Britton & Koontz Capital (BKBK) 10-Q 2007 Q2 Quarterly report

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, 2007

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 is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

o Large accelerated filer o Accelerated filer x Non-accelerated filer

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:

2,117,966 Shares of Common Stock, Par Value $2.50, were outstanding as of May 1, 2007.

BRITTON & KOONTZ CAPITAL CORPORATION

AND SUBSIDIARIES

INDEX

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACTOF 2002

CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACTOF 2002

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS REQUIRED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION OF CHIEF FINANCIAL OFFICER AS REQUIRED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

PART IFINANCIAL INFORMATION

Item 1.Financial Statements

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FOR THE PERIODS ENDED
A S S E T S
	March 31,		December 31,
ASSETS:	2007		2006
Cash and due from banks:
Non-interest bearing	$	7,658,409	$	6,254,363
Interest bearing		880,275		317,799
Total cash and due from banks		8,538,684		6,572,163
Federal funds sold		124,073		304,569
Investment Securities:
Trading (amortized cost, in 2007 and 2006,
of $19,924,723 and $0, respectively)		19,358,005		-
Available-for-sale (amortized cost, in 2007 and 2006,
of $45,031,728 and $65,580,510, respectively)		44,521,233		64,419,428
Held-to-maturity (market value, in 2007 and 2006,
of $39,437,941 and $39,525,495, respectively)		38,719,915		38,610,920
Equity securities		4,386,900		4,339,700
Loans, less unearned income of $21 in 2007 and
$122 in 2006, and allowance for loan losses of
$2,322,640 in 2007 and $2,344,434 in 2006		238,074,101		241,190,049
Loans held for sale		115,606		54,810
Bank premises and equipment, net		7,703,048		7,719,278
Other real estate, net		1,044,352		1,256,611
Accrued interest receivable		2,402,790		2,437,387
Cash surrender value of life insurance		986,544		973,212
Deposit Premium		746,370		773,275
Other assets		1,121,108		666,839
TOTAL ASSETS	$	367,842,729	$	369,318,241

LIABILITIES AND STOCKHOLDERS' EQUITY
	March 31,			December 31,
LIABILITIES:	2007			2006
Deposits
Non-interest bearing	$	51,679,173		$	50,345,279
Interest bearing		214,523,798			203,411,996
Total deposits		266,202,971			253,757,275
Federal Home Loan Bank advances		51,619,348			65,667,972
Securities sold under repurchase agreements		7,594,833			8,149,016
Accrued interest payable		2,132,618			1,786,288
Advances from borrowers for taxes and insurance		215,100			401,678
Accrued taxes and other liabilities		897,029			804,124
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		333,816,899			335,721,353
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share;
12,000,000 shares authorized; 2,131,586 and 2,130,816 issued;
2,117,966 outstanding for March 31, 2007, and 2,117,966
outstanding for December 31, 2006		5,331,165			5,331,165
Additional paid-in capital		7,296,669			7,295,235
Retained earnings		21,636,965			22,003,063
Accumulated other comprehensive income		18,406			(775,200	)
		34,283,205			33,854,263
Cost of 14,500 shares of common stock held by the company		(257,375	)		(257,375	)
Total stockholders' equity		34,025,830			33,596,888
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	367,842,729		$	369,318,241

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended
	March 31,
	2007			2006
INTEREST INCOME:
Interest and fees on loans	$	4,776,965		$	4,338,445
Interest on investment securities:
Taxable interest income		812,168			957,632
Exempt from federal taxes		414,730			408,574
Interest on federal funds sold		3,244			12,021
Total interest income		6,007,107			5,716,672
INTEREST EXPENSE:
Interest on deposits		1,846,895			1,440,148
Interest on Federal Home Loan Bank advances		707,083			716,945
Interest on trust preferred securities		106,429			99,218
Interest on securities sold under repurchase agreements		85,151			80,428
Total interest expense		2,745,558			2,336,739
NET INTEREST INCOME		3,261,549			3,379,933
Provision for loan losses		80,000			60,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		3,181,549			3,319,933
OTHER INCOME:
Service charges on deposit accounts		394,197			327,348
Income from fiduciary activities		999			9,358
Income from investment activities		80,317			20,774
Insurance premiums and commissions		50			-
Gain/(loss) on sale of mortgage loans		49,623			85,148
Gain/(loss) on sale of securities		(468,407	)		-
Gain/(loss) on sale of other assets		-			(400	)
Other		140,908			169,155
Total other income		197,687			611,383

OTHER EXPENSES:
Salaries		1,268,785		1,271,667
Employee benefits		188,507		191,451
Director fees		44,800		47,345
Net occupancy expense		235,950		223,218
Equipment expenses		283,287		263,885
FDIC assessment		7,799		7,906
Advertising		42,894		54,457
Stationery and supplies		41,699		45,742
Audit expense		63,127		45,481
Other real estate expense		179,203		26,389
Amortization of deposit premium		26,904		26,904
Other		535,790		484,854
Total other expenses		2,918,745		2,689,299
INCOME BEFORE INCOME TAX EXPENSE		460,491		1,242,017
Income tax expense		33,366		316,625
NET INCOME	$	427,125	$	925,392
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.20	$	0.44
Basic weighted shares outstanding		2,117,966		2,116,811
Diluted earnings per share	$	0.20	$	0.44
Diluted weighted shares outstanding		2,120,993		2,124,283

