Item 1. Business.
General
The Company
Britton & Koontz Capital Corporation was organized as a Mississippi business corporation in July 1982. Later that year, the Company became a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended when it acquired all of the issued and outstanding shares of Britton & Koontz Bank, National Association, a national banking association headquartered in Natchez, Mississippi (the “Bank”). The Bank is a wholly-owned subsidiary of the Company, and stock of the Bank is the Company’s most significant asset.
The Company’s major source of income in 2007 was dividends from the Bank in the amount of $2.8 million. The Company expects that dividends from the Bank will continue to be the Company’s major source of income in 2008. As of December 31, 2007, the Company had total assets of approximately $368 million and total consolidated shareholders’ equity of approximately $36 million. Financial information about the Company, including information with respect to revenues from external customers, profit and loss and total assets for 2007, 2006 and 2005, is contained in Item 8, Financial Statements and Supplementary Data.
The Company has entered into a Trust Services Agreement with National Independent Trust Company, a national banking association doing business as Argent Trust Company, headquartered in Ruston, Louisiana. Effective January 1, 2007, Argent Trust Company assumed all responsibilities associated with the Bank’s trust services, having been duly appointed successor trustee for all Bank trust accounts. Argent Trust Company performs certain fiduciary services for customers transferred from and referred by the Bank to Argent Trust Company. In return, the Bank receives a specified percentage of the fee income generated by Argent Trust Company.
The Bank
The Bank provides commercial and consumer banking to customers in Adams and Warren Counties, Mississippi, and East Baton Rouge Parish, Louisiana, and the adjoining counties and parishes in Mississippi and Louisiana. The Bank conducts its full-service banking business from its main office and two branch offices in Natchez, Mississippi, two branches in Vicksburg, Mississippi, and one branch office in Baton Rouge, Louisiana. The geographical area serviced by the Bank is economically diverse and includes public and private sector industries, including government service, manufacturing, tourism, agriculture and oil and gas exploration. The Bank is not dependent on any one customer or group of customers in any of its activities, and it has no foreign operations.
The products and services offered by the Bank include personal and commercial checking accounts, money market deposit accounts, savings accounts, automated clearinghouse services, safe deposit box facilities, and brokerage services. The Bank also offers access to automated teller machines and cash management services including remote deposit, money transfer, direct deposit payroll and sweep accounts. The Bank is a full-service residential and commercial mortgage lender and engages in other commercial and consumer lending activities, including, among other things, the issuance of VISA credit cards and letters of credit.
Income from the Bank’s lending activities, including loan interest and fees, represent the largest component of the Bank’s total operating revenues. This source accounted for 71%, 71% and 66% of the Bank’s total operating revenue during 2007, 2006 and 2005, respectively, and the Company expects that income from lending activities will continue to be the leading source of income related to the Bank’s activities. In addition to business and consumer lending, the bank invests a portion of its total assets in the securities market in order to earn a higher return compared to overnight positions. Investment security purchases are monitored closely and managed on a monthly basis by an asset liability committee comprised of four outside directors along with the bank’s Chief Executive Officer and Chief Financial Officer. Investment income represents the second largest source of revenue for the Bank. For the 2007, 2006 and 2005 fiscal years, revenue in this segment amounted to 21%, 20% and 24% of the Bank’s total operating revenue, respectively.
Competition
There is significant competition among banks and bank holding companies in the Bank’s market areas and throughout Mississippi and Louisiana. The Bank competes with both national and state banks, savings and loan associations and credit unions for loans and deposits. The Bank also competes with large national banks from the principal cities in Louisiana and Mississippi for certain commercial loans. All of these numerous institutions, including the Bank, compete in the delivery of products and services on the basis of availability, quality and pricing. Most institutions track total deposits as an appropriate measure of penetration in each market. As of December 31, 2007, the Bank’s market share, in relation to total deposits, was 36.22% and 3.53% for Adams and Warren Counties in Mississippi, respectively, and .30% in East Baton Rouge Parish in Louisiana.
The deregulation of depository institutions as well as the increased ability of non-banking financial institutions, such as finance companies, investment companies, insurance companies, brokerage companies and several governmental agencies, to provide services previously reserved to commercial banks has further intensified competition. Accordingly, the Bank now competes with these non-banking financial institutions, all of which are engaged in marketing various types of loans, commercial paper, short-term obligations, investments and other services. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, in many instances they may operate with greater flexibility. The continued deregulation of the financial services industry may have a detrimental effect on the Bank’s long-term growth and profitability.
In addition to the deregulation of the financial services industry, the increasing liberalization of the laws and regulations affecting the conduct of interstate banking activities makes it possible that competition in the Bank’s geographical market area will increase. If large, regional bank holding companies acquire branches in the Bank’s market area, they may offer a wider range of services than are currently offered by the Bank. Some of these regional competitors may take full advantage of the powers of “financial holding companies,” as defined in the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which allows such competitors to offer products and services not offered by the Bank. In addition, these competitors are likely to be better capitalized than the Bank and the Company.
Employees
As of December 31, 2007, the Company had three full-time employees, who are also employees of the Bank and compensated by the Bank. The Bank’s employees increased from 97 full-time and 11 part-time employees at December 31, 2006, to 102 full-time and 11 part-time at December 31, 2007. The employees are not represented by a collective bargaining agreement. The Company believes that its relationship with its employees is good.
Supervision and Regulation
General
The banking industry is extensively regulated under federal and state law. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and to supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Pursuant to the BHCA, the Company may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any other company, including a bank, without the prior approval of the Federal Reserve. The BHCA further limits the activities of both the Company and the Bank to the business of banking and activities closely related or incidental to banking.
As a national bank, the Bank is subject to supervision and regular examination by the Office of the Comptroller of the Currency (the “Comptroller”). The examinations are undertaken to ensure the protection of the Deposit Insurance Fund (the “DIF”). In February, 2006, President George W. Bush signed The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) into law. The Reform Act contains technical and conforming changes to implement deposit insurance reform, as well as a number of study and survey requirements. Among the highlights of this law was merging the Bank Insurance Fund and the Savings Association Insurance Fund into the new fund. This change was made effective March 31, 2006. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based on the balance of the insured deposits as well as on the degree of risk the institution poses to the insurance fund.
In 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), which, among other things, substantially revised the depository institution regulatory and funding provisions of the FDIA. FDICIA also expanded the regulatory and enforcement powers of bank regulatory agencies. Most significantly, FDICIA mandates annual examinations of banks by their primary regulators and requires the federal banking agencies to take prompt “corrective action” whenever financial institutions do not meet minimum capital requirements. FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capitalization status will depend on how well its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. As of December 31, 2007, the Bank maintained a capital level which qualified it as being “well capitalized” under such regulations.
FDICIA also prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be “undercapitalized.”
The banking industry is affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit to moderate recessions and to curb inflation. Among the instruments of monetary policy used by the Federal Reserve to implement its objectives are: open-market operations in U.S. Government securities, changes in the discount rate on bank borrowings and changes in reserve requirements on bank deposits. Changes in any of these policies can affect how the Bank operates and generates revenues.
Interstate Banking and Branching Legislation
Federal Law. In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act (“Riegle-Neal”), which affected the interstate banking and branching abilities of bank holding companies and banks. Riegle-Neal authorizes a national bank domiciled in one state to establish branches in any other state as long as neither state has opted out of interstate branching between the date of enactment of Riegle-Neal and May 31, 1997. Riegle-Neal, however, does allow states to preserve certain restrictions on the entry of out-of-state banks, such as the fashion in which entry can be made, an age requirement for a bank being merged or acquired, and a deposit cap. Under Riegle-Neal, once a bank has established a branch in another state, it may exercise the same rights in that state as national and state banks enjoy in that state, including the ability to branch intra-state.
Riegle-Neal also permits states to allow banks to enter the state by establishing a de novo branch in that state. In order to allow de novo entry into a particular state, that state’s banking laws must expressly provide for de novo branching. Once a bank has established a branch in a host state through de novo branching, it may exercise the same rights in that state as national and state banks enjoy, including the ability to branch intra-state. If a state opts out of interstate branching, no bank domiciled in that state may establish branches in other states, and no bank domiciled in another state may establish branches in that state.
Mississippi Law. On March 29, 1996, the Governor of Mississippi signed into law a bill in which Mississippi elected to opt in to interstate branching, effective May 1, 1997. As enacted, the bill (1) allows all Mississippi banks to establish branches in any other state pursuant to the entry rules in the potential host state, and (2) allows out-of-state banks to establish branches in Mississippi pursuant to Mississippi’s entry rules. The bill does not authorize de novo branching into Mississippi. An out-of-state bank can establish branches in Mississippi only by (1) merging with a Mississippi-domiciled bank, (2) buying all of the assets of a Mississippi-domiciled bank, or (3) buying all of the assets in Mississippi of an out-of-state bank which has branches in Mississippi. All interstate branching transactions require appropriate regulatory approval.
On December 1, 2000, the Bank acquired its first interstate branch offices in Baton Rouge, Louisiana. Under applicable law, the Bank, with the approval of the Comptroller, can establish additional de novo branch offices within the States of Mississippi and Louisiana. The Company from time to time evaluates merger and acquisition opportunities, as well as opportunities to establish additional branch offices, and it anticipates that it will continue to evaluate such opportunities.
Financial Modernization
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLB Act”) was enacted into law on November 12, 1999. The GLB Act potentially affects every facet of a depository institution’s operations. The GLB Act does three fundamental things affecting the banking industry: (a) repeals key provisions of the Glass-Steagall Act to permit commercial banks to affiliate with securities firms, insurance companies and other financial service providers; (b) establishes a statutory framework pursuant to which full affiliations can occur between these entities; and (c) provides financial services organizations with flexibility in structuring these new financial affiliations through a new entity called a “financial holding company” or through a financial subsidiary.
As a result of the GLB Act, banks will be able to offer customers a wide range of financial products and services without the restraints of previous legislation. In addition, bank holding companies and other financial services providers will be able to commence new activities or new affiliations much more readily. To take advantage of the new provisions of the GLB Act, a bank holding company must elect to become a financial holding company. The Company has elected to become a financial holding company.
