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EX-31.2 - CERTIFICATION OF CFO SECTION 302 - BRITTON & KOONTZ CAPITAL CORPex31_2.htm
EX-32.1 - CERTIFICATION OF CEO SECTION 906 - BRITTON & KOONTZ CAPITAL CORPex32_1.htm
EX-32.2 - CERTIFICATION OF CFO SECTION 906 - BRITTON & KOONTZ CAPITAL CORPex32_2.htm
EX-31.1 - CERTIFICATION OF CEO SECTION 302 - BRITTON & KOONTZ CAPITAL CORPex31_1.htm
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2011

or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ___________ to ___________

0-22606
Commission File Number
 
 
 
BRITTON & KOONTZ CAPITAL CORPORATION
(Exact name of Registrant as Specified in Its Charter)

Mississippi
64-0665423
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification Number)

 
500 Main Street, Natchez, Mississippi  39120
 
(Address of Principal Executive Offices) (Zip Code)

 
601-445-5576
 
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
Large accelerated filer
 
 
o
 
Accelerated filer
o
 
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
x
 

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  2,142,466 Shares of Common Stock, Par Value $2.50, were outstanding as of May 1, 2011.

 
 

 

 
 
BRITTON & KOONTZ CAPITAL CORPORATION
AND SUBSIDIARIES
INDEX




 
 











 
PART I.  FINANCIAL INFORMATION

Item 1.                      Financial Statements



 



BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
 
 
 
A S S E T S
 
   
   
March 31,
   
December 31,
 
 ASSETS:
 
2011
   
2010
 
 Cash and due from banks:
           
 Non-interest bearing
  $ 6,646,909     $ 4,827,021  
 Interest bearing
    24,314,460       991,832  
        Total cash and due from banks
    30,961,369       5,818,853  
 Federal funds sold
    -       112,497  
 Investment Securities:
               
 Available-for-sale (amortized cost, in 2011 and 2010,
               
     of $89,651,232 and $94,250,975, respectively)
    91,940,148       97,308,410  
 Held-to-maturity (market value, in 2011 and 2010,
               
     of $36,377,377 and $40,609,764, respectively)
    35,228,476       39,760,756  
 Equity securities
    1,635,100       1,835,200  
 Loans, less allowance for loan losses of $3,071,901
               
     in 2011 and $2,420,143 in 2010
    203,763,742       208,144,673  
 Loans held for sale
    2,714,204       6,074,014  
 Bank premises and equipment, net
    7,503,828       7,599,077  
 Other real estate
    3,303,189       3,303,189  
 Accrued interest receivable
    1,684,758       1,781,242  
 Cash surrender value of life insurance
    1,154,729       1,145,016  
 Core Deposits, net
    315,906       342,810  
 Other assets
    1,789,219       2,193,946  
 TOTAL ASSETS
  $ 381,994,668     $ 375,419,683  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
   
 
   
     
 
 LIABILITIES:
               
 Deposits
               
 Non-interest bearing
  $ 49,320,424     $ 45,634,123  
 Interest bearing
    224,846,810       212,908,407  
        Total deposits
    274,167,234       258,542,530  
                 
 Federal Home Loan Bank advances
    9,000,000       17,457,000  
 Securities sold under repurchase agreements
    51,921,548       51,365,895  
 Accrued interest payable
    591,714       657,984  
 Advances from borrowers for taxes and insurance
    151,811       245,943  
 Accrued taxes and other liabilities
    1,342,935       2,063,358  
 Junior subordinated debentures
    5,155,000       5,155,000  
        Total liabilities
    342,330,242       335,487,710  
                 
 STOCKHOLDERS' EQUITY:
               
 Common stock - $2.50 par value per share;
               
 12,000,000 shares authorized; 2,156,966 and 2,149,966 issued
               
 and 2,142,466 and 2,135,466 outstanding, for March 31, 2011,
               
 and December 31, 2010, respectively
    5,392,415       5,374,915  
 Additional paid-in capital
    7,385,668       7,379,891  
 Retained earnings
    25,708,568       25,517,531  
 Accumulated other comprehensive income
    1,435,150       1,917,011  
 Less: Treasury stock, 14,500 shares, at cost
    (257,375 )     (257,375 )
        Total stockholders' equity
    39,664,426       39,931,973  
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 381,994,668     $ 375,419,683  
                 

 


 
 
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 
 
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
 INTEREST INCOME:
           
 Interest and fees on loans
  $ 3,005,719     $ 3,249,316  
 Interest on investment securities:
               
     Taxable interest income
    911,179       1,203,805  
     Exempt from federal taxes
    386,556       421,024  
 Interest on federal funds sold
    43       45  
 Total interest income
    4,303,497       4,874,190  
                 
 INTEREST EXPENSE:
               
 Interest on deposits
    670,019       849,274  
 Interest on Federal Home Loan Bank advances
    69,512       78,258  
 Interest on trust preferred securities
    43,165       42,537  
 Interest on securities sold under repurchase agreements
    445,271       520,488  
 Total interest expense
    1,227,967       1,490,557  
                 
 NET INTEREST INCOME
    3,075,530       3,383,633  
                 
 Provision for loan losses
    750,000       1,099,996  
                 
 NET INTEREST INCOME AFTER PROVISION
               
 FOR LOAN LOSSES
    2,325,530       2,283,637  
                 
 OTHER INCOME:
               
 Service charges on deposit accounts
    346,460       359,213  
 Income from fiduciary activities
    1,285       777  
 Gain/(loss) on sale of mortgage loans
    145,917       28,973  
 Fees and commissions on mortgage loans
    202,128       133,022  
 Gain/(loss) on sale of securities
    666,993       447,530  
 Other real estate income, net
    -       7,036  
 Other
    168,526       146,291  
 Total other income
    1,531,309       1,122,842  
                 
                 
 OTHER EXPENSES:
               
 Salaries
    1,558,788       1,552,385  
 Employee benefits
    210,954       222,548  
 Director fees
    37,059       36,850  
 Net occupancy expense
    263,000       256,602  
 Equipment expenses
    263,172       318,608  
 FDIC assessment
    108,986       127,964  
 Advertising
    43,201       46,048  
 Stationery and supplies
    35,713       41,331  
 Audit expense
    65,500       63,456  
 Other real estate expense, net
    5,440       -  
 Amortization of deposit premium
    26,904       26,904  
 Other
    514,831       834,180  
 Total other expenses
    3,133,548       3,526,876  
                 
 INCOME/(LOSS) BEFORE INCOME TAX EXPENSE
    723,291       (120,397 )
                 
 Income tax expense/(benefit)
    147,871       (183,690 )
                 
 NET INCOME
  $ 575,420     $ 63,293  
                 
 EARNINGS PER SHARE DATA:
               
                 
 Basic earnings per share
  $ 0.27     $ 0.03  
 Basic weighted shares outstanding
    2,136,788       2,130,866  
 Diluted earnings per share
  $ 0.27     $ 0.03  
 Diluted weighted shares outstanding
    2,137,907       2,131,706  
 Cash dividends per share
  $ 0.18     $ 0.18  
                 

 

 
BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
 

                           
Accumulated
             
   
Common Stock
   
Additional
         
Other
         
Total
 
               
Paid-in
   
Retained
   
Comprehensive
   
Treasury
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Stock
   
Equity
 
                                           
 Balance at December 31, 2009
    2,126,466     $ 5,352,415     $ 7,396,211     $ 25,082,298     $ 2,267,340     $ (257,375 )   $ 39,840,889  
 Comprehensive Income:
                                                       
       Net income
    -       -       -       63,293       -       -       63,293  
       Other comprehensive
                                                       
          income (net of tax):
    -       -       -       -       -       -       -  
       Net change in unrealized gain/(loss)
                                                       
          on securities available for sale, net
                                                       
  of taxes of $(65,791)
    -       -       -       -       (110,592 )     -       (110,592 )
Total Comprehensive income
                                                    (47,299 )
Cash Dividend paid $0.18 per share
    -       -       -       (384,384 )     -       -       (384,384 )
Common stock issued
    9,000       22,500       84,600       -       -       -       107,100  
Unearned compensation
    -       -       -       (92,192 )     -       -       (92,192 )
Fair Value unexercised stock options
    -       -       1,643       -       -       -       1,643  
 Balance at March 31, 2010
    2,135,466     $ 5,374,915     $ 7,482,454     $ 24,669,015     $ 2,156,748     $ (257,375 )   $ 39,425,757  
                                                         
