UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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.

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 May 14, 2013; 10,292,069; $1.00 par value common shares.

INDEX


	Page
Part I. Financial Information

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012		2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012		3

Condensed Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2013 and 2012		4

Notes to Condensed Consolidated Financial Statements		5-28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29-41

Item 3. Quantitative and Qualitative Disclosures About Market Risk		41

Item 4. Controls and Procedures		41

Part II. Other Information

Item 1. Legal Proceedings		42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. Mine Safety Disclosures		42

Item 5. Other Information		42

Item 6. Exhibits		43

Signatures		44

Certifications		45-48

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

March 31, 2013 (unaudited) 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		2,506,506			1,776,673

Total assets	$	300,063,590		$	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		(5,272,762	)		(5,236,465	)
Accumulated other comprehensive loss		(224,979	)		(48,218	)

Total stockholders’ equity		8,203,526			8,416,584

Total liabilities and stockholders’ equity	$	300,063,590		$	300,662,859

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three Months Ended March 31, 2013 and 2012 (Unaudited)


	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		1,257,834			1,505,347

Total other expenses		2,744,053			3,002,212

Income (loss) before income tax benefits		13,703			(762,657	)
Income tax benefits		—			—

Net income (loss)		13,703			(762,657	)

Preferred stock dividends		(50,000	)		(50,000	)

Net loss available available to common shareholders		(36,297	)		(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	$	(213,058	)	$	(562,814	)

Basic losses per common share	$	(0.00	)	$	(0.08	)

Diluted losses per common share	$	(0.00	)	$	(0.08	)

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of

Cash Flows For The Three Months Ended

March 31, 2013 and 2012

(Unaudited)


	Three Months Ended March 31,
	2013			2012
OPERATING ACTIVITIES
Net income (loss)	$	13,703		$	(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		1,429,967			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

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The interim consolidated financial information included for Capitol City Bancshares, Inc. (the “Company”), Capitol City Bank & Trust Company (the “Bank”) and Capitol City Home Loans (the “Mortgage Company”) herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods. 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 May 14, 2013, the date these condensed consolidated financial statements were issued, for potential recognition or disclosure in these condensed consolidated financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash, Due From Banks and Cash Flows

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

The Bank maintains certain cash deposits at the Federal Home Loan Bank which are used to secure borrowings and are, therefore, restricted. At March 31, 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.

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.

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

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:

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.

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.

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.

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 continuing to be in the “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.

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. The Company’s March 31, 2013 condensed consolidated financial statements include an other operating expense equal to the applicable insurance deductible, and an amount receivable on the insurance claim in other assets.

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.

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.

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.

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.

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.

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		—		—		—		—

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

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.

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.

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

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

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	$	(36,297	)	$	(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.

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.

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.

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.

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

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

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.

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 $300.1 million, a decrease of approximately $0.6 million, or 0.20%, 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, net loans of $1.2 million, and other assets of $0.7 million. For the three months ended March 31, 2013, we had net loss of $36 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

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 $0.6 million from $300.7 million to $300.1 million, or 0.2%. 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 $213 thousand for the three months ended March 31, 2013. This decrease consisted of net loss of $36 thousand and net decreases in accumulated other comprehensive income of $177 thousand.

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 estate loans, which increased by $1.4 million this quarter.

At March 31, 2013, the Company had loan concentrations in real estate totaling $211 million or 96% of total loans. Loans secured by the cash value of deposits or investments totaled $3.2 million or 1.4% of total loans. The remaining $5.3 million or 2.6% of total loans consisted of unsecured, vehicle, business asset and other loans.

The following table presents a summary of the loan portfolio (gross) according to type of loans.


	March 31,		December 31,
	2013		2012
	(Dollars in thousands)
Unsecured	$	644	$	823
Cash value		3,181		3,393
Residential real estate		26,014		24,604
Commercial real estate		184,993		185,352
Business assets		2,578		2,622
Vehicles		1,801		1,687
Other		293		102

Total Loans	$	219,504	$	218,583

ASSET QUALITY

At March 31, 2013, the loan portfolio was 73.2% of total assets. Management considers asset quality to be of primary importance.

