UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 31, 2005.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission File Number 0-22606
BRITTON & KOONTZ CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Mississippi 64-0665423
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
500 Main Street, Natchez, Mississippi 39120
(Address of Principal Executive Offices) (Zip Code)
601-445-5576
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
2,116,316 Shares of Common Stock, Par Value $2.50, were outstanding as of May 1,
2005.
BRITTON & KOONTZ CAPITAL CORPORATION
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits
SIGNATURES
CERTIFICATIONS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FOR THE PERIODS ENDED
A S S E T S
March 31, December 31,
ASSETS: 2005 2004
---------------- -----------------
Cash and due from banks:
Non-interest bearing $ 6,769,139 $ 5,739,604
Interest bearing 503,328 837,221
---------------- ----------------
Total cash and due from banks 7,272,467 6,576,825
Federal funds sold - 109,031
Investment Securities:
Held-to-maturity (market value, in 2005 and 2004,
of $40,234,217 and $41,337,742, respectively) 39,026,015 39,803,853
Available-for-sale (amortized cost, in 2005 and 2004,
of $93,386,296 and $91,068,652, respectively) 92,747,453 91,947,189
Equity securities 5,804,100 5,396,600
Loans, less unearned income of $1,637 in 2005 and
$1,996 in 2004, and allowance for loan losses of
$2,307,545 in 2005 and $2,236,778 in 2004 225,998,811 217,073,919
Loans held for sale 1,966,005 1,688,338
Bank premises and equipment, net 8,254,726 8,265,756
Other real estate, net 1,352,515 1,320,337
Accrued interest receivable 2,170,718 2,127,079
Cash surrender value of life insurance 911,114 943,481
Deposit Premium 961,602 988,506
Other assets 993,756 954,720
---------------- ----------------
TOTAL ASSETS $ 387,459,282 $ 377,195,634
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
LIABILITIES: 2005 2004
---------------- ----------------
Deposits
Non-interest bearing $ 41,160,172 $ 39,868,482
Interest bearing 191,544,341 186,419,447
---------------- ----------------
Total deposits 232,704,513 226,287,929
Federal Home Loan Bank advances 105,185,830 96,922,871
Federal funds purchased 2,695,000 6,435,000
Securities sold under repurchase agreements 8,346,102 8,103,381
Accrued interest payable 1,073,664 984,859
Advances from borrowers for taxes and insurance 219,951 399,443
Accrued taxes and other liabilities 1,197,150 1,910,383
Junior subordinated debentures 5,000,000 5,000,000
---------------- ----------------
Total liabilities 356,422,210 346,043,866
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share;
12,000,000 shares authorized; 2,130,816 issued and 2,116,316
outstanding for March 31, 2005 and December 31, 2004, respectively 5,327,040 5,327,040
Additional paid-in capital 7,254,113 7,254,113
Retained earnings 19,073,131 18,181,718
Accumulated other comprehensive income (359,837) 646,272
---------------- ----------------
31,294,447 31,409,143
Cost of 14,500 shares of common stock held by the company (257,375) (257,375)
---------------- ----------------
Total stockholders' equity 31,037,072 31,151,768
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 387,459,282 $ 377,195,634
================ ================
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
--------------------------------
2005 2004
--------------- --------------
INTEREST INCOME:
Interest and fees on loans $ 3,654,263 $ 3,406,487
Interest on investment securities:
Taxable interest income 1,090,030 1,019,685
Exempt from federal taxes 408,837 407,404
Interest on federal funds sold 492 1,335
--------------- --------------
Total interest income 5,153,622 4,834,911
--------------- --------------
INTEREST EXPENSE:
Interest on deposits 886,040 858,491
Interest on Federal Home Loan Bank advances 801,036 631,480
Interest on federal funds purchased 29,520 4,219
Interest on trust preferred securities 71,699 54,548
Interest on securities sold under repurchase agreements 46,763 28,851
--------------- --------------
Total interest expense 1,835,058 1,577,589
--------------- --------------
NET INTEREST INCOME 3,318,564 3,257,322
Provision for loan losses 90,000 120,000
--------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,228,564 3,137,322
--------------- --------------
OTHER INCOME:
Service charges on deposit accounts 319,252 313,853
Income from fiduciary activities 10,193 12,447
Income from investment activities 31,213 23,042
Insurance premiums and commissions 71 (244)
Gain/(loss) on sale of ORE 1,870 (19,817)
Gain/(loss) on sale of mortgage loans 94,514 89,029
Gain/(loss) on sale of other assets - (1,000)
Other 148,524 153,723
--------------- --------------
Total other income 605,637 571,033
--------------- --------------
OTHER EXPENSES:
Salaries 1,357,798 1,501,790
Employee benefits 237,275 259,494
Director fees 51,525 47,660
Net occupancy expense 241,679 215,977
Equipment expenses 255,684 245,482
FDIC assessment 7,867 8,812
Advertising 54,220 51,562
