, on page 30 for a complete discussion.


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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2013 (unaudited and restated) and December 31, 2012

 

     March 31, 2013*     December 31,  
     (unaudited)     2012  
Assets     

Cash and due from banks

   $ 12,937,832      $ 7,807,478   

Interest-bearing deposits at other financial institutions

     809,606        727,124   

Federal funds sold

     295,000        6,340,000   

Securities available for sale

     41,171,956        42,609,727   

Restricted equity securities, at cost

     608,700        691,900   

Loans, net of unearned income

     218,498,388        217,650,162   

Less allowance for loan losses

     5,042,189        5,389,613   
  

 

 

   

 

 

 

Loans, net

     213,456,199        212,260,549   
  

 

 

   

 

 

 

Premises and equipment, net

     8,907,525        8,962,223   

Foreclosed real estate

     19,370,266        19,487,185   

Other assets*

     1,673,506        1,776,673   
  

 

 

   

 

 

 

Total assets*

   $ 299,230,590      $ 300,662,859   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits:

    

Noninterest-bearing

   $ 29,804,386      $ 33,116,883   

Interest-bearing

     248,990,936        248,224,450   
  

 

 

   

 

 

 

Total deposits

     278,795,322        281,341,333   

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

     3,886,492        1,726,692   
  

 

 

   

 

 

 

Total liabilities

     291,860,064        292,246,275   
  

 

 

   

 

 

 

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   

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

     1,000,000        1,000,000   

Common stock, par value $1.00; 80,000,000 shares authorized; 10,292,069 shares issued and outstanding

     10,292,069        10,292,069   

Surplus

     801,398        801,398   

Retained deficit*

     (6,105,762     (5,236,465

Accumulated other comprehensive loss

     (224,979     (48,218
  

 

 

   

 

 

 

Total stockholders’ equity*

     7,370,526        8,416,584   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity*

   $ 299,230,590      $ 300,662,859   
  

 

 

   

 

 

 

* – See Note 13 for discussion on the restated items.

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

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31, 2013 and 2012 (unaudited and restated)

 

     Three Months Ended
March 31,
 
     2013*     2012  

Interest income:

    

Loans, including fees

   $ 2,830,522      $ 3,302,339   

Deposits in banks

     411        130   

Securities

     195,798        258,697   

Federal funds sold

     1,385        649   
  

 

 

   

 

 

 

Total interest income

     3,028,116        3,561,815   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     824,949        1,152,434   

Other borrowings

     43,788        45,149   
  

 

 

   

 

 

 

Total interest expense

     868,737        1,197,583   
  

 

 

   

 

 

 

Net interest income

     2,159,379        2,364,232   

Provision for loan losses

     100,000        745,000   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     2,059,379        1,619,232   
  

 

 

   

 

 

 

Other income:

    

Service charges on deposit accounts

     360,135        342,607   

Other fees and commissions

     23,690        27,541   

Gain on sales of available for sale securities

     70,988        115,694   

Rental Income

     115,399        72,958   

Other operating income

     128,165        61,523   
  

 

 

   

 

 

 

Total other income

     698,377        620,323   
  

 

 

   

 

 

 

Other expenses:

    

Salaries and employee benefits

     935,969        940,370   

Occupancy and equipment expenses, net

     296,520        272,341   

Loss on sales of foreclosed real estate

     82,924        —     

Foreclosed real estate expenses and writedowns

     170,806        284,154   

Other operating expenses*

     2,090,834        1,505,347   
  

 

 

   

 

 

 

Total other expenses*

     3,577,053        3,002,212   
  

 

 

   

 

 

 

Income (loss) before income tax benefits*

     (819,297     (762,657

Income tax benefits

     —          —     
  

 

 

   

 

 

 

Net income (loss)*

     (819,297     (762,657
  

 

 

   

 

 

 

Preferred stock dividends

     (50,000     (50,000
  

 

 

   

 

 

 

Net loss available available to common shareholders*

     (869,297     (812,657

Other comprehensive income (loss):

    

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

     (105,773     365,537   

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

     (70,988     (115,694
  

 

 

   

 

 

 

Comprehensive loss*

   $ (1,046,058   $ (562,814
  

 

 

   

 

 

 

Basic losses per common share*

   $ (0.08   $ (0.08
  

 

 

   

 

 

 

Diluted losses per common share*

   $ (0.08   $ (0.08
  

 

 

   

 

 

 

* – See Note 13 for discussion on the restated items.

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

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of

Cash Flows For The Three Months Ended

March 31, 2013 and 2012

(Unaudited and restated)

 

     Three Months Ended
March 31,
 
     2013*     2012  

OPERATING ACTIVITIES

    

Net income (loss)*

   $ (819,297   $ (762,657

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation, amortization and accretion

     232,240        241,340   

Provision for loan losses

     100,000        745,000   

Net gain on sale of securities available for sale

     (70,988     (115,694

Other-than-temporary impairment of securities

     —          262,437   

Loss on sale of foreclosed assets

     82,924        —     

Writedowns of foreclosed real estate

     —          98,500   

Increase in dividends payable on preferred stock

     (50,000     (50,000

Net other operating activities*

     2,262,967        175,342   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,737,846        594,268   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of securities available for sale

     (14,671,953     (7,992,359

Proceeds from sales of securities available for sale

     14,539,044        3,888,865   

Proceeds from maturities and paydowns of securities available for sale

     1,354,232        1,275,248   

Proceeds from sales of restricted equity securities

     83,200        —     

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

     (82,482     35,212   

Net decrease in federal funds sold

     6,045,000        595,000   

Net increase in loans

     (1,311,300     (1,644,645

Capitalized costs on foreclosed real estate

     (184,431     —     

Proceeds from sale of foreclosed real estate

     234,076        —     

Payments for construction in process

     —          (112,136

Purchase of premises and equipment

     (66,867     (37,973
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     5,938,519        (3,992,788
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net increase (decrease) in deposits

     (2,546,011     1,030,807   

Net increase in federal funds purchased

     —          1,445,000   

Proceeds from issuance of common stock

     —          530,000   

Proceeds from exercise of stock options

     —          10,001   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (2,546,011     3,015,808   
  

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     5,130,354        (382,712

Cash and due from banks at beginning of year

     7,807,478        7,029,604   
  

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 12,937,832      $ 6,646,892   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

    

Cash paid for:

    

Interest

   $ 870,731      $ 1,214,518   

NONCASH TRANSACTIONS

    

Principal balances of loans transferred to foreclosed real estate

   $ 15,650      $ —     

Financed sales of foreclosed real estate

   $ —        $ 994,792   

* – See Note 13 for discussion on the restated items.

