Britton & Koontz Capital (BKBK) 10-Q 2010 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, 2010

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  2,135,466 shares of Common Stock, par value $2.50 per share, were outstanding as of August 1, 2010.

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 4. Controls and Procedures
PART II.	OTHER INFORMATION
	Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
	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
	June 30,			December 31,
ASSETS:	2010			2009
Cash and due from banks:
Non-interest bearing	$	5,149,151		$	4,702,159
Interest bearing		1,772,729			5,601,482
Total cash and due from banks		6,921,880			10,303,641
Federal funds sold		25,496			58,799
Investment Securities:
Available-for-sale (amortized cost, in 2010 and 2009,
of $89,094,841 and $94,684,079, respectively)		93,796,255			98,300,252
Held-to-maturity (fair value, in 2010 and 2009,
of $43,655,752 and $45,996,945, respectively)		42,152,120			45,027,914
Equity securities		2,255,500			3,262,100
Loans, less allowance for loan losses of $2,538,737
in 2010 and $3,878,738 in 2009		213,864,521			219,938,639
Loans held for sale		5,949,000			784,063
Bank premises and equipment, net		7,717,483			8,030,900
Other real estate		1,953,871			815,207
Accrued interest receivable		1,840,821			2,002,259
Cash surrender value of life insurance		1,124,900			1,099,395
Core Deposits, net		396,618			450,426
Other assets		2,793,468			3,036,554
TOTAL ASSETS	$	380,791,933		$	393,110,149
LIABILITIES AND STOCKHOLDERS' EQUITY
	June 30,			December 31,
LIABILITIES:		2010			2009
Deposits
Non-interest bearing	$	45,664,635		$	49,847,304
Interest bearing		213,252,751			201,094,816
Total deposits		258,917,386			250,942,120
Federal Home Loan Bank advances		19,804,605			41,022,754
Securities sold under repurchase agreements		53,163,731			53,211,325
Accrued interest payable		705,201			793,141
Advances from borrowers for taxes and insurance		161,094			259,315
Accrued taxes and other liabilities		2,532,103			1,885,605
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		340,439,120			353,269,260
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share;
12,000,000 shares authorized; 2,149,966 and 2,140,966 issued
and 2,135,466 and 2,126,466 outstanding, as of June 30, 2010
and December 31, 2009, respectively		5,374,915			5,352,415
Additional paid-in capital		7,484,097			7,396,211
Retained earnings		24,803,389			25,082,298
Accumulated other comprehensive income		2,947,787			2,267,340
		40,610,188			40,098,264
Cost of 14,500 shares of common stock held by the company		(257,375	)		(257,375	)
Total stockholders' equity		40,352,813			39,840,889
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	380,791,933		$	393,110,149

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010			2009
INTEREST INCOME:
Interest and fees on loans	$	3,257,056	$	3,287,815	$	6,506,372		$	6,584,345
Interest on investment securities:
Taxable interest income		1,075,002		1,538,807		2,278,807			3,224,154
Exempt from federal taxes		415,468		442,956		836,492			868,050
Interest on federal funds sold		29		31		74			120
Total interest income		4,747,555		5,269,609		9,621,745			10,676,669
INTEREST EXPENSE:
Interest on deposits		825,599		1,001,430		1,674,872			2,067,609
Interest on Federal Home Loan Bank advances		72,517		35,197		150,776			146,315
Interest on trust preferred securities		43,579		54,847		86,117			112,343
Interest on securities sold under repurchase agreements		524,269		525,117		1,044,757			1,041,330
Total interest expense		1,465,964		1,616,591		2,956,522			3,367,597
NET INTEREST INCOME		3,281,591		3,653,018		6,665,223			7,309,072
Provision for loan losses		200,000		250,000		1,299,996			950,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		3,081,591		3,403,018		5,365,227			6,359,072
OTHER INCOME:
Service charges on deposit accounts		368,430		418,969		727,643			826,409
Income from fiduciary activities		714		300		1,491			911
Income from networking arrangements		-		22,743		-			44,954
Gain/(loss) on sale of mortgage loans		42,958		64,097		71,931			110,197
Gain/(loss) on sale/matured securities		-		17,785		447,530			17,785
Other		299,394		176,243		578,707			377,175
Total other income		711,496		700,137		1,827,302			1,377,431
OTHER EXPENSES:
Salaries		1,487,803		1,320,155		3,040,188			2,688,439
Employee benefits		228,713		191,961		451,261			382,528
Director fees		41,387		37,295		78,237			73,545
Net occupancy expense		272,186		237,659		528,788			459,771
Equipment expenses		311,741		284,696		630,349			581,541
FDIC assessment		91,495		280,735		219,459			396,090
Advertising		38,385		74,257		84,433			130,815
Stationery and supplies		38,512		46,131		79,843			84,785
Audit expense		63,455		60,305		126,911			120,555
Other real estate expense, net		18,924		138,675		11,888			197,418
Amortization of deposit premium		26,904		26,904		53,808			53,808
Other		596,273		462,333		1,430,453			941,398
Total other expenses		3,215,778		3,161,106		6,735,618			6,110,693
INCOME BEFORE INCOME TAX EXPENSE		577,309		942,049		456,911			1,625,810
Income tax expense/(benefit)		73,458		184,261		(110,232	)		268,006
NET INCOME	$	503,851	$	757,788	$	567,143		$	1,357,804
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.24	$	0.36	$	0.27		$	0.64
Basic weighted shares outstanding		2,135,466		2,126,466		2,133,179			2,124,259
Diluted earnings per share	$	0.24	$	0.36	$	0.27		$	0.64
Diluted weighted shares outstanding		2,136,450		2,127,144		2,134,092			2,124,761
Cash dividends per share	$	0.18	$	0.18	$	0.36		$	0.36

