Britton & Koontz Capital (BKBK) 10-Q 2007 Q3 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 June 30, 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 August 1, 2007.

BRITTON & KOONTZ CAPITAL CORPORATION

 AND SUBSIDIARIES

 

INDEX

PART I.	FINANCIAL INFORMATION
	Item 1.    Financial Statements
	Consolidated Statements of Financial Condition
	Consolidated Statements of Income
	Consolidated Statements of Changes in Stockholders' Equity
	Consolidated Statements of Cash Flows
	Notes to the Consolidated Financial Statements
	Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.   Quantitative and Qualitative Disclosures About Market Risk
	Item 4.  Controls and Procedures
PART II.	OTHER INFORMATION
	Item 1A.  Risk Factors
	Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
	Item 4.     Submission of Matters to a Vote of Security Holders
	Item 6.     Exhibits
SIGNATURES
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 I                      FINANCIAL 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
	June 30,		December 31,
ASSETS:	2007		2006
Cash and due from banks:
Non-interest bearing	$	7,305,578	$	6,254,364
Interest bearing		991,490		317,799
Total cash and due from banks		8,297,068		6,572,163
Federal funds sold		139,682		304,569
Investment Securities:
Trading (amortized cost, in 2007 and 2006,
of $20,042,969 and $0, respectively		19,592,440		-
Available-for-sale (amortized cost, in 2007 and 2006,
of $44,839,056 and $65,580,510, respectively)		43,706,218		64,419,428
Held-to-maturity (market value, in 2007 and 2006,
of $37,762,653 and $39,015,853, respectively)		37,652,626		38,610,920
Equity securities		3,590,700		4,339,700
Loans, less unearned income of $(54) in 2007 and
$122 in 2006, and allowance for loan losses of
$2,409,452 in 2007 and $2,344,434 in 2006		244,746,421		241,190,049
Loans held for sale		-		54,810
Bank premises and equipment, net		7,596,224		7,719,278
Other real estate		1,026,574		1,256,611
Accrued interest receivable		2,341,950		2,437,387
Cash surrender value of life insurance		995,530		973,212
Core Deposit, net		719,466		773,275
Other assets		1,116,262		666,839
TOTAL ASSETS	$	371,521,161	$	369,318,241

LIABILITIES AND STOCKHOLDERS' EQUITY
	June 30,			December 31,
LIABILITIES:	2007			2006
Deposits
Non-interest bearing	$	46,241,886		$	50,345,279
Interest bearing		212,905,012			203,411,996
Total deposits		259,146,898			253,757,275
Federal Home Loan Bank advances		56,333,487			65,667,972
Securities sold under repurchase agreements		14,077,075			8,149,016
Accrued interest payable		2,236,671			1,786,288
Advances from borrowers for taxes and insurance		244,983			401,678
Accrued taxes and other liabilities		858,022			804,124
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		338,052,136			335,721,353
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share;
12,000,000 shares authorized; 2,132,466 issued and
2,117,966 outstanding, for June 30, 2007, and December 31, 2006		5,331,165			5,331,165
Additional paid-in capital		7,298,103			7,295,235
Retained earnings		21,869,033			22,003,063
Accumulated other comprehensive income		(771,901	)		(775,200	)
		33,726,400			33,854,263
Cost of 14,500 shares of common stock held by the company		(257,375	)		(257,375	)
Total stockholders' equity		33,469,025			33,596,888
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	371,521,161		$	369,318,241