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
										Accumulated
	Common Stock				Additional					Other						Total
					Paid-in		Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Capital		Earnings			Income			Stock			Equity
Balance at December 31, 2005	2,116,316		$5,327,040		$7,254,113		$19,949,100			$ (1,012,720)			$  (257,375)			$ 31,260,158
Comprehensive Income:
Net income		-		-		-		925,392			-						925,392
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes for $137,685											(231,443	)					(231,443	)
Other Comprehensive gains from
derivates, net of reclassification
adjustment of $8,873											(14,916	)					(14,916	)
Total Comprehensive income																	679,033
Cash Dividend paid $0.18 per share								(381,075	)								(381,075	)
Stock Options exercised		770		1,925		14,522											16,447
Balance at March 31, 2006		2,117,086	$	5,328,965	$	7,268,635	$	20,493,416		$	(1,259,079	)	$	(257,375	)	$	31,574,562
Balance at December 31, 2006		2,117,966	$	5,331,165	$	7,295,235	$	22,003,063		$	(775,200	)	$	(257,375	)	$	33,596,888
Comprehensive Income:
Net income		-		-		-		427,125			-						427,125
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $31,283											52,586						52,586
Other Comprehensive gains from
derivates, net of reclassification
adjustment of $21,095											35,260						35,260
Total Comprehensive income																	514,971
FAS 159 adjustment								(411,989	)		705,760						293,771
Cash Dividend paid $0.18 per share								(381,234	)								(381,234	)
Fair Value unexercised stock options						1,434											1,434
Balance at March 31, 2007		2,117,966	$	5,331,165	$	7,296,669	$	21,636,965		$	18,406		$	(257,375	)	$	34,025,830

 

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED MARCH 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	427,125		$	925,392
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		(23,265	)		(239,390	)
Provision for loan losses		80,000			60,000
Provision for depreciation		196,848			196,632
Stock dividends received		(47,200	)		(48,200	)
(Gain)/loss on sale of mortgage loans		(49,623	)		(85,148	)
(Gain)/loss on sale of investment securities		468,407			-
Net amortization (accretion) of securities		21,054			44,768
Amortization of deposit premium		26,904			26,904
Writedown of other real estate		211,959			22,178
Writedown of other repossessed assets		15,000			-
Net change in:
Loans held for sale		(60,796	)		171,200
Accrued interest receivable		34,597			111,627
Cash surrender value		(13,332	)		(12,166	)
Other assets		(389,523	)		(14,997	)
Accrued interest payable		346,330			291,815
Accrued taxes and other liabilities		98,170			186,520
Net cash provided (used) by operating activities		1,342,655			1,637,135
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		180,495			(680,250	)
Proceeds from sales, maturities and paydowns
of investment securities		6,496,507			4,200,719
Redemption of FHLB stock		-			420,400
Purchases of investment securities		(6,234,601	)		(612,882	)
(Increase)/decrease in loans		3,081,571			10,469,053
Proceeds from sale and transfers of other real estate		-			1,079
Proceeds from sale and transfers of other repossessed assets		4,000			4,500
Purchase of premises and equipment		(180,617	)		(155,254	)
Net cash provided (used) by investing activities		3,347,355			13,647,365

	2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES
Increase /(decrease) in customer deposits		2,483,566			6,114,609
Increase /(decrease) in brokered deposits		9,962,130			78,359
Increase /(decrease) in securities sold under
repurchase agreements		(554,183	)		266,090
Increase /(decrease) in FHLB advances		(14,048,624	)		(13,106,570	)
Increase /(decrease) in advances from borrowers
for taxes and insurance		(186,578	)		(200,878	)
Cash dividends paid		(381,234	)		(381,075	)
Common stock issued		1,434			16,447
Net cash provided (used) by financing activities		(2,723,489	)		(7,213,018	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		1,966,521			8,071,482
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		6,572,163			9,825,459
CASH AND DUE FROM BANKS AT END OF PERIOD	$	8,538,684		$	17,896,941
SUPPLEMENTAL DISCLOSURES OF CASH FLOW		2007			2006
INFORMATION:
Cash paid during the year for interest	$	2,399,228		$	2,044,924
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gains (losses)			��
on securities available for sale	$	83,869		$	(369,128	)
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	(31,283	)	$	(137,685	)
Change in unrealized gains (losses) on derivative	$	56,355		$	(23,789	)
Change in the deferred tax effect in
unrealized gains (losses) on derivative	$	(21,096	)	$	(8,873	)

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2007

Note A. Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the "Company") as of December 31, 2006, 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, 2007, 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 2006 amounts have been reclassified to conform to the 2007 presentation.

Note B. Interest Rate Risk Management

In an effort to reduce funding costs, Britton & Koontz Bank, N.A., the Company’s wholly-owned subsidiary (the “Bank”), enters into or purchases interest rate caps. On February 4, 2005, the Bank entered into an agreement with the Federal Home Loan Bank (“FHLB”) to cap the interest rate paid on a $20 million advance for 3 years at 3-Month LIBOR with a strike price of 4% and a cost of 35 basis points (“bps”) plus a margin of 2 bps. The Bank entered into a cap with a 2-year term with the FHLB on October 18, 2005, for $5 million with a strike price of 3-Month LIBOR at 4.50% at a cost of 35 bps with no margin. On April 18, 2007, 3-Month LIBOR was 5.36% and both caps were in the money. On August 15, 2006, the Bank entered into an agreement with the FHLB to cap the interest rate paid on another $5 million advance for 2 years at 3-Month LIBOR with a strike price of 5.50% and a cost of 19 bps with no added margin. The cost of all caps is included in the monthly interest expense paid to the FHLB. Other than these agreements with the FHLB, the Bank does not have any interest rate cap agreements.

