Item 1. Business.
General
The Company
Britton & Koontz Capital Corporation was organized as a Mississippi business corporation in July 1982. Later that year, the Company became a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended, when it acquired all of the issued and outstanding shares of Britton & Koontz Bank, National Association, a national banking association headquartered in Natchez, Mississippi (the “Bank”). The Bank is a wholly-owned subsidiary of the Company, and stock of the Bank is the Company’s most significant asset.
The bank has historically paid dividends to the Company in excess of the amount needed to satisfy dividends declared by the Company. However, no dividends were paid by the Bank to the Company for the year ended December 31, 2009, due to the national recession and its impact on regional and local economies. The Bank resumed paying dividends to the Company in the 2nd quarter of 2010 and paid a total of $1.2 million in dividends for the year ended December 31, 2010. The Company expects dividend payments from the Bank to be paid on a quarterly basis in 2011 consistent with the historical practice of quarterly dividend payments, which in turn will generate excess cash at the Company and continue to be the Company’s major source of income.
As of December 31, 2010, the Company had total consolidated assets of approximately $375 million and total consolidated stockholders’ equity of approximately $40 million. Financial information about the Company, including information with respect to revenues from external customers, profit and loss and total assets for 2010 and 2009, is contained in Item 8, Financial Statements and Supplementary Data.
Effective January 1, 2007, the Company entered into a Trust Services Agreement with National Independent Trust Company, a national banking association doing business as Argent Trust Company, headquartered in Ruston, Louisiana. Argent Trust Company assumed all responsibilities associated with the Bank’s trust services, having been duly appointed successor trustee for all Bank trust accounts. Argent Trust Company performs certain fiduciary services for customers transferred from and referred by the Bank to Argent Trust Company. In return, the Bank receives a specified percentage of the fee income generated by Argent Trust Company.
During the third quarter of 2009, the Company entered into a networking arrangement with Argent Financial Group, an affiliate of Argent Trust Company also based in Ruston, Louisiana, to move the Company’s brokerage business and related networking arrangements from its prior provider. Under the new networking arrangement, Argent Financial Group leases space from the Company in its Baton Rouge and Natchez offices. The Company and Argent Financial Group may refer business to their respective financial specialists; however, unlike the terms of the prior arrangement, financial consultant personnel are not employees of the Company. The Company also is no longer responsible for the office expenses and other related selling expenses associated with networking activities. The majority of the revenue the Company receives from this relationship is derived from lease payments by Argent Financial Group.
The Bank
The Bank provides commercial and consumer banking to customers in Adams and Warren Counties, Mississippi, and East Baton Rouge Parish, Louisiana, and the adjoining counties and parishes in Mississippi and Louisiana. The Bank conducts its full-service banking business from its main office and two branch offices in Natchez, Adams County, Mississippi, two branches in Vicksburg, Warren County, Mississippi, and three branch offices in Baton Rouge, East Baton Rouge Parish, Louisiana. The geographical area serviced by the Bank is economically diverse and includes public and private sector industries, including government service, manufacturing, tourism, agriculture and oil and gas exploration. The Bank is not dependent on any one customer or group of customers in any of its activities, and it has no foreign operations.
The products and services offered by the Bank include personal and commercial checking accounts, money market deposit accounts, savings accounts, automated clearinghouse services, safe deposit box facilities, and brokerage services through Argent Financial Group. The Bank also offers access to automated teller machines and cash management services including remote deposit, money transfer, direct deposit and payroll and sweep accounts. The Bank is a full-service residential and commercial mortgage lender and engages in other commercial and consumer lending activities, including, among other things, the issuance of VISA credit cards and letters of credit.
Income from the Bank’s lending activities, including loan interest, fees and gains on sales of mortgage loans, represent the largest component of the Bank’s total operating revenue. This source accounted for 61% and 58% of the Bank’s total operating revenue during 2010 and 2009, respectively. The Company expects that income from lending activities will continue in 2011 to be the leading source of income generated by the Bank’s activities. In addition to its lending activities, the Bank invests a portion of its total assets in the securities market in order to earn a higher return compared to overnight positions. Investment security purchases are monitored closely and managed on a monthly basis by an asset liability committee comprised of three non-employee directors along with the Bank’s Chief Executive Officer and Chief Financial Officer. Investment income represents the second largest source of revenue for the Bank. For the 2010 and 2009 fiscal years, revenue in this segment amounted to 26% and 32%, respectively, of the Bank’s total operating revenue. The bulk of the remainder of the Bank’s revenue in each of the last two years is attributable to fees related to deposit services.
Competition
There is significant competition among banks and bank holding companies in the Bank’s market areas and throughout Mississippi and Louisiana. The Bank competes with both national and state banks, savings and loan associations and credit unions for loans and deposits. The Bank also competes with large national banks from the principal cities in Louisiana and Mississippi for certain commercial loans. All of these numerous institutions, including the Bank, compete in the delivery of products and services on the basis of availability, quality and pricing. Many of the Bank’s competitors are better capitalized than the Bank and the Company. Most institutions track total deposits as an appropriate measure of penetration in each market. As of June 30, 2010, the last date such information is available, the Bank’s market share in relation to total deposits, according to data collected from the Federal Deposit Insurance Corporation, was approximately 25.17% and 2.23% for Adams and Warren Counties in Mississippi, respectively, and .28% in East Baton Rouge Parish in Louisiana.
The deregulation of depository institutions as well as the increased ability of non-banking financial institutions, such as finance companies, investment companies, insurance companies, brokerage companies and several governmental agencies, to provide services previously reserved to commercial banks has further intensified competition, and we expect such competition to increase. Accordingly, the Bank now competes with these non-banking financial institutions, all of which are engaged in marketing various types of loans, commercial paper, short-term obligations, investments and other services. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, in many instances they operate with greater flexibility.
Employees
As of December 31, 2010, the Company had three full-time employees, who are also employees of the Bank and compensated by the Bank. The Bank had 105 full-time and 8 part-time employees at December 31, 2009, and 106 full-time and 6 part-time employees at December 31, 2010. The employees are not represented by a collective bargaining agreement. The Company believes that its relationship with its employees is good.
Supervision and Regulation
General
The banking industry is extensively regulated under federal and state law. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Pursuant to the BHCA, the Company may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any other company, including a bank, without the prior approval of the Federal Reserve. The BHCA further limits the activities of both the Company and the Bank to the business of banking and activities closely related or incidental to banking.
As a national bank, the Bank is subject to supervision and regular examination by the Office of the Comptroller of the Currency (the “Comptroller”). The examinations are undertaken to ensure the protection of the Deposit Insurance Fund (the “DIF”). In February, 2006, the Federal Deposit Insurance Reform Act of 2005 was signed into law. Among the highlights of this law was merging the Bank Insurance Fund and the Savings Association Insurance Fund into the newly-created DIF. This change was effective March 31, 2006. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based on the institution’s consolidated assets less its tangible capital as well as on the degree of risk the institution poses to the insurance fund.
In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), which, among other things, substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act. FDICIA also expanded the regulatory and enforcement powers of bank regulatory agencies. Most significantly, FDICIA mandates annual examinations of banks by their primary regulators and requires the federal banking agencies to take prompt “corrective action” whenever financial institutions do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capitalization status will depend on how well its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. As of December 31, 2010, the Bank maintained a capital level which qualified it as being “well capitalized” under such regulations.
FDICIA also prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be “undercapitalized.”
The banking industry is affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit to moderate recessions and to curb inflation. Among the instruments of monetary policy used by the Federal Reserve to implement its objectives are open-market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. Changes in any of these policies can affect how the Bank operates and generates revenues.
Finally, the Company elected not to participate in the U.S. Treasury Department’s Capital Purchase Program, which is part of the federal government’s Troubled Asset Relief Program. Thus, it is not subject to any of the regulations enacted with respect to such program. The Company participated in the FDIC’s Transaction Account Guarantee Program, which was a part of the FDIC’s Temporary Liquidity Guarantee Program. The Transaction Account Guarantee Program expired on December 31, 2010. On account of amendments to the deposit insurance provisions of the Federal Deposit Insurance Act enacted pursuant to Section 343 of the Dodd-Frank Act (as defined below), the FDIC did not have the statutory authority to extend the Transaction Account Guarantee Program. Section 343 provides for full deposit insurance for non-interest-bearing deposit accounts until December 31, 2012. Unlike the original Transaction Account Guarantee Program, however, interest-bearing accounts are not covered. Section 343 does not impose any separate assessment on the Bank for the insurance coverage provided thereunder.
Interstate Banking and Branching Legislation
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (“Riegle-Neal”), a national bank domiciled in one state could establish branches in any other state only so long as neither state had opted out of interstate branching between the date of enactment of Riegle-Neal and May 31, 1997. The Dodd-Frank Act removed the restrictions on interstate branching contained in Riegle-Neal. National and state-chartered banks are now authorized to establish de novo branches in other states if, under the laws of the state in which the branch is to be located, a bank chartered by that state would be permitted to establish the branch. Accordingly, banks will be able to enter new markets more freely.
On December 1, 2000, the Bank acquired its first interstate branch office in Baton Rouge, Louisiana. The Company from time to time evaluates merger and acquisition opportunities, as well as opportunities to establish additional branch offices, and it anticipates that it will continue to evaluate such opportunities.
Financial Modernization
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLB Act”) was enacted into law on November 12, 1999. The GLB Act potentially affects every facet of a depository institution’s operations. The GLB Act does three fundamental things affecting the banking industry: (1) repeals key provisions of the Glass-Steagall Act to permit commercial banks to affiliate with securities firms, insurance companies and other financial service providers; (2) establishes a statutory framework pursuant to which full affiliations can occur between these entities; and (3) provides financial services organizations with flexibility in structuring these new financial affiliations through a new entity called a “financial holding company” or through a financial subsidiary.
As a result of the GLB Act, banks will be able to offer customers a wide range of financial products and services without the restraints of previous legislation. In addition, bank holding companies and other financial services providers will be able to commence new activities or new affiliations much more readily. To take advantage of the new provisions of the GLB Act, a bank holding company must elect to become a financial holding company. The Company has elected to become a financial holding company.