Anti-Money Laundering
On October 26, 2001, the President signed the USA PATRIOT Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as the Bank. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The IMLAFA requires all “financial institutions,” as defined, to establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee training programs, and an independent audit function to review and test the program. The Company believes that it has complied with the IMLAFA requirements as currently in effect.
Further Changes in Regulatory Requirements
The United States Congress and the Mississippi legislature have periodically considered and adopted legislation that has adversely affected the profitability of the banking industry. See “Competition” above. Future legislation could further modify or eliminate geographic and other business restrictions on banks and bank holding companies and current prohibitions affecting other financial institutions, including mutual funds, securities brokerage firms, insurance companies, banks from other states and investment banking firms. The effect of any such legislation on the business of the Company or the Bank cannot be accurately predicted. The Company also cannot predict what legislation might be enacted or what other implementing regulations might be adopted, and if enacted or adopted, the effect thereof.
Restrictions on Dividends
The Company is a legal entity separate and distinct from the Bank, and substantially all of the Company’s revenues result from amounts paid by the Bank, as dividends, to the Company. The payment of dividends by the Bank is, of course, dependent upon its earnings and financial condition. The Bank, however, as a national bank, is also subject to legal limitations on the amount of its earnings that it may pay as dividends. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller, may credit net profits to the Bank’s undivided profits account and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve have each indicated that banking organizations should generally pay dividends only out of current operating earnings.
Further, in connection with the Company’s acquisition of Natchez First Federal in 1993, the Bank assumed a liquidation account of approximately $2.8 million which has the effect of prohibiting the payment of dividends if the Bank’s net worth would thereby be reduced below $2.8 million.
Corporate Governance
The Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) requires publicly traded companies to adhere to several directives designed to prevent corporate misconduct. Additional duties have been placed on officers, directors, auditors and attorneys of public companies. The Sarbanes Act requires certifications regarding financial statement accuracy and internal control adequacy by the chief executive officer and chief financial officer of the Company in periodic and annual reports filed with the Securities and Exchange Commission (the “SEC”). The Sarbanes Act also accelerates insider reporting obligations under Section 16 of the Securities Exchange Act of 1934, as amended, restricts certain executive officer and director transactions, imposes new obligations on corporate audit committees and provides for enhanced review by the SEC.
Item 1A.
Item 1A. Risk Factors.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
The Company has its principal offices in its headquarters building at 500 Main Street, Natchez, Adams County, Mississippi 39120, which is owned and occupied by the Bank. The Bank owns the property on four additional branches and leases the property for one of its branches. In the judgment of management, the facilities of the Company and the Bank are generally suitable, adequately insured and provide for the continuing needs of the Company and the Bank. All branches operated are full service and the list below describes the locations and general character of the properties owned and leased by the Company and the Bank:
The lease for the Company’s branch located at 8810 Bluebonnet Boulevard, in Baton Rouge, Louisiana is for a ten year period beginning October 1, 2003.
Item 3.
Item 3. Legal Proceedings.
The Company and the Bank are currently not involved in any material pending legal proceedings.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the Company’s shareholders during the fourth quarter of 2007.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Information Regarding our Common Stock
The Company’s common stock is listed on The NASDAQ Capital Market, and trades under the symbol “BKBK.” The table below sets forth dividends per share and the high and low sales prices ranges for the common stock, as reported by NASDAQ, for the last two fiscal years.
On March 3, 2008, there were 481 shareholders of record of the Company’s common stock, and the price of the Company’s common stock was $16.50.
Historically the Company has declared dividends on a quarterly basis. Funds for the payment of cash dividends are obtained from dividends received by the Company from the Bank. Accordingly, the declaration and payment of cash dividends by the Company depends upon the Bank’s earnings, financial condition, general economic conditions, compliance with regulatory requirements and other factors. Restrictions on the Bank’s ability to transfer funds to the Company in the form of cash dividends exist under federal and state law and regulations. See Note N, “Regulatory Matters”, in the Notes to the Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, for a discussion of these restrictions. There restrictions do not, are not expected in the future to, materially limit the Company’s ability to pay dividends to its shareholders.
Please refer to the information under “Equity Compensation Plan Information” in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for a discussion of the securities authorized for issuance under the Company’s equity compensation plans.
The Company did not repurchase any equity securities during the 4th quarter of 2007.
Item 6.
Item 6. Selected Financial Data.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion presents a review of the major factors that have affected the financial condition, changes in financial condition and results of operations of Britton & Koontz Capital Corporation (the “Company”) and its subsidiaries, principally Britton & Koontz Bank, N.A. (the “Bank”), as of and for the three years ended December 31, 2007.
Summary
In 2007, the Company reported net income of $3.0 million, or $1.42 per basic and diluted share, representing a decrease of 16%, or $573 thousand, compared to net income of $3.6 million, or $1.69 per basic and diluted share, reported at December 31, 2006, and a 7% decrease compared to net income of $3.2 million, or $1.53 and $1.52 per basic and diluted share, reported at December 31, 2005. Return on average equity for the years 2007, 2006 and 2005 was 8.80%, 11.10% and 10.30%, respectively. Net interest margins increased to 3.82% at December 31, 2007, from 3.78% at December 31, 2006 and 3.66% at December 31, 2005.
The Company’s decision to limit the volume of residential mortgages retained in its own portfolio and to allow residential mortgage loans already booked to pay down limited overall loan growth in 2007. Loan growth was generated primarily in the Baton Rouge market, which experienced better economic conditions than those in the Company’s Vicksburg and Natchez markets. In Baton Rouge, the Company’s lending was focused primarily on commercial real estate financing, and the Company expects such financing to remain the dominant type of lending for the Bank in its Baton Rouge market.
The Company anticipates that deposit gathering in the future will be bolstered by our sale of new financial products such as remote deposit, Internet banking and commercial cash management services. We believe that the more urban Baton Rouge market in particular presents an excellent opportunity for the Company to sell these new products. The Company took steps in 2007 to position the Company for future growth in its deposit gathering. For example, personnel recruitment included the hiring of a Chief Deposit Officer, a veteran banker with extensive treasury management sales experience. This hiring accounts for a portion of the increase in personnel costs for 2007.
To increase its physical presence in the area and to facilitate access to the bank services, the Company intends to expand in the Baton Rouge market. In 2008, the Company intends to acquire two new sites in Baton Rouge to supplement the Company’s approximate 5100 square foot full-service branch office in Baton Rouge on Bluebonnet Boulevard. Company plans are to begin construction of a new branch on one of the sites in 2008 with construction of the second site beginning in early to mid 2009. Capital expenditures and the associated operating expenses incurred in connection with this expansion will likely dampen net income over the next 12 to 24 months, although the Company expects that additional loans and deposits resulting from our expansion will generate additional income for the Company. In addition, the impact from the increase in capital expenditures and operating expenses will be somewhat offset by the decline of depreciation expense on existing plant and equipment.
The Company’s strategy in Baton Rouge continues the focus on commercial lending, reflected both in the Company product emphasis and recruitment of personnel. The Company believes that the products and services it offers in the Baton Rouge market are competitive with those offered by competing institutions but that its single physical location limits the demand for the Company’s retail services in the market.
The Company does expect to increase its mortgage originations in all markets. In recent years, the Company has not actively participated in sub-prime market products. Although this has resulted in the lower loan origination volumes, the Company does not expect to be severely impacted by the downturn in the subprime market. At the same time, the Company believes that greater regulatory supervision of the delivery systems for mortgages arising in response to the recent market excesses will actually improve the opportunities for the Company, which has traditionally operated within conservative mortgage parameters.
Financial Condition
Assets
During 2007, total assets decreased $973 thousand to $368 million at December 31, 2007. The change is due primarily to a decrease of $20 million in loans, which ended 2007 at $221 million, offset by an $18 million increase in investment securities to $126 million. Nearly 60% of the decrease in loans occurred in the 1-4 residential portfolio.
During 2006, total assets decreased 5%, or $19.9 million to $369.3 million from $389.3 million at December 31, 2005. The decline in assets was primarily due to the redirection of cash flows from both the investment portfolio and the residential mortgage portfolio into new commercial loans and the reduction in Federal Home Loan Bank (“FHLB”) borrowings. The strategy had the effect of lowering the Bank’s total assets but also improving both interest margins and net interest income.
Average Earning Assets. Interest income from earning assets represents the Company’s main source of revenue. Average earning assets for the year ended December 31, 2007, totaled $349.5 million, a $7.9 million, or 2.2%, decrease compared to December 31, 2006. The decrease included a $5.4 million, or 2.2%, decrease in average loans and a $3.8 million, or 3.4%, decrease in investment securities offset by increases in interest-bearing bank balances. Average earning assets for the period ended December 31, 2005, totaled $370.6 million.
Investment Securities. The Company’s securities at December 31, 2007, primarily consist of mortgage-backed and municipal investments. Securities that are deemed to be held-to-maturity (“HTM”) are accounted for by the amortized cost method and represent approximately 32% of total securities at December 31, 2007. Securities designated available-for-sale (“AFS”) are accounted for at fair value with valuation adjustments recorded in the equity section of the Company’s balance sheet through other comprehensive income/(loss) and represent approximately 51% of the total at December 31, 2007. A new trading category was established in connection with the Company’s adoption of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). Securities classified as trading are accounted for at fair value with periodic valuation adjustments recorded directly to earnings of the Company. The trading portfolio represents approximately 15% of the total at December 31, 2007. Equity securities account for the remaining 2%. Management determines the classification of its securities at acquisition. In both 2005 and 2006, the flat interest rate yield curve discouraged reinvestment of proceeds from investments back into the market. Cash flows from investments were instead used to fund new loan growth and reduce borrowings. As the loan portfolio declined in 2007, the market presented opportunities for reinvestment of these cash flows back into investment securities. Total investment securities increased by $18.3 million, or 17%, to $125.7 million at December 31, 2007, from $107.4 million at December 31, 2006.
In the first quarter of 2008, the Company sold its portfolio of approximately $20 million in trading securities at a gain of $148 thousand. Proceeds from these securities will be used to pay down borrowed funds and callable brokered deposits. Any remaining proceeds will be re-invested back into HTM securities. The Company does not currently intend to classify any securities purchased in the future as trading.