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

 

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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. The following unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. 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, 2012.

The results of operations for the three month period ended March 31, 2013 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, 2013, but prior to July 12, 2013, the date these condensed consolidated financial statements were reissued, for potential recognition or disclosure in these condensed consolidated financial statements. Refer to Note 14 for disclosure of identified subsequent events.

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, 2013 and December 31, 2012, those restricted balances were both $2,453,491.

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.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 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.

 

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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

 

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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, 2013. Further, all years subsequent to 2009 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, the Compliance 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 strengthen 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.

 

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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 in relation 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 2012 and the first three months of 2013. The Bank’s continuing level of problem loans as of the quarter ended March 31, 2013 and the Bank’s capital levels being in the “significantly under capitalized” category of the regulatory framework for prompt corrective action as of March 31, 2013 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 that may include seizure.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 loan 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 first quarter of 2013 the Company discovered a material misappropriation of cash due to suspected collusion of employees. Management continues to work diligently with the appropriate authorities in this matter and believes this misappropriation is fully covered, less appropriate deductibles, by its insurance policies. However, the Company’s March 31, 2013 condensed consolidated financial statements include an other operating expense of $933 thousand, which is equal to the full amount of the employee fraud.

 

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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:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

March 31, 2013

          

U.S. Government sponsored enterprises (GSEs)

   $ —         $ —         $ —        $ —     

State, county and municipals

     5,563,747         45,349         (119,766     5,489,330   

Mortgage-backed securities GSE residential

     35,417,750         35,926         (186,488     35,267,188   

Trust preferred securities

     365,438         —           —          365,438   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     41,346,935         81,275         (306,254     41,121,956   

Equity securities

     50,000         —           —          50,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 41,396,935       $ 81,275       $ (306,254   $ 41,171,956   
  

 

 

    

 

 

    

 

 

   

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

December 31, 2012

          

U.S. Government sponsored enterprises (GSEs)

   $ 2,000,000       $ 5,760       $ —        $ 2,005,760   

State, county and municipals

     9,345,055         88,501         (125,929   $ 9,307,627   

Mortgage-backed securities GSE residential

     30,897,452         114,419         (130,969     30,880,902   

Trust preferred securities

     365,438         —           —          365,438   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     42,607,945         208,680         (256,898     42,559,727   

Equity securities

     50,000         —           —          50,000   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 42,657,945       $ 208,680       $ (256,898   $ 42,609,727   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of debt securities as of March 31, 2013 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 in one year or less

   $ 502,632       $ 506,050   

Due from one to five years

     790,190         786,617   

Due from five to ten years

     637,537         581,442   

Due after ten years

     3,998,826         3,980,659   

Mortgage-backed securities

     35,417,750         35,267,188   
  

 

 

    

 

 

 
   $ 41,346,935       $ 41,121,956   
  

 

 

    

 

 

 

Securities with a carrying value of $7,939,148 and $16,222,527 at March 31, 2013 and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

 

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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, 2013 and December 31, 2012.

 

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

March 31, 2013

             

State, county and municipals

   $ 4,207,686       $ (119,766   $ —         $ —         $ (119,766

Mortgage-backed securities GSE residential

     24,526,621         (186,488     —           —           (186,488
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities

   $ 28,734,307       $ (306,254   $ —         $ —         $ (306,254
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

December 31, 2012

             

State, county and municipals

   $ 6,679,387       $ (125,929   $ —         $ —         $ (125,929

Mortgage-backed securities GSE residential

     17,211,179         (130,969     —           —           (130,969
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total securities

   $ 23,890,566       $ (256,898   $ —         $ —         $ (256,898
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Mortgage-backed securities GSE residential. There were unrealized losses on eleven GSE mortgage-backed 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, 2013.

State, county and municipal securities. There were unrealized losses on six 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, 2013.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 the same cost basis of $262,438 as of March 31, 2013.

NOTE 6. LOANS

The composition of loans is summarized as follows:

 

     March 31,     December 31,  
     2013     2012  

Unsecured

   $ 643,910      $ 822,538   

Cash Value

     3,180,787        3,393,228   

Residential Real Estate

     26,013,607        24,604,432   

Commercial Real Estate

     184,992,704        185,352,416   

Business Assets

     2,577,854        2,621,853   

Vehicles

     1,801,740        1,686,508   

Other

     293,237        101,655   
  

 

 

   

 

 

 
     219,503,839        218,582,630   

Unearned loan fees

     (1,005,451     (932,468

Allowance for loan losses

     (5,042,189     (5,389,613
  

 

 

   

 

 

 

Loans, net

   $ 213,456,199      $ 212,260,549   
  

 

 

   

 

 

 

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, 2013 were 0.3% of the total loan portfolio.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, 2013 were 1.4% 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, 2013 were 11.9% 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, 2013 were 84.3% 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, 2013 were 1.2% 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, 2013 were 0.8% of the total loan portfolio.

