Britton & Koontz Capital (BKBK) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2011

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ___________

0-22606

Commission File Number

BRITTON & KOONTZ CAPITAL CORPORATION

(Exact name of Registrant as Specified in Its Charter)

Mississippi	64-0665423
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

500 Main Street, Natchez, Mississippi  39120

(Address of Principal Executive Offices) (Zip Code)

601-445-5576

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant 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:  2,142,466 Shares of Common Stock, Par Value $2.50, were outstanding as of May 1, 2011.

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

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
	March 31,			December 31,
ASSETS:	2011			2010
Cash and due from banks:
Non-interest bearing	$	6,646,909		$	4,827,021
Interest bearing		24,314,460			991,832
Total cash and due from banks		30,961,369			5,818,853
Federal funds sold		-			112,497
Investment Securities:
Available-for-sale (amortized cost, in 2011 and 2010,
of $89,651,232 and $94,250,975, respectively)		91,940,148			97,308,410
Held-to-maturity (market value, in 2011 and 2010,
of $36,377,377 and $40,609,764, respectively)		35,228,476			39,760,756
Equity securities		1,635,100			1,835,200
Loans, less allowance for loan losses of $3,071,901
in 2011 and $2,420,143 in 2010		203,763,742			208,144,673
Loans held for sale		2,714,204			6,074,014
Bank premises and equipment, net		7,503,828			7,599,077
Other real estate		3,303,189			3,303,189
Accrued interest receivable		1,684,758			1,781,242
Cash surrender value of life insurance		1,154,729			1,145,016
Core Deposits, net		315,906			342,810
Other assets		1,789,219			2,193,946
TOTAL ASSETS	$	381,994,668		$	375,419,683
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits
Non-interest bearing	$	49,320,424		$	45,634,123
Interest bearing		224,846,810			212,908,407
Total deposits		274,167,234			258,542,530
Federal Home Loan Bank advances		9,000,000			17,457,000
Securities sold under repurchase agreements		51,921,548			51,365,895
Accrued interest payable		591,714			657,984
Advances from borrowers for taxes and insurance		151,811			245,943
Accrued taxes and other liabilities		1,342,935			2,063,358
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		342,330,242			335,487,710
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share;
12,000,000 shares authorized; 2,156,966 and 2,149,966 issued
and 2,142,466 and 2,135,466 outstanding, for March 31, 2011,
and December 31, 2010, respectively		5,392,415			5,374,915
Additional paid-in capital		7,385,668			7,379,891
Retained earnings		25,708,568			25,517,531
Accumulated other comprehensive income		1,435,150			1,917,011
Less: Treasury stock, 14,500 shares, at cost		(257,375	)		(257,375	)
Total stockholders' equity		39,664,426			39,931,973
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	381,994,668		$	375,419,683

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
	2011		2010
INTEREST INCOME:
Interest and fees on loans	$	3,005,719	$	3,249,316
Interest on investment securities:
Taxable interest income		911,179		1,203,805
Exempt from federal taxes		386,556		421,024
Interest on federal funds sold		43		45
Total interest income		4,303,497		4,874,190
INTEREST EXPENSE:
Interest on deposits		670,019		849,274
Interest on Federal Home Loan Bank advances		69,512		78,258
Interest on trust preferred securities		43,165		42,537
Interest on securities sold under repurchase agreements		445,271		520,488
Total interest expense		1,227,967		1,490,557
NET INTEREST INCOME		3,075,530		3,383,633
Provision for loan losses		750,000		1,099,996
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		2,325,530		2,283,637
OTHER INCOME:
Service charges on deposit accounts		346,460		359,213
Income from fiduciary activities		1,285		777
Gain/(loss) on sale of mortgage loans		145,917		28,973
Fees and commissions on mortgage loans		202,128		133,022
Gain/(loss) on sale of securities		666,993		447,530
Other real estate income, net		-		7,036
Other		168,526		146,291
Total other income		1,531,309		1,122,842
OTHER EXPENSES:
Salaries		1,558,788		1,552,385
Employee benefits		210,954		222,548
Director fees		37,059		36,850
Net occupancy expense		263,000		256,602
Equipment expenses		263,172		318,608
FDIC assessment		108,986		127,964
Advertising		43,201		46,048
Stationery and supplies		35,713		41,331
Audit expense		65,500		63,456
Other real estate expense, net		5,440		-
Amortization of deposit premium		26,904		26,904
Other		514,831		834,180
Total other expenses		3,133,548		3,526,876
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE		723,291		(120,397	)
Income tax expense/(benefit)		147,871		(183,690	)
NET INCOME	$	575,420	$	63,293
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.27	$	0.03
Basic weighted shares outstanding		2,136,788		2,130,866
Diluted earnings per share	$	0.27	$	0.03
Diluted weighted shares outstanding		2,137,907		2,131,706
Cash dividends per share	$	0.18	$	0.18

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010

											Accumulated
	Common Stock				Additional						Other						Total
					Paid-in			Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Capital			Earnings			Income			Stock			Equity
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		-		-		-			63,293			-			-			63,293
Other comprehensive
income (net of tax):		-		-		-			-			-			-			-
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $(65,791)		-		-		-			-			(110,592	)		-			(110,592	)
Total Comprehensive income																		(47,299	)
Cash Dividend paid $0.18 per share		-		-		-			(384,384	)		-			-			(384,384	)
Common stock issued		9,000		22,500		84,600			-			-			-			107,100
Unearned compensation		-		-		-			(92,192	)		-			-			(92,192	)
Fair Value unexercised stock options		-		-		1,643			-			-			-			1,643
Balance at March 31, 2010		2,135,466	$	5,374,915	$	7,482,454		$	24,669,015		$	2,156,748		$	(257,375	)	$	39,425,757
Balance at December 31, 2010		2,135,466	$	5,374,915	$	7,379,891		$	25,517,531		$	1,917,011		$	(257,375	)	$	39,931,974
Comprehensive Income:
Net income		-		-		-			575,420			-			-			575,420
Other comprehensive
income (net of tax):		-		-		-			-			-			-			-
Net change in unrealized gain/(loss)
on securities available for sale, net
of taxes of $(286,657)		-		-		-			-			(481,861	)		-			(481,861	)
Total Comprehensive income																		93,559
Cash Dividend paid $0.18 per share		-		-		-			(384,384	)		-			-			(384,384	)
Common stock issued		7,000		17,500		84,000			-			-			-			101,500
Unearned compensation		-		-		(78,785	)		-			-			-			(78,785	)
Fair Value unexercised stock options		-		-		562			-			-			-			562
Balance at March 31, 2011		2,142,466	$	5,392,415	$	7,385,668		$	25,708,568		$	1,435,150		$	(257,375	)	$	39,664,426