Anti-Money Laundering
The USA PATRIOT Act of 2001 contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as the Bank. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The IMLAFA requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit function to review and test the program. The Company believes that it has complied with the IMLAFA requirements as currently in effect.
Financial Reform Legislation
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act will significantly alter the current bank regulatory structure and affect the lending, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act includes the following provisions that, among other things:
·
Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and, for large financial institutions, enforcing compliance with federal consumer financial laws. Banks with $10 billion or less in assets will be examined by their applicable bank regulators.
·
Weaken the federal preemption available for national banks and give state attorneys general the ability to enforce applicable federal consumer protection laws.
·
Require the Office of the Comptroller of the Currency to seek to make its capital requirements for national banks, such as the Bank, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction.
·
Broaden the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the DIF and increase the floor of the size of the DIF.
·
In addition to the unlimited federal deposit insurance on non-interest bearing deposit accounts described above, make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.
·
Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
·
Authorize the FDIC to assess the cost of examinations.
·
Direct the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
Some of these provisions may have the consequence of increasing the Company’s expenses, decreasing its revenues and changing the activities in which the Company engages. The environment in which banking organizations will now operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the profitability of banking organizations that cannot now be foreseen. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities do not apply to the Company’s trust preferred securities because of the Company’s size. The specific impact of the Dodd-Frank Act on the Company’s financial performance and the markets in which its operates will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry in general.
Further Changes in Regulatory Requirements
The United States Congress and the Mississippi legislature have periodically considered and adopted legislation that has adversely affected the profitability of the banking industry. Future legislation could further modify or eliminate geographic and other business restrictions on banks and bank holding companies and current prohibitions affecting other financial institutions, including mutual funds, securities brokerage firms, insurance companies, banks from other states and investment banking firms. In addition, the United States in general, and the financial services industry in particular, is currently recovering from the economic downturn in 2008 and 2009. In response to this downturn, numerous significant legislative and regulatory changes have been proposed. The Company cannot accurately predict the ultimate outcome of such proposals or the effects of any new legislation or regulations on the business of the Company or the Bank.
Restrictions on Dividends
The Company is a legal entity separate and distinct from the Bank, and substantially all of the Company’s revenues result from amounts paid by the Bank, as dividends, to the Company. The payment of dividends by the Bank is, of course, dependent upon its earnings and financial condition. The Bank, however, as a national bank, is also subject to legal limitations on the amount of its earnings that it may pay as dividends. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller, may credit net profits to the Bank’s undivided profits account and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve have each indicated that banking organizations should generally pay dividends only out of current operating earnings.
Further, in connection with the Company’s acquisition of Natchez First Federal in 1993, the Bank assumed a liquidation account of approximately $2.8 million which has the effect of prohibiting the payment of dividends if the Bank’s net worth would thereby be reduced below $2.8 million.
Corporate Governance
The Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) requires publicly traded companies to adhere to several directives designed to prevent corporate misconduct. Additional duties have been placed on officers, directors, auditors and attorneys of public companies. The Sarbanes Act requires certifications regarding financial statement accuracy and internal control adequacy by the chief executive officer and chief financial officer of the Company in periodic and annual reports filed with the Securities and Exchange Commission (the “SEC”). The Sarbanes Act also accelerates insider reporting obligations under Section 16 of the Securities Exchange Act of 1934, as amended, restricts certain executive officer and director transactions, imposes new obligations on corporate audit committees and provides for enhanced review by the SEC.
Item 1A.
Item 1A. Risk Factors.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 1B.
Item 1B. Unresolved Staff Comments.
No disclosure is required hereunder as the Company is neither an “accelerated filer” or a “large accelerated filer,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, nor a “well-known seasoned issuer,” as defined in Rule 405 under the Securities Act of 1933, as amended.
Item 2.
Item 2. Properties.
The Company has its principal offices in its headquarters building at 500 Main Street, Natchez, Adams County, Mississippi 39120, which is owned and occupied by the Bank. The Bank owns the property for five of its branches and leases the property for the remaining two branches. The Company leases office space for a loan production office opened in 2010. The Bank also owns a vacant lot in Vidalia, Louisiana that was purchased in May 2004 for future branch expansion. In the judgment of management, the facilities of the Company and the Bank are generally suitable, adequately insured and provide for the continuing needs of the Company and the Bank. All branches are full service.
The list below describes the locations and general character of the properties owned and leased by the Company and the Bank:
Location
Own/Lease
Use
Approximate Office
Space (square feet)
Natchez
500 Main Street
Natchez, Mississippi 39120
Owned
Main Office
33,790
411 Highway 61 N.
Natchez, Mississippi 39120
Owned
Branch Office
1,671
55A Sgt. Prentiss Drive
Natchez, Mississippi 39120
Owned
Branch Office
10,720
Vicksburg
2059 Highway 61 N.
Vicksburg, Mississippi 39183
Owned
Branch Office
3,050
2150 S. Frontage Road
Vicksburg, Mississippi 39180
Owned
Branch Office
4,570
Baton Rouge
8810 Bluebonnet
Suites A & B
Baton Rouge, Louisiana 70810
Lease
Branch Office
5,112
4703 Bluebonnet Blvd
Baton Rouge, Louisiana
Owned
Branch Office
4,080
7415 Corporate Blvd
Suite 935 Building H
Baton Rouge, Louisiana 70809
Lease
Branch Office
1,256
17544 Greenwell Springs Road
Central, Louisiana 70818
Lease
Loan Production Office
The lease for the Company’s branch located at 8810 Bluebonnet Boulevard, in Baton Rouge, Louisiana is for a ten year period, which began October 1, 2003. The lease at the branch located at 7415 Corporate Boulevard, in Baton Rouge, Louisiana is for a five year period, which began October 1, 2009. The Company has the right to terminate the latter lease at the end of the 36th month by providing the landlord written notice no later than 180 days prior to the end of the 36th month of the lease term. The lease at 17544 Greenwell Springs Road is open ended and can be terminated with a 30 day notice from either party. The Company occupies one office in the building with approximately 144 square feet.
Item 3.
Item 3. Legal Proceedings.
The Company and the Bank are currently not involved in any material pending legal proceedings, and no material legal proceedings were terminated in the fourth quarter of 2010.
Item 4.
Item 4. Reserved.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Information Regarding our Common Stock
The Company’s common stock is listed on The NASDAQ Capital Market (“NASDAQ”), and trades under the symbol “BKBK.” The table below sets forth dividends per share and the high and low sales prices for the Company’s common stock, as reported by NASDAQ, for each quarter of the last two fiscal years.
On March 14, 2011, there were 463 shareholders of record of the Company’s common stock, and the price of the Company’s common stock was $13.01.
Historically, the Company has declared dividends on a quarterly basis. Funds for the payment of cash dividends are obtained from dividends received by the Company from the Bank. Accordingly, the declaration and payment of cash dividends by the Company depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. There are also restrictions on the Bank’s ability to transfer funds to the Company in the form of cash dividends under federal and state law and regulations. See Note N, “Regulatory Matters”, in the Notes to the Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, for a discussion of these restrictions. These restrictions do not, and are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders consistent with historical dividend payments.
Please refer to the information under “Equity Compensation Plan Information” in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.
The Company did not repurchase any equity securities during the 4th quarter of 2010. No options were exercised in 2010.
Item 6.
Item 6. Selected Financial Data.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion presents a review of the major factors that have affected the financial condition, changes in financial condition and results of operations of the Company and its subsidiaries, principally the Bank, as of and for the years ended December 31, 2010 and December 31, 2009.
Summary
In 2010, the Company reported net income of $1.9 million, or $.90 per basic and diluted share, compared to net income of $1.6 million, or $.76 per basic and diluted share, reported at December 31, 2009. Returns on average assets and equity for the year ended December 31, 2010, were .51% and 4.76%, respectively, compared to .40% and 4.01%, respectively, for same period in 2009.
During 2010, the Company’s overall asset quality remained relatively stable, declining slightly due mainly to the ongoing effects of the economic downturn affecting the United States as a whole and the local markets in which the Company operates. The Company acted to recognize probable losses in the loan portfolio and continues to attempt to resolve these issues quickly through foreclosure and sale of collateral. There were positive trends in the resolution of non-performing loans throughout 2010; however, management continues to remain cautious and is still uncertain as to whether the Company’s local markets have stabilized. Therefore, unexpected asset quality issues may still arise. Management will continue to ensure that its credit administration and loan underwriting processes remain disciplined and focused on the creditworthiness of new loan originations. The Company anticipates that the steps necessary in 2011 to maintain an adequate allowance for loan losses and otherwise address asset quality issues will have a lesser impact on the Company’s earnings in 2011 than such steps had in 2010.
The Company’s current level of capital significantly exceeds the amount that regulators consider “Well-Capitalized.” It is this strength of capital along with the Company’s conservative credit standards that, in management’s opinion, allowed the Company to weather the economic downturn that continued to affect the United States and the Company’s local markets in 2010. Management believes the Company has capital and financial strength sufficient to allow it to continue to engage in prudent lending activity and to expand its franchise as opportunities are presented in 2011.
Financial Condition
Assets
Total assets decreased $17.7 million to $375.4 million at December 31, 2010, as compared to total assets of $393.1 million at December 31, 2009. The change is due mostly to a $7.7 million decrease in total investment securities, a $6.5 million decrease in net loans, including loans held for sale (“LHFS”), and a $4.5 million decrease in cash and due from banks. The decrease in investment securities is due to a lack of attractive re-investment opportunities during the year; instead, liquidity from the securities portfolio was used to repay debt. The decline in loans is mainly due to the general depressed economic conditions affecting the United States and the Company’s local markets.
Average Earning Assets. Interest income from earning assets represents the Company’s main source of revenue. Average earning assets for the year ended December 31, 2010, totaled $357.1 million, a $27.5 million, or 7.2%, decrease compared to $384.6 million at December 31, 2009. The decrease primarily resulted from a decline in the Bank’s investment securities portfolio. Additionally, average loan balances declined $3.5 million from $223.8 million to $220.3 million. The average earning asset mix shifted during 2010 compared to 2009. In 2010, loans comprised 62% of average earning assets compared to 58% in 2009, while investments decreased to 38% of average earning assets in 2010 from 41% in 2009. The balance, which was held in short-term funds, decreased $784 thousand.