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
										Accumulated
	Common		Stock		Additional					Other					Total
					Paid-in		Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Capital		Earnings			Income		Stock			Equity
Balance at December 31, 2008		2,117,966	$	5,331,165	$	7,319,282	$	25,049,748		$	2,098,248	$	(257,375	)	$	39,541,068
Comprehensive Income:
Net income								1,357,804								1,357,804
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes for $20,880											35,098					35,098
Total Comprehensive income																1,392,902
Cash Dividend paid $0.36 per share								(765,528	)							(765,528	)
Common stock issued		8,500		21,250		65,450										86,700
Unearned compensation								(73,362	)							(73,362	)
Fair Value unexercised stock options						5,221										5,221
Balance at June 30, 2009		2,126,466	$	5,352,415	$	7,389,953	$	25,568,662		$	2,133,346	$	(257,375	)	$	40,187,001
Balance at December 31, 2009		2,126,466	$	5,352,415	$	7,396,211	$	25,082,298		$	2,267,340	$	(257,375	)	$	39,840,889
Comprehensive Income:
Net income								567,143								567,143
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $404,795											680,446					680,446
Total Comprehensive income																1,247,589
Cash Dividend paid $0.36 per share								(768,768	)							(768,768	)
Common stock issued		9,000		22,500		84,600										107,100
Unearned compensation								(77,284	)							(77,284	)
Fair Value unexercised stock options						3,286										3,286
Balance at June 30, 2010		2,135,466	$	5,374,915	$	7,484,097	$	24,803,389		$	2,947,787	$	(257,375	)	$	40,352,813

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	567,143		$	1,357,804
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		(93,630	)		(264,194	)
Provision for loan losses		1,299,996			950,000
Provision for losses on foreclosed real estate		-			170,020
Provision for depreciation		390,516			370,038
Stock dividends received		(4,500	)		(4,900	)
(Gain)/loss on sale of other real estate		(466,350	)		6,411
(Gain)/loss on sale of mortgage loans		(71,931	)		(110,197	)
(Gain)/loss on sale of investment securities		(447,530	)		(17,785	)
(Gain)/loss on sale of other securities		-			(1,262	)
Net amortization (accretion) of securities		52,740			(9,137	)
Amortization of deposit premium		53,808			53,808
Writedown of other real estate		780,168			83,435
Unearned compensation		(77,285	)		(73,362	)
Net change in:
Loans held for sale		(5,164,937	)		-
Accrued interest receivable		161,438			105,029
Cash surrender value		(25,505	)		(24,314	)
Other assets		243,086			(426,844	)
Accrued interest payable		(87,940	)		(122,458	)
Accrued taxes and other liabilities		335,334			(737,245	)
Net cash provided by (used in) operating activities		(2,555,379	)		1,304,847
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		33,303			(2,271	)
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		22,927,653			17,858,375
Held-to-maturity		2,862,393			4,626,570
Redemption of FHLB stock		1,011,100			270,700
Purchase of securities:
Available-for-sale		(16,930,224	)		(7,732,408	)
Held-to-maturity		-			(4,131,731	)
(Increase)/decrease in loans		2,617,222			(407,047	)
Proceeds from sale and transfers of other real estate		776,350			9,109
Purchase of premises and equipment		(77,099	)		(1,094,550	)
Net cash provided by (used in) investing activities		13,220,698			9,396,747
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase /(decrease) in customer deposits		8,345,176			(4,964,633	)
Net Increase /(decrease) in brokered deposits		(369,910	)		88,752
Net Increase /(decrease) in securities sold under
repurchase agreements		(47,594	)		458,091
Net Increase /(decrease) in FHLB advances		(21,218,149	)		(6,823,105	)
Net Increase /(decrease) in advances from borrowers
for taxes and insurance		(98,221	)		(125,896	)
Cash dividends paid		(768,768	)		(765,528	)
Common stock issued		107,100			86,700
Fair value of unexercised stock options		3,286			5,221
Net cash provided by (used in) financing activities		(14,047,080	)		(12,040,398	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		(3,381,761	)		(1,338,804	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		10,303,641			6,951,543
CASH AND DUE FROM BANKS AT END OF PERIOD	$	6,921,880		$	5,612,739
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest	$	3,044,462		$	3,490,055
Cash paid/(refunds) during the period for income taxes	$	(125,320	)	$	1,279,874
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gains (losses)
on securities available for sale	$	1,085,241		$	55,978
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	404,795		$	20,880

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010

Note A.  Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the “Company”) as of December 31, 2009, has been derived from the audited financial statements of the Company for the year then ended.  The accompanying interim consolidated financial statements as of June 30, 2010 and for the three and six months then ended 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 2009 amounts have been reclassified to conform to the 2010 presentation.