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

PERIODS ENDED MARCH 31,

	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	575,420		$	63,293
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes		(302,008	)		(262,544	)
Provision for loan losses		750,000			1,099,996
Provision for depreciation		153,444			195,258
Stock dividends received		(800	)		(2,300	)
(Gain)/loss on sale of other real estate		-			(433,693	)
(Gain)/loss on sale of mortgage loans		(145,917	)		(28,973	)
(Gain)/loss on sale of investment securities		(666,993	)		(447,530	)
Net amortization (accretion) of securities		92,120			28,526
Amortization of deposit premium		26,904			26,904
Writedown of other real estate		-			780,168
Net change in:
Loans held for sale		3,359,810			675,474
Accrued interest receivable		96,483			58,130
Cash surrender value of life insurance		(9,713	)		(9,718	)
Other assets		404,728			38,462
Unearned compensation		(78,784	)		(92,192	)
Accrued interest payable		(66,270	)		(103,496	)
Accrued taxes and other liabilities		(131,758	)		(129,085	)
Net cash provided by (used in) operating activities		4,056,666			1,456,680
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		112,497			18,958
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		16,404,907			17,768,745
Held-to-maturity		4,532,850			1,782,163
Redemption of FHLB stock		375,700			-
Purchase of FHLB stock		(174,800	)		-
Purchase of securities:
Available-for-sale		(11,230,860	)		-
(Increase)/decrease in loans		3,776,849			(2,668,393	)
Proceeds from sale and transfers of other real estate		-			438,693
Purchase of premises and equipment		(58,195	)		(36,997	)
Net cash provided by (used in) investing activities		13,738,948			17,303,169
CASH FLOWS FROM FINANCING ACTIVITIES
Increase /(decrease) in customer deposits		15,612,792			867,365
Increase /(decrease) in brokered deposits		11,911			(77,313	)
Increase /(decrease) in securities sold under
repurchase agreements		555,653			975,941
Increase /(decrease) in FHLB advances		(8,457,000	)		(24,325,565	)
Increase /(decrease) in advances from borrowers
for taxes and insurance		(94,132	)		(111,016	)
Cash dividends paid		(384,384	)		(384,384	)
Common stock issued		101,500			107,100
Fair value of unexercised stock options		562			1,643
Net cash provided by (used in) financing activities		7,346,902			(22,946,229	)
NET INCREASE/(DECREASE) IN CASH AND DUE FROM BANKS		25,142,516			(4,186,380	)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		5,818,853			10,303,641
CASH AND DUE FROM BANKS AT END OF PERIOD	$	30,961,369		$	6,117,261
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest	$	1,294,237		$	1,594,053
Cash paid/(refunds) during the period for income taxes	$	-		$	(200,000	)
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Change in unrealized gains (losses)
on securities available for sale	$	(768,518	)	$	(176,383	)
Change in the deferred tax effect in unrealized
gains (losses) on securities available for sale	$	(286,657	)	$	(65,791	)

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2011

Note A.  Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the "Company") as of December 31, 2010, has been derived from the audited financial statements of the Company for the year then ended.  The accompanying interim consolidated financial statements as of March 31, 2011, 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 2010 amounts have been reclassified to conform to the 2011 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%.  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 Structured Repurchase Agreement with interest payments made quarterly on the 20th day of January, April, July and October, which 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 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 the 13th of each February, May, August and November.

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 March 31, 2011 and December 31, 2010, are summarized below.

The amortized cost and approximate fair value of investment securities classified as available-for-sale at March 31, 2011, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	7,790,935	$	135,659	$	(182,927	)	$	7,743,667
Obligations of Other U.S.
Government Sponsored Agencies		24,514,525		9,622		(173,018	)		24,351,129
Mortgage-Backed Securities		57,345,772		2,588,207		(88,627	)		59,845,352
Total	$	89,651,232	$	2,733,488	$	(444,572	)	$	91,940,148

The amortized cost and approximate fair value of investment securities classified as available-for-sale at December 31, 2010, are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of State and
Political Subdivisions	$	7,366,392	$	95,289	$	(289,191	)	$	7,172,490
Mortgage-Backed Securities		62,346,074		3,421,198		(60,622	)		65,706,650
Obligations of Other U.S.
Government Sponsored Agencies		24,538,510		42,797		(152,037	)		24,429,270
Total	$	94,250,976	$	3,559,284	$	(501,850	)	$	97,308,410

The amortized cost and approximate fair value of investment securities classified as held-to-maturity at March 31, 2011, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	28,559,057	$	808,564	$	(95,932	)	$	29,271,689
Mortgage-Backed Securities		6,669,419		436,269		-			7,105,688
Total	$	35,228,476	$	1,244,833	$	(95,932	)	$	36,377,377

The amortized cost and approximate fair value of investment securities classified as held-to-maturity at December 31, 2010, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and
Political Subdivisions	$	31,747,346	$	558,246	$	(200,170	)	$	32,105,422
Mortgage-Backed Securities		8,013,410		490,931		-			8,504,341
Total	$	39,760,756	$	1,049,177	$	(200,170	)	$	40,609,763

There were no investment securities classified as trading at March 31, 2011 or December 31, 2010.

