Britton & Koontz Capital (BKBK) 10-Q 2011 Q0 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, 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 November 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
	September 30,			December 31,
ASSETS:	2010			2009
Cash and due from banks:
Non-interest bearing	$	4,725,388		$	4,702,159
Interest bearing		1,044,469			5,601,482
Total cash and due from banks		5,769,857			10,303,641
Federal funds sold		-			58,799
Investment Securities:
Available-for-sale (amortized cost, in 2010 and 2009,
of $90,625,414 and $94,684,079, respectively)		94,862,099			98,300,252
Held-to-maturity (fair value, in 2010 and 2009,
of $43,373,402 and $45,996,945, respectively)		41,419,013			45,027,914
Equity securities		1,944,700			3,262,100
Loans, less allowance for loan losses of $2,714,126
in 2010 and $3,878,738 in 2009		211,411,487			219,938,639
Loans held for sale		2,808,369			784,063
Bank premises and equipment, net		7,779,706			8,030,900
Other real estate		2,895,569			815,207
Accrued interest receivable		1,866,999			2,002,259
Cash surrender value of life insurance		1,134,955			1,099,395
Core Deposits, net		369,714			450,426
Other assets		2,352,532			3,036,554
TOTAL ASSETS	$	374,615,000		$	393,110,149
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing	$	42,455,103		$	49,847,304
Interest bearing		214,296,621			201,094,816
Total deposits		256,751,724			250,942,120
Federal Home Loan Bank advances		18,672,000			41,022,754
Securities sold under repurchase agreements		50,502,986			53,211,325
Accrued interest payable		659,255			793,141
Advances from borrowers for taxes and insurance		225,798			259,315
Accrued taxes and other liabilities		2,273,795			1,885,605
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		334,240,558			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 September 30, 2010
and December 31, 2009, respectively		5,374,915			5,352,415
Additional paid-in capital		7,485,740			7,396,211
Retained earnings		25,114,760			25,082,298
Accumulated other comprehensive income		2,656,402			2,267,340
		40,631,817			40,098,264
Cost of 14,500 shares of common stock held by the company		(257,375	)		(257,375	)
Total stockholders' equity		40,374,442			39,840,889
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	374,615,000		$	393,110,149

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
INTEREST INCOME:
Interest and fees on loans	$	3,176,359	$	3,392,001	$	9,682,731	$	9,976,346
Interest on investment securities:
Taxable interest income		1,032,036		1,398,981		3,310,843		4,623,134
Exempt from federal taxes		415,617		432,203		1,252,109		1,300,253
Interest on federal funds sold		30		47		105		167
Total interest income		4,624,042		5,223,232		14,245,788		15,899,900
INTEREST EXPENSE:
Interest on deposits		835,244		941,865		2,510,116		3,009,474
Interest on Federal Home Loan Bank advances		71,722		50,649		222,498		196,963
Interest on trust preferred securities		46,937		47,743		133,053		160,085
Interest on securities sold under repurchase agreements		481,694		533,588		1,526,451		1,574,918
Total interest expense		1,435,597		1,573,845		4,392,118		4,941,440
NET INTEREST INCOME		3,188,445		3,649,387		9,853,670		10,958,460
Provision for loan losses		150,000		920,000		1,449,996		1,870,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		3,038,445		2,729,387		8,403,674		9,088,460
OTHER INCOME:
Service charges on deposit accounts		369,310		432,229		1,096,953		1,258,638
Income from fiduciary activities		705		300		2,196		1,211
Income from networking arrangements		-		17,813		-		62,766
Gain/(loss) on sale of ORE		139,194		-		605,543		-
Gain/(loss) on sale of mortgage loans		332,481		112,088		711,678		344,920
Gain/(loss) on sale/matured securities		-		19,280		447,530		37,065
Other		143,428		116,529		414,870		371,069
Total other income		985,118		698,239		3,278,770		2,075,669
OTHER EXPENSES:
Salaries		1,502,032		1,336,294		4,542,221		4,024,732
Employee benefits		227,558		189,497		678,819		572,025
Director fees		37,784		35,400		116,021		108,945
Net occupancy expense		288,817		249,651		817,605		709,422
Equipment expenses		295,945		315,494		926,294		897,035
FDIC assessment		111,512		95,669		330,972		491,759
Advertising		46,970		51,617		131,403		182,432
Stationery and supplies		44,578		33,701		124,421		118,485
Audit expense		63,500		62,425		190,411		182,980
Other real estate expense, net		35,483		134,157		513,721		331,575
Amortization of deposit premium		26,904		26,904		80,712		80,712
Other		490,113		469,565		1,920,566		1,410,963
Total other expenses		3,171,196		3,000,374		10,373,166		9,111,065
INCOME BEFORE INCOME TAX EXPENSE		852,367		427,252		1,309,278		2,053,064
Income tax expense/(benefit)		171,520		103,059		61,288		371,065
NET INCOME	$	680,847	$	324,193	$	1,247,990	$	1,681,999
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.32	$	0.15	$	0.58	$	0.79
Basic weighted shares outstanding		2,135,466		2,126,466		2,133,950		2,125,003
Diluted earnings per share	$	0.32	$	0.15	$	0.58	$	0.79
Diluted weighted shares outstanding		2,135,800		2,127,070		2,134,685		2,125,282
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, 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								1,681,999								1,681,999
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes for $512,688											861,811					861,811
Total Comprehensive income																2,543,810
Cash Dividend paid $0.54 per share								(1,148,292	)							(1,148,292	)
Common stock issued		8,500		21,250		65,450										86,700
Unearned compensation								(66,692	)							(66,692	)
Fair Value unexercised stock options						8,350										8,350
Balance at September 30, 2009		2,126,466	$	5,352,415	$	7,393,082	$	25,516,763		$	2,960,059	$	(257,375	)	$	40,964,944
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								1,247,990								1,247,990
Other comprehensive
income (net of tax):
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $231,452											389,062					389,062
Total Comprehensive income																1,637,052
Cash Dividend paid $0.54 per share								(1,153,152	)							(1,153,152	)
Common stock issued		9,000		22,500		84,600										107,100
Unearned compensation								(62,377	)							(62,377	)
Fair Value unexercised stock options						4,929										4,929
Balance at September 30, 2010		2,135,466	$	5,374,915	$	7,485,740	$	25,114,759		$	2,656,402	$	(257,375	)	$	40,374,442