BRITTON& KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2007			2006		2007			2006
INTEREST INCOME:
Interest and fees on loans	$	4,899,367		$	4,487,117	$	9,676,332		$	8,825,562
Interest on investment securities:
Taxable interest income		970,233			938,396		1,782,401			1,896,028
Exempt from federal taxes		413,273			409,527		828,003			818,101
Interest on federal funds sold		2,836			9,313		6,080			21,333
Total interest income		6,285,709			5,844,353		12,292,816			11,561,024
INTEREST EXPENSE:
Interest on deposits		2,022,271			1,566,428		3,869,166			3,006,576
Interest on Federal Home Loan Bank advances		612,444			697,148		1,319,526			1,414,093
Interest on trust preferred securities		107,357			99,852		213,786			199,070
Interest on securities sold under repurchase agreements		113,824			80,453		198,975			160,881
Total interest expense		2,855,896			2,443,881		5,601,453			4,780,620
NET INTEREST INCOME		3,429,813			3,400,472		6,691,363			6,780,404
Provision for loan losses		120,000			60,000		200,000			120,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		3,309,813			3,340,472		6,491,363			6,660,404
OTHER INCOME:
Service charges on deposit accounts		394,279			345,435		788,476			672,783
Income from fiduciary activities		999			10,383		1,998			19,741
Income from investment activities		45,654			66,806		125,971			87,580
Gain/(loss) on sale of ORE		(26,270	)		-		(26,270	)		-
Gain/(loss) on sale of mortgage loans		75,008			54,721		124,632			139,869
Gain/(loss) on sale of securities		-			-		(468,407	)		-
Gain/(loss) on mark to market trading securities		(450,529	)		-		(450,529	)		-
Other		121,351			115,706		262,309			284,461
Total other income		160,492			593,051		358,180			1,204,434
OTHER EXPENSES:
Salaries		1,251,268			1,303,630		2,520,053			2,575,296
Employee benefits		189,896			201,359		378,402			392,810
Director fees		61,125			53,480		105,925			100,825
Net occupancy expense		246,478			244,984		482,428			468,202
Equipment expenses		280,789			260,594		564,076			524,479
FDIC assessment		7,715			8,188		15,514			16,094
Advertising		37,282			62,088		80,176			116,545
Stationery and supplies		40,778			36,350		82,478			82,092
Audit expense		63,132			44,194		126,259			89,675
Other real estate expense		4,498			18,070		183,701			44,459
Amortization of deposit premium		26,904			26,904		53,808			53,808
Other		511,348			516,166		1,047,137			1,001,020
Total other expenses		2,721,213			2,776,007		5,639,957			5,465,305
INCOME BEFORE INCOME TAX EXPENSE		749,092			1,157,516		1,209,586			2,399,533
Income tax expense		135,793			282,060		169,159			598,685
NET INCOME	$	613,299		$	875,456	$	1,040,427		$	1,800,848
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.29		$	0.41	$	0.49		$	0.85
Basic weighted shares outstanding		2,117,966			2,117,376		2,117,966			2,117,084
Diluted earnings per share	$	0.29		$	0.41	$	0.49		$	0.85
Diluted weighted shares outstanding		2,120,158			2,121,382		2,120,330			2,122,033

BRITTON& KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
										Accumulated
					Additional					Other						Total
	Common Stock				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		-		-		-		1,800,848			-						1,800,848
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes for $410,999											(690,874	)					(690,874	)
Other Comprehensive gains from
derivatives, net of reclassification
adjustment of $12,700											(21,349	)					(21,349	)
Total Comprehensive Income																	1,088,625
Cash Dividend paid $0.36 per share								(762,152	)								(762,152	)
Stock Options exercised		1,650		4,125		36,255											40,380
Balance at June 30, 2006		2,117,966	$	5,331,165	$	7,290,368	$	20,987,796		$	(1,724,943	)	$	(257,375	)	$	31,627,011
Balance at December 31, 2006		2,117,966	$	5,331,165	$	7,295,235	$	22,003,063		$	(775,200	)	$	(257,375	)	$	33,596,888
Adjustment to opening balance, net of tax, for the
adoption of SFAS No. 159								(411,989	)								(411,989	)
Adjusted opening balance, January 1, 2007							$	21,591,074								$	33,184,899
Comprehensive Income:
Net income		-		-		-		1,040,427			-						1,040,427
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $10,534											17,708						17,708
Other Comprehensive gains from
derivatives, net of reclassification
adjustment of $8,572											(14,409	)					(14,409	)
Total Comprehensive Income																	1,043,726
Cash Dividend paid $0.36 per share								(762,468	)								(762,468	)
Fair value unexercised stock options						2,868											2,868
Balance at June 30, 2007		2,117,966	$	5,331,165	$	7,298,103	$	21,869,033		$	(771,901	)	$	(257,375	)	$	33,469,025