Equity securities at December 31, 2006 are comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $1.7 million, the Company’s $155 thousand interest in its B&K Bank Statutory Trust and ECD Investments, LLC membership interests of $100 thousand. These securities decreased $1.8 million to $2.5 million in 2007 from $4.3 million in 2006, due to mandatory redemptions of $2.0 million of FHLB stock.
The amortized cost of the Bank’s investment securities at December 31, 2007, 2006 and 2005, are summarized below:
The amortized cost and approximate market value of the Company’s investment debt securities (including mortgage-backed securities) at December 31, 2007, by contractual maturity, is set forth in Note B, “Investment Securities,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data.
Loans. Loans represent the Company’s largest source of revenue. Total loans at December 31, 2007, were $223.4 million, a decrease of $20.2 million compared to December 31, 2006. Total loans at December 31, 2006 were $243.6 million, a decrease of $1.5 million compared to December 31, 2005. Loan balances declined in all categories during 2007 except home equity lines of credit which showed limited growth. Loan growth in the Company’s Baton Rouge, Louisiana market was $11 million in 2007 as loan demand in that market slowed. Total loans in Baton Rouge were approximately $96 million at December 31, 2007, compared to $85 million at December 31, 2006. Total loans in the Natchez, Mississippi market declined $12 million and ended December 31, 2007, at $77 million compared to $89 million in 2006 while total loans in Vicksburg, Mississippi declined $8 million to $33 million at December 31, 2007. The 1-4 family residential portfolio declined $13 million during 2007. The Company sells its 1-4 family residential mortgage loans in the secondary market and has allowed this portfolio to liquidate partially since December 31, 2005. This shift was implemented in order to reduce some of the Company’s thrift-like characteristics and as a result management believes loan yields should improve as the Company grows. Loan demand, particularly in Baton Rouge, is expected to increase during 2008 in the small business and commercial real estate sector. The Company is adding to and improving the technology in its cash management department, which introduced remote deposit and other services in 2007. These innovations, along with other methods of delivering Bank products and services to the customer, are expected to accelerate in the near future. Cash management and treasury services should complement new commercial lending business. The composition of the Bank’s loan portfolio, including loans held for sale, at the end of the last five years is presented below. The Company has no foreign loan activities.
The following table sets forth as of December 31, 2007, the periods in which the Bank’s commercial, financial and agricultural loans and its real estate-construction loans mature or reprice and the total amount of all such loans due after one year having (a) predetermined interest rates and (b) floating or adjustable rates. Loan maturities are based upon contract terms and specific maturity dates. Loans with balloon payments and longer amortizations are often repriced and extended beyond the initial maturity when credit conditions remain satisfactory. Demand loans, loans with no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
Asset Quality
Management continually monitors the diversification of the loan portfolio and assesses loan quality. When the assessment of an individual loan relationship indicates that the borrower has a defined weakness in the ability to repay and collection of all outstanding principal and/or interest is in doubt, the debt is placed on non-accrual. By placing loans on non-accrual the Company recognizes a problem credit, foregoes interest that is likely uncollectible, and adjusts the carried loan balance to reflect the collection amount expected. When problem credits are transferred to non-accrual status, the accrual of interest income is discontinued and all previously accrued and uncollected interest for the year is reversed against interest income. A non-accrual loan may be restored to accrual status when it is no longer delinquent and management no longer doubts the collectibility of interest and principal.
Several key measures are used to evaluate and monitor the Company’s asset quality. These measures include the levels and percentages of total nonperforming assets, loan delinquencies, non-accrual loans, foreclosed assets and charge-offs. Nonperforming assets, consisting of non-accrual loans, loans past due 90 days or more and other real estate owned, decreased $621 thousand to $2.1 million at December 31, 2007 compared to the balance at December 31, 2006. From December 31, 2005 to December 31, 2006, nonperforming assets decreased $49 thousand. Non-performing assets as a percent of average assets decreased to .56% in 2007 compared to .71% in 2006 and .70% in 2005. Nonperforming loans as a percent of total loans, net of unearned income and loans held for sale, remained stable at .59% at December 31, 2007, .59% at December 31, 2006 and .51% at December 31, 2005. Net charge-offs as a percent of average loans decreased to .15% at December 31, 2007, from .21% at December 31, 2006.
At December 31, 2007, overall credit quality improved as most key measures were moving in a positive direction. Specific reserves have been set aside for the unsecured portion of problem credits as well as any unforeseen shortfalls. The Company added a $120 thousand provision for loan losses in the fourth quarter of 2007 to maintain the overall adequacy of the Allowance for Loan Losses, which ended December 31, 2007, 2006 and 2005 at 1.09%, .96% and .97% of loans, respectively. A breakdown of nonperforming loans at the end of each of the last five years is presented below:
Loan classification is an on-going, dynamic process, and the migration of loans into an impaired status cannot be predicted with total accuracy. The Company does not believe that there are any other loans or any other interest-bearing asset for which it has not reserved for or about which management has serious doubts as to the ability of the borrower to comply with the present repayment terms. There were no loans in any of the reported periods above classified as “troubled debt restructurings” as defined in Statement of Financial Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring.”
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated through a provision for loan losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. The allowance is subject to change as management re-evaluates the adequacy of the allowance on a quarterly basis. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on the evaluation of individual loans, the known and inherent risk characteristics and size of the loan portfolios, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience, review of regulatory authority examination reports and evaluations of specific loans and other relevant factors. The Bank risk rates each loan at the initiation of the transaction and risk ratings are reviewed and changed, when necessary, during the life of the loan.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are considered impaired. Loan loss reserve factors are multiplied against the balances in each risk rating category to arrive at the appropriate level for the allowance for loan losses. Loans assigned higher risk ratings are monitored more closely by management. The general component of the allowance for loan losses groups loans with similar characteristics and allocates a percentage based upon historical losses and the inherent risks within each category. The unallocated portion of the allowance reflects management’s estimate of probable but undetected losses inherent in the portfolio; such estimates are influenced by uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, difficulty in identifying triggering events that correlate to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The methodology for determining the adequacy of the allowance for loan losses is consistently applied; however, revisions may be made to the methodology and assumptions based on historical information related to charge-off and recovery experience and management’s evaluation of the current loan portfolio.
Based upon this evaluation, management believes the allowance for loan losses of $2.4 million at December 31, 2007, which equals 1.09% of gross loans held to maturity, is more than adequate, under prevailing economic conditions, to absorb probable losses on existing loans. At December 31, 2007, total reserves included specific reserves of $948 thousand, general reserves of $1.0 million and unallocated reserves of $483 thousand. At December 31, 2006, the allowance for loan losses was $2.3 million, or .96%, of gross loans held to maturity, which was composed of specific reserves of $603 thousand, general reserves of $1.3 million and unallocated reserves of $489 thousand. At December 31, 2005, the allowance for loan losses was $2.4 million, or .97%, of gross loans held to maturity, which was composed of specific reserves of $825 thousand, general reserves of $1.1 million and unallocated reserves of $494 thousand. Activity in the allowance for loan losses for the last five years is presented below.
In establishing the amounts of provision for each year charged to operating expense, management uses the basic methodologies described above. The allocation of the allowance for loan losses applicable to each loan category for the previous five years is presented below.
Other Real Estate
The balance of other real estate (ORE) decreased $510 thousand to $747 thousand in 2007 from $1.3 million in 2006. The ORE balance was $1.5 million at December 31, 2005. Activity during 2007, set forth below, includes write-downs/reserves of $326 thousand, proceeds from sales of $703 thousand and foreclosures of $519 thousand. The balance at December 31, 2007, was concentrated in two parcels of commercial real estate in the Natchez market.
Funding
Deposits. Deposits are the Company’s primary source of funding for earning assets. Total deposits ended 2007 at $246.4 million compared to $253.8 million at December 31, 2006 and $257.4 million at December 31, 2005. Average deposits remained stable at $255 million at December 31, 2007, compared to the year before. Average deposits increased 8.5% from $236 million at December 31, 2005, to $256 million at December 31, 2006. Non-interest bearing deposits ended 2007 at $47.3 million, compared to $50.3 million in 2006 and $51.5 million in 2005.
The decrease in deposits in 2007 was primarily due to the loss of public funds and special promotion CD’s which are considered non-core deposits. In the midst of a flat to inverted interest rate yield curve for much of the year and decreasing loan demand, the Company allowed non-core funding and higher-costing wholesale deposits to decrease. During 2007, deposits that the Bank considers core deposits increased approximately $2.4 million.
As loan demand returns in all markets in 2008, the Company anticipates that deposits will increase to meet the demand for new loans. The Company also maintains wholesale deposit funding sources to provide additional liquidity if necessary. The Company belongs to a network that allows access to national deposits and has the ability to gather these deposits as needed. It also has joined the Certificate of Deposit Account Registry Service (“CDARS”), a deposit placement network. Deposits in the CDARS program are federally insured and are considered brokered. These deposits have increased over the past three years to $8.8 million at December 31, 2007, from $8.3 million at December 31, 2006, and $6.6 million at December 31, 2005.
Maturities of certificates of deposits of $100,000 or more at December 31, 2007, and 2006, are summarized below.
Deposits at December 31, 2007, 2006 and 2005, consist of the following:
Borrowings. Aside from the deposit base described above, the Company utilizes short and long-term borrowings as an additional funding source. Short-term borrowings include overnight funding through established lines of credit with correspondent banks, customer repurchase agreements and advances maturing in one year or less from the FHLB. The Company collateralizes short-term funding from the FHLB with a portion of the Bank’s one-to-four family residential mortgage portfolio and certain secured commercial loans.
Also included in short-term borrowings are the Company’s junior subordinated debentures (See Note I, “Borrowings,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data). These instruments have a quarterly call feature beginning in March 2008 and as a result, have been moved from long-term borrowing at December 31, 2006, to short-term at December 31, 2007. The Company will consider calling the debentures if it determines they are not needed as a capital base to support the asset growth of the Company.
Short-term borrowings at December 31, 2007, 2006 and 2005 are presented below:
Long-term borrowings in 2006 primarily consisted of advances from the FHLB with a maturity date greater than one year from the reporting period. The longer-term funding sources increased during 2007 to $42.4 million at December 31, 2007, from $39.6 million at December 31, 2006. During 2007, the Company shifted the majority of these borrowings into Structured Repurchase Agreements with JPMorgan Chase Bank, N.A. (“Chase”). The purpose of the realignment of the long-term borrowings into these agreements was to provide leverage of capital and a measure of protection against rising interest rates beyond a one year range. (See Note M, “Securities Sold Under Repurchase Agreements” in the Notes to the Consolidated Financial Statements.)