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, 2013 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, 2013, 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, 2013

                 

Beginning balance

  $ 77,502      $ 17,054      $ 2,328,224      $ 2,259,106      $ 477,511      $ 230,216      $ —        $ —        $ 5,389,613   

Charge-offs

    (63,372     (17,054     (158,228     —          (203,346     (29,677     —          —          (471,677

Recoveries

    —          —          5,040        8,282        10,931        —          —          —          24,253   

Provision

    90,160        11,732        103,679        (316,282     130,474        80,237        —          —          100,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 104,290      $ 11,732      $ 2,278,715      $ 1,951,106      $ 415,570      $ 280,776      $ —        $  —        $ 5,042,189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance-individually evaluated impairment

  $ 5,801      $ —        $ 1,615,450      $ 1,346,900      $ 90,151      $ 61,617      $ —        $ —        $ 3,119,919   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance (1)

  $ 643,910      $  3,180,787      $ 26,013,607      $ 184,992,704      $ 2,577,854      $ 1,801,740      $ 293,237      $ —        $ 219,503,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance-Loans individually evaluated for impairment

  $ 34,758      $ —        $ 12,934,441      $ 34,923,107      $ 725,422      $ 103,215      $ —        $ —        $ 48,720,943   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Loan balances presented are gross of unearned loan fees of $1,005,451.

 

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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, 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:

                 

December 31, 2012

                 

Beginning balance

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

Charge-offs

    (25,523     —          (605,011     (1,051,727     (2,087     (9,633     —          —          (1,693,981

Recoveries

    2,584        —          66,437        105,116        23,160        9,515        —          —          206,812   

Provision

    2,480        327        783,513        724,947        156,697        54,313        —          —          1,722,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 77,502      $ 17,054      $ 2,328,224      $ 2,259,106      $ 477,511      $ 230,216      $ —        $ —        $ 5,389,613   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance—individually evaluated impairment

  $ 11,060      $ 17,054      $ 1,645,625      $ 1,075,729      $ 293,697      $ 81,037      $ —        $ —        $ 3,124,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance (1)

  $ 822,538      $ 3,393,228      $ 24,604,432      $ 185,352,416      $ 2,621,853      $ 1,686,508      $ 101,655      $ —        $ 218,582,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance—Loans individually evaluated for impairment

  $ 40,017      $ 17,054      $ 13,001,107      $ 34,805,680      $ 561,091      $ 123,984      $ —        $ —        $ 48,548,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1) Loan balances presented are gross of unearned loan fees of $932,468.

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.

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.

 

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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, 2013  
     Unpaid Total
Principal
Balance
     Recorded
Investment
With No
Allowance
     Recorded
Investment
With Allowance
     Total Recorded
Investment
     Related
Allowance
 

Unsecured

   $ 159,388       $ 28,957       $ 5,801       $ 34,758       $ 5,801   

Cash value

     —           —           —           —           —     

Residential real estate

     15,113,891         4,412,810         8,521,631         12,934,441         1,615,450   

Commercial real estate

     36,890,592         16,439,050         18,484,057         34,923,107         1,346,900   

Business assets

     1,147,919         79,686         645,736         725,422         90,151   

Vehicles

     103,215         4,180         99,035         103,215         61,617   

Other

     —           —           —           —           —     

 

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

Unsecured

   $ 44,634       $ 28,957       $ 11,060       $ 40,017       $ 11,060   

Cash value

     19,543         —           17,054         17,054         17,054   

Residential real estate

     15,758,053         6,419,011         6,582,096         13,001,107         1,645,625   

Commercial real estate

     40,127,425         22,047,391         12,758,289         34,805,680         1,075,729   

Business assets

     657,529         92,819         468,272         561,091         293,697   

Vehicles

     165,850         5,529         118,455         123,984         81,037   

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, 2013 and 2012 and for the year ended December 31, 2012, by portfolio segment, is as follows:

 

     Three months ended March 31, 2013      Three months ended March 31, 2012  
     Average Recorded
Investment
     Interest Income
Recognized
     Average Recorded
Investment
     Interest Income
Recognized
 

Unsecured

   $ 37,388       $ 139       $ 36,861       $ —     

Cash value

     8,527         —           17,054         —     

Residential real estate

     12,967,774         95,818         12,032,186         58,683   

Commercial real estate

     34,864,394         268,111         34,744,286         229,310   

Business assets

     643,257         14,467         639,742         316   

Vehicles

     113,600         —           137,245         566   

Other

     —           —           —           —     

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

     Year ended December 31, 2012  
     Average Recorded
Investment
     Interest Income
Recognized
 

Unsecured

   $ 52,549       $ 860   

Cash value

     17,054         —     

Residential real estate

     12,590,802         353,218   

Commercial real estate

     35,194,208         1,314,075   

Business assets

     605,742         32,322   

Vehicles

     134,690         7,582   

Other

     —           —     

A primary credit quality indicator for financial institutions is delinquent balances. Following are the delinquent amounts, by portfolio segment, as of March 31, 2013:

 

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

Unsecured

   $ 516,127       $ 92,529       $ —         $ 92,529       $ 35,254       $ 643,910   

Cash value

     2,993,009         187,778         —           187,778         —           3,180,787   

Residential real estate

     18,615,246         788,713         —           788,713         6,609,648         26,013,607   

Commercial real estate

     147,494,335         16,076,092         862,129         16,938,221         20,560,148         184,992,704   

Business assets

     2,309,021         —           —           —           268,833         2,577,854   

Vehicles

     1,526,702         128,425         —           128,425         146,613         1,801,740   

Other

     293,237         —           —           —           —           293,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 173,747,677       $ 17,273,537       $ 862,129       $ 18,135,666       $ 27,620,496       $ 219,503,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Following are the delinquent amounts, by portfolio segment, as of December 31, 2012:

 

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

Unsecured

   $ 802,020       $ 20,518       $ —         $ 20,518       $ —         $ 822,538   

Cash value

     3,373,835         19,393         —           19,393         —           3,393,228   