 Balance at December 31, 2010
    2,135,466     $ 5,374,915     $ 7,379,891     $ 25,517,531     $ 1,917,011     $ (257,375 )   $ 39,931,974  
 Comprehensive Income:
                                                       
        Net income
    -       -       -       575,420       -       -       575,420  
       Other comprehensive
                                                       
          income (net of tax):
    -       -       -       -       -       -       -  
       Net change in unrealized gain/(loss)
                                                       
          on securities available for sale, net
                                                       
          of taxes of $(286,657)
    -       -       -       -       (481,861 )     -       (481,861 )
Total Comprehensive income
                                                    93,559  
Cash Dividend paid $0.18 per share
    -       -       -       (384,384 )     -       -       (384,384 )
Common stock issued
    7,000       17,500       84,000       -       -       -       101,500  
Unearned compensation
    -       -       (78,785 )     -       -       -       (78,785 )
Fair Value unexercised stock options
    -       -       562       -       -       -       562  
 Balance at March 31, 2011
    2,142,466     $ 5,392,415     $ 7,385,668     $ 25,708,568     $ 1,435,150     $ (257,375 )   $ 39,664,426  

 

 
BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31,
 
   
2011
   
2010
 
 CASH FLOWS FROM OPERATING ACTIVITIES
           
 Net income
  $ 575,420     $ 63,293  
 Adjustments to reconcile net income to net cash
               
 provided by (used in) operating activities:
               
 Deferred income taxes
    (302,008 )     (262,544 )
 Provision for loan losses
    750,000       1,099,996  
 Provision for depreciation
    153,444       195,258  
 Stock dividends received
    (800 )     (2,300 )
 (Gain)/loss on sale of other real estate
    -       (433,693 )
 (Gain)/loss on sale of mortgage loans
    (145,917 )     (28,973 )
 (Gain)/loss on sale of investment securities
    (666,993 )     (447,530 )
 Net amortization (accretion) of securities
    92,120       28,526  
 Amortization of deposit premium
    26,904       26,904  
 Writedown of other real estate
    -       780,168  
 Net change in:
               
     Loans held for sale
    3,359,810       675,474  
     Accrued interest receivable
    96,483       58,130  
     Cash surrender value of life insurance
    (9,713 )     (9,718 )
     Other assets
    404,728       38,462  
     Unearned compensation
    (78,784 )     (92,192 )
     Accrued interest payable
    (66,270 )     (103,496 )
     Accrued taxes and other liabilities
    (131,758 )     (129,085 )
                 
 Net cash provided by (used in) operating activities
    4,056,666       1,456,680  
                 
 CASH FLOWS FROM INVESTING ACTIVITIES
               
 (Increase)/decrease in federal funds sold
    112,497       18,958  
 Proceeds from sales, maturities and paydowns of securities:
               
 Available-for-sale
    16,404,907       17,768,745  
 Held-to-maturity
    4,532,850       1,782,163  
 Redemption of FHLB stock
    375,700       -  
 Purchase of FHLB stock
    (174,800 )     -  
 Purchase of securities:
               
 Available-for-sale
    (11,230,860 )     -  
 (Increase)/decrease in loans
    3,776,849       (2,668,393 )
 Proceeds from sale and transfers of other real estate
    -       438,693  
 Purchase of premises and equipment
    (58,195 )     (36,997 )
                 
 Net cash provided by (used in) investing activities
    13,738,948       17,303,169  
                 
 CASH FLOWS FROM FINANCING ACTIVITIES
               
 Increase /(decrease) in customer deposits
    15,612,792       867,365  
 Increase /(decrease) in brokered deposits
    11,911       (77,313 )
 Increase /(decrease) in securities sold under
               
 repurchase agreements
    555,653       975,941  
 Increase /(decrease) in FHLB advances
    (8,457,000 )     (24,325,565 )
 Increase /(decrease) in advances from borrowers
               
 for taxes and insurance
    (94,132 )     (111,016 )
 Cash dividends paid
    (384,384 )     (384,384 )
 Common stock issued
    101,500       107,100  
 Fair value of unexercised stock options
    562       1,643  
                 
 Net cash provided by (used in) financing activities
    7,346,902       (22,946,229 )
                 
 NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS
    25,142,516       (4,186,380 )
                 
 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD
    5,818,853       10,303,641  
                 
 CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 30,961,369     $ 6,117,261  
                 
                 
                 
                 
 SUPPLEMENTAL DISCLOSURES OF CASH FLOW
               
 INFORMATION:
               
                 
Cash paid during the period for interest
  $ 1,294,237     $ 1,594,053  
Cash paid/(refunds) during the period for income taxes
  $ -     $ (200,000 )
                 
 SCHEDULE OF NONCASH INVESTING AND
               
 FINANCING ACTIVITIES:
               
                 
 Change in unrealized gains (losses)
               
  on securities available for sale
  $ (768,518 )   $ (176,383 )
                 
 Change in the deferred tax effect in unrealized
               
  gains (losses) on securities available for sale
  $ (286,657 )   $ (65,791 )

 


 
 
 
 
 
 
 

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2011

Note A.  Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the "Company") as of December 31, 2010, has been derived from the audited financial statements of the Company for the year then ended.  The accompanying interim consolidated financial statements as of March 31, 2011, are unaudited and reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the Company’s financial position and operating results as of and for the periods presented.  Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

Note B.  Interest Rate Risk Management

On August 10, 2007, the Company’s wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), entered into a 5 year, no-call 2-year Structured Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase”) for $20 million.  Terms of the transaction call for the Bank to pay a fixed interest rate of 4.82%.  Effective July 20, 2010, the Company extended the term of this agreement for an additional three years.  The new agreement entered into is a 5 year, no-call 3 year Structured Repurchase Agreement with interest payments made quarterly on the 20th day of January, April, July and October, which commenced on October 20, 2010 and continue up to and including the maturity date.  Chase, in its discretion, may terminate the agreement on July 20, 2013, by notice to the Company two business days prior to such date.  In exchange for the extension of term, Chase lowered the interest rate to be paid from the original 4.82% to a fixed interest rate of 3.69%.  There is no interest rate cap embedded in the modified agreement.

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 interest rate of 4.71%.  In the first three years of the agreement, this 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 the term of this agreement, the Bank’s cost of funds cannot exceed the initial interest rate of 4.71%.  Chase, in its discretion, may terminate this agreement on the 13th of each February, May, August and November.
 
Under each of the above-described repurchase agreements, the Bank is required to maintain a margin percentage of 105% on the subject securities.  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.

Note C.  Investment Securities

The amortized cost of the Bank’s investment securities, including held-to-maturity and available-for-sale securities, at March 31, 2011 and December 31, 2010, are summarized below.

The amortized cost and approximate fair value of investment securities classified as available-for-sale at March 31, 2011, are summarized as follows:
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Obligations of State and
                       
Political Subdivisions
  $ 7,790,935     $ 135,659     $ (182,927 )   $ 7,743,667  
Obligations of Other U.S.
                               
       Government Sponsored Agencies
    24,514,525       9,622       (173,018 )     24,351,129  
Mortgage-Backed Securities
    57,345,772       2,588,207       (88,627 )     59,845,352  
 
                        Total
  $ 89,651,232     $ 2,733,488     $ (444,572 )   $ 91,940,148  
 
 
 

 
The amortized cost and approximate fair value of investment securities classified as available-for-sale at December 31, 2010, are summarized as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Obligations of State and
                       
Political Subdivisions
  $ 7,366,392     $ 95,289     $ (289,191 )   $ 7,172,490  
Mortgage-Backed Securities
    62,346,074       3,421,198       (60,622 )     65,706,650  
Obligations of Other U.S.
                               