Effective October 3, 2006, the Bank entered into an off-balance sheet interest rate swap agreement with a notional amount of $10 million to convert existing prime based loans to a fixed rate. Under the terms of the agreement, the Bank receives a fixed rate of 7.769% and is obligated to pay a floating rate based on USD-Prime-H.15. The original term is for three years, expiring October 5, 2009. The fair value of this derivative, designated as a cash flow hedge is hedging a $10mm pool of prime floating loans with a zero spread to prime.  Because the material terms of the swap and the hedged pool of loans are identical, this hedge has been effective. Testing for effectiveness of the swap is completed by using the long-haul method on a monthly basis and reported appropriately as comprehensive income/(loss) in the equity portion of the balance sheet. Management and the Board of Directors periodically enter into such arrangements to protect against adverse swings in interest rates. The current negative payment to the counterparty is expected to be temporary as management anticipates that the Federal Reserve will lower rates prior to the expiration of the swap agreement in 2009 such that a negative payment will no longer be required. The negative carry to net interest income is viewed as insurance to protect against the decline in revenues on prime-based loans. Management does not consider the arrangement to have a material impact toward the Company’s liquidity or capital resources or to pose any known risks with respect to market or credit risk.

Note C. 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 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 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.

Loans held-for-sale are primarily thirty year and fifteen year fixed rate, one to four family real estate loans which are valued at the lower of cost or market, as determined by outstanding commitments from investors or current investor yield requirements, calculated on an individual basis. These loans are sold to protect earnings and equity from undesirable shifts in interest rates. Unrealized losses on loans held-for-sale are charged against income in the period of decline. Such declines are recorded in a valuation allowance account and deducted from the cost basis of the loans. Gains on loans held-for-sale are recognized when realized. At March 31, 2007, there was one loan in the amount of $116 thousand in loans held-for-sale. Due to the short holding period before completion of the sale, it is estimated that there is no gain or loss on this loan.

On a monthly basis, loans held for sale are reviewed and reported on the balance sheet at the lower of cost or market. The holding period is generally very short for these loans. At least annually, all loans held in the portfolio are 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 D. 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, 2007, was 8.50%.

Note E. Loan Commitments

In the ordinary course of business, the Company enters into commitments to extend credit to its customers. Letters of credit at March 31, 2007, and December 31, 2006, were $1.9 million and $2.1 million, respectively. As of March 31, 2007, the Company had entered into other commercial and residential loan commitments with certain customers that had an aggregate unused balance of $68.2 million, an increase from $64.5 million at December 31, 2006. This compares with loan commitments of $92.9 million and $82.6 million at March 31, 2006, and December 31, 2005, respectively. Because letters of credit and loan commitments often are not used in their entirety, if at all, before they expire, the balances on such commitments should not be used to project actual future liquidity requirements. However, the Company does incorporate expectations about the level of draws under all credit-related commitments into its funds management process.

Note F. Earnings per Share

Basic income per share amounts are computed by dividing net income by the weighted average number of common shares outstanding. The computation of diluted income per share assumes the exercise of all outstanding securities potentially convertible into common stock, including options granted, unless the effect is anti-dilutive. The effect will be anti-dilutive when the exercise price per share of an option exceeds the current market price for a share of Company stock. The Company accounts for its options under the recognition and measurement of fair value recognition provision of Financial Accounting Standards No. 123R “Fair Based Payments.” 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, 2007 and 2006.

	For the three months ended
	March 31,
	2007	2006
Basic weighted average shares outstanding	2,117,966	2,116,811
Dilutive effect of granted options	3,027	7,472
Diluted weighted average shares outstanding	2,120,993	2,124,283
Net income	$    427,125	$    925,392
Net income per share-basic	$ 0.20	$ 0.44
Net income per share-diluted	$ 0.20	$ 0.44

Note G. Adoption of Statement of Financial Accounting Standards (“SFAS”) Nos. 157 and 159

On April 12, 2007, the Company announced that effective January 1, 2007, the Company elected early adoption of SFAS 157 (Fair Value Measurement) and SFAS 159 (Fair Value Option for Financial Assets and Financial Liabilities) which establish a framework for measuring fair value under generally accepted accounting principles and allow companies to measure at fair value most financial assets and liabilities that were previously required to be measured in a different manner. On that date, the Company announced that it had selected the fair value measurement option for approximately $55 million of its aggregate $64 million of available-for-sale investment securities. On April 24, 2007, the Company announced its earnings as of and for the quarter ended March 31, 2007. Earnings announced on that date incorporated the effects of the Company’s election to measure at fair value $55 million of its investment securities.

Subsequent to April 24, 2007, the Company determined after discussions with the SEC to apply the fair value measurement under SFAS 159 to only $20 million of its available-for-sale investment securities. The extent of the election and the cumulative-effect adjustment to retained earnings are as follows and supercede the discussions in the Company’s announcements on April 12 and April 24, 2007:

Description	Balance Sheet At January 1, 2007 Prior to Adoption	Net Loss Upon Adoption	Balance Sheet At January 1, 2007 After Adoption of Fair Value Option
Investment Securities Increase in Deferred Tax Asset Cumulative Effect of the Adoption of the Fair Value Option  (charge to retained earnings)	$20,387,696	$(657,080)  245,091 $(411,989)	$19,730,616

     On April 12, 2007, the Company sold the $20 million of the securities it had transferred to trading in relation the adoption of SFAS 157 and SFAS 159 along with an additional $35 million of securities it transferred from held to maturity to available-for-sale securities (“AFS”). The net proceeds from these sales were reinvested back into longer-term higher yielding mortgage backed securities in order to reduce short-term cash flows and mitigate increasing asset sensitivity of the Company’s asset/liability position in the face of an inverted yield curve environment extending to 10 year maturities. The average duration of the new investment securities in the AFS category is 4.68 years and in the trading category 4.25 years. Within the structure of the adoption, the Company intends to classify $20 million of the new securities as trading and the remaining $35 million as available-for-sale. It is expected that the securities classified as Trading would be the first to be sold to meet liquidity needs of the Company that may arise from unexpected loan demand or reduction in deposits or borrowings.