The following is a category detail of our allowance percentage and reserve balance by loan type at March 31, 2013 and December 31, 2012:


	March 31, 2013					December 31, 2012
Loan Group Description	Calculated Reserves		Reserve %			Calculated Reserves		Reserve %
Unsecured	$	104,290		16.20	%	$	77,502		9.42	%
Cash Value		11,732		0.37	%		17,054		0.50	%
Residential real estate		2,278,715		8.76	%		2,328,224		9.46	%
Commercial real estate		1,951,106		1.05	%		2,259,106		1.22	%
Business assets		415,570		16.12	%		477,511		18.21	%
Vehicles		280,776		15.58	%		230,216		13.65	%
Other		—		0.00	%		—		0.00	%
Unallocated		—		0.00	%		—		0.00	%

Total Allowance for Loan Loss	$	5,042,189		2.30	%	$	5,389,613		2.48	%

Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been included in the table above do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources. These classified loans do not represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

As of December 31, 2012, the higher charge off percentage of residential real estate consisted largely of failed or struggling construction loans used to build or develop residential 1-4 family units. As a result of the decline in real estate, the related problem loans were identified and charged off as needed. As a result of the prior charge offs, the remaining residential real estate portfolio, consists of mostly owner occupied single family 1st or 2nd mortgage loans. In addition, by identifying other impaired residential loans and allocating specific reserves based on calculated impairments, the remaining portfolio of residential loans are considered to be primarily good to excellent credit quality. The current reserve percentage of residential real estate loans is an indicator of this activity due to historical losses and identified impairment write downs. The amount of the calculated allowance for loan losses for residential real estate increased by $794 thousand when comparing March 31, 2013 to December 31, 2012. This reflects the continuing decline in real estate values of outstanding residential real estate loans as management has continued to identify impairments on residential real estate loans and taking partial charge-offs on certain residential loans. As of March 31, 2013, management still considers the remaining portfolio of residential loans that are not impaired to be primarily good to excellent credit quality. Management also believes that they have identified all impaired residential real estate loans as of March 31, 2013 and have allocated specific reserves based on calculated impairments.

Updated appraisals or evaluations are generally obtained annually for impaired collateral dependent loans and ORE. If there is a concern about the appraised value, the procedure is to contact the appraisal management company and discuss the concern. Next, the appraisal management company will perform an internal review of the appraisal and make their conclusions. The appraiser may be contacted by the appraisal management company and an adjustment or a new appraisal might be obtained. Only on a few occasions, adjustments were made to outdated appraisals. The individuals making the adjustment factored in the current economic factors, market conditions, recent sales and current trends on similar types of properties to determine a percentage for the adjustment. Property evaluations were used in lieu on appraisals as long as it is within USPAP guidelines. Appraisals are obtained for all collateral dependent loans at the initial underwriting. On annual reviews, updated appraisals are generally obtained. However, we used tax assessments, broker evaluations or present value of discounted cash flows to obtain a value until a new appraisal is obtained.

Information regarding certain loans and allowance for loan loss data for the three month period ended March 31, 2013 and 2012 is as follows:


	Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Average amount of loans outstanding	$	221,125		$	221,680

Balance of allowance for loan losses at beginning of period	$	5,390		$	5,155

Loans charged off
Commercial		(203	)		(11	)
Real estate		(158	)		(859	)
Installment		(111	)		(15	)

		(472	)		(885	)

Loans recovered
Commercial		11			9
Real estate		13			86
Installment		—			2

		24			97

Net charge-offs		(448	)		(788	)

Additions to allowance charged to operating expense during period		100			745

Balance of allowance for loan losses at end of period	$	5,042		$	5,112

Ratio of net loans charged-off during the period to average loans outstanding		0.20	%		0.36	%

As of March 31, 2013, the Company had approximately $48.7 million in loans specifically evaluated for impairment with approximately $3.1 million in associated specific reserves. As of December 31, 2012, the Company had $48.5 million in loans specifically evaluated for impairment with approximately $3.1 million in associated specific reserves. Impaired loans represented 22.20% and 22.21% of the portfolio as of March 31, 2013 and December 31, 2012, respectively. Nonaccrual loans are by definition considered impaired loans and as such the impaired loans included $27.6 million and $27.9 million of nonaccrual loans as of March 31, 2013 and December 31, 2012, respectively.