Government Sponsored Agencies
    24,538,510       42,797       (152,037 )     24,429,270  
 
                        Total
  $ 94,250,976     $ 3,559,284     $ (501,850 )   $ 97,308,410  



The amortized cost and approximate fair value of investment securities classified as held-to-maturity at March 31, 2011, are summarized as follows:
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Obligations of State and
                       
Political Subdivisions
  $ 28,559,057     $ 808,564     $ (95,932 )   $ 29,271,689  
Mortgage-Backed Securities
    6,669,419       436,269       -       7,105,688  
 
                        Total
  $ 35,228,476     $ 1,244,833     $ (95,932 )   $ 36,377,377  

 
 
The amortized cost and approximate fair value of investment securities classified as held-to-maturity at December 31, 2010, are summarized as follows:
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Obligations of State and
                       
Political Subdivisions
  $ 31,747,346     $ 558,246     $ (200,170 )   $ 32,105,422  
Mortgage-Backed Securities
    8,013,410       490,931       -       8,504,341  
 
                        Total
  $ 39,760,756     $ 1,049,177     $ (200,170 )   $ 40,609,763  
 
 
 
 
There were no investment securities classified as trading at March 31, 2011 or December 31, 2010.

The aggregate fair value and aggregate unrealized losses on securities whose fair values are below book values as of March 31, 2011 and December 31, 2010, are summarized below.  Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.




As of March 31, 2011, there were eight securities included in held-to-maturity and twenty securities included in available-for-sale with fair values below book value.


   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Held-to-Maturity:
                                   
 Obligations of
                                   
State and Political
                                   
Subdivisions (8)
  $ 4,192,433     $ (78,573 )   $ 482,641     $ (17,359 )   $ 4,675,074     $ (95,932 )
 
Total
  $ 4,192,433     $ (78,573 )   $ 482,641     $ (17,359 )   $ 4,675,074     $ (95,932 )
Available for Sale:
                                               
 Obligations of
                                               
State and Political
Subdivisions (10)
  $ 599,328     $ (16,011 )   $ 2,740,893     $ (166,915 )   $ 3,340,221     $ (182,926 )
Obligations of Other U.S. Government Sponsored Agencies (7)
    17,830,820       (173,018 )     -       -       17,830,820       (173,018 )
Mortgage Backed Securities(3)
    6,976,750       (88,627 )     -       -       6,976,750       (88,627 )
 
Total
  $ 25,406,898     $ (277,656 )   $ 2,740,893     $ (166,915 )   $ 28,147,791     $ (444,571 )
 
 
 
As of December 31, 2010, there were twenty-one securities included in held-to-maturity and twenty-three securities included in available-for-sale with fair values below book value.
 
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
Held-to-Maturity:
                                   
 Obligations of
                                   
State and Political
                                   
Subdivisions (21)
  $ 8,828,777     $ (168,632 )   $ 468,462     $ (31,538 )   $ 9,297,239     $ (200,170 )
 
Total
  $ 8,828,777     $ (168,632 )   $ 468,462     $ (31,538 )   $ 9,297,239     $ (200,170 )
Available for Sale:
                                               
 Obligations of
                                               
State and Political
Subdivisions (12)
  $ 1,038,994     $ (19,365 )   $ 2,637,651     $ (269,826 )   $ 3,676,645     $ (289,191 )
Obligations of Other U.S. Government Sponsored Agencies (7)
    17,857,740       (152,037 )     -       -       17,857,740       (152,037 )
Mortgage Backed Securities(4)
    9,440,517       (60,622 )     -       -       9,440,517       (60,622 )
 
Total
  $ 28,337,251     $ (232,024 )   $ 2,637,651     $ (269,826 )   $ 30,974,902     $ (501,850 )
 
 
 
 
 
 
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 to hold these securities until maturity; the Company does not have the intent to sell, and more likely than not will not be required to sell, these securities prior to maturity.  Thus, the Company is not required to record any loss on the securities. However, asset/liability strategies may occasionally result in the Company adjusting the available-for-sale portfolio duration by selling securities in the portfolio.  The Company sold $10 million of its longer-term 30 year mortgage backed securities during the 1st quarter of 2011 and subsequently sold an additional $10 million of similar securities in April 2011.

Note D.  Loans and Allowance for Loan Losses
 
Management segregates the loan portfolio into portfolio segments.  Under applicable accounting rules, a loan portfolio segment is determined based on the level at which a bank develops and documents a systematic method for determining its allowance for loan losses.  The Bank’s portfolio segments are based on loan types and the underlying risk factors present in each loan type.  Such risk factors are periodically reviewed by management and revised as deemed appropriate.  The following tables set forth, as of March 31, 2011 and December 31, 2010, the balance of both the allowance for loan losses and all “financing receivables” (that is, the principal amount of all loans plus accrued and unpaid interest as of the applicable measurement date) by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually.  The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses.  The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type.  Such risk factors are periodically reviewed by management and revised as deemed appropriate.  The following tables set forth, as of March 31, 2011 and December 31, 2010, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually.  The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.



 
Allowance for loan Losses and Recorded Investment in Financing Receivables
For the Quarter Ended March 31, 2011

 
         
Commercial
                         
   
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Unallocated
   
Total
 
Allowance for loan losses:
                                   
                                     
Beginning balance
  $ 376,946     $ 1,470,692     $ 26,590     $ 505,515     $ 40,400     $ 2,420,143  
     Charge-offs
    (12,070 )     (14,419 )     (10,107 )     (76,882 )     -       (113,478 )
     Recoveries
    8,207       450       1,799       4,780       -       15,236  
     Provision
    91,413       219,844       4,730       149,213       284,800       750,000  
Ending balance
  $ 464,496     $ 1,676,567     $ 23,012     $ 582,626     $ 325,200     $ 3,071,901  
                                                 
Ending balance:  individually
                                               
evaluated for impairment
  $ 187,770     $ 1,094,001     $ -     $ 269,716     $ -     $ 1,551,487  
                                                 
Ending Balance: collectively
                                               
evaluated for impairment
  $ 276,726     $ 582,566     $ 23,012     $ 312,910     $ 325,200     $ 1,520,414  
                                                 
Ending Balance: loans acquired with
                                               
deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Financing receivables:
                                               
Ending balance
  $ 22,690,000     $ 107,658,000     $ 3,983,000     $ 75,219,000     $ -     $ 209,550,000  
                                                 
Ending balance: individually
                                               
evaluated for impairment
  $ 346,951     $ 7,247,300     $ 21,529     $ 1,624,928     $ -     $ 9,240,708  
                                                 
Ending balance: collectively
                                               
evaluated for impairment
  $ 22,343,049     $ 100,410,700     $ 3,961,471     $ 73,594,072     $ -     $ 200,309,292  
                                                 
Ending balance: loans acquired with
                                               
deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 

 


Allowance for loan Losses and Recorded Investment in Financing Receivables
For the Year Ended December 31, 2010

 
         
Commercial
                         
   
Commercial
   
Real Estate
   
Consumer
   
Residential
   
Unallocated
   
Total
 
Allowance for loan losses:
                                   
                                     
Beginning balance
  $ 631,065     $ 2,476,025     $ 161,172     $ 300,750     $ 309,726     $ 3,878,738  
     Charge-offs
    (523,284 )     (2,496,345 )     (24,381 )     (165,350 )     -       (3,209,360 )
     Recoveries
    48,477       6,336       4,427       16,521       -       75,761  
     Provision
    220,688       1,484,676       (114,628 )     353,594       (269,326 )     1,675,004  
Ending balance
  $ 376,946     $ 1,470,692     $ 26,590     $ 505,515     $ 40,400     $ 2,420,143  
                                                 
Ending balance:  individually
                                               
evaluated for impairment
  $ 131,663     $ 784,382     $ -     $ 139,819     $ -     $ 1,055,864  
                                                 
Ending Balance: collectively
                                               
evaluated for impairment
  $ 245,283     $ 686,310     $ 26,590     $ 365,696     $ 40,400     $ 1,364,279  
                                                 
Ending Balance: loans acquired with
                                               
deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
Financing receivables:
                                               
Ending balance
  $ 24,661,000     $ 108,856,000     $ 4,451,000     $ 78,671,000     $ -     $ 216,639,000  
                                                 
Ending balance: individually
                                               
evaluated for impairment
  $ 364,163     $ 6,862,175     $ 24,028     $ 259,406     $ -     $ 7,509,772  
                                                 
Ending balance: collectively
                                               
evaluated for impairment
  $ 24,296,837     $ 101,993,825     $ 4,426,972     $ 78,411,594     $ -     $ 209,129,228  
                                                 
Ending balance: loans acquired with
                                               
deteriorated credit quality
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 

 
 
Management divides the loan portfolio segments into classes, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

As of March 31, 2011 and December 31, 2010, loan balances outstanding more than 90 days and still accruing interest amounted to $82 thousand and $484 thousand, respectively.  As of March 31, 2011 and December 31, 2010, non-accrual loans were $9.2 million and $7.5 million, respectively.  The Bank considers all loans more than 90 days past due as non-performing loans.

