Index to Financial Statements

Exhibit 13.1

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 2012

TABLE OF CONTENTS


	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		1

FINANCIAL STATEMENTS

Consolidated Balance Sheets		2
Consolidated Statements of Operations		3
Consolidated Statements of Comprehensive Loss		4
Consolidated Statements of Stockholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S REPORT ON SUPPLEMENTAL INFORMATION		47

Consolidating Balance Sheet		48
Consolidating Statements of Operations		49

Index to Financial Statements


	NICHOLS, CAULEY & ASSOCIATES, LLC
	A Professional Services Firm of: Certified Public Accountants Certified Internal Auditors Certified Financial Planners^® Certified Valuation Analysts	REPLY TO: 2800 Century Pkwy., Ste. 900 Atlanta, Georgia 30345 800-823-1224 FAX 404-214-1302 atlanta@nicholscauley.com
Atlanta — Clarkesville — Dublin — Warner Robins www.nicholscauley.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Capitol City Bancshares, Inc.

Atlanta, Georgia

We have audited the accompanying consolidated balance sheets of Capitol City Bancshares, Inc. and its wholly owned subsidiaries, Capitol City Bank & Trust and Capitol City Home Loans, Inc., as of December 31, 2012 and 2011, and the related consolidated statements of operations, other comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capitol City Bancshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company is operating under regulatory orders to, among other items, increase capital and maintain certain levels of minimum capital. As of December 31, 2012, the Company was not in compliance with these capital requirements. In addition to its deteriorating capital position, the Company has suffered significant losses related to nonperforming assets, and has significant maturities of liabilities within the next twelve months. These matters raise substantial doubt about the ability of Capitol City Bancshares, Inc. and subsidiaries to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Nichols, Cauley and Associates, LLC

Atlanta, Georgia

April 15, 2013

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2012 and 2011


	2012			2011
Assets
Cash and due from banks	$	7,807,478		$	7,029,604
Interest-bearing deposits at other financial institutions		727,124			635,511
Federal funds sold		6,340,000			595,000
Securities available for sale		42,609,727			42,566,577
Restricted equity securities, at cost		691,900			792,900

Loans, net of unearned income		217,650,162			220,172,602
Less allowance for loan losses		(5,389,613	)		(5,154,505	)

Loans, net		212,260,549			215,018,097


Premises and equipment, net		8,962,223			9,137,049
Foreclosed real estate		19,487,185			18,151,601
Other assets		1,776,673			1,953,767


Total assets	$	300,662,859		$	295,880,106


Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest-bearing	$	33,116,883		$	28,433,587
Interest-bearing		248,224,450			248,465,195

Total deposits		281,341,333			276,898,782
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		1,726,692			1,601,390

Total liabilities		292,246,275			287,678,422


Stockholders’ equity
Preferred stock, par value $100, 5,000,000 shares authorized
Series A, cumulative, non voting, 10,000 shares issued and outstanding		1,000,000			1,000,000
Series B, cumulative, non voting, 6,078 shares issued and outstanding		607,800			607,800
Series C, cumulative, non voting, 10,000 and -0- shares issued and outstanding, respectively		1,000,000			—
Common stock, par value $1.00; 80,000,000 shares authorized; 10,292,069 and 9,833,430 shares issued and outstanding, respectively		10,292,069			9,833,430
Surplus		801,398			130,036
Retained deficit		(5,236,465	)		(3,442,584	)
Accumulated other comprehensive income (loss)		(48,218	)		73,002

Total stockholders’ equity		8,416,584			8,201,684


Total liabilities and stockholders’ equity	$	300,662,859		$	295,880,106

See Notes to Consolidated Financial Statements.

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations

Years ended December 31, 2012 and 2011


	2012			2011
Interest income:
Loans, including fees	$	12,329,198		$	13,650,673
Deposits in banks		1,518			988
Securities		976,790			958,586
Federal funds sold		1,218			3,666

Total interest income		13,308,724			14,613,913


Interest expense:
Deposits		4,162,717			5,525,543
Other borrowings		180,241			173,972

Total interest expense		4,342,958			5,699,515

Net interest income		8,965,766			8,914,398
Provision for loan losses		1,722,277			2,746,000

Net interest income after provision for loan losses		7,243,489			6,168,398


Other income:
Service charges on deposit accounts		1,465,679			1,386,243
Other fees and commissions		124,227			94,774
Gain on sales of available for sale securities		514,758			403,712
Rental income		377,560			262,898
Gain (loss) on disposal of premises and equipment		(7,453	)		10,549
Other operating income		401,586			361,864

Total other income		2,876,357			2,520,040

Other expenses:
Salaries and employee benefits		3,662,659			3,645,725
Occupancy and equipment expenses, net		1,259,633			1,279,857
Loss on sales of foreclosed real estate		37,993			36,666
Other real estate expenses and writedowns		1,711,401			816,217
Other operating expenses		5,179,885			4,505,084

Total other expenses		11,851,571			10,283,549

Loss before income tax benefits		(1,731,725	)		(1,595,111	)

Income tax benefits		—			—

Net loss		(1,731,725	)		(1,595,111	)


Preferred stock dividends		(62,156	)		(62,156	)


Net loss available to common shareholders	$	(1,793,881	)	$	(1,657,267	)


Basic losses per common share	$	(0.18	)	$	(0.17	)


Diluted losses per common share	$	(0.18	)	$	(0.17	)

See Notes to Consolidated Financial Statements.

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

Years ended December 31, 2012 and 2011


	2012			2011
Net loss	$	(1,731,725	)	$	(1,595,111	)


Other comprehensive income (loss):

Unrealized gains on securities available for sale arising during period		393,538			910,278

Reclassification adjustment for realized gains on securities available for sale arising during the period		(514,758	)		(403,712	)


Other comprehensive income (loss)		(121,220	)		506,566


Comprehensive loss	$	(1,852,945	)	$	(1,088,545	)

See Notes to Consolidated Financial Statements.

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2012 and 2011


	Preferred Stock				Common Stock				Surplus		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Shares		Par Value		Shares		Par Value		Surplus		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance, December 31, 2010		16,078	$	1,607,800		9,777,656	$	9,777,656	$	75,330	$	(1,785,317	)	$	(433,564	)	$	9,241,905
Net loss		—		—		—		—		—		(1,595,111	)		—			(1,595,111	)
Issuance of common stock		—		—		55,774		55,774		54,706		—			—			110,480
Dividends declared on cumulative preferred stock		—		—		—		—		—		(62,156	)					(62,156	)
Other comprehensive income		—		—		—		—		—		—			506,566			506,566

Balance, December 31, 2011		16,078		1,607,800		9,833,430		9,833,430		130,036		(3,442,584	)		73,002			8,201,684
Net loss		—		—		—		—		—		(1,731,725	)		—			(1,731,725	)
Issuance of preferred stock		10,000		1,000,000		—		—		—		—			—			1,000,000
Issuance of common stock		—		—		458,639		458,639		671,362		—			—			1,130,001
Dividends declared on cumulative preferred stock		—		—		—		—		—		(62,156	)		—			(62,156	)
Other comprehensive loss		—		—		—		—		—		—			(121,220	)		(121,220	)

Balance, December 31, 2012		26,078	$	2,607,800		10,292,069	$	10,292,069	$	801,398	$	(5,236,465	)	$	(48,218	)	$	8,416,584

See Notes to Consolidated Financial Statements.