We have noted an overall increase in the amount of loans evaluated for impairment since December 31, 2012. The $172 thousand increase in impaired loans from December 31, 2012 to March 31, 2013 was due to an increase in impaired business loans of $164 thousand and an increase in impaired commercial real estate loans of $118 thousand, offset partially by a decline in impaired residential real estate loans of $67 thousand. The decline in the amount of impaired residential real estate loans is attributable to amounts charged off during the quarter. The changes are the result of continued declines in real estate valuation and management’s continued monitoring and identification of impaired loans. The overall level of impaired loans approximates the levels as of December 31, 2012 and 2011, and impaired loans have declined $1.7 million since December 31, 2010. The rate of loans migrating from performing status to non performing status appears to have decreased.

The remaining portfolio of loans not considered impaired as of March 31, 2013 was $170.8 million, and the allowance for loan losses associated with these loans was $1.9 million or 1.1% of the unimpaired principal balance. As of December 31, 2012, loans not considered impaired were $170 million and the associated allowance was $2.3 million or 1.3% of unimpaired principal balance. Management has determined that the allowance for loan losses in relation to unimpaired loans is reflective of the probable credit losses inherent in this portfolio based on its evaluation of the collectability of loans in light of historical experience, nature and volume of the unimpaired portfolio, overall portfolio quality, underlying collateral values and prevailing economic conditions. Overall, the Company charged off $3.1 million in 2011, $1.7 million in 2012, and $472 thousand as of March 31, 2013. As the primary source of our charge-offs relates to real estate valuations on impaired loans, real estate values are noted as still declining but at a much slower pace. As of March 31, 2013, $211 million of our $219.5 million loan portfolio were either residential or commercial real estate loans, therefore our specific reserves on impaired loans are highly subject to changes in the underlying value of the collateral. We believe our allowance for loan losses as a percentage of loans is sufficient to cover probable losses.

NONPERFORMING ASSETS

The total amount of nonperforming assets, which includes nonaccruing loans, other real estate owned, repossessed collateral, and loans for which payments are more than 90 days past due was $47.9 million at March 31, 2013, representing a decrease of $328 thousand (0.7%) from December 31, 2012. This decrease is attributable to a decrease of $307 thousand in nonaccruing loans, an increase of $95 thousand in past dues over 90 days still accruing, and a decrease of $117 thousand in foreclosed real estate. Total nonperforming assets were 21.8% of total loans at March 31, 2013, compared to 22.1% at December 31, 2012. Nonperforming assets represented 15.9% of total assets at March 31, 2013, compared to 16.0% of total assets at December 31, 2012. Nonaccrual loans represented 12.6% of total loans outstanding at March 31, 2013, compared to 12.83% of total loans outstanding at December 31, 2012. There were no related party loans which were considered to be nonperforming at March 31, 2013.

The following summarizes nonperforming assets at March 31, 2013 and December 31, 2012:


	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Total nonaccruing loans	$	27,620	$	27,927
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		862		767
Other real estate owned		19,370		19,487
Repossessed assets		—		—

Total nonperforming assets	$	47,852	$	48,181

It is our policy to discontinue the accrual of interest income when, in the opinion of management, collection of such interest becomes doubtful. This status is accorded such interest when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected and (2) the principal or interest is more than ninety days past due, unless the loan is both well-secured and in the process of collection. Accrual of interest on such loans is resumed when, in management’s judgment, the collection of interest and principal becomes probable.