The aggregate fair value and aggregate unrealized losses on securities whose fair values are below book values as of March 31, 2011 and December 31, 2010, 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 March 31, 2011, there were eight securities included in held-to-maturity and twenty 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 (8)	$	4,192,433	$	(78,573	)	$	482,641	$	(17,359	)	$	4,675,074	$	(95,932	)
Total	$	4,192,433	$	(78,573	)	$	482,641	$	(17,359	)	$	4,675,074	$	(95,932	)
Available for Sale:
Obligations of
State and Political Subdivisions (10)	$	599,328	$	(16,011	)	$	2,740,893	$	(166,915	)	$	3,340,221	$	(182,926	)
Obligations of Other U.S. Government Sponsored Agencies (7)		17,830,820		(173,018	)		-		-			17,830,820		(173,018	)
Mortgage Backed Securities(3)		6,976,750		(88,627	)		-		-			6,976,750		(88,627	)
Total	$	25,406,898	$	(277,656	)	$	2,740,893	$	(166,915	)	$	28,147,791	$	(444,571	)

As of December 31, 2010, there were twenty-one securities included in held-to-maturity and twenty-three 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 (21)	$	8,828,777	$	(168,632	)	$	468,462	$	(31,538	)	$	9,297,239	$	(200,170	)
Total	$	8,828,777	$	(168,632	)	$	468,462	$	(31,538	)	$	9,297,239	$	(200,170	)
Available for Sale:
Obligations of
State and Political Subdivisions (12)	$	1,038,994	$	(19,365	)	$	2,637,651	$	(269,826	)	$	3,676,645	$	(289,191	)
Obligations of Other U.S. Government Sponsored Agencies (7)		17,857,740		(152,037	)		-		-			17,857,740		(152,037	)
Mortgage Backed Securities(4)		9,440,517		(60,622	)		-		-			9,440,517		(60,622	)
Total	$	28,337,251	$	(232,024	)	$	2,637,651	$	(269,826	)	$	30,974,902	$	(501,850	)

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. However, asset/liability strategies may occasionally result in the Company adjusting the available-for-sale portfolio duration by selling securities in the portfolio.  The Company sold $10 million of its longer-term 30 year mortgage backed securities during the 1st quarter of 2011 and subsequently sold an additional $10 million of similar securities in April 2011.

Note D.  Loans and Allowance for Loan Losses

Management segregates the loan portfolio into portfolio segments.  Under applicable accounting rules, a loan portfolio segment is determined based on the level at which a bank develops and documents a systematic method for determining its allowance for loan losses.  The Bank’s portfolio segments are based on loan types and the underlying risk factors present in each loan type.  Such risk factors are periodically reviewed by management and revised as deemed appropriate.  The following tables set forth, as of March 31, 2011 and December 31, 2010, the balance of both the allowance for loan losses and all “financing receivables” (that is, the principal amount of all loans plus accrued and unpaid interest as of the applicable measurement date) by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually.  The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Bank develops and documents a systematic method for determining its allowance for loan losses.  The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type.  Such risk factors are periodically reviewed by management and revised as deemed appropriate.  The following tables set forth, as of March 31, 2011 and December 31, 2010, the balance of the allowance for loan losses by portfolio segment, disaggregated by impairment methodology, which is then further segregated by amounts evaluated for impairment collectively and individually.  The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Allowance for loan Losses and Recorded Investment in Financing Receivables

For the Quarter Ended March 31, 2011

				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	376,946		$	1,470,692		$	26,590		$	505,515		$	40,400	$	2,420,143
Charge-offs		(12,070	)		(14,419	)		(10,107	)		(76,882	)		-		(113,478	)
Recoveries		8,207			450			1,799			4,780			-		15,236
Provision		91,413			219,844			4,730			149,213			284,800		750,000
Ending balance	$	464,496		$	1,676,567		$	23,012		$	582,626		$	325,200	$	3,071,901
Ending balance:  individually
evaluated for impairment	$	187,770		$	1,094,001		$	-		$	269,716		$	-	$	1,551,487
Ending Balance: collectively
evaluated for impairment	$	276,726		$	582,566		$	23,012		$	312,910		$	325,200	$	1,520,414
Ending Balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-
Financing receivables:
Ending balance	$	22,690,000		$	107,658,000		$	3,983,000		$	75,219,000		$	-	$	209,550,000
Ending balance: individually
evaluated for impairment	$	346,951		$	7,247,300		$	21,529		$	1,624,928		$	-	$	9,240,708
Ending balance: collectively
evaluated for impairment	$	22,343,049		$	100,410,700		$	3,961,471		$	73,594,072		$	-	$	200,309,292
Ending balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-

Allowance for loan Losses and Recorded Investment in Financing Receivables

For the Year Ended December 31, 2010

				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	631,065		$	2,476,025		$	161,172		$	300,750		$	309,726		$	3,878,738
Charge-offs		(523,284	)		(2,496,345	)		(24,381	)		(165,350	)		-			(3,209,360	)
Recoveries		48,477			6,336			4,427			16,521			-			75,761
Provision		220,688			1,484,676			(114,628	)		353,594			(269,326	)		1,675,004
Ending balance	$	376,946		$	1,470,692		$	26,590		$	505,515		$	40,400		$	2,420,143
Ending balance:  individually
evaluated for impairment	$	131,663		$	784,382		$	-		$	139,819		$	-		$	1,055,864
Ending Balance: collectively
evaluated for impairment	$	245,283		$	686,310		$	26,590		$	365,696		$	40,400		$	1,364,279
Ending Balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-
Financing receivables:
Ending balance	$	24,661,000		$	108,856,000		$	4,451,000		$	78,671,000		$	-		$	216,639,000
Ending balance: individually
evaluated for impairment	$	364,163		$	6,862,175		$	24,028		$	259,406		$	-		$	7,509,772
Ending balance: collectively
evaluated for impairment	$	24,296,837		$	101,993,825		$	4,426,972		$	78,411,594		$	-		$	209,129,228
Ending balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

Management divides the loan portfolio segments into classes, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

As of March 31, 2011 and December 31, 2010, loan balances outstanding more than 90 days and still accruing interest amounted to $82 thousand and $484 thousand, respectively.  As of March 31, 2011 and December 31, 2010, non-accrual loans were $9.2 million and $7.5 million, respectively.  The Bank considers all loans more than 90 days past due as non-performing loans.

The following tables present, by class, qualitative and quantitative information concerning the credit quality of financing receivables by credit quality indicators as of March 31, 2011 and December 31, 2010.