The following tables present, by class, qualitative and quantitative information concerning the credit quality of financing receivables by credit quality indicators as of March 31, 2011 and December 31, 2010.
 
 

 
Credit Quality Indicators
As of March 31, 2011
 
   
Performing
   
Non-Performing
   
Total
 
Commercial
  $ 22,343,049     $ 346,951     $ 22,690,000  
Consumer
    3,961,472       21,528       3,983,000  
                         
Real Estate:
                       
     Construction and Development:
                       
           1-4 family residential
    13,181,000       -       13,181,000  
           Other construction loans
    16,687,218       911,782       17,599,000  
    Commercial Real Estate:
                       
            Owner occupied
    37,473,600       2,761,400       40,235,000  
            Non-owner occupied
    46,249,882       3,574,118       49,824,000  
    Residential:
                       
             1-4 family residential
    48,214,098       582,902       48,797,000  
             Multi-family
    12,117,414       1,123,586       13,241,000  
Total
  $ 200,227,733     $ 9,322,267     $ 209,550,000  
                         

Credit Quality Indicators
As of December 31, 2010
 
   
Performing
   
Non-Performing
   
Total
 
Commercial
  $ 24,296,837     $ 364,163     $ 24,661,000  
Consumer
    4,426,783       24,217       4,451,000  
                         
Real Estate:
                       
     Construction and Development:
                       
           1-4 family residential
    10,641,000       -       10,641,000  
           Other construction loans
    17,521,218       911,782       18,433,000  
    Commercial Real Estate:
                       
            Owner occupied
    37,311,142       2,777,858       40,089,000  
            Non-owner occupied
    46,759,883       3,574,117       50,334,000  
    Residential:
                       
             1-4 family residential
    54,622,211       341,789       54,964,000  
             Multi-family
    13,066,000       -       13,066,000  
Total
  $ 208,645,074     $ 7,993,926     $ 216,639,000  
 


The following tables present, by class, an analysis of the age of the recorded investment in financing receivables that are 30-89 days past due based on the Company’s review policy along with financing receivables past due 90 days or more and still accruing as of March 31, 2011 and December 31, 2010.
 
 
Aged Analysis of Past Due Financing Receivables
As of March 31, 2011
 
   
30-89 Days Past Due
   
Greater Than 90 Days Past Due
   
Total Past Due
   
Current Loans
   
Total Financing Recievable
   
Recorded Investment > 90 Days and Accruing
 
Commercial
  $ 2,167     $ 162,594     $ 164,761     $ 22,525,239     $ 22,690,000     $ -  
Consumer
    32,253       21,528       53,781       3,929,219       3,983,000       -  
                                                 
Real Estate:
                                               
     Construction & Development:
                                               
          1-4 Family Residential
    107,333       -       107,333       13,073,667       13,181,000       -  
          Other Construction Loan
    1,210,427       911,782       2,122,209       15,476,791       17,599,000       -  
    Commercial Real Estate:
                                               
          Owner Occupied
    -       413,481       413,481       39,821,519       40,235,000       -  
           Non-Owner Occupied
    1,544,678       3,574,117       5,118,795       44,705,205       49,824,000       -  
    Residential:
                                               
           1-4 Family Residential
    305,120       424,209       729,329       48,067,671       48,797,000       81,559  
           Multi-family
    113,836       1,123,586       1,237,422       12,003,578       13,241,000       -  
                              Total
  $ 3,315,814     $ 6,631,297     $ 9,947,111     $ 199,602,889     $ 209,550,000     $ 81,559  
                                                 
                                                 
 
 

 
 
 
Aged Analysis of Past Due Financing Receivables
As of December 31, 2010
 
   
30-89 Days Past Due
   
Greater Than 90 Days Past Due
   
Total Past Due
   
Current Loans
   
Total Financing Recievable
   
Recorded Investment > 90 Days and Accruing
 
Commercial
  $ 67,563     $ 188,594     $ 256,157     $ 24,404,843     $ 24,661,000     $ -  
Consumer
    52,579       24,217       76,796       4,374,204       4,451,000       189  
                                                 
Real Estate:
                                               
     Construction & Development:
                                               
          1-4 Family Residential
    833,395       -       833,395       9,807,605       10,641,000       -  
          Other Construction Loan
    190,430       911,782       1,102,212       17,330,788       18,433,000       483,965  
    Commercial Real Estate:
                                               
          Owner Occupied
    1,548,589       3,574,117       5,122,706       34,966,294       40,089,000       -  
           Non-Owner Occupied
    -       -       -       50,334,000       50,334,000       -  
    Residential:
                                               
           1-4 Family Residential
    700,210       140,467       840,677       54,123,323       54,964,000       -  
           Multi-family
    -       -       -       13,066,000       13,066,000       -  
                              Total
  $ 3,392,766     $ 4,839,177     $ 8,231,943     $ 208,407,057     $ 216,639,000     $ 484,154  
 
 
 
 
 
 
 
The following table presents, by class, information regarding the recorded investment in financing receivables that have been placed on non-accrual status as of March 31, 2011 and December 31, 2010.
 
 
Financing Receivables on Non-Accrual Status
For the Periods Ended
 
   
3/31/2011
   
12/31/2010
 
             
     Commercial
  $ 346,951     $ 364,163  
     Consumer
    21,528       24,028  
     Real Estate:
               
           Construction and Development:
               
                  1-4 Family Residential
    -       -  
                   Other Construction Loans
    911,782       427,817  
           Commercial Real Estate
               
                   Owner Occupied
    2,761,400       2,777,858  
                   Non-owner Occupied
    3,574,117       3,574,117  
           Residential
               
                   1-4 Family Residential
    501,344       341,789  
                   Multi-family
    1,123,586       -  
Total
  $ 9,240,708     $ 7,509,772  
                 
 
 
The following tables present, by class, for loans that meet the definition of an impaired loan in sections 310-10-35-16 and 310-10-35-17 of Accounting Standards Codification Topic 310, "Receivables," for the quarter ended March 31, 2011 and the year ended December 31, 2010, (1) the recorded investment in impaired loans for which there is a related allowance for credit loss, (2) the recorded investment in impaired loans for which there is not a related allowance for credit loss and (3) the total unpaid principal balance in the impaired loan.  Additionally, the table includes the average recorded investment in the impaired loan and the amount of interest income recognized using a cash basis method of accounting during the time within that period that the loans were impaired.
 
 

 
 
 
Impaired Loans
For Quarter Ended March 31, 2011
 
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance Recorded:
                             
     Commercial
  $ 9,677     $ 9,576     $ -     $ 10,980     $ -  
     Consumer
    24,407       23,693       -       25,235       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    837,032       1,040,782       -       832,914       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    1,411,822       1,293,109       -       1,406,167       -  
                Non-Owner Occupied
    -       -       -       -       -  
           Residential:
                                       
                1-4 Family Residential
    260,792       290,733       -       221,636       -  
                Multifamily
    -       -       -       -       -  
                                         
With Related Allowance Recorded:
                                       
     Commercial
    367,418       339,154       187,770       380,689       -  
     Consumer
    -       -       -       -       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    173,374       454,000       45,500       172,572       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    1,626,377       1,726,071       574,294       1,620,996       -  
                Non-Owner Occupied
    3,759,117       3,574,117       474,207       3,741,852       -  
           Residential:
                                       
                1-4 Family Residential
    314,045       323,988       87,630       314,633       -  
                Multifamily
    1,137,519       1,125,138       182,086       1,136,722       -  
                                         
Total
                                       
     Commercial
    377,095       348,730       187,770       391,669       -  
     Consumer
    24,407       23,693       -       25,235       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    1,010,406       1,494,782       45,500       1,005,486       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    3,038,199       3,019,180       574,294       3,027,163       -  
                Non-Owner Occupied
    3,759,117       3,574,117       474,207       3,741,852       -  
           Residential:
                                       
                1-4 Family Residential
    574,837       614,721       87,630       536,269       -  
                Multifamily
    1,137,519       1,125,138       182,086       1,136,722       -  
    $ 9,921,581     $ 10,200,361     $ 1,551,487     $ 9,864,396     $ -  
                                         
 
 

 
 
 
Impaired Loans
For Year Ended December 31, 2010

   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance Recorded:
                             
     Commercial
  $ -     $ -     $ -     $ -     $ -  
     Consumer
    26,370       -       -       26,498       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    330,703       556,817       -       590,120       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    1,398,337       1,273,530       -       1,302,045       21,113  
                Non-Owner Occupied
    -       -       -       -       -  
           Residential:
                                       
                1-4 Family Residential
    202,904       128,219       -       213,837       7,533  
                Multifamily
    -       -       -       -       -  
                                         
With Related Allowance Recorded:
                                       
     Commercial
    387,464       364,163       131,663       373,183       2,898  
     Consumer
    -       -       -       -       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    170,968       454,000       45,500       171,396       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    1,612,482       1,731,769       179,765       1,569,355       17,482  
                Non-Owner Occupied
    3,707,323       3,574,117       559,117       3,707,323       -  
           Residential:
                                       
                1-4 Family Residential
    203,813       192,467       139,819       222,159       2,504  
                Multifamily
    -       -       -       -       -  
                                         
Total
                                       
     Commercial
    387,464       364,163       131,663       373,183       2,898  
     Consumer
    26,370       -       -       26,498       -  
     Real Estate:
                                       
           Construction and Development:
                                       
                1-4 Family Residential
    -       -       -       -       -  
                Other Construction Loans
    501,671       1,010,817       45,500       761,516       -  
           Commercial Real Estate:
                                       
                Owner Occupied
    3,010,819       3,005,299       179,765       2,871,400       38,595  
                Non-Owner Occupied
    3,707,323       3,574,117       559,117       3,707,323       -  
           Residential:
                                       
                1-4 Family Residential
    406,717       320,686       139,819       435,996       10,037  
                Multifamily
    -       -       -       -       -  
    $ 8,040,364     $ 8,275,082     $ 1,055,864     $ 8,175,916     $ 51,530  
 
 


 
Note E.  Loans Held-for-Sale

The Company originates loans that will be sold in the secondary market and other loans that it plans to hold to maturity.  Loans to be held in the portfolio are classified as held to maturity at origination based on the Company’s intent and ability to hold until maturity.  These loans are reported at their outstanding balance.  Loans held for sale are designated as such at origination and locked in with an approved investor by obtaining a forward commitment to purchase the loan, usually not to exceed 30 days from closing.  Management has a clear intent to sell the loan based on the commitment it has obtained from the investor.  These loans are carried at the lower of cost or market value.

Loans held-for-sale primarily consist of 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 sold to protect earnings and equity from undesirable shifts in interest rates.  Unrealized losses on loans held-for-sale, if any, are charged against income in the period of decline.  Such declines are recorded in a valuation allowance account and deducted from the cost basis of the loans.  There were no such losses at March 31, 2011.  Gains and fees on loans held-for-sale are recognized when realized and amounted to $348 thousand for the three months ended March 31, 2011.  The Company held $2.7 million of loans-held-for-sale at March 31, 2011.

Loans held in the portfolio are periodically analyzed and compiled as to the individual characteristics of each loan.  If at any time a decision is made to sell any loan in the portfolio, such loan is reclassified as held-for-sale and carried at the lower of cost or market.

Note F.  Junior Subordinated Debentures

On March 26, 2003, the Company finalized its participation in FTN Financial Capital Market’s and Keefe, Bruyette & Woods’ pooled trust preferred offering.  The Company established Britton & Koontz Statutory Trust # 1 which issued 5,000 capital securities and 155 common securities with an aggregate liquidation amount of $5 million and $155 thousand, respectively.  The term of the capital securities and debentures is 30 years, callable after 5 years at the option of the Company.  The initial interest rate was 4.41%, adjusting quarterly at 3-Month LIBOR plus 3.15% and capped at 11.75%.  The interest rate at March 31, 2011, was 3.46%.   The securities are currently callable at the discretion of the Company on a quarterly basis.

Note G.  Loan Commitments

In the ordinary course of business, the Company enters into standby letters of credit and commitments to extend credit to its customers.  Letters of credit at March 31, 2011, and December 31, 2010, were $4.1 million and $4.4 million, respectively.  As of March 31, 2011, the Company had entered into commercial and residential loan commitments with certain customers that had an aggregate unused balance of $36.2 million, a decrease from $38.8 million at December 31, 2010.  Because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire, the balances on such commitments should not be used to project actual future liquidity requirements.  However, the Company does incorporate expectations about the level of draws under all credit-related commitments into its funds management process.

Note H.  Earnings per Share

Basic income per share amounts are computed by dividing net income by the weighted average number of common shares outstanding.  The computation of diluted income per share assumes the exercise of all outstanding securities potentially convertible into common stock, including options granted, unless the effect is anti-dilutive.  The effect will be anti-dilutive when the exercise price per share of an option exceeds the current market price for a share of Company stock.  The Company accounts for its options under the recognition and measurement of fair value provisions of Accounting Standards Codification (“ASC”) Topic 718, “Compensation—Stock Compensation.”  The Company uses the Black-Scholes method for valuing stock options.  The following information sets forth the computation of earnings per share for the three months ended March 31, 2011 and 2010.

 

 
 

 

   
For the three months ended
March 31,
 
   
2011
   
2010
 
Basic weighted average shares outstanding
    2,136,788       2,130,866  
Dilutive effect of granted options
    1,119       840  
Diluted weighted average shares outstanding
    2,137,907       2,131,706  
Net income
  $ 575,421     $ 63,293  
Net income per share-basic
  $ 0.27     $ 0.03  
Net income per share-diluted
  $ 0.27     $ 0.03  

Note I.  Fair Value

Fair Value Disclosures

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation.  Fair value is based on the assumptions market participants would use when pricing the asset or liability.  A fair value hierarchy has been established that prioritizes the inputs used to develop those assumptions and measure fair value.  The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs.  The three levels of inputs used to measure fair value are as follows:

·  
Level 1 - Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

·  
Level 2 - Includes observable inputs.  Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

·  
Level 3 - Includes unobservable inputs and should be used only when observable inputs are unavailable.

Since the assumptions used in measuring fair value significantly affect fair value measurements, the fair value estimates may not be realized in an immediate settlement of the instrument.  In addition, in accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments - For short-term instruments, including federal funds sold, the carrying amount is a reasonable estimate of fair value.

Securities - Fair value of securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  Investment securities also include equity securities that are not traded in an active market.  The fair value of these securities equals their carrying value.

Loans - The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for simi­lar loans to borrowers with similar credit ratings.  Loans with similar classifications are aggregated for purposes of the calculations.  The allowance for loan losses, which was used to measure the credit risk, is subtracted from the fair value of the loans.

Cash Surrender Value of Life Insurance – The fair value approximates its carrying value which is based on cash surrender values indicated by insurance companies.
 
 
 
 
 
 
Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar maturities.

Securities Sold Under Repurchase Agreements – The fair value approximates its carrying value.
 
Junior Subordinated Debt – Due to short-term variable repricing, the fair value approximates its carrying value
Commitments to Extend Credit and Standby Letters of Credit - The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The estimated approximate fair values of the Company's financial in­struments as of March 31, 2011 and December 31, 2010 are as follows:

   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
         
(dollars in Thousands)
       
Financial Assets:
                       
Cash and due from banks
  $ 30,961     $ 30,961     $ 5,819     $ 5,819  
Federal funds sold
    -       -       112       112  
Investment securities:
                               
   Held-to-maturity
    35,228       36,377       39,761       40,610  
   Available-for-sale
    91,940       91,940       97,308       97,308  
   Equity securities
    1,635       1,635       1,835       1,835  
Cash surrender value of life insurance
    1,155       1,155       1,145       1,145  
Loans, net
    206,478       210,510       214,219       218,739  
                                 
Financial Liabilities:
                               
Deposits
    274,167       274,766       258,543       259,192  
Short-term borrowings
    -       -       8,457       8,456  
Long-term borrowings
    9,000       9,346       9,000       9,368  
Securities sold under
                               
   repurchase agreements:
                               
Retail
    11,922       11,920       11,366       11,364  
Structured
    40,000       43,120       40,000       43,506  
Junior subordinated debentures
    5,155       5,155       5,155       5,155  
                                 



Recurring Basis

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service.  This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

The following table presents the balance of assets measured on a recurring basis as of March 31, 2011 and December 31, 2010.  As of those dates, the Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.
 
 
 
 

 
 
Description
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
March 31, 2011:
                       
Mortgage Backed Securities
  $ 59,845,352     $ 0.00     $ 59,845,352     $ 0.00  
Obligation of State and Political Subdivision
    7,743,666       0.00       7,743,666       0.00  
Obligations of Other U.S. Government Sponsored Agencies
    24,351,130       0.00       24,351,130       0.00  
Total
  $ 91,940,148     $ 0.00     $ 91,940,148     $ 0.00  
 
December 31, 2010:
                               
Mortgage Backed Securities
  $ 65,706,650     $ 0.00     $ 65,706,650     $ 0.00  
Obligation of State and Political Subdivision
    7,172,490       0.00       7,172,490       0.00  
Obligations of Other U.S. Government Sponsored Agencies
    24,429,270       0.00       24,429,270       0.00  
Total
  $ 97,308,410     $ 0.00     $ 97,308,410     $ 0.00  



Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement dates in the table below.  As of such measurement dates, the Company did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.

The fair value of impaired loans is measured at the fair value of the collateral for collateral-dependent loans.   Impaired loans are Level 2 assets measured using recent appraisals from external parties of the collateral less any prior liens.  Repossessed assets are initially recorded at fair value less estimated costs to sell.  The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available.  As such, the Company records repossessed assets as Level 2.

The following table presents the balance of assets measured on a non-recurring basis as of March 31, 2011 and December 31, 2010.


 
 

 

Description
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
 
March 31, 2011:
                       
Assets:
                       
Impaired Loans
  $ 7,689,221     $ 0.00     $ 7,689,221     $ 0.00  
Repossessed Assets
    3,303,189       0.00       3,303,189       0.00  
Total
  $ 10,992,410     $ 0.00     $ 10,992,410     $ 0.00  
                                 
 
December 31, 2010:
                               
Assets:
                               
Impaired Loans
  $ 6,453,908     $ 0.00     $ 6,453,908     $ 0.00  
Repossessed Assets
    3,303,189       0.00       3,303,189       0.00  
Total
  $ 9,757,097     $ 0.00     $ 9,757,097     $ 0.00  
                                 
 
 
Note J. Subsequent Events

The Company evaluated events and transactions occurring subsequent to March 31, 2011 for potential recognition or disclosure in the financial statements included in this quarterly report.  The Company has concluded that no significant events occurred after March 31, 2011, but prior to the issuance of these financial statements that would have a material impact on its financial statements.
 
 
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This discussion is intended to present a review of the major factors affecting the financial condition of Britton & Koontz Capital Corporation (the “Company”) and its wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), as of March 31, 2011, as compared to the Company’s financial condition as of December 31, 2010, and the results of operations of the Company for the three-month period ended March 31, 2011, as compared to the corresponding period in 2010.

Summary

Net income and earnings per diluted share for the three months ended March 31, 2011, was $575 thousand and $.27 per diluted share, respectively, compared to $63 thousand and $.03 per diluted share for the quarter ended March 31, 2010.  The increase in earnings in the 1st quarter of 2011 as compared to the same period in 2010 is due to several factors.  During the 1st quarter of 2011, the Company’s provision for loan losses declined $350 thousand from $1.1 million to $750 thousand while gains on sales of investment securities increased $219 thousand during the same period.  Additionally, this year’s 1st quarter improved due to a $306 thousand charge to expenses during the 1st quarter of 2010 related to the provision for possible uncollectible loan and late fees receivable.  Finally, net interest income during the 1st quarter of 2011 decreased $308 thousand compared to the same period in 2010.

Assets increased $6.6 million during the 1st quarter of 2011 to $382.0 million due primarily to the increase of $25.1 million in Federal Reserve cash balances offset by lower investment securities and loans.  At March 31, 2011, investment securities of $128.8 million were down due to sales of $10 million and normal pay-downs while net loan balances of $206.5 million declined due to lower loans held for sale and the general slowdown in all Company markets.  Total deposits increased $15.6 million to $274.2 million at March 31, 2011 from $258.5 million at December 31, 2010, while total borrowings declined $7.9 million to $60.9 million.  Total stockholders’ equity decreased $268 thousand to $39.7 million at March 31, 2011, from $39.9 million at December 31, 2010.

The provision for loan losses for the three month period ending March 31, 2011, was decreased to $750 thousand, compared to $1.1 million during the same period in 2010.  Net charge-offs decreased during the 1st quarter of 2011 to $98 thousand compared to $1.8 million during the same period in 2010.  Total non-performing assets ended the 1st quarter of 2011 at $12.6 million compared to $11.3 million at December 31, 2010.
 
While non-performing assets have increased since the beginning of 2011, management remains confident that certain existing problem assets will be resolved during 2011.  However, even with these resolutions, management continues to remain cautious and is still uncertain as to whether the Company’s local markets have stabilized.  Therefore, unexpected asset quality issues may still arise.  Management continues its efforts to identify and resolve problem credits as quickly as possible.
 
 
Financial Condition
 
Loans

Total loans decreased $7.1 million to $209.5 million at March 31, 2011, from $216.6 million at December 31, 2010, due to lower commercial real estate activity and sales of the 1-4 family residential portfolio and decreases in loans held for sale at March 31, 2011.  Further declines are expected to occur in the Company’s commercial and residential real estate portfolio through the remainder of 2011.  The depressed economic conditions affecting the United States generally have weakened demand in all Company markets.  The Company’s decision to expand its mortgage operations by hiring new loan originators in 2009 has resulted in increased originations and sales of 1-4 family residential loans in the secondary market.  The Company sold approximately $46 million of 1-4 family residential loans in 2010 and $12.9 million of such loans in the 1st quarter of 2011.  The decision to sell loans in the secondary market instead of holding them in the portfolio, coupled with the lack of market demand for new loans using these proceeds, has contributed to the decline in total loans.  The following table presents the Company's loan portfolio composition at March 31, 2011, and December 31, 2010.

 
 
 

 
COMPOSITION OF LOAN PORTFOLIO
   
03/31/11
   
12/31/10
 
Commercial, financial & agricultural
  $ 22,690,000     $ 24,661,000  
Real estate-construction
    30,780,000       29,074,000  
Real estate-residential
    62,036,000       68,030,000  
Real estate-other
    90,059,000       90,423,000  
Installment
    3,863,000       4,204,000  
Other
    122,000       247,000  
Total loans
  $ 209,550,000     $ 216,639,000  

The Company’s loan portfolio at March 31, 2011, had no significant concentrations of loans other than in the categories presented in the table above.

Investment Securities

The Company’s investment portfolio at March 31, 2011, consisted of mortgage-backed, agency and municipal securities.  Investment securities that are classified as held-to-maturity (“HTM”) are accounted for by the amortized cost method while securities in the available-for-sale (“AFS”) category are accounted for at fair value.  Changes in value of the AFS securities are recorded in the equity section of the balance sheet in “accumulated other comprehensive income.”
 
 
Management determines the classification of its securities at acquisition.  Total HTM and AFS investment securities decreased $9.9 million to $127.2 million at March 31, 2011 from $137.1 million at December 31, 2010.  The decrease is due to the sale of $10 million of AFS securities during the 1st quarter 2011 in order to shorten the portfolio’s average life with the proceeds being held as cash or used to pay down debt rather than being reinvested in the market.  Equity securities declined during this period $200 thousand to $1.6 million   At March 31, 2011, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, Federal Home Loan Bank ("FHLB") stock of $811 thousand, ECD Investments, LLC (“ECD”) membership interests of $100 thousand and the Company’s $155 thousand investment in B&K Statutory Trust.

Bank Premises

There have been no material changes in the Company’s premises since December 31, 2010.

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 collectability of interest and principal.

Several key measures are used to evaluate and monitor the Company’s asset quality.  These measures include the levels and percentages of total nonperforming assets, loan delinquencies, non-accrual loans, foreclosed assets and charge-offs.  Nonperforming assets, including non-accrual loans of $9.3 million, other real estate of $3.3 million and loans 90 days or more delinquent of $82 thousand, increased $1.3 million to $12.6 million at March 31, 2011, from $11.3 million at December 31, 2010.  The increase is due primarily to one commercial credit in the amount of $1.1 million that was classified as nonaccrual in the 1st quarter of 2011.  Nonperforming loans as a percent of total loans, net of unearned income and loans held for sale ("LHFS"), increased to 4.51% at March 31, 2011, compared to 3.80% at December 31, 2010.  Net charge-offs during the 1st quarter of 2011 decreased to $98 thousand compared to $519 thousand during the 4th quarter of 2010 and $1.8 million during the 1st quarter of 2010.  Notwithstanding increases in the Company's nonperforming assets, management believes that the Company’s asset quality as of March 31, 2011, is equal to or exceeds industry and peer levels as was the case at December 31, 2010, based on Federal Deposition Insurance Corporation (“FDIC”) year-end call report data.
 
 
 

 
A breakdown of nonperforming assets at March 31, 2011, and December 31, 2010, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

   
03/31/11
   
12/31/10
 
   
(dollars in thousands)
 
Non-accrual loans by type:
           
Real estate
  $ 8,872     $ 7,122  
Installment
    22       24  
Commercial and all other loans
    347       364  
Total non-accrual loans
    9,241       7,510  
Loans past due 90 days or more
    81       484  
Total nonperforming loans
    9,322       7,994  
Other real estate owned (net)
    3,303       3,303  
Total nonperforming assets
  $ 12,625     $ 11,297  
Nonperforming loans to total loans, net of LHFS
    4.51 %     3.80 %
Nonperforming loans to total assets
    2.44 %     2.13 %
Nonperforming assets to total loans, net of LHFS
    6.10 %     5.37 %
Nonperforming assets to total assets
    3.31 %     3.01 %

Allowance for Loan Losses

The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses.  The balance of the loans determined to be impaired under Accounting Standards Codification Topic 310, “Receivables,” and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance is sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. Additionally, the estimate of the allowance required to absorb credit losses in the entire portfolio may change due to shifts in the mix and level of loan balances outstanding and in prevailing economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates and energy costs. While no one factor is dominant, each could cause actual loan losses to differ materially from originally estimated amounts.
 
For portfolio balances of consumer, consumer mortgage and certain other similar loan types, allowance factors are determined based on historical loss ratios by portfolio and may be adjusted by other qualitative criteria. For larger commercial and commercial real estate secured loans, risk-rating grades are assigned by lending, credit administration or loan review personnel, based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consideration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but which may not be fully reflected in our historical loss ratios.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for problem loans primarily of $50,000 or greater by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  For real estate collateral, the fair market value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser of the underlying collateral.
 
 
 
 
Based upon this evaluation, management believes the allowance for loan losses of $3.1 million at March 31, 2011, which represents 1.49% of gross loans less unearned interest and LHFS, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans.  At December 31, 2010, the allowance for loan loss was $2.4 million, or 1.15% of gross loans less unearned interest and LHFS.  The allowance includes a specific allocation of approximately $1.6 million on total impaired loans of $9.3 million.

The process by which management determines the appropriate level of the allowance, and the corresponding provision for probable credit losses, involves considerable judgment; therefore, no assurance can be given that future losses will not vary from current estimates.

Provision for Loan Losses

The provision for loan losses is a charge to earnings to maintain the allowance 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.  The Company decreased the provision by $350 thousand to $750 thousand for the 1st quarter of 2011 compared to $1.1 million during the 1st quarter of 2010 primarily due to lower net charge-offs during the 1st quarter of 2011 of $98 thousand from $1.8 million during the 1st quarter of 2010.

The Company regularly reviews the allowance account in an effort to maintain it at an adequate level and collects necessary data to make a proper provision expense to earnings.  However, factors may come to light during the remainder of the 2nd quarter that may influence management to change its expected provision.  The following table details the allowance activity for the three months ended March 31, 2011 and 2010:

ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

   
03/31/11
   
03/31/10
 
   
(dollars in thousands)
 
Balance at beginning of period
  $ 2,420     $ 3,878  
Charge-offs:
               
Real Estate
    (91 )     (1,822 )
Commercial
    (12 )     (10 )
Installment and other
    (10 )     (11 )
Recoveries:
               
Real Estate
    5       4  
Commercial
    8       5  
Installment and other
    2       1  
Net (charge-offs)/recoveries
    (98 )     (1,833 )
Provision charged to operations
    750       1,100  
Balance at end of period
  $ 3,072     $ 3,145  
Allowance for loan losses as a percent of loans, net of unearned interest and LHFS
    1.49 %     1.42 %
Net charge-offs as a percent of average loans1
    .05 %     .82 %
Net charge-offs as a percent of average loans2
    .66 %     1.62 %


1. Net charge-offs are year to date
2. Net charge-offs are trailing twelve months

 
 
 

Potential Problem Loans

At March 31, 2011, the Company had no loans, other than those balances incorporated in the above tables, which management had significant doubts as to the ability of the borrower to comply with current repayment terms.

Deposits
 
 
Total deposits increased $15.7 million from $258.5 million at December 31, 2010, to $274.2 million at March 31, 2011.  The increase is due primarily to higher non-interest bearing demand deposits, the Company’s rewards checking and local school deposits.

The composition of the Company’s deposits is described in the following table.

COMPOSITION OF DEPOSITS
   
03/31/11
   
12/31/10
 
Non-Interest Bearing
  $ 49,320,424     $ 45,634,123  
NOW Accounts
    80,405,802       66,650,551  
Money Market Deposit Accounts
    35,513,052       36,140,259  
Savings Accounts
    20,175,073       19,098,255  
Certificates of Deposit
    88,752,883       91,019,342  
Total Deposits
  $ 274,167,234     $ 258,542,530  

Borrowings

Total Company borrowings, including FHLB advances, federal funds purchased, customer and structured repurchase agreements and junior subordinated debentures, decreased $7.9 million to $60.9 million at March 31, 2011, compared to $68.8 million at December 31, 2010.  The decrease in borrowed funds is due primarily to the decline in the investment portfolio from sales of securities: sales proceeds, along with monthly cash flows from investment securities, have been used to pay down debt rather than be re-invested back into the market.  The Company includes in these borrowings balances that the Company has pursuant to agreements with local depositors to sweep overnight funds from their commercial deposit accounts.  Because of the nature of the agreements, these sweep accounts are included as borrowings rather than local customer deposits; these amounts are classified as repurchase agreements and included under the “Securities sold under repurchase agreements” line item on the Company’s balance sheet.  Management believes these accounts perform more like a core deposit rather than a bank obligation.