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED JUNE 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,040,427		$	1,800,848
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		(187,185	)		(238,635	)
Provision for loan losses		200,000			120,000
Provision for depreciation		391,290			389,931
Stock dividends received		(92,800	)		(95,600	)
(Gain)/loss on sale of other real estate		26,270			(3,323	)
(Gain)/loss on sale of mortgage loans		(124,632	)		(139,869	)
(Gain)/loss on sale of investment securities		558,770			-
(Gain)/loss on valuation of trading securities		360,166			-
Net amortization (accretion) of securities		(13,136	)		82,593
Amortization of deposit premium		53,808			53,808
Writedown of other real estate		211,958			22,178
Writedown of other repossessed assets		15,000			-
Net change in:
Purchase of trading securities		(21,171,178	)		-
Proceeds from sales, maturities and paydowns
of trading securities		806,484			-
Loans held for sale		54,810			112,229
Accrued interest receivable		95,437			(3,793	)
Cash surrender value		(22,318	)		(20,046	)
Other assets		(300,093	)		(47,155	)
Accrued interest payable		450,383			391,512
Accrued taxes and other liabilities		51,811			(394,112	)
Net cash provided by (used in) operating activities		(17,594,728	)		2,030,566
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		164,886			398,688
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		57,574,695			7,599,210
Held-to-maturity		5,596,041			548,412
Redemption of FHLB stock		841,800			1,044,000
Purchases of securities:
Available-for-sale		(37,376,524	)		(302,953	)
Held-to-maturity		(4,640,000	)		(309,929	)
(Increase)/decrease in loans		(4,006,781	)		1,981,361
Proceeds from sale and transfers of other real estate		362,850			34,401
Proceeds from sale and transfers of other repossessed assets		4,000			4,500
Purchase of premises and equipment		(268,236	)		(305,257	)
Net cash provided by (used in) investing activities		18,252,731			10,692,433

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

PERIODS ENDED JUNE 30,

(continued) 

	2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES
Increase /(decrease) in customer deposits		(4,499,650	)		6,112,286
Increase /(decrease) in brokered deposits		9,889,273			581,879
Increase /(decrease) in securities sold under
repurchase agreements		5,928,059			(1,315,393	)
Increase /(decrease) in FHLB advances		(9,334,485	)		(17,739,354	)
Increase /(decrease) in advances from borrowers
for taxes and insurance		(156,695	)		(159,994	)
Cash dividends paid		(762,468	)		(762,152	)
Common stock issued		2,868			40,380
Net cash provided by (used in) financing activities		1,066,902			(13,242,348	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		1,724,905			(519,350	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		6,572,163			9,825,459
CASH AND DUE FROM BANKS AT END OF PERIOD	$	8,297,068		$	9,306,109
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest	$	5,151,070		$	4,389,108
Cash paid during the year for income taxes	$	266,928		$	1,051,298
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans foreclosed to other real estate	$	-		$	78,078
Change in unrealized gains (losses)
on securities available for sale	$	28,242		$	(1,101,874	)
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	10,534		$	(410,999	)
Change in unrealized gains (losses) on derivative	$	(22,981	)	$	(34,049	)
Change in the deferred tax effect in
unrealized gains (losses) on derivative	$	(8,572	)	$	(12,700	)

BRITTON& KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007 AND DECEMBER 31, 2006

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 consolidated financial statements as of June 30, 2007, are unaudited and reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the financial position and operating results of 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 of Dallas (“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.  On October 18, 2005, the Bank entered into a second agreement with the FHLB to cap the interest rate paid on a $5 million advance for 2 years at 3-Month LIBOR with a strike price of 4.50% and a cost of 35 bps with no margin.  On August 15, 2006, the Bank entered into an agreement with the FHLB to cap the interest rate paid on a third $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 margin.  On July 25, 2007, 3-Month LIBOR was 5.36% and the first two caps are in the money. 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 and considered highly effective over its term, will be determined 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 interest rates prior to the expiration of the swap agreement in 2009.  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.  Due to the short holding period before completion of the sale, there is generally no gain or loss on these loans.  On a monthly basis, loans held for sale are reviewed and reported on the balance sheet at the lower of cost or market.  At June 30, 2007, there were no loans classified as held-for-sale.

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 June 30, 2007, was 8.51%.

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 June 30, 2007, and December 31, 2006, were $2.7 million and $2.1 million, respectively.  As of June 30, 2007, the Company had entered into other commercial and residential loan commitments with certain customers that had an aggregate unused balance of $60.5 million, a decrease from $64.5 million at December 31, 2006.  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 Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.”  Using the Black-Scholes option-pricing model, the total cost of options granted to employees at June 30, 2007, was $2,868.  This amount has been included in compensation cost for the six months ended June 30, 2007.  The following information sets forth the computation of earnings per share for the three and six months ended June 30, 2007 and 2006.

