<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-25227
---------
CAPITOL CITY BANCSHARES, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58 - 1994305
- ------- ------------
(State or other jurisdiction of (I.R.S. Employment
Incorporation or organization) Identification Number)
562 Lee Street, S.W.
Atlanta, Georgia 30311
- ---------------- -----
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (404) 752-6067
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 1, 1999: 532,088
Transitional Small Business Disclosure Format (check one) Yes _____ No X
---
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
---------------------
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet
as of March 31, 1999 3
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three Months Ended
March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 1999 and 1998 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-15
Part II Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
------
Cash and due from banks $ 2,411,898
Federal funds sold 3,221,000
Securities available-for-sale, at fair value 20,380,856
Loans 23,947,551
Less allowance for loan losses 245,561
--------------------
Loans, net 23,701,990
--------------------
Premises and equipment 2,534,774
Other assets 599,453
--------------------
TOTAL ASSETS $ 52,849,971
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DEPOSITS
Demand $ 18,245,460
Interest-bearing demand 1,512,288
Savings 3,518,811
Time 23,251,505
--------------------
TOTAL DEPOSITS 46,528,064
Other liabilities 268,437
--------------------
TOTAL LIABILITIES 46,796,501
--------------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, par value $6; 5,000,000 shares authorized;
532,088 shares issued and outstanding 3,192,528
Capital surplus 2,128,352
Retained earnings 729,316
Accumulated other comprehensive income 3,274
--------------------
TOTAL STOCKHOLDERS' EQUITY 6,053,470
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 52,849,971
====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
------------------ ---------------
<S> <C> <C>
INTEREST INCOME
Loans $ 593,786 $ 439,184
Taxable securities 260,690 233,070
Federal funds sold 41,014 41,059
------------------ ---------------
TOTAL INTEREST INCOME 895,490 713,313
INTEREST EXPENSE ON DEPOSITS 350,210 270,039
------------------ ---------------
NET INTEREST INCOME 545,280 443,274
PROVISION FOR LOAN LOSSES 15,000 25,000
------------------ ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 530,280 418,274
------------------ ---------------
OTHER INCOME
Service charges on deposit accounts 259,216 209,507
Other operating income 32,989 55,008
------------------ ---------------
TOTAL OTHER INCOME 292,205 264,515
------------------ ---------------
OTHER EXPENSES
Salaries and other employee benefits 319,126 265,897
Occupancy and equipment expenses 84,209 59,545
Other operating expenses 291,420 168,285
------------------ ---------------
TOTAL OTHER EXPENSES 694,755 493,727
------------------ ---------------
NET INCOME BEFORE INCOME TAXES 127,730 189,062
INCOME TAX EXPENSE 23,863 64,280
------------------ ---------------
NET INCOME 103,867 124,782
------------------ ---------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities available-for-sale
arising during period, net of tax (99,311) 63,710
------------------ ---------------
Other comprehensive income (loss) (99,311) 63,710
------------------ ---------------
COMPREHENSIVE INCOME $ 4,556 $ 188,492
================== ===============
BASIC AND DILUTED INCOME PER COMMON SHARE $ 0.20 $ 0.23
================== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC AND DILUTED) 532,088 532,088
================== ===============
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ - $ -
================== ===============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 103,867 $ 124,782
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 45,799 29,516
Provision for loan losses 15,000 25,000
Other operating activities (204,550) (281,444)
----------------- ----------------
Net cash used in operating activities (39,884) (102,146)
----------------- ----------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (4,499,082) (687,700)
Proceeds from maturities of securities available-for-sale 1,703,117 0
Net (increase) decrease in Federal funds sold 105,000 (272,000)
Net increase in loans (2,071,398) (570,137)
Purchase of premises and equipment (97,449) (21,797)
----------------- ----------------
Net cash used in investing activities (4,859,812) (1,551,634)
----------------- ----------------
FINANCING ACTIVITIES
Net increase in deposits 5,175,375 1,215,105
----------------- ----------------
Net cash provided by financing activities 5,175,375 1,215,105
----------------- ----------------
Net increase (decrease) in cash and due from banks 275,679 (438,675)
Cash and due from banks, beginning of period 2,136,219 1,878,666
----------------- ----------------
Cash and due from banks, end of period $ 2,411,898 $ 1,439,991
================= ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
CAPITOL CITY BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial information included herein is unaudited;
however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of results for the interim
periods.