Due to collateral values of the underlying collateral and losses already recognized, we do not anticipate significant additional losses related to identified impaired loans. Management believes the allowance for loan loss at March 31, 2013 is adequate to absorb any foreseeable losses in the loan portfolio.

DEPOSITS

Average deposits increased approximately $2.1 million when comparing the three months ended March 31, 2013 to the same period in 2012. This increase is mostly attributed to the increase in the average balance on time deposits. Average time deposits increased $2.2 million to $213.7 million for the three months ended March 31, 2013, compared to $211.5 million for the three months ended March 31, 2012. The increase in average time deposits is attributed to our efforts to attract and retain this source of funding.

The following table sets forth the average amount of deposits and average rate paid on such deposits for the three months ended March 31, 2013 and 2012.


	For the Three Months Ended March 31,
	2013					2012
	Average Balance		Yields / Rates			Average Balance		Yields / Rates
	(Dollars in thousands)
Non-interest bearing demand	$	31,293		0.00	%	$	30,217		0.00	%
Interest bearing demand and savings deposits		35,686		0.35	%		36,887		0.71	%
Time deposits		213,704		1.49	%		211,502		2.07	%

Total	$	280,683		1.33	%	$	278,606		1.87	%

Time deposits greater than $100,000 totaled $132.6 million at March 31, 2013, compared to $137.9 million at December 31, 2012. Our overall change in time deposits between December 31, 2012 and March 31, 2013 was minimal; however, we did experience a shift in the size of our time deposits. This shift was primarily due to the continued effect of the increase in deposit insurance limits for time deposits and an overall decrease in brokered deposits. As brokered deposits (other deposits) mature, they are replaced with time deposits with lower interest rates resulting in (1) little or no effect on liquidity and (2) increased income due to significantly lower interest expense.

REGULATORY CAPITAL REQUIREMENTS

At March 31, 2013, our capital to asset ratios were considered under capitalized based on guidelines established by regulatory authorities. At March 31, 2013, stockholders’ equity was $8.2 million versus $8.4 million at December 31, 2012. This decrease is attributed to a net loss of $36 thousand and net decreases in accumulated other comprehensive income of $177 thousand.

The primary sources of funds available to the holding company are the payment of dividends by our subsidiaries. Banking regulations limit the amount of the dividends that may be paid by our bank subsidiary without prior approval of the Bank’s regulatory agency. Currently, no dividends can be paid by the Bank to the holding company without regulatory approval. The payment of dividends is decided by the Board of Directors based on factors available to them at the time of declaration.

Banking regulations require us to maintain minimum capital levels in relation to assets. At March 31, 2013, the Bank’s capital ratios were considered under capitalized and the consolidated capital ratios were considered significantly under capitalized based on regulatory minimum capital requirements. The minimum capital requirements and the actual capital ratios for the Company and Bank at March 31, 2013 and December 31, 2012 are as follows:


						Minimum					Minimum Required
						Required for					For Compliance
						Capital Adequacy					With Consent
	Actual					Purposes					Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of March 31, 2013
Total Capital to Risk Weighted
Assets:
Consolidated	$	14,484		5.61	%	$	20,643		8.00	%		N/A		N/A
Bank	$	15,878		6.16	%	$	20,625		8.00	%	$	25,782		10.00	%
Tier I Capital to Risk Weighted
Assets:
Consolidated	$	11,239		4.36	%	$	10,321		4.00	%		N/A		N/A
Bank	$	12,633		4.90	%	$	10,313		4.00	%		N/A		N/A
Tier I Capital to Average Assets:
Consolidated	$	11,239		3.71	%	$	12,126		4.00	%		N/A		N/A
Bank	$	12,633		4.17	%	$	12,118		4.00	%	$	24,235		8.00	%