Credit Quality Indicators

As of March 31, 2011

	Performing		Non-Performing		Total
Commercial	$	22,343,049	$	346,951	$	22,690,000
Consumer		3,961,472		21,528		3,983,000
Real Estate:
Construction and Development:
1-4 family residential		13,181,000		-		13,181,000
Other construction loans		16,687,218		911,782		17,599,000
Commercial Real Estate:
Owner occupied		37,473,600		2,761,400		40,235,000
Non-owner occupied		46,249,882		3,574,118		49,824,000
Residential:
1-4 family residential		48,214,098		582,902		48,797,000
Multi-family		12,117,414		1,123,586		13,241,000
Total	$	200,227,733	$	9,322,267	$	209,550,000

Credit Quality Indicators

As of December 31, 2010

	Performing		Non-Performing		Total
Commercial	$	24,296,837	$	364,163	$	24,661,000
Consumer		4,426,783		24,217		4,451,000
Real Estate:
Construction and Development:
1-4 family residential		10,641,000		-		10,641,000
Other construction loans		17,521,218		911,782		18,433,000
Commercial Real Estate:
Owner occupied		37,311,142		2,777,858		40,089,000
Non-owner occupied		46,759,883		3,574,117		50,334,000
Residential:
1-4 family residential		54,622,211		341,789		54,964,000
Multi-family		13,066,000		-		13,066,000
Total	$	208,645,074	$	7,993,926	$	216,639,000

The following tables present, by class, an analysis of the age of the recorded investment in financing receivables that are 30-89 days past due based on the Company’s review policy along with financing receivables past due 90 days or more and still accruing as of March 31, 2011 and December 31, 2010.

Aged Analysis of Past Due Financing Receivables

As of March 31, 2011

	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Recievable		Recorded Investment > 90 Days and Accruing
Commercial	$	2,167	$	162,594	$	164,761	$	22,525,239	$	22,690,000	$	-
Consumer		32,253		21,528		53,781		3,929,219		3,983,000		-
Real Estate:
Construction & Development:
1-4 Family Residential		107,333		-		107,333		13,073,667		13,181,000		-
Other Construction Loan		1,210,427		911,782		2,122,209		15,476,791		17,599,000		-
Commercial Real Estate:
Owner Occupied		-		413,481		413,481		39,821,519		40,235,000		-
Non-Owner Occupied		1,544,678		3,574,117		5,118,795		44,705,205		49,824,000		-
Residential:
1-4 Family Residential		305,120		424,209		729,329		48,067,671		48,797,000		81,559
Multi-family		113,836		1,123,586		1,237,422		12,003,578		13,241,000		-
Total	$	3,315,814	$	6,631,297	$	9,947,111	$	199,602,889	$	209,550,000	$	81,559

Aged Analysis of Past Due Financing Receivables

As of December 31, 2010

	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Recievable		Recorded Investment > 90 Days and Accruing
Commercial	$	67,563	$	188,594	$	256,157	$	24,404,843	$	24,661,000	$	-
Consumer		52,579		24,217		76,796		4,374,204		4,451,000		189
Real Estate:
Construction & Development:
1-4 Family Residential		833,395		-		833,395		9,807,605		10,641,000		-
Other Construction Loan		190,430		911,782		1,102,212		17,330,788		18,433,000		483,965
Commercial Real Estate:
Owner Occupied		1,548,589		3,574,117		5,122,706		34,966,294		40,089,000		-
Non-Owner Occupied		-		-		-		50,334,000		50,334,000		-
Residential:
1-4 Family Residential		700,210		140,467		840,677		54,123,323		54,964,000		-
Multi-family		-		-		-		13,066,000		13,066,000		-
Total	$	3,392,766	$	4,839,177	$	8,231,943	$	208,407,057	$	216,639,000	$	484,154

The following table presents, by class, information regarding the recorded investment in financing receivables that have been placed on non-accrual status as of March 31, 2011 and December 31, 2010.

Financing Receivables on Non-Accrual Status

For the Periods Ended

	3/31/2011		12/31/2010
Commercial	$	346,951	$	364,163
Consumer		21,528		24,028
Real Estate:
Construction and Development:
1-4 Family Residential		-		-
Other Construction Loans		911,782		427,817
Commercial Real Estate
Owner Occupied		2,761,400		2,777,858
Non-owner Occupied		3,574,117		3,574,117
Residential
1-4 Family Residential		501,344		341,789
Multi-family		1,123,586		-
Total	$	9,240,708	$	7,509,772

The following tables present, by class, for loans that meet the definition of an impaired loan in sections 310-10-35-16 and 310-10-35-17 of Accounting Standards Codification Topic 310, "Receivables," for the quarter ended March 31, 2011 and the year ended December 31, 2010, (1) the recorded investment in impaired loans for which there is a related allowance for credit loss, (2) the recorded investment in impaired loans for which there is not a related allowance for credit loss and (3) the total unpaid principal balance in the impaired loan.  Additionally, the table includes the average recorded investment in the impaired loan and the amount of interest income recognized using a cash basis method of accounting during the time within that period that the loans were impaired.

Impaired Loans

For Quarter Ended March 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	9,677	$	9,576	$	-	$	10,980	$	-
Consumer		24,407		23,693		-		25,235		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		837,032		1,040,782		-		832,914		-
Commercial Real Estate:
Owner Occupied		1,411,822		1,293,109		-		1,406,167		-
Non-Owner Occupied		-		-		-		-		-
Residential:
1-4 Family Residential		260,792		290,733		-		221,636		-
Multifamily		-		-		-		-		-
With Related Allowance Recorded:
Commercial		367,418		339,154		187,770		380,689		-
Consumer		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		173,374		454,000		45,500		172,572		-
Commercial Real Estate:
Owner Occupied		1,626,377		1,726,071		574,294		1,620,996		-
Non-Owner Occupied		3,759,117		3,574,117		474,207		3,741,852		-
Residential:
1-4 Family Residential		314,045		323,988		87,630		314,633		-
Multifamily		1,137,519		1,125,138		182,086		1,136,722		-
Total
Commercial		377,095		348,730		187,770		391,669		-
Consumer		24,407		23,693		-		25,235		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		1,010,406		1,494,782		45,500		1,005,486		-
Commercial Real Estate:
Owner Occupied		3,038,199		3,019,180		574,294		3,027,163		-
Non-Owner Occupied		3,759,117		3,574,117		474,207		3,741,852		-
Residential:
1-4 Family Residential		574,837		614,721		87,630		536,269		-
Multifamily		1,137,519		1,125,138		182,086		1,136,722		-
	$	9,921,581	$	10,200,361	$	1,551,487	$	9,864,396	$	-