Average Balances and Yield Analysis
The following table presents the Bank’s average balance sheets during 2007, 2006 and 2005. Dividing income or expense by the average balance of assets and liabilities, respectively, derives yields and costs. Non-accrual loans are included in loans for yield computations. Loan fees and late charges in the amount of approximately $917 thousand for 2007 and $1.1 million for both 2006 and 2005 are included in both income and yield computations in loans. Income and expense resulting from interest rate caps and swaps used to manage interest rate risk are included appropriately in loans and certificates of deposit. (No tax-equivalent adjustments have been made. All averages are derived from monthly average balances.)
Capital
Stockholders' equity ended 2007 at $35.8 million compared to $33.6 million at December 31, 2006 and $31.2 million at December 31, 2005. The change in stockholders equity from 2006 to 2007 is due to net income of $3.0 million in 2007, an increase of accumulated other comprehensive income of $1.1 million offset by dividend payments totaling $1.5 million, and a $412 thousand transfer of unrealized losses in the available-for-sale portfolio at December 31, 2006, directly to retained earnings due to the adoption of SFAS 159. Stockholders' equity ended December 31, 2006, at $33.6 million compared to $31.3 million at December 31, 2005. The change in stockholders equity from 2005 to 2006 is due to net income of $3.6 million in 2006 offset by dividend payments totaling $1.5 million and a $238 thousand increase in accumulated other comprehensive income.
Other comprehensive income is the result of unrealized gains or losses on available-for-sale securities and the recognition of the fair value of certain derivative instruments. The Company’s AFS portfolio, representing approximately 51% of total investment securities, is marked to market each month, and the result of these unrealized gains or losses, net of deferred taxes, is reported as a component of comprehensive income in stockholders’ equity. Stockholders’ equity to assets ratio at December 31, 2007, increased to 9.7% from 9.1% at December 31, 2006 and 8.0% at December 31, 2005.
Capital is well above regulatory minimums. Management is in the process of analyzing the need for its junior subordinated debentures, as the Company has the right to call the debentures in March 2008. Management intends to use excess capital to fund expansion in the Baton Rouge market in 2008 and to make a target dividend payout in a per share amount consistent with the Company’s per share dividend payout in 2007. Currently, fixed assets are $7.3 million, or 21% of stockholders equity. Additional capital expenditures for the Company’s planned expansion over the next 18 months are likely to result in an increase in fixed assets peaking to approximately $10-12 million. The Company does not expect income from the growth in loans and deposits resulting from the expansion to immediately offset depreciation expense and other operating expenses associated with the expansion.
Capital levels for the Company and the Bank substantially exceed the minimum requirements of the regulatory agencies for well-capitalized institutions in all three categories in both 2007 and 2006. Both the Company and the Bank maintain levels in total capital to risk-weighted assets, Tier 1 capital to risk-weighted assets and a leverage ratio (Tier 1 capital to average assets) in excess of the minimum requirements of 10.00%, 6.00% and 5.00%, respectively.
(1) Excludes disallowed assets
Pursuant to Mississippi law, the Company’s Board of Directors may authorize the Company to pay cash dividends to its shareholders. The only limitation on such a dividend is that no distribution may be made if, after giving effect to the distribution (a) the Company would not be able to pay its debts as they come due in the usual course of business, or (b) the Company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any shareholders whose preferential rights are superior to those receiving the distribution.
The principal source of the Company’s cash revenues are dividends from the Bank. There are certain limitations on the Bank’s ability to pay dividends to the Company. See the disclosures under the heading “Liquidity” below.
The Company declared semiannual cash dividends in 2004 and prior years. Beginning in the second quarter of 2005, the Company began paying dividends on a quarterly basis. Dividends, for the last three fiscal years total, on an annual basis, $.69 per share for 2005 and $.72 per share for 2006 and $.72 in 2007. Historical dividend payout ratios, expressed as a percentage of net income, for 2005, 2006 and 2007 were 45.10%, 42.60% and 50.70%, respectively.
The declaration of future dividends is at the discretion of the Company and generally will be dependent upon the earnings of the Bank, the assessment of capital requirements, considerations of safety and soundness, applicable law and regulation and other factors. Subject to the limitations referenced above, it is the present policy of the Board of Directors of the Company to continue the declaration of cash dividends on the Company’s common stock on a quarterly basis, to the extent practicable.
Retained earnings of the Bank available for payment of cash dividends under applicable dividend regulations was $5.3 million, $5.3 million and $4.6 million as of December 31, 2007, December 31, 2006, and December 31, 2005, respectively. The Bank intends to retain most of these funds for capital and not pay them out as dividends.
RESULTS OF OPERATIONS
The following are measurements of the Company’s earnings in relation to assets, equity and earnings per share for the past three years.
Non-Interest Income/Non-Interest Expense
Non-interest income primarily includes service charge on deposit accounts, gains on sales of mortgage loans originated and sold in the secondary market, revenues from the Company’s networking arrangements and other non-interest fee generating services. The Company has sought to increase income in the category by broadening its financial services, such as business Internet banking and commercial cash management services, including remote deposit, which allows Bank customers to make deposits electronically from their offices.
Non-interest income for the year ended December 31, 2007, was $2.2 million compared to $2.5 million in 2006 and $2.4 million in 2005. The decrease for the year ended December 31, 2007, is primarily related to losses on the sale of approximately $35 million in available-for-sale securities offset by gains recorded in the trading portfolio as these securities were marked to market. These items are due to the Company’s adoption of SFAS 159 as discussed in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 filed with the Securities and Exchange Commission. The slight increase in non-interest income from 2005 to 2006 was related to higher service charges on deposit accounts offset by lower gains on sales of mortgage originations sold in the secondary market in 2006 and a decrease in the Bank’s income from networking arrangements.
Non-interest expenses primarily include personnel, occupancy and equipment costs along with other operating expenses related to transacting the Company’s business. Total non-interest expenses for the year ended December 31, 2007, amounted to $11.3 million, an increase of $561 thousand compared to the corresponding period in 2006. Write-downs of other real estate, which were higher than expected, amounted to $326 thousand. Salary and employee benefits increased $166 thousand primarily from recruitment in the lending and cash management-treasury areas. Non-interest expense decreased $925 thousand for the year ended December 31, 2006, compared to the same period in 2005. The reduction in non-interest expense from 2005 to 2006 was due primarily to lower personnel costs and expenses related to the Company’s 2005 offer of a voluntary separation package to employees with certain years of service.
Net Interest Income/Margins
Net interest income, the amount by which interest income on loans, investments and other interest earning assets exceed interest expense on deposits and other borrowed funds, is the largest component of the Company’s earnings and is affected by several factors, including the volume of earning assets and costing liabilities, the mix of these assets and liabilities and interest rates. Net Interest Margin represents net interest income expressed as a percentage of average earning assets. Tax-equivalent margins (“TEY”) are in parenthesis.
Net interest income decreased $340 thousand, or 1%, for the year ended December 31, 2007, to $13.3 million compared to the same period in 2006 while net interest margin increased during this period from 3.78% to 3.82%. The reduction of net interest income for the year ended December 31, 2007, was due primarily to lower volumes of earning assets as average loan volumes decreased $5 million compared to 2006 and was partially offset by the increase in net interest margin which increased net interest income by $178 thousand. The small decline in net interest income of $53 thousand from 2005 to 2006 reflects compression due to the interest rate environment offset by lower earning assets. Net interest margins for 2007, 2006 and 2005 were 3.82% (4.06% TEY), 3.78% (4.01% TEY) and 3.66% (3.89% TEY), respectively.
The following table presents the dollar amount of changes in interest income and interest expense for the major components of the Company’s interest earning assets and interest bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (a) changes in volume (i.e., changes in volume multiplied by the old rate) and (b) changes in rates (i.e., changes in rates multiplied by the old volume.) For purposes of this table, changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rates.
Provision for Loan Losses
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management’s assessment of the risk of loss in the loan portfolio in light of current risk management strategies, economic conditions and market trends. Net charge-offs were $353 thousand for the year ended December 31, 2007 compared to $508 and $159 thousand for the years ended December 31, 2006, and 2005, respectively. The Company recorded a provision for the twelve months ended December 31, 2007, of $440 thousand, compared to $475 thousand in 2006 and $300 thousand in 2005.
Liquidity
Liquidity is a measure of the Company’s ability to fund loan commitments and meet deposit maturities and withdrawals in a timely and cost-effective manner. These needs can be met by generating profits, attracting new deposits, converting assets (including short-term investments, mortgage loans held for sale and securities available for sale) to cash through sales or securitizations, and increasing borrowings. To minimize funding risks, management monitors liquidity monthly through reviews of basic surplus which includes investment securities available for pledging or borrowing offset by short-term liabilities, along with projections of loan and deposits for the next 90 days.
Principal sources of liquidity, both short and long-term, for the Company are asset cash flows, customer deposits and the ability to borrow against investment securities and loans. The Company’s cash and cash equivalents increased from $6.6 million at December 31, 2006, to $8.7 million at December 31, 2007. At December 31, 2007, cash used in operating and financing activities was $14.4 and $5.3 million, respectively, while $21.9 million was provided by investing activities.
In 2007, the Company experienced a 2.9% decline in deposits primarily from non-core deposits. Consequently, in 2007, the Company used available short and long-term borrowing capacity from the FHLB and other short-term federal funds lines with correspondent banks to offset this decline. In addition to the Company’s deposit base, management believes that the current level of short-term investments and the projected cash flows from earning assets and securities available for sale are more than adequate to meet the Company’s current liquidity needs. Additional sources of liquidity available to the Company include the ability to issue additional retail brokered certificates of deposit and the ability to sell or securitize a portion of the Company’s residential first mortgage portfolio. The Company also has available federal funds lines and its membership in the FHLB to further augment liquidity by providing a readily accessible source of funds at competitive rates.
