CAPITOL CITY BANCSHARES INC - FORM 10-Q

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EX-31.1 - CERTIFICATION - CAPITOL CITY BANCSHARES INC	dex311.htm
EX-31.2 - CERTIFICATION - CAPITOL CITY BANCSHARES INC	dex312.htm
EX-32.1 - SECTION 906 CERTIFICATION - CAPITOL CITY BANCSHARES INC	dex321.htm
EX-32.2 - SECTION 906 CERTIFICATION - CAPITOL CITY BANCSHARES INC	dex322.htm

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 June 30, 2011

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

For the transition period from to

Commission File Number: 000-25227

CAPITOL CITY BANCSHARES, INC.

(Exact name of issuer as specified in its charter)

Georgia

58-2452995

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

562 Lee Street, S.W., Atlanta, Georgia 30311

(Address of principal executive office)

(404) 752-6067

(Issuer’s telephone number)

N/A

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

Indicated by checkmark 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 June 30, 2011; 9,821,848; $1.00 par value

INDEX


	Page

Part I. Financial Information

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010		2

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2011 and 2010		3

Condensed Consolidated Statements of Cash Flows For The Six Months Ended June 30, 2011 and 2010		4

Notes to Condensed Consolidated Financial Statements		5 - 21

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22 - 31

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

Part II. Other Information

Item 1. Legal Proceedings		32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32

Item 3. Defaults Upon Senior Securities		32

Item 4. (Removed and Reserved)		32

Item 5. Other Information		33

Item 6. Exhibits		33

Signatures		34

Certifications

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

June 30, 2011 (unaudited) and December 31, 2010


	June 30, 2011 (unaudited)			December 31, 2010
Assets
Cash and due from banks	$	7,333,908		$	5,345,394
Interest-bearing deposits at other financial institutions		577,192			454,968
Federal funds sold		4,130,000			730,000
Securities available for sale		40,896,523			37,012,468
Restricted equity securities, at cost		910,300			1,025,300

Loans, net of unearned income		230,425,845			235,545,772
Less allowance for loan losses		5,259,240			5,223,764

Loans, net		225,166,605			230,322,008

Premises and equipment, net		9,299,197			9,501,807
Foreclosed real estate		12,627,111			8,917,239
Other assets		1,960,773			1,999,543

Total assets	$	302,901,609		$	295,308,727

Liabilities and Stockholders’ Equity

Liabilities:
Deposits:
Noninterest-bearing	$	26,724,226		$	24,624,361
Interest-bearing		255,084,032			250,657,934

Total deposits		281,808,258			275,282,295
Note payable		275,250			275,250
Federal Home Loan Bank advances		5,500,000			5,500,000
Company guaranteed trust preferred securities		3,403,000			3,403,000
Other liabilities		1,591,550			1,606,277

Total liabilities	$	292,578,058		$	286,066,822

Stockholders’ equity
Preferred stock, par value $100, 5,000,000 shares authorized
Series A, cumulative, non voting, 10,000 shares issued and outstanding		1,000,000			1,000,000
Series B, cumulative, non voting, 6,078 shares issued and outstanding		607,800			607,800
Common stock, par value $1.00; 80,000,000 shares authorized; 9,821,848 and 9,777,656 shares issued and outstanding, respectively		9,821,848			9,777,656
Surplus		141,618			75,330
Stock sale receivable		(1930	)		—
Retained deficit		(1,591,430	)		(1,785,317	)
Accumulated other comprehensive income (loss)		345,645			(433,564	)

Total stockholders’ equity		10,323,551			9,241,905

Total liabilities and stockholders’ equity	$	302,901,609		$	295,308,727

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 Income (Loss)

Three and six months ended June 30, 2011 and 2010 (unaudited)


	Three Months Ended					Six Months Ended
	June 30, 2011		June 30, 2010			June 30, 2011		June 30, 2010
Interest income:
Loans, including fees	$	3,489,120	$	3,312,875		$	6,941,887	$	7,268,579
Deposits in banks		79		23			694		26
Securities		258,059		311,814			477,124		630,531
Federal funds sold		998		315			2,652		361

Total interest income		3,748,256		3,625,027			7,422,357		7,899,497

Interest expense:
Deposits		1,415,594		1,856,432			2,871,910		3,848,743
Other borrowings		43,579		64,984			87,751		159,961

Total interest expense		1,459,173		1,921,416			2,959,661		4,008,704

Net interest income		2,289,083		1,703,611			4,462,696		3,890,793
Provision for loan losses		150,000		220,000			355,000		220,000

Net interest income after provision for loan losses		2,139,083		1,483,611			4,107,696		3,670,793

Other income:
Service charges on deposit accounts		300,949		361,150			641,689		702,779
Other fees and commissions		24,135		19,349			47,488		38,586
Gain on sales of available for sale securities, net		—		184,297			—		184,297
Gain on sales of foreclosed real estate		—		40,885			—		56,204
Other operating income		128,982		106,981			247,836		213,754

Total other income		454,066		712,662			937,013		1,195,620

Other expenses:
Salaries and employee benefits		903,443		851,974			1,817,419		1,823,858
Occupancy and equipment expenses, net		276,531		299,132			598,650		589,670
Other operating expenses		1,254,590		1,550,528			2,384,753		2,837,503

Total other expenses		2,434,564		2,701,634			4,800,822		5,251,031

Income (Loss) before income tax benefits		158,585		(505,361	)		243,887		(384,618	)

Income tax benefits		—		—			—		—

Net income (loss)		158,585		(505,361	)		243,887		(384,618	)

Preferred stock dividends		—		50,000			50,000		50,000

Net income (loss) available to common shareholders	$	158,585	$	(555,361	)	$	193,887	$	(434,618	)

Other comprehensive income (loss):
Unrealized gains on securities available for sale arising during period, net of tax		724,291		21,134			779,209		123,661
Reclassification adjustment for realized gains on securities available for sale arising during the period, net of tax		—		(121,636	)		—		(121,636	)