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,247,990		$	1,681,999
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		4,592			(213,763	)
Provision for loan losses		1,449,996			1,870,000
Provision for losses on foreclosed real estate		-			205,030
Provision for depreciation		568,365			571,746
Stock dividends received		(6,100	)		(6,200	)
(Gain)/loss on sale of other real estate		(605,543	)		80,639
(Gain)/loss on sale of mortgage loans		(204,468	)		(156,169	)
(Gain)/loss on sale of investment securities		(447,530	)		(37,065	)
(Gain)/loss on sale of other securities		-			(1,262	)
Net amortization (accretion) of securities		81,206			8,223
Amortization of deposit premium		80,712			80,712
Writedown of other real estate		780,168			83,435
Unearned compensation		(62,377	)		(66,692	)
Net change in:
Loans held for sale		(2,808,369	)		764,500
Accrued interest receivable		135,260			101,422
Cash surrender value		(35,560	)		(34,040	)
Other assets		684,022			(367,552	)
Accrued interest payable		(133,886	)		(250,015	)
Accrued taxes and other liabilities		152,146			(982,809	)
Net cash provided by (used in) operating activities		880,624			3,332,139
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		58,799			(314,942	)
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		31,381,602			25,678,860
Held-to-maturity		3,592,971			9,195,867
Redemption of FHLB stock		1,568,600			756,300
Purchase of FHLB stock		(245,100	)		-
Purchase of securities:
Available-for-sale		(26,940,681	)		(11,967,395	)
Held-to-maturity		-			(4,131,731	)
(Increase)/decrease in loans		4,642,873			(2,323,967	)
Proceeds from sale and transfers of other real estate		1,167,829			501,452
Purchase of premises and equipment		(317,171	)		(1,335,455	)
Net cash provided by (used in) investing activities		14,909,722			16,058,989
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase /(decrease) in customer deposits		5,555,724			(5,100,683	)
Net Increase /(decrease) in brokered deposits		253,879			86,905
Net Increase /(decrease) in securities sold under
repurchase agreements		(2,708,338	)		(377,703	)
Net Increase /(decrease) in FHLB advances		(22,350,754	)		(12,263,631	)
Net Increase /(decrease) in advances from borrowers
for taxes and insurance		(33,517	)		(81,424	)
Cash dividends paid		(1,153,152	)		(1,148,292	)
Common stock issued		107,100			86,700
Fair value of unexercised stock options		4,929			8,350
Net cash provided by (used in) financing activities		(20,324,129	)		(18,789,778	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		(4,533,783	)		601,350
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		10,303,641			6,951,543
CASH AND DUE FROM BANKS AT END OF PERIOD	$	5,769,857		$	7,552,893
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest	$	4,526,004		$	5,191,455
Cash paid/(refunds) during the period for income taxes	$	(125,320	)	$	1,463,199
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers from loans foreclosed to other real estate	$	3,422,815		$	1,128,452
Change in unrealized gains (losses)
on securities available for sale	$	620,514		$	1,374,499
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	231,452		$	512,688