The Company accepts funds from various local and state governments. Total public deposits at December 31, 2007, were $28.1 million compared to $31.1 million at December 31, 2006, and $29.0 million at December 31, 2005. These deposits, considered non-core, generally are accepted on a bid basis and tend to fluctuate from year to year. Management does not believe the reductions in public deposits will affect the Company’s ability to fund loans, engage in investment activities or handle normal deposit fluctuations.
In the ordinary course of business, the Company enters into commitments to extend credit to its customers. See Note O, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements of the Company in Item 8, Financial Statements and Supplementary Data, for a discussion of the Company’s commitments to extend credit as of December 31, 2007.
The Company’s liquidity and capital resources are substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account, and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings. The Bank’s ability to pay dividends is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors.
Further, in connection with the acquisition of Natchez First Federal in 1993, the Bank assumed a liquidation account of approximately $2.8 million which has the effect of prohibiting the payment of dividends if the Bank’s net worth would thereby be reduced below the amount required for the liquidation account. Management does not anticipate that this restriction will have a material adverse effect on the Bank’s ability to pay dividends to the Company.
Certain restrictions exist on the ability of the Bank to transfer such funds to the Company in the form of loans. Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2007, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $3.7 million. There were no loans outstanding from the Bank to the Company at December 31, 2007.
The Company’s asset/liability committee (“ALCO”) determines an appropriate level of capital and liquidity adequate to respond to the needs of depositors and borrowers. At December 31, 2007, the ALCO, in its report to the Board of Directors, indicated that it believes that the Company’s current level of liquidity is adequate to fund foreseeable asset growth or to meet unanticipated deposit fluctuations.
OFF-BALANCE-SHEET ARRANGEMENTS
The Bank enters into off-balance-sheet arrangements in the normal course of its business. For a discussion of such arrangements, see Note A, “Summary of Significant Accounting Policies − Off-Balance-Sheet Financial Instruments,” “− Interest-Rate Cap Agreements,” and “Interest-Rate Swap Agreements,” Note O, “Commitments and Contingencies,” and Note R, “Interest Rate Risk Management,” in the Notes to the Consolidated Financial Statements of the Company, in Item 8, Financial Statements and Supplementary Data. Such discussion is incorporated by reference into this item.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) of Regulation S-K.
Item 8.
Item 8. Financial Statements and Supplementary Data.
BRITTON & KOONTZ CAPITAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007, 2006 AND 2005
CONTENTS
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Britton & Koontz Capital Corporation (the “Company”) and its subsidiaries has prepared the consolidated financial statements and other information in our Annual Report on Form 10-K in accordance with generally accepted accounting principles and is responsible for the accuracy of the financial statements and other information. The financial statements necessarily include amounts that are based on management’s best estimates and judgments.
In meeting its responsibility, management relies on internal accounting and related control systems. The internal control systems are designed to ensure that transactions are properly authorized and recorded in the Company’s financial records and to safeguard the Company’s assets from material loss or misuse. Such assurance cannot be absolute because of inherent limitations in any internal control system, including the possibility that a control can be circumvented or overridden, and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. The Company’s bank subsidiary, Britton & Koontz Bank N.A., contracts with outside audit firms to monitor compliance in areas such as Information Technology and Bank Secrecy Act with the Company’s and Bank’s systems of internal controls and reports to management and to the Audit Committee of the Board of Directors.
The Audit Committee of the Company’s Board of Directors consists entirely of independent directors. The Audit Committee meets periodically with the internal auditor and the independent accountants to discuss audit, internal control, financial reporting and related matters. The Company’s independent accountants and the internal audit staff have direct access to the Audit Committee.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, and further described in interpretive guidance regarding management’s report on internal control over financial reporting issued by the Securities and Exchange Commission on June 27, 2007. Under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, management of the Company conducted an assessment of the effectiveness of internal control over financial reporting as of December 31, 2007 based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our assessment included an assessment of the design of the internal control system, a review of the documentation of controls and tests of the effectiveness of internal controls. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007 and meets the criteria described in Internal Control - Integrated Framework.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report.
/s/ W. Page Ogden /s/ William M. Salters
W. Page Ogden William M. Salters
President and Chief Executive Officer EVP and Chief Financial Officer
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Britton & Koontz Capital Corporation and Subsidiaries
We have audited the accompanying Consolidated Balance Sheets of Britton & Koontz Capital Corporation and Subsidiaries as of December 31, 2007 and 2006, and the related Consolidated Statements of Income, Changes in Stockholders' Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Britton & Koontz Capital Corporation and Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
/s/ Hannis T. Bourgeouis, LLP
HANNIS T. BOURGEOIS, LLP
Baton Rouge, Louisiana
March 5,
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
ASSETS
The accompanying notes are an integral part of these financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
The accompanying notes are an integral part of these financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
The accompanying notes are an integral part of these financial statements.
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
The accompanying notes are an integral part of these financial statements.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Britton & Koontz Capital Corporation (the “Company”) and its wholly owned subsidiaries, Britton & Koontz Bank, National Association (the “Bank”) and B & K Title Insurance Agency, Inc. (the “Agency”). All material inter-company profits, balances and transactions have been eliminated
Nature of Operations
The Bank operates under a national bank charter and provides full banking services, including trust services. The primary area served by the Bank is the southwest region of Mississippi and East Baton Rouge Parish in Louisiana. Services are provided at three locations in Natchez, Mississippi, two locations in Vicksburg, Mississippi, and one location in Baton Rouge, Louisiana. The Agency’s operations were discontinued during 2006.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Investment Securities
Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and the Bank has the ability at the time of purchase to hold debt securities until maturity, they are classified as held-to-maturity and carried at cost, adjusted for amortization of premiums and accretion of discounts using methods approximating the interest method. Available-for-sale securities include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rates and resultant prepayment risk changes. These securities are carried at fair value.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trading securities include securities purchased and classified as trading in connection with the Company’s adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“Statement”) No. 157, “Fair Value Measurements” (“SFAS 157”), and Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). These securities are also carried at fair value. Equity securities primarily include stock in the Federal Reserve Bank and the Federal Home Loan Bank, which are restricted and are carried at cost.
Realized gains and losses on dispositions of investment securities are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available-for-sale are based on the difference between book value and fair value of each security. These unrealized gains and losses are reported as a component of comprehensive income in stockholders' equity, net of the related deferred tax effect. The Bank marks to market its trading portfolio at the end of each quarter with gains or losses reported to net income. Such changes in the fair value due to market changes may contribute to volatility in quarterly earnings.
Loans
Loans are stated at the amount of principal outstanding, reduced by unearned income and an allowance for loan losses. Unearned income on certain installment loans is recognized as income over the terms of the loans by a method which approximates the interest method. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Loans are ordinarily placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. Any unpaid interest previously accrued on non-accrual loans is reversed from income. Interest income, generally, is not recognized on 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 non-accrual loans is recognized only to the extent of interest payments received.
Securitized loans are transferred to a long-term investment category at the lower of cost or market value on the transfer date. Any material difference between the carrying amount of the loans and their outstanding principal balance is recognized as an adjustment to the yield by the interest method.
Loans Held-for-Sale
Loans held-for-sale primarily range from ten, fifteen and thirty-year fixed-rate, one-to-four family real estate loans which are valued at the lower of cost or market, as determined by outstanding commitments from investors or current investor yield requirements, calculated on an individual basis. These loans are originated with the intent of selling them in the secondary market.
Unrealized losses on loans held-for-sale are charged against income in the period of decline. Such declines are recorded in a valuation allowance account and deducted from the cost basis of the loans. Gains on loans held-for-sale are recognized when realized.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date based on evaluations of the 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. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are adjusted to the allowance. Past due status is determined based on contractual terms.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed by the straight-line method and is charged to expense over the estimated useful lives of the assets, which range from 3 to 40 years.
Other Real Estate
Properties acquired through foreclosure or in settlement of loans and in lieu of loan foreclosures are classified as foreclosed properties and are valued at the lower of the loan value or estimated fair value of the property acquired less estimated selling costs. At the time of foreclosure, the excess, if any, of the loan value over the estimated fair value of the property acquired less estimated selling costs, is charged to the allowance for loan losses. Additional decreases in the carrying values of foreclosed properties or changes in estimated selling costs, subsequent to the time of foreclosure, are recognized through provisions charged to operations. Revenues and expenses from operations and gains and losses on dispositions of such assets are recorded in earnings in the period incurred.
The fair value of foreclosed properties is determined based upon appraised value, utilizing either the estimated replacement cost, the selling price of properties utilized for similar purposes, or discounted cash flow analyses of the properties' operations.
Compensated Absences
Employees of the Bank are entitled to paid vacation, emergency and sick days off, depending on length of service in the banking industry. Vacation, emergency and sick days are granted on an annual basis to eligible employees. Unused vacation and emergency days expire on December 31 of each year. Unused sick days expire on each employee's employment anniversary date each year.
The estimated amount of compensation for future absences is deemed immaterial to the consolidated financial statements; accordingly, no liability has been recorded in the accompanying financial statements. The Bank's policy is to recognize the cost of compensated absences when actually paid to employees.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The provision for income taxes is based on amounts reported in the statements of income after exclusion of nontaxable income such as interest on state and municipal securities. Also, certain items of income and 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 determined utilizing a liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company and its subsidiaries file a consolidated federal income tax return. Consolidated income tax expense is allocated on the basis of each company's income adjusted for permanent differences.
On January 1, 2007, the Company adopted the provision of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). The Company does not believe it has any unrecognized tax benefits included in its consolidated financial statements. The Company has not recognized any interest or penalties in the consolidated financial statements, nor has it recorded an accrued liability for interest or penalty payments.
Earnings Per Share
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. All shares held by the Employee Stock Ownership Plan are treated as outstanding in computing the earnings per share. Stock options are used in the calculation of diluted earnings per share if they are dilutive. Earnings per common share has been computed as follows:
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has granted options to purchase various amounts of the Company’s common stock at various prices ranging from $14.50 to $19.02 per share. Those options whose exercise price exceeded the average market price of the common shares are not included in the options adjustment for diluted earnings per share.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of interest-rate swap and cap agreements, commitments to extend credit and standby letters of credit. Financial instruments related to loans are recorded in the financial statements when they become payable.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers only cash and due from banks to be cash equivalents.
