Britton & Koontz Capital (BKBK) 10-Q 2008 Q4 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 September 30, 2008

or

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

001-33009

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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

2,117,966 Shares of Common Stock, Par Value $2.50, were outstanding as of November 1, 2008.

BRITTON & KOONTZ CAPITAL CORPORATION

 AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION
	Item 1.     Financial Statements
	Consolidated Balance Sheets
	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 4T.   Controls and Procedures
PART II.	OTHER INFORMATION
	Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
	Item 5.     Other Information
	Item 6.     Exhibits
SIGNATURES
CERTIFICATIONS:

Certification of Chief Executive Officer as required pursuant to section 302 of the Sarbanes Oxley Act of 2002

Certification of Chief Financial Officer as required pursuant to section 302 of the Sarbanes Oxley Act of 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 BALANCE SHEETS

AS OF

A S S E T S

	September 30,			December 31,
ASSETS:	2008			2007
Cash and due from banks:
Non-interest bearing	$	6,950,596		$	6,102,837
Interest bearing		201,458			2,629,470
Total cash and due from banks		7,152,054			8,732,307
Federal funds sold		37,714			245,192
Investment Securities:
Trading (amortized cost, in 2008 and 2007,
of $0 and $19,144,678, respectively)		-			19,199,207
Available-for-sale (amortized cost, in 2008 and 2007,
of $90,726,633 and $63,612,681, respectively)		90,644,831			63,983,146
Held-to-maturity (market value, in 2008 and 2007,
of $53,368,103 and $40,639,894, respectively)		54,101,291			39,988,305
Equity securities		3,359,738			2,521,000
Loans, less allowance for loan losses of $2,292,273
in 2008 and $2,430,936 in 2007		219,201,732			220,921,727
Bank premises and equipment, net		6,975,101			7,357,785
Other real estate, net of reserves of $163,380		1,389,812			746,796
Accrued interest receivable		2,207,684			2,294,235
Cash surrender value of life insurance		1,046,229			1,013,683
Core Deposits, net		584,946			665,658
Other assets		814,445			676,231
TOTAL ASSETS	$	387,515,577		$	368,345,272
LIABILITIES AND STOCKHOLDERS' EQUITY
	September 30,			December 31,
LIABILITIES:	2008			2007
Deposits
Non-interest bearing	$	48,712,324		$	47,305,927
Interest bearing		188,335,968			199,088,223
Total deposits		237,048,292			246,394,150
Federal Home Loan Bank advances		55,027,868			29,160,730
Securities sold under repurchase agreements		50,393,869			48,229,299
Accrued interest payable		1,270,646			2,070,075
Advances from borrowers for taxes and insurance		271,259			359,501
Accrued taxes and other liabilities		1,444,558			1,175,652
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		350,611,492			332,544,407
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 September 30, 2008, and
December 31, 2007		5,331,165			5,331,165
Additional paid-in capital		7,315,954			7,305,970
Retained earnings		24,565,631			23,071,921
Accumulated other comprehensive income/(loss)		(51,290	)		349,184
		37,161,460			36,058,240
Cost of 14,500 shares of common stock held by the company		(257,375	)		(257,375	)
Total stockholders' equity		36,904,085			35,800,865
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	387,515,577		$	368,345,272