The following provides the fair value hierarchy table set forth in SFAS 157 supplemented with information about where in the income statement changes in fair value of assets (for which the fair value options has been elected) is included in earnings:

Fair Value Measurements at March 31, 2007:

Description	Fair Value Measurements  at March 31, 2007	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant  Observable Inputs
Trading Securities	$19,358,005	$19,358,005

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion is intended to present a review of the major factors affecting the financial condition and results of operations of Britton & Koontz Capital Corporation (the “Company”) and its wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), as of March 31, 2007, and disclose and expand on material changes from prior periods.

SUMMARY

On April 24, 2007, the Company announced net income and earnings per share for the quarter ended March 31, 2007 of $835 thousand, or $.39 per diluted share, compared to $925 thousand, or $.44 per diluted share, for the quarter ended March 31, 2006. This announcement was based on the Company’s early adoption of Statement of Financial Accounting Standards No. 157 (“SFAS 157”) and Statement of Financial Accounting Standards No. 159 (“SFAS 159”) effective January 1, 2007 and the Company’s initial determination to apply the fair value measurement option of SFAS 157 and SFAS 159 to approximately $55 million of its available-for-sale (“AFS”) securities. Subsequently, after discussions with the SEC and further analysis of SFAS 159 by the accounting industry, the Company decided to apply SFAS 157 and SFAS 159 to only $20 million of its AFS securities. As a result of this decision by the Company, the Company reported net income of $427 thousand ($0.20 basic and $0.20 diluted earnings per share) for the three months ended March 31, 2007 (rather than $835 thousand, or $.39 per diluted share, as announced on April 24, 2007), compared to $925 thousand ($0.44 basic and $0.44 diluted earnings per share) for the three months ended March 31, 2006.   The lower earnings were primarily related to the sale of approximately $35 million of the Company’s AFS portfolio on April 12, 2007. These securities were originally included in the early adoption of SFAS 159. Due to changes in interest rates since original purchase, these securities had an unrealized loss, net of tax, of approximately $350 thousand that was held in other comprehensive income in the equity section of the balance sheet. Once the decision to sell the securities was made in April, 2007, this $350 thousand unrealized loss carried on the balance sheet was transferred from equity and flowed through current earnings on line item “loss on sale of securities” as an other than temporary impairment as of March 31, 2007. The Company believes that the restructure of these securities into a higher yielding portfolio will be beneficial in the long-term as future earnings potential and likely lower short-term cash flows provide a hedge against the negative effects of the inverted yield curve and the margin compression produced by such a yield curve.

A one-time write-down of approximately $214 thousand on three properties the Bank had included in other real estate as well as higher funding costs associated with the inverted yield curve, also contributed to the decline in the Company’s net income in the first quarter of 2007. The Company’s early adoption of SFAS Nos. 157 and SFAS 159 during the second quarter of 2007 and the subsequent transfer of approximately $20 million of securities to trading provided an after-tax benefit of $57 thousand in gains associated with the shift in market rates since December 31, 2006. Securities in the held to maturity (“HTM”) classification, which were not affected by the Company’s adoption of SFAS 157 and SFAS 159, increased $109 thousand due to the replacement of municipal securities that had matured or been called.

Other real estate owned decreased $213 thousand from $1.3 million at December 31, 2006 to $1.0 million at March 31, 2007. At March 31, 2007, other real estate included a commercial property that the Company had entered into an agreement to sell. The sale of this property has since been completed, and the current balance in other real estate is $670 thousand. Deposits increased $12.5 million from December 31, 2006, to $266.2 million at March 31, 2007, while borrowings from the Federal Home Loan Bank (“FHLB”) decreased $14.0 million to $51.6 million over the same period. The increase in deposits is a result of the purchase of $10.0 million in brokered deposits along with a $2.5 million increase in customer deposits. Total stockholders’ equity increased $429 thousand from December 31, 2006 to $34.0 million at March 31, 2007.

Financial Condition

Assets

The Company’s total assets decreased$1.5 million from $369.3 million at December 31, 2006, to $367.8 million at March 31, 2007. The Company’s investment portfolio dropped $384 thousand to $107.0 million while loan balances, excluding loans held for sale, declined $3.1 million from $243.5 million at December 31, 2006, to $240.4 million at March 31, 2007.

Investment Securities

The Company’s investment portfolio at March 31, 2007, consisted of mortgage-backed, municipal, agency and equity securities. Investment securities that are classified as HTM are accounted for by the amortized cost method while securities in the 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.” A new Trading classification was established in connection with the adoption of SFAS 157 and SFAS 159 in the first quarter of 2007. The securities in the Trading classification are accounted for at fair value on the balance sheet and changes in value in this category are recorded in the income statement as either a gain or loss. Losses in the AFS portfolio and off-balance sheet derivatives, included in other comprehensive income, are due to changes in interest rates and are considered a temporary impairment of the security. After the sale of $35 million of the securities in the AFS portfolio in the second quarter, as described above, the only losses recorded in other comprehensive income in the quarter related to off-balance sheet derivative securities.

Management determines the classification of its securities at acquisition. Total HTM, AFS and trading investment securities decreased only $431 thousand to $102.6 million during the first quarter of 2007 as cash flows from such securities were used to fund maturing and called municipal securities. Total HTM, AFS and trading securities at March 31, 2007, were $38.7 million, $44.5 million and $19.4 million, respectively, compared to $38.6 million, $64.4 million, and $0, respectively at December 31, 2006. Equity securities increased $47 thousand to $4.4 million from December 31, 2006, to March 31, 2007, due to quarterly stock dividends. At March 31, 2007, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $3.6 million and ECD Investments, LLC (“ECD”) membership interests of $100 thousand. ECD is a vehicle through which banks, individuals and other institutions can participate in economic and business development activities in economically depressed regions of the country, in this instance, the states of Arkansas, Louisiana and Mississippi.

The amortized cost of the Bank’s investment securities, including HTM, AFS and Trading securities, at March 31, 2007, and December 31, 2006, are summarized in Table 1.

TABLE 1: COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

	03/31/07		12/31/06
Mortgage-Backed Securities	$	60,749,944	$	61,518,891
Agencies Obligations		6,500,000		6,496,959
Obligations of State and
Political Subdivisions		36,426,422		36,175,580
	$	103,676,366	$	104,191,430

Loans

Net loans held to maturity fell $3.1 million to $238.1 million at March 31, 2007, from $241.2 million at December 31, 2006, as loan growth in the Company’s markets slowed. At the same time, the Company continued to sell its 1-4 family residential loans in the secondary market during the first quarter of 2007 and allowed the current residential portfolio to pay down, which further contributed to the decrease in loans. Commercial loans increased $2.3 million while residential mortgage and installment loans decreased $5.9 million. The net loan to deposit ratio was 89.4% at March 31, 2007, compared to 95.0% at year-end. Table 2 presents the Bank’s loan portfolio composition at March 31, 2007, and December 31, 2006.

TABLE 2: COMPOSITION OF LOAN PORTFOLIO (including loans held for sale)

	03/31/07		12/31/06
Commercial, financial & agricultural	$	27,912,000	$	28,385,000
Real estate-construction		42,895,000		44,592,000
Real estate-residential		79,901,000		83,256,000
Real estate-other		80,482,000		76,473,000
Installment		9,065,000		10,680,000
Other		257,000		203,000
Total loans	$	240,512,000	$	243,589,000

The Company’s loan portfolio at March 31, 2007, had no significant concentrations of loans other than in the categories presented in the table above.

Bank Premises

There have been no material changes in the Company’s premises since December 31, 2006.

Asset Quality

The Bank’s asset quality remained strong in the first quarter of 2007 as compared to December 31, 2006. Nonperforming assets, including non-accrual loans, other real estate and loans 90 days or more delinquent, increased $169 thousand to $2.9 million at March 31, 2007, from $2.7 million at year-end. The increase is mainly due to two commercial loans in the aggregate amount of $503 thousand that were transferred to non-accrual during the quarter, partially offset by lower amounts in loans 90 days past due and other real estate. The Company has established specific reserves of approximately $30 thousand for the two commercial properties that were transferred to non-accrual during the quarter. Based on current appraisals of properties securing these relationships, the Company does not expect additional losses and believes its current collateral position to be sufficient. The higher non-accruals pushed the Bank’s nonperforming loan ratio to .75% at March 31, 2007, from .59% at December 31, 2006. A breakdown of nonperforming assets at March 31, 2007, and December 31, 2006, is shown in Table 3.

TABLE 3: BREAKDOWN OF NONPERFORMING ASSETS

	03/31/07			12/31/06
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	1,370		$	829
Installment		21			13
Commercial and all other loans		246			351
Total non-accrual loans		1,637			1,193
Loans past due 90 days or more		170			232
Total nonperforming loans		1,807			1,425
Other real estate owned (net)		1,044			1,257
Total nonperforming assets	$	2,851		$	2,682
Nonperforming loans as a percent of loans, net of unearned interest and loans held for sale		.75	%		.59	%

Allowance for Possible Loan Losses

The allowance for loan losses is established as losses are estimated through a provision for loan losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. The allowance is subject to change as management re-evaluates the adequacy of the allowance on a quarterly basis. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on the evaluation of individual loans, the known and inherent risk characteristics and size of the loan portfolios, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience, review of regulatory authority examination reports and evaluations of specific loans and other relevant factors. The Bank risk rates each loan at the initiation of the transaction and risk ratings are reviewed and changed, when necessary, during the life of the loan.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are considered impaired. Loan loss reserve factors are multiplied against the balances in each risk rating category to arrive at the appropriate level of the specific component of the allowance. Loans assigned higher risk ratings are monitored more closely by management. The general component of the allowance for loan losses groups loans with similar characteristics; the level of the general component is a percentage of the balance of these loans. The percentage is based upon historical losses and the inherent risks within each category. The unallocated portion of the allowance reflects management’s estimate of probable but undetected losses inherent in the portfolio; such estimates are influenced by uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, difficulty in identifying triggering events that correlate to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. The methodology for determining the adequacy of the allowance for loan losses is consistently applied; however, revisions may be made to the methodology and assumptions based on historical information related to charge-off and recovery experience and management’s evaluation of the current loan portfolio.

Based upon this evaluation, management believes the allowance for loan losses of $2.3 million at March 31, 2007, which represents .97% of gross loans held to maturity, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans. At March 31, 2007, total reserves included specific reserves of $590 thousand, general reserves of $1.1 million and unallocated reserves of $631 thousand. At December 31, 2006, the allowance for loan loss was $2.3 million, or .96% of gross loans held to maturity.

Provision for Possible Loan Losses

The provision for possible loan losses is a charge to earnings to maintain the allowance for possible loan losses at a level consistent with management’s assessment of the loan portfolio in light of current and expected economic conditions. The Company’s regular review of the allowance is an effort to maintain it at an adequate level and make a proper provision expense to earnings.

Table 4 details allowance activity for the three months ended March 31, 2007 and 2006:

TABLE 4: ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

	03/31//07			03/31/06
	(dollars in thousands)
Balance at beginning of period	$	2,344		$	2,378
Charge-offs:
Real Estate		(25	)		(8	)
Commercial		(73	)		(10	)
Installment and other		(28	)		(26	)
Recoveries:
Real Estate		-			21
Commercial		7			5
Installment and other		18			4
Net (charge-offs)/recoveries		(101	)		(14	)
Provision charged to operations		80			60
Balance at end of period	$	2,323		$	2,424
Allowance for loan losses as a percent of loans, net of unearned interest & loans held for sale		.97	%		1.03	%
Net charge-offs as a percent of average loans		.04	%		.01	%

Potential Problem Loans

At March 31, 2007, the Company had no loans, other than those balances incorporated in tables 3 and 4 above, which management had significant doubts as to the ability of the borrower to comply with current repayment terms.

Deposits

Total deposits increased $12.4 million from $253.8 million at December 31, 2006, to $266.2 million at March 31, 2007. The increase in total deposits is due primarily to the purchase of $10 million in brokered deposits and customer deposit increases of $2.5 million. The purchase of the brokered deposits was initiated as part of an asset liability strategy to protect net interest margins should interest rates increase. With the flat to inverted yield curve, it has been difficult to prevent declines in net interest income and margin compression. The lock-in of these funds at current rates will help mitigate further compression in the months ahead.

TABLE 5: COMPOSITION OF DEPOSITS

	03/31/07		12/31/06
Non-Interest Bearing	$	51,679,173	$	50,345,279
NOW Accounts		25,001,915		24,555,009
Money Market Deposit Accounts		35,850,846		37,101,457
Savings Accounts		19,012,208		18,082,839
Certificates of Deposit		134,658,829		123,672,691
Total Deposits	$	266,202,971	$	253,757,275

Borrowings

Total Bank borrowings, including FHLB advances and customer repurchase agreements, decreased $14.6 million from $73.8 million at December 31, 2006, to $59.2 million at March 31, 2007. The Company replaced the reduced borrowed funds with the increase in deposits.

Capital

Stockholders' equity totaled $34.0 million at March 31, 2007, compared to $33.6 million at December 31, 2006. Earnings of $427 thousand were offset by $381 thousand in dividends paid, a $794 thousand change in unrealized losses in the AFS investment portfolio and off-balance sheet derivatives and a $412 thousand transfer of unrealized losses in the AFS portfolio at December 31, 2006, directly to retained earnings, due to the adoption of SFAS 159.

One of the features of the adoption of SFAS 159 for the Company was the ability to transfer the unrealized loss on certain AFS securities to retained earnings instead of charging the loss to the Company’s earnings. This one-time election allowed the Company to move $412 thousand in unrealized losses, an element of other comprehensive income, to retained earnings. Because the unrealized loss account was an element of other comprehensive income, such losses had already reduced the Company’s overall capital. Therefore, the transfer did not negatively affect shareholders’ equity. However, regulatory capital measurements exclude components of comprehensive income from the calculation of capital ratios. By moving the unrealized losses out of other comprehensive income and decreasing retained earnings, the Company’s regulatory capital at December 31, 2006 would have declined slightly, as shown in Table 6 below.

TABLE 6: COMPARISON OF REGULATORY CAPITAL (at December 31, 2006)

	As Reported			SFAS 159 Adjusted			Minimum Capital  Requirement			Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
Total Capital (to Risk-
Weighted Assets)
Consolidated		15.27	%		15.12	%		8.00	%		N/A
The Bank		14.17	%		14.01	%		8.00	%		10.00	%
Tier I Capital (to Risk-
Weighted Assets)
Consolidated		14.40	%		14.24	%		4.00	%		N/A
The Bank		13.29	%		13.14	%		4.00	%		6.00	%
Tier I Capital (to Average
Assets)
Consolidated		10.45	%		10.34	%		4.00	%		N/A
The Bank		9.57	%		9.46	%		4.00	%		5.00	%

The Company and Bank maintained a total capital to risk weighted assets ratio of 14.95% and 13.79%, a Tier 1 capital to risk weighted assets ratio of 14.10% and 12.94% and a leverage ratio of 10.50% and 9.61%, respectively, at March 31, 2007. Bank levels substantially exceed the minimum requirements of bank regulatory agencies for well-capitalized institutions of 10.00%, 6.00% and 5.00% respectively. The ratio of shareholders' equity to assets increased to 9.25% at March 31, 2007, compared to 9.10% at December 31, 2006.

Off-Balance Sheet Arrangements

There have been no significant changes in the Company’s off-balance sheet arrangements during the three months ended March 31, 2007. See Note B and Note E to the Company’s consolidated financial statements for a description of the Company’s off-balance sheet arrangements.