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2012 and 2011


	2012			2011
OPERATING ACTIVITIES
Net loss	$	(1,731,725	)	$	(1,595,111	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and accretion		1,007,451			901,918
Provision for loan losses		1,722,277			2,746,000
Net gain on sale of securities available for sale		(514,758	)		(403,712	)
Other-than-temporary impairment of securities		262,437			—
Loss on sale of foreclosed assets		37,993			36,666
Writedowns of foreclosed real estate		763,358			351,680
(Gain) loss on sale of premises and equipment		7,453			(10,549	)
Increase in dividends payable on preferred stock		(62,156	)		(62,156	)
Decrease in interest receivable		235,993			37,015
Decrease in interest payable		(16,528	)		(104,282	)
Net other operating activities		82,931			108,156


Net cash provided by operating activities		1,794,726			2,005,625


INVESTING ACTIVITIES
Purchases of securities available for sale		(38,068,420	)		(42,396,521	)
Proceeds from sales and paydowns of securities available for sale		36,641,601			37,371,320
Proceeds from maturities and calls of securities available for sale		1,010,000			—
Proceeds from sales of restricted equity securities		101,000			232,400
Net increase in interest-bearing deposits at other financial institutions		(91,613	)		(180,543	)
Net (increase) decrease in federal funds sold		(5,745,000	)		135,000
Net (increase) decrease in loans		(815,266	)		2,995,562
Capitalized costs on foreclosed real estate		(449,679	)		(92,108	)
Proceeds from sale of foreclosed real estate		163,281			31,749
Purchase of premises and equipment		(345,811	)		(159,182	)
Proceeds from disposal of premises and equipment		10,503			13,941


Net cash used in investing activities		(7,589,404	)		(2,048,382	)


FINANCING ACTIVITIES
Net increase in deposits		4,442,551			1,616,487
Proceeds from issuance of preferred stock		1,000,000			—
Proceeds from issuance of common stock from secondary stock offering		1,120,000			110,480
Proceeds from exercise of stock options		10,001			—


Net cash provided by financing activities		6,572,552			1,726,967


Net increase in cash and due from banks		777,874			1,684,210

Cash and due from banks at beginning of year		7,029,604			5,345,394


Cash and due from banks, end of period	$	7,807,478		$	7,029,604


SUPPLEMENTAL DISCLOSURES
Cash paid (received) for:
Interest	$	4,359,486		$	5,803,797
Income taxes	$	—		$	—

NONCASH TRANSACTIONS
Principal balances of loans transferred to foreclosed real estate	$	3,371,256		$	10,270,956
Financed sales of foreclosed real estate	$	1,708,011		$	708,607

See Notes to Consolidated Financial Statements.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Capitol City Bancshares, Inc. (the “Company”) is a bank holding company whose principal activity is the ownership and management of its wholly-owned subsidiaries, Capitol City Bank & Trust (the “Bank”) and Capitol City Home Loans, Inc. (the “mortgage company”). The Bank is a commercial bank located in Atlanta, Fulton County, Georgia with two branches located in Atlanta, one located at Hartsfield Jackson International Airport, one branch located in Stone Mountain, one branch located in Albany, one branch located in Savannah, and one branch located in Augusta, Georgia. The Bank provides a full range of banking services in its primary market areas of Fulton County and the metropolitan Atlanta area, Dougherty County, Chatham County, and Richmond County. In addition to its geographical market area, the Bank actively markets to minority groups throughout the southeastern United States.

Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, fair market value of financial instruments, the valuation of foreclosed real estate and deferred tax assets.

The Company has evaluated all transactions, events, and circumstances for consideration or disclosure through April 15, 2013, the date these financial statements were issued, and has reflected or disclosed those items within the consolidated financial statements and related footnotes as deemed appropriate.

Cash, Due From Banks and Cash Flows

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

The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances were approximately $535,000 and $489,000 at December 31, 2012 and 2011, respectively.

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

Securities

Securities, including equity securities and trust preferred securities with readily determinable fair values, are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in the statements of comprehensive income (loss), net of the related deferred tax effect. Equity securities without a readily determinable fair value are classified as available for sale and recorded at cost. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Securities (continued)

Accounting guidance related to other-than-temporary impairments of debt securities (FASB ASC 320-10) requires that, when considering whether losses on debt and equity securities are other-than-temporary, management consider whether a credit loss has occurred on the security. If management does not intend to sell the security and it is more likely than not that they will not have to sell the security before recovery of the cost basis, management will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Trust preferred securities are financial instruments that combine the characteristics of both equity instruments and debt instruments. These securities are non-callable for five years or more with original maturities of 30 years or greater similar to debt instruments; however, the securities are subordinated to the issuer’s senior liabilities similar to equity instruments. As an investment, trust preferred securities offer relatively high yields when compared to other types of issues with similar maturities.

Restricted Equity Securities

The Company is required to maintain an investment in capital stock of the Federal Home Loan Bank. Based on redemption provisions of this entity, the stock has no quoted market value and is carried at cost. At its discretion, the Federal Home Loan Bank may declare dividends on the stock. Management reviews for impairment based on the ultimate recoverability of the cost basis in this stock.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance less unearned income, net deferred fees and costs on originated loans, and the allowance for loan losses. Interest income is accrued based on the outstanding principal balance.

Loan origination fees that approximate the direct cost of loans originated are recognized at the time the loan is recorded. Loan origination fees for other loans are deferred and recognized into income over the life of the loans as an adjustment of the yield.

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. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on impaired and nonaccrual loans is recognized on the cash-basis or cost-recovery method, until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Loan Losses (continued)

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

This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make changes to the allowance based on their judgment about information available to them at the time of their examinations.

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Loan Losses (continued)

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 downturn in the economy as evidenced 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.

Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. The range of estimated useful lives for premises and equipment are:


Buildings and improvements			10-40 years
Furniture and equipment			2-10 years

Foreclosed Real Estate

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes (Benefits)

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

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

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

In accordance with ASC 740-10 Income Taxes it is the Bank’s policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes and to disclose the recognized interest and penalties, if material. Management has evaluated all tax positions that could have a significant effect on the financial statements and determined the Bank had no uncertain tax positions at December 31, 2012 or 2011. Further, all years subsequent to 2009 remain subject to evaluation. The Company’s 2009 federal tax return is currently subject to an ongoing audit. Such audit could result in additional amounts owed; however, at this time any such amounts are not known or reasonably estimatable.

Profit-Sharing Plan

Profit-sharing plan contributions are based on a percentage of individual employee’s salary, not to exceed the amount that can be deducted for federal income tax purposes.

Stock-Based Compensation Plans

At December 31, 2012, the Company has a stock-based employee/director compensation plan which is more fully described in Note 12 of the consolidated financial statements.

Stock compensation accounting guidance (FASB ASC 718, Compensation – Stock Compensation) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards and stock grants.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation Plans (continued)

All outstanding grants were fully vested and there were no options granted during the years ended December 31, 2012 and 2011. Therefore, there were no compensation cost related to share-based payments for the years ended December 31, 2012 and 2011.

Earnings (Losses) Per Share

Basic earnings (losses) per share are computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings (losses) per share are computed by dividing net income (loss) by the sum of the weighted-average number of shares of common stock outstanding and diluted potential common shares. Potential common shares consist of all outstanding stock options. Potential dilutive shares are determined using the treasury stock method.

Financial Instruments

In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

Fair Values of Financial Instruments

The fair value of a financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if available, are utilized as estimates of the fair values of financial instruments. Since no quoted market prices exist for a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on management’s assumptions, the estimated amount and timing of future cash flows, and estimated discounted rates.

The estimation methods for individual classifications of financial instruments are described in Note 20. Different assumptions could significantly affect these estimates. Accordingly, net realizable values could be materially different from the estimates presented. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the combined Company.

Comprehensive Loss

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income (loss), are components of comprehensive loss.