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
INTEREST INCOME:
Interest and fees on loans	$	3,811,902	$	4,927,873	$	12,077,937	$	14,604,205
Interest on investment securities:
Taxable interest income		1,428,241		983,216		3,822,149		2,765,617
Exempt from federal taxes		416,120		408,169		1,245,032		1,236,172
Interest on federal funds sold		1,474		4,144		4,569		10,225
Total interest income		5,657,737		6,323,402		17,149,687		18,616,219
INTEREST EXPENSE:
Interest on deposits		1,212,286		1,976,714		4,214,165		5,845,880
Interest on Federal Home Loan Bank advances		286,571		505,670		782,271		1,825,196
Interest on trust preferred securities		76,625		108,624		245,498		322,410
Interest on securities sold under repurchase agreements		542,806		269,840		1,626,631		468,815
Total interest expense		2,118,288		2,860,848		6,868,565		8,462,301
NET INTEREST INCOME		3,539,449		3,462,554		10,281,122		10,153,918
Provision for loan losses		120,000		120,000		360,000		320,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		3,419,449		3,342,554		9,921,122		9,833,918
OTHER INCOME:
Service charges on deposit accounts		489,450		409,424		1,326,362		1,197,900
Income from fiduciary activities		999		999		2,997		2,997
Income from networking arrangements		59,351		68,894		126,558		194,865
Gain/(loss) on sale of mortgage loans		55,037		91,889		176,114		216,521
Gain/(loss) on sale of securities		-		-		148,116		(558,770	)
Net gain on trading securities		-		204,754		-		(155,412	)
Other		114,094		103,821		375,954		366,130
Total other income		718,931		879,781		2,156,101		1,264,231
OTHER EXPENSES:
Salaries		1,347,170		1,327,749		4,137,534		3,847,802
Employee benefits		177,865		189,403		547,327		567,805
Director fees		41,400		52,500		125,000		158,425
Net occupancy expense		251,436		241,814		718,499		724,242
Equipment expenses		269,932		287,544		835,170		851,620
FDIC assessment		10,602		7,733		25,093		23,247
Advertising		54,178		41,594		154,494		121,770
Stationery and supplies		39,764		61,795		127,487		144,273
Audit expense		58,102		57,292		172,025		183,551
Other real estate expense (includes gn/ls on sale)		53,669		118,113		113,154		328,084
Amortization of deposit premium		26,904		26,904		80,712		80,712
Other		460,763		450,047		1,423,447		1,497,184
Total other expenses		2,791,785		2,862,488		8,459,942		8,528,715
INCOME BEFORE INCOME TAX EXPENSE		1,346,595		1,359,847		3,617,281		2,569,434
Income tax expense		403,515		358,773		979,869		527,932
NET INCOME	$	943,080	$	1,001,074	$	2,637,412	$	2,041,502
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.45	$	0.47	$	1.25	$	0.96
Basic weighted shares outstanding		2,117,966		2,117,966		2,117,966		2,117,966
Diluted earnings per share	$	0.45	$	0.47	$	1.25	$	0.96
Diluted weighted shares outstanding		2,117,966		2,119,093		2,117,966		2,119,824
Cash dividends per share	$	0.18	$	0.18	$	0.54	$	0.54

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

										Accumulated
	Common Stock				Additional					Other						Total
					Paid-in		Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Capital		Earnings			Income			Stock			Equity
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								2,041,502									2,041,502
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes for $208,104											349,817						349,817
Other Comprehensive gains/(loss) from
derivatives, net of reclassification
adjustment of $43,163											72,556						72,556
Total Comprehensive income																	2,463,875
Cash Dividend paid $0.54 per share								(1,143,702	)								(1,143,702	)
Fair Value unexercised stock options						8,052											8,052
Balance at September 30, 2007		2,117,966	$	5,331,165	$	7,303,287	$	22,488,874		$	(352,827	)	$	(257,375	)	$	34,513,124
Balance at December 31, 2007		2,117,966	$	5,331,165	$	7,305,970	$	23,071,921		$	349,184		$	(257,375	)	$	35,800,865
Comprehensive Income:
Net income								2,637,412									2,637,412
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $(168,695)											(283,571	)					(283,571	)
Other Comprehensive gains/(loss) from
derivatives, net of reclassification
adjustment of $(69,545)											(116,903	)					(116,903	)
Total Comprehensive income																	2,236,938
Cash Dividend paid $0.54 per share								(1,143,702	)								(1,143,702	)
Fair Value unexercised stock options						9,984											9,984
Balance at September 30, 2008		2,117,966	$	5,331,165	$	7,315,954	$	24,565,631		$	(51,290	)	$	(257,375	)	$	36,904,085