Advertising Costs
Advertising and marketing costs are recorded as expenses in the year in which they are incurred. Advertising and marketing costs charged to operations during 2007, 2006 and 2005 were $165,531, $207,834 and $198,233, respectively.
Interest-Rate Cap Agreements
The Company uses these financial instruments to manage interest rate risk. The only caps currently used are embedded in either Federal Home Loan Bank (“FHLB”) borrowings or Structured Repurchase Agreements as an increase in the interest rate.
Interest-Rate Swap Agreements
The Bank enters into interest-rate swap agreements to modify the interest rate characteristics of its assets and liabilities. These agreements may involve the receipt or payment of fixed rate amounts in exchange for floating rate interest receipts or payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest income or expense. The related amount payable to or receivable from counter-parties is included in other liabilities or assets.
Core Deposits
During 1999, the Company acquired certain assets and liabilities of three Union Planters, N.A. branches in Natchez and Vicksburg, Mississippi, which were accounted for as a purchase. The Bank paid a premium for the depositor relationship of $1,614,210. This premium is included in other assets and is being amortized over 15 years, which is the estimated life of the customer base.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation Plans
FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), encouraged all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby com­pensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also permitted an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Prior to 2006, the Company applied the accounting methodology in APB Opinion No. 25 with respect to outstanding stock options. Note J below provides pro forma disclosures of net income and earnings per share and other disclosures as if the fair value based method of accounting had been applied prior to 2006.
In December 2004, FASB issued Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). This statement is a revision to SFAS 123 and supersedes APB Opinion No. 25. This statement eliminated the alternative to use APB Opinion No. 25’s intrinsic value method of accounting that was allowed under SFAS 123 as originally issued. As a result, a public entity is required to measure the cost of employee services received in exchange for an award of equity based instruments based on the grant-date fair value of the award and to recognize the cost over the period during which an employee is required to provide service in exchange for the award. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) which expressed the views of the staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and the valuation of share based payment arrangements for public companies. SAB 107 provided that the effective date for implementation of SFAS 123(R) was the first fiscal year beginning on or after June 15, 2005. The Company has applied the principles set forth in SFAS 123(R) beginning in the 2006 fiscal year. Note J below sets forth information regarding the Company’s application of SFAS 123(R) with respect to stock options outstanding in 2007.
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
Recent Accounting Pronouncements
In June 2006, the FASB issued FIN 48. The interpretation prescribes a recognition threshold and measurement attribute for recognition in financial statements of the recognition and measurement of a tax position taken in a tax return. FIN 48 prescribes that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not threshold should be measured in order to determine the tax benefit to be recognized in the financial statements. Effective January 1, 2007, the Company adopted the provisions of FIN 48 as discussed above in the Income Taxes subpart of this Note A. The adoption of FIN 48 did not have a material impact on the Company’s financial position or results of operations.
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In September 2006, the FASB issued SFAS 157. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. Under the standard, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts its business. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. Effective January 1, 2007, the Company early adopted the provisions of SFAS 157 as it relates to certain investment securities. The effects of the adoption of this standard are disclosed below in Note B, Investment Securities.
In February 2007, the FASB issued SFAS 159. SFAS 159 provides the Company with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements to facilitate reporting between companies. The fair value option established by SFAS 159 permits the Company to choose to measure eligible items at fair value at specified election dates. The Company must then report unrealized gains and losses on items for which the fair value option has been elected in earnings at each reporting date subsequent to implementation. The Company early adopted the provisions of SFAS 159 effective January 1, 2007 as it relates to trading securities. The effects of the adoption are presented in these financial statements and disclosed in Note B, Investment Securities, below.
Reclassifications
Certain reclassifications have been made to the 2006 and 2005 consolidated financial statements in order to conform to the classifications adopted for reporting in 2007.
NOTE B.
INVESTMENT SECURITIES
The amortized cost and approximate market value of investment securities classified as held-to-maturity at December 31, 2007, are summarized as follows:
The amortized cost and approximate market value of investment securities classified as available-for-sale at December 31, 2007, are summarized as follows:
The amortized cost and approximate market value of investment securities classified as trading at December 31, 2007, are summarized as follows:
The amortized cost and approximate market value of investment securities classified as held-to-maturity at December 31, 2006, are summarized as follows:
NOTE B.
INVESTMENT SECURITIES (Continued)
The amortized cost and approximate market value of investment securities classified as available-for-sale at December 31, 2006, are summarized as follows:
The aggregate fair value and aggregate unrealized losses on securities whose fair values are below book values as of December 31, 2007, are summarized below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.
NOTE B.
INVESTMENT SECURITIES (Continued)
The aggregate fair values and aggregate unrealized losses on securities whose fair values were below book values as of December 31, 2006, are summarized below. Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities. As of December 31, 2006, there were six securities included in held-to-maturity and twenty-nine securities included in available-for-sale.
The unrealized losses in the Company’s investment portfolio, caused by interest rate increases, are not credit issues and are deemed to be temporary. Cash flows from the mortgage-backed securities are guaranteed by the full faith and credit of the United States or by an agency of the United States government. The Company also has the ability and intent to hold these securities until maturity and thus is not required to record any loss on the securities.
Equity securities at December 31, 2007 and 2006, include the following: Federal Home Loan Bank stock of $1,696,500 and $3,515,200 for 2007 and 2006, respectively; Federal Reserve Bank stock of $521,700 for 2007 and 2006; First National Bankers Bank stock in the amount of $47,800 for 2007 and 2006; a $100,000 investment in ECD Investments, LLC for both years; and a $155,000 investment in B&K Statutory Trust for both years. Redemptions of stock in the Federal Home Loan Bank during 2007 and 2006 were $2,013,600 and $1,354,200, respectively. The Federal Home Loan Bank, Federal Reserve Bank and First National Bankers Bank stocks are considered restricted stock as only banks, which are members of these organizations, may acquire or redeem them. The stock is redeemable at its face value; therefore, there are no gross unrealized gains or losses associated with these investments.
NOTE B.
INVESTMENT SECURITIES (Continued)
Investment securities with an amortized cost of approximately $94,064,000 (approximate market value $95,138,000) at December 31, 2007, and approximately $56,217,000 (approximate market value $56,600,000) at December 31, 2006, were pledged to collateralize public deposits and for other purposes as required or permitted by law or agreement. The increase from year to year is due to moving from Federal Home Loan Bank advances to Structured Repurchase Agreements with JPMorgan Chase. (See Note M).
The amortized cost and approximate market value of investment debt securities at December 31, 2007, by contractual maturity (including mortgage-backed securities), are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Yields on tax-exempt municipal securities have been computed on a book equivalent basis which takes into account the coupon rate paid by the issuer adjusted by any premium paid or discount received on the security at settlement date.
NOTE B.
INVESTMENT SECURITIES (Continued)
NOTE B.
INVESTMENT SECURITIES (Continued)
During the first quarter of 2007, the Company elected early adoption of SFAS 157 and SFAS 159 on approximately $20 million of its investment securities. The extent of the election and the cumulative-effect adjustment to retained earnings are as follows:
Description
Balance Sheet
At January 1, 2007
Prior to Adoption
Net Loss Upon Adoption
Balance Sheet
At January 1, 2007
After Adoption of Fair Value Option
Investment Securities
Increase in Deferred Tax Asset
Cumulative Effect of the Adoption of the Fair Value Option (charge to retained earnings)
$20,387,696
$(657,080)
245,091
$ 411,989
$19,730,616
On April 12, 2007, the Company sold the $20 million of the securities it had transferred to trading in connection with the adoption of SFAS 157 and SFAS 159 along with an additional $35 million of its available-for-sale securities (“AFS”). The net proceeds from this sale was reinvested back into longer-term higher yielding mortgage backed securities in order to reduce short-term cash flows and mitigate increasing asset sensitivity of the Company’s asset/liability position in the face of an inverted interest rate yield curve environment extending to 10 year maturities. The average duration of the new investment securities is 3.93 years. The Company classified $20 million of the new securities as trading and the remaining $35 million as AFS. Subsequent to year-end, the Company sold its $20 million of securities classified as trading.
The following provides the fair value hierarchy table set forth in SFAS 157 supplemented with information regarding the income statement changes in fair value of assets (for which the fair value options has been elected):
Fair Value Measurements at December 31, 2007:
NOTE B. INVESTMENT SECURITIES (Continued)
Level 1 includes the most reliable sources, and includes quoted prices in active markets. Level 2 includes observable inputs. Observable inputs are defined in SFAS 159 to include “inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates)” as well as “inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).” Level 3 includes unobservable inputs and should be used only when observable inputs are unavailable.
NOTE C. LOANS
The Bank’s loan portfolio (rounded to the nearest thousand) at December 31, 2007 and 2006, consists of the following:
Loans on which accrual of interest has been discontinued or reduced were approximately $1,302,000 and $1,193,000 at December 31, 2007, and 2006, respectively. If interest on such loans had been accrued, the income would have approximated $36,000 in 2007, $31,000 in 2006, and $24,000 in 2005. At December 31, 2007 and 2006, the recorded investment in loans that were considered to be impaired was approximately $1,301,942 and $1,192,901, respectively, substantially all of which were on a non-accrual basis. The related allowance amount on impaired loans at December 31, 2007, was approximately $333,000 compared to $388,000 at December 31, 2006. Loans which are contractually 90 days or more past due as of December 31, 2007 and 2006, were approximately $12,302 and $232,292, 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 $2,406,672 and $3,255,659 at December 31, 2007 and 2006, 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.
The aggregate amount of loans to such related parties for 2007 and 2006 is as follows:
NOTE D. ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses is as follows:
NOTE E. LOAN SERVICING
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans were approximately $12,691,665, $12,830,831 and $11,274,712 in 2007, 2006 and 2005, respectively.
NOTE F. BANK PREMISES AND EQUIPMENT
A summary of Bank premises and equipment is as follows:
NOTE F. BANK PREMISES AND EQUIPMENT (Continued)
The provision for depreciation charged to operating expenses was $791,330, $798,221 and $824,447 for the years ended December 31, 2007, 2006 and 2005, respectively.
NOTE G. 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 balance sheets 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.