Investment Securities. The Company’s securities at December 31, 2010, consist primarily of mortgage-backed securities, municipal investments and equity securities. Securities deemed to be held-to-maturity (“HTM”) are accounted for by the amortized cost method and represented approximately 29% of total securities at December 31, 2010. Securities designated as available-for-sale (“AFS”) are accounted for at fair value with valuation adjustments recorded in the equity section of the Company’s balance sheet through other comprehensive income/(loss). AFS securities comprised approximately 70% of total investment securities at December 31, 2010. Equity securities accounted for the remaining 1%. There were no securities categorized as trading at December 31, 2010. The Company classifies its security purchases at acquisition.
The $7.7 million decrease in investment securities was a result of the lower interest rate environment during 2010 which made profitable reinvestment of cash flows back into the market difficult. Instead, cash flows were primarily used to repay short-term debt.
Equity securities at December 31, 2010, are comprised primarily of Federal Reserve Bank stock of $522 thousand, Federal Home Loan Bank (“FHLB”) stock of $1.0 million, the Company’s $155 thousand interest in its B&K Bank Statutory Trust and the Enterprise Corporation of the Delta Investments, LLC membership interests of $100 thousand. These securities decreased $1.4 million to $1.8 million in 2010, primarily due to the redemption of FHLB stock as borrowing throughout the year declined.
The amortized cost of the Bank’s investment securities at December 31, 2010, 2009 and 2008, is summarized below:
The amortized cost and approximate market value of the Company’s investment debt securities (including mortgage-backed securities) at December 31, 2010, by contractual maturity, is set forth in Note B, “Investment Securities,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data.
Loans. Loans represent the Company’s largest source of revenue. Total loans at December 31, 2010 of $216.6 million represent a decrease of $8.0 million compared to $224.6 million at December 31, 2009. In 2010, just as in 2009, the Company’s Baton Rouge, Louisiana market continued to see demand for loans from both businesses and households offset further weakening in the Company’s other markets. In 2011, as the economy continues to slowly recover, the Company expects minimal loan growth in all of its markets.
The Company generally does not hold residential loans in its loan portfolio. As a result, its existing portfolio of residential loans has generally declined over the last few years, although residential loans increased $817 thousand at December 31, 2010 as compared to December 31, 2009. Total residential loans originated and sold during 2010 were $46.4 million, up from $26.4 million in 2009. The increase in mortgage originations is due to the increase in lending personnel in Baton Rouge, Louisiana during the year. Loans held for sale increased $5.3 million to $6.1 million at December 31, 2010, compared to $784 thousand at December 31, 2009, which in turn resulted in the increase in residential loans from December 31, 2009 to December 31, 2010 noted above. The increase in both residential loans and LHFS is a direct result of increased loan originations during 2010. Management expects total originations and fee income generated in 2011 to equal or surpass the results in 2010.
The composition of the Bank’s loan portfolio, including loans held for sale, at the end of the last five years is presented below. The Company has no foreign loan activities. “Real estate-other” below primarily includes mortgage lending for non-residential properties.
The Company’s loan portfolio at December 31, 2010, had no significant concentrations of loans other than in the categories presented in the table above.
The following table sets forth as of December 31, 2010, (1) the periods in which the Bank’s commercial, financial and agricultural loans and its real estate-construction loans mature or reprice and (2) the total amount of all such loans due after one year having (a) predetermined interest rates and (b) floating or adjustable interest rates. Loan maturities are based upon contract terms and specific maturity dates. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans with no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Asset Quality
Management continually monitors the diversification of the loan portfolio and assesses loan quality. When the assessment of an individual loan relationship indicates that the borrower has a defined weakness in the ability to repay and collection of all outstanding principal and/or interest is in doubt, the debt is placed on non-accrual. By placing loans on non-accrual the Company recognizes a problem credit, discontinues the accrual of interest that is likely uncollectible (unless the net realizable value of any collateral securing the loan is sufficient to cover its principal balance and accrued interest), and adjusts the carried loan balance to reflect the collection amount expected. In addition, all previously accrued and uncollected interest for the year is reversed against interest income. A non-accrual loan may be restored to accrual status when it is no longer delinquent and management no longer doubts the collectability of interest and principal.
Several key measures are used to evaluate and monitor the Company’s asset quality. These measures include the levels and percentages of total nonperforming assets, loan delinquencies, non-accrual loans, foreclosed assets and charge-offs. The economic downturn affecting the United States and the related decline of economic activity in the Company’s markets continued to affect nonperforming assets in 2010. Nonperforming assets, consisting of non-accrual loans, loans past due 90 days or more and other real estate owned, increased slightly to $11.3 million at December 31, 2010, compared to $10.5 million at December 31, 2009. During the fourth quarter of 2010, non-performing assets increased $1.5 million due primarily to one commercial real estate credit in the Baton Rouge market. The borrower on this credit engaged an outside consulting firm to assist the borrower in improving occupancy levels. Since this consultant was hired, two new tenants have leased space at the property. Based on a current market appraisal, the Bank believes it has limited exposure on this credit.
The borrower on another commercial real estate credit in the amount of $2.5 million that has been categorized as non-accrual for nearly a year has recently emerged from bankruptcy, and a new payment plan for this credit has been established. The first quarterly payment on this credit was received at the end of 2010, and the next payment is due by March 31, 2011. If this credit establishes a history of payments in accordance with the payment plan, and the borrower’s anticipated cash flow remains sufficient to meet the credit’s payment terms in the future, management believes this loan could be restored to accrual status during 2011.
Non-performing assets as a percent of average assets increased to 3.00% in 2010 compared to 2.62% in 2009. Nonperforming loans as a percent of total loans, net of unearned income and loans held for sale, decreased to 3.80% at December 31, 2010, compared to 4.34% at December 31, 2009. Net charge-offs as a percentage of average loans increased to 1.42% at December 31, 2010, compared to .87% at December 31, 2009. Management believes that the Company’s asset quality is equal to or exceeds industry and peer levels, based on Federal Deposition Insurance Corporation (“FDIC”) year-end call report data.
A breakdown of nonperforming assets at the end of each of the last five years is presented below:
Loan classification is an on-going, dynamic process, and the migration of loans into an impaired status cannot be predicted with total accuracy, especially in light of the current economic climate in the United States. As of December 31, 2010, the table above reflects all loans that the Company had serious doubts as to the ability of the borrower to comply with current repayment terms. There were no loans in any of the reported periods above classified as “troubled debt restructurings” as defined in the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) (which is discussed in more detail in Note A, “Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data). As of December 31, 2010, if non-accrual loans had been current in accordance with their terms, interest in the amount of approximately $373,000 would have accrued on such loans. Approximately $49,000 in interest income on such loans was recognized on a cash basis for 2010. Finally, the Company does not hold any other interest-bearing assets that, if the assets were loans, would be included in the table above.
Management expects the economic environment in the Company’s three markets to remain sluggish in 2011, in keeping with national trends. The intensified efforts on problem credits during 2010 have increased charge-offs and non-performing assets since December 31, 2009. Although resolution of problem credits has been impeded by the decreasing demand and falling prices for both commercial and residential real estate, the Company expects resolution of such problem credits to accelerate during 2011. While asset quality has weakened slightly during 2010 and overall problem loan levels have remained elevated at December 31, 2010, the Company’s capital is very strong and remains substantially above what the regulators consider “well capitalized.”
Allowance for Loan Losses
The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses. The balance of the loans determined to be impaired under ASC 310, “Receivables,” and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance is sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. Additionally, the estimate of the allowance required to absorb credit losses in the entire portfolio may change due to shifts in the mix and level of loan balances outstanding and in prevailing economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates and energy costs. While no one factor is dominant, each could cause actual loan losses to differ materially from originally estimated amounts.
For portfolio balances of consumer, consumer mortgage and certain other similar loan types, allowance factors are determined based on historical loss ratios by portfolio and may be adjusted by other qualitative criteria. For larger commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consideration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but which may not be fully reflected in our historical loss ratios.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for problem loans primarily of $50,000 or greater by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. For real estate collateral, the fair market value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser of the underlying collateral. The process by which management determines the appropriate level of the allowance, and the corresponding provision for probable credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates.
The Company added $1.7 million to its allowance for loan losses in 2010, which ended the year at $2.4 million, compared to $3.4 million in 2009. The higher amount in 2009 was primarily due to an accumulated provision relating to two commercial loans. Both of these loans were identified as impaired at December 31, 2009 and as a result management determined that the allowance should be increased by $1 million. Both of these loans were charged-off during 2010 contributing to the higher level of charge-offs in 2010.
At December 31, 2010, management believes the allowance for loan losses of $2.4 million is adequate, under prevailing economic conditions, to absorb probable losses on existing loans. The allowance includes an allocation of approximately $1.1 million on total impaired loans of $7.4 million.
Activity in the allowance for loan losses for the last five years is presented below.
In establishing the amounts of provision for each year charged to operating expense, management uses the basic methodologies described above. The allocation of the allowance for loan losses applicable to each loan category for the previous five years is presented below.
In the fourth quarter of 2009, the Company hired a certified real estate appraiser to oversee the internal appraisal review process. Also, effective January 1, 2010, the Company adopted a new policy that governs the ordering, scope, independence and review of real estate appraisals used in the lending function, which is designed to reduce the Company’s risks in real estate secured loans.
Under the new policy, with respect to the renewal of any loan over $50,000, Bank lending personnel may use commercial real estate appraisals or complying evaluations performed by external, competent professional appraisers dated no more than two years prior to the date of the renewal. Appraisals older than two years but less than five years may be reused but are subjected to heightened internal scrutiny to maintain appropriate lending margin and knowledge of the collateral.