Comprehensive income (loss)	$	882,876	$	(655,863	)	$	973,096	$	(432,593	)

Basic earnings (losses) per common share	$	0.02	$	(.06	)	$	0.02	$	(0.04	)

Diluted earnings (losses) per common share	$	0.02	$	(.06	)	$	0.02	$	(0.04	)

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

Six Months Ended June 30, 2011 and 2010 (Unaudited)


	June 30, 2011			June 30, 2010
OPERATING ACTIVITIES
Net income (loss)	$	243,887		$	(384,618	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		380,655			701,683
Provision for loan losses		355,000			220,000
Net gain on sale of securities available for sale		—			(184,297	)
Other-than-temporary impairment of securities		—			97,500
Gain on sale of foreclosed assets		—			(56,204	)
Writedowns of foreclosed real estate		—			70,600
Decrease in income tax receivable		—			3,157,285
Net other operating activities		(25,957	)		(155,886	)

Net cash provided by operating activities		953,585			3,466,063

INVESTING ACTIVITIES
Purchases of securities available for sale		(5,147,408	)		(16,927,508	)
Proceeds from sales of securities available for sale		—			13,597,396
Proceeds from maturities of securities available for sale		1,864,517			7,265,581
Proceeds from sales of restricted equity securities		115,000			—
Net increase in interest-bearing deposits		(122,224	)		(113,670	)
Net increase in federal funds sold		(3,400,000	)		(1,420,000	)
Net (increase) decrease in loans		1,182,639			(2,118,619	)
Capitalized costs on foreclosed real estate		(92,108	)		(3,858	)
Proceeds from sale of foreclosed real estate		—			42,710
Purchase of premises and equipment		—			(25,277	)

Net cash provided by (used in) investing activities		(5,599,584	)		296,755

FINANCING ACTIVITIES
Net increase in deposits		6,525,963			3,494,433
Net decrease in securities sold under repurchase agreements		—			(2,939,604	)
Net decrease in federal funds purchased		—			(4,140,000	)
Proceeds from issuance of common stock from secondary stock offering		108,550			134,650

Net cash provided by (used in) financing activities		6,634,513			(3,450,521	)

Net increase in cash and due from banks		1,988,514			312,297

Cash and due from banks, beginning of period		5,345,394			7,647,982

Cash and due from banks, end of period	$	7,333,908		$	7,960,279

SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest	$	3,051,278		$	4,516,458

NONCASH TRANSACTIONS
Principal balances of loans transferred to foreclosed real estate	$	3,617,764		$	1,637,339
Financed sales of foreclosed real estate	$	—		$	1,505,991

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. 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, 2010.

The results of operations for the three and six month periods ended June 30, 2011 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 June 30, 2011, but prior to August 15, 2011, 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, deposits and securities sold under repurchase agreements 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 June 30, 2011 and December 31, 2010, those restricted balances were $2,315,500.

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 collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

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 collectibility of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower’s ability to pay, estimated value of underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

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 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.

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.

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.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 financial statements and determined the Bank had no uncertain tax positions at June 30, 2011. Further, all years subsequent to 2007 remain subject to evaluation.

NOTE 3. REGULATORY MATTERS 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, 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.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

iii.

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

iv.

The Bank is currently below the requisite minimum capital ratios of Tier 1 capital at 8% of total assets and Total risk based capital at 10% of total risked based assets. The Bank continues to actively pursue those institutional investors that have made conditional commitments to us. Additionally, the Bank will continue to solicit on an ongoing basis investment from individuals. As these funds are infused our capital ratios will improved to the required levels. In the interim some progress is being made through our focus on the profitable operation of the bank.

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

vi.

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

vii.

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

viii.

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

ix.

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

The bank’s budget plan is being 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 and 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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

engaged external advisors and has pursued various capital enhancing transactions and strategies throughout the first six months of 2011. The continuing level of problem loans as of the quarter ended June 30, 2011 and capital levels continuing to be in the “under capitalized” category of the regulatory framework for prompt corrective action as of June 30, 2011 continue to create substantial doubt about the Company’s ability to continue as a going concern. There can be no assurance that any capital raising activities or other measures will allow the Bank to meet the capital levels required in the Order. Non-compliance with the capital requirements of the Order and other provisions of the Order may cause the Bank to be subject to further enforcement actions by the FDIC or the Department.

NOTE 4. 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

June 30, 2011

U.S. Government sponsored enterprises (GSEs)

518,717

2,659

—

521,376

State, county and municipals

2,351,884

20,590

(13,914

)

2,358,560

Mortgage-backed securities GSE residential

37,002,402

391,630

(55,320

)

37,338,712

Trust preferred securities

627,875

—

627,875

Total debt securities

40,500,878

414,879

(69,234

)

40,846,523

Equity securities

50,000

—

50,000

Total securities

40,550,878

414,879

(69,234

)

40,896,523


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2010
U.S. Government sponsored enterprises (GSEs)	$	582,112	$	1,579	$	—		$	583,691
State, county and municipals		2,353,058		—		(145,326	)		2,207,732
Mortgage-backed securities GSE residential		33,832,986		88,554		(378,370	)		33,543,170
Trust preferred securities		627,875		—		—			627,875

Total debt securities		37,396,031		90,133		(523,696	)		36,962,468
Equity securities		50,000		—		—			50,000

Total securities	$	37,446,031	$	90,133	$	(523,696	)	$	37,012,468

The amortized cost and fair value of debt securities as of June 30, 2011 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.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Amortized Cost		Fair Value
Due from one to five years	$	524,875	$	524,875
Due from five to ten years		1,367,524		1,356,740
Due after ten years		1,606,077		1,626,196
Mortgage-backed securities		37,002,402		37,338,712

	$	40,500,878	$	40,846,523

Securities with a carrying value of $16,383,587 and $18,790,667 at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

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 June 30, 2011 and December 31, 2010.