	For the three months ended June 30,
	2007		2006
Basic weighted average shares outstanding		2,117,966		2,117,376
Dilutive effect of granted options		2,192		4,006
Diluted weighted average shares outstanding		2,120,158		2,121,382
Net income	$	613,299	$	875,456
Net income per share-basic	$	0.29	$	0.41
Net income per share-diluted	$	0.29	$	0.41

	For the six months ended June 30,
	2007		2006
Basic weighted average shares outstanding		2,117,966		2,117,084
Dilutive effect of granted options		2,364		4,948
Diluted weighted average shares outstanding		2,120,330		2,122,033
Net income	$	1,040,427	$	1,800,848
Net income per share-basic	$	0.49	$	0.85
Net income per share-diluted	$	0.49	$	0.85

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 June 30, 2007, as compared to the Company’s financial condition as of December 31, 2006, and the results of operations of the Company for the three and six month periods ended June 30, 2007, as compared to the corresponding periods of 2006.

SUMMARY

The Company reported net income for the three months ended June 30, 2007, of $613 thousand, or $0.29 per diluted share, compared to $875 thousand, or $0.41 per diluted share, for the same period in 2006.  For the six months ended June 30, 2007, net income and earnings per share was $1.0 million, or $0.49 per diluted share, compared to $1.8 million, or $0.85 per diluted share, for the same period in 2006.  The decline in both quarter and year-to-date net income was primarily related to the Company’s adoption on April 5, 2007, of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value.

On April 12, 2007, the Company announced that effective January 1, 2007, the Company elected early adoption of Statement of Financial Accounting Standards No. 157, “Fair Value Measurement” (“SFAS 157”), and SFAS 159.  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. Thereafter, the securities selected for the fair value measurement option were sold and re-invested back into similar securities with an approximate 1.25% added yield.

Subsequently, after discussions with the Securities and Exchange Commission and further analysis of SFAS 159 by the accounting industry, the Company decided to apply SFAS 159 to only $20 million of the securities purchased in April, 2007, and as a result classified that amount into a new “trading” category of investment securities and classified the remaining $35 million as available-for-sale investment securities.  The loss in the amount of $559 thousand on the sale of the securities used to repurchase available-for-sale securities was accounted for as an “other than temporary impairment” in the first quarter of 2007 due to changes in interest rates since original purchase.

If interest rates rise in the remainder of 2007, the application of SFAS 159 will likely have a negative impact on the Company’s earnings due to the requirement under SFAS 159 that investment securities classified in the trading category be periodically marked to market.  As rates rise, the value of the investment securities declines and reduces our earnings.  However, future earnings from our securities portfolio in the last half of 2007 and thereafter are expected to be enhanced due to the re-investment of the sold securities at higher yields.  Management also expects that the anticipated lower cash flows from the longer duration securities purchased in April, 2007 will provide a hedge against the negative effects of the inverted yield curve and the margin compression produced by such a yield curve.  Additionally, management believes that losses sustained from any sale of securities and the eventual markdown of a portfolio should be viewed as an earnings adjustment that does not have a material effect on the Company’s underlying economics.  Whether a loss is held in the equity section of the balance sheet or marked to market through earnings, it is still a loss and neither option places the Company in a worse economic position.

Total assets increased $2.2 million from $369.3 million at December 31, 2006 to $371.5 million at June 30, 2007.  Cash and due from banks increased to $8.3 million at June 30, 2007, from $6.6 million at December 31, 2006.  The available-for-sale investment securities portfolio decreased from December 31, 2006, by $20.7 million to $43.7 million at June 30, 2007, primarily from the sale and repurchase of approximately $55 million of its investment securities and subsequent classification of $20 million of the newly purchased securities into the new trading category of investment securities.  The balance of the trading portfolio at June 30, 2007, was $19.6 million.  The held-to-maturity portfolio fell $958 thousand to $37.7 million from December 31, 2006, to June 30, 2007.  Net loans, excluding loans held for sale, at June 30, 2007, increased $3.6 million to $244.7 million since December 31, 2006.  Other real estate owned decreased $230 thousand over the same period.  Since December 31, 2006, total deposits have increased $5.4 million to $259.1 million at June 30, 2007, while borrowings have declined $3.4 million over the same period.  Total stockholders’ equity decreased $128 thousand to $33.5 million at June 30, 2007 from $33.6 million at December 31, 2006.

Financial Condition

Assets

The Company’s total assets increased $2.2 million from $369.3 million at December 31, 2006, to $371.5 million at June 30, 2007.  The increase was primarily due to growth in the loan portfolio offset by re-directing cash flows from the investment portfolio to pay down borrowed funds.