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,637,412		$	2,041,502
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		(151,264	)		(298,255	)
Provision for loan losses		360,000			320,000
Provision for losses on foreclosed real estate		105,030			23,340
Provision for depreciation		560,085			592,380
Stock dividends received		(49,200	)		(131,900	)
(Gain)/loss on sale of other real estate		(32,694	)		26,270
(Gain)/loss on sale of other repossessed assets		-			(1,000	)
(Gain)/loss on sale of mortgage loans		(176,114	)		(216,521	)
(Gain)/loss on sale of investment securities		(148,116	)		558,770
(Gain)/loss on sale of trading securities		-			155,412
(Gain)/Loss on other securities		1,262			-
Net amortization (accretion) of securities		(66,552	)		(11,420	)
Amortization of deposit premium		80,712			80,712
Writedown of other real estate		-			297,959
Writedown of other repossessed assets		-			15,000
Purchase of trading securities		-			(21,171,178	)
Proceeds from sales, maturities and paydowns
of trading securities		19,349,806			1,079,229
Net change in:
Loans held for sale		-			54,810
Accrued interest receivable		86,551			47,126
Cash surrender value		(32,546	)		(31,387	)
Other assets		251,645			18,542
Accrued interest payable		(799,428	)		499,244
Accrued taxes and other liabilities		112,103			(49,823	)
Net cash provided by (used in) operating activities		22,088,692			(16,101,188	)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		207,478			166,210
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		8,148,272			58,187,260
Held-to-maturity		3,074,478			5,698,207
Redemption of FHLB stock		945,400			841,800
Purchase of FHLB stock		(1,736,200	)		-
Purchase of securities:					-
Available-for-sale		(35,168,412	)		(36,954,202	)
Held-to-maturity		(17,217,207	)		(5,308,539	)
(Increase)/decrease in loans		278,949			8,298,668
Proceeds from sale and transfers of other real estate		511,808			362,850
Proceeds from sale and transfers of other repossessed assets		-			5,000
Proceeds from sale of premises and equipment		-			491
Purchase of premises and equipment		(177,401	)		(382,495	)
Net cash provided by (used in) investing activities		(41,132,835	)		30,915,250

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

(Continued)

	2008			2007
CASH FLOWS FROM FINANCING ACTIVITIES
Increase /(decrease) in customer deposits		(4,563,107	)		(5,283,524	)
Increase /(decrease) in brokered deposits		(4,782,751	)		6,776,968
Increase /(decrease) in securities sold under
repurchase agreements		2,164,570			20,115,216
Increase /(decrease) in FHLB advances		25,867,137			(28,170,529	)
Increase /(decrease) in advances from borrowers
for taxes and insurance		(88,242	)		(104,331	)
Cash dividends paid		(1,143,701	)		(1,143,702	)
Common stock issued
Fair value of unexercised stock options		9,984			8,052
Net cash provided by (used in) financing activities		17,463,890			(7,801,850	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		(1,580,253	)		7,012,212
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		8,732,307			6,572,163
CASH AND DUE FROM BANKS AT END OF PERIOD	$	7,152,054		$	13,584,375
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest	$	7,667,994		$	7,963,057
Cash paid during the period for income taxes, net of refunds	$   698,186			$	670,312
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans foreclosed to other real estate	$	1,227,160		$	304,918
Change in unrealized gains (losses)
on securities available for sale	$	(452,266	)	$	557,921
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	(168,695	)	$	208,104
Change in unrealized gains (losses) on derivative	$	(186,448	)	$	115,719
Change in the deferred tax effect in
unrealized gains (losses) on derivative	$	(69,545	)	$	43,163

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND DECEMBER 31, 2007

Note A.  Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the “Company”) as of December 31, 2007, has been derived from the audited financial statements of the Company for the year then ended.  The accompanying interim consolidated financial statements as of September 30, 2008, 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 2007 amounts have been reclassified to conform to the 2008 presentation.