Note B.  Interest Rate Risk Management

On August 10, 2007, the Company’s wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), entered into a 5 year, no-call 2-year Structured Repurchase Agreement with JPMorgan Chase Bank, N.A. (“Chase”) for $20 million.  Terms of the transaction call for the Bank to pay a fixed interest rate of 4.82%.  During the term of the agreement, the Bank’s cost of funds cannot exceed the initial interest rate of 4.82%.   Effective July 20, 2010, the Company extended the term of this agreement for an additional three years.  The new agreement entered into is a 5 year, no-call 3 year with interest payments made quarterly on the 20th day of January, April, July and October, star ting October 20, 2010 and continuing up to and including the maturity date.  Chase, in its discretion, may terminate the agreement on July 20, 2013, by notice to the Company two business days prior to such date.  In exchange for the extension of term, Chase has lowered the interest rate to be paid from the original 4.82% to a fixed interest rate of 3.69%.  There is no interest rate cap embedded in the modified agreement.

On November 13, 2007, the Company entered into a 5 year, no-call 3-year Structured Repurchase Agreement with Chase for an additional $20 million.  Terms of the transaction call for the Bank to pay a fixed interest rate of 4.71%.  In the first three years of the agreement, this rate is subject to reduction if 3-Month LIBOR is greater than 4.90% measured two business days prior to the 13th of each February, May, August and November.  Accordingly, during the term of this agreement, the Bank’s cost of funds cannot exceed the initial interest rate of 4.71%.  Chase, in its discretion, may terminate this agreement on November 13, 2010 and quarterly thereafter.  This agreement carries a cap embedded into the in terest rate that protects the Company in the case of adverse interest rate increases.

Under each of the above-described repurchase agreements, the Bank is required to maintain a margin percentage of 105% on the subject securities.  These agreements with Chase were entered into as a means of adding additional leverage and to lock in a fixed rate for a certain period of time.

Note C.  Investment Securities

The amortized cost of the Bank’s investment securities, including held-to-maturity and available-for-sale securities, at June 30, 2010 and December 31, 2009, are summarized below.

COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

	06/30/10		12/31/09
Mortgage-Backed Securities	$	73,202,715	$	95,511,473
Obligations of Other U.S.
Government Sponsored Agencies		18,149,935		3,600,154
Obligations of State and
Political Subdivisions		39,894,311		40,600,366
Total	$	131,246,961	$	139,711,993

The amortized cost and approximate fair value of investment securities classified as available-for-sale at June 30, 2010, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	7,368,218	$	287,009	$	(253,672	)	$	7,401,555
Obligations of Other U.S.
Government Sponsored Agencies		18,149,934		147,182		-			18,297,116
Mortgage-Backed Securities		63,576,689		4,520,895		-			68,097,584
Total	$	89,094,841	$	4,955,086	$	(253,672	)	$	93,796,255

The amortized cost and approximate fair value of investment securities classified as available-for-sale at December 31, 2009, are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of State and
Political Subdivisions	$	6,978,808	$	171,975	$	(317,748	)	$	6,833,035
Obligations of Other U.S.
Government Sponsored Agencies		3,600,154		-		(125,494	)		3,474,660
Mortgage-Backed Securities		84,105,117		3,899,723		(12,283	)		87,992,557
Total	$	94,684,079	$	4,071,698	$	(455,525	)	$	98,300,252

The amortized cost and approximate fair value of investment securities classified as held-to-maturity at June 30, 2010, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	32,526,093	$	964,423	$	(112,881	)	$	33,377,635
Mortgage-Backed Securities		9,626,027		652,090		-			10,278,117
Total	$	42,152,120	$	1,616,513	$	(112,881	)	$	43,655,752

The amortized cost and approximate fair value of investment securities classified as held-to-maturity at December 31, 2009, are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of State and
Political Subdivisions	$	33,621,558	$	758,162	$	(253,581	)	$	34,126,138
Mortgage-Backed Securities		11,406,356		464,451		-			11,870,807
Total	$	45,027,914	$	1,222,613	$	(253,581	)	$	45,996,945

There were no investment securities classified as trading at June 30, 2010 or December 31, 2009.

The aggregate fair value and aggregate unrealized losses on securities whose fair values are below book values as of June 30, 2010 and December 31, 2009, are summarized below.  Due to the nature of the investment and current market prices, these unrealized losses are considered a temporary impairment of the securities.  As of June 30, 2010, there were ten securities included in held-to-maturity and ten securities included in available-for-sale with fair values below book value.

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Held-to-Maturity:
Obligations of State
and Political
Subdivisions (10)		-		-		$	4,386,683	$	(112,881	)	$	4,386,683	$	(112,881	)
Total		-		-		$	4,386,683	$	(112,881	)	$	4,386,683	$	(112,881	)
Available for Sale:
Obligations of State
and Political Subdivisions (10)	$	3,171,626	$	(253,672	)		-		-		$	3,171,626	$	(253,672	)
Total	$	3,171,626	$	(253,672	)		-		-		$	3,171,626	$	(253,672	)

As of December 31, 2009, there were twenty-five securities included in held-to-maturity and fifteen securities included in available-for-sale with fair values below book value.