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 2010 and for the three and nine 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, whic h commenced on October 20, 2010 and continue 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 September 30, 2010 and December 31, 2009, is summarized below.

COMPOSITION OF INVESTMENT PORTFOLIO (Amortized Cost)

	09/30/10		12/31/09
Mortgage-Backed Securities	$	67,593,254	$	95,511,473
Obligations of Other U.S.
Government Sponsored Agencies		24,556,287		3,600,154
Obligations of State and
Political Subdivisions		39,894,885		40,600,366
Total	$	132,044,426	$	139,711,993

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	7,367,439	$	435,508	$	(126,469	)	$	7,676,478
Obligations of Other U.S.
Government Sponsored Agencies		24,556,287		99,328		-			24,655,615
Mortgage-Backed Securities		58,701,687		3,828,319		-			62,530,006
Total	$	90,625,413	$	4,363,155	$	(126,469	)	$	94,862,099

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 September 30, 2010, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	32,527,446	$	1,440,687	$	(6,180	)	$	33,961,953
Mortgage-Backed Securities		8,891,567		519,882		-			9,411,449
Total	$	41,419,013	$	1,960,569	$	(6,180	)	$	43,373,402

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 September 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 September 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 September 30, 2010, there were two securities included in held-to-maturity and seven 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 (2)	$	587,190	$	(3,167	)	$	496,987	$	(3,013	)	$	1,084,177	$	(6,180	)
Total	$	587,190	$	(3,167	)	$	496,987	$	(3,013	)	$	1,084,177	$	(6,180	)
Available for Sale:
Obligations of
State and Political Subdivisions (7)	$	1,829,287	$	(118,579	)	$	951,556	$	(7,890	)	$	2,780,843	$	(126,469	)
Total	$	1,829,287	$	(118,579	)	$	951,556	$	(7,890	)	$	2,780,843	$	(126,469	)

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	$	(455,525	)	$	-	$	-		$	8,046,211	$	(455,525	)

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 September 30, 2010, the Company held $2.8 million in loans held-for-sale compared to $784 thousand at December 31, 2009.  T here were no losses recorded in loans held-for-sale at either period.

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 September 30, 2010, was 3.44%.  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 September 30, 2010, and December 31, 2009, were $4.2 million and $4.4 million, respectively.  As of September 30, 2010, the Company had entered into other commercial and residential loan commitments with certain customers that had an aggregate unused balance of $35.7 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 manageme nt 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.

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

	For the three months ended September 30,
	2010		2009
Basic weighted average shares outstanding		2,135,466			2,126,466
Dilutive effect of granted options		334			604
Diluted weighted average shares outstanding		2,135,800			2,127,070
Net income	$	680,847		$	324,193
Net income per share-basic	$	0.32		$	0.15
Net income per share-diluted	$	0.32		$	0.15
	For the nine months ended September 30,
		2010			2009
Basic weighted average shares outstanding		2,133,950			2,125,003
Dilutive effect of granted options		736			279
Diluted weighted average shares outstanding		2,134,685			2,125,282
Net income	$	1,247,990		$	1,681,998
Net income per share-basic	$	0.58		$	0.79
Net income per share-diluted	$	0.58		$	0.79

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 fair value of this item approximates its carrying 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 rate 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:

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(dollars in Thousands)
Financial Assets:
Cash and due from banks	$	5,769	$	5,769	$	10,304	$	10,304
Federal funds sold		-		-		59		59
Investment securities:
Held-to-maturity		41,419		43,373		45,028		45,997
Available-for-sale		94,862		94,862		98,300		98,300
Equity securities		1,945		1,945		3,262		3,262
Cash surrender value of life insurance		1,135		1,135		1,099		1,099
Loans, net		214,220		218,730		220,723		223,095
Financial Liabilities:
Deposits		256,752		257,619		250,942		251,628
Short-term borrowings		9,672		9,670		32,023		32,019
Long-term borrowings		9,000		9,520		9,000		9,074
Securities sold under
repurchase agreements:
Retail		10,503		10,501		13,211		13,210
Structured		40,000		44,201		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	$	35,700	$	35,700	$	43,400	$	43,400
Standby letters of credit		4,200		4,200		4,400		4,400