Advertising

The Company expenses advertising costs as incurred. For the years ended December 31, 2012 and 2011, advertising expense was $112,289 and $93,127, respectively.

Reclassifications

Certain reclassifications have been made to the December 31, 2011 financial statements in order to be comparable to the December 31, 2012 financial statements.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

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

NOTE 2.

REGULATORY ORDER AND GOING CONCERN CONSIDERATIONS

Regulatory Actions

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

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

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.

REGULATORY ORDER AND GOING CONCERN CONSIDERATIONS (CONTINUED)

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

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

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

ii.

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

iii.

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

iv.

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

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

vii.

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

viii.

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.

REGULATORY ORDER AND GOING CONCERN CONSIDERATIONS (CONTINUED)

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 has been revised.

xi.

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

Going Concern Considerations

The 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 consolidated financial statements do not include an adjustment to reflect possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon its ability to obtain the capital necessary to sustain profitable operations, implement a management plan to develop a profitable operation, overcoming and satisfying the requirements of the regulatory order described above and lower the level of problem assets.

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

NOTE 3.

RISK FACTORS

The Company’s operations are affected by various risk factors, including interest rate risk, credit risk, liquidity risk, and risk from geographic concentration in lending, real estate, marketing, and sales activities. Management attempts to manage interest rate risk through various asset/liability management techniques designed to match maturities of assets and liabilities. Loan policies and administration are designed to provide assurance that loans will only be granted to credit-worthy borrowers, although credit losses are expected to occur because of subjective factors and factors beyond the control of the Company.

The Company’s operations are significantly dependent upon economic conditions and related uncertainties.

The Company is affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies. Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists, drought, natural disasters, and other factors beyond the Company’s control may adversely affect the results of operations. Changes in interest rates, in particular, could adversely affect the net interest income and could have many other adverse effects on operations. Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures, nonperforming assets, and a decrease in the value of the property or other collateral which secures the loans, all of which could adversely affect the results of operations. The Company is particularly sensitive to changes in economic conditions and related uncertainties in Georgia because the Company dervies substantially all of its loans, deposits, and other business from this area.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3.

RISK FACTORS (CONTINUED)

Accordingly, the Company remains subject to the risks associated with prolonged declines in national and local economies.

The Company is subject to extensive federal and state governmental supervision and regulation intended primarily for the protection of depositors. In addition, the Company is subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted, but could adversely affect the Company’s future business and operations.

The Company is subject to vigorous competition in all aspects and areas of business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions, and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, and insurance companies. The Company also competes with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low cost or guaranteed loans to certain borrowers. Certain competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems, and a wider array of commercial banking services.

The Bank is a community bank and as such, is mandated by the Community Reinvestment Act and other regulations to conduct most of its lending activities within the geographic area where it is located. As a result, the Bank and its borrowers may be especially vulnerable to the consequences of changes in the local economy.

In addition, the Bank conducts business daily with correspondent banks. These banks are not immune to financial difficulties. Regulation F “Limitations on Interbank Liabilities” requires the Bank to establish and maintain written policies and procedures to prevent excessive exposure to any individual correspondent in relation to the financial condition of the correspondent. Actions resulting from the Dodd-Frank Act of 2010 have reduced the risk somewhat, but the Bank will be vulnerable to the financial difficulties of its major correspondent banks.

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
December 31, 2012
U.S. Government sponsored enterprises (GSEs)	$	2,000,000	$	5,760	$	—		$	2,005,760
State, county and municipals		9,345,055		88,501		(125,929	)		9,307,627
Mortgage-backed securities GSE residential		30,897,452		114,419		(130,969	)		30,880,902
Trust preferred securities		365,438		—		—			365,438

Total debt securities		42,607,945		208,680		(256,898	)		42,559,727
Equity securities		50,000		—		—			50,000

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.

SECURITIES (CONTINUED)


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2011
State, county and municipals	$	16,076,970	$	73,281	$	(186,020	)	$	15,964,231
Mortgage-backed securities GSE residential		25,738,730		201,977		(16,236	)		25,924,471
Trust preferred securities		627,875		—		—			627,875

Total debt securities		42,443,575		275,258		(202,256	)		42,516,577
Equity securities		50,000		—		—			50,000

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

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


	Amortized Cost		Fair Value
Due in one year or less	$	505,306	$	511,705
Due from one to five years		3,060,332		3,068,090
Due from five to ten years		3,098,073		3,047,528
Due after ten years		5,046,782		5,051,502
Mortgage-backed securities		30,897,452		30,880,902

	$	42,607,945	$	42,559,727

Securities with a carrying value of $16,222,527 and $17,070,932 at December 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Proceeds from sales of securities available for sale for the years ended December 31, 2012 and 2011 totaled $32,607,712 and $33,881,314 respectively. Gross gains and losses of $514,758 and $-, respectively, were realized on the sales for the year ended December 31, 2012. Gross gains and losses of $405,719 and $(2,007), respectively, were realized on the sales for the year ended December 31, 2011.

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 December 31, 2012 and December 31, 2011.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.

SECURITIES (CONTINUED)


	Less Than Twelve Months					Twelve Months or More				Total Unrealized Losses
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Total Unrealized Losses
December 31, 2012
State, county and municipals	$	6,679,387	$	(125,929	)	$	—	$	—	$	(125,929	)
Mortgage-backed securities GSE residential		17,211,179		(130,969	)		—		—		(130,969	)

Total securities	$	23,890,566	$	(256,898	)	$	—	$	—	$	(256,898	)


December 31, 2011
State, county and municipals	$	9,161,795	$	(186,020	)	$	—	$	—	$	(186,020	)
Mortgage-backed securities GSE residential		2,464,959		(16,236	)		—		—		(16,236	)

Total securities	$	11,626,754	$	(202,256	)	$	—	$	—	$	(202,256	)

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

Mortgage-backed securities GSE residential. The unrealized loss on the Company’s investment in eight GSE mortgage-backed securities was caused by interest rate increases. The Company purchased these investments at a discount relative to its face amount, and the contractual cash flows of this investment is guaranteed by an agency of the U.S. Government. Accordingly, it is expected that these securities will not be settled at a price less than the amortized cost base of the Company’s investment. 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 investment before recovery of its amortized cost base, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2012.

Other-Than-Temporary Impairment

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.

SECURITIES (CONTINUED)

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

NOTE 5.

LOANS

The composition of loans is summarized as follows:


	December 31,
	2012			2011
Unsecured	$	822,538		$	848,418
Cash Value		3,393,228			3,927,837
Residential Real Estate		24,604,432			31,146,880
Commercial Real Estate		185,352,416			181,117,917
Business Assets		2,621,853			1,821,587
Vehicles		1,686,508			1,948,661
Other		101,655			104,200

		218,582,630			220,915,500
Unearned loan fees		(932,468	)		(742,898	)
Allowance for loan losses		(5,389,613	)		(5,154,505	)

Loans, net	$	212,260,549		$	215,018,097

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

Unsecured – Loans in this segment are any loans, whether guaranteed, endorsed or co-made, that are not fully collateralized. Unsecured loans are subject to the lending policies and procedures described in Note 1. Total unsecured loans as of December 31, 2012 were 0.38% 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 1. Total cash value loans as of December 31, 2012 were 1.55% 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 1. Total residential real estate loans as of December 31, 2012 were 11.26% 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 1. Total commercial real estate loans as of December 31, 2012 were 84.80% of the total loan portfolio.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 1. Total business assets loans as of December 31, 2012 were 1.20% of the total loan portfolio.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

Vehicles – Loans in this segment are secured by motor vehicles. Vehicle loans are subject to the lending policies and procedures described in Note 1. Total vehicle loans as of December 31, 2012 were 0.77% 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 1. Total other loans as of December 31, 2012 were less than 0.04% of the total loan portfolio.