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Held-to-Maturity:
Obligations of State
and Political
Subdivisions (25)	$	5,753,701	$	(39,094	)	$	4,466,850	$	(214,487	)	$	10,220,551	$	(253,581	)
Total	$	5,753,701	$	(39,094	)	$	4,466,850	$	(214,487	)	$	10,220,551	$	(253,581	)
Available for Sale:
Obligations of State
and Political
Subdivisions (12)	$	3,647,027	$	(317,748	)		-		-		$	3,647,027	$	(317,748	)
Obligations of Other U.S. Government Sponsored Agencies (2)		3,474,660		(125,494	)							3,474,660		(125,494	)
Mortgaged-backed Securities (1)		924,524		(12,283	)		-		-			924,524		(12,283	)
Total	$	8,046,211	$	(455,526	)		-		-		$	8,046,211	$	(455,526	)

The unrealized losses in the Company’s investment portfolio, caused by interest rate increases, are not credit issues and are deemed to be temporary.  Cash flows from the mortgage-backed securities are guaranteed by the full faith and credit of the United States or by an agency of the United States government.  The Company also has the ability to hold these securities until maturity; the Company does not have the intent to sell, and more likely than not will not be required to sell, these securities prior to maturity.  Thus, the Company is not required to record any loss on the securities.

Note D.  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 June 30, 2010, the Company held $5.9 million in loans held-for-sale compared to $784 thousand at December 31, 2009.

Loans held to maturity are periodically analyzed and compiled as to the individual characteristics of each loan.  If at any time a decision is made to sell any loans in the portfolio, such loans will be reclassified as held-for-sale and carried at the lower of cost or market, based on the valuation analysis described in the first sentence of the above paragraph.

Note E.  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 June 30, 2010, was 3.69%.   The securities are currently callable on a quarterly basis at the option of the Company.

Note F.  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, 2010, and December 31, 2009, were $4.4 million.  As of June 30, 2010, the Company had entered into other commercial and residential loan commitments with certain customers that had an aggregate unused balance of $42.5 million, down from $43.4 million at December 31, 2009.  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 G.  Earnings per Share

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

The Company uses the Black-Scholes method for valuing stock options.  On February 16, 2010, the Company awarded 9,000 shares of restricted common stock pursuant to its 2007 Long-Term Incentive Compensation Plan.  The shares are subject to a three-year holding period, commencing on the date of the award, during which the shares may not be sold, assigned, pledged or otherwise transferred.

The following information sets forth the computation of earnings per share for the three and six months ended June 30, 2010 and 2009.

	For the three months ended June 30,
	2010		2009
Basic weighted average shares outstanding		2,135,466		2,126,466
Dilutive effect of granted options		984		678
Diluted weighted average shares outstanding		2,136,450		2,127,144
Net income	$	503,851	$	757,788
Net income per share-basic	$	0.24	$	0.36
Net income per share-diluted	$	0.24	$	0.36
	For the six months ended June 30,
		2010		2009
Basic weighted average shares outstanding		2,133,179		2,124,259
Dilutive effect of granted options		913		502
Diluted weighted average shares outstanding		2,134,092		2,124,761
Net income	$	567,143	$	1,357,804
Net income per share-basic	$	0.27	$	0.64
Net income per share-diluted	$	0.27	$	0.64

Note H.  Fair Value of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on esti­mates using present value or other valuation techniques. Those tech­niques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.  ASC Topic 825, “Financial Instruments,” excludes certain financial instru­ments and all non-fina ncial instruments from its disclosure require­ments. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. This topic clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also requires disclosure about how fair value was determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

Level 1	Quoted prices in active markets for identical assets or liabilities;
Level 2	Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
Level 3	Unobservable inputs, such as discounted cash flow models or valuations.

The following methods and assumptions are used by the Company in estimating fair value disclosures for financial instruments:

Cash and Due From Banks

Fair value equals the carrying value of such assets because of their shorter-term maturities.

Federal Funds Sold

Due to the short-term nature of this asset, the carrying value of this item approximates its fair value.

Investment Securities

Fair values for investment securities are based on quoted market prices, when available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.  Investment securities also include equity securities that are not traded in an active market.  The fair value of these securities equals the carrying value of such assets.

Net Loans

For variable-rate loans which reprice frequently, fair values are based on carrying values. Other variable-rate loans, fixed-rate commercial loans, installment loans, and mortgage loans are valued using discounted cash flows.  The discount rates used to determine the present value of these loans are based on interest rates currently being charged by the Bank on loans with comparable credit risk and terms.

Cash Surrender Value of Life Insurance

The fair value of this item approximates its carrying value.

Deposits

The fair value of demand deposits equals the carrying value of such deposits.  Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts, and money market demand accounts.  Discounted cash flows have been used to value fixed rate term deposits.  The discount rate used is based on interest rates currently being offered by the Bank on deposits with comparable amounts and terms.

Federal Funds Purchased and Securities Sold Under Customer Repurchase Agreements

Due to the short-term nature of these instruments, the fair value of these items approximates their carrying values.

Long-Term Borrowings

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing ratio for similar types of borrowing arrangements.