The new policy and related procedures also extend to real estate collateral securing impaired loans. However, in the context of default, renewals, and restructures of impaired loans, any number of circumstances may dictate that the Bank either obtain updates to existing appraisal or undertake completely new appraisals of the collateral, regardless of the age of the existing appraisal. These circumstances include, among other things, the following: the receipt and analysis of additional financial information from the borrower or a guarantor; a negative change in the scope or timing of a project; or an unacceptable payment pattern. In determining specific exposures on impaired commercial real estate and other collateral-dependent loans, and therefore the amount and timing of the provision for loan losses with respect thereto, the Company focuses primarily on recent, detailed collateral information obtained through appraisal updates or new appraisals, as the case may be. In addition to collateral information, the Company considers the financial strength and character of the guarantors along with the past performance history and nature of the business, including sudden local market events or any other event which substantially eliminates the original, primary source of repayment. Finally, the Company evaluates the general economic climate as well as the nature of the credit (including any extended project delays), the specific line of business of the borrower and limitations on refinancing opportunities.
In foreclosure situations, the Bank obtains independent appraisals. Foreclosed properties are moved to Other Real Estate at the appraised value less sales commission and related marketing costs. The remaining balance of the impaired loan is charged off.
When the Company determines that a loan is nonperforming or impaired through its ongoing loan review process or, less frequently, receives notice of the occurrence of events impacting the collectability of a loan, its emphasis promptly shifts to the evaluation of the loan collateral. The evaluation of such collateral involves input from several parties within the bank: loan review, credit administration, the in-house appraisal review officer, and the relevant lending officer. Following such input, the Company’s chief credit policy officer makes the final determination regarding whether to order new appraisals of the real estate collateral or an update to an existing appraisal. Write-downs and charge-offs resulting from the credit review and collection processes are reviewed monthly by the independent members of the board of directors. There is typically no significant timing difference in ordering appraisals and the recognition of provision or related charge-off.
Other Real Estate
The balance of other real estate (ORE) increased $2.5 million to $3.3 million in 2010 from $815 thousand in 2009. Activity during 2010, set forth below, includes new foreclosures of $4.0 million, gains on the sale of property of $649 thousand offset by write-downs/reserves of $780 thousand and proceeds from sales of $1.35 million. The balance at December 31, 2009, was made up of one commercial property in Baton Rouge, Louisiana in the amount of $534 thousand that was moved into ORE during 2009 with the remaining balance primarily in residential lots and vacant land.
Funding
Deposits. Deposits are the Company’s primary source of funding for earning assets. Total deposits increased to $258.5 million at December 31, 2010, compared to $250.9 million at December 31, 2009. Non-interest bearing deposits decreased to $45.6 million at December 31, 2010 compared to $49.8 million at December 31, 2009. Deposits at December 31, 2010 and 2009, consist of the following:
The increase in deposits in 2010 was primarily due to increases in the Company’s rewards checking and money market deposit accounts offset by lower public funds and special promotion CDs. During 2010, deposits that the Bank considers core deposits increased approximately $8.7 million, including deposits into the rewards checking accounts.
The Company maintains wholesale deposit funding sources to provide additional liquidity if necessary. The Company belongs to a network that allows access to national deposits and has the ability to gather these deposits as needed. It also is a member of the Certificate of Deposit Account Registry Service (“CDARS”), a deposit placement network. Deposits in the CDARS program are federally insured and are considered brokered. Because of the brokered classification, the Company considers these deposits as non-core; however, they have remained relatively stable over the past several years ending December 31, 2010, at $11.8 million compared to $11.4 million at December 31, 2009.
Maturities of certificates of deposits of $100,000 or more at December 31, 2010, and 2009, are summarized below.
Other time deposits of $100,000 or more, including savings and money market demand accounts, at December 31, 2010, were $30,124,000. For all such deposits, the time remaining until maturity was three months or less.
Borrowings. In addition to the deposit base described above, the Company utilizes short and long-term borrowings as an additional funding source. Short-term borrowings include overnight funding through established lines of credit with correspondent banks, customer repurchase agreements and overnight and other advances from the FHLB. The Company collateralizes short-term funding from the FHLB with a portion of the Bank’s one-to-four family residential mortgage portfolio, certain secured commercial loans and certain investment securities in accordance with the Advance Security and Collateral Agreement with the FHLB.
Also included in short-term borrowings are the Company’s junior subordinated debentures. See Note H, “Borrowings,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data. The Company has the right to call these debentures on a quarterly basis. They are included in short-term borrowings at December 31, 2010 and December 31, 2009. The Company will consider calling the debentures if it determines they are not needed as a capital base to support the asset growth of the Company. Total short-term borrowings at December 31, 2010, 2009 and 2008 are presented below:
The information regarding our short-term FHLB borrowings for 2010, 2009 and 2008, is presented below:
Long-term borrowings in 2010 of $49 million consisted of Structured Repurchase Agreements of $40 million in the aggregate with JPMorgan Chase Bank, N.A. and an additional $9 million in 5 year term advances from the FHLB. These longer-term borrowings were completed in an effort to further protect against rising rates. See Note L, “Securities Sold Under Repurchase Agreements” in the Notes to the Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data for further information on the Company’s Structured Repurchase Agreements.
Average Balances and Yield Analysis
The following table presents the Bank’s average balance sheets during 2010, 2009 and 2008. Dividing income or expense by the average balance of assets or liabilities, as applicable, derives yields and costs. Average non-accrual loans of $7.4 million, $5.8 million and $2.5 million at December 31, 2010, 2009 and 2008, respectively, are included in loans for yield computations. Loan fees and late charges in the amount of approximately $496 thousand for 2010, $680 thousand for 2009 and $720 thousand for 2008 are included in both income and yield computations in loans. Income and expense resulting from interest rate caps and swaps used to manage interest rate risk are included appropriately in loans and certificates of deposit. No tax-equivalent adjustments have been made. All averages are derived from monthly average balances.
Britton & Koontz Capital Corporation
Average Balances Report
Twelve Months Ended December 31,
Capital
The Company’s capital base remains strong at $39.9 million as of December 31, 2010, compared to $39.8 million at December 31, 2009. The change in stockholders’ equity from 2009 to 2010 is primarily due to net income of $1.9 million in 2010 offset by a decrease of accumulated other comprehensive income of $350 thousand and by dividend payments totaling $1.5 million.
Other comprehensive income is the result of unrealized gains or losses on AFS securities and the recognition of the fair value of certain derivative instruments. The Company’s AFS portfolio, representing approximately 70% of total investment securities, is marked to market each month, and the result of these unrealized gains or losses, net of deferred taxes, is reported as a component of comprehensive income in stockholders’ equity. Stockholders’ equity to assets ratio at December 31, 2010, increased to 10.6% compared to 10.1% at December 31, 2009.
During 2009, the Company opened two new branch offices in its Baton Rouge, Louisiana market. The first location in The Oaks at Bluebonnet Parc occupies approximately 4,400 square feet, offers convenient depository services and includes a conference layout to accommodate select meetings of professional and commercial customers. This new facility also houses the Company’s mortgage center, a professional client services department and key company-wide credit administration personnel. The second new location, in the Towne Center area, occupies approximately 1,256 square feet, and its high visibility is expected to enhance the Company’s current retail presence in the city. The Company’s fixed assets increased $1.1 million to $8.0 million at December 31, 2009, compared to the previous year in part due to these two new locations.
During 2010, the Company leased office space in Central, Louisiana, for the purpose of opening a loan production office. The new facility will be used to originate residential mortgage loans for the secondary market. There are no immediate plans to open a full service branch at this location. The Company continues to look for ways to use its excess capital in relation to expansion in its current markets or in other markets through acquisition. The Company currently intends to target a per share dividend payout ratio, expressed as a percent of net income, for 2011 in the range of 60-65%, as compared to a historical dividend payout ratio of 80.38% and 94.30% in 2010 and 2009, respectively.
Capital levels for the Company and the Bank substantially exceeded the minimum requirements of the regulatory agencies for well-capitalized institutions in all three categories in both 2010 and 2009. Both the Company and the Bank maintain levels in total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and a leverage ratio (Tier 1 capital to average assets) in excess of the minimum requirements of 10.00%, 6.00% and 5.00%, respectively.
(1)
Excludes disallowed assets
Pursuant to Mississippi law, the Company’s Board of Directors may authorize the Company to pay cash dividends to its shareholders. The only limitation on dividends is that no distribution may be made if, after giving effect to the distribution (1) the Company would not be able to pay its debts as they come due in the usual course of business, or (2) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any shareholders whose preferential rights are superior to those receiving the distribution. The principal source of the Company’s cash revenues are dividends from the Bank. There are certain limitations on the Bank’s ability to pay dividends to the Company. See the disclosures under the heading “Liquidity.”
Dividends for the last two fiscal years have remained the same at $.72 per share. Historical dividend payout ratios, expressed as a percentage of net income, for 2010 and 2009 were 80.38% and 94.30%, respectively.
The declaration of future dividends is at the discretion of the Company and generally will be dependent upon the earnings of the Bank, the assessment of capital requirements, considerations of safety and soundness, applicable law and regulation and other factors. Subject to the limitations referenced above, it is the present policy of the Board of Directors of the Company to continue the declaration of cash dividends on the Company’s common stock on a quarterly basis, to the extent practicable.
Retained earnings of the Bank available for payment of cash dividends under applicable dividend regulations was $2.4 million and $4.2 million as of December 31, 2010 and December 31, 2009, respectively. The Bank intends to retain most of these funds for capital and not pay them out as dividends.
RESULTS OF OPERATIONS
The following are measurements of the Company’s earnings in relation to assets, equity and earnings per share for December 31, 2010, 2009 and 2008
Non-Interest Income/Non-Interest Expense
Non-interest income primarily includes service charges on deposit accounts, fees and gains on sales of mortgage loans originated and sold in the secondary market and other non-interest fee generating services. The Company continues to seek to increase income in this category by broadening its financial services, including offering business Internet banking and commercial cash management services, such as remote deposit, which allows Bank customers to make deposits electronically from their offices.
Non-interest income for the year ended December 31, 2010, was $4.3 million compared to $2.8 million in 2009. The increase is primarily related to one-time gains of $1.1 million from the sale of securities and other real estate and higher income related to the sale of mortgage loans of $627 thousand over the previous year. The increase in mortgage fee income is due to growth in the Company’s mortgage origination department. These increases were offset by lower service charges on deposit accounts and lower revenue from networking arrangements resulting from the transfer of our brokerage business and related arrangements to Argent Financial Group in 2009.