	Less Than Twelve Months					Twelve Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Unrealized Losses
June 30, 2011
State, county and municipals	$	540,776	$	(13,914	)	$	—	$	—	$	(13,914	)
Mortgage-backed securities GSE residential		8,277,861		(55,320	)		—		—		(55,320	)

Total securities	$	8,818,637	$	(69,234	)	$	—	$	—	$	(69,234	)

December 31, 2010
State, county and municipals	$	2,207,732	$	(145,326	)	$	—	$	—	$	(145,326	)
Mortgage-backed securities GSE residential		24,689,777		(378,370	)		—		—		(378,370	)

Total securities	$	26,897,509	$	(523,696	)	$	—	$	—	$	(523,696	)

State, county and municipal securities. There were unrealized losses on two state and municipal securities resulting from temporary changes in the interest rate market. Because the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost bases, which may be maturity, the Company does not consider the investment to be other-than-temporarily impaired at June 30, 2011.

GSE residential mortgage-backed securities. The unrealized losses on the Company’s investment in five GSE mortgage-backed securities were caused by interest rate increases. The Company purchased those investments at a discount relative to their face amount, and the contractual cash flows of those investments are guaranteed by an agency of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost bases of the Company’s investments. Because the decline in market value is attributable to changes in interest rates and not credit quality, and 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 their amortized cost bases, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2011.

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 its investment in a trust preferred security. As of December 31, 2009, the value of the 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 declines in its underlying collateral. The security has a new cost basis of approximately $524,875.

NOTE 5. LOANS

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 June 30, 2011 were 0.3% of the total loan portfolio.

Cash Value – These are loans fully secured by cash or cash equivalents. Cash value loans are subject to the lending policies and procedures described in Note 2. Total cash value loans as of June 30, 2011 were 2.0% 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 June 30, 2011 were 16.3% 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 June 30, 2011 were 79.3% 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 June 30, 2011 were 1.0% 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 June 30, 2011 were 1% 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 June 30, 2011 were less than 0.1% of the total loan portfolio.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The allowance for loan losses and loans evaluated for impairment for the three and six months ended June 30, 2011, by portfolio segment, is as follows:


	Unsecured			Cash Value		Residential Real Estate			Commercial Real Estate			Business Assets			Vehicles			Other			Unallocated			Total
Allowance for loan losses:
For the three months ended June 30, 2011:
Beginning balance	$	106,021		$	14,262	$	1,829,967		$	2,810,638		$	328,785		$	132,161		$	5		$	70,198		$	5,292,037
Charge-offs		(6,043	)		—		(1,790	)		(181,240	)		—			(5,972	)		—			—			(195,045	)
Recoveries		2,909			—		—			6,683			1,481			1,175			—			—			12,248
Provision		(44,783	)		1,385		264,833			(15,635	)		(26,400	)		(3,444	)		(5	)		(25,951	)		150,000

Ending balance	$	58,104		$	15,647	$	2,093,010		$	2,620,446		$	303,866		$	123,920		$	—		$	44,247		$	5,259,240

Allowance for loan losses:
For the six months ended June 30, 2011:
Beginning balance	$	63,020		$	5,210	$	2,258,833		$	2,234,925		$	316,844		$	141,759		$	5		$	203,168		$	5,223,764
Charge-offs		(20,915	)		—		(34,288	)		(273,678	)		—			(14,028	)		—			—			(342,909	)
Recoveries		6,895			—		—			12,659			2,656			1,175			—			—			23,385
Provision		9,104			10,437		(131,535	)		646,540			(15,634	)		(4,986	)		(5	)		(158,921	)		355,000

Ending balance	$	58,104		$	15,647	$	2,093,010		$	2,620,446		$	303,866		$	123,920		$	—		$	44,247		$	5,259,240

Ending balance – individually evaluated impairment	$	573		$	—	$	1,011,572		$	1,198,730		$	197,089		$	71,736		$	—		$	—		$	2,479,700

Loans:
Ending balance (1)	$	780,583		$	4,704,932	$	37,750,152		$	183,593,077		$	2,314,489		$	2,265,230		$	105,365		$	—		$	231,513,828

Ending balance – Loans individually evaluated for impairment	$	49,662		$	—	$	17,325,001		$	35,633,745		$	852,986		$	169,923		$	—		$	—		$	54,031,317

(1)	Loan balances presented are gross of unearned loan fees of $1,087,983.

The allowance for loan losses and loans evaluated for impairment for the year ended December 31, 2010, 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:
Beginning balance	$	121,061		$	68,835		$	2,945,465		$	2,821,151		$	483,536		$	209,172		$	41		$	—	$	6,649,261
Charge-offs		(48,444	)		(2,840	)		(1,107,937	)		(989,904	)		—			(16,509	)		—			—		(2,165,634	)
Recoveries		30,594			—			11,184			195,909			32,450			—			—			—		270,137
Provision		(40,191	)		(60,785	)		410,121			207,769			(199,142	)		(50,904	)		(36	)		203,168		470,000

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

Ending balance – individually evaluated impairment	$	4,535		$	—		$	638,268		$	989,599		$	255,338		$	122,269		$	—		$	—	$	2,010,009

Loans:
Ending balance (1)	$	882,795		$	4,824,758		$	38,447,647		$	186,281,923		$	3,386,296		$	2,585,997		$	106,559		$	—	$	236,515,975

Ending balance – Loans individually evaluated for impairment	$	83,801		$	—		$	18,707,869		$	29,430,587		$	1,940,334		$	238,945		$	—		$	—	$	50,401,536

(1)	Loan balances presented are gross of unearned loan fees of $970,203.

