NATCHEZ — Britton & Koontz Capital Corporation has re-evaluated its potential exposure with respect to two impaired commercial loans in its Mississippi market and has increased the allowance for loan loss by $1 million. The company determined that the provision expense necessary to increase the allowance should be charged to the company’s fourth quarter earnings.
As a result, the company’s earnings for the 12 months were $1.6 million, while the company experienced a loss of $58,000 for the three months. These amounts reflect a downward revision from earnings of $569,000 and $2.3 million for the three and 12 months that the company reported Jan. 25.
As noted above, the additional provision expense is associated with two commercial loans which are secured by commercial real estate. Both of these loans were identified as impaired at Dec. 31, 2009; however, based upon additional information available, the company increased the level of impairment on each loan from a partial to total impairment. For one of the loans, Britton & Koontz Bank, N.A., foreclosed on the commercial real estate securing the loan in January. Upon gaining access to the property, the bank discovered that substantial damage and theft had occurred sometime during the weeks of the foreclosure proceedings. The company believes such damage and theft is covered by insurance, and an insurance claim has been filed in connection with the loss (as well as a police report). At this time, though, the company cannot be sure whether it will fully recover the previously estimated fair value of the collateral.
With respect to the other loan, the loan was classified as partially impaired at Dec. 31, 2009, on the basis of alleged borrower fraud relating to the borrower’s title to the commercial real estate securing the loan. The company demanded payment under the loan’s title insurance policy and brought suit against the title insurer in Dec. 2009. Since the end of 2009, the increasing likelihood of delays in resolving the company’s lawsuit has prompted the company to increase its partial reserve allocation to a full reserve.
The additional reserves required with respect to these two commercial loans have increased by a total of $1 million to the company’s provision expense for the fourth quarter of 2009. In the absence of negotiated settlements of the company’s claims with the insurance companies, charge-off of some or all of the identified credit exposures on the two credits, equal to approximately $1.5 million, may be necessary at the end of the first quarter of 2010. The company’s revised allowance for loan loss will be $3.9 million, or 1.73 percent of loans at Dec. 31, 2009, compared to $2.9 million, or 1.29 percent, of loans reported in the company’s Jan. 25 earnings release.