Non-interest expenses primarily include personnel, occupancy and equipment costs along with other operating expenses related to transacting the Company’s business. Total non-interest expense of $13.5 million for the year ended December 31, 2010, increased from $12.4 million for the year ended December 31, 2009. Approximately 50% of the annual increase in non-interest expense is due to higher personnel costs associated with the new hires in the mortgage division along with write-downs of other real estate, higher occupancy and equipment costs and other charges to expense related to the provision of loan and late fees receivable. These additional costs were offset by lower FDIC assessment charges due to a special assessment of $183 thousand made in the 1st half of 2009.
Net Interest Income/Margins
Net interest income, the amount by which interest income on loans, investments and other interest earning assets exceeds interest expense on deposits and other borrowed funds, is the largest component of the Company’s earnings and is affected by several factors, including the volume of earning assets and costing liabilities, the mix of these assets and liabilities, and interest rates. Net Interest Margin represents net interest income expressed as a percentage of average earning assets. In the following discussion, tax-equivalent margins (“TEY”) are in parenthesis.
Net interest income for the twelve months ended December 31, 2010, decreased 10% to $13.1 million compared to the same period in 2009, while net interest margin decreased twelve basis points during this period to 3.66%. The decrease is primarily due to the decline in earning assets exceeding the decline in costing liabilities. Average earning assets decreased by $27.5 million from 2009 to 2010, primarily from a decline in the Bank’s investment securities portfolio. The lower interest rate environment during 2010 made profitable reinvestment of cash flows back into the market difficult. Instead, cash flows were primarily used to repay short-term debt. Asset yields also declined at a faster pace than funding costs for the twelve months ended December 31, 2010, with yields on assets declining 20 basis points while funding costs fell by only 10 basis points. Lower interest rates also contributed to the decline of interest rate spread and margin during the year ended December 31, 2010. Interest rate spread declined 10 basis points to 3.28%, while interest rate margin declined 12 basis points to 3.66% for the year ended December 31, 2010, respectively. Net interest margins for 2010 and 2009 were 3.66% (3.90% TEY) and 3.78% (4.01% TEY), respectively.
The following table presents the dollar amount of changes in interest income and interest expense for the major components of the Company’s interest earning assets and interest bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (a) changes in volume (i.e., changes in volume multiplied by the old rate) and (b) changes in rates (i.e., changes in rates multiplied by the old volume.) For purposes of this table, changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rates.
Volume/Rate Analysis
(dollars in thouands)
Provision for Loan Losses
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the risk of loss in the loan portfolio in light of current risk management strategies, economic conditions and market trends. Net charge-offs increased during 2010 to $3.1 million compared to $1.9 million at December 31, 2009. The Company added $1.7 million to its allowance for loan losses in 2010 which ended the year at $2.4 million, compared to $3.9 million in 2009. The higher amount in 2009 was primarily due to approximately $1 million of the provision that was specifically allocated to two commercial loans. Both of these loans were identified as impaired at December 31, 2009; however, in connection with its ongoing monitoring of problem loans, the Company determined in 2010 that it was appropriate to increase the level of impairment on each loan effective as of December 31, 2009. These two loans were subsequently charged-off in 2010 which contributed to the increase in charge-offs for the year. The Company believes the allowance for loan loss account is adequate as of December 31, 2010.
Liquidity
Liquidity is a measure of the Company’s ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective manner. These needs can be met by generating profits, attracting new deposits, converting assets (including short-term investments, mortgage loans held for sale and securities available for sale) to cash through sales or securitizations, and increasing borrowings. To minimize funding risks, management monitors liquidity monthly through reviews of basic surplus which includes investment securities available for pledging or borrowing offset by short-term liabilities, along with projections of loan and deposits for the next 90 days.
Principal sources of liquidity, both short and long-term, for the Company are asset cash flows, customer deposits and the ability to borrow against investment securities and loans. The Company’s cash and cash equivalents decreased from $10.3 million at December 31, 2009, to $5.8 million at December 31, 2010. The higher amount of cash and cash equivalents at December 31, 2009, was due to a timing difference in transferring cash on hand to pay down overnight borrowings. At December 31, 2010, cash provided by investing activities was $15.7 million while operating and financing activities used $905 thousand and $19.2 million, respectively.
The increase in the Company’s deposit base during 2010 contributed to the amount of funding available for possible loan commitments. In addition to the Company’s deposit base, management believes that the current level of short-term investments, the projected cash flows from earning assets and securities available for sale are more than adequate to meet the Company’s current liquidity needs. Additional sources of liquidity available to the Company include the ability to issue additional retail brokered certificates of deposit and the ability to sell or securitize a portion of the Company’s residential first mortgage portfolio. The Company also has available federal funds lines and its membership in the FHLB to further augment liquidity by providing a readily accessible source of funds at competitive rates.
The Company accepts funds from various local and state governments. Total public deposits at December 31, 2010, were $42.3 million compared to $43.9 million at December 31, 2009. These deposits, considered non-core, generally are accepted on a bid basis and tend to fluctuate from year to year.
In the ordinary course of business, the Company enters into commitments to extend credit to its customers. See Note N, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, for a discussion of the Company’s commitments to extend credit as of December 31, 2010.
The Company’s liquidity and capital resources are substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account, and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings. The Bank’s ability to pay dividends is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors.
Further, in connection with the acquisition of Natchez First Federal in 1993, the Bank assumed a liquidation account of approximately $2.8 million which has the effect of prohibiting the payment of dividends if the Bank’s net worth would thereby be reduced below the amount required for the liquidation account. Management does not anticipate that this restriction will have a material adverse effect on the Bank’s ability to pay dividends to the Company.
Certain restrictions exist on the ability of the Bank to transfer such funds to the Company in the form of loans. Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2010, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $2.4 million. There were no loans outstanding from the Bank to the Company at December 31, 2010.
The Company’s asset/liability committee (“ALCO”) determines an appropriate level of capital and liquidity adequate to respond to the needs of depositors and borrowers. At December 31, 2010, the ALCO, in its report to the Board of Directors, indicated that it believes that the Company’s current level of liquidity is adequate to fund foreseeable asset growth and to meet unanticipated deposit fluctuations.
OFF-BALANCE-SHEET ARRANGEMENTS
The Bank enters into off-balance-sheet arrangements in the normal course of its business. For a discussion of such arrangements, see Note A, “Summary of Significant Accounting Policies − Off-Balance-Sheet Financial Instruments,” “− Interest-Rate Cap Agreements,” and “Interest-Rate Swap Agreements,” Note N, “Commitments and Contingencies,” and Note Q, “Interest Rate Risk Management,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data. Such discussion is incorporated by reference into this item.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 8.
Item 8. Financial Statements and Supplementary Data.
BRITTON & KOONTZ CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
CONTENTS
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Britton & Koontz Capital Corporation (the “Company”) and its subsidiaries has prepared the consolidated financial statements and other information in the Company’s Annual Report on Form 10-K in accordance with generally accepted accounting principles and is responsible for the accuracy of the financial statements and other information. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.
In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. The Company’s bank subsidiary, Britton & Koontz Bank, N.A., contracts with outside audit firms to monitor compliance in areas such as Information Technology and Bank Secrecy Act in light of the Company’s and Bank’s systems of internal controls and reports to management and to the Audit Committee of the Board of Directors.
The Audit Committee of the Company’s Board of Directors consists entirely of independent directors. The Audit Committee meets periodically with the internal auditor and the independent accountants to discuss audit, internal control, financial reporting and related matters. The Company’s independent accountants and the internal audit staff have direct access to the Audit Committee.
The Company’s management is responsible for establishing and maintaining for the Company adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and further described in interpretive guidance regarding management’s report on internal control over financial reporting issued by the Securities and Exchange Commission on June 27, 2007. Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management of the Company conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2010, based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our assessment included an assessment of the design of the internal control system, a review of the documentation of controls and tests of the effectiveness of internal controls. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010 and meets the criteria described in Internal Control - Integrated Framework.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Under applicable Securities and Exchange Commission rules, management’s report is not subject to attestation by the Company’s registered public accounting firm because the Company is not an “accelerated filer” or a “large accelerated filer,” each as defined pursuant to rules promulgated under the Exchange Act.
W. Page Ogden William M. Salters
President and Chief Executive Officer EVP and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Britton & Koontz Capital Corporation and Subsidiaries
We have audited the accompanying Consolidated Balance Sheets of Britton & Koontz Capital Corporation and Subsidiaries as of December 31, 2010 and 2009, and the related Consolidated Statements of Income, Changes in 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company 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, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Britton & Koontz Capital Corporation and Subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
HANNIS T. BOURGEOIS, LLP
Baton Rouge, Louisiana
March 15, 2011
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
ASSETS
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND STOCKHOLDERS’ EQUITY
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
The accompanying notes are an integral part of these financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
The accompanying notes are an integral part of these financial statements.
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BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(Continued)
The accompanying notes are an integral part of these financial statements.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Britton & Koontz Capital Corporation (the “Company”) and its wholly-owned subsidiary, Britton & Koontz Bank, National Association (the “Bank”). All material inter-company profits, balances and transactions have been eliminated.
Nature of Operations
The Bank operates under a national bank charter and provides full banking services. The primary area served by the Bank is the southwest region of Mississippi and East Baton Rouge Parish in Louisiana. Services are provided at three locations in Natchez, Mississippi, two locations in Vicksburg, Mississippi, and three locations in Baton Rouge, Louisiana.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as 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 relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Investment Securities
Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and the Bank has the ability at the time of purchase to hold debt securities until maturity, they are classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using methods approximating the interest method. Available-for-sale securities include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates,
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
resultant prepayment risk and other related factors. These securities are carried at fair value. Trading securities are also carried at fair value. Equity securities primarily include stock in the Federal Reserve Bank and the Federal Home Loan Bank (“FHLB”), which are restricted and are carried at cost.
Realized gains and losses on dispositions of investment securities are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available-for-sale are based on the difference between book value and fair value of each security. These unrealized gains and losses are reported as a component of comprehensive income in stockholders’ equity, net of the related deferred tax effect. The Bank marks to market its trading portfolio at the end of each quarter with gains or losses reported to net income. Such changes in the fair value due to market changes may contribute to volatility in quarterly earnings. The Bank sold its portfolio of trading securities in early 2008 and does not currently intend to classify future security purchases into this category.