The results of operations for the three month period ended March 31,
1999 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2. CURRENT ACCOUNTING DEVELOPMENTS
In April of 1998 the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, "Reporting on the Costs of Start Up
Activities". SOP 98-5 requires that costs of startup activities and
organization costs be expensed as incurred. SOP 98-5 became effective
for financial statements for fiscal years beginning after December 15,
1998. Upon adoption of SOP 98-5 on January 1, 1999, the Company
expensed $32,414 of unamortized organization costs initially
capitalized in connection with the formation of the holding company in
1998.
In June of 1998 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier
adoption is encouraged, but permitted only as of the beginning of any
fiscal quarter that begins after June 1998. The Company has not
determined the effect of SFAS 133 on its financial condition and
results of operations at this time.
There are no other recent accounting pronouncements that have had, or
are expected to have, a material effect on the Company's financial
statements.
6
<PAGE>
CAPITOL CITY BANKSHARES, INC. AND SUBSIDIARY
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain forward-looking statements which are
based on certain assumptions and describe future plans, strategies, and our
expectations. These forward-looking statements are generally identified by use
of the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
or similar expressions. Our ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse effect on our operations include, but are not limited to,
changes in interest rates, general economic conditions, legislation and
regulation, monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of our loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in our market area,
and accounting principles and guidelines. You should consider these risks and
uncertainties in evaluating forward-looking statements and should not place
undue reliance on such statements. We will not publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
FINANCIAL CONDITION
Total assets increased during the first quarter of 1999 from $47.8 million to
$52.8 million, or 10.50% for the quarter. The increase in total assets in 1999
is above the 9.89% growth for the same period in 1998. The growth in both years
was funded by an increase in total deposits of $5.2 million and $3.4 million,
respectively. The increase in total assets for the quarter ended March 31, 1999
consisted primarily of an increase of $2.6 million in securities and an increase
of $2.1 million in net loans. The loan to deposit ratio at March 31, 1999 was
51% compared to 50% at March 31, 1998. For the first quarter of 1999, deposit
growth continued to grow at a faster pace than loans, as the loan to deposit
ratio decreased from 53% at December 31, 1998.
7
<PAGE>
LIQUIDITY
Liquidity management involves the matching of the cash flow requirements of
customer withdrawals of funds and the funding of loan originations, and the
ability of the Company's subsidiary bank to meet those requirements. Management
monitors and maintains appropriate levels of liquidity so that maturities of
assets and deposit growth are such that adequate funds are provided to meet
estimated customer withdrawals and loan requests.
At March 31, 1999, the Bank's liquidity was more than adequate in relation to
regulatory guidelines and internal target ratios. The liquidity ratio was 37% at
March 31, 1999.
REGULATORY CAPITAL REQUIREMENTS
Banking regulations require the Company and Bank to maintain minimum capital
levels in relation to assets. At March 31, 1999, the Company's capital ratios
were considered adequate based on regulatory minimum capital requirements. The
minimum capital requirements and the actual capital ratios for the Bank at March
31, 1999 are as follows:
<TABLE>
<CAPTION>
Regulatory
Actual Requirement
<S> <C> <C>
Leverage Capital Ratio 11.81% 4.00%
Risk-Based Capital Ratios
Core Capital 18.44% 4.00%
Total Capital 19.19% 8.00%
</TABLE>
Management is not aware of any other current recommendations by the regulatory
authorities, events or trends, which, if they were to be implemented, would have
a material effect on the Company's liquidity, capital resources, or operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET INTEREST INCOME. Net interest income increased by $102,000 for the quarter
ended March 31, 1999 compared to the same period in 1998, or by 23.01%. The
comparable increase in 1998 was $101,000. The increase in net interest income
for the quarter ended March 31, 1999 is attributable to an increase in earning
assets of $11,345,000 as compared to March 31, 1998. During this same period,
total deposits increased by $13,011,000, of which $9,139,000 was noninterest-
bearing deposits. The overall result of an increase in net interest income is
based on the spread between rates earned on interest earning assets and rates
paid on interest bearing liabilities.