Impaired loans by portfolio segment are as follows:


	As of June 30, 2011
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Unsecured	$	49,662		35,749	$	13,913	$	49,662	$	573
Cash value		—		—		—		—		—
Residential real estate		18,190,715		12,904,637		4,420,364		17,325,001		1,011,572
Commercial real estate		37,853,322		22,903,843		12,729,902		35,633,745		1,198,730
Business assets		852,986		437,662		415,324		852,986		197,089
Vehicles		169,923		89,187		80,736		169,923		71,736
Other		—		—		—		—		—

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	As of December 31, 2010
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Unsecured	$	83,801		76,446	$	7,355	$	83,801	$	4,535
Cash value		—		—		—		—		—
Residential real estate		21,894,780		17,387,990		1,319,879		18,707,869		638,268
Commercial real estate		31,165,379		22,062,076		7,368,511		29,430,587		989,599
Business assets		1,971,023		1,673,333		267,001		1,940,334		255,338
Vehicles		264,991		80,697		158,248		238,945		122,269
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 six months ended June 30, 2011, by portfolio segment, is as follows:


	Three months ended June 30, 2011				Six months ended June 30, 2011				Year ended December 31, 2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
Unsecured	$	66,703	$	2,077	$	72,402	$	3,259	$	72,556
Cash value		311,426		—		207,617		4,671		45,829
Residential real estate		17,444,654		79,376		17,865,725		125,531		16,564,446
Commercial real estate		34,281,724		51,256		32,664,678		128,122		25,613,162
Business assets		1,502,104		503		1,648,181		32,181		1,025,838
Vehicles		135,774		337		170,164		444		187,439
Other		—		—		—		—		—

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A primary credit quality indicator for financial institutions is delinquent balances. Following are the delinquent amounts, by portfolio segment, as of June 30, 2011:


	Current		30-89 Days		Greater Than 90 Days Still Accruing		Total Accruing Past Due		Non-accrual		Total Financing Receivables
Unsecured	$	697,510	$	22,240	$	7,083	$	29,323	$	53,750	$	780,583
Cash value		4,667,713		37,219		—		37,219		—		4,704,932
Residential real estate		23,116,561		4,153,328		25,000		4,178,328		10,455,263		37,750,152
Commercial real estate		152,099,430		15,575,708		270,629		15,846,337		15,647,310		183,593,077
Business assets		1,511,967		14,195		—		14,195		788,327		2,314,489
Vehicles		1,736,929		264,893		—		264,893		263,408		2,265,230
Other		105,365		—		—		—		—		105,365

	$	183,935,475	$	20,067,583	$	302,712	$	20,370,295	$	27,208,058	$	231,513,828

Following are the delinquent amounts, by portfolio segment, as of December 31, 2010:


	Current		30-89 Days		Greater Than 90 Days Still Accruing		Total Accruing Past Due		Non-accrual		Total Financing Receivables
Unsecured	$	748,934	$	86,414	$	—	$	86,414	$	47,447	$	882,795
Cash value		4,790,927		33,831		—		33,831		—		4,824,758
Residential real estate		25,093,331		3,101,601		610,925		3,712,526		9,641,790		38,447,647
Commercial real estate		159,067,792		8,305,542		—		8,305,542		18,908,589		186,281,923
Business assets		2,181,829		571,309		—		571,309		633,158		3,386,296
Vehicles		2,174,963		86,212		8,970		95,182		315,852		2,585,997
Other		106,559		—		—		—		—		106,559

	$	194,164,335	$	12,184,909	$	619,895	$	12,804,804	$	29,546,836	$	236,515,975

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 June 30, 2011 two residential real estate loans totaling $994,949 were past due less than 90 days and carried as nonaccrual at management’s discretion based on the afore mentioned qualifications. As of June 30, 2011 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 June 30, 2011:


Rating:	Unsecured		Cash Value		Residential Real Estate		Commercial Real Estate		Business Assets		Vehicles		Other		Total
Grade 1 (Prime)	$	—	$	41,048	$	—	$	—	$	—	$	—	$	—	$	41,048
Grade 2 (Superior)		18,607		470		—		363,755		—		25,554		—		408,386
Grade 3 (Acceptable-Average)		483,204		4,394,669		12,099,979		128,588,195		732,532		1,544,937		—		147,843,516
Grade 4 - Fair (Watch)		34,370		79,514		2,003,230		9,084,706		616,392		277,873		105,365		12,201,450
Grade 5 (Special Mention)		24,227		189,231		2,906,057		6,288,504		—		28,793		—		9,436,812
Grade 6 (Substandard)		220,175		—		19,475,595		38,345,113		919,874		386,732		—		59,347,489
Grade 7 (Doubtful)		—		—		1,255,526		759,713		45,691		1,215		—		2,062,145
Grade 8 (Loss)		—		—		9,765		163,091		—		126		—		172,982

	$	780,583	$	4,704,932	$	37,750,152	$	183,593,077	$	2,314,489	$	2,265,230	$	105,365	$	231,513,828

The following table presents the Company’s loans by risk rating at December 31, 2010:


Rating:	Unsecured		Cash Value		Residential Real Estate		Commercial Real Estate		Business Assets		Vehicles		Other		Total
Grade 1 (Prime)	$	—	$	44,674	$	—	$	—	$	—	$	—	$	—	$	44,674
Grade 2 (Superior)		22,945		70,500		—		371,277		—		42,733		—		507,455
Grade 3 (Acceptable-Average)		538,193		4,006,005		14,756,707		134,777,727		844,321		1,770,983		—		156,693,936
Grade 4 - Fair (Watch)		34,410		703,579		2,717,276		9,840,462		1,707,272		355,056		106,559		15,464,614
Grade 5 (Special Mention)		68,892		—		2,741,872		4,143,158		—		30,812		—		6,984,734
Grade 6 (Substandard)		218,355		—		17,787,787		36,936,982		834,703		381,283		—		56,159,110
Grade 7 (Doubtful)		—		—		444,005		—		—		5,130		—		449,135
Grade 8 (Loss)		—		—		—		212,317		—		—		—		212,317

	$	882,795	$	4,824,758	$	38,447,647	$	186,281,923	$	3,386,296	$	2,585,997	$	106,559	$	236,515,975

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.