Stationery and supplies 50,797 60,747
Audit expense 47,451 40,030
Other real estate expense 7,063 20,256
Amortization of deposit premium 26,904 26,904
Other 504,047 466,971
--------------- --------------
Total other expenses 2,842,310 2,945,684
--------------- --------------
INCOME BEFORE INCOME TAX EXPENSE 991,891 762,671
Income tax expense 100,478 138,611
--------------- --------------
NET INCOME $ 891,413 $ 624,060
=============== ==============
EARNINGS PER SHARE DATA:
Basic earnings per share $ 0.42 $ 0.30
=============== ==============
Basic weighted shares outstanding 2,116,316 2,113,087
=============== ==============
Diluted earnings per share $ 0.42 $ 0.29
=============== ==============
Diluted weighted shares outstanding 2,120,750 2,119,730
=============== ==============
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Accumulated
Common Stock Additional Other Total
---------------------- Paid-in Retained Comprehensive Treasury Stockholders
Shares Amount Capital Earnings Income Stock Equity
---------- ----------- ----------- ------------ -------------- ---------- -------------
Balance at December 31, 2003 2,113,087 $ 5,318,968 $ 7,225,408 $ 16,690,918 $ 1,218,680 $ (257,375) $30,196,599
Comprehensive Income:
Net income - - - 624,060 - 624,060
Other comprehensive income (net of tax)
Net change in unrealized gain/(loss)
on securities available for sale,
net of taxes for $134,371 225,875 225,875
Other Comprehensive gains from
derivates, net of reclassification
adjustment of $18,864 31,711 31,711
---------- ----------- ----------- ------------ -------------- ---------- -------------
Balance at March 31, 2004 2,113,087 $ 5,318,968 $ 7,225,408 $ 17,314,978 $ 1,476,266 $ (257,375) $31,078,245
========== =========== =========== ============ ============== ========== =============
Balance at December 31, 2004 2,116,316 $ 5,327,040 $ 7,254,113 $ 18,181,718 $ 646,272 $ (257,375) $31,151,768
Comprehensive Income:
Net income - - - 891,413 - 891,413
Other comprehensive income (net of tax)
Net change in unrealized gain/(loss)
on securities available for sale,
net of taxes of $565,983 (951,398) (951,398)
Other Comprehensive gains from
derivates, net of reclassification
adjustment of $32,547 (54,711) (54,711)
---------- ----------- ----------- ------------ -------------- ---------- -------------
Balance at March 31, 2005 2,116,316 $ 5,327,040 $ 7,254,113 $ 19,073,131 $ (359,837) $ (257,375) $31,037,072
========== =========== =========== ============ ============== ========== =============
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31,
2005 2004
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 891,413 $ 624,060
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (130,869) 27,367
Provision for loan losses 90,000 120,000
Provision for depreciation 186,666 185,186
Stock dividends received (36,000) (16,800)
(Gain)/loss on sale of other real estate (1,870) 19,817
(Gain)/loss on sale of other repossessed assets - 1,000
(Gain)/loss on sale of mortgage loans (94,514) (89,029)
Net amortization (accretion) of securities 94,839 195,190
Amortization of deposit premium 26,904 26,904
Writedown of other real estate - 11,000
Net change in:
Loans held for sale (277,667) (1,061,458)
Accrued interest receivable (43,639) 65,236
Cash surrender value 32,367 (16,071)
Other assets (106,730) 606,678
Accrued interest payable 88,805 23,260
Accrued taxes and other liabilities 16,165 (358,164)
------------------- -------------------
Net cash provided (used) by operating activities 735,870 364,176
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold 109,031 41,361
Proceeds from sales, maturities and paydowns
of investment securities 5,396,887 6,927,104
Purchase of FHLB stock (371,500) -
Purchases of investment securities (7,031,532) -
(Increase)/decrease in loans (9,007,120) (5,538,801)
Proceeds from sale and transfers of other real estate 36,870 327,248
Proceeds from sale and transfers of other repossessed assets - 6,000
Purchase of premises and equipment (175,636) (543,886)
------------------- -------------------
Net cash provided (used) by financing activities (11,043,000) 1,219,026
------------------- -------------------
2005 2004
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase /(decrease) in customer deposits 6,316,584 7,539,022
Increase /(decrease) in brokered deposits 100,000 -
Increase /(decrease) in securities sold under
repurchase agreements 242,721 106,426
Increase /(decrease) in federal funds purchased (3,740,000) (2,270,000)
Increase /(decrease) in FHLB advances 8,262,959 (3,275,763)
Increase /(decrease) in advances from borrowers
for taxes and insurance (179,492) (173,282)
------------------- -------------------
Net cash provided (used) by financing activities 11,002,772 1,926,403
------------------- -------------------
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS 695,642 3,509,605
------------------- -------------------
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 6,576,825 8,359,755