The following provides the fair value hierarchy table for fair value measurements of available-for-sale securities at September 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)
September 30, 2010:
Mortgage Backed Securities	$	62,530,006	$	0.00	$	62,530,006	$	0.00
Obligation of State and Political Subdivision		7,676,478		0.00		7,676,478		0.00
Obligations of Other U.S. Government Sponsored Agencies		24,655,615		0.00		24,655,615		0.00
Total	$	94,862,099	$	0.00	$	94,862,099	$	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 September 30, 2010 for potential recognition or disclosure in the financial statements included in this quarterly report.  The Company has concluded that no significant events occurred after September 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 September 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 nine month periods ended September 30, 2010, as compared to the corresponding periods of 2009.

SUMMARY

The Company’s net income for the three months ended September 30, 2010, was $681 thousand, or $.32 per diluted share, compared to $324 thousand, or $.15 per diluted share, for the quarter ended September 30, 2009.   For the nine month period ended September 30, 2010, net income and diluted earnings per share was $1.2 million and $0.58, respectively, compared to $1.7 million and $0.79, respectively, for the same period in 2009.  The variance for both periods is primarily related to a decrease in loan provision expense offset by lower net interest income attributable to the reduction in size of the Bank’s balance sheet.

Total assets decreased $18.5 million from $393.1 million at December 31, 2009, to $374.6 million at September 30, 2010.  Cash and due from banks decreased $4.5 million to $5.8 million.  Investment securities decreased $8.4 million to $138.2 million.  Net loans, excluding loans held for sale, decreased $8.5 million to $211.4 million while loans held for sale (“LHFS”) increased $2.0 million to $2.8 million.  Other real estate owned increased $2.1 million to $2.9 million.  Since December 31, 2009, total deposits have increased $5.8 million to $256.8 million at September 30, 2010.  Total borrowings decreased $25.1 million over the same period as investment cash flows and proceeds from deposits were used to pay down debt.   Total stockholde rs’ equity increased $534 thousand to $40.4 million at September 30, 2010, from $39.8 million at December 31, 2009.

Overall asset quality has improved as the Company’s nonperforming assets, made up of non-accrual loans, loans 90 days or more delinquent and other real estate, decreased to $9.8 million at September 30, 2010, compared to $10.5 million at December 31, 2009.  During the third quarter of 2010, nonperforming assets remained relatively stable, as slight increases in other real estate were partially offset by improvement in non-accrual loans.  After higher than normal net charge-offs during the first two quarters of 2010, the Bank experienced a slowdown in charge-offs; net recoveries of $25 thousand were recorded in the third quarter.  Management believes that it has identified the most significantly troubled assets in its loan portfolio and is working to resolve the credit issues related to these ass ets as quickly as possible.  Even though asset quality only improved slightly during the third quarter as compared to the second quarter of 2010, management is optimistic that the positive trend of problem asset resolution will continue through the remainder of 2010.  Management remains cautious and will continue to ensure that its credit administration and loan underwriting processes remain disciplined and focused on the creditworthiness of new loan originations.  Finally, management is still uncertain as to whether 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 $7.7 million to $216.9 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 through the remainder of 2010.  The depressed economic conditions affecting the United States generally have weakened demand in all Company markets.  However, 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 $11.0 million during this period.  Even with the increases in the Baton Rouge market thus far in 2010, demand is st ill sluggish and management expects growth to be slow for the remainder of the year.  Continued low interest rates and the expansion of the Company’s mortgage loan operations have contributed to increased originations and sales of loans during all quarters of 2010 compared to 2009.  Loans sold in the 3rd quarter of 2010 increased $6.5 million to $11.5 million compared to the 3rd quarter of 2009.

The ratio of total loans to total assets increased to 57.9% at September 30, 2010, compared to 57.1% at December 31, 2009.  At September 30, 2010, the loan to deposit ratio was 84.5% compared to 89.5% at December 31, 2009.  The following table presents the Bank’s loan portfolio composition at September 30, 2010, and December 31, 2009.