Off-Balance Sheet Instruments

Loan commitments are negotiated at current market rates and are relatively short-term in nature.  Therefore, the estimated fair value of loan commitments approximates the face amount. Fair values for interest rate swaps and caps are based on quoted market prices where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

The estimated fair values of the Company's financial instruments, rounded to the nearest thousand, are as follows:

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(dollars in Thousands)
Financial Assets:
Cash and due from banks	$	6,921	$	6,921	$	10,304	$	10,304
Federal funds sold		25		25		59		59
Investment securities:
Held-to-maturity		42,152		43,656		45,028		45,997
Available-for-sale		93,796		93,796		98,300		98,300
Equity securities		2,256		2,256		3,262		3,262
Cash surrender value of life insurance		1,125		1,125		1,099		1,099
Loans, net		219,814		223,252		220,723		223,095
Financial Liabilities:
Deposits		258,917		259,694		250,942		251,628
Short-term borrowings		10,805		10,803		32,023		32,019
Long-term borrowings		9,000		9,385		9,000		9,074
Securities sold under
repurchase agreements:
Retail		13,164		13,162		13,211		13,210
Structured		40,000		43,550		40,000		43,348
Junior subordinated debentures		5,155		5,155		5,155		5,155
	Face Amount		Fair  Value		Face Amount		Fair  Value
Other:
Commitments to extend credit	$	42,530	$	42,530	$	43,423	$	43,423
Standby letters of credit		4,407		4,407		4,374		4,374

The following provides the fair value hierarchy table for fair value measurements of available-for-sale securities at June 30, 2010 and December 31, 2009:

Description	Fair Value Measurement		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2010:
Mortgage Backed Securities	$	68,097,584	$	0.00	$	68,097,584	$	0.00
Obligation of State and Political Subdivision		7,401,555	$	0.00	$	7,401,555	$	0.00
Obligations of Other U.S. Government Sponsored Agencies		18,297,116	$	0.00	$	18,297,116	$	0.00
Total	$	93,796,255	$	0.00	$	93,796,255	$	0.00
December 31, 2009:
Mortgage Backed Securities	$	87,992,557	$	0.00	$	87,992,557	$	0.00
Obligation of State and Political Subdivision		6,833,035	$	0.00		6,833,035	$	0.00
Obligations of Other U.S. Government Sponsored Agencies		3,474,660	$	0.00		3,474,660	$	0.00
Total	$	98,300,252	$	0.00	$	98,300,252	$	0.00

Note I.  Subsequent Events

The Company evaluated events and transactions occurring subsequent to June 30, 2010 for potential recognition or disclosure in the financial statements included in this quarterly report.  The Company concluded that no significant events occurred after June 30, 2010 but prior to the issuance of these financial statements that would have a material impact on its financial statements.

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

This discussion is intended to present a review of the major factors affecting the financial condition of Britton & Koontz Capital Corporation (the “Company”) and its wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), as of June 30, 2010, as compared to the Company’s financial condition as of December 31, 2009, and the results of operations of the Company for the three and six month periods ended June 30, 2010, as compared to the corresponding periods of 2009.

SUMMARY

The Company’s net income for the three months ended June 30, 2010, was $504 thousand, or $.24 per diluted share, compared to $758 thousand, or $.36 per diluted share, for the quarter ended June 30, 2009.   For the six month period ended June 30, 2010, net income and diluted earnings per share was $567 thousand and $0.27, respectively, compared to $1.4 million and $0.64, respectively, for the same period in 2009.

Earnings for the three and six months ended June 30, 2010, decreased as compared to the corresponding periods in 2009 primarily from lower earnings related to the reduction in size of the Bank’s investment portfolio during the first half of 2010 along with increased loan loss provision in the first quarter of 2010.  Partially offsetting the decrease in earnings over the first six months of 2010 were gains on sales of other real estate and securities in the first quarter of 2010.  The higher provision expense negatively impacted diluted earnings per share by approximately $0.10 for the six month periods ended June 30, 2010.

Total assets decreased $12.3 million from $393.1 million at December 31, 2009, to $380.8 million at June 30, 2010.  Cash and due from banks decreased $3.4 million to $6.9 million.  Investment securities decreased $8.4 million to $138.2 million.  Net loans, excluding loans held for sale, decreased $6.1 million to $213.9 million while loans held for sale (“LHFS”) increased $5.2 million to $5.9 million.  Other real estate owned increased $1.1 million to $2.0 million.  Since December 31, 2009, total deposits have increased $8.0 million to $258.9 million at June 30, 2010.  Total borrowings decreased $21.3 million over the same period as investment cash flows and proceeds from deposits were used to pay down debt.   Total stockholders’ equity increased $512 thousand to $40.4 million at June 30, 2010, from $39.8 million at December 31, 2009.

Overall asset quality has improved as the Company’s nonperforming assets have decreased to $9.7 million at June 30, 2010, compared to $10.5 million at December 31, 2009.  Resolution of problem assets in the second quarter of 2010 has been positive as non-accrual loans and loans past due 90 days or more have declined since December 31, 2009, although this has been partially offset by increases in other real estate.  Management believes that it has identified the most significant troubled assets in its loan portfolio and is working to resolve the credit issues related to these assets as quickly as possible.  While management is optimistic that the positive trend in the Company’s asset quality will continue, it remains cautious and will continue to ensure that its credit administration and loan un derwriting processes remain disciplined and focused on the creditworthiness of new loan originations.  Finally, management is still uncertain that the local markets in which the Company operates have stabilized; therefore, unexpected asset quality issues may still arise.  Further detail on the Company’s nonperforming assets may be found below under the heading “Asset Quality.”