NOTE 6. EARNINGS PER COMMON SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings per common share for the three and six months ended June 30, 2011 and 2010.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Net income (loss) available to common shareholders	$	158,585	$	(555,361	)	$	193,887	$	(434,618	)

Weighted average common shares outstanding		9,711,258		9,717,300			9,806,899		9,701,656
Net effect of the assumed exercise of stock options based on the treasury stock method using the average market price for the period		111,481		111,660			111,481		111,660

Average number of common shares outstanding used to calculate diluted earnings per common share		9,822,739		9,828,960			9,918,380		9,813,316

Weighted average common shares outstanding are used in the diluted earnings per share calculation for June 30, 2010, as there was a net loss, and inclusion of common stock equivalents would have been anti-dilutive.

Weighted average shares outstanding for the three and six months ended June 30, 2010 have been adjusted for a four for one stock split in the form of a 100% stock dividend declared and paid on June 22, 2010.

NOTE 7. 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 optionee 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, 2010, all outstanding options were fully vested and there were no options granted during the three and six month periods ended June 30, 2011 and 2010. Therefore, there was no compensation cost related to share-based payments for the three and six months ended June 30, 2011 and 2010.

The following table represents stock option activity for the three and six months ended June 30, 2011:

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30, 2011				June 30, 2011
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contract Life
Options outstanding beginning of period		178,656	$	0.94		178,656	$	0.94
Options exercised		—		—		—		—
Options forfeited		—		—		—		—

Options outstanding end of period		178,656		0.94		178,656		0.94		1.5 Years

Outstanding exercisable end of period		178,656		0.94		178,656		0.94		1.5 Years

The option price for all options outstanding and exercisable at June 30, 2011 was $0.94.

Shares available for future stock options grants to employees and directors under existing plans were 633,600 at June 30, 2011. At June 30, 2011, the aggregate intrinsic value of options outstanding and exercisable was $279,150.

NOTE 8. 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.

NOTE 9. FAIR VALUE OF ASSETS AND LIABILITIES

Determination of Fair Value

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

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

Fair Value Hierarchy

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

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

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

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Off-balance Sheet Credit-Related Instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Assets Measured at Fair Value on a Recurring Basis:

Assets measured at fair value on a recurring basis are summarized below:


	June 30, 2011
	Level 1		Level 2		Level 3		Total
Investment securities available for sale	$	—	$	40,896,523	$	—	$	40,896,523


	December 31, 2010
	Level 1		Level 2		Level 3		Total
Investment securities available for sale	$	—	$	37,012,468	$	—	$	37,012,468

Assets Measured at Fair Value on a Nonrecurring Basis:

Under certain circumstances we make adjustments to fair value for our assets and liabilities although they are not measured at fair value on an ongoing basis. The following table presents the financial instruments carried on the consolidated balance sheet by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded:


	June 30, 2011
	Level 1		Level 2		Level 3		Total Gains (Losses)
Impaired loans	$	—	$	—	$	19,685,134	$	(3,588,916	)
Foreclosed real estate		—		—		—		—

Total	$	—	$	—	$	19,685,134	$	(3,588,916	)


	December 31, 2010
	Level 1		Level 2		Level 3		Total Gains (Losses)
Impaired loans	$	—	$	—	$	19,201,393	$	(6,424,524	)
Foreclosed real estate		—		—		1,175,349		(271,788	)

Total	$	—	$	—	$	20,376,742	$	(6,696,312	)

At June 30, 2011, in accordance with the provisions of the loan impairment guidance, individual loans with a carrying value of $23,274,050 were written down to fair value of $19,685,134, resulting in charge-offs and specific reserves $3,588,916. 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 management’s estimates of changes in economic conditions.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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.

The carrying amount and fair value of the Company’s financial instruments were as follows:

June 30, 2011

December 31, 2010

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

Financial assets:

Cash and short term investments

12,041,100

6,530,362

Securities

41,806,823

38,037,768

Loans, net

225,166,605

227,831,633

230,322,008

233,696,460

Accrued interest receivable

1,053,302

1,124,611

Financial liabilities:

Deposits

281,808,258

279,833,832

275,282,295

277,390,698

Note payable

275,250

275,250

Federal Home Loan Bank advances

5,500,000

5,520,763

5,500,000

5,521,875

Company guaranteed trust preferred securities

3,403,000

3,403,000

Accrued interest payable

907,750

999,367

NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2011, the FASB issued Accounting Standards Update No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU No. 2011-01”). ASU 2011-01 temporarily delays the effective date of troubled debt restructuring disclosures required by ASU 2010-20 for public companies. The disclosures regarding troubled debt restructurings will be effective for interim and annual periods ending after June 15, 2011. ASU No. 2011-01 will have an impact on the Company’s disclosures, but not its financial position or results of operations.

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU No. 2011-02”). ASU 2011-02 provides additional clarification for creditors in evaluating whether or not a debt restructuring involves a concession and whether a debtor is experiencing financial difficulties, both of which are the basis for determining whether a restructuring constitutes a troubled debt restructuring. The amendments will be effective for the first interim or annual period beginning on or after June 15, 2011. ASU 2011-02 also requires disclosure of those items deferred in ASU 2011-01 for interim and annual periods beginning on or after June 15, 2011. ASU No. 2011-02 will have an impact on the Company’s disclosures, but not its financial position or results of operations.