Contractual Obligations

The Company’s long-term contractual obligations are comprised of operating lease agreements and long-term borrowings including junior subordinated debt. The following table sets forth the Company’s contractual obligations as of March 31, 2007. There were no material changes outside of the ordinary course of business to any of the contractual obligations disclosed in the table below during the first quarter of 2007.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations	$	51,619	$	38,500	$	13,119	$	-	$	-
Operating Lease Obligations		732		106		212		211		203
Customer Repurchase Agreements		7,594		7,594		-		-		-
Junior Subordinated Debenture		5,000		5,000		-		-		-
Total	$	64,945	$	51,200	$	13,331	$	211	$	203

Results of Operations

Net Income

  On April 24, 2007, the Company announced net income and earnings per share for the quarter ended March 31, 2007 of $835 thousand, or $.39 per diluted share, compared to $925 thousand, or $.44 per diluted share, for the quarter ended March 31, 2006. This announcement was based on the Company’s early adoption of SFAS 157 and SFAS 159 effective January 1, 2007 and the Company’s initial determination to apply the fair value measurement option of SFAS 157 and SFAS 159 to approximately $55 million of its available-for-sale (“AFS”) securities. Subsequently, after discussions with the SEC and further analysis of SFAS 159 by the accounting industry, the Company decided to apply SFAS 157 and SFAS 159 to only $20 million of its AFS securities. As a result of this decision by the Company, the Company reported net income of $427 thousand ($0.20 basic and $0.20 diluted earnings per share) for the three months ended March 31, 2007 (rather than $835 thousand, or $.39 per diluted share, as announced on April 24, 2007), compared to $925 thousand ($0.44 basic and $0.44 diluted earnings per share) for the three months ended March 31, 2006. The decrease in earnings was primarily related to the transfer of approximately $35 million of the Company’s securities from held to maturity to AFS in the second quarter and the sale of those securities on April 12, 2007. Due to changes in interest rates since original purchase, these securities had an unrealized loss, net of tax, of approximately $350 thousand that was held in other comprehensive income in the equity section of the balance sheet. Once the decision to sell the securities was made in April, 2007, the unrealized loss carried on the balance sheet was transferred from equity and flowed through current earnings on line item "loss on sale of securities" as an “other than temporary” impairment as of March 31, 2007. The Company believes that the restructure of these securities into a higher yielding portfolio will be beneficial in the long-term as future earnings potential and likely lower short-term cash flows provide a hedge against the negative effects of the inverted yield curve and the margin compression produced by such a yield curve.

A one-time write-down of approximately $214 thousand on three properties the Bank had included in other real estate, as well as higher funding costs associated with the inverted yield curve, also contributed to the decline in the Company’s net income in the first quarter of 2007. The Company’s early adoption of SFAS 157 and SFAS 159 during the second quarter of 2007 and the subsequent transfer of approximately $20 million of securities to trading provided an after-tax benefit of $57 thousand in gains associated with the shift in market rates since December 31, 2006. Securities in the held to maturity classification, which were not affected by the Company’s adoption of SFAS 157 and SFAS 159, increased $109 thousand due to the replacement of municipal securities that had matured or been called.

Due to one-time items related to first quarter activity contributing to the lower quarterly net income, annualized returns on both average assets and average equity decreased to .46% and 5.06% at March 31, 2007, respectively, from .95% and 11.10% at December 31, 2006, respectively. The Company, however, believes that the first quarter is not a true measure of the ongoing profitability of the Bank. Excluding these one-time items, net income for the first quarter would have approximated $870 thousand resulting in returns on average assets and equity of .94% and 10.30%, respectively. Further, the resulting higher yielding portfolio is expected to contribute to higher interest income in the remaining months of 2007 of approximately $445 thousand.

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.

       Comparing the three month period ended March 31, 2007, to the same period in 2006, net interest income decreased $118 thousand to $3.3 million. The drop in net interest income is primarily due to the interest rate environment that has compressed margins and reduced spreads. Throughout the year as short-term rates continued to be higher than longer-term rates, both loans and deposits repriced to higher rates. Asset yields moved up 51 basis points from 6.35% to 6.86% in the first quarter comparative periods while funding costs increased 72 basis points from 3.15% to 3.87% during the same period. The negative spread contributed $146 thousand toward the decrease in net interest income and was offset by $28 thousand due to lower asset and liability volumes. Average assets decreased $11.9 million primarily as cash flows from the investment portfolio were re-directed to pay down higher cost borrowed funds. The decrease in investment securities were partially offset by a $4.6 million increase in average loans. As a result of the interest rate environment, the Company’s net interest margin decreased slightly from 3.75% at the end of March 31, 2006, to 3.72% at the end of the first quarter of 2007. Increased yields of nearly 1.25% on the approximate $55 million in new securities purchased will increase net interest income, provide a measure of protection against the inverted yield curve and reduce cash flows

 Non-Interest Income

Non-interest income includes service charges on deposit accounts, income from fiduciary and brokerage activities, gains from the sale of mortgage loans and other revenue not derived from interest on earning assets. Non-interest income for the three months ended March 31, 2007, decreased $414 thousand over the same period in 2006. Included in this decrease was a loss of $559 thousand incurred in connection with the sale of $35 million AFS securities in the second quarter of 2007. Offsetting this loss was a pre-tax gain of $90 thousand due to the Company’s adoption and SFAS 159 when approximately $20 million was transferred to trading from AFS in the second quarter of 2007. Other factors that helped offset the negative effects of the impairment was additional earnings from Bank securities networking arrangements, which reflects sales of stocks, bonds, mutual funds, annuities and life insurance products. Increases in service charges on deposit accounts were offset by lower gains on sale of mortgage loans as mortgage activity slowed during the first quarter of 2007. The Company’s mortgage loan department generates loans for the secondary market and recorded gains of $50 thousand on $3.4 million in sales of mortgage loans during the first quarter of 2007 compared to gains of $85 thousand on sales of $8.4 million in 2006.

Non-Interest Expense

Non-interest expense includes salaries and benefits, occupancy, equipment, audit and other operating expenses. Non-interest expenses for the three months ended March 31, 2007, were $2.9 million compared to $2.7 million for the same period in 2006. Write-downs of other real estate amounting to $214 thousand were the primary contributor to the increase in non-interest expense.

Income Taxes

The Company recorded income tax expense of $33 thousand for the three months ended March 31, 2007, compared to $317 thousand for the same period in 2006. The reduced tax expense was due primarily to the tax effects resulting from the recognition of the impairment of $559 thousand in connection with the sale of $55 million in securities described earlier.

Liquidity and Capital Resources

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

The Company has established a liquidity contingency plan to guide the Bank in the event of a liquidity crisis. The plan describes the normal operating environment, prioritizes funding options and outlines management responsibilities and board notification procedures.

The Company’s cash and cash equivalents increased $2.0 million to $8.5 million at March 31, 2007, from $6.6 million at December 31, 2006. Cash provided by operating and investing activities during the first quarter of 2007 was $1.0 million and $3.8 million, respectively, while financing activities used $2.7 million over the same period. (Check final)

At March 31, 2007, the Company had unsecured federal funds lines with correspondent banks of $42 million and maintained the ability to draw on its available line of credit with the FHLB in the amount of approximately $58 million. In addition to these lines of credit, the bank had approximately $47 million in unencumbered investment securities available for collateralized borrowing. Management believes it maintains adequate liquidity for the Company’s current 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.” 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

Market risk reflects the potential risk of economic loss that would result from adverse changes in interest rates and market prices. The risk is usually seen in either reduced market value of financial assets or reduced net interest income in future periods. The Company does not participate in some of the financial instruments that are inherently subject to substantial market risk.

The Company utilizes an asset/liability committee comprised of three outside directors, the Bank’s Chief Executive Officer and its Chief Financial Officer, who acts as chairman of the committee. The committee meets monthly and its primary responsibility is the management of the assets and liabilities of the Bank to produce a stable and evenly rising flow of net interest income, an appropriate level of capital and a level of liquidity adequate to respond to the needs of depositors and borrowers and to earnings' enhancement opportunities. The committee manages the interest rate risk inherent in the loan, investment, deposit and borrowed funds portfolios. Further, the committee manages the risk profile of the Company and determines strategies to maintain interest rate sensitivity at a low level.

Annually, an Economic Value of Equity (“EVE”) analysis is performed to determine the sensitivity of capital associated with interest rate changes. The analysis indicated that, at December 31, 2006, there is a slight exposure to both rising and falling rates. These results are driven primarily by offsetting factors - the relative change in value to the Bank of its residential and commercial mortgage portfolios and its core deposit base. As rates fall, the assets increase in value. Counteracting this, however, is the relative decrease in value of the core deposit base. Likewise as rates rise, the assets extend and their value declines, while core deposit values increase as the lower cost funding is inherently worth more to the Bank. The worst case exposure is in the -300 basis point rate shock, in which the Bank’s EVE ratio (economic value of equity as a percentage of the economic value of assets) falls from 12.75% to 10.56%. Even in this scenario, the Bank’s capital ratio would still significantly exceed the minimum ratio of 5% required to be “well capitalized.” The 219 basis point change in value still places the Bank in a minimum risk position as determined by the Office of Thrift Supervision (“OTS”) Risk Summary - TB13A. Even though the Bank does not fall under the OTS regulatory guideline, it believes it is a valid measure of risk and a means to view the trend from a historical basis. The committee as reported to the Board of Directors agreed that this was well within acceptable limits.

The addition of Trading as a third level of investment security classification is not expected to change the Company’s market risk position significantly. However, changes in interest rates that contribute to gains or losses in a security held as Trading may result in more volatility in earnings than in the past as gains or losses begin to flow through earnings rather than through equity.

Item 4.Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. There has been no change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A.Risk Factors

Information regarding risk factors appears in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K.

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, 2007, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $5.5 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, 2007, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $3.0 million. There were no loans outstanding from the Bank to the Company at March 31, 2007.

Item 6.Exhibits

Exhibit		Description of Exhibit
3.1	*	Restated Articles of Incorporation of Britton & Koontz Capital Corporation, as amended, incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 4, 2006.
3.2	*	By-Laws of Britton & Koontz Capital Corporation, as amended, incorporated by reference to Exhibit 3.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2006.
4.1	*	Shareholder Rights Agreement dated June 1, 1996, between Britton & Koontz Capital Corporation and Britton & Koontz First National Bank, as Rights Agent, incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement on Form S-8, Registration No. 333-20631, filed with the Commission on January 29, 1997.
4.2	*	Amendment No. 1 to Rights Agreement, dated as of August 15, 2006, by and between Britton & Koontz Capital Corporation and Britton & Koontz Bank, N.A., incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed with the Commission on August 17, 2006.
31.1		Certifications of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certifications of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certifications of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

SIGNATURES

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

BRITTON & KOONTZ CAPITAL CORPORATION

Date:May 15, 2007  /s/ W. Page Ogden

W. Page Ogden

Chief Executive Officer

Date:May 15, 2007 /s/ William M. Salters

   William M. Salters

     Chief Financial Officer

 EXHIBIT INDEX

ExhibitDescription of Exhibit

31.1 Certifications of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certifications of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certifications of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certifications of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002