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


	Unsecured			Cash Value		Residential Real Estate			Commercial Real Estate			Business Assets			Vehicles			Other		Unallocated		Total
Allowance for loan losses:
December 31, 2012
Beginning balance	$	97,961		$	16,727	$	2,083,285		$	2,480,770		$	299,741		$	176,021		$	—	$	—	$	5,154,505
Charge-offs		(25,523	)		—		(605,011	)		(1,051,727	)		(2,087	)		(9,633	)		—		—		(1,693,981	)
Recoveries		2,584			—		66,437			105,116			23,160			9,515			—		—		206,812
Provision		2,480			327		783,513			724,947			156,697			54,313			—		—		1,722,277

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

Ending balance - individually evaluated impairment	$	11,060		$	17,054	$	1,645,625		$	1,075,729		$	293,697		$	81,037		$	—	$	—	$	3,124,202

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

Ending balance - Loans individually evaluated for impairment	$	40,017		$	17,054	$	13,001,107		$	34,805,680		$	561,091		$	123,984		$	—	$	—	$	48,548,933

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

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


	Unsecured			Cash Value		Residential Real Estate			Commercial Real Estate			Business Assets			Vehicles			Other			Unallocated			Total
Allowance for loan losses:
December 31, 2011
Beginning balance	$	63,020		$	5,210	$	2,258,833		$	2,234,925		$	316,844		$	141,759		$	5		$	203,168		$	5,223,764
Charge-offs		(68,717	)		—		(1,532,779	)		(1,058,851	)		(219,264	)		(174,728	)		—			—			(3,054,339	)
Recoveries		9,199			—		190,046			26,853			11,807			1,175			—			—			239,080
Provision		94,459			11,517		1,167,185			1,277,843			190,354			207,815			(5	)		(203,168	)		2,746,000

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

Ending balance - individually evaluated impairment	$	37,861		$	17,054	$	1,559,888		$	942,959		$	287,819		$	67,891		$	—		$	—		$	2,913,472

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

Ending balance - Loans individually evaluated for impairment	$	65,080		$	17,054	$	12,180,496		$	35,582,735		$	650,392		$	145,395		$	—		$	—		$	48,641,152

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

Impaired loans by portfolio segment are as follows:


	As of December 31, 2012
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Unsecured	$	44,634	$	28,957	$	11,060	$	40,017	$	11,060
Cash value		19,543		—		17,054		17,054		17,054
Residential real estate		15,758,053		6,419,011		6,582,096		13,001,107		1,645,625
Commercial real estate		40,127,425		22,047,391		12,758,289		34,805,680		1,075,729
Business assets		657,529		92,819		468,272		561,091		293,697
Vehicles		165,850		5,529		118,455		123,984		81,037
Other		—		—		—		—		—


	As of December 31, 2011
	Unpaid Total Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Unsecured	$	65,080	$	27,219	$	37,861	$	65,080	$	37,861
Cash value		17,054		—		17,054		17,054		17,054
Residential real estate		13,754,238		7,738,672		4,441,824		12,180,496		1,559,888
Commercial real estate		37,035,387		18,762,620		16,820,115		35,582,735		942,959
Business assets		650,392		334,973		315,419		650,392		287,819
Vehicles		145,395		62,344		83,051		145,395		67,891
Other		—		—		—		—		—

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


	Year ended December 31, 2012				Year ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Unsecured	$	52,549	$	860	$	65,096	$	3,582
Cash value		17,054		—		127,981		1,314
Residential real estate		12,590,802		353,218		15,630,196		390,773
Commercial real estate		35,194,208		1,314,075		32,650,297		1,243,184
Business assets		605,742		32,322		1,251,354		31,742
Vehicles		134,690		7,582		160,830		12,539
Other		—		—		—		—

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

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


	Current		30-89 Days		Greater Than 90 Days And Still Accruing		Total Accruing Past Due		Non-accrual		Total Financing Receivables
Unsecured	$	802,020	$	20,518	$	—	$	20,518	$	—	$	822,538
Cash value		3,373,835		19,393		—		19,393		—		3,393,228
Residential real estate		18,982,218		451,314		135,007		586,321		5,035,893		24,604,432
Commercial real estate		154,822,727		7,691,888		632,367		8,324,255		22,205,434		185,352,416
Business assets		1,555,326		387,218		—		387,218		679,309		2,621,853
Vehicles		1,533,528		145,902		—		145,902		7,078		1,686,508
Other		101,655		—		—		—		—		101,655

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

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


	Current		30-89 Days		Greater Than 90 Days And Still Accruing		Total Accruing Past Due		Non-accrual		Total Financing Receivables
Unsecured	$	680,215	$	96,348	$	25,358	$	121,706	$	46,497	$	848,418
Cash value		3,627,793		282,990		—		282,990		17,054		3,927,837
Residential real estate		24,875,203		1,340,826		—		1,340,826		4,930,851		31,146,880
Commercial real estate		149,663,226		10,485,170		2,271,985		12,757,155		18,697,536		181,117,917
Business assets		997,810		308,062		—		308,062		515,715		1,821,587
Vehicles		1,679,728		91,771		—		91,771		177,162		1,948,661
Other		104,200		—		—		—		—		104,200

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

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 December 31, 2012 one residential real estate loan totaling $246,609, and two commercial real estate loans totaling $885,992 were past due less than 90 days and carried as nonaccrual at management’s discretion based on the afore mentioned qualifications. As of December 31, 2012 loans past due over 90 and still accruing have been examined by management to ensure they are well-secured and in the process of collection of past due amounts.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

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

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

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

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

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

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

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

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

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


Rating:	Unsecured		Cash Value		Residential Real Estate		Commercial Real Estate		Business Assets		Vehicles		Other		Total
Grade 1 (Prime)	$	900	$	27,496	$	—	$	—	$	—	$	—	$	—	$	28,396
Grade 2 (Superior)		16,163		220,824		—		339,757		—		3,969		—		580,713
Grade 3 (Acceptable-Average)		678,806		3,061,567		9,685,196		111,762,353		1,758,313		1,295,909		—		128,242,144
Grade 4 - Fair (Watch)		—		66,287		980,562		5,477,217		—		18,387		—		6,542,453
Grade 5 (Special Mention)		—		—		860,863		16,236,103		288,068		175,254		—		17,560,288
Grade 6 (Substandard)		126,669		—		13,077,811		51,536,986		575,472		192,989		101,655		65,611,582
Grade 7 (Doubtful)		—		—		—		—		—		—		—		—
Grade 8 (Loss)		—		17,054		—		—		—		—		—		17,054

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

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


Rating:	Unsecured		Cash Value		Residential Real Estate		Commercial Real Estate		Business Assets		Vehicles		Other		Total
Grade 1 (Prime)	$	15,490	$	27,296	$	—	$	—	$	—	$	—	$	—	$	42,786
Grade 2 (Superior)		20,127		190,867		—		354,446		—		18,929		—		584,369
Grade 3 (Acceptable-Average)		575,653		3,574,692		12,193,364		119,006,553		539,117		1,389,332		—		137,278,711
Grade 4 - Fair (Watch)		63,473		72,988		1,940,701		6,166,739		308,062		55,803		104,200		8,711,966
Grade 5 (Special Mention)		14,162		—		3,013,965		12,125,628		301,423		253,112		—		15,708,290
Grade 6 (Substandard)		159,513		61,994		13,892,036		43,464,551		672,985		231,381		—		58,482,460
Grade 7 (Doubtful)		—		—		106,814		—		—		104		—		106,918
Grade 8 (Loss)		—		—		—		—		—		—		—		—

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

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

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

At the time a loan is restructured, the Company considers the existing and anticipated cash flows and recent payment history to determine whether a restructured loan will accrue interest. Once a loan is restructured, missed payment under the revised note is an indication the customer is experiencing further cash flow difficulties, and therefore a restructure would immediately go to nonaccrual status. From time to time the Company has modified

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

loans and not accounted for them as troubled debt restructurings. Given the current economic environment, especially with respect to interest rates, there have been instances where a good customer has come in to renegotiate for a more favorable rate or one more in line with market rates. Given this and similar circumstances we have made concessions to keep the relationship. In such cases these are not and will not be accounted for or reported as a TDR. Before any loan is modified and considered as a Troubled Debt Restructure, a thorough analysis is performed on current financial information and collateral valuation to derive a payment schedule that is supported by cash flows. The existing and anticipated cash flows and recent payment history will determine whether the loan will accrue interest or not.