The net interest margin was 4.74% and 5.14% at March 31, 1999 and 1998,
respectively.
8
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
management's evaluation of the economic environment, the history of charged off
loans and recoveries, size and composition of the loan portfolio, nonperforming
and past due loans, and other aspects of the loan portfolio. Management reviews
the allowance for loan loss on a quarterly basis and makes provisions as
necessary. A provision of $15,000 was made during the three month period ending
March 31, 1999 based upon this evaluation process. The allowance for loan loss
as a percentage of total loans was 1.03% at March 31, 1999 compared to 1.36% at
December 31, 1998. There were no nonperforming loans as of March 31, 1999.
Management believes the allowance for loan loss at March 31, 1999 is adequate to
meet any future losses in the loan portfolio.
At March 31, 1999 and December 31, 1998, nonaccrual, past due, and restructured
loans were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Total nonaccruing loans $ - $ 56
Loans contractually past due ninety days
or more as to interest or principal
payments and still accruing - 9
Restructured loans - -
</TABLE>
It is the policy of the Company to discontinue the accrual of interest income
when, in the opinion of management, collection of such interest becomes
doubtful. This status is accorded such interest when (1) there is a significant
deterioration in the financial condition of the borrower and full repayment of
principal and interest is not expected and (2) the principal or interest is more
than ninety days past due, unless the loan is both well-secured and in the
process of collection. Accrual of interest on such loans is resumed when, in
management's judgment, the collection of interest and principal becomes
probable.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention that have not been included in the table above do not represent
or result from trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity, or capital resources.
These classified loans do not represent material credits about which management
is aware of any information which causes management to have serious doubts as to
the ability of such borrowers to comply with the loan repayment terms.
9
<PAGE>
Information regarding certain loans and allowance for loan loss data through
March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Average amount of loans outstanding $ 22,668 $ 16,434
========== ==========
Balance of allowance for loan losses at beginning of period $ 299 $ 272
Loans charged off
Commercial and financial (9) -
Construction - -
Real estate - -
Installment (88) (62)
---------- ----------
(97) (62)
---------- ----------
Loans recovered
Commercial and financial 3 -
Construction - -
Real estate - -
Installment 25 21
---------- ----------
28 21
---------- ----------
Net (charge-offs) recoveries (69) (41)
---------- ----------
Additions to allowance charged to operating expense during period 15 25
---------- ----------
Balance of allowance for loan losses at end of period 245 256
========== ==========
Ratio of net loans charged-off during the
period to average loans outstanding .30% .25%
========== ==========
</TABLE>
OTHER INCOME. Other income increased by $28,000 for the quarter ended March 31,
1999 compared to an increase of $39,000 for the same period in 1998. The single
most significant difference which affected both periods was increases of $50,000
and $19,000 in service charges on deposit accounts for 1999 and 1998,
respectively.
OTHER EXPENSES. Other expenses increased by $201,000, or 40.72% for the three
months ended March 31, 1999 as compared to the same period in 1998. The increase
in 1998 as compared to the same period in 1997 was $72,000. The most significant
increases in 1999 are increases of $53,000 in salaries and employee benefits and
an increase of $123,000 in other operating expenses. The increase in salaries
and employee benefits represents normal increases in salaries and the staffing
of an additional branch opened December 1998. At March 31, 1999, the number of
full-time equivalent employees was 35 compared to 29 at March 31, 1998.
10
<PAGE>
Other operating expenses increased to $291,000 at March 31, 1999. Included in
other operating expenses was $33,000 of expenses incurred of the holding
company. The majority of this amount, or $32,000, represents the immediate
write-off of organization costs in accordance with the new accounting statement
of position 98-5. Prior to the adoption of SOP 98-5, this amount would have been
written off over 60 months. There were no other significant increases in
individual amounts as compared to the same period in 1998. The two largest items
included in other operating expenses are EDP expenses and security expenses
totaling $31,000 and $30,000, respectively. Other increases were directly
related to the growth in loans and deposits.
NET INCOME. Net income decreased by $21,000 for the three months ended March 31,
1999 as compared to the same period in 1998. As discussed earlier, the primary
variance over 1998 is the adoption of SOP 98-5.