In April 2011, the FASB also issued Accounting Standards Update No. 2011-03, Transfers and Servicing; Reconsideration of Effective Control for Repurchase Agreements (“ASU No. 2011-03”). ASU 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to impact the Company’s disclosures, financial position or results of operations.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU No 2011-04”). ASU 2011-04 provides common principles and requirements for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. ASU 2011-04 is effective for interim and annual periods beginning on or after December 15, 2011 and is expected to impact the Company’s disclosures but not its financial position or results of operations.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU No 2011-04”). ASU 2011-05 provides entities with the option of presenting comprehensive income in a single, continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option of presenting comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 is effective for interim and annual periods beginning on or after December 15, 2011 and is not expected to impact the Company’s disclosures, financial position or results of operations.

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 11. SECONDARY STOCK OFFERING

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

NOTE 12. FEDERAL HOME LOAN BANK ADVANCES

During the first quarter of 2011, the Company had outstanding Federal Home Loan Bank (FHLB) advances of $5,500,000. These advances are variable rate and mature on various dates between April 1, 2011 and August 3, 2011.

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.

NOTE 13. STOCK SPLIT

On June 22, 2010, the Company’s shareholders approved a 4 for 1 stock split and a change in the par value of its common stock from $1.50 to $1.00. All per share amounts in all periods have been retroactively adjusted for this split as if it occurred in the first period presented.

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 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.

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 imprecisions 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 possible 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 June 30, 2011, 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 2011.

FINANCIAL CONDITION

Total assets increased during the first six months of 2011 by $7.6 million from $295.3 million to $302.9 million, or 2.57%. The increase was largely due to an increase in securities of $3.9 million, increase in due from banks of $1.9 million, increase in federal funds sold of $3.4 million and increases in foreclosed real estate of $3.7 million. These increases are offset by net decreases in loans of $5.2 million. The loan to deposit ratio at June 30, 2011 was 82% compared to 86% at December 31, 2010.

Stockholders’ equity increased by $1,081,646 for the six months ended June 30, 2011. This net increase consisted of net income of $244,000, proceeds from issuance of common stock of $110,000, dividends declared on preferred stock of $50,000, and net increases in accumulated other comprehensive income of $779,000.

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 $40,137,881 at June 30, 2011, representing an increase of $1,053,911 (2.7%) from December 31, 2010. This increase is attributable to decreases of $317,183 in past dues over 90 days, $2,338,778 in nonaccrual loans, and an increase of $3,709,872 in foreclosed real estate. Total nonperforming assets were 17.42% of total loans at June 30, 2011, compared to 16.59% at December 31, 2010. Nonperforming assets represented 13.25% of total assets at June 30, 2011, compared to 13.23% of total assets at December 31, 2010. Nonaccrual loans represented 11.81% of total loans outstanding at June 30, 2011, compared to 12.54% of total loans outstanding at December 31, 2010. There were no related party loans which were considered to be nonperforming at June 30, 2011.

At June 30, 2011, the Company had loan concentrations in real estate totaling $221,343,000 or 95.6% of total loans. Business asset loans of $2,314,000 made up 1.0% of total loans. The remaining $7,857,000, or 3.4%, of total loans consisted of consumer and other loans.

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.

At June 30, 2011, the Bank’s liquidity ratio of 11.21% 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 June 30, 2011, the Company had the ability to borrow up to $5 million in federal funds from correspondent banks. It also had an available repurchase line with a correspondent bank of $10 million and borrowing capacity through the Federal Reserve Discount Window of $2.6 million.

REGULATORY CAPITAL REQUIREMENTS

Banking regulations require us to maintain minimum capital levels in relation to assets. At June 30, 2011, the achieved a capital level for Tier 1 Risk Based Capital and Tier 1 Leverage Capital that would qualify as adequately capitalized under the prompt corrective action framework. However, because the Bank’s Total Risk Based Capital ratio does not meet the level to be considered adequately capitalized, the Bank is considered, under the prompt correction action framework, undercapitalized since the lowest ratio determines the regulatory category. The minimum capital requirements and the actual capital ratios for the Company and Bank at June 30, 2011 are as follows:


	Company			Bank			Regulatory Minimum Requirement
Leverage Capital Ratio		4.37	%		4.52	%		4.00	%
Risk-Based Capital Ratios
Core Capital		5.16	%		5.33	%		4.00	%
Total Capital		6.42	%		6.59	%		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.

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 June 30, 2011 are as follows:


	June 30, 2011
Commitments to extend credit	$	3,668,000
Financial standby letters of credit		619,000
Other standby letters of credit		431,000

	$	4,718,000

RESULTS OF OPERATIONS

Net Interest Income

Net interest income increased by $585,000 and increased by $572,000 for the three and six month periods ended June 30, 2011, respectively, compared to the same periods in 2010. The overall increase in net interest income for the six month period is primarily attributable to the decrease in our net yield on average interest-bearing liabilities. The rate paid on interest-bearing liabilities decreased from 2.95% to 2.24%, or 71 basis points, for the same period. 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. The net yield on interest-earning assets increased to 3.54% at June 30, 2011 as compared to 2.84% at June 30, 2010 and 3.02% for the entire year ended December 31, 2010.

The yield on interest-earning assets increased from 5.77% to 5.89%, or 12 basis points, from June 30, 2010 to June 30, 2011.