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


	2012		2011
Performing TDRs	$	15,166,660	$	13,360,284
Non-performing TDRs		6,472,817		7,832,091

Total TDRs	$	21,639,477	$	21,192,375

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


	December 31, 2012
	Accruing		Non-Accrual		Total
Unsecured	$	—	$	—	$	—
Cash value		—		—		—
Residential real estate		6,276,108		1,533,958		7,810,066
Commercial real estate		8,880,336		4,938,859		13,819,195
Business assets		10,216		—		10,216
Vehicles		—		—		—
Other		—		—		—

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


	December 31, 2011
	Accruing		Non-Accrual		Total
Unsecured	$	—	$	13,604	$	13,604
Cash value		—		—		—
Residential real estate		4,935,018		—		4,935,018
Commercial real estate		11,142,281		5,083,439		16,225,720
Business assets		12,205		—		12,205
Vehicles		5,828		—		5,828
Other		—		—		—

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

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

The Company recorded $536,111 and $726,270 in specific reserves as of December 31, 2012 and 2011, respectively. The Company recognized $204,143 in charge offs on TDR loans during the year ended December 31, 2012 and no charge offs for the year ended December 31, 2011.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS (CONTINUED)

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


	2012		2011
Lowered interest rate and/or payment amount	$	8,195,283	$	5,767,702
Interest only payment terms		3,434,438		3,476,659
Interest only & rate reduction		748,324		935,697
Waived interest and/or late fees		3,282,608		5,478,899
A&B note structure		1,429,139		1,015,693
Substitution of debtor		4,549,685		4,517,725

Total TDRs	$	21,639,477	$	21,192,375

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


	2012				2011
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Unsecured		—	$	—		1	$	13,604
Cash value		—		—		—		—
Residential real estate		9		7,865,546		5		4,949,688
Commercial real estate		20		13,881,050		22		16,320,317
Business assets		1		10,896		2		12,799
Vehicles		—		—		2		6,017
Other		—		—		—		—

Total TDRs		30	$	21,757,492		32	$	21,302,425

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

In the ordinary course of business, the Company has granted loans to certain related parties including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans for the year ended December 31, 2012 are as follows:


Balance, beginning of year	$	2,870,488
Advances		1,106,270
Repayments		(295,509	)
Change in related parties		3,916,765

Balance, end of year	$	7,598,014

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.

PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:


	December 31,
	2012			2011
Land	$	1,359,497		$	1,359,497
Buildings and improvements		9,172,868			8,931,190
Furniture and equipment		4,542,210			4,486,276

		15,074,575			14,776,963
Accumulated depreciation		(6,112,352	)		(5,639,914	)

	$	8,962,223		$	9,137,049

Depreciation expense was $502,681 and $520,548 for the years ended December 31, 2012 and 2011, respectively.

Leases

The Company has an operating sublease agreement for the rental of a branch banking facility at Hartsfield Jackson Atlanta International Airport. The sublease agreement covers approximately 475 square feet of space located in the main terminal of the airport. The sublessor agreed to pay the Company’s obligations under the sublease with the exception of the Company’s pro rata share of actual maintenance and operating costs for the Bank center (currently estimated at $25 per square foot per year). The lease calls for lease payments of $1,000 per month and has a term of five years.

The Company also has an operating lease agreement for the rental of an ATM location inside a retail shopping center in Albany, Georgia. The lease calls for lease payments of $950 per month and has a lease term of three years.

The following represents the minimum monthly lease payments under noncancelable operating leases:


2013	$	23,400
2014		14,850
2015		12,000
2016		12,000
2017		5,000

Total	$	67,250

Total rental expense for the years ended December 31, 2012 and 2011 was $71,033 and $71,544, respectively.

NOTE 7.

FORECLOSED REAL ESTATE

A summary of foreclosed real estate are presented as follows:


	Years Ended December 31,
	2012			2011
Balance, beginning of year	$	18,151,601		$	8,917,239
Additions		3,371,256			10,270,956
Capitalized expenses		449,679			92,108
Writedowns		(763,358	)		(351,680	)
Sales		(163,281	)		(31,749	)
Internally financed sales		(1,708,011	)		(708,607	)
Net gain (loss) on sales		(37,993	)		(36,666	)
Deferred gain on sale		187,292			—

Balance, end of year	$	19,487,185		$	18,151,601

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.

FORECLOSED REAL ESTATE (CONTINUED)

Included in the amount of writedowns above are direct charges related to specifically identified declines in value of $33,139 and $166,680 for the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, the general reserve was funded by $730,219 for probable losses related to selling and holding costs. During the year ended December 31, 2011, a general reserve of $185,000 was established for probable losses related to selling and holding costs.

As of December 31, 2012 and 2011, deferred gains on sales of foreclosed real estate of $396,962 and $312,950, respectively are included in the balance sheet as a reduction of loans.

(Income) expenses applicable to foreclosed real estate include the following:


	Years Ended December 31,
	2012		2011
Net loss on sales of real estate	$	37,993	$	36,666
Operating expenses, net of rental income		697,952		705,966

Total	$	735,945	$	742,632

NOTE 8.

DEPOSITS

Deposit account balances at December 31, 2012 and 2011 are summarized as follows:


	2012		2011
Non-interest bearing	$	33,116,883	$	28,433,587
Interest-bearing demand		4,835,768		5,513,729
Money market		20,595,812		22,220,023
Individual savings		10,632,569		9,567,472
Time deposits $100,000 or greater		137,865,996		126,350,997
Other time deposits		74,294,305		84,812,974

Total	$	281,341,333	$	276,898,782

The scheduled maturities of time deposits at December 31, 2012 are as follows:


2013	$	117,237,648
2014		51,721,125
2015		20,519,434
2016		8,230,852
2017 and thereafter		14,451,242

Total	$	212,160,302

At December 31, 2012 and 2011, the Company had brokered deposits of $6,171,499 and $13,854,654, respectively.

At December 31, 2012 and 2011, overdraft demand deposits reclassified to loans totaled $71,909 and $62,961, respectively.

NOTE 9.

NOTE PAYABLE

The Company has a line of credit with a financial institution that was later taken into receivership in 2010. Under the terms of the line of credit, the Company could borrow funds during the first two years “draw period” of the agreement. During the “draw period,” interest only payments were due on a quarterly basis. Effective September 1, 2006, the Company was required to begin amortizing the loan over a ten year period maturing June 1, 2016 through equal annual principal payments and accrued interest payments due quarterly. This line of credit is secured by the outstanding shares of Capitol City Bank & Trust common stock. As of December 31, 2012 and 2011, total borrowings under this line of credit were $275,250.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.

NOTE PAYABLE (CONTINUED)

On April 10, 2009, certain terms of the line of credit were modified including the increase in the interest rate to prime plus 3.00%. The Company is required to make principal payments of $45,875 per quarter together with accrued interest. Payments totaling $91,750 were due in 2011 and $183,500 were due in 2010, but were not paid and a waiver has not been provided by the lender due to the receivership of the originating institution. At December 31, 2012, the Company remains in the process of renewing the note subject to regulatory approval of the proposed terms and conditions. Under the terms of the note, the lender has the right to call the note due and payable; however, payment of such would likely be subject to regulatory approval of the FDIC since the source of payments of this note is from the holding company which derives its cash from dividends paid from the Bank. However, as of December 31, 2012, the Bank is unable to pay dividends to the holding company due to the consent order with the FDIC.

Contractual maturities of the note payable are as follows:


2013	$	275,250
2014		—

Total	$	275,250

NOTE 10.

OTHER BORROWINGS

At December 31, 2012, the Company had a federal fund line available with a correspondent bank of $5,000,000. The Company also had an available repurchase line with a correspondent bank of $10,000,000 and a borrowing capacity through the Federal Reserve Discount Window of $2,261,024. The availability through the Federal Reserve Discount Window is secured by one investment security available for sale with a carrying value of $2,553,994 at December 31, 2012.

FHLB advances are secured by a lien on the Company’s FHLB stock, the Company’s deposits with the FHLB, and specific loans with total unpaid principal of $17,519,320. As of December 31, 2012 and 2011, the Company had advances outstanding with the FHLB totaling $5,500,000. As of December 31, 2012, advances had a weighted average rate of 0.37% and mature on various dates between April 3, 2013 and July 19, 2013.

On May 10, 2010, the Company was notified by the FHLB that, based on the current financial and operating condition of the Company, all credit availability of the Company with the FHLB had been rescinded. Additionally, the Company is also now required to provide all collateral underlying existing advances outstanding for safekeeping at the FHLB. On March 23, 2011, the Company was notified that its credit availability had been reinstated, for a maximum of 4% of the total assets of the Bank. At December 31, 2012, the Company had credit availability with FHLB of $6,276,974.

NOTE 11.

TRUST PREFERRED SECURITIES

In 2003, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities in a private placement offering. The grantor trust has invested the proceeds of the trust preferred securities in subordinated debentures of the Company. The trust preferred securities can be redeemed, in whole or in part, from time to time, prior to maturity at the option of the Company on or after April 7, 2008. The sole assets of the grantor trust are the Junior Subordinated Debentures of the Company (the “Debentures”). The Debentures have the same variable interest rate of LIBOR plus 3.3% provided that the applicable interest rate could not exceed 12.5% through April 7, 2008 (3.61% at December 31, 2012). The Company had the right to defer interest payments on the Debentures up to ten consecutive semi-annual periods (five years), so long as the Company is not in default under the subordinated debentures. Interest compounds during the deferral period. No deferral period may extend beyond the maturity date.

The preferred securities are subject to redemption, in whole or in part, upon repayment of the subordinated debentures at maturity on April 7, 2033 or their earlier redemption. The Company has the right to redeem the debentures, in whole or in part, from time to time, on or after April 7, 2008, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11.

TRUST PREFERRED SECURITIES (CONTINUED)

The Company has guaranteed the payment of all distributions the Trust is obligated to make, but only to the extent the Trust has sufficient funds to satisfy those payments. The Company and the Trust believe that, taken together, the obligations of the Company under the Guarantee Agreement, the Trust Agreement, the Subordinated Debentures, and the Indenture provide, in the aggregate, a full, irrevocable and unconditional guarantee of all of the obligations of the Trust under the Preferred Securities on a subordinated basis.

The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank and financial holding companies. In calculating the amount of Tier 1 qualifying capital, the trust preferred securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock.

The trust preferred securities and the related Debentures were issued on April 7, 2003. Both financial instruments bear an identical annual rate of interest at 3.61% at December 31, 2012. Distributions on the trust preferred securities are paid quarterly on January 7, April 7, July 7, and October 7 of each year, beginning July 7, 2003. Interest on the Debentures is paid on the corresponding dates. The Company has exercised its right to defer payment of interest on the Debentures beginning during the first quarter of 2010, continuing through December 31, 2012. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2012 and 2011 was $3,403,000. The aggregate principal amount of Debentures outstanding at December 31, 2012 and 2011 was $3,403,000.

NOTE 12.

EMPLOYEE BENEFIT PLANS

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. Other pertinent information related to the options is as follows:

A summary of stock option activity under the Plan as of December 31, 2012 and 2011, and changes during the years then ended is presented below:


December 31, 2012	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at January 1, 2012		178,656		$	0.94
Granted		—			—
Forfeited		(24,000	)		0.94
Expired		(37,361	)		0.94
Exercised		(10,639	)		0.94

Outstanding at December 31, 2012		106,656		$	0.94		0.25

Vested at December 31, 2012		106,656		$	0.94		0.25

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12.

EMPLOYEE BENEFIT PLANS (CONTINUED)


December 31, 2011	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at January 1, 2011		178,656	$	0.94
Granted		—		—
Forfeited		—		—
Exercised		—		—

Outstanding at December 31, 2011		178,656	$	0.94		1.0

Vested at December 31, 2011		178,656	$	0.94		1.0

There was no compensation cost related to share-based payments for the years ended December 31, 2012 and 2011.

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

Employee Stock Purchase Plan

In 2007, the Company adopted a stock purchase plan. Under the plan, employees of the Company meeting certain eligibility requirements are eligible to participate in the plan. Participants in the plan may participate through payroll deductions which are limited to 15% of gross pay. The purchase price of the shares of common stock is based on 85% of the fair market value. The initial offering commenced on January 1, 2007. For the years ended December 31, 2012 and 2011, no shares were purchased under the plan. A total of 7,440 shares have been purchased under the plan as of December 31, 2012.

401(k) Profit-Sharing Plan

The Company has a 401(k) profit-sharing plan covering all employees, subject to certain minimum age and service requirements. Contributions to the plan charged to expense for the years ended December 31, 2012 and 2011 amounted to $88,001 and $81,732, respectively.

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.

NOTE 14.

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.

On March, 19, 2012, the Company began accepting the subscriptions of several investors in a private placement offering to accredited investors under an exemption from registration contained in Section 4(2) of the Securities Act of 1933 and Rule 505 and 506 of Regulation D under the Securities Act. The Company is offering a maximum of 1,000,000 shares of its common stock at a price of $2.50 per share. If all of the shares are purchased, the total raised would be $2.5 million, less offering expenses of approximately $10,000. The offering closed in 2012 and 448,000 shares were sold for $1,120,000.

On April 24, 2012, the Company entered into an agreement with SunTrust Bank to sell 10,000 shares of Series C cumulative nonvoting, $100 par value preferred stock for cash consideration of $1,000,000. No underwriting

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

discounts or commissions were paid. The transaction was exempt under the Securities Act of 1933, as amended, in reliance on Section 4(2) thereof, as a transaction by an issuer not involving a public offering. The proceeds were used to inject capital into the Company’s subsidiary bank.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15.

INCOME TAXES

Income tax benefit consists of the following:


	Years Ended December 31,
	2012		2011
Current	$	—	$	—
Deferred		—		—

Income tax benefit	$	—	$	—

The Company’s income tax expense (benefit) differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows:


	Years Ended December 31,
	2012			2011
Tax benefit at statutory federal rate	$	(588,787	)	$	(542,338	)
Tax-free income		(18,685	)		(5,130	)
Disallowed interest expense		1,711			562
State income tax benefit		(65,861	)		(59,153	)
Valuation allowance		662,175			597,497
Other items, net		9,447			8,562

Income tax benefit	$	—		$	—

The components of the net deferred tax asset, included in other assets, are as follows:


	Years Ended December 31,
	2012			2011
Deferred tax assets:
Loan loss reserves	$	1,078,736		$	1,058,955
Reserve for other real estate		495,163			494,783
Income tax loss carryover		2,644,960			2,045,540
Other		9,130			6,252

		4,227,989			3,605,530

Deferred tax liabilities:
Depreciation		166,103			205,819

Valuation allowance		(4,061,886	)		(3,399,711	)

Net deferred tax assets	$	—		$	—

The Company has net operating loss carryforwards expiring in 2029, if not utilized.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16.

LOSSES PER COMMON SHARE

Presented below is a summary of the components used to calculate basic and diluted earnings per common share:


	Years Ended December 31,
	2012			2011
Net loss available to common shareholders	$	(1,793,881	)	$	(1,657,267	)

Weighted average common shares outstanding		10,167,367			9,818,338
Net effect of the assumed exercise of stock options based on the treasury stock method using the average market price for the period		104,843			111,481

Average number of common shares outstanding used to calculate diluted earnings per common share		10,292,210			9,929,819

Weighted average common shares outstanding are used in the diluted earnings per share calculation for the years ended December 31, 2012 and 2011, as there was a net loss, and inclusion of common stock equivalents would have been anti-dilutive.

NOTE 17.

COMMITMENTS AND CONTINGENCIES

Loan Commitments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The majority of all commitments to extend credit and standby letters of credit are variable rate instruments.

The Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. A summary of the Company’s commitments is as follows:


	December 31,
	2012		2011
Commitments to extend credit	$	4,733,000	$	4,196,000
Financial standby letters of credit		503,000		544,000
Other standby letters of credit		488,000		340,000

	$	5,724,000	$	5,080,000

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies and is required in instances which the Company deems necessary.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17.

COMMITMENTS AND CONTINGENCIES (CONTINUED)

At December 31, 2012 and 2011, the carrying amount of liabilities related to the Company’s obligation to perform under financial standby letters of credit was insignificant. The Company has not been required to perform on any financial standby letters of credit, and the Company has not incurred any losses on financial standby letters of credit for the years ended December 31, 2012 and 2011.

Contingencies

The Company’s nature of business is such that it ordinarily results in a certain amount of litigation. In the opinion of management for the Company, there is no litigation in which the outcome will have a material effect on the consolidated financial statements.

NOTE 18.

CONCENTRATIONS OF CREDIT

The Company originates primarily commercial, residential, and consumer loans to customers in Fulton County, Dougherty County, Chatham County, Richmond County, metropolitan Atlanta, and to various minority groups throughout the southeastern United States. The ability of the majority of the Company’s customers to honor their contractual loan obligations is dependent on the economy in these market areas. Ninety-six percent of the Company’s loan portfolio is concentrated in loans secured by real estate, of which a substantial portion is secured by real estate in the Company’s primary market areas. Included in loans secured by real estate are loans to churches and convenience stores in the Company’s market areas which make up twenty-five percent and twenty-seven percent, respectively, of the total loan portfolio. Accordingly, the ultimate collectability of the Company’s loan portfolio is susceptible to changes in real estate conditions in the Company’s primary market areas. The other concentrations of credit by type of loan are set forth in Note 5.

The Company, as a matter of policy, does not generally extend credit to any single borrower or group of related borrowers in excess of 25% of the Bank’s statutory capital or net assets, as defined, which amounted to approximately $2,800,000 at December 31, 2012.

The Company has cash deposits with a financial institution in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution were not to honor its contractual liability, the Company could incur losses. Management is of the opinion that there is no material risk because of the financial strength of the institution.

NOTE 19.

REGULATORY MATTERS

The Bank is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2012, no dividends could be declared without regulatory approval.

The Company, on a consolidated basis, and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined by the regulations), to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).

On January 13, 2010, the Company received a consent order (“order”) from the Federal Deposit Insurance Corporation and the Georgia Department of Banking and Finance. 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:

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.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19.

REGULATORY MATTERS (CONTINUED)

As of December 31, 2012, the Bank’s capital amounts and ratios fall under the category of “under capitalized” under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table and also must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by federal banking regulators. Management has implemented plans to raise additional capital to restore the Bank and Company to “well-capitalized” status.

The Company and Bank’s actual capital amounts and ratios are presented in the following table.


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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19.

REGULATORY MATTERS (CONTINUED)


	Actual					Minimum Required for Capital Adequacy Purposes					Minimum Required For Compliance With Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in Thousands)
As of December 31, 2011:
Total Capital to Risk Weighted Assets:
Consolidated	$	14,075		5.47	%	$	20,585		8.00	%		N/A		N/A
Bank	$	15,237		5.93	%	$	20,566		8.00	%	$	25,708		10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated	$	10,837		4.21	%	$	10,292		4.00	%		N/A		N/A
Bank	$	12,000		4.67	%	$	10,283		4.00	%		N/A		N/A
Tier I Capital to Average Assets:
Consolidated	$	10,837		3.62	%	$	11,961		4.00	%		N/A		N/A
Bank	$	12,000		4.02	%	$	11,952		4.00	%	$	23,904		8.00	%

NOTE 20.

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

Fair Value Hierarchy

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

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20.

FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)

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.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20.

FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)

Assets and Liabilities Measured at Fair Value:

Assets measured at fair value are summarized below:


	December 31, 2012
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Assets
Recurring fair value measurements:
Debt securities available for sale:
U.S. Government sponsored enterprises (GSEs)	$	2,005,760	$	—	$	2,005,760	$	—
State, county and municipals		9,307,627		—		9,307,627		—
Mortgage-backed securities GSE residential		30,880,902		—		30,880,902		—
Trust preferred securities		365,438		—		—		365,438

Total debt securities available for sale		42,559,727		—		42,194,289		365,438
Equity securities		50,000		—		—		50,000

Investment securities available for sale	$	42,609,727	$	—	$	42,194,289	$	415,438

Nonrecurring fair value measurements:
Impaired loans	$	25,525,940	$	—	$	—	$	25,525,940	$	(1,848,164	)
Foreclosed real estate		5,412,435		—		—		5,412,435		(802,157	)

Total nonrecurring fair value measurements	$	30,938,375	$	—	$	—	$	30,938,375	$	(2,650,321	)

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


	Quantitative Information About Level 3 Fair Value Measurements
Asset Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Impaired loans	$	25,525,940	Appraisal of collateral (1)	Liquidation expenses (2)	0.0% to-8.0% (-6.89%)

				Discount for lack of marketability and age of appraisal	0.0% to-92.0% (3.39%)

Foreclosed real estate	$	5,412,435	Appraisal (1)	Liquidation expenses (2)	0.0% to-7.0% (-6.9%)

				Discount for lack of marketability and age of appraisal	0.0% to-18.0% (1.3%)

(1)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include level 3 inputs which are not identifiable.