Financial Condition

Assets

Loans

Total loans decreased $2.2 million to $222.4 since December 31, 2009, due to lower commercial real estate activity and cash flows from the 1-4 family residential portfolio offset by increases in loans held for sale.  Further declines are expected to occur in the Company’s residential real estate portfolio.  Even though the national economic recession has weakened demand in all Company markets, the Company’s Baton Rouge market continues to trend upward with increased loans of approximately $3.0 million since December 31, 2009, offset by declines in the Company’s Mississippi markets of approximately $10.0 million.  Even with the increases in the Baton Rouge market, demand is still sluggish and management is not expecting much growth for the remainder of the year.  Lower interest r ates and the expansion of the Company’s mortgage loan operations has resulted in increased originations and sales of loans in both quarters in 2010 compared to the same periods in 2009.  Loans sold during the 1st quarter of 2010 increased $1.5 million to $7.6 million compared to the 1st quarter of 2009.  Loans sold in the 2nd quarter of 2010 increased $1.4 million to $9.5 million compared to the 2nd quarter of 2009.

The ratio of total loans to total assets increased to 58.4% at June 30, 2010, compared to 57.0% at December 31, 2009.  At June 30, 2010, the loan to deposit ratio was 85.9% compared to 89.5% at December 31, 2009.  The following table presents the Bank’s loan portfolio composition at June 30, 2010, and December 31, 2009.

COMPOSITION OF LOAN PORTFOLIO

	06/30/10		12/31/09
Commercial, financial & agricultural	$	25,469,000	$	25,606,000
Real estate-construction		29,619,000		31,341,000
Real estate-residential		68,693,000		67,213,000
Real estate-other		93,597,000		95,511,000
Installment		4,611,000		4,806,000
Other		363,000		124,000
Total loans	$	222,352,000	$	224,601,000

The Company’s loan portfolio at June 30, 2010, had no significant concentrations of loans other than in the categories presented in the table above.

Investment Securities

The Company’s investment securities portfolio at June 30, 2010, consists of mortgage-backed, agency and municipal securities along with certain equity securities.  Investment securities that are classified as held-to-maturity (“HTM”) are accounted for by the amortized cost method while securities in the available-for-sale (“AFS”) category are accounted for at fair value.  The Company has no investment securities classified as trading.  Changes in value of the AFS securities are recorded in the equity section of the balance sheet in “accumulated other comprehensive income.”

Management determines the classification of its securities at acquisition.  Total HTM and AFS investment securities decreased $7.4 million to $135.9 million at June 30, 2010, from $143.3 million at December 31, 2009.  The decrease is due to cash flows from monthly pay downs being used to pay down debt rather than being reinvested in investment securities on account of the low yields available on investment securities in the market.  Equity securities declined $1.0 million to $2.3 million due to a mandatory redemption of Federal Home Loan Bank (“FHLB”) stock calculated on lower advance balances held at the FHLB.  At June 30, 2010, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $1.4 million, ECD Investments, LLC (“ECD” ;) membership interests of $100 thousand and the Company’s $155 thousand investment in B&K Statutory Trust.

Bank Premises

There have been no material changes in the Company’s premises since December 31, 2009.

Asset Quality

Non-performing assets, which includes non-accrual loans, loans delinquent 90 days or more and other real estate, decreased to $9.7 million, or 2.53% of total assets, at June 30, 2010, from $10.5 million, or 2.68% of total assets, at December 31, 2009.  Net charge-offs for the 2nd quarter of 2010 were $807 thousand compared to $383 thousand during the same period in 2009.  Net charge-offs increased to $2.6 million for the six month period ended June 30, 2010, compared to $515 thousand for the six month period in 2009.  The increase in net charge-offs for the six month period includes two commercial credits that the Company had provided approximately $1 million at December 31, 2009, but did not charge-off until the 1st quarter of 2010.

A breakdown of nonperforming assets at June 30, 2010, and December 31, 2009, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

	06/30/10			12/31/09
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	7,471		$	8,510
Installment		200			12
Commercial and all other loans		24			187
Total non-accrual loans		7,695			8,709
Loans past due 90 days or more		2			1,004
Total nonperforming loans		7,697			9,713
Other real estate owned (net)		1,954			815
Total nonperforming assets	$	9,651		$	10,528
Nonperforming loans to total loans, net of LHFS		3.56	%		4.34	%
Nonperforming loans to total assets		2.02	%		2.47	%
Nonperforming assets to total loans, net of LHFS		4.46	%		4.70	%
Nonperforming assets to total assets		2.53	%		2.68	%

Allowance for Loan Losses

The allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio. The appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses.  The balance of the loans determined to be impaired under ASC Topic 310, “Receivables,” and the related allowance is included in management’s estimation and analysis of the allowance for loan losses. The determination of the appropriate level of the allowance is sensitive to a variety of internal factors, primarily historical loss ratios and assigned risk ratings, and external factors, primarily the economic environment. Additionally, the estimate of the allowance required to absorb credit losses in the entire po rtfolio may change due to shifts in the mix and level of loan balances outstanding and in prevailing economic conditions, as evidenced by changes in real estate demand and values, interest rates, unemployment rates and energy costs. While no one factor is dominant, each could cause actual loan losses to differ materially from originally estimated amounts.