Residential real estate

     18,982,218         451,314         135,007         586,321         5,035,893         24,604,432   

Commercial real estate

     154,822,727         7,691,888         632,367         8,324,255         22,205,434         185,352,416   

Business assets

     1,555,326         387,218         —           387,218         679,309         2,621,853   

Vehicles

     1,533,528         145,902         —           145,902         7,078         1,686,508   

Other

     101,655         —           —           —           —           101,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 181,171,309       $ 8,716,233       $ 767,374       $ 9,483,607       $ 27,927,714       $ 218,582,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013, three commercial real estate loans totaling $933,600 and four residential real estate loans totaling $169,673 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, 2013 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.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

The following table presents the Company’s loans by risk rating, before unearned loan fees, at March 31, 2013:

 

Rating:

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

Grade 1 (Prime)

   $ 514       $ 27,708       $ —         $ —         $ —         $ —         $ —         $ 28,222   

Grade 2 (Superior)

     14,565         30,220         —           —           —           3,307         —           48,092   

Grade 3 (Acceptable-Average)

     569,900         2,852,608         11,297,049         110,952,539         1,480,551         1,437,697         192,246         128,782,590   

Grade 4 - Fair (Watch)

     —           64,439         530,508         9,439,182         —           15,091         100,991         10,150,211   

Grade 5 (Special Mention)

     —           —           850,388         14,533,976         358,288         156,300         —           15,898,952   

Grade 6 (Substandard)

     58,931         205,812         13,335,662         50,067,007         739,015         189,345         —           64,595,772   

Grade 7 (Doubtful)

     —           —           —           —           —           —           —           —     

Grade 8 (Loss)

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 643,910       $ 3,180,787       $ 26,013,607       $ 184,992,704       $ 2,577,854       $ 1,801,740       $ 293,237       $ 219,503,839   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2012:

 

Rating:

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

Grade 1 (Prime)

   $ 900       $ 27,496       $ —         $ —         $ —         $ —         $ —         $ 28,396   

Grade 2 (Superior)

     16,163         220,824         —           339,757         —           3,969         —           580,713   

Grade 3 (Acceptable-Average)

     678,806         3,061,567         9,685,196         111,762,353         1,758,313         1,295,909         —           128,242,144   

Grade 4 - Fair (Watch)

     —           66,287         980,562         5,477,217         —           18,387         —           6,542,453   

Grade 5 (Special Mention)

     —           —           860,863         16,236,103         288,068         175,254         —           17,560,288   

Grade 6 (Substandard)

     126,669         —           13,077,811         51,536,986         575,472         192,989         101,655         65,611,582   

Grade 7 (Doubtful)

     —           —           —           —           —           —           —           —     

Grade 8 (Loss)

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 822,538       $ 3,393,228       $ 24,604,432       $ 185,352,416       $ 2,621,853       $ 1,686,508       $ 101,655       $ 218,582,630   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 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, 2013 and December 31, 2012 are presented below based on their status as performing or non-performing in accordance with the restructured terms:

 

     March 31,      December 31,  
     2013      2012  

Performing TDRs

   $ 17,100,590       $ 15,166,660   

Non-performing TDRs

     4,964,345         6,472,817   
  

 

 

    

 

 

 

Total TDRs

   $ 22,064,935       $ 21,639,477   
  

 

 

    

 

 

 

TDRs quantified by loan type and classified separately as accrual and non-accrual are presented below as of March 31, 2013 and December 31, 2012:

 

     March 31, 2013  
     Accruing      Non-Accrual      Total  

Unsecured

   $ —         $ —         $ —     

Cash value

     —           —           —     

Residential real estate

     7,973,509         38         7,973,547   

Commercial real estate

     9,116,865         4,964,307         14,081,172   

Business assets

     10,216         —           10,216   

Vehicles

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 17,100,590       $ 4,964,345       $ 22,064,935   
  

 

 

    

 

 

    

 

 

 

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

     December 31, 2012  
     Accruing      Non-Accrual      Total  

Unsecured

   $ —         $ —         $ —     

Cash value

     —           —           —     

Residential real estate

     6,276,108         1,533,958         7,810,066   

Commercial real estate

     8,880,336         4,938,859         13,819,195   

Business assets

     10,216         —           10,216   

Vehicles

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 15,166,660       $ 6,472,817       $ 21,639,477   
  

 

 

    

 

 

    

 

 

 

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 $1,254,118 and $536,111 in specific reserves as of March 31, 2013 and December 31, 2012, respectively. The Company recognized no charge offs on TDR loans during the three months ended March 31, 2013 and $204,143 in charge offs on TDR loans for the year ended December 31, 2012.

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, 2013 and December 31, 2012 are presented in the table below:

 

     March 31,      December 31,  
     2013      2012  

Lowered interest rate and/or payment amount

   $ 8,254,895       $ 8,195,283   

Interest only payment terms

     3,430,453         3,434,438   

Interest only & rate reduction

     748,324         748,324   

Waived interest and/or late fees

     3,288,426         3,282,608   

A&B note structure

     1,808,191         1,429,139   

Substitution of debtor

     4,534,646         4,549,685   
  

 

 

    

 

 

 

Total TDRs

   $ 22,064,935       $ 21,639,477   
  

 

 

    

 

 

 

 

20


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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, 2013 and December 31, 2012:

 

     March 31, 2013      December 31, 2012  
     Number of      Recorded      Number of      Recorded  
     Loans      Investment      Loans      Investment  

Unsecured

     —         $ —           —         $ —     

Cash value

     —           —           —           —     

Residential real estate

     12         8,008,561         9         7,865,546   

Commercial real estate

     20         14,151,465         20         13,881,050   

Business assets

     1         10,903         1         10,896   

Vehicles

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total TDRs

     33       $ 22,170,929         30       $ 21,757,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013. 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, 2012.