Impaired Loans

For Year Ended December 31, 2010

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Consumer		26,370		-		-		26,498		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		330,703		556,817		-		590,120		-
Commercial Real Estate:
Owner Occupied		1,398,337		1,273,530		-		1,302,045		21,113
Non-Owner Occupied		-		-		-		-		-
Residential:
1-4 Family Residential		202,904		128,219		-		213,837		7,533
Multifamily		-		-		-		-		-
With Related Allowance Recorded:
Commercial		387,464		364,163		131,663		373,183		2,898
Consumer		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		170,968		454,000		45,500		171,396		-
Commercial Real Estate:
Owner Occupied		1,612,482		1,731,769		179,765		1,569,355		17,482
Non-Owner Occupied		3,707,323		3,574,117		559,117		3,707,323		-
Residential:
1-4 Family Residential		203,813		192,467		139,819		222,159		2,504
Multifamily		-		-		-		-		-
Total
Commercial		387,464		364,163		131,663		373,183		2,898
Consumer		26,370		-		-		26,498		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		501,671		1,010,817		45,500		761,516		-
Commercial Real Estate:
Owner Occupied		3,010,819		3,005,299		179,765		2,871,400		38,595
Non-Owner Occupied		3,707,323		3,574,117		559,117		3,707,323		-
Residential:
1-4 Family Residential		406,717		320,686		139,819		435,996		10,037
Multifamily		-		-		-		-		-
	$	8,040,364	$	8,275,082	$	1,055,864	$	8,175,916	$	51,530

Note E.  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.  These loans are carried at the lower of cost or market value.

Loans held-for-sale primarily consist of fifteen and thirty 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.  There were no such losses at March 31, 2011.  Gains and fees on loans held-for-sale are recognized when realized and amounted to $348 thousand for the three months ended March 31, 2011.  The Company held $2.7 million of loans-held-for-sale at March 31, 2011.

Loans held in the portfolio are periodically analyzed and compiled as to the individual characteristics of each loan.  If at any time a decision is made to sell any loan in the portfolio, such loan is reclassified as held-for-sale and carried at the lower of cost or market.

Note F.  Junior Subordinated Debentures

On March 26, 2003, the Company finalized its participation in FTN Financial Capital Market’s and Keefe, Bruyette & Woods’ pooled trust preferred offering.  The Company established Britton & Koontz Statutory Trust # 1 which issued 5,000 capital securities and 155 common securities with an aggregate liquidation amount of $5 million and $155 thousand, respectively.  The term of the capital securities and debentures is 30 years, callable after 5 years at the option of the Company.  The initial interest rate was 4.41%, adjusting quarterly at 3-Month LIBOR plus 3.15% and capped at 11.75%.  The interest rate at March 31, 2011, was 3.46%.   The securities are currently callable at the discretion of the Company on a quarterly basis.

Note G.  Loan Commitments

In the ordinary course of business, the Company enters into standby letters of credit and commitments to extend credit to its customers.  Letters of credit at March 31, 2011, and December 31, 2010, were $4.1 million and $4.4 million, respectively.  As of March 31, 2011, the Company had entered into commercial and residential loan commitments with certain customers that had an aggregate unused balance of $36.2 million, a decrease from $38.8 million at December 31, 2010.  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 H.  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 months ended March 31, 2011 and 2010.

	For the three months ended March 31,
	2011		2010
Basic weighted average shares outstanding		2,136,788		2,130,866
Dilutive effect of granted options		1,119		840
Diluted weighted average shares outstanding		2,137,907		2,131,706
Net income	$	575,421	$	63,293
Net income per share-basic	$	0.27	$	0.03
Net income per share-diluted	$	0.27	$	0.03

Note I.  Fair Value

Fair Value Disclosures

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 based on the assumptions market participants would use when pricing the asset or liability.  A fair value hierarchy has been established that prioritizes the inputs used to develop those assumptions and measure fair value.  The hierarchy requires companies to maximize the use of observable inputs and minimize the use of unobservable inputs.  The three levels of inputs used to measure fair value are as follows:

·   Level 1 - Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

·   Level 2 - Includes observable inputs.  Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

·   Level 3 - Includes unobservable inputs and should be used only when observable inputs are unavailable.

Since the assumptions used in measuring fair value significantly affect fair value measurements, the fair value estimates may not be realized in an immediate settlement of the instrument.  In addition, in accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments - For short-term instruments, including federal funds sold, the carrying amount is a reasonable estimate of fair value.

Securities - Fair value of securities is based on quoted market prices.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  Investment securities also include equity securities that are not traded in an active market.  The fair value of these securities equals their carrying value.

Loans - The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for simi­lar loans to borrowers with similar credit ratings.  Loans with similar classifications are aggregated for purposes of the calculations.  The allowance for loan losses, which was used to measure the credit risk, is subtracted from the fair value of the loans.

Cash Surrender Value of Life Insurance – The fair value approximates its carrying value which is based on cash surrender values indicated by insurance companies.

Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of Federal Home Loan Bank advances is estimated using the rates currently offered for advances of similar maturities.

Securities Sold Under Repurchase Agreements – The fair value approximates its carrying value.