Loans
Loans are stated at the amount of principal outstanding, reduced by unearned income and an allowance for loan losses. Unearned income on certain installment loans is recognized as income over the terms of the loans by a method which approximates the interest method. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loans are ordinarily placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on non-accrual loans is reversed from income. Interest income, generally, is not recognized on loans specifically determined to be impaired unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received.
Loans Held-for-Sale
Loans held-for-sale primarily consist of ten, fifteen and thirty-year fixed-rate, one-to-four family real estate loans which are valued at the lower of cost or market, as determined by outstanding commitments from investors or current investor yield requirements, calculated on an individual basis. These loans are originated with the intent of selling them in the secondary market.
Unrealized losses on loans held-for-sale are charged against income in the period of decline. Such declines are recorded in a valuation allowance account and deducted from the cost basis of the loans. There were no such losses at December 31, 2010 and 2009.
Gains on loans held-for-sale are recognized when realized. Gains on sales of loans in the held-for-sale portfolio were $1.1 million and $491 thousand at December 31, 2010 and 2009, respectively.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date based on evaluations of the collectability of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are adjusted to the allowance. Past due status is determined based on contractual terms.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed by the straight-line method and is charged to expense over the estimated useful lives of the assets, which range from 3 to 40 years.
Other Real Estate
Properties acquired through foreclosure or in settlement of loans and in lieu of loan foreclosures are classified as foreclosed properties and are valued at the lower of the loan value or estimated fair value of the property acquired less estimated selling costs. At the time of foreclosure, the excess, if any, of the loan value over the estimated fair value of the property acquired less estimated selling costs, is charged to the allowance for loan losses. Additional decreases in the carrying values of foreclosed properties or changes in estimated selling costs, subsequent to the time of foreclosure, are recognized through provisions charged to operations. Revenues and expenses from operations and gains and losses on dispositions of such assets are recorded in earnings in the period incurred.
The fair value of foreclosed properties is determined based upon appraised value, utilizing either the estimated replacement cost, the selling price of properties utilized for similar purposes, or discounted cash flow analyses of the properties’ operations.
Compensated Absences
Employees of the Bank are entitled to paid vacation, emergency and sick days off, depending on length of service in the banking industry. Vacation, emergency and sick days are granted on an annual basis to eligible employees. Unused vacation and emergency days expire on December 31 of each year. Unused sick days expire on each employee’s employment anniversary date each year. The estimated amount of compensation for future absences is deemed immaterial to the consolidated financial statements; accordingly, no liability has been recorded in the accompanying financial statements. The Bank’s policy is to recognize the cost of compensated absences when actually paid to employees.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The provision for income taxes is based on amounts reported in the statements of income after exclusion of nontaxable income such as interest on state and municipal securities. Also, certain items of income and expense are recognized in different time periods for financial statement purposes than for income tax purposes. Thus, provisions for deferred taxes are recorded in recognition of such temporary differences.
Deferred taxes are determined utilizing a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company and its subsidiaries file a consolidated federal income tax return. Consolidated income tax expense is allocated on the basis of each company’s income adjusted for permanent differences.
The Company adopted the provisions of accounting for uncertainty in income taxes recognized in financial statements. The Company has not recognized any interest or penalties in the consolidated financial statements, nor has it recorded an accrued liability for interest or penalty payments.
The Company files income tax returns in the U. S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to federal and state income tax examinations by tax authorities for years before 2007.
Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. All shares held by the Employee Stock Ownership Plan are treated as outstanding in computing the earnings per share. Stock options are used in the calculation of diluted earnings per share if they are dilutive. Earnings per common share has been computed as follows:
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has granted options to purchase various amounts of the Company’s common stock at various prices ranging from $10.20 to $19.02 per share. Those options whose exercise price exceeded the average market price of the common shares are not included in the options adjustment for diluted earnings per share.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of interest-rate swap and cap agreements, commitments to extend credit and standby letters of credit. Financial instruments related to loans are recorded in the financial statements when they become payable.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers only cash and due from banks to be cash equivalents.
Advertising Costs
Advertising and marketing costs are recorded as expenses in the year in which they are incurred.
Interest-Rate Cap Agreements
The Company uses these financial instruments to manage interest rate risk. There were no interest rate cap agreements in place at December 31, 2010. The only interest rate cap agreements in place at December 31, 2009, were embedded in the Structured Repurchase Agreements which were entered into with J.P. Morgan Chase Bank, N.A. in 2007. The cap agreements had expired at December 31, 2010.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest-Rate Swap Agreements
The Bank enters into interest-rate swap agreements to modify the interest rate characteristics of its assets and liabilities. These agreements may involve the receipt or payment of fixed rate amounts in exchange for floating rate interest receipts or payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest income or expense. The related amount payable to or receivable from counter-parties is included in other liabilities or assets. There were no interest-rate swap agreements in place at December 31, 2010 or 2009.
Amortization of Core Deposits
During 1999, the Company acquired certain assets and liabilities of three Union Planters, N.A. branches in Natchez and Vicksburg, Mississippi, which were accounted for as a purchase. The Bank paid a premium for the depositor relationship of $1,614,210. This premium is included in other assets and is being amortized over 15 years, which is the estimated life of the customer base.
Stock Compensation Plans
The Company measures the cost of employee services received in exchange for an award of equity based instruments based on the grant-date fair value of the award and recognizes the cost over the period during which an employee is required to provide service in exchange for the award. Note I below sets forth information with respect to stock based awards.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and 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, are components of comprehensive income.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures About Fair Value Measurements,” which added disclosure requirements about transfers in and out of Levels 1 and 2 of the fair value hierarchy, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and Level 3 fair value measurements. This ASU also requires that Level 3 activity about purchases, sales, issuances, and settlements be presented on a gross basis rather than as a net number. The Company adopted the provisions of the ASU in preparing its
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
consolidated financial statements at and for the period ended December 31, 2010. The adoption of the provisions of this ASU, which was subsequently codified into FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”) only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s results of operations or financial position.
In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset” (“ASU 2010-18”). ASU 2010-18 allows for the one-time election to terminate accounting for loans as a pool under ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. ASU 2010-18 is effective for modifications of loans accounted for within pools under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of ASU 2010-18 did not have an impact on the Company’s results of operations, financial position or disclosures.
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivable and the Allowance for Credit Losses” (“ASU 2010-20”). ASU 2010-20 requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. The ASU is effective for interim and reporting periods ending on or after December 15, 2010 and the disclosures have been included in these financial statements for the year ended December 31, 2010. As the adoption of ASU 2010-20 amends only the disclosure requirements for loans and leases and the allowance for credit losses, the adoption had no impact on the Company’s results of operations or financial position.
Reclassifications
Certain reclassifications have been made to the 2009 consolidated financial statements in order to conform to the classifications adopted for reporting in 2010.
Subsequent Event
The Company evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements.
NOTE B. INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities classified as held-to-maturity at December 31, 2010, are summarized as follows:
The amortized cost and approximate fair value of investment securities classified as available-for-sale at December 31, 2010, are summarized as follows:
NOTE B. INVESTMENT SECURITIES (Continued)
The amortized cost and approximate fair value of investment securities classified as held-to-maturity at December 31, 2009, are summarized as follows:
The amortized cost and approximate fair value of investment securities classified as available-for-sale at December 31, 2009, are summarized as follows:
NOTE B. INVESTMENT SECURITIES (Continued)
The aggregate fair value and aggregate unrealized losses on securities whose fair values were below book values as of December 31, 2010, are summarized below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.
As of December 31, 2010, there were twenty-one securities included in held-to-maturity and twenty-three securities included in available-for-sale.
The aggregate fair value and aggregate unrealized losses on securities whose fair values were below book values as of December 31, 2009, are summarized below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.
As of December 31, 2009, there were twenty-five securities included in held-to-maturity and fifteen securities included in available-for-sale.
NOTE B. INVESTMENT SECURITIES (Continued)
The unrealized losses in the Company’s investment portfolio, caused by interest rate increases, are not credit issues and are deemed to be temporary. Cash flows from mortgage-backed securities and other U.S. government sponsored agencies are guaranteed by the full faith and credit of the United States or by an agency of the United States government. The Company does not have the intent to sell and, more likely than not, will not be required to sell, these securities prior to maturity. Thus the Company is not required to record any loss on the securities. However, asset/liability strategies may occasionally result in the Company adjusting the available-for-sale portfolio duration through sales of a portion of the portfolio.
The amortized cost and approximate fair value of investment debt securities at December 31, 2010, by contractual maturity are shown below.
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax-exempt municipal securities have been computed on a tax equivalent basis which takes into account the coupon rate paid by the issuer adjusted by any premium paid or discount received on the security at settlement date.
NOTE B. INVESTMENT SECURITIES (Continued)
NOTE B. INVESTMENT SECURITIES (Continued)
Equity securities at December 31, 2010 and 2009, include the following: FHLB stock of $1,010,700 and $2,437,600 for 2010 and 2009, respectively; Federal Reserve Bank stock of $521,700 for 2010 and 2009; First National Bankers Bank stock in the amount of $47,800 for 2010 and 2009; an investment in Enterprise Corporation of the Delta Investments, LLC of $100,000 in 2010 and 2009 and a $155,000 investment in B&K Statutory Trust for both years. Redemptions of stock in the FHLB during 2010 and 2009 amounted to $1,870,931 and $756,300, respectively, due to the declining borrowed funds level. The FHLB, Federal Reserve Bank and First National Bankers Bank stocks are considered restricted stock as only banks, which are members of these organizations, may acquire or redeem them. The stock is redeemable at its face value; therefore, there are no gross unrealized gains or losses associated with these investments.
Investment securities with an amortized cost of approximately $107,399,000 (approximate fair value $111,333,000) at December 31, 2010, and approximately $108,047,000 (approximate fair value $111,626,000) at December 31, 2009, were pledged to collateralize public deposits and for other purposes as required or permitted by law or agreement.