The Company has entered into a Trust Services Agreement with National Independent Trust Company, a national banking association doing business as Argent Trust Company, headquartered in Ruston, Louisiana. Effective January 1, 2007, Argent Trust Company assumed all responsibilities associated with trust services, having been duly appointed successor trustee for all trust accounts. Argent Trust Company performs certain fiduciary services for customers transferred from and referred by the Bank to Argent Trust Company. In return the Bank receives a specified percentage of fee income paid to Argent Trust Company by those customers.
NOTE H. DEPOSITS
Deposits at December 31, 2007 and 2006, consisted of the following:
Maturities of certificates of deposit of $100,000 or more outstanding at December 31, 2007 and 2006, are summarized as follows:
NOTE H. DEPOSITS (Continued)
The approximate scheduled maturities of certificates of deposits for each of the next five years are:
Interest expense on certificates of deposit greater than $100,000 was approximately $2,430,000, $2,486,000 and $1,647,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The public fund deposits were $28,121,213 and $31,160,342 at December 31, 2007 and 2006, respectively.
NOTE I. BORROWINGS
Federal Home Loan Bank Advances:
During 2007 and 2006, the Bank received advances from and remitted payments to the Federal Home Loan Bank. These advances are collateralized by a portion of the Bank’s one-to-four family residential mortgage portfolio, certain secured commercial loans and certain investment securities in accordance with the Advance Security and Collateral Agreement with the Federal Home Loan Bank. The following provides information regarding outstanding Federal Home Loan Bank advances:
Advances outstanding at December 31, 2007, consist of:
Four amortizable fixed-rate loans totaling $4,160,730 with interest rates ranging from 2.377% to 4.963%. The maturities on these loans range from May 1, 2008, to September 1, 2010.
Two variable-rate loans, tied to 3 month Libor, totaling $25,000,000 with interest rates, including margins and adjusting quarterly, ranging from 4.37% to 5.059% and caps established at the strike price of 4.00% and 5.50%. The maturities on these loans are February 4, 2008 and August 15, 2008.
Advances outstanding at December 31, 2006, consist of:
Two fixed-rate term loans totaling $6,000,000 with interest rates of 3.619% and 3.762%, respectively. The maturities on these loans are May 30, 2007 and November 30, 2007, respectively.
Five amortizable fixed-rate loans totaling $9,607,972 with interest rates ranging from 2.377% to 4.177%. The maturities on these loans range from January 2, 2007, to June 1, 2009.
Three variable-rate loans, tied to 3 month Libor, totaling $30,000,000 with interest rates, including margins and adjusting quarterly, ranging from 4.37% to 5.564% and caps established at the strike price of 4.00%, 4.50% and 5.50%. The maturities on these loans range from October 18, 2007, to August 15, 2008.
One overnight advance in the amount of $20,060,000 with an interest rate of 5.44%.
NOTE I. BORROWINGS (Continued)
Annual maturities for the next three years as of December 31, 2007 are as follows:
Junior Subordinated Debentures:
In 2003, the Company issued $5,000,000 of junior subordinated debentures. These junior subordinated debentures qualify as Tier 1 capital for regulatory capital purposes but are classified as a liability under accounting principles generally accepted in the United States of America. These securities carry an interest rate of LIBOR + 3.15%, adjusted quarterly, with interest paid quarterly in arrears and mature in March, 2033. Under certain circumstances, these securities are subject to repayment on March 26, 2008, or thereafter.
NOTE J. EMPLOYEE BENEFIT PLANS
The Bank has an employee stock ownership plan which is designed to invest primarily in employer stock. All employees of the Bank with one year of service and who are at least 21 years old are covered, and are fully vested after six years of service. Employer contributions are determined annually in the discretion of the Board of Directors and are allocated among participants on the basis of their total annual compensation. Dividends on stock owned by the plan are recorded as a reduction of retained earnings. There were no company contributions to the plan for the years 2007, 2006, or 2005. The plan owned 87,296 and 89,733 shares of Britton & Koontz Capital Corporation stock, as of December 31, 2007 and 2006, respectively.
The overall cost to the plan for the years ended December 31, 2007, 2006 and 2005, was $7.94, $8.00 and $7.73 per share, respectively.
Employees age 21 and older are eligible to participate in a 401(k) plan established by the Bank. Under this plan, employees may defer a percentage of their salaries, subject to limits based on federal tax laws. These deferrals are immediately vested. Employer matching and profit sharing contributions are non-mandatory and 100% vested after six years. Employer contributions to the plan are made at the discretion of the Board of Directors and aggregated $121,691, $123,816 and $114,077 for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company maintains a long-term incentive plan, the Britton Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan (the “2007 LTIP”), in which all employees of the Company and its subsidiaries may participate. The plan is administered by a Committee of at least two non-employee directors appointed by the full Board of Directors. The 2007 LTIP was approved by the Company’s shareholders on April 24, 2007, and replaced the Company’s 1996 Long-Term Incentive Plan (the “1996 LTIP”), which was effective as of May 16, 1996 and expired as of May 16, 2006, after which no grants or awards could be made. The 86,337 shares remaining available for grant or award under the 1996 LTIP at the time of its expiration have been added to the shares available for grant under the 2007 LTIP.
NOTE J. EMPLOYEE BENEFIT PLANS (Continued)
The 1996 LTIP will remain in effect until all grants and awards under that plan have been satisfied by the issuance of common stock, forfeited or have expired. The Company has granted options to purchase a total of 112,643 shares, including 98,643 from the 1996 LTIP and 14,000 from the 2007 LTIP. An aggregate of 87,130 shares remain available for grant or award at December 31, 2007, under the 2007 LTIP. Options to acquire 8,354 shares were outstanding and exercisable as of December 31, 2007.
The summary of stock option activity is shown below:
The following table summarizes information about stock options outstanding at December 31, 2007:
The Company applied APB Opinion 25 and related interpretations in accounting for the stock options prior to 2006. Accordingly, no compensation cost was recognized. Had compensation cost for the Company’s stock options been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS 123(R), the Company’s net income and earnings per share for 2005 would have been adjusted to the pro forma amounts indicated below:
NOTE J. EMPLOYEE BENEFIT PLANS (Continued)
The fair value of each option is estimated on the grant date using the Black-Scholes option pricing model. The following assumptions were made in estimating fair values in 2007 and 2005. No options were granted in 2006.
SFAS 123(R) requires measurement for share-based transactions at the fair value of the equity instrument issued. The Company adopted this pronouncement effective as of January 1, 2006. Net income after tax for 2007 and 2006 was reduced by $11,000 and $10,000, respectively, due to valuing stock options for the years ended December 31, 2007 and December 31, 2006. The Company has addressed the future application of this pronouncement and does not consider its potential impact to be significant.
The Bank maintains a salary continuation agreement with its chief executive officer. The agreement is intended to provide equal annual benefits for a period of 15 years following the later of (1) his attainment of age 65, or (2) his retirement. The amount of the benefit is fixed and is based on the chief executive’s age when his employment ceases; the maximum annual benefit that he may receive under the plan is $40,000. One-half of the chief executive’s benefit vested upon his attainment of age 55; the remaining benefit will fully vest upon his attainment of age 64. If the chief executive dies while he is employed, his beneficiaries will be paid an annual benefit equal to $40,000 during the 15-year period following his date of death. If he dies after his installment payments have commenced, his beneficiaries will receive the remaining payments. The benefit under the Salary Continuation Agreement is subject to forfeiture if the chief executive is terminated for cause. The agreement also contains a non-competition covenant during the three-year period after his employment ceases for any reason. If he breaches this covenant, the Bank may cease all further payments. The Bank is also currently paying benefits to a retired executive officer pursuant to a salary continuation agreement. The financial statements for the years ended December 31, 2007, 2006 and 2005 include salary continuation expenses of $33,630, $33,478 and $42,982, respectively.
NOTE K. LEASES
The Bank leases one branch office as well as parking space under operating leases which expire in various years through 2014. Rent expense was $107,172, $103,277 and $124,577 in 2007, 2006 and 2005, respectively.
The future minimum rental commitments for these leases at December 31, 2007, are as follows:
NOTE L. INCOME TAXES
The provision/(benefit) for income taxes included in the consolidated statements of income is as follows for the years ended December 31, 2007, 2006 and 2005:
The provision for federal income taxes differs from that computed by applying the federal statutory rate of 34% in 2007, 2006 and 2005 as indicated in the following analysis:
NOTE L. INCOME TAXES (Continued)
The net deferred tax liability of $527,508 in 2007 is included in accrued taxes and other liabilities. Net deferred tax assets of $9,620 in 2006 and $35,974 in 2005 are included in other assets. The net deferred tax asset and liabilities consist of the following components at December 31, 2007, 2006 and 2005:
A summary of the changes in the net deferred tax asset (liability) for the years ended December 31, 2007, 2006 and 2005, is as follows:
NOTE M. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 2007 and 2006, 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 carried on the balance sheet at approximately $59 million, with an approximate market value of $59 million. These securities generally remain under the Bank's control and are included in investment securities. At December 31, 2007, these securities had coupon rates ranging from 5.00% to 6.00% and maturity dates ranging from 2018 to 2036. The related liability to repurchase these securities, included in securities sold under repurchase agreements, was $48 million at December 31, 2007, and $8 million at December 31, 2006.
NOTE M. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Continued)
The increase from year to year is due to the Company redirecting its borrowed funds from FHLB advances to Structured Repurchase Agreements. The Company entered into a $20 million transaction with JPMorgan Chase Bank, N.A. (“Chase”) in the 3rd quarter of 2007. Details of this transaction can be found in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC. On November 13, 2007, the Company entered into a 5 year, no-call 3-year Structured Repurchase Agreement with Chase for an additional $20 million. Terms of the transaction call for the Bank to pay a fixed rate of 4.71%. In the first three years such rate is subject to reduction if 3-Month LIBOR is greater than 4.90% measured two business days prior to the 13th of each February, May, August and November. Accordingly, during this three year no-call period, the Bank’s cost of funds cannot exceed the initial rate of 4.71%. Chase, in its discretion, may terminate the transaction on November 13, 2010, and quarterly thereafter. The Bank is required to maintain a margin percentage of 105% on securities subject to the transaction. These agreements with Chase were entered into as a means of adding additional leverage and to lock in a fixed rate for a certain period of time. Additionally, both transactions carry a cap embedded into the interest rate that protects the Company in the case of adverse interest rate increases. The remaining $8 million in liability primarily includes agreements that the Company has entered into with local customers for overnight sweep accounts with rates ranging from 1.25% to 4.70% to provide a means to protect these funds that are generally outside FDIC insurance coverage.