Junior Subordinated Debt – Due to short-term variable repricing, the fair value approximates its carrying value

Commitments to Extend Credit and Standby Letters of Credit - The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The estimated approximate fair values of the Company's financial in­struments as of March 31, 2011 and December 31, 2010 are as follows:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(dollars in Thousands)
Financial Assets:
Cash and due from banks	$	30,961	$	30,961	$	5,819	$	5,819
Federal funds sold		-		-		112		112
Investment securities:
Held-to-maturity		35,228		36,377		39,761		40,610
Available-for-sale		91,940		91,940		97,308		97,308
Equity securities		1,635		1,635		1,835		1,835
Cash surrender value of life insurance		1,155		1,155		1,145		1,145
Loans, net		206,478		210,510		214,219		218,739
Financial Liabilities:
Deposits		274,167		274,766		258,543		259,192
Short-term borrowings		-		-		8,457		8,456
Long-term borrowings		9,000		9,346		9,000		9,368
Securities sold under
repurchase agreements:
Retail		11,922		11,920		11,366		11,364
Structured		40,000		43,120		40,000		43,506
Junior subordinated debentures		5,155		5,155		5,155		5,155

Recurring Basis

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service.  This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

The following table presents the balance of assets measured on a recurring basis as of March 31, 2011 and December 31, 2010.  As of those dates, the Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2011:
Mortgage Backed Securities	$	59,845,352	$	0.00	$	59,845,352	$	0.00
Obligation of State and Political Subdivision		7,743,666		0.00		7,743,666		0.00
Obligations of Other U.S. Government Sponsored Agencies		24,351,130		0.00		24,351,130		0.00
Total	$	91,940,148	$	0.00	$	91,940,148	$	0.00
December 31, 2010:
Mortgage Backed Securities	$	65,706,650	$	0.00	$	65,706,650	$	0.00
Obligation of State and Political Subdivision		7,172,490		0.00		7,172,490		0.00
Obligations of Other U.S. Government Sponsored Agencies		24,429,270		0.00		24,429,270		0.00
Total	$	97,308,410	$	0.00	$	97,308,410	$	0.00

Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement dates in the table below.  As of such measurement dates, the Company did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.

The fair value of impaired loans is measured at the fair value of the collateral for collateral-dependent loans.   Impaired loans are Level 2 assets measured using recent appraisals from external parties of the collateral less any prior liens.  Repossessed assets are initially recorded at fair value less estimated costs to sell.  The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available.  As such, the Company records repossessed assets as Level 2.

The following table presents the balance of assets measured on a non-recurring basis as of March 31, 2011 and December 31, 2010.

Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2011:
Assets:
Impaired Loans	$	7,689,221	$	0.00	$	7,689,221	$	0.00
Repossessed Assets		3,303,189		0.00		3,303,189		0.00
Total	$	10,992,410	$	0.00	$	10,992,410	$	0.00
December 31, 2010:
Assets:
Impaired Loans	$	6,453,908	$	0.00	$	6,453,908	$	0.00
Repossessed Assets		3,303,189		0.00		3,303,189		0.00
Total	$	9,757,097	$	0.00	$	9,757,097	$	0.00

Note J. Subsequent Events

The Company evaluated events and transactions occurring subsequent to March 31, 2011 for potential recognition or disclosure in the financial statements included in this quarterly report.  The Company has concluded that no significant events occurred after March 31, 2011, 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 March 31, 2011, as compared to the Company’s financial condition as of December 31, 2010, and the results of operations of the Company for the three-month period ended March 31, 2011, as compared to the corresponding period in 2010.

Summary

Net income and earnings per diluted share for the three months ended March 31, 2011, was $575 thousand and $.27 per diluted share, respectively, compared to $63 thousand and $.03 per diluted share for the quarter ended March 31, 2010.  The increase in earnings in the 1st quarter of 2011 as compared to the same period in 2010 is due to several factors.  During the 1st quarter of 2011, the Company’s provision for loan losses declined $350 thousand from $1.1 million to $750 thousand while gains on sales of investment securities increased $219 thousand during the same period.  Additionally, this year’s 1st quarter improved due to a $306 thousand charge to expenses during the 1st quarter of 2010 related to the provision for possible uncollectible loan and late fees receivable.  Finally, net interest income during the 1st quarter of 2011 decreased $308 thousand compared to the same period in 2010.

Assets increased $6.6 million during the 1st quarter of 2011 to $382.0 million due primarily to the increase of $25.1 million in Federal Reserve cash balances offset by lower investment securities and loans.  At March 31, 2011, investment securities of $128.8 million were down due to sales of $10 million and normal pay-downs while net loan balances of $206.5 million declined due to lower loans held for sale and the general slowdown in all Company markets.  Total deposits increased $15.6 million to $274.2 million at March 31, 2011 from $258.5 million at December 31, 2010, while total borrowings declined $7.9 million to $60.9 million.  Total stockholders’ equity decreased $268 thousand to $39.7 million at March 31, 2011, from $39.9 million at December 31, 2010.

The provision for loan losses for the three month period ending March 31, 2011, was decreased to $750 thousand, compared to $1.1 million during the same period in 2010.  Net charge-offs decreased during the 1st quarter of 2011 to $98 thousand compared to $1.8 million during the same period in 2010.  Total non-performing assets ended the 1st quarter of 2011 at $12.6 million compared to $11.3 million at December 31, 2010.

 

While non-performing assets have increased since the beginning of 2011, management remains confident that certain existing problem assets will be resolved during 2011.  However, even with these resolutions, management continues to remain cautious and is still uncertain as to whether the Company’s local markets have stabilized.  Therefore, unexpected asset quality issues may still arise.  Management continues its efforts to identify and resolve problem credits as quickly as possible.

 

Financial Condition

Loans

Total loans decreased $7.1 million to $209.5 million at March 31, 2011, from $216.6 million at December 31, 2010, due to lower commercial real estate activity and sales of the 1-4 family residential portfolio and decreases in loans held for sale at March 31, 2011.  Further declines are expected to occur in the Company’s commercial and residential real estate portfolio through the remainder of 2011.  The depressed economic conditions affecting the United States generally have weakened demand in all Company markets.  The Company’s decision to expand its mortgage operations by hiring new loan originators in 2009 has resulted in increased originations and sales of 1-4 family residential loans in the secondary market.  The Company sold approximately $46 million of 1-4 family residential loans in 2010 and $12.9 million of such loans in the 1st quarter of 2011.  The decision to sell loans in the secondary market instead of holding them in the portfolio, coupled with the lack of market demand for new loans using these proceeds, has contributed to the decline in total loans.  The following table presents the Company's loan portfolio composition at March 31, 2011, and December 31, 2010.