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Bank’s loan portfolio (rounded to the nearest thousand) at December 31, 2010 and 2009, consists of the following:
Impaired loans on which accrual of interest has been discontinued or reduced were approximately $7,510,000 and $8,709,000 at December 31, 2010, and 2009, respectively. If interest on these impaired loans had been accrued, the income would have approximated $373,000 in 2010 and $425,000 in 2009. The related allowance amount on impaired loans at December 31, 2010, was approximately $1,055,864 compared to $2,112,836 at December 31, 2009. Loans which are contractually 90 days or more past due as of December 31, 2010 and 2009, and still accruing interest were approximately $484,154 and $1,003,944, respectively.
In the ordinary course of business, the Bank makes loans to its executive officers, principal stockholders, directors and to companies in which these borrowers are principal owners. Loans outstanding to such borrowers (including companies in which they are principal owners) amounted to $408,109 and $957,807 at December 31, 2010 and 2009, respectively. These loans were made on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectability or present other unfavorable features.
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The aggregate amount of loans to such related parties for 2010 and 2009 is as follows:
Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The following table sets forth, as of December 31, 2010, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Year Ended December 31, 2010
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
An analysis of the allowance for loan losses as of December 31, 2009 is as follows:
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
Management further disaggregates the loan portfolio segments into classes, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.
As of December 31, 2010 and 2009, loan balances outstanding more than 90 days and still accruing interest amounted to $484 thousand and $1.0 million, respectively. As of December 31, 2010 and 2009, non-accrual loans were $7.5 million and $8.7 million, respectively. The Bank considers all loans more than 90 days past due as non-performing loans.
The following table presents, by class, qualitative and quantitative information concerning the credit quality of financing receivables by credit quality indicators as of December 31, 2010.
Credit Quality Indicators
As of December 31, 2010
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents, by class, an analysis of the age of the recorded investment in financing receivables that are past due based on the Company’s review policy along with financing receivables past due 90 days or more and still accruing as of December 31, 2010.
Aged Analysis of Past Due Financing Receivables
As of December 31, 2010
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents, by class, information regarding the recorded investment in financing receivables that have been placed on non-accrual status as of December 31, 2010.
Financing Receivables on Non-Accrual Status
As of December 31, 2010
NOTE C. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents, by class, for loans that meet the definition of an impaired loan in paragraphs ASC 310-10-35-16 through 35-17 for the year ended December 31, 2010, (1) the recorded investment in impaired loans for which there is a related allowance for credit loss, (2) the recorded investment in impaired loans for which there is not a related allowance for credit loss and (3) the total unpaid principal balance in the impaired loan. Additionally, the table includes the average recorded investment in the impaired loan and the amount of interest income recognized using a cash basis method of accounting during the time within that period that the loans were impaired.
Impaired Loans
For Year Ended December 31, 2010
NOTE D. LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were approximately $8,991,934 and $10,509,814 in 2010 and 2009, respectively.
NOTE E. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
The provision for depreciation charged to operating expenses was $756,295 and $798,158 for the years ended December 31, 2010 and 2009, respectively.
NOTE F. TRUST DEPARTMENT ASSETS
The Company has entered into a Trust Services Agreement with National Independent Trust Company, a national banking association doing business as Argent Trust Company, headquartered in Ruston, Louisiana. Effective January 1, 2007, Argent Trust Company assumed all responsibilities associated with trust services, having been duly appointed successor trustee for all trust accounts. Argent Trust Company performs certain fiduciary services for customers transferred from and referred by the Bank to Argent Trust Company. In return the Bank receives a specified percentage of fee income paid to Argent Trust Company by those customers.
NOTE G. DEPOSITS
Deposits at December 31, 2010 and 2009 consisted of the following:
NOTE G. DEPOSITS (Continued)
Maturities of certificates of deposit of $100,000 or more outstanding at December 31, 2010 and 2009, are summarized as follows:
The approximate scheduled maturities of certificates of deposits for each of the next five years are:
Interest expense on certificates of deposit greater than $100,000 was approximately $606,000 and $1,106,000 for the years ended December 31, 2010 and 2009, respectively. The public fund deposits were $42,254,956 and $43,882,717 at December 31, 2010 and 2009, respectively.
NOTE H. BORROWINGS
Federal Home Loan Bank Advances:
During 2010 and 2009, the Bank received advances from and remitted payments to the FHLB. These advances are collateralized by a portion of the Bank’s one-to-four family residential mortgage portfolio, certain secured commercial loans and certain investment securities in accordance with the Advance Security and Collateral Agreement with the FHLB. The following provides information regarding outstanding FHLB advances:
Advances outstanding at December 31, 2010 and 2009, consist of five fixed-rate loans totaling $9,000,000 with interest rates ranging from 2.658% to 3.546%. The maturities on these loans are longer-term and range from May 29, 2012, to October 6, 2014. At December 31, 2009, the Bank had one amortizing loan with a balance of $4,754 with a rate of 4.963% and a maturity of September 1, 2010.
In addition to the term advances, the Company had overnight borrowings of $8,457,000 at December 31, 2010 and $32,018,000 at December 31, 2009.
NOTE H. BORROWINGS (Continued)
Annual maturities for the next five years as of December 31, 2010, are as follows:
Junior Subordinated Debentures:
In 2003, the Company issued $5,000,000 of junior subordinated debentures. These junior subordinated debentures qualify as Tier 1 capital for regulatory capital purposes but are classified as a liability under accounting principles generally accepted in the United States of America. These securities carry an interest rate of LIBOR + 3.15%, adjusted quarterly, with interest paid quarterly in arrears and mature in March, 2033. The Company has the right to call these debentures quarterly.
NOTE I. EMPLOYEE BENEFIT PLANS
The Bank has an employee stock ownership plan which is designed to invest primarily in employer stock. All employees of the Bank with one year of service and who are at least 21 years old are covered, and are fully vested after six years of service. Employer contributions are determined annually at the discretion of the Board of Directors and are allocated among participants on the basis of their total annual compensation. Dividends on stock owned by the plan are recorded as a reduction of retained earnings. There were no Company contributions to the plan for the years 2010 or 2009. The plan owned 85,373 and 86,645 shares of Company stock, as of December 31, 2010 and 2009, respectively.
The overall cost to the plan for the years ended December 31, 2010 and 2009, was $9.46 and $9.36 per share, respectively.
Employees age 21 and older are eligible to participate in a 401(k) plan established by the Bank. Under this plan, employees may defer a percentage of their salaries, subject to limits based on federal tax laws. These deferrals are immediately vested. Employer matching and profit sharing contributions are non-mandatory and 100% vested after six years. Employer contributions to the plan are made at the discretion of the Board of Directors and aggregated $122,673 and $120,294 for the years ended December 31, 2010 and 2009, respectively.
The Company maintains a long-term incentive plan, the Britton Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan (the “2007 LTIP”), in which all employees of the Company and its subsidiaries may participate. The plan is administered by a committee of at least two non-employee directors appointed by the full Board of Directors. The 2007 LTIP was approved by the Company’s shareholders on April 24, 2007, and replaced the Company’s 1996 Long-Term Incentive Plan (the “1996 LTIP”). There were 86,630 shares remaining available for grant or award under the 1996 LTIP that have been added to the shares available for grant or award under the 2007 LTIP. The Company has granted options to purchase a total of 135,143 shares, including 98,643 from the 1996
NOTE I. EMPLOYEE BENEFIT PLANS (Continued)
LTIP and 36,500 from the 2007 LTIP. An aggregate of 70,380 shares remained available for grant or award at December 31, 2010, under the 2007 LTIP. The Company awarded 9,000 shares of restricted stock during 2010, but it did not grant any stock options in 2010. Options to acquire 27,120 shares were outstanding and exercisable as of December 31, 2010.
The summary of stock option activity is shown below:
The following table summarizes information about stock options outstanding at December 31, 2010:
The fair value of each option is estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were made in estimating fair values in 2010 and 2009.
Share-based transactions are measured at the fair value of the equity instrument issued. Net income for 2010 and 2009 was reduced by $66,000 and $38,000, respectively, due to valuing stock options.
The Bank maintains a Salary Continuation Agreement with its chief executive officer. The agreement provides equal annual benefits for a period of 15 years following the later of (1) his attainment of age 65, or (2) his retirement. The amount of the benefit is fixed and is based on the chief executive’s age when his employment ceases; the maximum annual benefit that he may receive under the plan is
NOTE I. EMPLOYEE BENEFIT PLANS (Continued)
$40,000. The chief executive is fully vested in his benefit. If the chief executive dies while he is employed, his beneficiaries will be paid an annual benefit equal to $40,000 during the 15-year period following his date of death. If he dies after his installment payments have commenced, his beneficiaries will receive the remaining payments. The benefit under the Salary Continuation Agreement is subject to forfeiture if the chief executive is terminated for cause. The agreement also contains a non-competition covenant during the three-year period after his employment ceases for any reason. If he breaches this covenant, the Bank may cease all further payments. The Bank is also currently paying benefits to a retired executive officer pursuant to a salary continuation agreement. The financial statements for the years ended December 31, 2010 and 2009, include salary continuation expenses of $38,912 and $37,080, respectively.
NOTE J. LEASES
The Bank leases two branch offices as well as parking space under operating leases which expire in various years through 2014. Rent expense was $139,779 and $114,715 in 2010 and 2009, respectively.
The future minimum rental commitments for these leases at December 31, 2010, are as follows:
NOTE K. INCOME TAXES
The provision/(benefit) for income taxes included in the consolidated statements of income is as follows for the years ended December 31, 2010 and 2009:
The provision/(benefit) for federal income taxes differs from that computed by applying the federal statutory rate of 34% in 2010 and 2009 as indicated in the following analysis:
The net deferred tax liability of $1,329,565 in 2010 and $1,052,725 in 2009 is included in accrued taxes and other liabilities. The net deferred tax asset and liability consist of the following components at December 31, 2010 and 2009:
NOTE K. INCOME TAXES (Continued)
A summary of the changes in the net deferred tax asset (liability) for the years ended December 31, 2010 and 2009 is as follows:
NOTE L. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 2010 and 2009, the Bank had sold various investment securities with an agreement to repurchase these securities at various times. The underlying securities are U.S. Government obligations and obligations of other U.S. Government agencies and corporations with a book value of approximately $59 million, and an approximate fair value of $62 million. These securities generally remain under the Bank’s control and are included in investment securities. At December 31, 2010, these securities had coupon rates ranging from 1.05% to 5.50% and maturity dates ranging from 2013 to 2037. The related liability to repurchase these securities, included in securities sold under repurchase agreements, was $51 million at December 31, 2010, and $53 million at December 31, 2009.