For portfolio balances of consumer, consumer mortgage and certain other similar loan types, allowance factors are determined based on historical loss ratios by portfolio and may be adjusted by other qualitative criteria. For larger commercial loans and loans secured by commercial real estate, risk-rating grades are assigned by lending, credit administration or loan review personnel based on an analysis of the financial and collateral strength and other credit attributes underlying each loan. The allowance factors are established based on historical loss ratios experienced by the Company for these loan types, as well as the credit quality criteria underlying each grade, adjusted for trends and expectations about losses inherent in our existing portfolios. In making these adjustments to the allowance factors, management takes into consid eration factors which it believes are causing, or are likely in the future to cause, losses within our loan portfolio but which may not be fully reflected in our historical loss ratios.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for problem loans of $50,000 or greater by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.  For real estate collateral, the fair market value of the collateral is based upon a recent appraisal by a qualified and licensed appraiser of the underlying collateral.  Please refer to our Annual Report on Form 10-K for the year ended December 31, 2009, for a discussion of the Company’s policies and procedures regarding the appraisal of collateral securing its loans, including impaired loans.

Based upon this evaluation, management believes the allowance for loan losses of $2.5 million at June 30, 2010, which represents 1.17% of gross loans, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans.  At December 31, 2009, the allowance for loan loss was $3.9 million, or 1.73% of gross loans.  The allowance at June 30, 2010, includes a specific allocation of approximately $1.0 million on total impaired loans of $7.7 million.

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

Provision for Loan Losses

The Company’s loan loss provision in the 2nd quarter of 2010 was $200 thousand, compared to $250 thousand for the corresponding period in 2009.  For the six months ended June 30, 2010, the Company’s loan loss provision was $1.3 million, compared to $950 thousand during the same period in 2009.  The increased provision during this period was made in the 1st quarter of 2010 anticipating the increased charge-offs in the 2nd quarter of 2010.

The Company regularly reviews the allowance account in an effort to maintain it at an adequate level and collects necessary data to make a proper provision expense to earnings.  Based upon this evaluation, and considering the net charge-offs in the 2nd quarter of 2010 and possible charge-offs for the remainder of the year, management currently believes that a provision for loan losses of approximately $150 thousand for the 3rd quarter of 2010 will be adequate to provide coverage for possible loan losses that may be inherent in the loan portfolio.  However, factors may come to light in the year ahead that may influence management to change its expected provision .  The following table details the allowance activity for the six months ended June 30, 2010 and 2009:

ACTIVITY OF ALLOWANCE FOR LOAN LOSSES

	06/30/10			06/30/09
	(dollars in thousands)
Balance at beginning of period	$	3,878		$	2,398
Charge-offs:
Real Estate		(2,166	)		(441	)
Commercial		(481	)		(98	)
Installment and other		(17	)		(17	)
Recoveries:
Real Estate		14			19
Commercial		9			17
Installment and other		1			5
Net (charge-offs)/recoveries		(2,640	)		(515	)
Provision charged to operations		1,300			950
Balance at end of period	$	2,538		$	2,833
Allowance for loan losses as a percent of loans, net of unearned interest & loans held for sale		1.17	%		1.26	%
Net charge-offs (YTD) as a percent of average loans		1.18	%		.23	%

Potential Problem Loans

At June 30, 2010, 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 increased $8.0 million from $250.9 million at December 31, 2009, to $258.9 million at June 30, 2010.  The increase in deposits is due primarily to increases in money market deposit accounts and the Company’s rewards checking developed and offered in the second quarter of 2009.  The composition of the Company’s deposits is described in the following table.

COMPOSITION OF DEPOSITS

	06/30/10		12/31/09
Non-Interest Bearing	$	45,664,635	$	49,847,304
NOW Accounts		66,381,257		57,815,246
Money Market Deposit Accounts		35,222,217		30,563,856
Savings Accounts		18,685,367		18,259,388
Certificates of Deposit		92,963,910		94,456,326
Total Deposits	$	258,917,386	$	250,942,120

Borrowings

Total bank borrowings, including FHLB advances, federal funds purchased and customer repurchase agreements, decreased $21.2 million from $94.2 million at December 31, 2009, to $73.0 million at June 30, 2010.  The decrease in borrowed funds is due primarily to deposit increases and the decline in the investment portfolio, as deposit proceeds and monthly cash flows from investment securities were used to pay down debt rather than be invested into the market.  Included in Company borrowings are balances that the Company has pursuant to agreements with local depositors to sweep overnight funds from their commercial deposit accounts.  Because of the nature of the agreements, these sweep accounts are included as borrowings rather than local customer deposits; these amounts are classified as repurchase agreements and included under the “Securities sold under repurchase agreements” line item on the Company’s balance sheet.  Management believes these accounts perform more like a core deposit rather than a bank obligation.

Capital

Stockholders' equity totaled $40.4 million at June 30, 2010, compared to $39.8 million at December 31, 2009.  The change is due primarily to earnings of $567 thousand and a $681 thousand change in unrealized losses in the available-for-sale investment portfolio offset by $769 thousand in dividends paid.

Any losses attributable to the available-for-sale investment portfolio 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 17.44%, a Tier 1 capital to risk weighted assets ratio of 16.45% and a leverage ratio of 11.07% at June 30, 2010.  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 increased to 10.6% at June 30, 2010, compared to 10.1% at December 31, 2009.

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, 2010.  See Note B and Note F 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, 2010, decreased to $504 thousand, or $0.24 per diluted share, compared to $758 thousand, or $0.36 per diluted share, for the same period in 2009.  Returns on average assets and average equity were .53% and 5.08%, respectively, for the three months ended June 30, 2010, compared to .75% and 7.52%, respectively, for the same period in 2009.  The decrease is primarily related to lower earnings from the reduction in size of the Bank’s investment portfolio in the first half of 2010.