COMPOSITION OF LOAN PORTFOLIO

	09/30/10		12/31/09
Commercial, financial & agricultural	$	26,234,000	$	25,606,000
Real estate-construction		30,260,000		31,341,000
Real estate-residential		65,549,000		67,213,000
Real estate-other		90,296,000		95,511,000
Installment		4,497,000		4,806,000
Other		98,000		124,000
Total loans	$	216,934,000	$	224,601,000

The Company’s loan portfolio at September 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 September 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 on the balance sheet by the amortized cost method while securities in the available-for-sale (“AFS”) category are accounted for on the balance sheet 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 $7.0 million to $136.3 million at September 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.  Although management expects to continue this course going forward, a portion of the cash flows from investment securities will be directed to the purchase of short-term securities in an amount sufficient to meet the Company’s obligations to pledge such securities to secure its borrowings, also taking into account the Company’s anticipated liquidity needs.   Equity securities declined $1.3 million to $1.9 million due primarily to a mandatory redemption of Federal Home Loan Bank (“FHLB”) stock calculated on lower advance balances held at the FHLB.  At September 30, 2010, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, FHLB stock of $1.1 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 include non-accrual loans, loans delinquent 90 days or more and other real estate, decreased to $9.8 million, or 2.63% of total assets, at September 30, 2010, from $10.5 million, or 2.68% of total assets, at December 31, 2009.  After higher than normal net charge-offs during the first two quarters of 2010, the Bank experienced a slowdown in charge-offs and net recoveries of $25 thousand were recorded in the 3rd quarter.

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

BREAKDOWN OF NONPERFORMING ASSETS

	09/30/10			12/31/09
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	6,510		$	8,510
Installment		31			12
Commercial and all other loans		160			187
Total non-accrual loans		6,701			8,709
Loans past due 90 days or more		248			1,004
Total nonperforming loans		6,949			9,713
Other real estate owned (net)		2,896			815
Total nonperforming assets	$	9,845		$	10,528
Nonperforming loans to total loans including LHFS		3.20	%		4.32	%
Nonperforming loans to total assets		1.86	%		2.47	%
Nonperforming assets to total loans including LHFS		4.54	%		4.69	%
Nonperforming assets to total assets		2.63	%		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 $2.7 million at September 30, 2010, which represents 1.27% 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 September 30, 2010, includes a specific allocation of approximately $1.2 million on total impaired loans of $6.6 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 3rd quarter of 2010 was $150 thousand, compared to $920 thousand for the corresponding period in 2009.  For the nine months ended September 30, 2010, the Company’s loan loss provision was $1.4 million, compared to $1.9 million during the same period in 2009.

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 reduced charge-offs in the 3rd quarter of 2010 plus management’s expectation of charge-offs for the remainder of the year, management currently believes that a provision for loan losses of approximately $150 thousand for the 4th 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 months ahead that may influence management to change its expected provision.  The following table details the allowance activity for the nine months ended September 30, 2010 and 2009:

ACTIVITY OF ALLOWANCE FOR LOAN LOSSES

	09/30/10			09/30/09
	(dollars in thousands)
Balance at beginning of period	$	3,878		$	2,398
Charge-offs:
Real Estate		(2,166	)		(1,759	)
Commercial		(481	)		(98	)
Installment and other		(19	)		(19	)
Recoveries:
Real Estate		19			25
Commercial		30			23
Installment and other		3			5
Net (charge-offs)/recoveries		(2,614	)		(1,823	)
Provision charged to operations		1,450			1,870
Balance at end of period	$	2,714		$	2,445
Allowance for loan losses as a percent of loans, net of unearned interest & loans held for sale		1.27	%		1.09	%
Net charge-offs (YTD) as a percent of average loans		1.18	%		.82	%

Potential Problem Loans

At September 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 $5.8 million from $250.9 million at December 31, 2009, to $256.8 million at September 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

	09/30/10		12/31/09
Non-Interest Bearing	$	42,455,103	$	49,847,304
NOW Accounts		67,280,610		57,815,246
Money Market Deposit Accounts		34,919,606		30,563,856
Savings Accounts		18,391,734		18,259,388
Certificates of Deposit		93,704,671		94,456,326
Total Deposits	$	256,751,724	$	250,942,120