NOTE 7. LOSSES 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, 2013 and 2012.

 

     Three Months Ended  
     March 31,  
     2013     2012  

Net loss available to common shareholders

   $ (869,297   $ (812,657
  

 

 

   

 

 

 

Weighted average common shares outstanding

     10,292,069        9,868,856   

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

     66,553        104,842   
  

 

 

   

 

 

 

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

     10,358,622        9,973,698   
  

 

 

   

 

 

 

Weighted average common shares outstanding are used in the diluted earnings per share calculation for the three months ended March 31, 2013 and 2012, as there was a net loss available to common shareholders and inclusion of common stock equivalents would have been anti-dilutive.

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, 2012, all outstanding options were fully vested and there were no options granted during the three month periods ended March 31, 2013 and 2012. Therefore, there was no compensation cost related to share-based payments for the three months ended March 31, 2013 and 2012.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table represents stock option activity for the three months ended March 31, 2013:

 

     Three Months Ended  
     March 31, 2013  
            Weighted-
Average
Exercise
     Weighted-
Average
Remaining
Contractual
 
     Shares      Price      Term (Years)  

Options outstanding beginning of period

     106,656       $ 0.94      

Options forfeited

     —           —        

Options exercised

     —           —        
  

 

 

    

 

 

    

Options outstanding end of period

     106,656       $ 0.94         0.01   
  

 

 

    

 

 

    

 

 

 

Outstanding exercisable end of period

     106,656       $ 0.94         0.01   
  

 

 

    

 

 

    

 

 

 

The option price for all options outstanding and exercisable at March 31, 2013 was $0.94.

Shares available for future stock options grants to employees and directors under existing plans were 633,600 at March 31, 2013. At March 31, 2013, the aggregate intrinsic value of options outstanding and exercisable was $262,527.

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.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

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.

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

Assets and Liabilities Measured at Fair Value:

Assets measured at fair value are summarized below:

 

     March 31, 2013  
     Total      Level 1      Level 2      Level 3      Total Gains
(Losses)
 

Assets

              

Recurring fair value measurements:

              

Debt securities available for sale:

              

State, county and municipals

   $ 5,489,330       $ —         $ 5,489,330       $ —        

Mortgage-backed securities GSE residential

     35,267,188         —           35,267,188         —        

Trust preferred securities

     365,438         —           —           365,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Total debt securities available for sale

     41,121,956         —           40,756,518         365,438      

Equity securities

     50,000         —           —           50,000      
  

 

 

    

 

 

    

 

 

    

 

 

    

Investment securities available for sale

   $ 41,171,956       $ —         $ 40,756,518       $ 415,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Nonrecurring fair value measurements:

              

Impaired loans

   $ 24,586,071       $  —         $ —         $ 24,586,071       $ (329,860

Foreclosed real estate

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

   $ 24,586,071       $ —         $ —         $ 24,586,071       $ (329,860
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013:

 

     Quantitative Information About Level 3 Fair Value Measurements

Asset Description

   Fair Value Estimate      Valuation     Unobservable    

Range (Weighted Average)

      Techniques     Input    

Impaired loans

   $ 24,586,071         Appraisal of collateral  (1)      Liquidation expenses  (2)    0.0% to—8.0% (-6.89%)
         
 
 
Discount for lack of
marketability and
age of appraisal
  
  
  
  0.0% to -92.0% (3.39%)

 

(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.

 

24


Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

Assets

              

Recurring fair value measurements:

              

Debt securities available for sale:

              

U.S. Government sponsored enterprises (GSEs)

   $ 2,005,760       $ —         $ 2,005,760       $ —        

State, county and municipals

     9,307,627         —           9,307,627         —        

Mortgage-backed securities GSE residential

     30,880,902         —           30,880,902         —        

Trust preferred securities

     365,438         —           —           365,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Total debt securities available for sale

     42,559,727         —           42,194,289         365,438      

Equity securities

     50,000         —           —           50,000      
  

 

 

    

 

 

    

 

 

    

 

 

    

Investment securities available for sale

   $ 42,609,727       $  —         $  42,194,289       $ 415,438      
  

 

 

    

 

 

    

 

 

    

 

 

    

Nonrecurring fair value measurements:

              

Impaired loans

   $ 25,525,940       $ —         $ —         $ 25,525,940       $ (1,848,164

Foreclosed real estate

     5,412,435         —           —           5,412,435         (802,157
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonrecurring fair value measurements

   $ 30,938,375       $ —         $ —         $ 30,938,375       $ (2,650,321
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

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, 2013 and for the year ended December 31, 2012.

 

     March 31, 2013      December 31, 2012  
     Debt Securities
Available for Sale
     Equity
Securities
     Total      Debt Securities
Available for Sale
    Equity
Securities
     Total  

Opening balance

   $  365,438       $  50,000       $  415,438       $ 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       $ 365,438      $ 50,000       $ 415,438   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

25


Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, 2013 and as of December 31, 2012.

The carrying amounts and fair values for other financial instruments that are not measured at fair value on a recurring basis at March 31, 2013, December 31, 2012, and March 31, 2012 are as follows:

 

     March 31, 2013  
     Carrying      Fair Value Level  
     Amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Interest-bearing deposits at other financial institutions

   $ 809,606       $  809,606       $ —         $ —         $ 809,606   

Federal funds sold

     295,000         295,000         —           —           295,000   

Restricted equity securities

     608,700         —           608,700         —           608,700   

Loans, net

     213,456,199         —           —           214,262,065         214,262,065   

Financial liabilities:

              

Deposits

     278,795,322         —           276,522,996         —           276,522,996   

Note payable

     275,250         —           —           275,250         275,250   

Federal Home Loan Bank advances

     5,500,000         —           5,500,161         —           5,500,161   

Company guaranteed trust preferred securities

     3,403,000         —           —           3,403,000         3,403,000   
     December 31, 2012  
     Carrying      Fair Value Level  
     Amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Interest-bearing deposits at other financial institutions