------------------- -------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 7,272,467 $ 11,869,360
=================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW 2005 2004
------------------- -------------------
INFORMATION:
Cash paid during the year for interest $ 1,746,253 $ 1,554,329
=================== ===================
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans foreclosed to other real estate $ 67,178 $ 51,565
=================== ===================
Change in unrealized gains (losses)
on securities available for sale $ (1,517,380) $ 360,245
=================== ===================
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale $ (565,983) $ 134,371
=================== ===================
Change in unrealized gains (losses) on derivative $ (87,258) $ 50,575
=================== ===================
Change in the deferred tax effect in
unrealized gains (losses) on derivative $ (32,547) $ 18,864
=================== ===================
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
Note A. Basis of Presentation
The consolidated balance sheet for Britton & Koontz Capital Corporation
(the "Company") as of December 31, 2004, has been derived from the audited
financial statements of the Company for the year then ended. The accompanying
consolidated financial statements as of March 31, 2005, are unaudited and
reflect all normal recurring adjustments which, in the opinion of management,
are necessary for the fair presentation of financial position and operating
results of the periods presented. Certain 2004 amounts have been reclassified to
conform to the 2005 presentation.
Note B. Interest Rate Risk Management
On May 9, 2002, Britton & Koontz Bank, N.A., the Company's wholly-owned
subsidiary (the "Bank"), entered into an off-balance sheet interest rate swap
agreement to convert existing prime based loans to a fixed rate. Under the terms
of the agreement, the Bank receives a fixed rate of 7.635% and is obligated to
pay a floating rate based on USD-Prime-H.15, calculated on a contractual
notional amount of $5,000,000. The original term is for five years, expiring May
10, 2007. The fair value of this derivative, designated as a cash flow hedge and
considered highly effective, was $64,941 at March 31, 2005, and is reflected in
other assets. The positive impact on income through March 31, 2005, is $27
thousand. Management does not consider the arrangement to have a material impact
toward the Company's liquidity or capital resources and or to pose any known
risks with respect to market or credit risk.
Note C. Loans Held-for-Sale
Loans held-for-sale are primarily thirty year and fifteen 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
sold to protect earnings and equity from undesirable shifts in interest rates.
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. At March 31, 2005, no charge was
recorded. Gains on loans are recognized when realized.
Note D. Trust Preferred Securities
On March 26, 2003, the Company finalized its participation in FTN
Financial Capital Market's and Keefe, Bruyette & Woods' pooled trust preferred
offering. The Company established Britton & Koontz Statutory Trust # 1 which
issued 5,000 capital securities and 155 common securities with an aggregate
liquidation amount of $5 million and $155 thousand, respectively. The term of
the capital securities and debentures is 30 years, callable after 5 years at the
option of the Company. The initial interest rate is 4.41%, adjusting quarterly
at 3-Month LIBOR plus 3.15% and capped at 11.75%.
Note E. Loan Commitments
In the ordinary course of business, the Company enters into commitments
to extend credit to its customers. Letters of credit included in the financial
statements at March 31, 2005 and December 31, 2004, were $2.1 million and $2.1
million, respectively. As of March 31, 2005, the Company had entered into other
commercial and residential loan commitments with certain customers that had an
aggregate unused balance of $46.4 million, an increase from $40.7 million at
December 31, 2004. Because letters of credit and loan commitments often are not
used in their entirety, if at all, before they expire, the balances on such
commitments should not be used to project actual future liquidity requirements.
However, the Company does incorporate expectations about the level of draws
under all credit-related commitments into its funds management process.
Note F. Earnings per Share
Basic income per share amounts are computed by dividing net income by
the weighted average number of common shares outstanding. The computation of
diluted income per share assumes the exercise of all outstanding securities
potentially convertible into common stock, including options granted, unless the
effect is anti-dilutive. The effect will be anti-dilutive when the exercise
price per share of an option exceeds the current market price for a share of our
common stock. The following is information about the computation of earnings per
share for the three months ended March 31, 2005 and 2004.
For the three months ended
March 31,
-----------------------------
2005 2004
------------- --------------
Basic weighted average shares outstanding 2,116,316 2,113,087
Dilutive effect of granted options 4,434 6,643
Diluted weighted average shares outstanding 2,120,750 2,119,730
Net income $ 891,413 $ 624,060
Net income per share-basic $ .42 $ .30
Net income per share-diluted $ .42 $ .29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion is intended to present a review of the major
factors affecting the financial condition and results of operations of the
Company as of March 31, 2005, and disclose and expand on material changes from
prior periods.
SUMMARY
The Company had net income of approximately $891 thousand ($0.42
basic and diluted earnings per share) for the three months ended March 31, 2005,
compared to $624 thousand ($0.30 basic and $0.29 diluted earnings per share) for
the three months ended March 31, 2004.
Total assets increased $10.3 million to $387.5 million at March 31,
2005, from $377.2 million at December 31, 2004. Since year-end, cash and due
from banks increased $695 thousand to $7.3 million, available-for-sale
investment securities increased $800 thousand to $92.7 million while the
held-to-maturity portfolio fell $778 thousand to $39.0 million. Net loans,
excluding loans held for sale, at March 31, 2005, increased $8.9 million from
the end of the year to $226.0 million. Other real estate owned increased $32
thousand to $1.4 million over the same period. Deposits increased $6.4 million
from December 31, 2004, to $232.7 million at March 31, 2005, while borrowings
increased $4.8 million to $116.2 million over the same period. Total
stockholders' equity decreased $114 thousand to $31.0 million. Earnings of $891
thousand were offset by $951 thousand and $55 thousand from unrealized losses in
the available-for-sale investment portfolio and off-balance sheet derivatives,
respectively.
Financial Condition
Assets
The Company's total assets increased $10.3 million from $377.2
million at December 31, 2004 to $387.5 million at March 31, 2005. The Company's
investment portfolio remained relatively stable at $137.6 million while the net
loan balance, excluding loans held for sale, grew 4% from $217.1 million at
December 31, 2004 to $226.0 million at March 31, 2005.
Investment Securities
The Company's investment portfolio at March 31, 2005, consisted of
mortgage-backed, municipal, and corporate securities. Investment securities that
are deemed to be held-to-maturity ("HTM") are accounted for by the amortized
cost method while securities in the available-for-sale ("AFS") category are
accounted for at fair value.
Management determines the classification of its securities at
acquisition. Generally, municipal securities are classified as held-to-maturity
whereas mortgage backed securities are generally classified as available-
for-sale. Total HTM and AFS investment securities remained relatively stable at
$131.8 million as cash flows for the 1st quarter were re-invested back into the
market. Equity securities increased $408 thousand to $5.8 million from December
31, 2004, to March 31, 2005, due primarily to the purchase of Federal Home Loan
Bank stock. At March 31, 2005, equity securities were comprised primarily of
Federal Reserve Bank stock of $522 thousand, Federal Home Loan Bank stock of
$5.1 million and ECD Investments, LLC ("ECD") membership interests of $100
thousand. ECD is a vehicle through which banks, individuals and other
institutions can participate in economic and business development activities in
economically depressed regions of the country, in this instance, the states of
Arkansas, Louisiana and Mississippi.
The amortized cost of the Bank's investment securities, including
HTM and AFS securities, at March 31, 2005, and December 31, 2004, are summarized
in Table 1.
TABLE 1: COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)
03/31/05 12/31/04
------------- -------------
Mortgage-Backed Securities $ 92,516,268 $ 90,545,807
Agencies Obligations 3,997,770 3,997,544
Obligations of State and
Political Subdivisions 34,894,309 35,321,402
Other Debt Securities 1,003,964 1,007,752
============= ============
$132,412,311 $130,872,505
============= ============
Loans
Loan growth of 4% during the first quarter of 2005 exceeded Company
expectations of 2.5%. Management expects higher demand in all three Company
markets (Baton Rouge, Louisiana, and Natchez and Vicksburg, Mississippi), which
ultimately led to the increase, to continue through the second quarter of this
year. Loans secured by real estate were the primary contributor to the growth;
there were also slight increases in commercial loans. Home equity lines of
credit continued to show signs of strength, increasing 7.5% to $13.3 million in
the first quarter, as a result of the success of loan specials featuring lower
interest rates for a specified length of time. The Company does not believe the
low interest rates on the loan specials will impact net interest margin
negatively in the long-term. The percentage of net loans, excluding loans held
for sale, to total assets increased to 58.3% at March 31, 2005, compared to
57.5% at December 31, 2004. The loan to deposit ratio was 97.1% at March 31,
2005 compared to 95.9% at year-end
Table 2 presents the Bank's loan portfolio composition at March 31,
2005, and December 31, 2004.
TABLE 2: COMPOSITION OF LOAN PORTFOLIO
03/31/05 12/31/04
------------ ------------
Commercial, financial & agricultural $ 32,115,000 $ 31,589,000
Real estate-construction 21,462,000 18,360,000
Real estate-1-4 family residential 86,128,000 85,629,000
Real estate-other 76,858,000 70,945,000
Installment 13,502,000 14,229,000
Other 210,000 249,000
------------ ------------
Total loans $230,275,000 $221,001,000
============ ============
The Company's loan portfolio at March 31, 2005, had no significant
concentrations of loans other than in the categories presented in the table
above.
Bank Premises
The Company ended the year with six locations due to significant
consolidation efforts throughout 2004, as discussed in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2004. There have been no
material changes in the Company's premises since the year-end.
Asset Quality
Nonperforming assets, including non-accrual loans, other real
estate and loans 90 days or more delinquent, increased $407 thousand to $2.6
million at March 31, 2005, from $2.2 million at year-end. The increase is mainly
due to non-accrual loans, but the current level is not deemed to represent a
material decline in overall credit quality. The bank's nonperforming loan ratio
increased to .56% at March 31, 2005, from .41% at December 31, 2004. A breakdown
of nonperforming assets at March 31, 2005, and December 31, 2004, is shown in
Table 3.
TABLE 3: BREAKDOWN OF NONPERFORMING ASSETS
03/31/05 12/31/04
------------- ------------
(dollars in thousands)
Non-accrual loans by type
Real estate $ 713 $ 532
Installment 59 26
Commercial and all other loans 342 214
------------- ------------
Total non-accrual loans 1,114 772
Loans past due 90 days or more 161 129
------------- ------------
Total nonperforming loans 1,275 901
Other real estate owned (net) 1,353 1,320
------------- ------------
Total nonperforming assets $ 2,628 $ 2,221
============= ============
Nonperforming loans as a percent
of loans, net of unearned interest
and loans held for sale .56% .41%
============= ============
Allowance for Possible Loan Losses
The allowance for loan losses is established as losses are
estimated through a provision for loan losses charged against operations and is
maintained at a level that management considers adequate to absorb losses in the
loan portfolio. The allowance is subject to change as management re-evaluates
the adequacy of the allowance on a quarterly basis. Management's judgment in
determining the adequacy of the allowance is inherently subjective and is based
on the evaluation of individual loans, the known and inherent risk
characteristics and size of the loan portfolios, the assessment of current
economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience, review of regulatory authority
examination reports and evaluations of specific loans and other relevant
factors. The bank risk rates each loan at the initiation of the transaction and
risk ratings are reviewed and changed, when necessary, during the life of the
loan.
The allowance consists of specific, general and unallocated
components. The specific component relates to loans that are considered
impaired. Loan loss reserve factors are multiplied against the balances in each
risk rating category to arrive at the appropriate level of the specific
component of the allowance. Loans assigned higher risk ratings are monitored
more closely by management. The general component of the allowance for loan
losses groups loans with similar characteristics; the level of the general
component is a percentage of the balance of these loans. The percentage is based
upon historical losses and the inherent risks within each category. The
unallocated portion of the allowance reflects management's estimate of probable
but undetected losses inherent in the portfolio; such estimates are influenced
by uncertainties in economic conditions, delays in obtaining information,
including unfavorable information about a borrower's financial condition,
difficulty in identifying triggering events that correlate to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. The methodology for determining the adequacy of the
allowance for loan losses is consistently applied; however, revisions may be
made to the methodology and assumptions based on historical information related
to charge-off and recovery experience and management's evaluation of the current
loan portfolio.
Based upon this evaluation, management believes the allowance for
loan losses of $2.3 million at March 31, 2005, which represents 1.01% of gross
loans held to maturity, is adequate, under prevailing economic conditions, to
absorb probable losses on existing loans. At March 31, 2005, total reserves
included specific reserves of $882 thousand, general reserves of $928 thousand
and unallocated reserves of $490 thousand. At December 31, 2004, the allowance
for loan loss was $2.2 million or 1.02% of gross loans held to maturity
Provision for Possible Loan Losses
The provision for possible loan losses is a charge to earnings to
maintain the allowance for possible loan losses at a level consistent with
management's assessment of the loan portfolio in light of current and expected
economic conditions. The Company's regular review of the allowance is an effort
to maintain it at an adequate level and make a proper provision expense to
earnings.
Table 4 details allowance activity for the three months ended March
31, 2005 and 2004:
TABLE 4: ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
03/31/05 03/31/04
------------- -------------
(dollars in thousands)
Balance at beginning of period $ 2,237 $ 2,070
Charge-offs:
Real Estate (3) (3)
Commercial (8) (1)
Installment and other (16) (13)
Recoveries:
Real Estate 0 1
Commercial 5 1
Installment and other 3 4
------------ -------------
Net (charge-offs)/recoveries (19) (11)
Provision charged to operations 90 120
------------ -------------
Balance at end of period $ 2,308 $ 2,179
============ =============
Allowance for loan losses as a percent of
loans, net of unearned interest & loans
held for sale 1.01% 1.03%
============ =============
Net charge-offs as a percent of average loans .01% .01%
============ =============
Potential Problem Loans
At March 31, 2005, the Company had no loans, other than those
balances incorporated in tables 3 and 4 above, which management had
significant doubts as to the ability of the borrower to comply with current
repayment terms.
Deposits
Total deposits increased $6.4 million from $226.3 million at
December 31, 2004, to $232.7 million at March 31, 2005. The increase in total
deposits is due primarily to an increase in non-maturity public funds and
customer demand deposits. The Company's markets are very competitive providing
some volatility in obtaining deposits associated with public entities. These
deposits are considered to be part of the total non-core wholesale funding used
to fund investments and loans.
TABLE 5: COMPOSITION OF DEPOSITS
03/31/05 12/31/04
-------------- --------------
Non-Interest Bearing $ 41,160,172 $ 39,868,482
NOW Accounts 33,428,983 28,103,197
Money Market Deposit Accounts 21,266,293 24,974,678
Savings Accounts 19,222,117 16,490,444
Certificates of Deposit 117,626,948 116,851,128
-------------- --------------
Total Deposits $ 232,704,513 $ 226,287,929
============== ==============
Borrowings
Total bank borrowings, including Federal Home Loan Bank advances,
Federal Funds purchased, and customer repurchase agreements, increased $4.8
million from $111.5 million at December 31, 2004 to $116.2 million at March 31,
2005. The additional borrowed funds along with the increase in bank deposits
were used to fund the bank's $8.9 million increase in loans.
Capital
Stockholders' equity totaled $31.0 million at March 31, 2005
compared to $31.2 million at December 31, 2004. The decrease is the result of
net income of $891 thousand for the three months ended March 31, 2005 offset by
the change in comprehensive income/(loss) over the same period totaling $1.0
million. The calculation of comprehensive income includes changes in unrealized
gains or losses in available-for-sale securities of $951 thousand and the
recognition of the change in fair value of certain derivative instruments of $55
thousand. Due to the nature of the investment portfolio, management considers
declines due to interest rates to be a temporary impairment of the security.
Components of comprehensive income are excluded from the calculation of capital
ratios. The Company maintained a total capital to risk weighted assets ratio of
15.08%, a Tier 1 capital to risk weighted assets ratio of 14.16% and a leverage
ratio of 9.27% at March 31, 2005. These levels substantially exceed the minimum
requirements of bank regulatory agencies for well-capitalized institutions of
10.00%, 6.00% and 5.00% respectively. The ratio of shareholders' equity to
assets decreased to 8.0% at March 31, 2005, compared to 8.3% at December 31,
2004.
Off-Balance Sheet Arrangements
There have been no significant changes in the Company's off-balance
sheet arrangements during the three months ended March 31, 2005. See Note B to
the Company's consolidated financial statements for a description of the
Company's off-balance sheet arrangements.
Results of Operations
Net Income
Net income for the three months ended March 31, 2005, increased
$267 thousand to $891 thousand, or $0.42 per diluted share, compared to $624
thousand, or $0.29 per diluted share for the same period in 2004. The increase
is primarily due to additional net interest income after provision for loan
losses of $91 thousand, an increase in net non-interest income/expense of $139
thousand and a one-time tax adjustment of $124 thousand made in the first
quarter of 2005 associated with bank owned life insurance. Returns on average
assets and average equity were .93% and 11.42% in the first quarter of 2005
compared to .67% and 8.16% in the first quarter of 2004. Returns on average
assets and average equity excluding the annualized effect of the tax adjustment
amounted to .83% and 10.29%, respectively. Consolidation of bank premises
throughout 2004 and reductions in full-time equivalents from 149 at March 31,
2004, to 125 at March 31, 2005, provided for a more profitable first quarter of
2005. Management believes the consolidation initiatives will result in
additional savings in occupancy, supplies and communication costs during the
current calendar year. Management does not believe the reduction in employees
will adversely affect ongoing operations but instead will allow the Company to
be more competitive in all three markets it serves.
Net Interest Income and Net Interest Margin
One of the largest components of the Company's earnings is net
interest income (NII), which is the difference between the interest and fees
earned on loans and investments and the interest paid for deposits and borrowed
funds. The net interest margin (NIM) is net interest income expressed as a
percentage of average earning assets.
Net interest income increased $61 thousand to $3.3 million for the
three months ended March 31, 2005 compared to the same period in 2004. An
increase in loan volume, partially offset by rising interest rates during the
first quarter of 2005, contributed to the increase in NII. The annualized net
interest margin was 3.64% for the three months ended March 31, 2005, compared to
3.73% for the same period in 2004. Additional volumes and compression from
higher interest rates contributed to the narrowing of net interest margin. The
expected rising rate environment throughout 2005 will add additional pressure on
net interest income and net interest margin. Management anticipates that the
effects of rising interest rates offset by continued above-average loan growth
will help to minimize this pressure on NII and NIM.
Non-Interest Income
Non-interest income includes service charges on deposit accounts,
income from fiduciary and brokerage activities, gains from the sale of mortgage
loans and other revenue not derived from interest on earning assets.
Non-interest income for the three months ended March 31, 2005, increased $35
thousand over the same period in 2004. The increase was primarily the result of
higher revenues from the sale of mortgage loans, higher fees from service
charges on deposit accounts and investment activities. Income was received on
$8.0 million in sales of mortgage loans during the first quarter of 2005
compared to $11.1 million in 2004.
Non-Interest Expense
Non-interest expense includes salaries and benefits, occupancy,
equipment, audit and other operating expenses. Non-interest expenses for the
three months ended March 31, 2005 were $2.8 million compared to $2.9 million for
the same period in 2004. As was discussed earlier, in consolidating bank
premises and employee reductions, the Company was able to realize lower costs
associated with employee salary and benefits.
Income Taxes
The Company recorded income tax expense of $100 thousand for the
three months ended March 31, 2005, compared to $139 thousand for the same period
in 2004. The decrease resulted from the Company's adjustment of a tax liability
in the amount of $124 thousand established in 1994 related to the possible
cancellation of bank owned life insurance. It was determined that the liability
will not be needed since management intends to keep the policies until maturity.
Liquidity and Capital Resources
The Company utilizes a funds management process to assist
management in maintaining net interest income during times of rising or falling
interest rates and in maintaining sufficient liquidity. Principal sources of
liquidity for the Company are asset cash flows, customer deposits and the
ability to borrow against investment securities and loans. Secondary sources of
liquidity include the sale of investment and loan assets. All components of
liquidity are reviewed and analyzed on a monthly basis.
The Company has established a liquidity contingency plan to guide
the Bank in the event of a liquidity crisis. The plan describes the normal
operating environment, prioritizes funding options and outlines management
responsibilities and board notification procedures.
The Company's cash and cash equivalents increased $577 thousand to
$8.9 million at March 31, 2005 from $8.4 million at December 31, 2004. Cash
provided by operating and financing activities during the first quarter of this
year was $4.1 million and $4.2 million, respectively, while investing activities
used $7.8 million. Investing activities include a net increase in loans of $13.0
million along with the purchase of $16.9 million of investment securities,
offset by pay downs of $21.1 million.
At March 31, 2005, the Company had unsecured federal funds lines
with correspondent banks of $32 million and maintained the ability to draw on
its line of credit with the Federal Home Loan Bank in the amount of
approximately $4 million. In addition to these lines of credit, the bank had
approximately $83 million in unencumbered investment securities available for
collateralized borrowing. Management believes it maintains adequate liquidity
for the Company's current needs.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, such
forward-looking statements are based on numerous assumptions (some of which may
prove to be incorrect) and are subject to risks and uncertainties which could
cause the actual results to differ materially from the Company's expectations.
Forward-looking statements have been and will be made in written documents and
oral presentations of the Company. Such statements are based on management's
beliefs as well as assumptions made by and information currently available to
management. When used in the Company's documents or oral presentations, the
words "anticipate", "believe", "estimate", "expect", "objective", "projection",
"forecast", "goal" and similar expressions are intended to identify
forward-looking statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking statements,
factors that could cause the Company's actual results to differ materially from
those contemplated in any forward-looking statements include, among others,
increased competition, regulatory factors, economic conditions, changing market
conditions, availability or cost of capital, employee workforce factors, costs
and other effects of legal and administrative proceedings, and changes in
federal, state or local legislative requirements. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of changes in actual results, changes in assumptions or other factors
affecting such statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk reflects the potential risk of economic loss that would
result from adverse changes in interest rates and market prices. The risk is
usually seen in either reduced market value of financial assets or reduced net
interest income in future periods.
The Company utilizes an asset/liability committee comprised of three
outside directors, the Bank's Chief Executive Officer and its Chief Financial
Officer, who acts as chairman of the committee. The committee meets monthly and
its primary responsibility is the management of the assets and liabilities of
the Bank to produce a stable and evenly rising flow of net interest income, an
appropriate level of capital and a level of liquidity adequate to respond to the
needs of depositors and borrowers and to earnings' enhancement opportunities.
The committee manages the interest rate risk inherent in the loan, investment,
deposit and borrowed funds portfolios. Further, the committee manages the risk
profile of the Company and determines strategies to maintain interest rate
sensitivity at a low level.
Annually, an economic value of equity analysis is performed to
determine the sensitivity of capital associated with interest rate changes. The
analysis showed that, at December 31, 2004, in a rising rate scenario where
rates moved up by 200 basis points, the value of equity would decline by less
than 15%. The committee as reported to the Board of Directors agreed that this
was well within acceptable limits.
There have been no significant changes in the Company's market risk
position since December 31, 2004.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on
Form 10-Q, the Company carried out an evaluation, under the supervision and with
the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our 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. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic SEC reports. There
has been no change in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
EXHIBIT INDEX
Exhibit Description of Exhibit
3.1 Restated Articles of Incorporation of Britton & Koontz Capital
Corporation, incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-8, Registration No.
333-20631, filed with the Commission on January 29, 1997. *
3.2 By-Laws of Britton & Koontz Capital Corporation, as amended and
restated, incorporated by reference to Exhibit 3.2 to Registrant's
Annual Report on Form 10-KSB filed with the Commission on March
30, 1998. *
4.1 Shareholder Rights Agreement dated June 1, 1996, between Britton &
Koontz Capital Corporation and Britton & Koontz First National
Bank, as Rights Agent, incorporated by reference to Exhibit 4.3 to
Registrant's Registration Statement on Form S-8, Registration No.
333-20631, filed with the Commission on January 29, 1997. *
31.1 Certifications of the Chief Executive Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certifications of the Chief Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications of the Chief Executive Officer, as required
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certifications of the Chief Financial Officer, as required
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* As indicated in the column entitled "Description of Exhibits" this
exhibit is incorporated by reference to another filing or
document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BRITTON & KOONTZ CAPITAL CORPORATION
Date: May 13, 2005 /s/ W. Page Ogden
------------------------------------
W. Page Ogden
Chairman and Chief Executive Officer
Date: May 13, 2005 /s/ William M. Salters
------------------------------------
William M. Salters
Chief Financial Officer
EXHIBIT 31.1
SECTION 302 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, W. Page Ogden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Britton &
Koontz Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by the report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 13, 2005 /s/ W. Page Ogden
------------------------------------
W. Page Ogden
Chief Executive Officer
EXHIBIT 31.2
SECTION 302 - CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, William M. Salters, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Britton &
Koontz Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by the report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 13, 2005 /s/ William M. Salters
------------------------------------
William M. Salters
Chief Financial Officer
EXHIBIT 32.1
SECTION 906 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. ss. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, of Britton & Koontz Capital Corporation (the "Company"),
as filed with the Securities Exchange Commission on the date hereof (the
"Quarterly Report"), I, W. Page Ogden, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Quarterly Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Date: May 13, 2005 /s/ W. Page Ogden
------------------------------------
W. Page Ogden
Chief Executive Officer
EXHIBIT 32.2
SECTION 906 - CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. ss. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005, of Britton & Koontz Capital Corporation (the "Company"),
as filed with the Securities Exchange Commission on the date hereof (the
"Quarterly Report"), I, William M. Salters, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Quarterly Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) the information contained in the Quarterly Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Date: May 13, 2005 /s/ William M. Salters
------------------------------------
William M. Salters
Chief Financial Officer