						Minimum					Minimum Required
						Required for					For Compliance
						Capital Adequacy					With Consent
	Actual					Purposes					Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2012:
Total Capital to Risk Weighted
Assets:
Consolidated	$	14,435		5.55	%	$	20,818		8.00	%		N/A		N/A
Bank	$	15,758		6.06	%	$	20,800		8.00	%	$	26,000		10.00	%
Tier I Capital to Risk Weighted
Assets:
Consolidated	$	11,159		4.29	%	$	10,409		4.00	%		N/A		N/A
Bank	$	12,482		4.80	%	$	10,400		4.00	%		N/A		N/A
Tier I Capital to Average Assets:
Consolidated	$	11,159		3.79	%	$	11,788		4.00	%		N/A		N/A
Bank	$	12,482		4.24	%	$	11,779		4.00	%	$	23,558		8.00	%

We are not aware of any other recommendations by the regulatory authorities, events or trends, which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.

RESULTS OF OPERATIONS

General

Our profitability is determined by our ability to effectively manage interest income and expense, to minimize loan and securities losses, to generate noninterest income, and to control noninterest expense. Because interest rates are determined by market forces and economic conditions beyond our control, the ability to generate net interest income is dependent upon our ability to obtain an adequate spread between the rate earned on interest-bearing assets and the rate paid on interest-bearing liabilities.

Net Interest Income

Our primary source of income is interest income from loans and investment securities. Net interest income decreased by $205 thousand for the three months ended March 31, 2013 with $2.2 million compared to $2.4 million for the same period in 2012. The decrease in net interest income for the three months ended March 31, 2013 is primarily attributable to the decrease in net yield on average interest-earning assets. The rate paid on interest-bearing liabilities decreased from 1.9% to 1.4%, or 50 basis points, when comparing the three months ended March 31, 2012 to March 31, 2013. The decrease in the rate paid on interest-bearing liabilities is due primarily to the repricing of deposits as they mature to the current lower rates. Also, brokered deposits typically demand higher rates which have directly impacted our net interest margin. Brokered deposits are a secondary source of funding the Company has used in the past which helped to fund loan demand in prior years. Management has worked to reduce dependency on this funding source during 2013 and 2012.

The yield on interest-earning assets decreased to 5.2% from 5.9% when comparing the three months March 31, 2013 to the three months ended March 31, 2012. The yield on average loans decreased 70 basis points to 6.0% for the three months ended March 31, 2013, as compared to 6.7% for the same period in 2012. The yield on average securities decreased 50 basis points to 1.9% for the three months ended March 31, 2013 as compared to 2.4% for the three months ended March 31, 2012. Average loans represented 81.3% and 81.3% of total interest-earning assets for the three months ended March 31, 2013 and 2012, respectively.

The key performance measure for net interest income is the net interest margin or net yield, which is net interest income divided by total average interest-earning assets. Interest-earning assets consist of interest-bearing deposits at other financial institutions, loans, securities, and federal funds sold. Interest-bearing liabilities consist of interest-bearing deposits, note payable, federal funds purchased, Federal Home Loan Bank advances, securities sold under repurchase agreements, and trust preferred securities.

The net interest margin was 3.7% for the three months ended March 31, 2013, as compared to 3.9% for the three months ended March 31, 2012. The yield on interest-earning assets and rates paid on interest-bearing liabilities is impacted by the 400 basis point decrease in the Prime Rate since December 31, 2007, and the fact that Prime has not changed since December 2008.

Interest Income and Interest Expense

The following table sets forth the amount of our interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets for the three months ended March 31, 2013 and 2012.


	For the Three Months Ended March 31,
	2013							2012
	Average Balance			Income / Expense		Yields / Rates		Average Balance			Income / Expense		Yields / Rates (5)
	(Dollars in thousands)
Earning assets:
Loans, net of unearned income (1) (2)	$	191,355		$	2,831		59.5	$	198,345		$	3,302		6.70	%
Securities (4)		42,120			195		1.86		42,699			259		2.44	%
Interest-bearing deposits in other financial institutions		841			—		0.00		638			—		0.00	%
Federal funds sold		1,125			1		0.36		2,316			1		0.17	%