The Company has entered into two $20 million transactions with JPMorgan Chase Bank, N.A. (“Chase”). The remaining liability of $11 million in 2010 and $13 million in 2009 primarily includes agreements that the Company has entered into with local customers for overnight sweep accounts and term repurchase agreements with rates ranging from .25% to 1.25%. The maximum amount of outstanding agreements at any month-end was $54 million and $53 million during 2010 and 2009, respectively. The monthly average amount of outstanding agreements was $52 million and $51 million during 2010 and 2009, respectively.
NOTE M. REGULATORY MATTERS
The primary source of the Company’s revenue is dividends from the Bank. Federal banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account, and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings. The Bank’s ability to pay dividends is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors. At December 31, 2010, $2.4 million was available for dividends out of current operating earnings.
NOTE M. REGULATORY MATTERS (Continued)
Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2010, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $2.4 million. There were no loans outstanding from the Bank to the Company at December 31, 2010. Any such distribution is also subject to the requirements described in the following paragraphs.
In accordance with Office of Thrift Supervision regulations, a special “Liquidation Account” has been established for the benefit of certain Qualifying Depositors of Natchez First Federal Savings Bank (acquired by the Bank in 1993) in an initial amount of approximately $2.8 million. The Liquidation Account serves as a restriction on the distribution of stockholders’ equity in the Bank and no cash dividend may be paid on its capital stock if the effect thereof would be to cause the regulatory capital of the Bank to be reduced below an amount equal to the adjusted Liquidation Account balance.
In the event of a complete liquidation of the Bank, each Qualifying Depositor would be entitled to his or her pro rata interest in the Liquidation Account. Such claims would be paid before payment to the Company as the Bank’s sole shareholder. A merger, consolidation, purchase of assets and assumption of deposits and/or other liabilities or similar transaction, with an FDIC-insured institution, would not be a complete liquidation for the purpose of paying the Liquidation Account. In such a transaction, the Liquidation Account would be required to be assumed by the surviving institution.
The Company and the Bank are subject to various regulatory capital requirements administered by 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 Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and 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. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2010, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
The most recent regulatory notification categorized the Bank as well capitalized under the regulatory capital framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company’s (consolidated) and the Bank’s actual capital amounts and ratios as of December 31, 2010 and 2009, are presented in the following table.
NOTE M. REGULATORY MATTERS (Continued)
NOTE N. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk entered into 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, which are not included in the accompanying consolidated financial statements. Commitments to extend credit are agreements to lend money at fixed and variable rates with fixed expiration dates or termination clauses. The Bank applies the same credit standards used in the lending process when extending these commitments, and periodically reassesses the customer’s creditworthiness through ongoing credit reviews. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral is obtained based on the Bank’s assessment of the transaction. At December 31, 2010 and 2009, the Bank’s commitments to extend credit totaled $38,844,486 and $43,423,096, respectively.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk and collateralization policy involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total unfunded letters of credit of $4,427,377 and $4,373,546 as of December 31, 2010 and 2009, respectively.
The Bank is required to maintain average reserves at the Federal Reserve Bank. This requirement approximated $275,000 at December 31, 2010. The Bank is in compliance with this requirement.
There were $6,074,014 and $784,063 loans held for sale at December 31, 2010 and December 31, 2009, respectively.
The Bank has outstanding lines of credit with several of its correspondent banks available to assist in the management of short-term liquidity. At December 31, 2010, the total available lines of credit were $36 million with an outstanding balance of $ -0- as reflected on the consolidated balance sheet. Additionally, the Bank has available borrowing capacity of $62 million at the Federal Home Loan Bank and $15 million at the Federal Reserve Discount Window.
The Company and its wholly owned subsidiary, the Bank, are involved in certain litigation incurred in the normal course of business. In the opinion of management and legal counsel, liabilities arising from such claims, if any, would not have a material effect upon the Company’s consolidated financial statements.
NOTE O. CONCENTRATIONS OF CREDIT
Substantially all of the Bank’s loans, commitments, and standby letters of credit have been granted to customers in the Bank’s market area. The majority of investments in state and municipal securities involve governmental entities in and around the Bank’s market area. The concentrations of credit by type of loan are set forth in Note C, and there are no other concentrations of credit other than those in the categories set forth in Note C. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Bank maintains deposit accounts and federal funds sold with correspondent banks which may, periodically, exceed the federally insured amount.
NOTE P. DIVIDENDS
The Bank paid dividends to the Company amounting to $1,200,000 and $0 for the years ended December 31, 2010 and 2009, respectively.
NOTE Q. INTEREST RATE RISK MANAGEMENT
There were no interest rate swaps at December 31, 2010 and December 31, 2009.
NOTE R. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value Disclosures
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is based on the assumptions market participants would use when pricing the asset or liability. A fair value hierarchy has been established that prioritizes the inputs used to develop those assumptions and measure fair value. The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
·
Level 1 - Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.
·
Level 2 - Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
·
Level 3 - Includes unobservable inputs and should be used only when observable inputs are unavailable.
Since the assumptions used in measuring fair value significantly affect fair value measurements, the fair value estimates may not be realized in an immediate settlement of the instrument. In addition, in accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Short-Term Investments - For short-term instruments, the carrying amount is a reasonable estimate of fair value.
NOTE R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Securities - Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Investment securities also include equity securities that are not traded in an active market. The fair value of these securities equals their carrying value.
Loans - The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for simi­lar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.
Cash Surrender Value of Life Insurance - The fair value approximates its carrying value which is based on cash surrender values indicated by insurance companies.
Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.
Borrowings - The fair value of FHLB advances is estimated using the rates currently offered for advances of similar maturities.
Securities Sold Under Repurchase Agreements - The fair value approximates its carrying value.
Commitments to Extend Credit and Standby Letters of Credit - The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.
The estimated approximate fair values of the Bank’s financial in­struments as of December 31, 2010 and 2009 are as follows:
NOTE R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Recurring Basis
Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.
The following table presents the balance of assets measured on a recurring basis as of December 31, 2010 and 2009. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.
NOTE R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Nonrecurring Basis
The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.
The fair value of impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.
NOTE R. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
NOTE S.
CONDENSED FINANCIAL INFORMATION OF
BRITTON & KOONTZ CAPITAL CORPORATION
The financial information of Britton & Koontz Capital Corporation, parent company only, is as follows:
BALANCE SHEETS
STATEMENTS OF INCOME
NOTE S.
CONDENSED FINANCIAL INFORMATION OF
BRITTON & KOONTZ CAPITAL CORPORATION (Continued)
STATEMENTS OF CASH FLOWS
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer of the Company (“CEO”) and the Chief Financial Officer of the Company (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2010. Based on this evaluation, the CEO and CFO concluded that as of December 31, 2010, the Company’s disclosure controls and procedures are effective for ensuring that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control over Financial Reporting is contained in Item 8, Financial Statements and Supplementary Data, and is incorporated herein by reference. There were no changes to internal control over financial reporting during the fourth quarter of 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following tables set forth the names and principal occupations of each director and executive officer of the Company.
The additional information required in response to this item is incorporated into this report by reference to the material under the headings “Stock Ownership,” “Board of Directors,” “Committees of the Board of Directors” and “Executive Officers” in the Company’s Definitive Proxy Statement for its 2010 Annual Meeting of Shareholders (the “2011 Proxy Statement”).
Code of Ethics
The Board of Directors has adopted a code of business conduct and ethics in compliance with Item 406 of Regulation S-K that applies to the principal executive officer, principal financial officer, principal accounting officer and controller of the Company and the Bank. Access to the Company’s Code of Ethics is available to shareholders of the Company and customers of the Bank through the Bank’s website at www.bkbank.com under “investor relations.” Amendments to or waivers from provisions of the Company’s Code of Ethics will be disclosed on the Company’s website.
Item 11.
Item 11. Executive Compensation.
The information required in response to this item is incorporated into this report by reference to the material under the headings “Board of Directors” and “Executive Compensation” in the 2011 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table summarizes our equity compensation plan information as of December 31, 2010. The Britton & Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan (the “2007 LTIP”) was approved by the Company’s shareholders on April 24, 2007 and replaced the Company’s 1996 Long-Term Incentive Plan (the “1996 LTIP”), which was effective as of May 16, 1996 and expired during 2006. As of December 31, 2010, an aggregate of 8,120 options granted under the 1996 LTIP remain outstanding and are exercisable in accordance with their terms. Stock options and restricted stock are available for grant and award under the 2007 LTIP.
_________________________
(1)
An aggregate of 115,000 shares of common stock are authorized for issuance under the 2007 LTIP in the form of stock options and restricted stock.
Additional information required in response to this item is incorporated into this report by reference to the material under the heading “Stock Ownership” in the 2011 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required in response to this item is incorporated into this report by reference to the material under the heading “Board of Directors” in the 2011 Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required in response to this item is incorporated into this report by reference to the material under the heading “Independent Registered Public Accountants” in the 2011 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
1.
Consolidated Financial Statements and Supplementary Information for Years Ended December 31, 2010 and 2009, which include the following:
(a)
Management’s Annual Report on Internal Control over Financial Reporting
(b)
Report of Independent Registered Public Accounting Firm
(c)
Consolidated Balance Sheets
(d)
Consolidated Statements of Income
(e)
Consolidated Statements of Changes in Stockholders’ Equity
(f)
Consolidated Statement of Cash Flows
(g)
Notes to the Consolidated Financial Statements
2.
Financial Statement Schedules
None
3.
Exhibits required by Item 601 of Regulation S-K
*
As indicated in the column entitled “Description of Exhibit,” this exhibit is incorporated by reference to another filing or document.
†
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) of Form 10-K.
The Company does not have any un-registered long-term debt exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will file with the SEC, upon request, a copy of all long-term debt instruments.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRITTON & KOONTZ CAPITAL CORPORATION
Date: March 15, 2011 By: /s/ Robert R. Punches
Robert R. Punches
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX