Message to Shareholders
Our company enjoyed another rewarding year characterized by
solid earnings and continued growth of both loans and deposits.
Net after-tax earnings were $2.3 million, or $1.32 per share.
The cash dividends totaled $.59 per share, which represented a
45% payout of annual earnings. Returns on average assets and
average equity were 1.36% and 12.34% respectively. Total assets
grew to $173.6 million from $162.1 million in 1997.
Earnings were about the same as the previous year. Increased
revenue from the growth of both deposits and loans offset higher
expenses associated with the implementation of new bank
technology and the launching of a 35% investment in Sumx Inc., a
new company formed to develop and market Internet-based
electronic banking software to financial institutions.
Further growth is indicated by our announcement in September of
the acquisition of two local branches owned by a regional bank.
Completed in January of 1999, the acquisition brings another $12
million in deposits and $1.8 million in loans to the balance
sheet of B&K. Such growth is essential to continued increases
in earnings per share. The board and management are committed
to growing in our existing marketplace and to expanding the
boundaries of the banking franchise.
A valuable aspect of the company's stock is its public trading
under the symbol BKBK in the NASDAQ Small Cap Market. Like many
bank stocks, the price for the company's stock softened in 1998.
The ending price was $19 compared to $22 a year ago. However,
brisk trading volume continued and the price/earnings multiple
of many larger banks dropped closer to that of BKBK. The
growing liquidity and competitive P/E ratio make the company's
stock attractive currency for other institutions considering
sale.
A major area of discussion for the public in 1999 will be the
banking industry's readiness for year 2000, or Y2k. As part of
our desire to keep our technology not only up-to-date, but also
leading edge, we have invested heavily during the last two years
in new hardware and software for our core processing, check
processing and imaging, and networking. These recent technology
investments have had the added advantage of significantly
reducing the bank's exposure to Y2k risks. Nevertheless, the
bank continues to test mission critical systems, as well as an
extensive inventory of related systems, to make the risk of any
Y2k problems remote.
Last year we noted several economic challenges before us, namely
the spread of difficulties in major foreign markets and the
narrowing net interest margins resulting from lower interest
rates and a flat yield curve. These challenges remain
significant issues into 1999. However, your company is poised
for further growth and earnings enhancement. B&K employees have
adopted new technologies with eagerness and continue to deliver
a high level of banking service that distinguishes B&K not only
in its marketplace, but also throughout the banking industry.
We appreciate our shareholders' confidence in us and look
forward to building wealth for you in the next millennium.
Yours truly,
W. J. Feltus III W. Page Ogden
Chairman of the Board President & CEO
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
HIGHLIGHTS
($ in thousands, except for per share data)
1998 1997
-------- --------
Net Income $ 2,332 $ 2,398
Net Income Per Share 1.32 1.36
Net Loans 118,285 106,156
Deposits 143,186 133,481
Total Assts 173,573 162,057
Total Stockholders' Equity 19,249 17,982
CONTENTS
Message to shareholders
Financial Statements
Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Corporate Information
Directors and Officers
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
with
Independent Auditor's Report
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
Page
Number
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS 2
Consolidated Statements of Financial Condition 3-4
Consolidated Statements of Income 5-6
Consolidated Statements of Changes in Stockholders' Equity 7
Consolidated Statements of Cash Flows 8-9
Notes to the Consolidated Financial Statements 10-44
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Britton & Koontz Capital Corporation and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Britton & Koontz Capital Corporation and Subsidiary as of
December 31, 1998 and 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Britton & Koontz Capital Corporation and Subsidiary at December 31, 1998
and 1997, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Vicksburg, Mississippi
January 20, 1999
FINANCIAL STATEMENTS
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
------------- -------------
ASSETS:
Cash and due from banks:
Non-interest bearing $ 4,337,900 $ 5,806,360
Interest bearing 472,727 123,283
------------- -------------
Total cash and due from banks 4,810,627 5,929,643
Investment securities:
Held-to-maturity (market value of $31,300,856 and
$39,371,180, respectively) 30,724,063 38,727,543
Available for sale (amortized cost of $10,900,039 and
$3,969,053, respectively) 10,923,838 4,031,005
Equity securities, at cost less equity in undistributed losses 990,149 -
Other equity securities 1,197,350 1,197,850
Loans, less unearned income of $182,917 in 1998 and
$246,813 in 1997, and allowance for loan losses of
$746,738 in 1998 and $676,745 in 1997 118,285,228 106,156,237
Bank premises and equipment, net 4,090,692 3,947,207
Other real estate, net 96,322 74,038
Accrued interest receivable 1,371,834 1,233,181
Cash surrender value of life insurance 716,313 679,925
Other assets 367,027 80,501
------------- -------------
TOTAL ASSETS $ 173,573,443 $ 162,057,130
============= =============
See accompanying notes to the consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
------------- -------------
LIABILITIES:
Deposits:
Non-interest bearing $ 21,681,170 $ 21,412,471
Interest bearing 121,505,227 112,068,906
------------- -------------
Total deposits 143,186,397 133,481,377
Federal Home Loan Bank advances 5,000,000 3,000,000
Federal funds purchased 350,000 1,650,000
Securities sold under repurchase agreements 2,416,043 2,133,977
Accrued interest payable 951,472 956,016
Negative goodwill, net of accumulated amortization
of $2,075,441 in 1998 and $1,833,810 in 1997 984,981 1,226,612
Advances from borrowers for taxes and insurance 357,025 370,228
Accrued taxes and other liabilities 1,078,342 1,257,176
------------- -------------
Total liabilities 154,324,260 144,075,386
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $2.50 par value per share;
12,000,000 shares authorized;
1,767,064 shares issued and outstanding 4,417,660 4,417,660
Additional paid-in capital 3,414,927 3,414,927
Retained earnings 11,399,263 10,110,313
Accumulated other comprehensive income 17,333 38,844
------------- -------------
Total stockholders' equity 19,249,183 17,981,744
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 173,573,443 $ 162,057,130
============= =============
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 9,967,320 $ 8,990,804
Interest on investment securities:
Taxable interest income 2,898,549 2,997,906
Exempt from federal income taxes 91,217 85,912
Interest on federal funds sold 109,372 47,501
------------ ------------
Total interest income 13,066,458 12,122,123
------------ ------------
INTEREST EXPENSE:
Interest on deposits 5,592,734 5,011,690
Interest on federal funds purchased 97,272 69,596
Interest on securities sold under
repurchase agreements 119,151 152,386
------------ ------------
Total interest expense 5,809,157 5,233,672
------------ ------------
NET INTEREST INCOME 7,257,301 6,888,451
PROVISION FOR LOAN LOSSES 162,000 160,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,095,301 6,728,451
------------ ------------
OTHER INCOME:
Service charges on deposit accounts 759,060 669,619
Income from fiduciary activities 81,787 58,721
Insurance premiums and commissions 29,291 34,320
Other real estate income 6,408 5,511
Amortization of negative goodwill 241,631 290,130
Equity in investee losses (9,851) -
Other 387,311 386,818
------------ ------------
Total other income 1,495,637 1,445,119
------------ ------------
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
OTHER EXPENSES:
Salaries 2,381,824 2,144,159
Director fees 144,960 112,205
Employee benefits 326,429 357,449
Net occupancy expense 375,912 358,675
Equipment expense 555,059 456,401
FDIC assessment 37,679 36,902
Stationery and supplies 166,590 145,746
Other 1,114,749 954,338
------------ ------------
Total other expenses 5,103,202 4,565,875
------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 3,487,736 3,607,695
INCOME TAX EXPENSE 1,156,218 1,210,135
------------ ------------
NET INCOME $ 2,331,518 $ 2,397,560
============ ============
EARNINGS PER SHARE DATA:
Basic earnings per share $ 1.32 $ 1.36
============ ============
Diluted earnings per share $ 1.32 $ 1.36
============ ============
See accompanying notes to the consolidated financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings Other Total
--------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1996 441,072 $ 4,410,720 $ 3,395,617 $ 8,715,045 $ - $ 16,521,382
Comprehensive income:
Net income - - - 2,397,560 - 2,397,560
Other comprehensive
income (net of tax):
Net change in
unrealized gain on
securities available
for sale, net of taxes
of $23,108 - - - - 38,844 38,844
--------- ------------ ------------ ------------ --------- ------------
Total comprehensive income - - - 2,397,560 38,844 2,436,404
--------- ------------ ------------ ------------ --------- ------------
Cash dividends declared
(.56 per share) - - - (989,556) - (989,556)
New shares issued 2,776 6,940 19,310 (12,736) - 13,514
Four-for-one stock split 1,323,216 - - - - -
--------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1997 1,767,064 4,417,660 3,414,927 10,110,313 38,844 17,981,744
Comprehensive income:
Net income - - - 2,331,518 - 2,331,518
Other comprehensive
income (net of tax):
Net change in
unrealized gain on
securities available
for sale, net of taxes
of $16,642 - - - - (21,511) (21,511)
--------- ------------ ------------ ------------ --------- ------------
Total comprehensive income - - - 2,331,518 (21,511) 2,310,007
--------- ------------ ------------ ------------ --------- ------------
Cash dividends declared
(.59 per share) - - - (1,042,568) - (1,042,568)
--------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1998 1,767,064 $ 4,417,660 $ 3,414,927 $ 11,399,263 $ 17,333 $ 19,249,183
See accompanying notes to the consolidated financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,331,518 $ 2,397,560
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred taxes (37,124) (36,014)
Provision for loan losses 162,000 160,000
Provision for depreciation 464,055 381,616
Gain on sale of mortgage loans (16,658) (9,589)
Stock dividends received (55,900) (56,200)
Amortization (accretion) of investment security
premiums (discounts), net (50,104) (58,799)
Amortization of valuation adjustment
on acquired loans 47,360 71,160
Amortization of valuation adjustment
on acquired deposits (700) (10,510)
Amortization of negative goodwill (241,631) (290,130)
Equity in investee losses 9,851 -
Increase in accrued interest receivable (138,653) (175,070)
Increase in cash surrender value of life insurance (36,388) (44,995)
(Increase) decrease in other assets (286,526) 37,473
Increase (decrease) in accrued interest payable (4,544) 116,555
Decrease in accrued taxes and other liabilities (125,068) (682,697)
------------ ------------
Net cash provided by operating activities 2,021,488 1,800,360
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in federal funds sold - 700,000
Proceeds from maturities and paydowns
of investment securities 11,069,298 11,181,192
Redemption of securities 56,400 56,000
Purchases of investment securities (10,946,700) (10,406,981)
Net increase in loans (12,343,977) (11,050,739)
Purchases of premises and equipment (607,540) (654,426)
------------ ------------
Net cash used in investing activities (12,772,519) (10,174,954)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 8,761,908 7,616,740
Net increase (decrease) in time deposits 943,812 (565,278)
Increase in Federal Home Loan Bank advances 2,000,000 1,000,000
Increase (decrease) in federal funds purchased (1,300,000) 1,650,000
Net increase in securities sold under
repurchase agreements 282,066 469,838
Increase (decrease) in advances from borrowers
for taxes and insurance (13,203) 2,494
Cash dividends paid (1,042,568) (989,556)
Proceeds from the sale of common stock, net - 13,514
------------ ------------
Net cash provided by financing activities 9,632,015 9,197,752
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS (1,119,016) 823,158
------------ ------------
CASH AND DUE FROM BANKS AT
BEGINNING OF YEAR 5,929,643 5,106,485
------------ ------------
CASH AND DUE FROM BANKS AT
END OF YEAR $ 4,810,627 $ 5,929,643
============ ============
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer of loans foreclosed to other real estate $ 22,284 $ 19,038
============ ============
Transfer of other real estate to loans $ - $ (23,928)
============ ============
Total increase (decrease) in unrealized gains
(losses) on securities available-for-sale $ (38,153) $ 61,952
============ ============
Total (increase) decrease in deferred income taxes
on unrealized gains on securities
available-for-sale $ 16,642 $ (23,108)
============ ============
See accompanying notes to the consolidated financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Britton &
Koontz Capital Corporation and its wholly-owned subsidiary, Britton & Koontz
First National Bank ("the Bank"). All material intercompany profits, balances
and transactions have been eliminated.
Nature of Operations
The Company operates under a national bank charter and provides full
banking services, including trust services. The primary area served by the
Company is the southwest region of Mississippi and services are provided at
three locations in Natchez, Mississippi.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans. In
connection with the determination of the allowances for losses on loans,
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 local
economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for losses
on loans. 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 losses on loans may change materially.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Investment Securities
Management determines the appropriate classification of securities at the
time of purchase. If management has the 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,
resultant prepayment risk and other factors related to interest rates and
resultant prepayment risk changes. These securities are carried at fair
value. Equity securities include stock in the Federal Reserve Bank and the
Federal Home Loan Bank, which are restricted and are carried at cost. Equity
securities also includes an investment in the voting stock of Sumx, Inc. This
investment is carried at cost adjusted for the Company's share of the
investee's earnings or losses. There is no readily available market for the
voting stock of Sumx, Inc. and, accordingly, no quoted market price is
available.
Realized gains and losses on dispositions 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 gains and losses are credited or charged to
stockholders' equity, net of applicable taxes. Realized gains and losses flow
through the Company's yearly operations. The Bank does not engage in trading
account activities.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 nonaccrual 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 nonaccrual loans is reversed from
income. Interest income, generally, is not recognized on specific impaired
loans 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 nonaccrual loans is
recognized only to the extent of interest payments received.
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility 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. 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 added to
the allowance.
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.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Other Real Estate
Other real estate consists primarily of foreclosed property. Properties
acquired through foreclosure or in settlement of loans and in-substance
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
associated with owning and operating other real estate, 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 related employee's employment anniversary date each
year.
The estimated amount of compensation for future absences is deemed
immaterial to the consolidated financial statements, and, accordingly, no
liability has been recorded in the accompanying financial statements. The
Bank's policy is to recognize the costs of compensated absences when actually
paid to employees.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 expenses
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 provided on 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 wholly-owned subsidiary 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.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Earnings Per Share
Basic earnings per share is the income available to the weighted average
number of shares of common stock outstanding for each period presented. All
per share amounts reflect the effects of the 1997 four-for-one stock split.
All shares held by the Employee Stock Ownership Plan (ESOP) 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 (i.e., the
average market price exceeds the exercise price). The following table
reconciles the basic and diluted earnings per share amounts:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Year ending December 31, 1998:
Basic earnings per share:
Income available to common
shareholders $ 2,331,518 1,767,064 $ 1.32
Diluted earnings per share: ==========
Options - 1,636
----------- ---------
Income available to common
shareholders assuming conversion $ 2,331,518 1,768,700 $ 1.32
=========== ========= ==========
Year ending December 31, 1997:
Basic earnings per share:
Income available to common
shareholders $ 2,397,560 1,766,007 $ 1.36
Diluted earnings per share: ==========
Options - 1,101
----------- ---------
Income available to common
shareholders assuming conversion $ 2,397,560 1,767,108 $ 1.36
=========== ========= ==========
Options to purchase 30,000 shares of common stock at $19.94 per share were
granted on November 18, 1997. These options were not included in the
computation of 1997 diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares.
However, during 1998, the average price exceeded the exercise price and,
therefore, the effects of the options have been included. The options, which
expire on November 18, 2007, were still outstanding at December 31, 1998.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 cap
agreements, commitments to extend credit and commercial letters of credit.
Financial instruments related to loans are recorded in the financial
statements when they become payable.
Cash Flows
For purposes of the statements of cash flows, the Company considers only
cash and due from banks to be cash equivalents.
The Company paid income taxes of $1,500,849 in 1998 and $1,019,185 in
1997. Interest paid on deposit liabilities and other borrowings was
$5,813,701 in 1998 and $5,117,117 in 1997.
Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued SFAS 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS
132 revises employers' disclosures about pension and other postretirement
benefit plans. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement should not have a material
effect on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board also issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This statement is effective for all fiscal quarters
beginning after June 15, 1999. The adoption of this statement should not have
a material effect on the consolidated financial statements.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Advertising Costs
Advertising and marketing costs are recorded as expenses in the year in
which they are incurred. Advertising and marketing costs charged to
operations during 1998 and 1997 were $93,756 and $83,155, respectively.
Stock Split
During 1997, the Company effected a four-for-one stock split. To effect
the split, the Company's authorized shares increased from 3,000,000 to
12,000,000, and issued and outstanding shares increased from 441,072 to
1,764,288.
Negative Goodwill
During 1993, the Company purchased Natchez First Federal Savings Bank in
a business combination accounted for as a purchase. The combination created
negative goodwill of $3,060,422. This amount is being amortized into income
over the life of the acquired, long-term, interest bearing assets which is
approximately fifteen years.
Interest-Rate Cap
The cost of interest-rate cap agreements is amortized to interest expense over
the terms of the caps. The unamortized cost is included in other assets in
the consolidated statement of financial position. Amounts receivable under
cap agreements are accrued as a reduction of interest expense. The Company
does not engage in trading of derivatives. All such financial instruments are
used to manage interest rate risk.
Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE B. INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities
classified as held-to-maturity at December 31, 1998, are summarized as
follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ------------
Obligations of other U. S.
Government agencies and
corporations $27,632,404 $ 644,707 $ (110,005) $28,167,106
Obligations of states and
political subdivisions 1,044,554 41,990 - 1,086,544
Privately issued collateralized
mortgage obligations 2,047,105 101 - 2,047,206
----------- ---------- ---------- -----------
$30,724,063 $ 686,798 $ (110,005) $31,300,856
=========== ========== ========== ===========
The amortized cost and approximate market value of investment securities
classified as available-for-sale at December 31, 1998, are summarized as
follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- ------------
U. S. Treasury obligations $ 5,989,208 $ 60,812 $ - $ 6,050,020
Obligations of other U.S.
Government agencies
and corporations 4,910,831 - (37,013) 4,873,818
----------- -------- --------- -----------
$10,900,039 $ 60,812 $ (37,013) $10,923,838
=========== ======== ========= ===========
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE B. INVESTMENT SECURITIES - CONTINUED
The amortized cost and approximate market value of investment securities
classified as held-to-maturity at December 31, 1997, are summarized as
follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U. S. Treasury obligations $ 1,997,265 $ 6,914 $ - $ 2,004,179
Obligations of other U. S.
Government agencies and
corporations 34,528,790 704,558 (177,415) 35,055,933
Obligations of states and
political subdivisions 1,123,872 44,740 - 1,168,612
Privately issued collateralized
mortgage obligations 1,077,616 64,840 - 1,142,456
----------- ---------- ---------- -----------
$38,727,543 $ 821,052 $ (177,415) $39,371,180
=========== ========== ========== ===========
The amortized cost and approximate market value of investment securities
classified as available-for-sale at December 31, 1997, are summarized as
follows:
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U. S. Treasury obligations $ 3,969,053 $ 61,952 $ - $ 4,031,005
----------- --------- ---------- -----------
$ 3,969,053 $ 61,952 $ - $ 4,031,005
=========== ========= ========== ===========
Proceeds from maturities of investment securities held-to-maturity were
$2,075,000 and $4,530,000 during 1998 and 1997, respectively. The Bank
purchased $3,002,276 and $6,449,168 of investment securities held-to-maturity
and received $8,967,819 and $6,651,192 from principal paydowns during 1998 and
1997, respectively. The Bank also purchased $6,944,424 and $3,957,813 of
investment securities available for sale and received $26,479 and $-0- from
principal paydowns during 1998 and 1997, respectively.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE B. INVESTMENT SECURITIES - CONTINUED
Equity securities include the Bank's investment in the Federal Home Loan
Bank and the Federal Reserve Bank. The Bank acquired $55,900 and $56,200 of
additional stock in the Federal Home Loan Bank and no additional stock in the
Federal Reserve Bank during 1998 and 1997, respectively. The Bank
subsequently redeemed $56,400 and $56,000 of stock in the Federal Home Loan
Bank during 1998 and 1997, respectively. This stock is considered a
restricted stock as only banks which are members of these organizations may
acquire or redeem the stock. The stock is redeemable at its face value;
therefore, there are no gross unrealized gains or losses associated with these
investments.
Equity securities also reflect an investment in Sumx, Inc. During 1998,
Britton & Koontz Capital Corporation invested $1 million in this electronic
banking development and marketing company. This investment reflects a 35%
ownership of the voting stock of Sumx, Inc. This investment is carried at
equity, which is the cost of the investment adjusted for the Company's
proportionate share of the investee's earnings or losses.
During 1998, Sumx, Inc. incurred a net loss of $84,439. The Company's
proportionate share of that loss adjusted for the portion of the year the
investment was actually owned was $9,851 and is reflected in other income.
The President and CEO and the Vice President of Britton & Koontz Capital
Corporation serve as two of the three members of the Board of Directors of
Sumx, Inc. In addition, the Vice President of Britton & Koontz Capital
Corporation individually owns 19.5% of the voting stock of Sumx, Inc. The
Company has also entered into an agreement with Sumx, Inc. whereby this Vice
President will devote substantially all of his time to the management of Sumx,
Inc. for up to two years for an annual fee of $90,000.
Investment securities carried at approximately $32,957,000 (approximate
market value $33,179,000) at December 31, 1998, and approximately
$19,040,000 (approximate market value $19,289,000) at December 31, 1997, were
pledged to collateralize public deposits, and for other purposes as required
by law or agreement.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE B. INVESTMENT SECURITIES - CONTINUED
The amortized cost and approximate market value of investment debt
securities at December 31, 1998, by contractual maturity (including
mortgage-backed securities), are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Securities held-to-maturity
---------------------------
Approximate
Amortized Market
Cost Value
------------ ------------
Due in one year or less $ - $ -
Due after one year through five years 5,348,451 5,297,363
Due after five years through ten years 6,401,088 6,600,464
Due after ten years 18,974,524 19,403,029
------------ ------------
$ 30,724,063 $ 31,300,856
============ ============
Securities available-for-sale
-----------------------------
Approximate
Amortized Market
Cost Value
------------ --------------
Due in one year or less $ 4,003,868 $ 4,023,760
Due after one year through five years 1,985,340 2,026,260
Due after five years through ten years - -
Due after ten years 4,910,831 4,873,818
------------ --------------
$ 10,900,039 $ 10,923,838
============ ============
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE C. SALES-TYPE LEASE INVESTMENT
During 1994, the Bank entered into a sales-type lease agreement with the City
of Natchez. In this agreement, the Bank sold the City certain land and
buildings included in other real estate and certain land, buildings and
improvements included in bank premises and equipment for a contract price of
$830,000. The City agreed to make annual lease payments and semi-annual
interest payments. The interest will accrue at 6.25% per year. The Bank will
retain title to the property until the end of the lease. Upon receipt of the
final lease payment in May 2004, the title will pass to the
City of Natchez. The obligation of the City to the Bank is evidenced by a
series of Certificates of Participation. Each Certificate represents an
annual principal payment. The Certificates do not represent a legal
obligation of the City and are contingent and expressly limited to the extent
of any specific, annual appropriation made by the City to fund the lease. The
Bank currently carries these Certificates in its investment portfolio as
held-to-maturity.
The following is a summary of the components of the Bank's net investment
in sales-type leases at December 31, 1998:
Total minimum lease payments to be received $ 588,750
Portion of payments representing interest 108,750
-------------
Net investment $ 480,000
=============
Minimum lease payments to be received as of December 31, 1998, for each
of the next five years are:
1999 $ -
2000 85,000
2001 90,000
2002 95,000
2003 100,000
Thereafter 110,000
-------------
$ 480,000
=============
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE D. LOANS
The Bank's loan portfolio at December 31, 1998 and 1997, consists of the
following:
1998 1997
------------- -------------
Commercial, financial and agricultural $ 22,365,655 $ 20,869,265
Real estate construction 1,895,106 1,252,872
Real estate mortgage 80,286,252 70,672,806
Installment 14,521,075 14,202,884
Overdrafts 146,795 81,968
------------- -------------
Total loans $ 119,214,883 $ 107,079,795
============= =============
Loans on which accrual of interest has been discontinued or reduced
amount to approximately $222,000 and $29,000 at December 31, 1998 and 1997,
respectively. If interest on such loans had been accrued, the income would
have approximated $5,100 and $400 in 1998 and 1997, 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
$2,841,291 and $1,641,355 at December 31, 1998 and 1997, 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 collectibility or
present other unfavorable features.
Changes in these loans are as follows:
Balance at January 1, 1998 $ 1,641,355
New loans 1,915,953
Repayments 716,017
---------------
Balance at December 31, 1998 $ 2,841,291
===============
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE E. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
1998 1997
--------- ---------
Balance at January 1 $ 676,745 $ 622,975
--------- ---------
Credits charged off (117,448) (133,764)
Recoveries 25,441 27,534
--------- ---------
Net credits charged off (92,007) (106,230)
--------- ---------
Provision for loan losses 162,000 160,000
--------- ---------
Balance at December 31 $ 746,738 $ 676,745
========= =========
NOTE F. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances
of these loans are summarized as follows:
1998 1997
----------- -----------
Mortgage loans serviced for:
Federal National Mortgage Association (FNMA) $ 4,806,937 $ 6,338,432
=========== ===========
Custodial escrow balances maintained in connection with the foregoing
loan servicing and included in advances from borrowers for taxes and insurance
in the accompanying consolidated statements of financial condition were
$62,259 and $73,889 at December 31, 1998 and 1997, respectively.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE G. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
1998 1997
----------- -----------
Land $ 442,675 $ 442,675
Buildings 3,723,251 3,719,251
Furniture and equipment 3,794,474 3,192,804
----------- -----------
7,960,400 7,354,730
Less accumulated depreciation 3,869,708 3,407,523
----------- -----------
Bank premises and equipment, net $ 4,090,692 $ 3,947,207
=========== ===========
NOTE H. TRUST DEPARTMENT ASSETS
Property (other than cash deposits) held by the Bank in fiduciary or
agency capacities for its customers is not included in the accompanying
consolidated statements of financial condition as such items are not assets of
the Bank. Trust fees are reported on the cash basis. The difference between
cash basis and the accrual basis is immaterial.
NOTE I. DEPOSITS
Maturities of certificates of deposit of $100,000 or more outstanding at
December 31, 1998 and 1997, are summarized as follows:
1998 1997
------------ ------------
Time remaining until maturity:
Three months or less $ 4,886,521 $ 5,053,918
Over three through six months 11,096,570 7,329,803
Over six through twelve months 2,654,412 2,566,144
Over twelve months 4,861,294 5,456,053
------------ ------------
$ 23,498,797 $ 20,405,918
============ ============
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE I. DEPOSITS - CONTINUED
Approximate scheduled maturities of certificates of deposits for each of
the next five years are:
1999 $ 56,246,000
2000 6,791,000
2001 3,821,000
2002 4,423,000
2003 3,311,000
Thereafter -
------------
$ 74,592,000
============
Deposits at December 31, 1998 and 1997, consisted of the following:
1998 1997
------------- -------------
Non-interest bearing demand deposits $ 21,681,170 $ 21,412,471
NOW accounts 24,705,808 19,792,486
Money market deposit accounts 10,622,990 7,933,842
Savings accounts 11,584,129 10,693,390
Certificates of deposit 74,592,300 73,649,188
------------- -------------
$ 143,186,397 $ 133,481,377
============= =============
NOTE J. FEDERAL HOME LOAN BANK ADVANCES
During 1998, the Bank received advances from and remitted payments to the
Federal Home Loan Bank. On November 24, 1998, the Bank received a $5,000,000
advance which remained outstanding at December 31, 1998. This advance accrues
interest at an annual rate of 4.94% and matures on January 11, 1999. The
advance is collateralized by a portion of the Bank's one to four family
residential mortgage portfolio in accordance with the Advance Security and
Collateral Agreement with the Federal Home Loan Bank.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE K. EMPLOYEE BENEFIT PLANS
The Bank has an employee stock ownership plan which is designed to invest
primarily in employer stock. Essentially, all employees of the Britton &
Koontz Capital Corporation and its wholly-owned subsidiary are covered under
this plan, with employees becoming fully vested in their benefits after seven
years of participation. Employer contributions are determined by the Board of
Directors each year and are allocated among participants on the basis of their
total annual compensation. Dividends on the Company stock owned by the plan
are recorded as a reduction of retained earnings. Operating expenses include
contributions to the plan of $40,000 in 1998 and 1997. This plan owned
213,070 shares of Britton & Koontz Capital Corporation stock, as of December
31, 1998 and 1997, at an overall cost to the plan of $4.79 per share.
Employees with one or more years of service are eligible to participate in a
401(k) plan established by the Company effective January 1, 1997. Under this
plan, employees may contribute up to 12% of their yearly salary, not to exceed
$7,000. These contributions are immediately 100% vested. Employer
contributions are vested 20% after three years of service and an additional
20% for each additional year of service, fully vested after seven years of
service. Employer contributions to the plan are made at the discretion of the
Board of Directors and aggregated $80,000 for the years ended December 31,
1998 and 1997.
During 1996, the Company adopted a long-term incentive plan in which all
employees of the Company and the Bank are eligible to participate. The plan
provides for discretionary grants of various incentives including stock
options; shares of common stock subject to restrictions on transfer,
forfeitability provisions or other limitations; and shares of common stock,
the issuance and delivery of which may be subject to the attainment of
specified performance objectives. A maximum of 160,000 shares of common stock
is available for grant under the plan, subject to adjustment on account of
stock dividends or stock splits, recapitalizations, mergers, consolidations or
other corporate reorganizations. The plan is administered by a committee of
at least two non-
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE K. EMPLOYEE BENEFIT PLANS - CONTINUED
employee directors as appointed by the full Board of Directors. On November
18, 1997, options to purchase 30,000 shares were granted as part of this
plan. These options are exercisable in installments beginning six months
after the date of grant and become fully exercisable nine and one-half years
after the date of grant. All options expire 10 years from the date of grant.
Three thousand three hundred (3,300) and zero (-0-) shares were exercisable as
of December 31, 1998 and 1997, respectively. The summary of stock option
activity is shown below:
Weighted
Options Average
Outstanding Exercise Price
------------ --------------
December 31, 1996 - $ -
Options granted 36,000 $ 18.20
Stock options exercised 6,000 $ 9.50
-----------
December 31, 1997 30,000 $ 19.94
Options granted - $ .00
Stock options exercised - $ .00
December 31, 1998 30,000 $ 19.94
The following table summarizes information about stock options outstanding at
December 31, 1998:
Exercise Price Options Outstanding Remaining Contractual Life
$19.94 30,000 8.9 years
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE K. EMPLOYEE BENEFIT PLANS - CONTINUED
During fiscal 1997, the Company adopted SFAS No 123, Accounting for
Stock-Based Compensation, which requires companies to estimate the fair value
for stock options on date of grant. Under SFAS No. 123, the Company is
required to record the estimated fair value of stock options issued as
compensation expense in its income statements over the related service periods
or, alternatively, continue to apply accounting methodologies as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and disclose the pro forma effects of the estimated fair
value of stock options issued in the accompanying footnotes to its financial
statements. The determination of fair value is only required for stock
options issued beginning in 1996. In adopting SFAS No. 123, the Company
decided to continue to follow the accounting methodologies as prescribed by
APB Opinion No. 25.
The pro forma effects of the total compensation expense that would have been
recognized under SFAS No. 123 are as follows:
1998 1997
------------- -------------
Net income, as reported $ 2,331,518 $ 2,397,560
Pro forma net income $ 2,308,678 $ 2,393,716
Basic earnings per share, as reported $ 1.32 $ 1.36
Pro forma basic earnings per share $ 1.31 $ 1.36
Diluted earnings per share, as reported $ 1.32 $ 1.36
Pro forma diluted earnings per share $ 1.31 $ 1.35
In adopting SFAS No. 123, the Company utilized the Black-Scholes Option
Pricing Model to estimate the fair value of stock options granted using the
following weighted average assumptions:
Expected dividend yield 2.94%
Expected option life 7.25 years
Expected volatility 25.00%
Risk-free interest rates 5.85%
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE K. EMPLOYEE BENEFIT PLANS - CONTINUED
Based on the results of the model, the fair value of the stock options issued
on the date of grant were $5.57 per share for the 30,000 shares granted in
1997.
During 1994, the Bank entered into a nonqualified salary continuation plan
with its executive officers. These officers will be entitled to agreed-upon
benefits which will begin vesting when each participant reaches the age of
fifty-five. The vested percentage will increase annually through the age of
sixty-five when the officers will be fully vested. Payment of any benefits is
contingent upon the officers' continued employment with the Bank through the
age of fifty-five. The projected benefit to each officer at age sixty-five is
allocated through a present value calculation to each year from inception of
the plan through age sixty-five. The Plan also includes a change of control
benefit for these officers. If any or all of the covered executives are
terminated from employment within 36 months of a sale or acquisition of the
Bank, the executive(s) may elect from the acquirer to receive fully vested
income benefits as stated above, or to receive an agreed-upon lump-sum
distribution, which would total $640,000 if all covered executives selected
this option. The financial statements for the years ended December 31, 1998
and 1997, respectively, include $30,572 and $28,230 of expense related to this
plan.
In addition to other benefits, the Company provides medical insurance to its
employees and makes medical insurance available to its employees' families.
The Company self-insures up to $15,000 per person per year with a total annual
maximum based on the number of covered employees ($127,613 and $118,588 at
December 31, 1998 and 1997, respectively). Claims exceeding these annual
limits are covered by traditional insurance contracts.
NOTE L. LEASES
The Company had no material lease obligations or similar commitments at
December 31, 1998 or 1997. All leases are of the normal cancelable operating
type and generally short-term in nature and not susceptible to capitalization
for financial accounting reporting purposes. Rent expense charged to income
was $3,067 and $4,915 in 1998 and 1997, respectively.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE M. INCOME TAX PROVISION
The provision for income taxes included in the consolidated statements of
income is as follows:
1998 1997
------------ ------------
Current $ 1,193,342 $ 1,246,149
Deferred (37,124) (36,014)
------------ ------------
$ 1,156,218 $ 1,210,135
============ ============
Income taxes payable of $273,887 in 1997 are included in accrued taxes
and other liabilities. Refundable income taxes of $59,082 in 1998 are
included in other assets.
Net deferred tax liabilities of $715,974 in 1998 and $769,740 in 1997,
are included in accrued taxes and other liabilities. Amounts comprising
deferred tax assets and liabilities are as follows:
1998 1997
----------- ------------
Deferred tax liability:
Bad debt recapture $ - $ 61,549
Insurance 45,082 33,234
Discount accretion 10,025 3,876
Depreciation 588,976 548,715
Federal Home Loan Bank dividends 131,641 118,146
Purchase accounting 32,566 50,178
Self-insured medical plan 13,410 5,616
Unrealized gain on
available-for-sale securities 6,466 23,108
------------ ------------
Total gross deferred tax liability $ 828,166 $ 844,422
============ ============
1998 1997
Deferred tax asset: ------------ ------------
Bad debts $ 68,650 $ 42,543
Deferred compensation 43,542 32,139
------------ ------------
Total gross deferred tax asset, net
of valuation allowance of $-0- $ 112,192 $ 74,682
============ ============
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE M. INCOME TAX PROVISION - CONTINUED
The temporary differences resulting in deferred income taxes and the tax
effect of each are as follows:
1998 1997
------------ -----------
Accretion of discount $ 6,149 $ 954
Depreciation 40,261 36,092
FHLB stock dividend 13,495 14,482
Provision for loan losses (87,656) (81,567)
Amortization of purchase
accounting adjustments (17,612) (28,252)
Insurance 11,848 11,753
Deferred compensation (11,403) (10,530)
Self-insured medical plan 7,794 21,054
Unrealized gain on
available-for-sale securities (16,642) 23,108
------------ -----------
$ 53,766 $ (12,906)
============ ===========
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34% in 1998 and 1997, as indicated in
the following analysis:
1998 1997
----------- -----------
Tax based on statutory rate $ 1,185,830 $ 1,226,616
State taxes 134,809 149,494
Effect of tax-exempt income (29,002) (31,789)
Amortization of negative goodwill (82,154) (98,644)
Officers' life insurance 1,220 1,137
Other (54,485) (36,679)
----------- -----------
$ 1,156,218 $ 1,210,135
=========== ===========
The income tax provision includes no amounts in 1998 and 1997, resulting
from securities transactions.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE N. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 1998 and 1997, the Bank had sold various investment
securities with an agreement to repurchase these securities at various times
within one year. The underlying securities are U.S. Government obligations
and obligations of other U.S. Government agencies and corporations. These
securities generally remain under the Bank's control and are included in
investment securities and the related liability to repurchase these securities
is included in securities sold under repurchase agreements. These securities
have coupon rates ranging from 5.875% to 7.00% and maturity dates ranging from
2000 to 2031. The maximum amount of outstanding agreements at any month-end
was $2,904,167 and $4,414,678 during 1998 and 1997, respectively. The monthly
average amount of outstanding agreements was $2,203,615 and $2,852,426 during
1998 and 1997, respectively. At December 31, 1998, the securities underlying
the repurchase agreements had an approximate amortized cost of $3,576,000 and
an approximate market value of $3,609,000.
NOTE O. REGULATORY MATTERS
The primary sources of revenue of Britton & Koontz Capital Corporation
are dividends from its subsidiary, Britton & Koontz First National Bank. On
December 31, 1998, approximately $2,618,000 was available for future
distribution by the Bank as dividends without prior approval of the banking
regulatory agencies. However, such distribution would be 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
Britton & Koontz First National Bank in 1993) in an amount of approximately
$2.8 million. The Liquidation Account serves as a restriction on the
distribution of stockholders' equity in Britton & Koontz First National Bank,
and no cash dividend may be paid on its capital stock if the effect thereof
would be to cause the regulatory capital of Britton & Koontz First National
Bank to be reduced below an amount equal to the adjusted Liquidation Account
balance.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE O. REGULATORY MATTERS - CONTINUED
In the event of a complete liquidation of Britton & Koontz First National
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 Britton & Koontz Capital Corporation as the Britton & Koontz First National
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 Bank is 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulation) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent regulatory notification
categorized the Bank as well capitalized under the regulatory capital
framework. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE O. REGULATORY MATTERS - CONTINUED
The Bank's actual capital amounts and ratios are also presented in the
table.
To Be Adequately To Be Well
Actual Capitalized Capitalized
--------------- ----------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------- ----- ------- ------
(amounts in thousands)
As of December 31, 1998
- -----------------------
Total Capital (to Risk-
Weighted Assets) $18,126 15.81% $ 9,172 8.00% $11,465 10.00%
Tier I Capital (to Risk-
Weighted Assets) $17,380 15.16% $ 4,586 4.00% $ 6,879 6.00%
Tier I Capital (to Average
Assets) $17,380 10.15% $ 5,137 3.00% $ 8,562 5.00%
As of December 31, 1997
- -----------------------
Total Capital (to Risk-
Weighted Assets) $17,920 18.52% $ 7,741 8.00% $ 9,676 10.00%
Tier I Capital (to Risk-
Weighted Assets) $17,244 17.82% $ 3,871 4.00% $ 5,806 6.00%
Tier I Capital (to Average
Assets) $17,244 10.82% $ 4,781 3.00% $ 7,969 5.00%
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE P. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and commercial letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated statements of financial condition.
Commitments to extend credit are agreements to lend money 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.
Commercial 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 standby letters of
credit is essentially the same as that involved in extending loans to
customers.
The Bank's maximum exposure to credit loss is represented by the
contractual amount of the commitments to extend credit and letters of credit
as follows:
1998 1997
------------- -------------
Commitments to extend credit $ 18,779,289 $ 15,756,588
============= =============
Commercial letters of credit $ 848,950 $ 820,336
============= =============
The Bank is required to maintain average reserves at the Federal Reserve
Bank. This requirement approximated $275,000 at December 31, 1998 and 1997,
respectively. The Bank is in compliance with this requirement.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE P. COMMITMENTS AND CONTINGENCIES - CONTINUED
Britton & Koontz Capital Corporation and its wholly-owned subsidiary,
Britton & Koontz First National 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 Bank's consolidated financial statements.
On September 18, 1998, Britton & Koontz First National Bank and Union Planters
Bank, NA, entered into an agreement whereby Britton & Koontz First National
Bank will acquire certain assets and liabilities of two Union Planters Bank,
NA, branch locations in Natchez, Mississippi. This transaction was
consummated on January 21, 1999. The Bank acquired approximately $1,800,000
in loans, $1,000,000 in premises and equipment and $8,900,000 in cash and
other assets, and assumed approximately $11,700,000 in deposit liabilities.
It is impracticable to disclose operating data as if the transaction had
occurred on January 1, 1997, due to the characteristics of a branch
acquisition. Operating data of branch locations can differ significantly
because of home office cost allocations and other branch accounting
differences.
NOTE Q. CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments, and commercial
letters of credit have been granted to customers in the Bank's market area.
Investments in state and municipal securities also involve governmental
entities in and around the Bank's market area. The concentrations of credit
by type of loan are set forth in Note D. The distribution of commitments to
extend credit approximates the distribution of loans outstanding. Commercial
letters of credit are granted primarily to commercial borrowers.
NOTE R. DIVIDENDS
Britton & Koontz Capital Corporation's only subsidiary, Britton & Koontz
First National Bank, paid dividends to the Capital Corporation amounting to $2,2
62,449; $1,076,358; and $952,858 for the years 1998, 1997, and 1996,
respectively.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE S. INTEREST RATE RISK MANAGEMENT
During 1998, the Bank entered into an off-balance-sheet interest-rate cap
agreement to reduce the potential impact of increases in interest rates on
floating-rate liabilities. The agreement entitles the Bank to receive from
counterparties on a quarterly basis the amounts, if any, by which the three
month LIBOR exceeds 6.0% computed on a $10 million notional amount. This
interest-rate cap expires on September 22, 2000. At December 31, 1998, the
original cost of the cap of $20,000 had been amortized into interest expense
to a balance of $17,500.
NOTE T. FAIR VALUE OF FINANCIAL INSTRUMENTS
In December of 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107 relative to disclosures about fair
values of
financial instruments. The statement requires disclosure of financial
instruments' fair values, as well as the methodology and significant
assumptions used in estimating fair values. These requirements have been
incorporated throughout the notes to the consolidated financial statements.
In cases where quoted market prices are not available, fair values are based
on estimates using present value techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates for those assets or liabilities cannot be substantiated by
comparison to independent markets and, in many cases, can not be realized in
immediate settlement of the instrument. All nonfinancial instruments, by
definition, have been excluded from these disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation and may not be indicative of amounts that
might ultimately be realized upon disposition or settlement of those assets
and liabilities.
The following methods and assumptions are used to estimate the fair value
of each class of financial instruments for which it is possible to estimate
that value:
Cash and Due From Banks
Fair value equals the carrying value of such assets.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE T. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Investment Securities
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Cash Surrender Value of Life Insurance
The fair value of this item approximates its carrying value.
Loans
For variable rate loans which are re-pricing immediately, fair values are
based on carrying values. Other variable rate loans, fixed rate commercial
loans, installment loans, and mortgage loans are valued using discounted cash
flows. The discount rates used to determine the present value of these loans
are based on interest rates currently being charged by the bank on comparable
loans as to credit risk and term.
Deposits
The fair values of demand deposits are equal to the carrying value of
such deposits. Demand deposits include non-interest bearing demand deposits,
savings accounts, NOW accounts, and money market demand accounts. Discounted
cash flows have been used to value fixed rate term deposits. The discount
rate used is based on interest rates currently being offered by the Bank on
comparable deposits as to amount and term.
Federal Funds Purchased and Federal Home Loan Bank Advance
Due to the short-term nature of this liability, the carrying value of
this item approximates its fair value.
Securities Sold Under Repurchase Agreements
The fair value of these items approximates their carrying values.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE T. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair values of the Bank's financial instruments are as
follows:
1998
----------------------------
Carrying Fair
Amount Value
------------- -------------
Financial assets:
Cash and due from banks $ 4,811,000 $ 4,811,000
Investment securities:
Held-to-maturity $ 30,724,063 $ 31,300,856
Available for sale $ 10,923,838 $ 10,923,838
Equity securities $ 2,187,499 $ 2,187,499
Cash surrender value of life insurance $ 716,000 $ 716,000
Loans $ 119,215,000 $ 119,978,000
Financial liabilities:
Deposits $ 143,124,000 $ 143,590,000
Federal Home Loan Bank advances $ 5,000,000 $ 5,000,000
Federal funds purchased $ 350,000 $ 350,000
Securities sold under
repurchase agreements $ 2,416,043 $ 2,416,043
Face Fair
Amount Value
------------- -------------
Other:
Commitments to extend credit $ 18,779,000 $ 18,779,000
Commercial letters of credit $ 849,000 $ 849,000
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE T. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
1997
---------------------------
Carrying Fair
Amount Value
------------- ------------
Financial assets:
Cash and due from banks $ 5,930,000 $ 5,930,000
Investment securities:
Held-to-maturity $ 38,728,000 $ 39,371,000
Available for sale $ 4,031,000 $ 4,031,000
Equity securities $ 1,198,000 $ 1,198,000
Cash surrender value of life insurance $ 680,000 $ 680,000
Loans $ 107,080,000 $ 107,538,000
Financial liabilities:
Deposits $ 133,481,000 $ 133,807,000
Federal Home Loan Bank advances $ 3,000,000 $ 3,000,000
Federal funds purchased $ 2,134,000 $ 2,134,000
Securities sold under
repurchase agreements $ 1,650,000 $ 1,650,000
Face Fair
Amount Value
------------- -------------
Other:
Commitments to extend credit $ 15,757,000 $ 15,757,000
Commercial letters of credit $ 820,000 $ 820,000
Off-Balance-Sheet Instruments
Loan commitments are negotiated at current market rates and are
relatively short-term in nature. Therefore, the estimated value of loan
commitments approximates the face amount.
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE U. SUMMARIZED FINANCIAL INFORMATION OF BRITTON & KOONTZ CAPITAL
CORPORATION
Summarized financial information of Britton & Koontz Capital Corporation,
parent company only, is as follows:
STATEMENTS OF FINANCIAL CONDITION
December 31,
1998 1997
ASSETS: ----------- -----------
Cash $ 766,970 $ 620,535
Investments in:
Britton & Koontz First National Bank 17,397,196 17,282,517
Sumx, Inc. 990,149 -
Cash surrender value of life insurance 70,450 65,825
Other assets 24,418 12,867
----------- -----------
TOTAL ASSETS $19,249,183 $17,981,744
=========== ===========
STOCKHOLDERS' EQUITY $19,249,183 $17,981,744
=========== ===========
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE U. SUMMARIZED FINANCIAL INFORMATION OF BRITTON & KOONTZ CAPITAL
CORPORATION - CONTINUED
STATEMENTS OF INCOME
Years Ended December 31,
1998 1997
----------- -----------
REVENUE:
Dividends received:
Britton & Koontz First National Bank $ 2,262,449 $ 1,076,358
Interest and other income earned 10,545 14,129
----------- -----------
2,272,994 1,090,487
EXPENSES 67,815 35,758
----------- ---------
2,205,179 1,054,729
EQUITY IN UNDISTRIBUTED
EARNINGS (LOSSES):
Britton & Koontz First National Bank 136,190 1,342,831
Sumx, Inc. (9,851) -
----------- -----------
NET INCOME $ 2,331,518 $ 2,397,560
=========== ===========
Continued
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1998 AND 1997
NOTE U. SUMMARIZED FINANCIAL INFORMATION OF BRITTON & KOONTZ CAPITAL
CORPORATION - CONTINUED
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,331,518 $ 2,397,560
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity on undistributed earnings of affiliates (126,339) (1,342,831)
Increase in cash surrender value of life insurance (4,625) (13,486)
Increase in other assets (11,551) (2,516)
----------- -----------
Net cash provided by operating activities 2,189,003 1,038,727
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Sumx, Inc. (1,000,000) -
----------- -----------
Net cash used in investing activities (1,000,000) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,042,568) (989,556)
Proceeds from sale of common stock - 13,514
----------- -----------
Net cash used in financing activities (1,042,568) (976,042)
----------- -----------
NET INCREASE IN CASH 146,435 62,685
CASH AT BEGINNING OF YEAR 620,535 557,850
----------- -----------
CASH AT END OF YEAR $ 766,970 $ 620,535
=========== ===========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gain on securities
available-for-sale, net of deferred
income taxes $ (21,511) $ 38,844
=========== ===========
Britton & Koontz Capital Corporation (the "Company") was
organized in July, 1982, under the Mississippi Business
Corporation Act, and became a one-bank holding company when it
acquired all of the outstanding shares of Britton & Koontz First
National Bank (the "Bank") in 1982. In July, 1993, the Company
acquired Natchez First Federal Savings Bank ("Natchez First
Federal") located in Natchez, Mississippi, and merged it into
the Bank, increasing total assets by approximately $48 million.
In January 1999, the Bank completed the acquisition of two local
branches owned by a regional bank with deposits of $12 million
and $1.8 million in loans The Company's major sources of income
are dividends from the Bank and interest on its deposits in the
Bank. The Bank's main office and its two branch offices are
located in Natchez, Mississippi, providing commercial and
consumer banking and trust services in Adams County,
Mississippi, and in adjoining counties and parishes of
Mississippi and Louisiana. These services include personal and
commercial checking, savings and time deposits, money market
deposit accounts, money transfer, safe deposit facilities,
access to automated teller machines, short-term and long-term
credit facilities, and residential and commercial mortgages to
individuals and businesses. The Bank also sells local internet
access and provides online banking services over the Internet.
In December 1998, the Company acquired a 35% interest in Sumx
Inc., a company formed to develop and market internet-based
electronic banking to financial institution.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion is intended to supplement the consolidated
financial statements, to explain material changes in financial
condition and to compare the operating results of Britton &
Koontz Capital Corporation for the year ended December 31, 1998,
to the same period in 1997.
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," "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 interest
rates, changing market conditions, availability or cost of
capital, employee workforce factors, cost and other effects of
legal and administrative proceedings, and changes in federal,
state or local legislature 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.
Financial Condition
Total Assets. Total assets increased 7.1% to $173.6 million at
December 31, 1998, from $162.1 million at year end 1997. Loans,
net of unearned interest and allowance for loan losses,
increased 11.4% to $118.3 million at December 31, 1998, compared
to $106.2 million at December 31, 1997. Loan growth was funded
primarily by a $9.7 million increase in deposits along with $2.0
million from current operations. A further analysis of the
Bank's loan portfolio is shown in Note D to the financial statements.
Nonperforming Loans. Nonperforming loans at December 31, 1998,
increased to $670 thousand from $272 thousand at December 31,
1997. Nonperforming loans consisted of nonaccrual loans of $222
thousand and loans past due ninety days or more of $448 thousand
compared to $29 thousand and $243 thousand, respectively, for
the year ended December 31, 1997. Nonperforming loans as a
percent of loans, net of unearned income, and loans held for
sale increased to .63% at December 31, 1998, from .28% at
December 31, 1997. The table below presents additional
information on nonperforming assets as of December 31, 1998 and
1997.
1998 1997
------- -------
(dollars in thousands)
Nonaccrual loans by type
Real estate $ 97 $ 23
Installment 30 6
Commercial and all other loan 95 0
----- -----
Total nonaccrual loans 222 29
Loans past due 90 days or more 448 243
----- -----
Total nonperforming loans 670 272
Other real estate 96 74
----- -----
Total nonperforming assets $ 766 $ 346
===== =====
Nonperforming loans as a
percent of loans, net of
unearned interest and loans
held for sale 0.56% 0.25%
===== =====
Allowance for Loan Losses. The allowance for loan losses was
$747 thousand at December 31, 1998, compared to $677 thousand at
December 31, 1997. The ratio of the allowance for loan losses
to loans, net of unearned income and loans held for sale
remained stable at .63% at December 31, 1998. Approximately
half of the loan portfolio is invested in 1-4 family residential
mortgage loans. A smaller portion of the allowance is allocated
to these loans due to their generally higher credit quality.
Management regularly reviews the level of the allowance for loan
losses to ensure the level is adequate to absorb loan losses
inherent in the loan portfolio. Activity in the allowance for
loan losses for the period ended December 31, 1998 and 1997 is
presented in Note E to the financial statements.
The allocation of the allowance for loan losses between 1-4
family residential first mortgage loans and other loans, net of
unearned interest and loans held for sale, as of December 31,
1998 and 1997 is presented below.
1998 1997
------------ ------------
1-4 Family Residential 1st Mortgage Loans
Volume $ 58,029,874 $ 52,594,153
Allocated reserve 165,493 144,461
Reserves as a percent of volume 0.29% 0.27%
Other Loans
Volume $ 61,002,092 $ 54,238,829
Allocated reserve 581,245 532,284
Reserves as a percent of volume 0.95% 0.98%
Total Loans
Volume $119,031,966 $106,832,982
Allocated reserve 746,738 676,745
Reserves as a percent of volume 0.63% 0.63%
Other Real Estate. Other real estate increased to $96 thousand
at December 31, 1998, compared to $74 thousand at December 31, 1997.
Premises and Equipment. Premises and equipment increased $607
thousand in 1998 pursuant to a capital expenditure plan to
upgrade and replace existing communications, data and check
processing systems. Major components of the capital plan
include replacement of the Bank's core accounting hardware and
software, acquisition of a new check processing system with
imaging capabilities, and upgrades or replacement of ancillary
systems. Implementation of these systems was completed in 1998.
Investment Securities. Management determines the
classification of its investment securities at the time of
acquisition. Securities that are deemed to be held-to-maturity
are accounted for by the amortized cost method while securities
that are purchased as available-for-sale are accounted for at
fair value. Securities held-to-maturity decreased $8.0 million
to $30.7 million at December 31, 1998, compared to $38.7 million
at December 31, 1997. However, the bank's available-for-sale
securities portfolio increased by $6.9 million to $10.9 million
at December 31, 1998. Net unrealized gains, after tax-effecting
the available-for-sale securities, amounted to $17 thousand.
Equity securities increased $990 thousand reflecting the
Company's 35% investment in Sumx Inc.
The Company's cash and cash equivalents ended the year at $4.8
million, a decrease of $1.1 million from December 31, 1997. Due
to the $12.3 million increase in loans, investing activities
used $12.7 million. The increase in investing activities was
provided for by $9.6 million in financing activities, most of
which came from an increase in demand deposits along with
operating activities providing $2.0 million.
Funding Sources. Deposits are the Company's primary source of
funding for earning assets. Average deposits, used to finance
additional loan growth, increased $15.5 million to $144.6
million at December 31, 1998. Average borrowings, which include
federal funds purchased, securities sold under repurchase
agreements, and advances from the Federal Home Loan Bank of
Dallas remained relatively constant. A further analysis of the
Company's funding uses and sources is reflected in the table
below.
Average Balances Percent of Total
---------------------------------------
1998 1997 1998 1997
---------------------------------------
(dollars in thousands)
Funding Uses
Loans, less unearned income $114,082 $101,249 66.4% 64.6%
Investments 43,287 44,274 25.2% 28.2%
Federal funds sold 2,140 920 1.2% 0.6%
Other 12,294 10,290 7.2% 6.6%
-------- -------- ----- -----
Total $171,803 $156,733 100.0% 100.0%
======== ======== ===== =====
Funding Sources
Non-interest bearing deposi $ 19,277 $ 16,726 11.2% 10.7%
Interest bearing deposits 125,349 112,444 73.0% 71.7%
Short-term borrowings 4,147 4,247 2.4% 2.7%
Other 4,136 5,774 2.4% 3.7%
Equity 18,894 17,542 11.0% 11.2%
-------- -------- ----- -----
Total $171,803 $156,733 100.0% 100.0%
======== ======== ===== =====
Liquidity. Principal sources of liquidity for the Company are
asset cash flows and the ability to borrow against investment
securities and loans. Principal and interest cash flows from
investment securities exceeded $14 million, or 8% of average
assets, in 1998. The portfolio primarily includes investments
in obligations of the U.S. Treasury, government agency
obligations and mortgage-backed securities.
Asset liquidity is provided by scheduled maturities within the
loan portfolio, although the probability of conversion is not as
certain as with investment securities. At the end of 1998, over
$22.2 million, or 19.1% of the loan portfolio, was scheduled to
mature within one year.
Liability liquidity is provided by sizable core deposits and
other sources of funds generated from the normal customer base.
Substantially all the funds utilized by the Company are
generated from the normal customer base. Brokered deposits are
not solicited; however, national market deposits have been
utilized from time to time to meet funding needs.
In addition to the liquidity provided by the balance sheet, the
Company maintains a capacity to borrow additional funds when the
need arises through federal funds purchased lines with
correspondent banks and broker repurchase agreements.
Additional borrowing capacity is available on 1-4 family
residential first mortgage loans through the Federal Home Loan Bank.
Interest Rate Sensitivity. The primary assets of banks are
portfolios of investment securities and loans, while liabilities
are primarily composed of interest bearing deposits and borrowed
funds. Assets and liabilities have varying maturities, and the
associated rates may be fixed or variable. Asset/liability
management techniques are used to maintain what are believed to
be appropriate levels and relationships between rate-sensitive
assets and liabilities. They represent the efforts to maximize
overall returns and to minimize the risk of loss associated with
significant, often unforeseen, shifts in interest rates.
A liability sensitive company will generally benefit from a
falling interest rate environment as the cost of interest
bearing liabilities falls faster than the yields on interest
earning assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will generally
benefit from a rising interest rate environment as the yields on
interest earning assets rise faster than the costs on interest
bearing liabilities.
Management utilizes computerized interest rate simulation
analysis as its primary measure of interest rate sensitivity.
Management's analyses indicate that initial exposure to rising
rates dampens the net interest margin in a short term horizon of
12 to 18 months. Beyond the short term period, the balance
sheet reflects a reversal from liability to asset sensitivity.
A traditional measure of interest rate sensitivity is the
difference between the balances of assets and liabilities in the
Company's current portfolio that are subject to repricing at
various time horizons. These differences are known as interest
sensitivity gaps: immediate to 3 months, 4 to 12 months, 1 to 3
years, 3 to 5 years, over 5 years and on a cumulative basis.
The Company's interest sensitivity analysis as of December 31,
1998, is shown in the table below.
(dollars in thousands)
immediate
to 3 4-12 1 to 3 3 to 5 Over 5
Months Months Years Years Years Totals
-------- ------- ------- ------- -------- --------
Interest Sensitive Assets $36,426 $42,269 $37,248 $21,298 $25,083 $162,324
Interest Sensitive Liabilit 41,692 44,390 10,089 7,604 47,953 $151,728
-------- ------- ------- ------- -------- --------
Interest Sensitivity Gaps ($5,266) ($2,121) $27,159 $13,694 ($22,870) $ 10,596
======== ======= ======= ======= ======== ========
Cumulative ratio of interest
sensitive assets to interest
sensitive liabilities 0.87 0.91 1.21 1.32 1.07
======== ======= ======= ======= ========
Changes in the mix of earning assets or supporting liabilities
can either increase or decrease the net interest margin without
affecting interest rate sensitivity. In addition, the interest
rate spread between an asset and its supporting liability can
vary significantly while the timing of repricing for both the
asset and the liability remains the same, thus impacting net
interest income. Varying interest rate environments can create
unexpected changes in prepayment levels of assets and
liabilities which are not reflected in the above interest
sensitivity analysis report. These prepayments may have
significant effects on the Company's net interest margin.
Because of these factors, the interest sensitivity analysis
contained in the above table does not provide a complete
assessment of the Company's exposure to changes in interest rates.
Management also evaluates the condition of the economy, the
pattern of market interest rates and other economic data in an
attempt to determine the appropriate mix and repricing
characteristics of assets and liabilities required to produce an
optimal net interest margin and thus maximize income.
In addition to the ongoing monitoring of its interest-sensitive
assets and liabilities, the Company from time to time utilizes
interest rate swaps or caps to augment the management of its
interest rate sensitivity. The interest rate risk factor in
these contracts is considered in the overall interest income and
interest rate risk management strategies. The income or expense
associated with these hedging techniques are reflected as
adjustments to interest income or expense. At December 31,
1998, the Company had purchased a two year, $10 million, 6%
interest rate cap. There were no swap contracts outstanding.
Capital and Dividends. Stockholders' equity increased by 7.0%
to $19.2 million at December 31, 1998, compared to $18.0 million
at the end of 1997. The ratio of stockholders' equity to assets
remained stable at 11.09% at December 31, 1998. The Company
paid dividends of $.59 per share in 1998 compared to $.56 in
1997.
The Company's wholly-owned subsidiary, Britton and Koontz First
National Bank, maintained a Tier 1 capital to risk weighted
assets ratio at December 31, 1998, of 15.16%, a total capital to
risk weighted assets ratio of 15.81% and a leverage ratio of
10.15%. These levels substantially exceed the minimum
requirements of the regulatory agencies of 4.00%, 8.00% and
3.00%, respectively, and place the Company in the
"well-capitalized" category under applicable regulatory
guidelines.
Results of Operations
Analysis of Net Income. The Company earned $2.3 million, or
$1.32 per share in 1998 compared to $2.4 million or $1.36 per
share in 1997. Returns on average assets and average equity for
1998 were 1.36% and 12.34%, respectively, compared to 1.53% and
13.67% in 1997. A one-time gain recorded in 1997 of $107
thousand is the primary reason for the decrease in earnings for
1998 compared to 1997. Other significant increases, for the
year ended December 31, 1998, in noninterest expense include
approximately $100 thousand related to the Company's $1.0
million investment in Sumx Inc., a 35% owned subsidiary
established to market internet-based banking software to the
banking industry; data processing and equipment expenses
related to improvements in computer systems along with the
upgrade of the bank's core accounting system to assure Year 2000
compliance.
Analysis of Net Interest Income. Net interest income increased
$369 thousand or 5.4% to $7.3 million in 1998. Interest income
increased $944 thousand or 7.8% primarily due to a 12.7%
increase in average loan volumes offset with a slight decrease
in overall interest rates and yields. As indicated in the
table, Summary of Changes in Net Interest Income, the change in
volumes increased net interest income $682 thousand in 1998
compared to 1997. A $1.2 million increase in interest income
due to the growth in loans was partially offset by a $471
thousand increase in interest expense due to growth in
interest bearing liabilities. The change in interest rates
caused a decline in net interest income of $313 thousand.
Interest income on loans declined $148 thousand due to changes
in yields caused by the bank's competitive lending environment
along with the natural decrease in rates. Interest expense
increased primarily due to market rates paid on the bank's
public funds portfolio.
The following Average Balance Yield Analysis presents average
balances, interest earned or paid, and average rates earned or
paid. Yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively.
Average balances are derived from average monthly balances.
Average Balance Yield Analysis
(dollars in thousands)
Twelve Months Ended December 31,
--------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
-------- ------- ---------- -------- ------- ----------
ASSETS
Loans (1)(2) $114,082 $ 9,966 8.74% $101,249 $ 8,991 8.88%
Investment securities:
U.S. Government & other 42,216 2,821 6.68% 43,411 2,955 6.81%
State & municipal 1,071 56 5.22% 863 47 5.46%
-------- ------- -------- ------
Total investment securities 43,287 2,877 6.65% 44,274 3,002 6.78%
Interest bearing bank balances 1,475 77 5.25% 825 42 5.09%
Federal funds sold 2,140 110 5.12% 920 48 5.16%
Other (Cash Value Life Insurance) 707 36 5.04% 660 39 5.87%
-------- ------- -------- ------
Total earning assets 161,691 13,066 8.08% 147,928 12,122 8.19%
-------- ------- -------- ------
Allowance for loan losses (738) (653)
Cash & due from banks, non-interest
bearing 4,989 4,214
Bank premises & equipment 4,009 3,751
Other assets 1,852 1,493
-------- --------
TOTAL ASSETS $171,803 $156,733
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits:
Savings $ 11,085 $ 276 2.49% $ 10,708 $ 268 2.50%
Interest bearing checking 25,305 734 2.90% 19,858 498 2.51%
Money rate savings 10,828 354 3.27% 7,947 216 2.72%
Certificates of deposit and other
time deposits 78,131 4,229 5.41% 73,931 4,030 5.45%
-------- ------- -------- -------
Total interest bearing deposits 125,349 5,593 4.46% 112,444 5,012 4.46%
Short term borrowed funds 4,147 216 5.22% 4,247 222 5.23%
-------- ------- -------- -------
Total interest bearing liabilities 129,496 5,809 4.49% 116,691 5,234 4.49%
-------- ------- -------- -------
Non-interest bearing deposits 19,277 16,726
Other liabilities 4,136 5,774
Shareholders' equity 18,894 17,542
-------- ------- -------- -------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $171,803 $ 5,809 $156,733 $ 5,234
======== ======= ======== =======
Interest income and rate earned $13,066 8.08% $12,122 8.19%
Interest expense and rate paid 5,809 4.49% 5,234 4.49%
------- ---- ------- ----
Interest rate spread 3.59% 3.70%
==== ====
NET INTEREST INCOME & NET YIELD
ON AVERAGE EARNING ASSETS $7,257 4.49% $6,888 4.66%
======= ==== ======= ====
(1) Nonaccrual loans are included in average balances for yield computations.
(2) Includes loan fees and late charges in both interest income and yield computations.
Summary of Changes in Net Interest Income
1998 compared to 1997
--------------------------------------
Increase (Decrease) Due to Change In
Total Volume Rates
---------- -------- -------
INTEREST EARNED ON:
Loans $ 975 $ 1,123 ($ 148)
Investment securities:
U.S. Government & other (134) (80) (54)
State & municipal 9 11 (2)
Interest bearing bank balances 35 34 1
Federal funds sold 62 62 0
Other (Cash Surrender Value Life Insurance) (3) 3 (6)
-------- ------- -------
Total earning assets 944 1,153 (209)
INTEREST PAID ON:
Savings 8 9 (1)
Interest bearing checking 236 150 86
Money rate savings 138 89 49
Certificates of deposit and other
time deposits 199 228 (29)
Short-term borrowed funds (6) (5) (1)
-------- ------- -------
Total interest bearing liabilities 575 471 104
-------- ------- -------
NET INTEREST INCOME $ 369 $ 682 ($ 313)
======== ======= =======
Provision for Loan Losses. The provision for loan losses
remained stable at $162 thousand in 1998. To determine the
provision amount, management considers factors such as
historical trends of charge-offs and recoveries, past due loans
and economic conditions along with additional analysis of
individual loans and pools of loans for exposure. After
allocating the existing reserves to estimated exposures,
management then adds to the reserve through a loan loss
provision to cover potential losses in the portfolio.
Management is of the opinion that the reserve at December 31,
1998, is adequate to cover estimated exposures.
Non-Interest Income. Non-interest income grew 3.5% to $1.5
million for the year ended December 31, 1998, compared to the
same period in 1997. Income from operations continues to
reflect strong core income. The growth in 1998 offset a
one-time gain reflected in 1997 and a continuing decline in the
Company's amortization of the negative goodwill credit from the
1993 acquisition of Natchez First Federal Savings Bank.
Non-Interest Expense. Non-interest expense increased $537
thousand to $5.1 million in 1998, as compared to $4.6 million in
1997. The major categories contributing to the increase were
staff costs, up $238 thousand; and equipment costs, up $100
thousand. Staff cost, which represent 47% of noninterest
expense, rose as a result of an increase in time spent training
for and converting to a new core accounting system. Also, the
Company absorbed additional personnel expenses associated with
the marketing of an internet-based electronic banking product.
In December, 1998, the marketing was transferred to Sumx Inc.,
in which the Company holds a 35% interest The increase in
equipment expense is primarily the result in the Company's
extensive update of the bank's core accounting system and
related computer systems necessary to assure the banks
compliance to Year 2000 issues.
The combination of all the above factors produced a pretax
income of $3.5 million in 1998, as compared to $3.6 million in 1997.
Income Taxes. Income taxes for 1998 decreased $54 thousand to
$1.2 million. The change in income taxes is detailed in Note M
to the financial statements.
Year 2000. The Year 2000 issue results from the fact that many
computer programs store and process data using two digits rather
than four to define the applicable year. This issue affects not
only Brittion & Koontz First National Bank but virtually all
companies and organizations that use computer information
systems.
The Company has adopted a formal five-step methodology to move
toward assuring that the systems it uses to process financial
institution records will be Year 2000 compliant. That process
includes the following phases: Awareness, Assessment, Renovation,
Testing and Implementation.
The Program is addressing: hardware and software purchased from
outside vendors, custom software developed in-house,
telecommunications equipment, facilities (i.e. elevators, HVAC,
etc.) and the information processing systems of our business
partners. The Company is aware that 2000 is a leap year and is
taking this fact into consideration in both its renovation and testing.
As part of the process, the institution has developed a plan
and provided sufficient human and financial resources for the
successful execution of that plan. Our plan calls for the
testing phase to be completed by March 31, 1999, and the
implementation phase to be completed by June 30, 1999. The last
six months of 1999 is intended to be a cushion period to protect
against missed deadlines and unexpected surprises. In addition,
the company is in the process of creating contingency plans for
unexpected system failures. At this point, the Company is on
target with its plan. While our program continues to track our
plan, there is no guarantee that target dates will be met as a
result of factors beyond the Company's control, such as external
resource constraints and the failure of third parties to become
Year 2000 compliant.
The Company has already incurred and expensed charges related
to Year 2000 compliance and will continue to charge related
items to noninterest expense. Management does not expect the
cost of compliance with the Year 2000 to have a material effect
on the financial statements of the Company.
Principal Market and Prices of the Company's Stock
On October 17, 1996, the Company listed its Common Stock on the
NASDAQ Small Cap Market. Prior to that date, there was no established
public trading market for the Common Stock. The table below sets forth
the NASDAQ Small Cap Market price high and low ranges for the Common Stock.
Dividends
Per Share High Low
Period 1998 --------- ------ ------
4th Quarter $ .30 $21.50 $18.00
3rd Quarter $23.00 $19.50
2nd Quarter $ .29 $22.50 $20.50
1st Quarter $23.00 $20.50
Period 1997
4th Quarter $ .29 $23.00 $18.25
3rd Quarter $19.75 $17.00
2nd Quarter $ .27 $23.00 $16.25
1st Quarter $18.75 $14.00
On December 31, 1998, there were 514 shareholders of record of the
Company's Stock.