Total interest-earning assets		235,441			3,027		5.17		243,998			3,562		5.87	%

Non-interest earning assets:
Cash and due from banks		13,397							7,526
Unrealized gains (losses) on securities available for sale		(92	)						149
Allowance for loan losses		(5,562	)						(4,914	)
Other assets		59,750							52,517

Total Assets	$	302,934						$	299,276

Interest-bearing liabilities
Interest bearing demand and savings deposits	$	35,686			31		0.35	$	36,887			65		0.71	%
Time deposits		213,704			794		1.49		211,502			1,088		2.07	%

Total deposits		249,390			825		1.33		248,389			1,153		1.87	%
Other short-term borrowings		5,775			9		0.63		5,879			9		0.62	%
Long-term debt		3,403			34		4.02		3,403			36		4.25	%

Total interest-bearing liabilities		258,568			868		1.35		257,671			1,198		1.87	%

Non-interest bearing demand		31,293							30,217
Other liabilities		3,738							2,742
Stockholders’ equity (3)		9,335							8,646

Total Liabilities and Stockholders’ Equity	$	302,934						$	299,276

Net interest income/net interest spread				$	2,159		3.81				$	2,364		4.00	%

Net yield on earning assets							3.67							3.90	%

(1)	Average loans exclude average nonaccrual loans of $29.8 million and $23.0 million for the three months ended March 31, 2013 and 2012, respectively.

(2)	Average loans are net of deferred loan fees and unearned interest. Interest on loans includes approximately $161 thousand and $264 thousand of loan fee income for the three months ended March 31, 2013 and 2012.

(3)	Includes average unrealized losses on securities available for sale, net of tax.

(4)	Yields on the securities, which includes nontaxable securities, are not presented on a tax-equivalent basis.

(5)	Annualized.

Rate and Volume Analysis

The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the year indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) change in volume (change in volume multiplied by old rate); (2) change in rate (change in rate multiplied by old volume); and (3) a combination of change in rate and change in volume. The change in interest income and interest expense attributable to both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. The following table represents information for the three months ended March 31, 2013 compared to March 31, 2012.


	Three Months Ended March 31, 2013 Compared to 2012 Changes Due To:
	Rate			Volume			Increase (Decrease)
	(Dollars in thousands)
Increase (decrease) in:
Interest on loans		(47	)		(425	)		(472	)
Interest on securities		(12	)		(51	)		(63	)
Interest on interest-bearing deposits in other financial institutions		—			—			—
Interest on federal funds sold		—			—			—

Total interest income		(59	)		(476	)		(535	)

Interest on interest-bearing demand and savings deposits		(11	)		(23	)		(34	)
Interest on time deposits		(64	)		(230	)		(294	)
Interest on short-term borrowings		—			—			—
Interest on long-term debt		—			(2	)		(2	)

Total interest expense		(75	)		(255	)		(330	)

Net interest income		16			(221	)		(205	)

Provision for Loan Losses

The provision for loan losses is based on management’s evaluation of the economic environment, the history of charged off loans and recoveries, size and composition of the loan portfolio, nonperforming and past due loans, and other aspects of the loan portfolio. We review the allowance for loan loss on a quarterly basis and make provisions as necessary. Additional discussions on loan quality and the allowance for loan losses are included in the Asset Quality section of this report, Note 2 and Note 6 to the Condensed Consolidated Financial Statements, and above in the Critical Accounting Policies section of this report.

A provision of $100 thousand was made for the three months ended March 31, 2013 as compared to a provision of $745 thousand made for the three months ended March 31, 2012. The allowance for loan loss as a percentage of total loans was 2.30%, 2.48% and 2.39% at March 31, 2013, December 31, 2012 and March 31, 2012, respectively. Net charge-offs as a percentage of average outstanding loans were 0.20% for the three months ended March 31, 2013 and 0.36% for the three months ended March 31, 2012. Net loan charge-offs decreased $340 thousand to $448 thousand for the three months ended March 31, 2013 when compared to $788 thousand for the three months ended March 31, 2012.

Other Income

Other income increased by approximately $78 thousand for the three months ended March 31, 2013 with $698 thousand compared to $620 thousand for the same period in 2012. The most significant component of other income is service charges on deposit accounts which accounts for 51.6% and 55.2% of total other income for the three months ended March 31, 2013 and 2012, respectively. Service charges on deposit accounts include monthly service charges, non-sufficient funds (“NSF”) charges, and other miscellaneous maintenance fees. The amount of service charges fluctuates with the volume of transaction accounts and the volume of NSF activity. The increase for the three month period is due primarily to the increase of $42 thousand in rental income and $67 thousand in other operating income when compared to the same period in 2012. The increase in other income for the three month period ended March 31, 2013 was offset by a decrease in gains on sales of securities available for sale of approximately $45 thousand when comparing to the same period in 2012.

Other Expenses

Other expenses decreased by $258 thousand for the three months ended March 31, 2013 with $2.7 million compared to $3.0 million for the same period in 2012. The decrease for the three month period consists of a loss on sales of foreclosed assets of $83 thousand, other operating expenses decrease of $248 thousand and increase in occupancy and equipment expenses of $24 thousand. The decrease in other operating expenses for the three months ended March 31, 2013 as compared to the same period in 2012 also includes a decrease in other real estate expenses and writedowns of $113 thousand. Since March 31, 2012, foreclosed real estate has decreased approximately $117 thousand. Most of the properties in foreclosed real estate were foreclosed prior to March 31, 2012, and the Company has experienced few sales of these foreclosed properties. At March 31, 2013, the number of full-time equivalent employees was 82 compared to 80 at March 31, 2012.

We continue to be a high volume, consumer oriented bank. This strategy continues to be beneficial to us in many ways; however, with high volume generally comes increased expenses, costs and operating losses. Management closely monitors these activities and the related costs.

The mortgage company previously originated loans which were table funded through independent investors. During third quarter 2008, the mortgage company became dormant due to declines in the real estate market. Operations since this time consist of operating expenses and taxes only. The net loss for the three months ended March 31, 2013 was $662, compared to the three months ended March 31, 2012 with a net loss of $892.

Income Tax Benefits

As of March 31, 2013, the Company has no more income taxes that it could recover from prior periods. Because of this tax situation, and the uncertainty of the realizability of deferred income taxes, no tax benefit has been recorded for the three months ended March 31, 2013 and 2012.

LIQUIDITY

Liquidity management involves the matching of the cash flow requirements of customer withdrawals of funds and the funding of loan originations, and the ability of our subsidiary bank to meet those requirements. Management monitors and maintains appropriate levels of liquidity so that maturities of assets and deposit growth are such that adequate funds are provided to meet estimated customer withdrawals and loan requests. We seek to meet liquidity requirements primarily through management of federal funds sold, securities available for sale, monthly amortizing loans, and the repayment of maturing single payment loans. We also maintain relationships with correspondent banks which can provide funds on short notice.

At March 31, 2013, the Bank’s liquidity ratio of 14.89% was considered satisfactory in relation to regulatory guidelines, although it was below internal targets. During the second quarter of 2010 the Company’s credit availability with the FHLB was rescinded. On March 23, 2011, the Company was notified that its credit availability had been reinstated for a maximum of 4% of total assets of the Bank. As of March 31, 2013, the Company had a total credit availability with FHLB of $6.5 million with $5.5 million in outstanding advances. It also had an available repurchase line with a correspondent bank of $10 million and borrowing capacity through the Federal Reserve Discount Window of $2.2 million.

OFF BALANCE SHEET ARRANGEMENTS

Our financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of business. These off-balance sheet financial instruments include commitments to extend credit and standby letters of credit. Such financial instruments are included in the financial statements when funds are distributed or the instruments become payable. Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. Although these amounts do not necessarily represent future cash requirements, a summary of our commitments as of March 31, 2013 are as follows:


	March 31, 2013
	(Dollars in thousands)
Commitments to extend credit	$	1,829
Financial standby letters of credit		847
Other standby letters of credit		100

	$	2,776

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable as the registrant is a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and the Principal Financial and Accounting Officer, of the design and operation of the Company’s disclosure controls and procedures. Based upon this evaluation, our Chief Executive Officer and the Principal Financial and Accounting Officer concluded that the Company’s disclosure controls and procedures are effective.

During the quarter ended March 31, 2013, the Company responded to identified material weaknesses and implemented the internal control changes which were presented in Item 9A of our Form 10-K, which was filed on April 17, 2013.

There have been no other changes in the Company’s internal control over financial reporting in the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II—Other Information

ITEM 1. LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings previously reported in the Company’s Annual Report on Form 10-K (filed with the Commission on April 17, 2013) nor have any new reportable legal proceedings involving the Company been instituted.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

2.1

Plan of Reorganization and Agreement of Merger, dated April 14, 1998, by and between Capitol City Bancshares, Inc., Capitol City Bank and Trust, and Capitol City Interim, Inc., which Agreement is included as Appendix A to the Proxy Statement included in this Registration Statement filed by Registrant on Form S-4 on September 30, 1998, Registration No. 333-64789 (incorporated by reference as Exhibit 2.1 to the Registrant’s 10-KSB filed on March 31, 1999).

3.1

Articles of Incorporation of Registrant (incorporated by reference as Exhibit 3.1 to the Registrant’s 10-KSB filed on March 31, 1999).

3.1(A)

Amendment to the Articles of Incorporation of Registrant (incorporated by reference as Exhibit 3.1(A) to the Registrant’s Annual Report on Form 10-KSB filed on March 31, 2005).

3.1(B)

Articles of Amendment to the Articles of Incorporation of the Registrant filed February 9, 2007 (incorporated by reference as Exhibit 3.1(B) to the Registrant’s Current Report on Form 8-K filed on February 15, 2007).

3.1(C)

Articles of Amendment to the Articles of Incorporation of the Registrant filed February 12, 2007 (incorporated by reference as Exhibit 3.1(C) to the Registrant’s Current Report on Form 8-K filed on February 15, 2007).

3.1(D)

Articles of Amendment to the Articles of Incorporation of the Registrant filed February 15, 2007 (incorporated by reference as Exhibit 3.1(D) to the Registrant’s Current Report on Form 8-K filed on February 15, 2007).

3.1(E)

Articles of Amendment to the Articles of Incorporation of the Registrant filed October 14, 2009 (incorporated by reference as Exhibit 3.1(E) to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009).

3.1(F)

Articles of Amendment to the Articles of Incorporation of the Registrant filed July 13, 2010 (incorporated by reference as Exhibit 3.9 to the Registrant’s Current Report on Form 8-K filed on July 16, 2010).

3.1(G)

Articles of Amendment to the Articles of Incorporation of the Registrant filed April 25, 2012 (incorporated by reference as Appendix B to the Registrant’s Definitive Proxy Statement filed with the Commission on April 30, 2012).

3.2

Bylaws of Registrant (incorporated by reference as Exhibit 3.2 to the Registrant’s 10-KSB filed on March 31, 1999).

3.3

Articles of Amendment to the Articles of Incorporation of the Registrant filed July 13, 2010 (incorporated by reference as Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on July 16, 2010).

31.1

Section 302 Certification of Principal Executive Officer

31.2

Section 302 Certification of Principal Financial and Accounting Officer

32.1

Section 906 Certification of Principal Executive Officer

32.2

Section 906 Certification of Principal Financial and Accounting Officer

101

Interactive Date File

SIGNATURES

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


				CAPITOL CITY BANCSHARES, INC.

Date: May 14, 2013				/s/ George G. Andrews
				George G. Andrews
				CEO, President and Director

Date: May 14, 2013				/s/ Tatina Brooks
				Tatina Brooks
				Senior Vice President of Accounting and Financial Reporting (Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

CAPITOL CITY BANCSHARES INC 10-Q