Note B.  Interest Rate Risk Management

On August 10, 2007, the Bank entered into a 5 year, no-call 2-year Structured Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase”) for $20 million.  Terms of the transaction call for the Bank to pay a fixed interest rate of 4.82%.  In the first two years of the agreement, this rate is subject to reduction if 3-Month LIBOR is greater than 5.36%, measured two business days prior to the 10th of each February, May, August and November.  Accordingly, during the term of the agreement, the Bank’s cost of funds cannot exceed the initial interest rate of 4.82%.  On November 13, 2007, the Company entered into a 5 year, no-call 3-year Structured Repurchase Agreement with Chase for an additional $20 million.  Terms of the transaction call for the Bank to pay a fixed interest rate of 4.71%.  In the first three years of the agreement, this rate is subject to reduction if 3-Month LIBOR is greater than 4.90% measured two business days prior to the 13th of each February, May, August and November.  Accordingly, during the term of this agreement, the Bank’s cost of funds cannot exceed the initial interest rate of 4.71%.  Chase, in its discretion, may terminate the transactions on August 10, 2009 and November 13, 2010, respectively, and quarterly thereafter.  Under each repurchase agreement, the Bank is required to maintain a margin percentage of 105% on the subject securities.  These agreements with Chase were entered into as a means of adding additional leverage and to lock in a fixed rate for a certain period of time.  Additionally, both transactions carry a cap embedded into the interest rate that protects the Company in the case of adverse interest rate increases.

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 as held to maturity at origination based on the Company’s intent and ability to hold until maturity.  These loans are reported at their outstanding balance.  Loans held-for-sale are designated as such at origination and locked in with an approved investor by obtaining a forward commitment to purchase the loan, usually not to exceed 30 days from closing.  Management has a clear intent to sell the loan based on the commitment it has obtained from the investor.

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, if any, are charged against income in the period of decline.  Such declines are recorded in a valuation allowance account and deducted from the cost basis of the loans.  Gains on loans held-for-sale are recognized when realized.  At September 30, 2008, the Company did not have any loans held-for-sale.

On an annual basis, 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.  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 September 30, 2008, was 6.63%.   The securities are currently callable on a quarterly basis at the option of the Company.

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 September 30, 2008, and December 31, 2007, were $3.7 million and $2.8 million, respectively.  As of September 30, 2008, the Company had entered into other commercial and residential loan commitments with certain customers that had an aggregate unused balance of $50.4 million, down from $58.4 million at December 31, 2007.  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 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 and nine months ended September 30, 2008 and 2007.

	For the three months ended September 30,
	2008		2007
Basic weighted average shares outstanding		2,117,966		2,117,966
Dilutive effect of granted options		0		1,127
Diluted weighted average shares outstanding		2,117,966		2,119,093
Net income	$	943,080	$	1001,074
Net income per share-basic	$	0.45	$	0.47
Net income per share-diluted	$	0.45	$	0.47

	For the nine months ended September 30,
	2008		2007
Basic weighted average shares outstanding		2,117,966		2,117,966
Dilutive effect of granted options		0		1,858
Diluted weighted average shares outstanding		2,117,966		2,119,824
Net income	$	2,637,412	$	2,041,502
Net income per share-basic	$	1.25	$	0.96
Net income per share-diluted	$	1.25	$	0.96

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 September 30, 2008, as compared to the Company’s financial condition as of December 31, 2007, and the results of operations of the Company for the three and nine month periods ended September 30, 2008, as compared to the corresponding periods of 2007.

SUMMARY

The Company’s net income for the three months ended September 30, 2008, decreased to $943 thousand, or $.45 per diluted share, compared to $1.0 million, or $.47 per diluted share, for the quarter ended September 30, 2007.  For the nine month period ended September 30, 2008, net income and earnings per share were $2.6 million and$1.25 per diluted share, respectively, compared to $2.0 millionand $0.96 per diluted share, respectively, for the same period in 2007.  The lower quarterly and increased year-to-date earnings compared to 2007 were primarily the result of adjustments made in 2007 in the Company’s trading investment portfolio and losses on the sale of approximately $35 million in its available-for-sale investment securities in 2007.

The Company’s net interest income increased in both the quarterly and year-to-date comparisons.  The lower interest rate environment in 2008 played a significant role in this improvement as the decline in funding costs outweighed the decline in asset yields.