(2)	Appraisals may be adjusted by management for qualitative factors including estimated liquidation expenses. The range of adjustments including liquidation expenses is presented as a percent of the appraisal.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	December 31, 2011
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
Assets
Recurring fair value measurements:
Debt securities available for sale:
State, county and municipals	$	15,964,231	$	—	$	15,964,231	$	—
Mortgage-backed securities GSE residential		25,924,471		—		25,924,471		—
Trust preferred securities		627,875		—		—		627,875

Total debt securities available for sale		42,516,577		—		41,888,702		627,875
Equity securities		50,000		—		—		50,000

Investment securities available for sale	$	42,566,577	$	—	$	41,888,702	$	677,875

Nonrecurring fair value measurements:
Impaired loans	$	21,155,090	$	—	$	—	$	21,155,090	$	(2,844,797	)
Foreclosed real estate		998,820		—		—		998,820		(166,680	)

Total nonrecurring fair value measurements	$	22,153,910	$	—	$	—	$	22,153,910	$	(3,011,477	)

In relation to the securities classified as available-for-sale which are reported at fair value utilizing Level 2 inputs, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The investments in the Company’s portfolio are generally not quoted on an exchange but are actively traded in the secondary institutional markets.

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

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


	December 31, 2012								December 31, 2011
	Debt Securities Available for Sale			Equity Securities		Total			Debt Securities Available for Sale		Equity Securities		Total
Opening Balance	$	627,875		$	50,000	$	677,875		$	627,875	$	50,000	$	677,875
Total gains or losses for the period
Loss on OTTI Impairment included in earnings		(262,437	)		—		(262,437	)		—		—		—
Included in other comprehensive income		—			—		—			—		—		—

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

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20.

FAIR VALUE OF ASSETS AND LIABILITIES (CONTINUED)

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

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

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


	December 31, 2012
	Carrying Amount		Fair Value Level
	Carrying Amount		Level 1		Level 2		Level 3		Total
Financial assets:
Interest-bearing deposits at other financial institutions	$	727,124	$	727,124	$	—	$	—	$	727,124
Federal funds sold		6,340,000		6,340,000		—		—		6,340,000
Restricted equity securities		691,900		—		691,900		—		691,900
Loans, net		212,260,549		—		—		212,704,841		212,704,841
Financial liabilities:
Deposits		281,341,333		—		283,707,789		—		283,707,789
Note payable		275,250		—		—		275,250		275,250
Federal Home Loan Bank advances		5,500,000		—		5,495,163		—		5,495,163
Company guaranteed trust preferred securities		3,403,000		—		—		3,403,000		3,403,000


	December 31, 2011
	Carrying Amount		Fair Value
Financial assets:
Interest-bearing deposits at other financial institutions	$	635,511	$	635,511
Federal funds sold		595,000		595,000
Restricted equity securities		792,900		792,900
Loans, net		215,018,097		217,575,824
Financial liabilities:
Deposits		276,898,782		276,218,543
Note payable		275,250		275,250
Federal Home Loan Bank advances		5,500,000		5,499,756
Company guaranteed trust preferred securities		3,403,000		3,403,000

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21.

SUPPLEMENTAL FINANCIAL DATA

Components of other operating expenses in excess of 1% of total revenue are as follows:


	Years Ended December 31,
	2012		2011
Security	$	350,812	$	338,418
Computer expenses		1,054,511		946,362
Audit and professional fees		1,002,264		865,853
Telephone expenses		159,583		152,275
FDIC insurance assessments		1,010,325		1,101,069

NOTE 22.

SUBSEQUENT EVENTS

The Company performed an evaluation of subsequent events through April 15, 2013, the date upon which the Company’s financial statements were available for issue. The Company has not evaluated subsequent events after this date.

Effective February 4, 2013, the Company’s $5,000,000 federal funds line of credit with a correspondent bank was closed.

Subsequent to December 31, 2012, the Company discovered a material misappropriation of cash due to suspected collusion of employees. Management is working diligently with the appropriate authorities in this matter and believes that this misappropriation is fully covered, less appropriate deductibles, by its insurance policies.

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.

PARENT COMPANY FINANCIAL INFORMATION

The following information presents the condensed balance sheets, statements of operations and cash flows of Capitol City Bancshares, Inc., as of and for the years ended December 31, 2012 and 2011:

CONDENSED BALANCE SHEETS


	2012		2011
Assets
Cash	$	4,817	$	13,051
Investment in subsidiaries		12,568,312		12,115,516
Investment in trust preferred securities		103,000		103,000
Securities available for sale		50,000		50,000
Other assets		64,839		73,239

Total assets	$	12,790,968	$	12,354,806

Liabilities and Stockholders’ Equity
Other liabilities	$	696,134	$	474,872
Note payable		275,250		275,250
Company guaranteed trust preferred securities		3,403,000		3,403,000
Stockholders’ equity		8,416,584		8,201,684

Total liabilities and stockholders’ equity	$	12,790,968	$	12,354,806

CONDENSED STATEMENTS OF OPERATIONS


	2012			2011
Income
Interest income	$	212		$	—
Dividends from bank subsidiary		—			—
Other income		—			—

Total income		212			—


Expense
Interest expense		159,106			148,062
Other expenses		118,096			45,413

Total expenses		277,202			193,475


Income (loss) before income tax benefit and equity in undistributed income (loss) of subsidiaries		(276,990	)		(193,475	)

Income tax benefit		—			—


Loss before equity in undistributed income (loss) of subsidiaries		(276,990	)		(193,475	)

Equity in undistributed income (distributions in excess of earnings) of subsidiaries		(1,454,735	)		(1,401,636	)


Net income (loss)	$	(1,731,725	)	$	(1,595,111	)

Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23.

PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS


	2012			2011
OPERATING ACTIVITIES
Net income (loss)	$	(1,731,725	)	$	(1,595,111	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
(Earnings) losses of subsidiaries		1,454,735			1,401,636
Net other operating activities		—			156,462


Net cash used in operating activities		(276,990	)		(37,013	)


INVESTING ACTIVITIES
Capital contribution in bank		(1,851,245	)		(75,000	)


Net cash used in investing activities		(1,851,245	)		(75,000	)


FINANCING ACTIVITIES
Proceeds from issuance of preferred stock		1,000,000			—
Proceeds from issuance of common stock from secondary stock offering		1,120,001			110,480
Proceeds from exercise of stock options		10,001			—


Net cash provided by financing activities		2,120,001			110,480


Net decrease in cash		(8,234	)		(1,533	)

Cash at beginning of year		13,051			14,584


Cash at end of year	$	4,817		$	13,051

Index to Financial Statements


	NICHOLS, CAULEY & ASSOCIATES, LLC
	A Professional Services Firm of: Certified Public Accountants Certified Internal Auditors Certified Financial Planners^® Certified Valuation Analysts	REPLY TO: 2800 Century Pkwy., Ste. 900 Atlanta, Georgia 30345 800-823-1224 FAX 404-214-1302 atlanta@nicholscauley.com
Atlanta — Clarkesville — Dublin — Warner Robins www.nicholscauley.com

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S

REPORT ON SUPPLEMENTAL INFORMATION

Board of Directors

Capitol City Bancshares, Inc.

Atlanta, Georgia

We have audited the consolidated financial statements of Capitol City Bancshares, Inc. and subsidiaries as of and for the year ended December 31, 2012, and our report thereon dated April 15, 2013, which expressed an unqualified opinion on those consolidated financial statements, appears on page 1. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying supplementary information as listed in the table of contents for the year ended December 31, 2012, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

/s/ Nichols, Cauley and Associates, LLC

Atlanta, Georgia

April 15, 2013

Index to Financial Statements

CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2012


	Capitol City Bank & Trust		Capitol City Bancshares, Inc.		Capitol City Home Loans		Eliminations			Consolidated
Assets
Cash and due from banks	$	7,807,478	$	4,817	$	35,770	$	(40,587	)	$	7,807,478
Interest-bearing deposits at other financial institutions		727,124		—		—		—

CAPITOL CITY BANCSHARES INC 10-K