COMPOSITION OF LOAN PORTFOLIO

	03/31/11		12/31/10
Commercial, financial & agricultural	$	22,690,000	$	24,661,000
Real estate-construction		30,780,000		29,074,000
Real estate-residential		62,036,000		68,030,000
Real estate-other		90,059,000		90,423,000
Installment		3,863,000		4,204,000
Other		122,000		247,000
Total loans	$	209,550,000	$	216,639,000

The Company’s loan portfolio at March 31, 2011, had no significant concentrations of loans other than in the categories presented in the table above.

Investment Securities

The Company’s investment portfolio at March 31, 2011, consisted of mortgage-backed, agency and municipal 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.  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 $9.9 million to $127.2 million at March 31, 2011 from $137.1 million at December 31, 2010.  The decrease is due to the sale of $10 million of AFS securities during the 1st quarter 2011 in order to shorten the portfolio’s average life with the proceeds being held as cash or used to pay down debt rather than being reinvested in the market.  Equity securities declined during this period $200 thousand to $1.6 million   At March 31, 2011, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, Federal Home Loan Bank ("FHLB") stock of $811 thousand, 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, 2010.

Asset Quality

Management continually monitors the diversification of the loan portfolio and assesses loan quality.  When the assessment of an individual loan relationship indicates that the borrower has a defined weakness in the ability to repay and collection of all outstanding principal and/or interest is in doubt, the debt is placed on non-accrual.  By placing loans on non-accrual the Company recognizes a problem credit, foregoes interest that is likely uncollectible, and adjusts the carried loan balance to reflect the collection amount expected.  When problem credits are transferred to non-accrual status, the accrual of interest income is discontinued and all previously accrued and uncollected interest for the year is reversed against interest income.  A non-accrual loan may be restored to accrual status when it is no longer delinquent and management no longer doubts the collectability of interest and principal.

Several key measures are used to evaluate and monitor the Company’s asset quality.  These measures include the levels and percentages of total nonperforming assets, loan delinquencies, non-accrual loans, foreclosed assets and charge-offs.  Nonperforming assets, including non-accrual loans of $9.3 million, other real estate of $3.3 million and loans 90 days or more delinquent of $82 thousand, increased $1.3 million to $12.6 million at March 31, 2011, from $11.3 million at December 31, 2010.  The increase is due primarily to one commercial credit in the amount of $1.1 million that was classified as nonaccrual in the 1st quarter of 2011.  Nonperforming loans as a percent of total loans, net of unearned income and loans held for sale ("LHFS"), increased to 4.51% at March 31, 2011, compared to 3.80% at December 31, 2010.  Net charge-offs during the 1st quarter of 2011 decreased to $98 thousand compared to $519 thousand during the 4th quarter of 2010 and $1.8 million during the 1st quarter of 2010.  Notwithstanding increases in the Company's nonperforming assets, management believes that the Company’s asset quality as of March 31, 2011, is equal to or exceeds industry and peer levels as was the case at December 31, 2010, based on Federal Deposition Insurance Corporation (“FDIC”) year-end call report data.

A breakdown of nonperforming assets at March 31, 2011, and December 31, 2010, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

	03/31/11			12/31/10
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	8,872		$	7,122
Installment		22			24
Commercial and all other loans		347			364
Total non-accrual loans		9,241			7,510
Loans past due 90 days or more		81			484
Total nonperforming loans		9,322			7,994
Other real estate owned (net)		3,303			3,303
Total nonperforming assets	$	12,625		$	11,297
Nonperforming loans to total loans, net of LHFS		4.51	%		3.80	%
Nonperforming loans to total assets		2.44	%		2.13	%
Nonperforming assets to total loans, net of LHFS		6.10	%		5.37	%
Nonperforming assets to total assets		3.31	%		3.01	%

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 Accounting Standards Codification 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 portfolio 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 and commercial real estate secured loans, 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 consideration 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 primarily 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 observable 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.

Based upon this evaluation, management believes the allowance for loan losses of $3.1 million at March 31, 2011, which represents 1.49% of gross loans less unearned interest and LHFS, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans.  At December 31, 2010, the allowance for loan loss was $2.4 million, or 1.15% of gross loans less unearned interest and LHFS.  The allowance includes a specific allocation of approximately $1.6 million on total impaired loans of $9.3 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 provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of the risk of loss in the loan portfolio in light of current risk management strategies, economic conditions and market trends.  The Company decreased the provision by $350 thousand to $750 thousand for the 1st quarter of 2011 compared to $1.1 million during the 1st quarter of 2010 primarily due to lower net charge-offs during the 1st quarter of 2011 of $98 thousand from $1.8 million during the 1st 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.  However, factors may come to light during the remainder of the 2nd quarter that may influence management to change its expected provision.  The following table details the allowance activity for the three months ended March 31, 2011 and 2010:

ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

	03/31/11			03/31/10
	(dollars in thousands)
Balance at beginning of period	$	2,420		$	3,878
Charge-offs:
Real Estate		(91	)		(1,822	)
Commercial		(12	)		(10	)
Installment and other		(10	)		(11	)
Recoveries:
Real Estate		5			4
Commercial		8			5
Installment and other		2			1
Net (charge-offs)/recoveries		(98	)		(1,833	)
Provision charged to operations		750			1,100
Balance at end of period	$	3,072		$	3,145
Allowance for loan losses as a percent of loans, net of unearned interest and LHFS		1.49	%		1.42	%
Net charge-offs as a percent of average loans1		.05	%		.82	%
Net charge-offs as a percent of average loans2		.66	%		1.62	%

1. Net charge-offs are year to date

2. Net charge-offs are trailing twelve months

Potential Problem Loans

At March 31, 2011, the Company had no loans, other than those 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 $15.7 million from $258.5 million at December 31, 2010, to $274.2 million at March 31, 2011.  The increase is due primarily to higher non-interest bearing demand deposits, the Company’s rewards checking and local school deposits.

The composition of the Company’s deposits is described in the following table.