Total assets increased $19.2 million from $368.3 million at December 31, 2007 to $387.5 million at September 30, 2008.  The increase in total assets is primarily due to increases in the investment portfolio of $21.6 million offset by $1.9 million in reductions in the loan portfolio.  Cash and due from banks decreased to $7.2 million at September 30, 2008, from $8.7 million at December 31, 2007.   Other real estate owned increased $643 thousand over the same period due primarily to the foreclosure of two 1-4 residential mortgage loans.  Since December 31, 2007, total deposits have decreased $9.3 million to $237.0 million at September 30, 2008, while borrowings have increased $28.0 million over the same period primarily to cover the purchase of investment securities.  Total stockholders’ equity increased $1.1 million to $36.9 million at September 30, 2008 from $35.8 million at December 31, 2007.

Overall asset quality for the Company at September 30, 2008, deteriorated slightly compared to December 31, 2007.  The ratio of non-performing assets to loans and foreclosed real estate increased to 1.61% at September 30, 2008, as compared to .92% at December 31, 2007, but this ratio decreased from 1.86% at June 30, 2008.

Financial Condition

Investment Securities

The Company’s investment securities portfolio at September 30, 2008, primarily 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).

Management determines the classification of its securities at acquisition.  Total held-to-maturity and available-for-sale investment securities were $144.7 million at September 30, 2008, representing an increase of $21.6 million since December 31, 2007.  The increase in securities resulted from investing public demand deposits received after a successful bid on local county deposits.  Additionally, the improved securities market during the first nine months of 2008 allowed the Company to prefund future cash flows that are expected from the current portfolio.  Under its prefunding strategy, the Company obtains short-term funding, typically from the Federal Home Loan Bank (“FHLB”), to acquire investment securities and then uses the cash flows generated by such securities in the subsequent one to two quarters to repay the short-term funding.  The Company employs this prefunding strategy from time to time to take advantage of favorable interest rate spreads between the short-term funding and the investment securities purchased with such funding.  Equity securities increased $839 thousand due to the purchase of FHLB stock by the Company which was required due to the increase in FHLB borrowings in connection with the above described prefunding strategy.    Equity securities are comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $2.5 million, the Company’s investment in its statutory trust of $155 thousand and ECD Investments, LLC membership interests of $99 thousand.

The amortized cost of the Bank’s investment securities at September 30, 2008, and December 31, 2007, are summarized below.

COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

	09/30/08		12/31/07
Mortgage-Backed Securities	$	106,354,026	$	84,741,030
Obligations of State and
Political Subdivisions		38,473,898		38,004,634
Total	$	144,827,924	$	122,745,664

Loans

Gross loans decreased $1.9 million during the first nine months of 2008.  Increases in loans of $8.2 million in the Company’s Baton Rouge, Louisiana market partially offset a decrease in loans of $4.1 million in the Company’s Vicksburg, Mississippi market and a decrease of $6.0 million in loans in the Company’s Natchez, Mississippi market.  Further declines are expected to occur in the residential real estate portfolio, primarily in the Natchez market, as management plans to replace cash flows from these loans with higher yielding commercial loans.  Given the current weak demand for commercial loans in the Natchez and Vicksburg markets, the Baton Rouge market provides our greatest opportunity for commercial lending.  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 this transition will place pressure on loan volumes and in fact total loan volumes may continue to decline during the remainder of the year.

The ratio of net loans to total assets decreased to 56.6% at September 30, 2008, compared to 60.0% at December 31, 2007.  At September 30, 2008, the loan to deposit ratio was 92.5% compared to 89.7% at December 31, 2007.  The following table presents the Bank’s loan portfolio composition at September 30, 2008, and December 31, 2007.

COMPOSITION OF LOAN PORTFOLIO

	09/30/08		12/31/07
Commercial, financial & agricultural	$	24,859,000	$	25,884,000
Real estate-construction		19,513,000		19,908,000
Real estate-1-4 family residential		62,890,000		68,041,000
Real estate-other		107,282,000		101,709,000
Installment		6,501,000		7,550,000
Other		449,000		261,000
Total loans	$	221,494,000	$	223,353,000

The Company’s loan portfolio at September 30, 2008, 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 year-end.

Asset Quality

Non-performing assets (“NPA’s”), which include non-accrual loans, loans 90 days or more delinquent and foreclosed other real estate, increased $1.5 million to $3.6 million at September 30, 2008, from $2.1 million at December 31, 2007.  Non-accrual loans increased $270 thousand due to one relationship totaling $205 thousand being classified as non-accrual in the second quarter of 2008.  The increase of $591 thousand in loans 90 days or more delinquent is due primarily to one commercial relationship in the amount of $400 thousand which was renewed to a current status and termed out after the end of the quarter.  Although accrued interest on loans 90 days or more delinquent is included in income, management does not believe that any reclassification of these loans to non-accrual status will have a material impact on the Company’s interest income.  Foreclosed other real estate increased $643 thousand due primarily to the foreclosure on two 1-4 family residential properties valued at approximately $830 thousand.  Management has signed a contract to sell one of these properties for $418 thousand by the end of November.

The ratio of non-performing loans to net loans increased to .98% at September 30, 2008, from .59% at December 31, 2007.  While the ratio for the nine months ended September 30, 2008, increased compared to the end of 2007, the ratio declined from 1.68% at June 30, 2008 primarily due to decreases in non-accrual loans.  Even though there has been some increase in NPA’s during the year, overall asset quality issues remain at acceptable levels.  The Company believes that its portfolio management process, including its underwriting standards and early involvement in problem loans, will allow it to identify in a timely manner any further weakening of asset quality during the current economic downturn.

A breakdown of nonperforming assets at September 30, 2008, and December 31, 2007, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

	09/30/08			12/31/07
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	1,493		$	992
Installment		79			87
Commercial and all other loans		0			223
Total non-accrual loans		1,572			1,302
Loans past due 90 days or more		603			12
Total nonperforming loans		2,175			1,314
Other real estate owned (net)		1,390			747
Total nonperforming assets	$	3,565		$	2,061
Nonperforming loans as a percent of loans, net of unearned interest and loans held for sale		.98	%		.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 $2.3 million at September 30, 2008, which represents 1.03% of gross loans held to maturity, is adequate under prevailing economic conditions, to absorb probable losses on existing loans.  At September 30, 2008, total reserves included specific reserves of $524 thousand, general reserves of $1.1 million and unallocated economic reserves of $680 thousand.  At December 31, 2007, the allowance for loan loss was $2.4 million, or 1.09% 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.  During the nine month period ended September 30, 2008, the Company’s provision for loan losses increased by $40 thousand to $360 thousand compared to the same period in 2007.  This increase is in response to higher net charge-offs during the nine months ended September 30, 2008, compared to the same period in 2007.  Net charge-offs during 2008 amounted to $499 thousand compared to $174 thousand in 2007.

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, and considering the net charge-offs in the first nine months and possiblecharge-offs in the fourth quarter of 2008, management currently intends to maintain the provision for possible loan losses at $40 thousand per month for the remainder of the year but will consider increasing the provision as necessary to address increases in NPA’s in the 4th quarter.  The following table details allowance activity for the nine months ended September 30, 2008, and September 30, 2007.

ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

	09/30/08			09/30/07
	(dollars in thousands)
Balance at beginning of period	$	2,431		$	2,344
Charge-offs:
Real Estate		(474	)		(121	)
Commercial		(303	)		(87	)
Installment and other		(34	)		(42	)
Recoveries:
Real Estate		19			4
Commercial		221			40
Installment and other		72			32
Net (charge-offs)/recoveries		(499	)		(174	)
Provision charged to operations		360			320
Balance at end of period	$	2,292		$	2,490
Allowance for loan losses as a percent of loans, net of unearned interest & loans held for sale		1.03	%		1.06	%
Net charge-offs as a percent of average loans		.22	%		.07	%

Potential Problem Loans

At September 30, 2008, the Company had no loans, other than those identified with reserves set aside and balances incorporated in the above tables, which management had significant doubts as to the ability of the borrower to comply with current repayment terms.

Deposits

Total deposits decreased $9.3 million from $246.4 million at December 31, 2007, to $237.0 million at September 30, 2008.  The decrease in deposits is due primarily to the intentional decrease of brokered and higher cost jumbo wholesale deposits.  The Company from time to time uses the brokered certificate of deposit market as an asset liability management tool.  These deposits are generally gathered to position the Bank’s funding more in line with asset maturities and to lock in fixed rates to help manage net interest income.  As interest rates fell in 2008, the Company decided to use other means of funding such as FHLB borrowings.

COMPOSITION OF DEPOSITS

	09/30/08		12/31/07
Non-Interest Bearing	$	48,712,324	$	47,305,927
NOW Accounts		26,807,302		24,056,081
Money Market Deposit Accounts		33,571,219		34,449,399
Savings Accounts		17,590,332		17,310,284
Certificates of Deposit		110,367,115		123,272,459
Total Deposits	$	237,048,292	$	246,394,150

Borrowings

Total bank borrowings, including FHLB advances, federal funds purchased and customer repurchase agreements, increased $28.0 million from $77.4 million at December 31, 2007, to $105.4 million at September 30, 2008.  The majority of the increase was the result of the Company increasing its FHLB advances to finance the purchase of additional investment securities, as described earlier.  Included in the increase were the Company’s customer repurchase agreements which grew $2.1 million.  Because of the nature of these agreements made with customers, the Bank must include these liabilities as borrowings rather than local customer deposits.  These contracts are primarily made with local customers to sweep overnight funds from their deposit accounts.  Management believes these accounts perform more like core deposits rather than wholesale borrowings.

Capital

Stockholders' equity totaled $36.9 million at September 30, 2008, compared to $35.8 million at December 31, 2007.  The Company posted earnings of $2.6 million which were offset by $400 thousand through accumulated other comprehensive losses primarily in unrealized losses in the available-for-sale investment portfolio and $1.1 million in dividends paid.

Losses in the available-for-sale investment portfolio included in comprehensive income/(loss) 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 17.02%, a Tier 1 capital to risk weighted assets ratio of 16.13% and a leverage ratio of 10.82% at September 30, 2008.  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 9.52% at September 30, 2008, compared to 9.72% at December 31, 2007, primarily from the increase in total assets.

Off-Balance Sheet Arrangements

There have been no significant changes in the Company’s off-balance sheet arrangements during the three months ended September 30, 2008.  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 September 30, 2008, decreased to $943 thousand, or $0.45 per diluted share, compared to $1.0 million, or $0.47 per diluted share, for the same period in 2007.  Returns on average assets and average equity were .99% and 10.40%, respectively, for the three months ended September 30, 2008, compared to 1.10% and 11.79%, respectively, for the same period in 2007.  The decrease reflects the recovery of $205 thousand in the third quarter of 2007 from losses previously recorded in the second quarter of 2007 in connection with marking the Company’s trading portfolio to fair value.

For the nine months ended September 30, 2008, net income was $2.6 million, or $1.25 per diluted share, compared to $2.0 million, or $0.96 per diluted share, for the same period in 2007.  This increase is primarily due to the loss recorded in 2007 in relation to the sale of available-for-sale investment securities and the mark-to-market investment portfolio losses experienced in the nine months ended September 30, 2007.

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 for the three and nine months ended September 30, 2008, was $3.5 million and $10.3 million, a $77 thousand and $127 thousand increase, respectively, compared to the same periods in 2007.  The improvement in net interest income is due primarily to the lower interest rate environment coupled with a $20 million increase in earning assets, which had a balance of $367 million at September 30, 2008.  The restructure of the investment portfolio during 2007 resulted in increased net interest income in 2008 by providing higher average yields during the nine month period ended September 30, 2008, compared to the same period in 2007.  The decrease in interest rates on both interest-earning assets and interest-bearing liabilities negatively affected other financial measures.  Even as net interest income increased and interest spreads widened, our net interest margin declined .14% and .09% for the three and nine month periods ending September 30, 2008, respectively, as compared to corresponding periods in 2007.  Net interest margin for the three and nine month periods ended September 30, 2008, was 3.86% and 3.79%, respectively, compared to 4.00% and 3.88% for the corresponding periods in 2007.  Due to the lower interest rate environment, assets purchased during 2008 were at narrower spreads compared to the spreads experienced on existing assets.

Non-Interest Income

Non-interest income decreased $161 thousand to $719 thousand for the third quarter of 2008, and increased $892 thousand to $2.2 million for the nine months ended September 30, 2008, compared to the previous year periods.  The variances are primarily due to adjustments made in 2007 on the Company’s trading investment portfolio and losses on the sale of approximately $35 million in its available-for-sale investment securities in 2007.  Excluding these entries, core non-interest income improved $44 thousand and $178 thousand for the quarter and year-to-date periods in 2008 as compared to corresponding periods in 2007.

Non-Interest Expense

      Non-interest expense was $2.8 million and $8.5 million for the three and nine months ended September 30, 2008, decreasing $71 thousand and $69 thousand, respectively, compared to the same periods in 2007, mainly from lower equipment and other real estate costs.

Income Taxes

The Company recorded income tax expense of $404 thousand for the three months ended September 30, 2008, compared to $359 thousand for the same period in 2007.Income tax expense for the nine months ended September 30, 2008, was $980 thousand compared to $528 thousand during the same period in 2007.  The increase in both periods was related to adjustments regarding the adoption of Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” in 2007.

Liquidity and Capital Resources

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

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

The Company’s cash and cash equivalents decreased $1.5 million to $7.2 million at September 30, 2008, from $8.7 million at December 31, 2007.  For the nine months ended September 30, 2008, cash provided by operating and financing was $22.1 million and $17.5 million, respectively, while investing activities used $41.1 million.

At September 30, 2008, the Company had unsecured federal funds lines with correspondent banks of $44 million and maintained the ability to draw on its available line of credit with the FHLB in the amount of approximately $40 million.  In addition to these lines of credit, the Bank had approximately $41 million in liquid assets including 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.  When used in the Company’s documents (including this Report) or oral presentations, the words “anticipate,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “goal” and similar expressions are intended to identify forward-looking statements.  In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company’s actual results to differ materially from those contemplated in any forward-looking statements include, among others, increased competition, regulatory factors, economic conditions, changing market conditions, availability or cost of capital, employee workforce factors, costs and other effects of legal and administrative proceedings, and changes in federal, state or local legislative requirements.  The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions or other factors affecting such statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

Item 4T.  Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer of the Company (“CEO”) and the Chief Financial Officer of the Company (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2008.  Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s SEC reports.

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

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

  The Company’s ability to pay dividends to its shareholders is substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances.  Federal law imposes limitations on the payment of dividends by national banks.  Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account and may declare a dividend from that account of so much of the net profits as they judge expedient.  The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings.  The Bank’s ability to pay dividends to the Company is also limited by prudence, statutory and regulatory guidelines and a variety of other factors.At September 30, 2008, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $5.3 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 September 30, 2008, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $4.4 million.  There were no loans outstanding from the Bank to the Company at September 30, 2008.

Item 5.    Other Information

On October 21, 2008, the board of directors of the Company approved an amendment to the provision in the Company’s Bylaws governing the procedures by which security holders of the Company may recommend nominees for election to the Company’s board of directors.  The changes to the Company’s Bylaws effected by this amendment are described in detail under Item 5.03 of the Company’s Form 8-K filed with the Securities and Exchange Commission on October 22, 2008, which description is incorporated herein by reference.

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 Current Report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2008.
4.1	*	Shareholder Rights Agreement dated June 1, 1996, between Britton & Koontz Capital Corporation and Britton & Koontz First National Bank, as Rights Agent, incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement on Form S-8, Registration No. 333-20631, filed with the Securities and Exchange Commission on January 29, 1997, as amended by Amendment No. 1 to Rights Agreement dated as of August 15, 2006, incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange 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 “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:	November 14, 2008	/s/ W. Page Ogden
		W. Page Ogden
		Chief Executive Officer

Date:	November 14, 2008	/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