   $ 727,124       $ 727,124       $ —         $ —         $ 727,124   

Federal funds sold

     6,340,000         6,340,000         —           —           6,340,000   

Restricted equity securities

     691,900         —           691,900         —           691,900   

Loans, net

     212,260,549         —           —           212,704,841         212,704,841   

Financial liabilities:

              

Deposits

     281,341,333         —           283,707,789         —           283,707,789   

Note payable

     275,250         —           —           275,250         275,250   

Federal Home Loan Bank advances

     5,500,000         —           5,495,163         —           5,495,163   

Company guaranteed trust preferred securities

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

 

26


Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvement.” It makes conforming amendments related to fair value measurement within the ASC as well as other technical corrections covering a broad range of topics. The amendments in the update that did not have transition guidance were effective upon issuance and the amendments subject to transition guidance will be effective for fiscal periods beginning after December 15, 2012, for public entities. The adoption of this guidance is not expected to have a material effect on the Company’s financial position or results of operations.

NOTE 11. STOCK OFFERING

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 offered a maximum of 1,000,000 shares of its common stock at a price of $2.50 per share. The offering closed in 2012, and 448,000 shares for $1,120,000 were sold.

On April 24, 2012, the Company entered into an agreement with SunTrust Bank to sell 10,000 shares of Series C cumulative, nonvoting, $100 par value preferred stock for cash consideration of $1,000,000. No underwriting discounts or commissions were paid. The transaction was exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) thereof, as a transaction by an issuer not involving a public offering. The proceeds were used to inject capital into the Company’s subsidiary bank.

NOTE 12. FEDERAL HOME LOAN BANK ADVANCES

As of March 31, 2013, 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 3, 2013 and July 19, 2013.

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, 2013, the Company had credit availability with FHLB of $6.5 million.

NOTE 13. RESTATEMENT OF FINANCIAL STATEMENTS

During the second quarter of 2013, the Company made an adjustment to its books based upon management’s continued investigation regarding the employee fraud loss. During the continued evaluation of the established receivable for an insurance claim on employee fraud loss, it was determined the amount included as a receivable for $833,000 should be written off and recorded as an expense until such time as our insurance company confirms the validity and amount of the loss reimbursement.

 

27


Table of Contents

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following financial statements for the quarter ended March 31, 2013 are shown below, including the effect of the adjustments between the original financial statements and the restated financial statements.

Consolidated Balance Sheet

 

     March 31, 2013     Effect of
Change
 
     Original
(unaudited)
    Restated
(unaudited)
   
Assets       

Cash and due from banks

   $ 12,937,832      $ 12,937,832      $ —     

Interest-bearing deposits at other financial institutions

     809,606        809,606        —     

Federal funds sold

     295,000        295,000        —     

Securities available for sale

     41,171,956        41,171,956        —     

Restricted equity securities, at cost

     608,700        608,700        —     

Loans, net of unearned income

     218,498,388        218,498,388        —     

Less allowance for loan losses

     5,042,189        5,042,189        —     
  

 

 

   

 

 

   

Loans, net

     213,456,199        213,456,199        —     
  

 

 

   

 

 

   

 

 

 

Premises and equipment, net

     8,907,525        8,907,525        —     

Foreclosed real estate

     19,370,266        19,370,266        —     

Other assets

     2,506,506        1,673,506        (833,000
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 300,063,590      $ 299,230,590      $ (833,000
  

 

 

   

 

 

   

 

 

 
Liabilities and Stockholders’ Equity       

Liabilities:

      

Deposits:

      

Noninterest-bearing

   $ 29,804,386      $ 29,804,386      $ —     

Interest-bearing

     248,990,936        248,990,936        —     
  

 

 

   

 

 

   

 

 

 

Total deposits

     278,795,322        278,795,322        —     

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

     3,886,492        3,886,492        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

     291,860,064        291,860,064        —     
  

 

 

   

 

 

   

 

 

 

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        —     

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

     1,000,000        1,000,000        —     

Common stock, par value $1.00; 80,000,000 shares authorized; 10,292,069 shares issued and outstanding

     10,292,069        10,292,069        —     

Surplus

     801,398        801,398        —     

Retained deficit

     (5,272,762     (6,105,762     (833,000

Accumulated other comprehensive loss

     (224,979     (224,979     —     
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     8,203,526        7,370,526        (833,000
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 300,063,590      $ 299,230,590      $ (833,000
  

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

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, 2013
    Effect of
Change
 
     Original
(unaudited)
    Restated
(unaudited)
   

Interest income:

      

Loans, including fees

   $ 2,830,522      $ 2,830,522      $ —     

Deposits in banks

     411        411        —     

Securities

     195,798        195,798        —     

Federal funds sold

     1,385        1,385        —     
  

 

 

   

 

 

   

 

 

 

Total interest income

     3,028,116        3,028,116        —     
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits

     824,949        824,949        —     

Other borrowings

     43,788        43,788        —     
  

 

 

   

 

 

   

 

 

 

Total interest expense

     868,737        868,737        —     
  

 

 

   

 

 

   

 

 

 

Net interest income

     2,159,379        2,159,379        —     

Provision for loan losses

     100,000        100,000        —     
  

 

 

   

 

 

   

Net interest income after provision for loan losses

     2,059,379        2,059,379        —     
  

 

 

   

 

 

   

 

 

 

Other income:

      

Service charges on deposit accounts

     360,135        360,135        —     

Other fees and commissions

     23,690        23,690        —     

Gain on sales of available for sale securities

     70,988        70,988        —     

Rental Income

     115,399        115,399        —     

Other operating income

     128,165        128,165        —     
  

 

 

   

 

 

   

 

 

 

Total other income

     698,377        698,377        —     
  

 

 

   

 

 

   

 

 