For the six months ended June 30, 2010, net income was $567 thousand, or $0.27 per diluted share, compared to $1.4 million, or $0.64 per diluted share, for the same period in 2009.  This change, similar to the decrease for the three months ended June 30, 2010, was due to a smaller investment securities portfolio and additional loan loss provision expense of $800 thousand in the 1st quarter of 2010.  Offsetting these negative factors were gains on the sale of investment securities and other real estate in the 1st quarter of 2010.

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, while interest rate spread is the difference between interest yield on assets and interest costs on liabilities.

Net interest income for the three and six month periods ended June 30, 2010, decreased $371 thousand and $644 thousand, respectively, over the same period in 2009.  Average earning assets during the quarterly and year to date periods fell primarily due to a decrease in average investment securities while average loan balances remained relatively stable.  The interest rate environment over the first six months of 2010 made profitable reinvestment of cash flows back into the market difficult, contributing to the decrease in net interest income during both comparative periods.  Lower interest rates also contributed to the decline of interest rate spread and margin during both periods.  Interest rate spread declined 15 and 5 basis points to 3.24% and 3.29% for the three and six month periods ended Ju ne 30, 2010, respectively, as compared to the corresponding periods in 2009.  Interest rate margin declined 15 and 6 basis points to 3.63% and 3.68% for the three and six months ended June 30, 2010, respectively, as compared to the same periods in 2009.

Non-Interest Income/ Non-Interest Expense

Non-interest income was relatively stable for the 2nd quarter of 2010 compared to the 2nd quarter of 2009, increasing $11 thousand, while non-interest income increased $450 thousand for the first six months of 2010 compared to the corresponding period in 2009.  The six month increase is due primarily to gains from sales of investment securities in the first quarter of 2010 and increases in mortgage related income, as fee income during the six month period ended June 30, 2010, increased to $379 thousand from $233 thousand during the same period in 2009.  This increase was offset by lower service charges on deposit accounts.

Non-interest expense remained relatively stable for the 2nd quarter of 2010 compared to the 2nd quarter of 2009, increasing only $55 thousand.  Non-interest expense increased $625 thousand for the six months ended June 30, 2010 as compared to the corresponding period in 2009, primarily due to a $368 thousand charge to expense related to the provision of loan and late fees receivable and higher occupancy, equipment and salary and benefits costs.  These additional costs were offset by lower FDIC assessment charges due to a special assessment of $183 thousand made in the 1st half of 200 9 and lower other real estate and collection costs.

Income Taxes

The Company recorded income tax expense of $73 thousand for the three months ended June 30, 2010, compared to $184 thousand for the same period in 2009.Income tax expense/(benefit) for the six months ended June 30, 2010, was $(110) thousand compared to $268 thousand during the same period in 2009  The tax benefit is due to the additional loan loss provision made in the 1st quarter of 2010 coupled with lower taxable net interest income.

Liquidity and Capital Resources

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

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

The Company’s cash and cash equivalents decreased $3.4 million to $6.9 million at June 30, 2010, from $10.3 million at December 31, 2009.  Cash provided by operating and investing activities during the 2nd quarter of 2010 was $8.6 million and $2.1 million, respectively, while financing activities used $14.1 million over the same period.

At June 30, 2010, the Company had unsecured federal funds lines with correspondent banks of $38 million and maintained the ability to draw on its available line of credit with the FHLB in the amount of approximately $60 million.  In addition to these lines of credit, the Bank had approximately $33 million in liquid assets including unencumbered investment securities available for collateralized borrowing and approximately $46 million available from the brokered CD market.

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer of the Company (“CEO”) and the Chief Financial Officer of the Company (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2010.  Based on this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective for ensuring that information that the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and recorded within the time periods specified in the SEC’s rules and forms.

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

PART II.  OTHER INFORMATION

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

The Company’s ability to pay dividends to its shareholders is substantially dependent on the ability of the Bank to transfer funds to the Company in the form of dividends, loans and advances.  Federal law imposes limitations on the payment of dividends by national banks.  Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the Comptroller of the Currency, may credit net profits to the bank’s undivided profits account and may declare a dividend from that account of so much of the net profits as they judge expedient.  The Comptroller and the Federal Reserve Board have each indicated that banking organizations should generally pay dividends only out of current operating earnings.  The Bank’s ability to pay dividends to the Company is also limited by prud ence, statutory and regulatory guidelines and a variety of other factors.At June 30, 2010, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $3.0 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 June 30, 2010, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $2.5 million.  There were no loans outstanding from the Bank to the Company at June 30, 2010.

Item 6. Exhibits

Exhibit		Description of Exhibit
3.1	*	Amended and Restated Articles of Incorporation of Britton & Koontz Capital Corporation, incorporated by reference to Exhibit 3.01 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“Commission”) on February 20, 2009.
3.2	*	By-Laws of Britton & Koontz Capital Corporation, as amended, incorporated by reference to Exhibit 3.2 to Company’s Current Report on Form 8-K filed with the Commission on October 22, 2008.
4.1	*	Shareholder Rights Agreement dated June 1, 1996, between Britton & Koontz Capital Corporation and Britton & Koontz First National Bank, as Rights Agent, incorporated by reference to Exhibit 4.3 to 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:	August 13, 2010	/s/ W. Page Ogden
		W. Page Ogden
		Principal Executive Officer

Date:	August 13, 2010	/s/ William M Salters
		William M. Salters
		Principal 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