Borrowings

Total bank borrowings, including FHLB advances, federal funds purchased and customer repurchase agreements, decreased $25.1 million from $94.2 million at December 31, 2009, to $69.1 million at September 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 of $10.0 million 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 September 30, 2010, compared to $39.8 million at December 31, 2009.  The change is due primarily to earnings of $1.2 million and a $389 thousand change in unrealized losses in the available-for-sale investment portfolio offset by $1.15 million 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 17.85%, a Tier 1 capital to risk weighted assets ratio of 16.77% and a leverage ratio of 11.32% at September 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 10.8% at September 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 nine months ended September 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 September 30, 2010, increased to $681 thousand, or $0.32 per diluted share, compared to $324 thousand, or $0.15 per diluted share, for the same period in 2009.  Returns on average assets and average equity were .73% and 6.75%, respectively, for the three months ended September 30, 2010, compared to .33% and 3.18%, respectively, for the same period in 2009.  The increase is primarily related to lower provision for loan losses combined with the reduction in size of the Bank’s investment portfolio.

For the nine months ended September 30, 2010, net income was $1.2 million, or $0.58 per diluted share, compared to $1.7 million, or $0.79 per diluted share, for the same period in 2009.  This change, similar to the increase for the three months ended September 30, 2010, was due to a smaller investment securities portfolio offset by lower loan loss provision expense.

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 nine month periods ended September 30, 2010, decreased $461 thousand and $1.1 million, 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 of $17.8 million and $25.6 million, respectively, while average loan balances decreased $6.0 million and $1.6 million, respectively.  Additionally, the interest rate environment over the first nine 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 spre ad declined 25 and 11 basis points to 3.22% and 3.27% for the three and nine month period ended September 30, 2010, respectively.  Interest rate margin declined 26 and 13 basis points to 3.60% and 3.65% for the three and nine months ended September 30, 2010, respectively.

Non-Interest Income/Non-Interest Expense

Non-interest income increased $287 thousand for the 3rd quarter of 2010 compared to the 3rd quarter of 2009 primarily from higher mortgage related income and gains on the sale of other real estate offset by decreases in service charges on deposit accounts.  Non-interest income increased $1.2 million to $3.3 million for the nine months ended September 30, 2010, compared to $2.1 million during the same period in 2009.  The increase is primarily due to higher mortgage related income, gains on sales of other real estate and gains on sales of securities offset by lower service charges on deposit accounts.  The reduced service charges are due to lower overdraft charges to customer accounts.

Non-interest expense increased $170 thousand to $3.2 million during the 3rd quarter of 2010 compared to the same period in 2009.  The increase is primarily due to higher personnel and occupancy costs offset by lower other real estate expenses.  Non-interest expense for the nine month period ended September 30, 2010, increased $1.2 million over the comparable period in 2009.  The majority of the higher expense level was due to an approximately $625 thousand increase in employee salary and benefits in the first nine months of 2010 as compared to the corresponding period in 2009.  Over half of the growth in employee salary and benefits was associated with the new hires in the mortgage division.  These expenses have been offset, to some extent, by the generation of increased mortgage f ee income.  The remainder of the increased operating expenses was due primarily to write-downs in other real estate, higher occupancy and equipment costs and other charges to expense related to the provision of loan and late fees receivable.  These additional costs were offset by lower FDIC assessment charges due to a special assessment of $183 thousand made in the 1st half of 2009.

Income Taxes

The Company recorded income tax expense of $172 thousand for the three months ended September 30, 2010, compared to $103 thousand for the same period in 2009.Income tax expense for the nine months ended September 30, 2010, was $61 thousand compared to $371 thousand during the same period in 2009.  The lower tax expense during the nine month period is due to reduced taxable income primarily the result of lower earning assets from the investment portfolio.

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 $4.5 million to $5.8 million at September 30, 2010, from $10.3 million at December 31, 2009.  Cash provided by operating and investing activities during the 3rd quarter of 2010 was $881 thousand and $14.9 million, respectively, while financing activities used $20.3 million over the same period.

At September 30, 2010, the Company had unsecured federal funds lines with correspondent banks of $38 million and a $19 million federal funds line of credit through its association with the Certificate of Deposit Account Registry System.  The Company maintains 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 $36 million in liquid assets including unencumbered investment securities available for collateralized borrowing and approximately $45 million available from the brokered CD market.  Management believes that overall liquidity measures, as outlined above,   indicate that the Company has adequate resources to fund foreseeable asset growth or to meet unanticipated de posit fluctuations or other immediate cash 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” 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 September 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 reported 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 prudence, statutory and regulatory guidelines and a variety of other factors.At September 30, 2010, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $2.8 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, 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 September 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:	November 12, 2010	/s/ W. Page Ogden
		W. Page Ogden
		Principal Executive Officer

Date:	November 12, 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