 

Other expenses:

      

Salaries and employee benefits

     935,969        935,969        —     

Occupancy and equipment expenses, net

     296,520        296,520        —     

Loss on sales of foreclosed real estate

     82,924        82,924        —     

Foreclosed real estate expenses and writedowns

     170,806        170,806        —     

Other operating expenses

     1,257,834        2,090,834        833,000   
  

 

 

   

 

 

   

 

 

 

Total other expenses

     2,744,053        3,577,053        833,000   
  

 

 

   

 

 

   

 

 

 

Income (loss) before income tax benefits

     13,703        (819,297     (833,000

Income tax benefits

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     13,703        (819,297     (833,000
  

 

 

   

 

 

   

 

 

 

Preferred stock dividends

     (50,000     (50,000     —     
  

 

 

   

 

 

   

 

 

 

Net loss available to common shareholders

     (36,297     (869,297     (833,000

Other comprehensive income (loss):

      

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

     (105,773     (105,773     —     

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

     (70,988     (70,988     —     
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (213,058   $ (1,046,058   $ (833,000
  

 

 

   

 

 

   

 

 

 

Basic losses per common share

   $ (0.00   $ (0.08   $ (0.08
  

 

 

   

 

 

   

 

 

 

Diluted losses per common share

   $ (0.00   $ (0.08   $ (0.08
  

 

 

   

 

 

   

 

 

 

 

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CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Consolidated Statement of Cash Flows

 

     Three Months Ended
March 31, 2013
       
     Original
(unaudited)
    Restated
(unaudited)
    Effect of
Change
 

OPERATING ACTIVITIES

      

Net income (loss)

   $ 13,703      $ (819,297   $ (833,000

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation, amortization and accretion

     232,240        232,240        —     

Provision for loan losses

     100,000        100,000        —     

Net gain on sale of securities available for sale

     (70,988     (70,988     —     

Other-than-temporary impairment of securities

     —          —          —     

Loss on sale of foreclosed assets

     82,924        82,924        —     

Writedowns of foreclosed real estate

     —          —          —     

Increase in dividends payable on preferred stock

     (50,000     (50,000     —     

Net other operating activities

     1,429,967        2,262,967        833,000   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,737,846        1,737,846        —     
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Purchases of securities available for sale

     (14,671,953     (14,671,953     —     

Proceeds from sales of securities available for sale

     14,539,044        14,539,044        —     

Proceeds from maturities and paydowns of securities available for sale

     1,354,232        1,354,232        —     

Proceeds from sales of restricted equity securities

     83,200        83,200        —     

Net increase in interest-bearing deposits at other financial institutions

     (82,482     (82,482     —     

Net decrease in federal funds sold

     6,045,000        6,045,000        —     

Net increase in loans

     (1,311,300     (1,311,300     —     

Capitalized costs on foreclosed real estate

     (184,431     (184,431     —     

Proceeds from sale of foreclosed real estate

     234,076        234,076        —     

Payments for construction in process

     —          —          —     

Purchase of premises and equipment

     (66,867     (66,867     —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by investing activities

     5,938,519        5,938,519        —     
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net decrease in deposits

     (2,546,011     (2,546,011     —     

Net increase (decrease) in federal funds purchased

     —          —          —     

Proceeds from issuance of common stock

     —          —          —     

Proceeds from exercise of stock options

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (2,546,011     (2,546,011     —     
  

 

 

   

 

 

   

 

 

 

Net increase in cash and due from banks

     5,130,354        5,130,354        —     

Cash and due from banks at beginning of year

     7,807,478        7,807,478        —     
  

 

 

   

 

 

   

 

 

 

Cash and due from banks, end of period

   $ 12,937,832      $ 12,937,832        —     
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES

      

Cash paid for:

      

Interest

   $ 870,731      $ 870,731      $ —     

NONCASH TRANSACTIONS

      

Principal balances of loans transferred to foreclosed real estate

   $ 15,650      $ 15,650      $ —     

Financed sales of foreclosed real estate

   $ —        $ —        $ —     

NOTE 14. SUBSEQUENT EVENTS

As part of management’s continual evaluation of problem assets and the adequacy of the allowance for loan losses, the determination was made that a material additional provision for loan losses is required as of June 30, 2013. Management’s evaluation of four relationships, which have previously been identified as impaired, based on updated information related to the financial capabilities of the borrowers and the underlying collateral for these relationships resulted in charge-offs totaling approximately $1,400,000. Charge-offs were also taken during the second quarter related to other smaller relationships totaling approximately $300,000. Incorporation of these charge-offs into management’s evaluation of the adequacy of the allowance for loan losses as of June 30, 2013 resulted in additional provision of $2,150,000 during the quarter then ended. This additional provision will further erode the Company’s capital position, which is already considered significantly under capitalized. Management’s determinations were based upon updated information and circumstances which are not deemed to have existed in a previous reporting period. As such, reflection of these amounts will be included in the financial statements presented for the period ended June 30, 2013.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements.

FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies, and our expectations. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, general economic conditions, legislation and regulation, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of our loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, and accounting principles and guidelines. You should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on such statements. We will not publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

EXECUTIVE SUMMARY

As of March 31, 2013, we reported total assets of $299.2 million, a decrease of approximately $1.4 million, or 0.48%, from December 31, 2012. The decrease in total assets included a decrease in federal funds sold of $6 million and securities of $1.4 million. The decrease was offset by increases in cash and due from banks of $5.1 million and net loans of $1.2 million. For the three months ended March 31, 2013, we had net loss of $869.3 thousand as compared to a net loss of $812.7 thousand for the three months ended March 31, 2012.