Capital

Stockholders' equity totaled $39.7 million at March 31, 2011, compared to $39.9 million at December 31, 2010.  Earnings of $575 thousand were primarily offset by a $482 thousand change in unrealized losses in the AFS investment portfolio and by $384 thousand in dividends paid.

The Company and Bank maintained a total capital to risk weighted assets ratio of 18.28% and 17.21%, respectively, a Tier 1 capital to risk weighted assets ratio of 17.06% and 15.99%, respectively, and a leverage ratio of 11.36% and 10.78%, respectively, at March 31, 2011.  These levels substantially exceed the minimum requirements of bank regulatory agencies for well-capitalized institutions of 10.00%, 6.00% and 5.00%, respectively.  Components of comprehensive income are excluded from the calculation of capital ratios.  The ratio of shareholders' equity to assets decreased to 10.4% at March 31, 2011, compared to 10.6% at December 31, 2010, due to the increase in total assets.

Off-Balance Sheet Arrangements

There have been no material changes in the Company’s off-balance sheet arrangements during the three months ended March 31, 2011.  See Note B and Note G to the Company’s consolidated financial statements for a description of the Company’s off-balance sheet arrangements.
 
 

 

 
Results of Operations

Net Interest Income and Net Interest Margin

One of the largest components of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds.  The net interest margin is net interest income expressed as a percentage of average earning assets.

Net interest income ended March 31, 2011, at $3.1 million compared to $3.4 million at March 31, 2010.  This decline was due primarily to lower average earning assets, offset slightly by lower funding costs of interest bearing liabilities.  Contributing to the lower average earning assets was a $13.3 million decrease in average loans coupled with a small decline in average investment securities offset by increases in average interest bearing cash balances.  Net interest margin declined from 3.74% at March 31, 2010, to 3.44% at March 31, 2011, due to the drop in net interest income.

Non-Interest Income/ Non-Interest Expense

Non-interest income ended March 31, 2011, at $1.5 million compared to $1.1 million at March 31, 2010. A total of approximately $11 million of mortgage-backed securities was sold in both quarters, and gains on such sales in the first quarter of 2011 exceeded gains in the corresponding period in 2010 by $219 thousand.  The expansion of the Company’s mortgage department contributed an additional $186 thousand in income from the sale of mortgage loans.  Non-interest expense decreased $393 thousand as compared to the 1st quarter of 2010 and ended the 1st quarter of 2011 at $3.1 million.  The decrease is primarily due to approximately $300 thousand charge to expense in the 1st quarter of 2010 related to the charge-off of loan and late fees receivable, located in the  “Other” line item in the Other Expenses section of the income statement.  Additionally, the expanded mortgage operations added approximately $96 thousand to personnel costs.  Other non-interest expense items were relatively stable.

 Income Taxes

The Company recorded income tax expense of $148 thousand for the three months ended March 31, 2011, compared to income tax credit of $184 thousand for the same period in 2010.  The tax credit arose primarily due to the tax effects resulting from the $1.1 million in the provision for loan losses in the 1st quarter of 2010.

Liquidity and Capital Resources

The Company utilizes a funds management process to assist management in maintaining net interest income during times of rising or falling interest rates and in maintaining sufficient liquidity.  Principal sources of liquidity for the Company are asset cash flows, customer deposits and the ability to borrow against investment securities and loans.  Secondary sources of liquidity include the sale of investment and loan assets.   All components of liquidity are reviewed and analyzed on a monthly basis.

The Company has established a liquidity contingency plan to guide the Bank in the event of a liquidity crisis.  The plan describes the normal operating environment, prioritizes funding options and outlines management responsibilities and board notification procedures.  As more emphasis has been directed to liquidity needs, the Company has enhanced its contingency plan to include stress levels, heightened reporting and monitoring along with testing to better understand and report its liquidity position and needs.
 
 

 
The Company’s cash and cash equivalents increased $25.1 million to $30.9 million at March 31, 2011, from $5.9 million at December 31, 2010.  Cash was provided by operating, investing and financing activities during the 1st quarter of 2011 in the amounts of $4.0 million and $13.7 million and $7.3 million, respectively.

At March 31, 2011, the Company had unsecured federal funds lines with correspondent banks of $36 million and a $19 million federal funds line of credit through its association with the Certificate of Deposit Account Registry System.  The Company maintains the ability to draw on its available line of credit with the FHLB in the amount of approximately $67 million.  In addition to these lines of credit, the Bank had approximately $49 million in liquid assets including unencumbered investment securities available for collateralized borrowing of $25 million, and cash available at the Federal Reserve Bank of $24 million.   Enhancing these liquidity levels, the Company has the ability to add $34 million from the brokered CD market.  Taken together, the total liquidity available to the Company after adjusting to account for market volatility, without affecting its well-capitalized status is approximately $189 million.  Management believes that overall liquidity measures, as outlined above,   indicate that the Company has adequate resources to fund foreseeable asset growth or to meet unanticipated deposit fluctuations or other immediate cash needs.

Certain restrictions exist on the ability of the Bank to transfer funds to the Company in the form of dividends and loans.  These restrictions are described in detail in Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” and incorporated by reference herein.  These restrictions have not had, and are not expected in the future to have, a material impact on the Company’s ability to meet its anticipated cash obligations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties, which could cause the actual results to differ materially from the Company’s expectations.  Forward-looking statements have been and will be made in written documents and oral presentations of the Company.  Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management.  When used in the Company’s documents (including this Report) or oral presentations, the words “anticipate,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “goal” and similar expressions are intended to identify forward-looking statements.  In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company’s actual results to differ materially from those contemplated in any forward-looking statements include, among others, increased competition, regulatory factors, economic conditions, changing market conditions, availability or cost of capital, employee workforce factors, costs and other effects of legal and administrative proceedings, and changes in federal, state or local legislative requirements.  The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions or other factors affecting such statements.

Item 3.               Quantitative and Qualitative Disclosures about Market Risk 

No disclosure is required hereunder as the Company is a “smaller reporting company,” as defined in Item 10(f) (1) of Regulation S-K.

Item 4.               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 March 31, 2010.  Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective for ensuring that information that the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
 
 
 
There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II.  OTHER INFORMATION

Item 2.               Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s ability to pay dividends to its shareholders is substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances.  Federal law imposes limitations on the payment of dividends by national banks.  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 to the Company is also limited by prudence, statutory and regulatory guidelines and a variety of other factors. At March 31, 2011, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $2.2 million.

Certain restrictions also exist on the ability of the Bank to transfer 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 March 31, 2011, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $2.5 million.  There were no loans outstanding from the Bank to the Company at March 31, 2011.

Item 6.               Exhibits

Exhibit
 
Description of Exhibit
     
3.1
*
Amended and Restated Articles of Incorporation of Britton & Koontz Capital Corporation, incorporated by reference to Exhibit 3.01 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“Commission”) on February 20, 2009.
     
3.2
*
By-Laws of Britton & Koontz Capital Corporation, as amended, incorporated by reference to Exhibit 3.2 to Company’s Current Report on Form 8-K filed with the Commission on October 22, 2008.
     
4.1
*
Shareholder Rights Agreement dated June 1, 1996 between Britton & Koontz Capital Corporation and Britton & Koontz First National Bank, as Rights Agent, incorporated by reference to Exhibit 4.3 to Company’s Registration Statement on Form S-8, Registration No. 333-20631, filed with the Commission on January 29, 1997, as amended by Amendment No. 1 to Rights Agreement dated as of August 15, 2006, incorporated by reference to Exhibit 4.2 to Company’s Current Report on Form 8-K filed with the Commission on August 17, 2006.
     
 
     
 
     
 
     
 


*
As indicated in the column entitled “Description of Exhibits” this exhibit is incorporated by reference to another filing or document.
 
 


SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


BRITTON & KOONTZ CAPITAL CORPORATION




Date:          May 5, 2011                                                       /s/ W. Page Ogden
W. Page Ogden
Chief Executive Officer




Date:          May 5, 2011                                                       /s/ William M. Salters
William M. Salters
Chief Financial Officer







 


EXHIBIT INDEX