Investment Securities

The Company’s investment portfolio at June 30, 2007, consists of mortgage-backed and municipal securities.  Investment securities that are deemed to be held-to-maturity are accounted for by the amortized cost method while securities in the available-for-sale category are accounted for at fair value with valuation adjustments recorded in the equity section through other comprehensive income/(loss).  A new trading category was established in connection with the Company’s adoption of SFAS 159.  Securities classified as trading are accounted for at fair value with periodic valuation adjustments recorded directly to earnings.

Management determines the classification of its securities at acquisition.  Total held-to-maturity, available-for-sale and trading investment securities were $101.0 million at June 30, 2007, representing a decrease of $2.1 million since December 31, 2006, as cash flows were used to pay down borrowings.  Equity securities decreased $749 thousand due primarily to a mandatory redemption of Federal Home Loan Bank (“FHLB”) stock held by the Company as a result of modifications made by the FHLB of the minimum investment requirement for its members.  Equity securities are comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $2.8 million, the Company’s investment in its statutory trust of $155 thousand and ECD Investments, LLC membership interests of $100 thousand.

The amortized cost of the Bank’s investment securities at June 30, 2007, and December 31, 2006, are summarized in Table 1.

TABLE 1: COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

	06/30/07		12/31/06
Mortgage-Backed Securities	$	67,063,980	$	61,518,891
Agencies Obligations		-		6,496,959
Obligations of State and
Political Subdivisions		35,470,671		36,175,580
Total	$	102,534,651	$	104,191,430

Loans

Net loans held to maturity increased $3.6 million during the first six months of 2007.  Increases of $12.8 million in the Company’s Baton Rouge, LA market in the second quarter of 2007 offset a decrease of $4.8 million in the Company’s Vicksburg, MS market and a decrease of $3.7 million in 1-4 family residential mortgage loans over the same period.  The Company’s Natchez, MS market was relatively flat in the second quarter of 2007.  Further declines are expected to occur in the residential real estate portfolio as management plans to replace cash flows from these loans with higher yielding commercial loans mainly in Baton Rouge.  Although management has been implementing this shift from residential real estate loans to commercial real estate loans for some time and believes that loan yield should improve in the process, it is aware that total loan volumes may decline throughout the year.

The Company intends to continue to broker the majority of its originations from its residential real estate segment in the secondary market.  This is known as “table funding” since the loan is funded by an outside party.  Management has decided to use table funding as opposed to funding these loans itself in an effort to streamline operations in the mortgage department.  It is expected that these streamlining efforts will also contribute to lower residential real estate loan portfolio balances.  However, these efforts will result in reduced servicing costs and will allow the mortgage department to focus on originations and fee income.   Gross loans to total assets increased to 66.5% at June 30, 2007, compared to 65.9% at December 31, 2006.  At June 30, 2007, the loan to deposit ratio was 95.4% compared to 96.0% at December 31, 2006.

Table 2 presents the Bank’s loan portfolio composition at June 30, 2007, and December 31, 2006.

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

	06/30/07		12/31/06
Commercial, financial & agricultural	$	28,747,000	$	32,868,000
Real estate-construction		50,918,000		30,069,000
Real estate-1-4 family residential		71,124,000		94,126,000
Real estate-other		87,474,000		75,237,000
Installment		8,747,000		12,478,000
Other		146,000		306,000
Total loans	$	247,156,000	$	245,084,000

The Company’s loan portfolio at June 30, 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 the year-end.

Asset Quality

Nonperforming assets, including non-accrual loans, other real estate and loans 90 days or more delinquent, increased $792 thousand to $3.5 million at June 30, 2007, from $2.7 million at December 31, 2006.  The Bank’s nonperforming loan ratio increased to .99% at June 30, 2007, from .59% at December 31, 2006.  The increase is due primarily to increases in loans past due 90 days or more, which increased $541 thousand during this period.  Two commercial loans with a single customer in the amount of $772 thousand went 90 days past due while the Bank was waiting on current financials and appraisals.  Both loans were renewed on July 31, 2007, and their status has changed to current from 90 days past due.  A breakdown of nonperforming assets at June 30, 2007, and December 31, 2006, is shown in Table 3.