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							For the Three Months Ended
	June 30, 2011							June 30, 2010
	Average Balance		Income / Expense		Yields / Rates (2)			Average Balance		Income / Expense		Yields / Rates (2)
	(Dollars in thousands)
Earning assets:
Loans, net of unearned income (3)	$	204,427	$	3,489		6.83	%	$	222,712	$	3,313		5.95	%
Securities		41,947		258		2.46	%		45,548		312		2.74	%
Interest-bearing deposits		501		0		0.06	%		67		0		0.14	%
Federal funds sold		5,198		1		0.08	%		913		0		0.14	%

Total interest-earning assets (1)	$	252,073	$	3,748		5.95	%	$	269,240	$	3,625		5.39	%

Interest-bearing liabilities
Demand and savings deposits	$	35,953	$	83		0.92	%	$	36,727	$	94		1.02	%
Time deposits		219,972		1,332		2.42	%		216,117		1,762		3.26	%

Total deposits		255,925		1,415		2.21	%		252,844		1,856		2.94	%

Other short-term borrowings		5,500		12		0.87	%		10,700		35		1.31	%
Long-term debt		3,403		32		3.76	%		3,403		30		3.53	%

Total interest-bearing liabilities	$	264,828	$	1,459		2.20	%	$	266,947	$	1,921		2.88	%

Net interest income/net interest spread			$	2,289		3.74	%			$	1,704		2.51	%

Net yield on earning assets						3.63	%						2.53	%

(1)	Average securities exclude average unrealized losses of $211,000 and unrealized gains of $665,000 for the three months ended June 30, 2011 and 2010, respectively.

(2)	Annualized.

(3)	Average loans exclude average nonaccrual loans of $28,413,000 and $21,309,000 for the three months ended June 30, 2011 and 2010, respectively.


	For the Six Months Ended							For the Six Months Ended
	June 30, 2011							June 30, 2010
	Average Balance		Income / Expense		Yeilds / Rates (2)			Average Balance		Income / Expense		Yeilds / Rates (2)
	(Dollars in thousands)
Earning assets:
Loans, net of unearned income (3)	$	205,269	$	6,942		6.76	%	$	227,046	$	7,268		6.46	%
Securities		40,427		477		2.36	%		48,571		631		2.62	%
Interest-bearing deposits		478		1		0.29	%		43		0		0.12	%
Federal funds sold		5,673		3		0.09	%		461		0		0.16	%

Total interest-earning assets (1)	$	251,847	$	7,423		5.00	%	$	276,121	$	7,899		5.77	%

Interest-bearing liabilities
Demand and savings deposits	$	35,270	$	166		0.94	%	$	36,427	$	200		1.11	%
Time deposits		219,992		2,706		2.46	%		217,877		3,649		3.38	%

Total deposits		255,262		2,872		2.25	%		254,304		3,849		3.16	%

Other short-term borrowings		5,500		24		0.86	%		16,220		98		2.05	%
Long-term debt		3,403		64		3.76	%		3,403		61		3.64	%

Total interest-bearing liabilities	$	264,165	$	2,960		2.24	%	$	273,927	$	4,008		2.95	%

Net interest income/net interest spread			$	4,463		3.65	%			$	3,891		2.82	%

Net yield on earning assets						3.54	%						2.84	%

(1)	Average securities exclude average unrealized losses of $350,000 and unrealized gains of $690,000 for the six months ended June 30, 2011 and 2010, respectively.

(2)	Annualized.

(3)	Average loans exclude average nonaccrual loans of $29,587,000 and $17,488,000 for the six months ended June 30, 2011 and 2010, respectively.

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 as of June 30, 2011 against June 30, 2010.


	2011 vs. 2010
	Changes Due To:
							Increase
	Rate			Volume			(Decrease)
	(Dollars in thousands)
Increase (decrease) in:
Interest on loans	$	(811	)	$	(1,137	)	$	(326	)
Interest on securities		(57	)		(97	)		(154	)
Interest on bank owned deposits		—			1			1
Interest on federal funds sold		—			3			3

Total interest income		754			(1,230	)		(476	)

Interest on interest-bearing demand and savings deposits		(28	)		(6	)		(34	)
Interest on time deposits		(1,048	)		105			(943	)
Interest on Federal Home Loan Bank advances		(35	)		(39	)		(74	)
Interest on company guaranteed trust preferred securities		3			—			3

Total interest expense		(1,108	)		60			(1,048	)

Net interest income	$	1,862		$	(1,290	)	$	572

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. A provision of $355,000 was made during the six month period ending June 30, 2011 as compared to a provision of $220,000 made during the six month period ending June 30, 2010. The allowance for loan loss as a percentage of total loans was 2.27%, 2.21%, and 2.81% at June 30, 2011, December 31, 2010 and June 30, 2010, respectively. Total nonaccrual loans decreased by $2,135,000, net charge-offs increased by $266,000, loans past due ninety days or more and still accruing increased by $210,000, and restructured loans increased by $4,878,000 for the six months ended June 30, 2011 as compared to the same periods in 2010. 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 June 30, 2011 is adequate to absorb any foreseeable losses in the loan portfolio.

As of June 30, 2011, the Company had approximately $54.0 million in loans specifically evaluated for impairment with approximately $2.5 million in associated specific reserves. As of December 31, 2010 the Company had $50.4 million in loans specifically evaluated for impairment with approximately $2.1 million in associated specific reserves. Impaired loans represented 23.3% and 21.3% of the portfolio as of June 30, 2011 and December 31, 2010, respectively. Nonaccrual loans are by definition considered impaired loans and as such the impaired loans included $27.2 and $29.5 million of nonaccrual loans as of June 30, 2011 and December 31, 2010, respectively.

The remaining portfolio of loans not considered impaired as of June 30, 2011 was $177.5 million, and the allowance for loan losses associated with these loans was $2.8 million or 1.58% of the unimpaired principal balance. As of December 31, 2010, loans not considered impaired were $186.1 million and the associated allowance was $3.1 million or 1.67% 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 $7.4 million in 2009, $2.2 million in 2010 and $355,000 in the first six months of 2011. Although, impaired loans as a percentage of the portfolio continues at a high level, charge offs as a percentage of loans were lower in 2010 than 2009; and 2011 trends are positive and overall economic conditions in our market have stabilized. We believe our allowance for loan losses as a percentage of loans is sufficient to cover probable losses.

At June 30, 2011 and 2010, nonaccrual, past due and restructured loans were as follows:


	June 30,
	2011		2010
	(Dollars in thousands)
Total nonaccruing loans	$	27,208	$	29,343
Loans contractually past due ninety days or more as to interest or principal payments and still accruing		303		93
Restructured loans		24,685		19,807

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.

As of June 30, 2011 and December 31, 2010, troubled debt restructuring loans (TDRs) were as follows:


	As of 6/30/2011		As of 12/31/2010
Total troubled debt restructurings (TDRs)	$	24,684,559	$	19,807,395
TDRs on nonaccrual status		8,307,006		12,656,703
TDRs included in impaired loans		23,553,360		12,433,192
Specific reserves on TDRs		253,225		121,956
Charge offs related to TDRs		0		871,836

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 following is a category detail of our allowance percentage and reserve balance by loan type at June 30, 2011 and December 31, 2010:


Loan Group Description	June 30, 2011 Calculated Reserves		June 30, 2011 Reserve %			December 31, 2010 Calculated Reserves		December 31, 2010 Reserve %
Unsecured	$	58,104		7.44	%	$	63,020		7.14	%
Cash Value		15,647		0.33	%		5,210		0.11	%
Residential real estate		2,093,010		5.54	%		2,258,833		5.88	%
Commercial real estate		2,620,446		1.43	%		2,234,925		1.20	%
Business assets		303,866		13.13	%		316,844		9.36	%
Vehicles		123,920		5.47	%		141,759		5.48	%
Other		—		0.00	%		5		0.00	%
Unallocated		44,247		0.00	%		203,168		0.00	%

Total Allowance for Loan Loss	$	5,259,240		2.27	%	$	5,223,764		2.21	%

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, 2010, 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. However, as of June 30, 2011 charge offs in this segment has declined reflecting the current condition of outstanding residential real estate loans.

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, discuss the concern. Next, the appraisal management company will perform an internal review of the appraisal and make their conclusions. The appraiser maybe 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 and six months ended June 30, 2011 and 2010 is as follows:


	Three Months Ended June 30,
	2011			2010
	(Dollars in thousands)
Average amount of loans outstanding	$	232,051		$	222,712

Balance of allowance for loan losses at beginning of period	$	5,292		$	6,531

Loans charged off
Commercial		—			—
Real estate		(184	)		—
Installment		(11	)		—

		(195	)		—

Loans recovered
Commercial		2			35
Real estate		7			27
Installment		3			2

		12			64

Net charge-offs		(183	)		64

Additions to allowance charged to operating expense during period		150			220

Balance of allowance for loan losses at end of period	$	5,259		$	6,815

Ratio of net loans charged-off during the period to average loans outstanding		0.08	%		-0.03	%


	Six Months Ended June 30,
	2011			2010
	(Dollars in thousands)
Average amount of loans outstanding	$	234,347		$	227,046

Balance of allowance for loan losses at beginning of period	$	5,224		$	6,649

Loans charged off
Commercial		(3	)		(8	)
Real estate		(297	)		(29	)
Installment		(43	)		(107	)

		(343	)		(144	)

Loans recovered
Commercial		3			43
Real estate		12			42
Installment		8			5

		23			90

Net charge-offs		(320	)		(54	)

Additions to allowance charged to operating expense during period		355			220

Balance of allowance for loan losses at end of period	$	5,259		$	6,815

Ratio of net loans charged-off during the period to average loans outstanding		0.14	%		0.02	%

Other Income

Other income decreased by $258,000 and decreased $258,000 for the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The most significant component of other income is service charges on deposit accounts which accounts for 68% and 59% of total other income for June 30, 2011 and 2010, 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 decrease in other income for the six month period ended June 30, 2011 is largely due to the decrease in gains on sales of securities available for sale of $184,000 and gains on sales of foreclosed assets of $56,000.

Other Expenses

Other expenses decreased by $267,000 and decreased by $450,000 for the three and six months ended June 30, 2011, as compared to the same periods in 2010. The decrease for the three month period consists of an increase in salaries and employee benefits of $51,000, offset by decreases in occupancy and equipment expenses of $23,000 and other operating expenses of $296,000. The increase for the six month period consists of a decrease of $453,000 in other operating expenses, offset by increases in occupancy and equipment expenses of $9,000. The decline in other operating expenses for the second quarter 2011 as compared to the second quarter 2010 is primarily due to reduced data processing costs of approximately $73,000, reduced regulatory assessments of approximately $239,000, reduced loan expenses and ORE expenses and losses of approximately $37,000; offset by increases in professional fees of approximately $35,000 and increased marketing expenditures of approximately $23,000. Other operating expenses declined during the first six months of 2011 as compared to the first six months of 2010 due primarily to reduced data processing costs of approximately $88,000, reduced regulatory assessments of approximately $100,000, reduced loan expenses and ORE expenses and losses of approximately $122,000, impairment write down of $100,000 during the first six months of 2010 related to investment securities; offset by increases in professional fees of approximately $44,000 and increased marketing expenditures of approximately $48,000. At June 30, 2011, the number of full-time equivalent employees was 77 compared to 76 at June 30, 2010.

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 six months ended June 30, 2011 and June 30, 2010 was $1,734 and $2,909.

Income Tax Benefits

As of June 30, 2011, 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 June 30, 2011.

Net Income

Net income increased by $663,946 and $628,505 for the three and six months ended June 30, 2011, as compared to the same periods in 2010. This increase is largely the result of the decreases in interest expense and decreases in other operating expenses since the prior year.

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.

There have been no 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 15, 2011) nor have any new reportable legal proceedings involving the Company been instituted.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

(REMOVED AND RESERVED)

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).

3.2		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

101.1		Interactive Data File (To be filed in a subsequent 10-Q/A)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		CAPITOL CITY BANCSHARES, INC.

Date: August 19, 2011		/s/ George G. Andrews
		George G. Andrews
		CEO, President and Director

Date: August 19, 2011		/s/ Tatina Brooks
		Tatina Brooks
		Senior Vice President of Accounting and Financial Reporting (Principal Financial and Accounting Officer)

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