YEAR 2000 DISCLOSURES
In accordance with sound management policy and directives from various
regulatory agencies, the Company began the Year 2000 review of hardware and
software in 1997. The review included not only computer and information systems
but heating, air conditioning, alarms, vaults, elevators and other office
equipment, and was completed in 1998. The Company engaged Malgeri and Associates
of Marietta, Georgia to develop a plan to be Year 2000 compliant. The plan
identifies items that were not Year 2000 compliant and categorized items as
either mission critical or not mission critical. All mission critical items that
were noncompliant were slated for upgrade or replacement.
Mission critical items are those that allow us to process deposits and
withdrawals to deposit accounts and payments or draws to loan accounts, and the
ability to maintain accurate customer account information. Items that are not
mission critical do not affect customer accounts or are easily replaced with
less technical items.
Upon the conclusion of this review, it was determined that the loan program
software, teller software, item processing equipment and software would need
replacement and that the Bank's core system, "Caption," provided by Intercept
would need upgrading. The "Caption" system has been upgraded by Intercept
installing PC Bank Pac, a Y2K compliant system. The item processing equipment
will be replaced in June 1999 with Year 2000 compliant hardware and software. To
interface with the Intercept system, a Windows NT Network was installed, a loan
software program, "CoPilot" was installed, and a new teller system was installed
in August 1998.
A testing phase on the PC Bank Pac system upgrade is ongoing. The Company is
participating in User Group or Proxy testing. The Company and independent third
parties are in the process of reviewing the results of these tests.
The Company has contacted and remains in discussions with suppliers, large loan
customers, and large depositors regarding their Year 2000 readiness. Management
does not currently expect any Year 2000 issue to have a material impact on the
condition of the Company.
11
<PAGE>
Through December 31, 1998, the Company had incurred approximately $225,000 in
costs related to the Year 2000 issue. The majority of this cost was spent
replacing hardware and software and consulting fees. The old equipment was sold
or written off and the resulting effect of the change in depreciation is not
material. This equipment would have been replaced in the normal course of
business regardless of the Year 2000 issue, but may not have occurred in 1998.
Other items were directly expensed and did not have a material impact on the
financial condition of the Company.
The Company has budgeted for an additional $100,000 in costs to complete the
Company's Year 2000 Project, primarily to replace the proof machine in June
1999.
In the normal course of business, the Company manages many types of risks.
Because the risks associated with the Year 2000 issue are unique, the Company
has adjusted its risk management process and its contingency plans to consider
the most probable Year 2000 effects. Although it is not possible to predict what
failures may occur, the Company believes that planning, communication, and
coordination will mitigate potential material disruption.
A formal contingency plan will be completed by mid-year for backup plans for all
mission critical systems. This includes emergency response teams and offsite
recovery centers. The plan will be reviewed and tested annually for
effectiveness. Testing and training are ongoing.
12
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
None.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITOL CITY BANCSHARES, INC.
(Registrant)
-----------------------------
Date:__________________________ /s/ George G. Andrews
-----------------------------
George G. Andrews
President and Director
Date:__________________________ /s/ Kevin M. Sharpe
-----------------------------
Kevin M. Sharpe
Vice President and
Chief Financial Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,411,898
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,221,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,380,856
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 23,947,551
<ALLOWANCE> 245,561
<TOTAL-ASSETS> 52,849,971
<DEPOSITS> 46,528,064
<SHORT-TERM> 0
<LIABILITIES-OTHER> 268,437
<LONG-TERM> 0
0
0
<COMMON> 3,192,528
<OTHER-SE> 2,860,942
<TOTAL-LIABILITIES-AND-EQUITY> 52,849,971
<INTEREST-LOAN> 593,786
<INTEREST-INVEST> 260,690
<INTEREST-OTHER> 41,014
<INTEREST-TOTAL> 895,490
<INTEREST-DEPOSIT> 350,210
<INTEREST-EXPENSE> 350,210
<INTEREST-INCOME-NET> 545,280
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 694,755
<INCOME-PRETAX> 127,730
<INCOME-PRE-EXTRAORDINARY> 127,730
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,867
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 4.74
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 299
<CHARGE-OFFS> 97
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 245
<ALLOWANCE-DOMESTIC> 245
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 245
</TABLE>