TABLE 3: BREAKDOWN OF NONPERFORMING ASSETS

	06/30/07			12/31/06
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	1,313		$	829
Installment		54			13
Commercial and all other loans		308			351
Total non-accrual loans		1,675			1,193
Loans past due 90 days or more		772			232
Total nonperforming loans		2,447			1,425
Other real estate owned (net)		1,027			1,257
Total nonperforming assets	$	3,474		$	2,682
Nonperforming loans as a percent of loans, net of unearned interest and loans held for sale		.99	%		.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 reevaluates the adequacy of the allowance.  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.   Each loan is assigned a risk rating between one and nine with a rating of “one” being the least risk and a rating of “nine” reflecting the most risk or a complete loss. Risk ratings are assigned by the originating loan officer or loan committee at the initiation of the transactions and are reviewed and changed, when necessary, during the life of the loan.

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

Based upon this evaluation, management believes the allowance for loan losses of $2.4 million at June 30, 2007, which represents .97% of gross loans held to maturity, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans.  At June 30, 2007, total reserves included specific reserves of $721 thousand, general reserves of $1.2 million and unallocated reserves of $486 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 provision for the three and six months ended June 30, 2007, was increased to $120 and $200 thousand from $60 and $120 thousand in the same periods in 2006.  The increase in both periods is due to the previously mentioned shift in the portfolio mix from residential real estate loans to commercial real estate loans and the presumed increased risk of these loans as well as to higher net charge-offs.

The Company regularly reviews the allowance in an effort to maintain it at an adequate level and provide necessary data to maintain a proper provision expense to earnings.  Based upon this evaluation, management believes that the provision for possible loan losses of $40 thousand per month going forward will be adequate to provide coverage for possible loan losses that may be inherent in the portfolio.

Table 4 details allowance activity for the six months ended June 30, 2007, and June 30, 2006:

TABLE 4: ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

	06/30/07			06/30/06
	(dollars in thousands)
Balance at beginning of period	$	2,344		$	2,378
Charge-offs:
Real Estate		(75	)		(8	)
Commercial		(74	)		(16	)
Installment and other		(40	)		(40	)
Recoveries:
Real Estate		1			22
Commercial		23			7
Installment and other		30			8
Net (charge-offs)/recoveries		(135	)		(27	)
Provision charged to operations		200			120
Balance at end of period	$	2,409		$	2,471
Allowance for loan losses as a percent of loans, net of unearned interest & loans held for sale		.97	%		1.02	%
Net charge-offs as a percent of average loans		.05	%		.02	%

Potential Problem Loans

At June 30, 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 $5.4 million from $253.8 million at December 31, 2006, to $259.1 million at June 30, 2007.  The increase in deposits is due primarily to the purchase of $10 million in brokered deposits.  The Company from time to time uses the brokered certificate of deposit market as an asset liability management tool.  This purchase allowed the Company to lengthen its funding and lock in an acceptable interest rate as a means of protecting against rising interest rates.

TABLE 5: COMPOSITION OF DEPOSITS

	06/30/07		12/31/06
Non-Interest Bearing	$	46,241,886	$	50,345,279
NOW Accounts		25,029,880		24,555,009
Money Market Deposit Accounts		35,620,143		37,101,457
Savings Accounts		18,859,238		18,082,839
Certificates of Deposit		133,395,751		123,672,691
Total Deposits	$	259,146,898	$	253,757,275

Borrowings

Total bank borrowings, including FHLB advances, federal funds purchased and customer repurchase agreements, decreased $3.4 million from $73.8 million at December 31, 2006 to $70.4 million at June 30, 2007.  The majority of the decrease resulted as FHLB advances were paid down with investment cash flows.  There has been a shift in the mix of borrowed funds as FHLB borrowings declined by $9.3 million while customer repurchase agreements increased $5.9 million.  Because of the nature of a customer repurchase agreement, the bank must include these liabilities as borrowings rather than local customer deposits.  The amounts are made up almost entirely from agreements made with local customers to sweep overnight funds from their deposit accounts.  Management believes these accounts perform more like a core deposit rather than a bank obligation.

Capital

Stockholders' equity totaled $33.5 million at June 30, 2007, compared to $33.6 million at December 31, 2006.  The Company posted earnings of $1.0 million which were offset by $762 thousand in dividends paid, and a $412 thousand transfer of unrealized losses in the available-for-sale portfolio at December 31, 2006, directly to retained earnings due to the adoption of SFAS 159.

Losses in the available-for-sale investment portfolio and off-balance sheet derivatives, included in comprehensive income, are considered declines due to interest rates and are therefore only a temporary impairment of the security.

Components of comprehensive income are excluded from the calculation of capital ratios.  The Company maintained a total capital to risk weighted assets ratio of 14.63%, a Tier 1 capital to risk weighted assets ratio of 13.77% and a leverage ratio of 10.46% at June 30, 2007.  These 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 decreased to 9.0% at June 30, 2007, compared to 9.1% at December 31, 2006.

Off-Balance Sheet Arrangements

There have been no significant changes in the Company’s off-balance sheet arrangements during the six months ended June 30, 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.

Results of Operations

Net Income

Net income for the three months ended June 30, 2007, decreased to $613 thousand, or $0.29 per diluted share, compared to $875 thousand, or $0.41 per diluted share, for the same period in 2006.  Returns on average assets and average equity were .67% and 7.26%, respectively, for the three months ended June 30, 2007, compared to .93% and 11.08%, respectively, for the same period in 2006.  The decrease is due primarily to marking the Company’s trading portfolio to market for the quarter ended June 30, 2007.  Increases in interest rates caused a decline of $450 thousand in the Company’s trading portfolio, which resulted in an after-tax decline in net income of $282 thousand.  Offsetting this decline was higher service charges on deposit accounts and increased income from the sale of residential mortgage loans.

For the six months ended June 30, 2007, net income was $1.0 million, or $0.49 per diluted share, compared to $1.8 million, or $0.85 per diluted share, for the same period in 2006.  This decrease, much like the decrease for the three months ended June 30, 2007, was due to the after-tax decline in the trading portfolio of $282 thousand along with after-tax losses of $350 thousand attributed to the sale of approximately $35 million in available-for-sale securities.

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 increased $29 thousand to $3.4 million for the three months ended June 30, 2007, as compared to the same period in 2006.  The slight increase is due to increased yield on the investment portfolio as the Company repurchased securities with higher yields to replace the $35 million of its available-for-sale investment securities and $20 million of its investment securities in the trading portfolio sold in the second quarter of 2007 in connection with its adoption of SFAS 159, as described earlier.  Higher fees and a slowing of margin compression in the second quarter of 2007 contributed to the improvement in net interest margin to 3.91% for the quarter ended June 30, 2007, compared to 3.83% at June 30, 2006.  The Company’s interest rate spread, which is the difference in the weighted average interest rate on earning assets less the weighted average interest rate on interest bearing liabilities, declined 3 basis points to 3.17% for the quarter ended June 30, 2007, compared to 3.20% during the same period in 2006.

For the six months ended June 30, 2007, net interest income decreased $89 thousand to $6.7 million compared to the same period in 2006.  The decrease was due primarily to a combination of lower volumes and a greater decline in interest rate spread during the six month analysis compared to the three month analysis.  Interest rate spread declined 10 basis points to 3.09% for the six months ended June 30, 2007, compared to 3.19% for the same period in 2006.  The lesser decline in interest rate spread for the three months ended June 30, 2007, over the six months ended June 30, 2007, points toward a slowing margin compression which should contribute to higher net interest income in the future.  Net interest margin increased to 3.82% for the six months ended June 30, 2007, as compared to 3.78% in the same period in 2006.

The Federal Reserve began in mid-2004 raising the Federal Funds rate, which currently is 5.25%.  Management believes that barring additional inflation concerns by the Federal Reserve, interest rates should stabilize and begin to decline.  As the interest rate curve begins to normalize and interest rate spreads begin to grow, net interest income should begin to increase.  At this point in the rate cycle, management does not expect any material decreases in net interest income or material negative compression in net interest margin.  In addition, funding cost increases continue to be limited by the Company’s purchase of interest rate caps on $30 million of its FHLB term advances.  See Note B to the Consolidated Financial Statements above for further information concerning these arrangements.  Management believes that these two factors provide a protective hedge against material declines in net interest income or net interest margin.

Non-Interest Income

Non-interest income includes service charges on deposit accounts, income from fiduciary 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 June 30, 2007, decreased $432 thousand to $160 thousand compared to the three month period ended June 30, 2006, due to the $450 thousand market decline in the trading securities portfolio.

For the six months ended June 30, 2007, non-interest income decreased $846 thousand to $358 thousand compared to the same period in 2006.  The decrease is due primarily to the $360 thousand market decline in the trading securities portfolio along with the loss of $559 thousand on the sale of approximately $35 million in available-for-sale securities.

Non-Interest Expense

Non-interest expense includes salaries and benefits, occupancy, equipment and other operating expenses.  Non-interest expense for the three months ended June 30, 2007, declined $55 thousand to $2.7 million compared to the same period in 2006.  Total non-interest expense declined due mainly to lower personnel costs.

Non-interest expense for the six months ended June 30, 2007, increased $175 thousand to $5.6 million compared to $5.5 million during the same period in 2006.  This increase was due primarily to a $145 thousand increase in write-downs of other real estate in the first six months of 2007.

Income Taxes

The Company recorded income tax expense of $136 thousand for the three months ended June 30, 2007, compared to $282 thousand for the same period in 2006.Income tax expense for the six months ended June 30, 2007, was $169 thousand compared to $599 thousand during the same period in 2006.  The decrease in both periods was related to adjustments regarding the adoption of SFAS 159.

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 $1.7 million to $8.3 million at June 30, 2007, from $6.6 million at December 31, 2006.  For the six months ended June 30, 2007, cash provided by investing and financing was $18.2 million and $1.1 million, respectively, while operating activities used $17.6 million.

The Company has unsecured federal funds lines with correspondent banks and maintains the ability to draw on its line of credit with the FHLB in the amounts of approximately $44 and $54 million, respectively. Management believes it maintains adequate liquidity for the Company’s current needs.

In the ordinary course of business, the Company enters into commitments to extend credit to its customers.  See Note E, “Loan Commitments,” to the Consolidated Financial Statements for a discussion of the Company’s commitments to extend credit as of June 30, 2007.

The Company’s liquidity and capital resources are substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances.  Certain restrictions exist on the ability of the Bank to transfer such funds to the Company in the form of dividends or loans.  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 June 30, 2007, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $4.9 million.

Federal Reserve regulations also limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations.  At June 30, 2007, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $3.2 million.  There were no loans outstanding from the Bank to the Company at June 30, 2007.

Contractual Obligations

There were no material changes outside of the ordinary course of business to any of the contractual obligations disclosed in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2007.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties which could cause the actual results to differ materially from the Company’s expectations.  Forward-looking statements have been and will be made in written documents and oral presentations of the Company.  Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management.  When used in the Company’s documents or oral presentations, the words “anticipate”, “believe”, “estimate”, “expect”, “objective”, “projection”, “forecast”, “plan”, “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 utilizes an asset/liability committee (“ALCO”) comprised of four outside directors, the Bank’s Chief Executive Officer and its Chief Financial Officer, who acts as chairman of the committee.  The committee meets monthly or more often as needed, 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.

The Company utilizes an electronically based financial modeling system.  After supplying the system with an interest rate scenario and a set of projections, the ALCO and Board of Directors receive a standard reporting package showing the current and future impact of changes in interest rates, strategies and tactics and tracking information against budgets, other forecasts and actual performance.

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 real estate and commercial real estate 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 OTS regulatory guidelines, 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 category in the investment security portfolio 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 classified 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 to allow them to make timely decisions regarding the disclosure of 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 such 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 June 30, 2007, retained earnings available for payment of cash dividends under applicable dividend regulations exceed $4.9 million.

Item 4.     Submission of Matters to a Vote of Security Holders

The 2007 Annual Meeting of Shareholders of the Company was held in the lobby of the main office of Britton & Koontz Bank, N.A., 500 Main Street, Natchez, Mississippi 39120, on Tuesday, April 24, 2007.

At the Annual Meeting, three Class II directors were elected.  The nominees for election as a Class II director received the number of votes set forth opposite their names in the table below.

Nominee	Number of Votes Cast “FOR” Nominee	Number of Votes Withheld
W. W. Allen, Jr.	1,420,563	217,136
Craig A. Bradford, D.M.D.	1,420,563	217,136
Vinod K. Thukral, Ph.D.	1,420,563	217,136

At the Annual Meeting, shareholders voted on the Britton & Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan.  Votes were cast as follows:

For	Against	Abstain	Broker Non-Votes
919,267	251,654	22,934	443,843

In addition to the directors noted above who were elected at the Annual Meeting, the following directors continued in office after the Annual Meeting: George R. Kurz, R. Andrew Patty II., Robert R. Punches, A. J. Ferguson and Bethany L. Overton.

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 and restated, 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, 2007.
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 Securities and Exchange 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 Securities and Exchange Commission on August 17, 2006.
10.1	*	Britton & Koontz Capital Corporation 2007 Long-Term Incentive Compensation Plan, incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 21, 2007.
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 “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 AND KOONTZ CAPITAL CORPORATION

Date:	August 13, 2007	/s/ W. Page Ogden
		W. Page Ogden
		Chief Executive Officer

Date:	August 13, 2007	/s/ William M. Salters
		William M. Salters
		Chief Financial Officer

EXHIBIT INDEX

Exhibit	Description 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