COMPOSITION OF DEPOSITS

	03/31/11		12/31/10
Non-Interest Bearing	$	49,320,424	$	45,634,123
NOW Accounts		80,405,802		66,650,551
Money Market Deposit Accounts		35,513,052		36,140,259
Savings Accounts		20,175,073		19,098,255
Certificates of Deposit		88,752,883		91,019,342
Total Deposits	$	274,167,234	$	258,542,530

Borrowings

Total Company borrowings, including FHLB advances, federal funds purchased, customer and structured repurchase agreements and junior subordinated debentures, decreased $7.9 million to $60.9 million at March 31, 2011, compared to $68.8 million at December 31, 2010.  The decrease in borrowed funds is due primarily to the decline in the investment portfolio from sales of securities: sales proceeds, along with monthly cash flows from investment securities, have been used to pay down debt rather than be re-invested back into the market.  The Company includes in these borrowings 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 $39.7 million at March 31, 2011, compared to $39.9 million at December 31, 2010.  Earnings of $575 thousand were primarily offset by a $482 thousand change in unrealized losses in the AFS investment portfolio and by $384 thousand in dividends paid.

The Company and Bank maintained a total capital to risk weighted assets ratio of 18.28% and 17.21%, respectively, a Tier 1 capital to risk weighted assets ratio of 17.06% and 15.99%, respectively, and a leverage ratio of 11.36% and 10.78%, respectively, at March 31, 2011.  These levels substantially exceed the minimum requirements of bank regulatory agencies for well-capitalized institutions of 10.00%, 6.00% and 5.00%, respectively.  Components of comprehensive income are excluded from the calculation of capital ratios.  The ratio of shareholders' equity to assets decreased to 10.4% at March 31, 2011, compared to 10.6% at December 31, 2010, due to the increase in total assets.

Off-Balance Sheet Arrangements

There have been no material changes in the Company’s off-balance sheet arrangements during the three months ended March 31, 2011.  See Note B and Note G to the Company’s consolidated financial statements for a description of the Company’s off-balance sheet arrangements.

Results of Operations

Net Interest Income and Net Interest Margin

One of the largest components of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid for deposits and borrowed funds.  The net interest margin is net interest income expressed as a percentage of average earning assets.

Net interest income ended March 31, 2011, at $3.1 million compared to $3.4 million at March 31, 2010.  This decline was due primarily to lower average earning assets, offset slightly by lower funding costs of interest bearing liabilities.  Contributing to the lower average earning assets was a $13.3 million decrease in average loans coupled with a small decline in average investment securities offset by increases in average interest bearing cash balances.  Net interest margin declined from 3.74% at March 31, 2010, to 3.44% at March 31, 2011, due to the drop in net interest income.

Non-Interest Income/ Non-Interest Expense

Non-interest income ended March 31, 2011, at $1.5 million compared to $1.1 million at March 31, 2010.A total of approximately $11 million of mortgage-backed securities was sold in both quarters, and gains on such sales in the first quarter of 2011 exceeded gains in the corresponding period in 2010 by $219 thousand.  The expansion of the Company’s mortgage department contributed an additional $186 thousand in income from the sale of mortgage loans.  Non-interest expense decreased $393 thousand as compared to the 1st quarter of 2010 and ended the 1st quarter of 2011 at $3.1 million.  The decrease is primarily due to approximately $300 thousand charge to expense in the 1st quarter of 2010 related to the charge-off of loan and late fees receivable, located in the  “Other” line item in the Other Expenses section of the income statement.  Additionally, the expanded mortgage operations added approximately $96 thousand to personnel costs.  Other non-interest expense items were relatively stable.

 Income Taxes

The Company recorded income tax expense of $148 thousand for the three months ended March 31, 2011, compared to income tax credit of $184 thousand for the same period in 2010.  The tax credit arose primarily due to the tax effects resulting from the $1.1 million in the provision for loan losses in the 1st quarter of 2010.

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 and needs.

The Company’s cash and cash equivalents increased $25.1 million to $30.9 million at March 31, 2011, from $5.9 million at December 31, 2010.  Cash was provided by operating, investing and financing activities during the 1st quarter of 2011 in the amounts of $4.0 million and $13.7 million and $7.3 million, respectively.

At March 31, 2011, the Company had unsecured federal funds lines with correspondent banks of $36 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 $67 million.  In addition to these lines of credit, the Bank had approximately $49 million in liquid assets including unencumbered investment securities available for collateralized borrowing of $25 million, and cash available at the Federal Reserve Bank of $24 million.   Enhancing these liquidity levels, the Company has the ability to add $34 million from the brokered CD market.  Taken together, the total liquidity available to the Company after adjusting to account for market volatility, without affecting its well-capitalized status is approximately $189 million.  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 deposit 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.  Forward-looking statements have been and will be made in written documents and oral presentations of the Company.  Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management.  When used in the Company’s documents (including this Report) or oral presentations, the words “anticipate,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “goal” and similar expressions are intended to identify forward-looking statements.  In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company’s actual results to differ materially from those contemplated in any forward-looking statements include, among others, increased competition, regulatory factors, economic conditions, changing market conditions, availability or cost of capital, employee workforce factors, costs and other effects of legal and administrative proceedings, and changes in federal, state or local legislative requirements.  The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions or other factors affecting such statements.

Item 3.               Quantitative and Qualitative Disclosures about Market Risk 

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 March 31, 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 March 31, 2011, retained earnings available for payment of cash dividends under applicable dividend regulations exceeded $2.2 million.

Certain restrictions also exist on the ability of the Bank to transfer funds to the Company in the form of loans.  Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations.  At March 31, 2011, 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 March 31, 2011.

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 Company’s Registration Statement on Form S-8, Registration No. 333-20631, filed with the 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 Company’s Current Report on Form 8-K filed with the Commission on August 17, 2006.
31.1		Certifications of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certifications of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certifications of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

SIGNATURES

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

BRITTON & KOONTZ CAPITAL CORPORATION

Date:          May 5, 2011                                                       /s/ W. Page Ogden

W. Page Ogden

Chief Executive Officer

Date:          May 5, 2011                                                       /s/ William M. Salters

William M. Salters

Chief Financial Officer

EXHIBIT INDEX

Exhibit	Description of Exhibit
31.1	Certifications of the Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of the Chief Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002