CRITICAL ACCOUNTING POLICIES

We have established policies to govern the application of accounting principles in the preparation of our financial statements. Certain accounting policies involve assumptions and decisions by management which may have a material impact on the carrying value of certain assets and liabilities, and the results of our operations. We consider these accounting policies to be our critical accounting policies. The assumptions and decisions used by management are based on historical data and other factors which are believed to be reasonable considering the circumstances. Management believes that the allowance for loan losses and the accounting for deferred income taxes are the most critical accounting policies upon which the Company’s financial condition depends. The allowance for loan losses and the recognition of deferred taxes involve the most complex and subjective decisions and assessments that management must make.

Allowance for loan losses

Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The Company’s allowance for loan losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Loans are charged against the allowance for loan losses when management believes the collection of the principal is unlikely. The Company’s allowance for loan and lease losses is the amount considered adequate to absorb probable losses within the portfolio based on management’s evaluation of the size and current risk characteristics of the loan portfolio. Such evaluation considers prior loss experience, the risk rating distribution of the portfolios, the impact of current internal and external influences on credit loss and the levels of nonperforming loans. Specific allowances for loan and lease losses are established for large impaired loans and leases on an individual basis. The specific allowance established for these loans and leases is based on a thorough analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the loan’s estimated market value, or the estimated fair value of the underlying collateral. General allowances are

 

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established for loans that are classified as either special mention, substandard, or doubtful. These loans are assigned a risk rating, and the allocated allowance for loan losses is determined based upon the loss percentage factors that correspond to each risk rating. Loss percentage factors are based on the probable loss including qualitative factors. The qualitative factors consider credit concentrations, recent levels and trends in delinquencies and nonaccrual, and growth in the loan portfolio. The occurrence of certain events could result in changes to the loss factors. Accordingly, these loss factors are reviewed periodically and modified as necessary.

General allowances are established for loans and leases that can be grouped into pools based on similar characteristics. In this process, general allowance factors are based on an analysis of historical charge-off experience and expected losses given default derived from the Company’s internal risk rating process. These factors are developed and applied to the portfolio in terms of line of business and loan type. Adjustments are also made to the allowance for the pools after an assessment of internal and external influences on credit quality that have not yet been reflected in the historical loss or risk rating data. Unallocated allowances relate to inherent losses that are not otherwise evaluated in the first two elements. The qualitative factors associated with unallocated allowances are subjective and require a high degree of management judgment. These factors include the inherent imprecision in mathematical models and credit quality statistics, recent economic uncertainty, losses incurred from recent events, and lagging or incomplete data.

The process of reviewing the adequacy of the allowance for loan losses requires management to make numerous judgments and assumptions about current events and subjective judgments, including the likelihood of loan repayment, risk evaluation, extrapolation of historical losses of similar banks, and similar judgments and assumptions. If these assumptions prove to be incorrect, charge-offs in future periods could exceed the allowance for loan losses.

Management considers the allowance for loan losses to be adequate and sufficient to absorb probable future losses; however, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional provisions to the allowance will not be required.

Deferred income taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realization of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income (in the near-term based on current projections), and tax planning strategies. As of March 31, 2013, there were no deferred income taxes as all had been written off as of December 31, 2010 due to losses sustained and none have been recorded during 2012 and for the three months ended March 31, 2013.

FINANCIAL CONDITION

Total assets decreased during the first three months of 2013 by $1.4 million from $300.7 million to $299.2 million, or 0.48%. Securities available for sale decreased approximately $1.4 million and federal funds sold decreased $6 million. Total loans, net of unearned income increased approximately $848 thousand. There was approximately $472 thousand in loans charged off during the first three months of 2013. The loan to deposit ratio at March 31, 2013 was 78.4% compared to 77.4% at December 31, 2012.

Total deposits decreased approximately $2.5 million, or 0.9%, when comparing March 31, 2013 to December 31, 2012. This decrease is attributed to a $766 thousand increase in interest bearing demand deposits, money market accounts and time deposits offset by a decrease of $3.3 million in non-interest bearing demand deposits. Time deposits of $100,000 or more decreased by $5.2 million during the first three months of 2013 to $132.6 million, while other time deposits increased during the first three months by $5.75 million, to $80 million. Noninterest-bearing demand deposits accounted for 10.7% and 11.8% of total deposits at March 31, 2013 and December 31, 2012, respectively. Brokered certificates of deposits decreased $0.9 million to $5.3 million as of March 31, 2013.

Stockholders’ equity decreased by $1.05 million for the three months ended March 31, 2013. This decrease consisted of net loss of $869 thousand and net decreases in accumulated other comprehensive income of $177 thousand.

 

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SECURITIES AVAILABLE FOR SALE

Securities in our investment portfolio totaled $41.2 million at March 31, 2013, compared to $42.6 million at December 31, 2012. Activity in our securities portfolio during the quarter included the purchases of $14.7 million in mortgage-backed securities, which were offset by the sales and calls of $3.8 million in state, county and municipal bonds, sales of $8.9 million in mortgage-backed securities, sales of $2 million in U.S. Government sponsored enterprises, and the paydowns of $1.2 million in mortgage-backed securities. Gains on the sales of securities available for sale for the three months ended March 31, 2013 were $71 thousand. At March 31, 2013, the securities portfolio had unrealized net gains of approximately $255 thousand.

The following table shows the carrying value of the securities available for sale at March 31, 2013 and December 31, 2012.

 

     March 31,
2013
     December 31,
2012
 
     (Dollars in thousands)  

Securities available for sale:

     

U.S. Government sponsored enterprises (GSEs)

   $ —         $ 2,006   

State, county and municipals

     5,489         9,308   

Mortgage-backed securities GSE residential

     35,268         30,881   

Trust preferred securities

     365         365   

Equity securities

     50         50   
  

 

 

    

 

 

 

Total securities

   $ 41,172       $ 42,610   
  

 

 

    

 

 

 

LOANS

Total loans, net of unearned income increased approximately $848 thousand, or 0.39%, at March 31, 2013. The primary driver of this increase was the extension of additional residential real e