The maximum amount of outstanding agreements at any month-end was $50 million and $15 million during 2007 and 2006, respectively. The monthly average amount of outstanding agreements was $21 million and $9 million during 2007 and 2006 respectively.
NOTE N.
REGULATORY MATTERS
The primary source of the Company’s revenue is dividends from the Bank. Federal banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account, and may declare a dividend from that account of so much of the net profits as they judge expedient. The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings. The Bank’s ability to pay dividends is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors.
Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations. At December 31, 2007, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $3.7 million. There were no loans outstanding from the Bank to the Company at December 31, 2007. Any such distribution is also subject to the requirements described in the following paragraphs.
In accordance with Office of Thrift Supervision regulations, a special "Liquidation Account" has been established for the benefit of certain Qualifying Depositors of Natchez First Federal Savings Bank (acquired by the Bank in 1993) in an initial amount of approximately $2.8 million. The Liquidation Account serves as a restriction on the distribution of stockholders' equity in the Bank and no cash dividend may be paid on its capital stock if the effect thereof would be to cause the regulatory capital of the Bank to be reduced below an amount equal to the adjusted Liquidation Account balance.
NOTE N.
REGULATORY MATTERS (Continued)
In the event of a complete liquidation of the Bank, each Qualifying Depositor would be entitled to his or her pro rata interest in the Liquidation Account. Such claims would be paid before payment to the Company as the Bank’s sole shareholder. A merger, consolidation, purchase of assets and assumption of deposits and/or other liabilities or similar transaction, with an FDIC-insured institution, would not be a complete liquidation for the purpose of paying the Liquidation Account. In such a transaction, the Liquidation Account would be required to be assumed by the surviving institution.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2007 and 2006, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
The most recent regulatory notification categorized the Bank as well capitalized under the regulatory capital framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category.
The Company’s (consolidated) and the Bank's actual capital amounts and ratios as of December 31, 2007 and 2006, are presented in the following table.
NOTE N.
REGULATORY MATTERS (Continued)
NOTE O. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements.
Commitments to extend credit are agreements to lend money at fixed and variable rates with fixed expiration dates or termination clauses. The Bank applies the same credit standards used in the lending process when extending these commitments, and periodically reassesses the customer's creditworthiness through ongoing credit reviews. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral is obtained based on the Bank's assessment of the transaction. At December 31, 2007 and 2006, the Bank’s commitments to extend credit totaled $58,418,706 and $67,515,609, respectively.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk and collateralization policy involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total unfunded letters of credit of $2,808,717 and $2,092,014 as of December 31, 2007 and 2006, respectively.
The Bank is required to maintain average reserves at the Federal Reserve Bank. This requirement approximated $275,000 at December 31, 2007. The Bank is in compliance with this requirement.
At December 31, 2006, the Bank had committed to sell approximately $55,000 of loans originated near year-end. These loans are classified as loans held-for-sale and are carried at the lower of cost or market. Due to the short period from origination, the cost and market value of these loans are approximately the same. There were no loans held for sale at December 31, 2007.
The Bank has outstanding lines of credit with several of its correspondent banks available to assist in the management of short-term liquidity. At December 31, 2007, the total available lines of credit were $44 million with an outstanding balance of $ -0- as reflected on the consolidated balance sheet.
The Company and its wholly owned subsidiaries, the Bank and the Agency, are involved in certain litigation incurred in the normal course of business. In the opinion of management and legal counsel, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements.
NOTE P. CONCENTRATIONS OF CREDIT
Substantially all of the Bank's loans, commitments, and standby letters of credit have been granted to customers in the Bank's market area. The majority of investments in state and municipal securities involve governmental entities in and around the Bank's market area. The concentrations of credit by type of loan are set forth in Note C. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. The Bank maintains deposit accounts and federal funds sold with correspondent banks which may, periodically, exceed the federally insured amount.
NOTE Q. DIVIDENDS
The Bank paid dividends to the Company amounting to $2,800,000 and $2,500,000 for the years 2007 and 2006, respectively.
NOTE R. INTEREST RATE RISK MANAGEMENT
During 2006, the Bank entered into an off-balance sheet interest rate swap agreement to reduce its interest-rate risk and protect its prime based loans if interest rates were to fall. Under the terms of this agreement, the Bank receives a fixed rate and is obligated to pay a floating rate based on Prime calculated on a contractual notional amount of $10 million at December 31, 2007. The original term is for three years expiring in October 2009. The fixed payment rate was 7.769% during 2007 with an average variable-payment rate of 8.05%. The collateral at December 31, 2007, is a Federal National Mortgage Association investment. The fair value of this derivative, designated as a cash flow hedge and considered highly effective over its term, is determined on a monthly basis and reported appropriately as comprehensive income/(loss) in the equity portion of the balance sheet. The carrying amount of the swap has been adjusted to its fair value at December 31, 2007, of approximating $186,000 and is included in other assets. Subsequent to year end, the Company sold its position in the swap for a gain of $300,000 which will be amortized at $16,700 per month for the remaining 18 month term.
NOTE S. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on esti­mates using present value or other valuation techniques. Those tech­niques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” excludes certain financial instru­ments and all non-financial instruments from its disclosure require­ments. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Cash and Due From Banks - Fair value equals the carrying value of such assets.
Federal Funds Sold - Due to the short-term nature of this asset, the carrying value of this item approximates its fair value.
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.
NOTE S. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans, Net - For variable-rate loans which are repricing 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 loans with comparable credit risk and terms.
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 deposits with comparable amounts and terms.
Long-Term Borrowings - The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing ratio for similar types of borrowing arrangements.
Federal Funds Purchased and Securities Sold Under Repurchase Agreements - The fair value of these items approximates their carrying values.
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. Fair values for interest rate swaps and caps 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.
NOTE S. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments, rounded to the nearest thousand, are as follows:
NOTE T.
CONDENSED FINANCIAL INFORMATION OF
BRITTON & KOONTZ CAPITAL CORPORATION
The financial information of Britton & Koontz Capital Corporation, parent company only, is as follows:
BALANCE SHEETS
STATEMENTS OF INCOME
NOTE T.
CONDENSED FINANCIAL INFORMATION OF
BRITTON & KOONTZ CAPITAL CORPORATION (Continued)
STATEMENTS OF CASH FLOWS
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
(1) None.
Item 9A.
Item 9A. Controls and Procedures.
The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer of the Company (“CEO”) and the Chief Financial Officer of the Company (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2007. Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s SEC reports.
Management’s Annual Report on Internal Control over Financial Reporting is contained in Item 8, Financial Statements and Supplementary Data, and is incorporated by reference. There were no changes to internal control over financial reporting during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth the names and principal occupations of each director and executive officer of the Company.
The additional information required in response to this item is incorporated into this report by reference to the material under the headings “Stock Ownership”, “Board of Directors”, “Committees of the Board of Directors”, “Executive Officers” and “Executive Compensation” in the Company’s Definitive Proxy Statement for its 2008 Annual Meeting of Shareholders (the “2008 Proxy Statement”).
Code of Ethics
The Board of Directors adopted a code of business conduct and ethics in compliance with Item 406 of Regulation S-K that applies to the principal executive officer, principal financial officer, principal accounting officer and controller of the Company and the Bank. Access to the Company’s Code of Ethics is available to shareholders of the Company and customers of the Bank through the Bank’s website at www.bkbank.com under “investor relations.” Amendments to or waivers from provisions of the Company’s Code of Ethics will be disclosed on the Company’s website.
Item 11.
Item 11. Executive Compensation.
The information required in response to this item is incorporated into this report by reference to the material under the headings “Board of Directors” and “Executive Compensation” in the 2008 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table summarizes our equity compensation plan information as of December 31, 2007. The Britton & Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan (the “2007 LTIP”) was approved by the Company’s shareholders on April 24, 2007 and replaced the Company’s 1996 Long-Term Incentive Plan (the “1996 LTIP”), which was effective as of May 16, 1996 and expired during 2006. An aggregate of 13,870 options granted under the 1996 LTIP remain outstanding and are exercisable in accordance with their terms. Also, 86,337 shares of Company common stock that remained available for grant or award under the 1996 LTIP at the time of its expiration have been added to the shares otherwise available under the 2007 LTIP and may be used to make grants and awards under that plan.
______________
(1)
An aggregate of 115,000 shares of common stock were authorized for issuance under the 2007 LTIP. This amount includes 28,663 newly-reserved shares and 86,337 shares that remained after the expiration of the 1996 LTIP.
Additional information required in response to this item is incorporated into this report by reference to the material under the headings “Stock Ownership” in the 2008 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required in response to this item is incorporated into this report by reference to the material under the heading “Board of Directors” in the 2008 Proxy Statement.
Item 14.
Item 14. Principal Accounting Fees and Services.
The information required in response to this item is incorporated into this report by reference to the material under the heading “Independent Registered Public Accountants” in the 2008 Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
(a)
1.
Consolidated Financial Statements and Supplementary Information for Years Ended December 31, 2007, 2006 and 2005, which include the following:
(a)
Management’s Annual Report on Internal Control over Financial Reporting
(b)
Report of Independent Registered Public Accounting Firm
(c)
Consolidated Balance Sheets
(d)
Consolidated Statements of Income
(e)
Consolidated Statements of Changes in Shareholders’ Equity
(f)
Consolidated Statement of Cash Flows
(g)
Notes to the Consolidated Financial Statements
2.
Financial Statement Schedules
None
3. Exhibits required by Item 601 of Regulation S-K
*
As indicated in the column entitled “Description of Exhibit,” this exhibit is incorporated by reference to another filing or document.
†
Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15 of Form 10-K.
The Company does not have any un-registered long-term debt exceeding ten percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company will file with the SEC, upon request, a copy of all long-term debt instruments.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BRITTON & KOONTZ CAPITAL CORPORATION
Date: March 11, 2008 By: /s/ Robert R. Punches
Robert R. Punches
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX