Britton & Koontz Capital (BKBK) 10-Q 2012 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 June 30, 2012

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 x  No o

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (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:  2,138,466 Shares of Common Stock, Par Value $2.50, were outstanding as of August 1, 2012.

BRITTON & KOONTZ CAPITAL CORPORATION

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	3
	Item 1.    Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Income	5
	Consolidated Statements of Changes in Stockholders' Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to the Consolidated Financial Statements	11
	Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3.    Quantitative and Qualitative Disclosures About Market Risk	37
	Item 4.    Controls and Procedures	37
PART II.	OTHER INFORMATION	37
	Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 6.    Exhibits	38
SIGNATURES		39
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

2

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF

A S S E T S

	June 30,		December 31,
ASSETS:	2012		2011
Cash and due from banks:
Non-interest bearing	$	8,786,810	$	9,437,968
Interest bearing		41,378,896		39,184,749
Total cash and due from banks		50,165,706		48,622,717
Federal funds sold		-		-
Investment Securities:
Available-for-sale (amortized cost, in 2012 and 2011, of $78,238,653 and $89,107,989, respectively)		81,274,824		91,527,860
Held-to-maturity (fair value, in 2012 and 2011, of $25,228,891 and $27,646,820, respectively)		23,345,540		25,829,277
Equity securities		1,353,500		1,637,200
Loans, less allowance for loan losses of $3,940,236 in 2012 and $4,287,910 in 2011		160,820,863		179,854,122
Loans held for sale		3,864,726		2,914,468
Bank premises and equipment, net		7,276,881		7,307,924
Other real estate		7,489,002		3,701,392
Accrued interest receivable		1,164,417		1,334,950
Cash surrender value of life insurance		1,214,350		1,189,097
Core Deposits, net		181,386		235,194
Other assets		2,562,924		1,937,031
TOTAL ASSETS	$	340,714,119	$	366,091,232

See accompanying notes to the consolidated financial statements

3

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF

LIABILITIES AND STOCKHOLDERS' EQUITY

	June 30,			December 31,
LIABILITIES:	2012			2011
Deposits
Non-interest bearing	$	50,771,545		$	53,097,241
Interest bearing		187,385,014			209,960,303
Total deposits		238,156,559			263,057,544
Federal Home Loan Bank advances		7,000,000			9,000,000
Securities sold under repurchase agreements		49,215,251			48,484,635
Accrued interest payable		519,771			575,658
Advances from borrowers for taxes and insurance		119,995			191,629
Accrued taxes and other liabilities		980,075			791,027
Junior subordinated debentures		5,155,000			5,155,000
Total liabilities		301,146,651			327,255,493
STOCKHOLDERS' EQUITY:
Common stock - $2.50 par value per share; 12,000,000 shares authorized; 2,152,966 and 2,138,466 issued and outstanding for June 30, 2012 and December 31, 2011, respectively		5,382,415			5,382,415
Additional paid-in capital		7,470,498			7,437,103
Retained earnings		25,068,251			24,756,337
Accumulated other comprehensive income		1,903,679			1,517,259
Less: Treasury stock, 14,500 shares, at cost		(257,375	)		(257,375	)
Total stockholders' equity		39,567,468			38,835,739
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	340,714,119		$	366,091,232

See accompanying notes to the consolidated financial statements

4

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED  STATEMENTS  OF   INCOME

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012		2011			2012			2011
INTEREST INCOME:
Interest and fees on loans	$	2,401,190	$	2,979,375		$	4,960,658		$	5,985,094
Interest on investment securities:
Taxable interest income		432,829		762,632			878,443			1,673,811
Exempt from federal taxes		274,390		361,846			546,931			748,402
Interest on federal funds sold		-		48			-			91
Total interest income		3,108,409		4,103,901			6,386,032			8,407,398
INTEREST EXPENSE:
Interest on deposits		282,753		647,915			607,269			1,317,935
Interest on Federal Home Loan Bank advances		64,315		69,040			133,364			138,552
Interest on trust preferred securities		45,775		43,652			92,753			86,817
Interest on securities sold under repurchase agreements		437,820		448,009			878,618			893,279
Total interest expense		830,663		1,208,616			1,712,004			2,436,583
NET INTEREST INCOME		2,277,746		2,895,285			4,674,028			5,970,815
Provision for loan losses		-		562,000			-			1,312,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,277,746		2,333,285			4,674,028			4,658,815
OTHER INCOME:
Service charges on deposit accounts		300,515		367,164			603,818			713,625
Income from fiduciary activities		775		749			1,892			2,034
Gain/(loss) on sale of ORE		-		(109,124	)		(19,499	)		(109,124	)
Gain/(loss) on sale of mortgage loans		90,667		107,689			181,794			253,606
Gain/(loss) on sale/matured securities		-		655,584			-			1,322,577
Gain/(loss) on sale of premises & equipment		-		-			6,900			-
Other		576,791		301,839			922,469			672,492
Total other income		968,748		1,323,901			1,697,374			2,855,210

See accompanying notes to the consolidated financial statements

5

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED  STATEMENTS  OF   INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
OTHER EXPENSES:
Salaries		1,261,872			1,538,589			2,538,959			3,097,377
Employee benefits		209,006			218,445			419,264			429,399
Director fees		34,409			37,459			71,968			74,518
Net occupancy expense		267,516			278,529			532,485			541,529
Equipment expenses		275,999			280,529			573,443			543,701
FDIC assessment		137,142			115,236			213,993			224,222
Advertising		33,194			36,998			73,020			80,199
Stationery and supplies		37,870			30,833			72,837			66,546
Audit expense		67,648			65,500			133,864			131,000
Other real estate expense, net		232,667			271,858			252,427			277,298
Amortization of deposit premium		26,904			26,904			53,808			53,808
Other		719,976			613,901			1,251,031			1,128,733
Total other expenses		3,304,203			3,514,781			6,187,098			6,648,330
INCOME/(LOSS) BEFORE INCOME TAX EXPENSE		(57,709	)		142,405			184,304			865,695
Income tax expense/(benefit)		(127,093	)		(86,706	)		(127,610	)		61,164
NET INCOME	$	69,384		$	229,111		$	311,914		$	804,531
EARNINGS PER SHARE DATA:
Basic earnings per share	$	0.03		$	0.11		$	0.15		$	0.38
Basic weighted shares outstanding		2,138,466			2,142,466			2,138,466			2,139,643
Diluted earnings per share	$	0.03		$	0.11		$	0.15		$	0.38
Diluted weighted shares outstanding		2,138,466			2,143,497			2,138,466			2,140,714
Cash dividends per share	$	-		$	0.18		$	-		$	0.36

See accompanying notes to the consolidated financial statements

6

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2012		2011			2012		2011
Net income	$	69,384	$	229,111		$	311,914	$	804,531
Other comprehensive income, net of tax:
Unrealized holding gains/(losses)		205,909		(402,933	)		386,420		(1,551,787	)
Reclassification adjustment for gains included in net income		-		655,584			-		1,322,577
Reclassification adjustment for (losses) included in net income		-		-			-		-
Total other comprehensive income/(loss)		205,909		252,651			386,420		(229,210	)
Comprehensive income	$	275,293	$	481,762		$	698,334	$	575,321

See accompanying notes to the consolidated financial statements

7

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012, AND 2011

											Accumulated
	Common Stock				Additional						Other						Total
					Paid-in			Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Capital			Earnings			Income			Stock			Equity
Balance at December 31, 2010		2,135,466	$	5,374,915	$	7,379,891		$	25,517,531		$	1,917,011		$	(257,375	)	$	39,931,973
Comprehensive Income:
Net income		-		-		-			804,531			-			-			804,531
Other comprehensive income (net of tax):		-		-		-			-			-			-			-
Net change in unrealized gain/(loss) on securities available for sale, net of taxes of $(136,356)		-		-		-			-			-			-			(1,551,787	)
Reclassification adjustment for gains included in net income		-		-		-			-			-			-			1,322,577
Reclassification adjustment for  (losses) included in net income		-		-		-			-			-			-			-
Other comprehensive income		-		-		-			-			(229,210	)		-			(229,210	)
Total Comprehensive income		-		-		-			-			-			-			575,321
Cash Dividend paid $0.36 per share		-		-		-			(770,027	)		-			-			(770,027	)
Common stock issued		7,000		17,500		84,000			-			-			-			101,500
Unearned compensation		-		-		(56,069	)		-			-			-			(56,069	)
Fair Value unexercised stock options		-		-		1,123			-			-			-			1,123
Balance at June 30, 2011		2,142,466	$	5,392,415	$	7,408,945		$	25,552,035		$	1,687,801		$	(257,375	)	$	39,783,821
Balance at December 31, 2011		2,138,466	$	5,382,415	$	7,437,103		$	24,756,337		$	1,517,259		$	(257,375	)	$	38,835,739
Comprehensive Income:
Net income		-		-		-			311,914			-			-			311,914
Other comprehensive income (net of tax):		-		-		-			-			-			-			-
Net change in unrealized gain/(loss) on securities available for sale, net of taxes of $229,880		-		-		-			-			-			-			386,420
Reclassificatrion adjustment for gains included in net income		-		-		-			-			-			-			-
Reclassificatrion adjustment for  (losses) included in net income		-		-		-			-			-			-			-
Other comprehensive income		-		-		-			-			386,420			-			386,420
Total Comprehensive income																		698,334
Common stock issued		-		-		-			-			-			-			-
Unearned compensation		-		-		32,408						-			-			32,408
Fair Value unexercised stock options		-		-		987			-			-			-			987
Balance at June 30, 2012		2,138,466	$	5,382,415	$	7,470,498		$	25,068,251		$	1,903,679		$	(257,375	)	$	39,567,468

See accompanying notes to the consolidated financial statements

8

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	311,914		$	804,531
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes		(76,608	)		(751,966	)
Provision for loan losses		-			1,312,000
Provision for depreciation		279,730			305,191
Stock dividends received		(1,400	)		(1,500	)
(Gain)/loss on sale of other real estate		19,499			109,123
(Gain)/loss on sale of mortgage loans		(181,794	)		(253,606	)
(Gain)/loss on sale of investment securities		-			(1,322,577	)
(Gain)/loss on sale of premises and equipment		(6,900	)		-
Net amortization (accretion) of securities		605,906			216,174
Amortization of deposit premium		53,808			53,808
Writedown of other real estate		(1,535	)		244,144
Unearned compensation		32,408			(56,069	)
Net change in:
Loans held for sale		(950,258	)		2,317,397
Accrued interest receivable		170,533			279,959
Cash surrender value		(25,253	)		(19,493	)
Other assets		(430,103	)		290,487
Accrued interest payable		(55,887	)		(22,797	)
Accrued taxes and other liabilities		(160,014	)		329,541
Net cash provided by (used in) operating activities		(415,954	)		3,834,347
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase)/decrease in federal funds sold		-			112,497
Proceeds from sales, maturities and paydowns of securities:
Available-for-sale		10,267,741			35,664,891
Held-to-maturity		2,479,426			6,557,324
Redemption of FHLB stock		285,100			375,700
Purchase of FHLB stock		-			(174,800	)
Purchase of securities:
Available-for-sale		-			(33,567,885	)
(Increase)/decrease in loans		15,286,630			13,767,884
Proceeds from sale and transfers of other real estate		122,848			105,877
Proceeds from sale of premises and equipment		6,900			-
Purchase of premises and equipment		(248,686	)		(104,489	)
Net cash provided by (used in) investing activities		28,199,959			22,736,999

See accompanying notes to the consolidated financial statements

9

BRITTON & KOONTZ  CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30,

(Continued)

	2012			2011
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase /(decrease) in customer deposits		(23,274,727	)		16,783,956
Net Increase /(decrease) in brokered deposits		(1,626,258	)		473,072
Net Increase /(decrease) in securities sold under repurchase agreements		730,616			(1,000,225	)
Net Increase /(decrease) in FHLB advances		(2,000,000	)		(8,457,000	)
Net Increase /(decrease) in advances from borrowers for taxes and insurance		(71,634	)		(79,882	)
Cash dividends paid		-			(770,028	)
Common stock issued		-			101,500
Fair value of unexercised stock options		987			1,123
Net cash provided by (used in) financing activities		(26,241,016	)		7,052,516
NET INCREASE IN CASH AND DUE FROM BANKS		1,542,989			33,623,862
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD		48,622,717			5,818,853
CASH AND DUE FROM BANKS AT END OF PERIOD	$	50,165,706		$	39,442,715
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	1,767,891		$	2,459,380
Cash paid/(refunds) during the period for income taxes	$	(478,886	)	$	485,802
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains (losses) on securities available for sale	$	616,300		$	(365,566	)
Change in the deferred tax effect in unrealized gains (losses) on securities available for sale	$	229,880		$	(136,356	)

See accompanying notes to the consolidated financial statements

10

BRITTON & KOONTZ CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012

Note A. Basis of Presentation

The consolidated balance sheet for Britton & Koontz Capital Corporation (the "Company") as of December 31, 2011, has been derived from the audited financial statements of the Company for the year then ended.  The accompanying interim consolidated financial statements as of June 30, 2012 and for the three and six months then ended are unaudited and reflect all normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the Company’s financial position and operating results as of and for the periods presented.  Certain 2011 amounts have been reclassified to conform to the 2012 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%, which rate is no longer subject to adjustment.

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

Note C. Investment Securities

The amortized cost of the Bank’s investment securities, including held-to-maturity and available-for-sale securities, at June 30, 2012 and December 31, 2011, are summarized below.

The amortized cost and approximate fair value of investment securities classified as available-for-sale at June 30, 2012, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Obligations of State and Political Subdivisions	$	8,623,479	$	875,566	$	-	$	9,499,045
Obligations of Other U.S. Government Sponsored Agencies		12,000,000		137,400		-		12,137,400
Mortgage-Backed Securities		57,615,174		2,023,205		-		59,638,379
Total	$	78,238,653	$	3,036,171	$	-	$	81,274,824

11

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of State and Political Subdivisions	$	8,624,776	$	756,454	$	-		$	9,381,230
Mortgage-Backed Securities		68,483,213		1,581,303		(58,006	)		70,006,510
Obligations of Other U.S. Government Sponsored Agencies		12,000,000		140,120		-			12,140,120
Total	$	89,107,989	$	2,477,877	$	(58,006	)	$	91,527,860

The amortized cost and approximate fair value of investment securities classified as held-to-maturity at June 30, 2012, are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Obligations of State and Political Subdivisions	$	19,247,286	$	1,553,428	$	(4,003	)	$	20,796,711
Mortgage-Backed Securities		4,098,254		333,926		-			4,432,180
Total	$	23,345,540	$	1,887,354	$	(4,003	)	$	25,228,891

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Obligations of State and Political Subdivisions	$	20,831,257	$	1,441,679	$	(19,585	)	$	22,253,351
Mortgage-Backed Securities		4,998,020		395,449		-			5,393,469
Total	$	25,829,277	$	1,837,128	$	(19,585	)	$	27,646,820

There were no investment securities classified as trading at June 30, 2012 or December 31, 2011.

The aggregate fair value and aggregate unrealized losses on securities whose fair values are below book values as of June 30, 2012 and December 31, 2011, 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.

12

As of June 30, 2012, there was one security included in held-to-maturity with a fair value below its book value.  There were no such securities included in available-for-sale at June 30, 2012.

	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 (1)	$	485,997	$	(4,003	)	$	-	$	-	$	485,997	$	(4,003	)
Total	$	485,997	$	(4,003	)	$	-	$	-	$	485,997	$	(4,003	)

As of December 31, 2011, there was one security included in held-to-maturity and two securities included in available-for-salewith fair value 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 (1)	$	-	$	-		$	470,415	$	(19,585	)	$	470,415	$	(19,585	)
Total	$	-	$	-		$	470,415	$	(19,585	)	$	470,415	$	(19,585	)
Available for Sale:
Mortgaged-backed Securities (2)	$	7,509,212	$	(58,006	)	$	-	$	-		$	7,509,212	$	(58,006	)
Total	$	7,509,212	$	(58,006	)	$	-	$	-		$	7,509,212	$	(58,006	)

13

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 30 year mortgage-backed securities during the 1st quarter of 2011 and subsequently sold an additional $10 million of similar securities during the 2nd quarter of 2011.  The Company has not sold any securities during 2012.

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 June 30, 2012 and December 31, 2011, 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, 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.

14

Allowance for Credit losses and Recorded Investment in Financing Receivables

For the Period Ended June 30, 2012

	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning balance	$	292,718		$	1,535,721		$	28,770		$	2,005,068		$	425,633	$	4,287,910
Charge-offs		(200,149	)		(128,947	)		(18,495	)		(135,314	)		-		(482,905	)
Recoveries		113,803			-			419			21,008			-		135,230
Provision		29,203			451,302			23,659			(1,345,660	)		841,496		0
Ending balance	$	235,575		$	1,858,076		$	34,354		$	545,102		$	1,267,129	$	3,940,236
Ending balance:  individually evaluated for impairment	$	-		$	703,420		$	1,718		$	158,968		$	-	$	864,106
Ending balance: collectively evaluated for impairment	$	235,575		$	1,154,656		$	32,636		$	386,134		$	1,267,129	$	3,076,130
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-
Financing receivables:
Ending balance	$	19,222,000		$	75,429,000		$	5,032,000		$	68,943,000		$	-	$	168,626,000
Ending balance: individually evaluated for impairment	$	-		$	3,917,649		$	13,536		$	1,280,492		$	-	$	5,211,677
Ending balance: collectively evaluated for impairment	$	19,222,000		$	71,511,351		$	5,018,464		$	67,662,508		$	-	$	163,414,323
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-

15

Allowance for Credit losses and Recorded Investment in Financing Receivables

For the Year Ended December 31, 2011

	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning balance	$	376,946		$	1,470,692		$	26,590		$	505,515		$	40,400	$	2,420,143
Charge-offs		(681,987	)		(1,316,333	)		(20,226	)		(1,513,753	)		-		(3,532,299	)
Recoveries		154,325			465,450			4,168			84,124			-		708,067
Provision		443,434			915,912			18,238			2,929,182			385,233		4,692,000
Ending balance	$	292,718		$	1,535,721		$	28,770		$	2,005,068		$	425,633	$	4,287,910
Ending balance:  individually evaluated for impairment	$	-		$	763,481		$	2,228		$	1,680,161		$	-	$	2,445,870
Ending balance: collectively evaluated for impairment	$	292,718		$	772,240		$	26,542		$	324,907		$	425,633	$	1,842,040
Ending balance: loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-
Financing receivables:
Ending balance	$	22,366,000		$	91,477,000		$	4,008,000		$	69,206,000		$	-	$	187,057,000
Ending balance: individually evaluated for impairment	$	-		$	4,632,690		$	17,552		$	4,142,822		$	-	$	8,793,064
Ending balance: collectively evaluated for impairment	$	22,366,000		$	86,844,310		$	3,990,448		$	65,063,178		$	-	$	178,263,936
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 June 30, 2012 and December 31, 2011, loan balances outstanding more than 90 days and still accruing interest amounted to $55 thousand and $199 thousand, respectively.  As of June 30, 2012 and December 31, 2011, non-accrual loans were $5.2 million and $8.2 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 June 30, 2012 and December 31, 2011.

16

Credit Quality Indicators

As of June 30, 2012

	Performing		Non-Performing		Total
Commercial	$	19,167,262	$	54,738	$	19,222,000
Consumer		5,018,464		13,536		5,032,000
Real Estate:
Construction and Development:
1-4 family residential		14,166,000		-		14,166,000
Other construction loans		5,929,183		273,817		6,203,000
Commercial Real Estate:
Owner occupied		34,919,930		1,650,070		36,570,000
Non-owner occupied		30,662,238		1,993,762		32,656,000
Residential:
1-4 family residential		45,949,566		1,279,434		47,229,000
Multi-family		7,546,942		1,058		7,548,000
Total	$	163,359,585	$	5,266,415	$	168,626,000

Credit Quality Indicators

As of December 31, 2011

	Performing		Non-Performing		Total
Commercial	$	22,216,151	$	149,849	$	22,366,000
Consumer		3,987,481		20,519		4,008,000
Real Estate:
Construction & Development:
1-4 family residential		12,511,000		-		12,511,000
Other construction loan		12,163,182		624,818		12,788,000
Commercial Real Estate:
Owner occupied		37,237,608		1,920,392		39,158,000
Non-owner occupied		37,443,519		2,087,481		39,531,000
Residential:
1-4 family residential		44,799,001		540,999		45,340,000
Multi-family		7,707,092		3,647,908		11,355,000
Total	$	178,065,034	$	8,991,966	$	187,057,000

17

The following tables present, by class, an analysis as of June 30, 2012 and December 31, 2011 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, both accruing and non-accruing.

Aged Analysis of Past Due Financing Receivables

As of June 30, 2012

	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	893,569	$	54,738	$	948,307	$	18,273,693	$	19,222,000	$	54,738
Consumer		36,568		3,165		39,733		4,992,267		5,032,000		-
Real Estate:
Construction & Development:
1-4 family residential		-		-		-		14,166,000		14,166,000		-
Other construction loan		1,146,445		273,817		1,420,262		4,782,738		6,203,000		-
Commercial Real Estate:
Owner cccupied		544,291		1,305,000		1,849,291		34,720,709		36,570,000		-
Non-owner occupied		-		-		-		32,656,000		32,656,000		-
Residential:
1-4 family residential		487,598		1,169,131		1,656,729		45,572,271		47,229,000		-
Multi-family		273,169		1,058		274,227		7,273,773		7,548,000		-
Total	$	3,381,640	$	2,806,909	$	6,188,549	$	162,437,451	$	168,626,000	$	54,738

18

Aged Analysis of Past Due Financing Receivables

As of December 31, 2011

	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	580,789	$	149,849	$	730,638	$	21,635,362	$	22,366,000	$	149,849
Consumer		88,621		2,966		91,587		3,916,413		4,008,000		2,966
Real Estate:
Construction & Development:
1-4 family residential		456,544		-		456,544		12,054,456		12,511,000		-
Other construction loan		217,304		624,817		842,121		11,945,879		12,788,000		-
Commercial Real Estate:
Owner occupied		-		1,305,000		1,305,000		37,853,000		39,158,000		-
Non-owner occupied		-		-		-		39,531,000		39,531,000		-
Residential:
1-4 family residential		206,203		393,744		599,947		44,740,053		45,340,000		46,087
Multi-family		56,982		3,590,926		3,647,908		7,707,092		11,355,000		-
Total	$	1,606,443	$	6,067,302	$	7,673,745	$	179,383,255	$	187,057,000	$	198,902

19

The following table presents, by class, information regarding the recorded investment in financing receivables that have been placed on non-accrual status as of June 30, 2012 and December 31, 2011.

Financing Receivables on Non-Accrual Status

For the Periods Ended

	6/30/2012		12/31/2011
Commercial	$	-	$	-
Consumer		13,536		17,553
Real Estate:
Construction and Development:		-
1-4 family residential		-		-
Other construction loans		273,817		624,817
Commercial Real Estate:
Owner occupied		1,650,070		1,305,000
Non-owner occupied		1,993,762		2,087,481
Residential:
1-4 family residential		1,279,434		494,913
Multi-family		1,058		3,647,908
Total	$	5,211,677	$	8,177,672

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 June 30, 2012 and the year ended December 31, 2011, (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 of impaired loans.  Additionally, the tables include, by class, the average recorded investment in impaired loans 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.

20

Impaired Loans

For Quarter Ended June 30, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Consumer		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		359,827		556,817		-		355,789		-
Commercial Real Estate:
Owner occupied		-		-		-		-		-
Non-owner occupied		-		-		-		-		-
Residential:
1-4 family residential		594,508		563,873		-		596,663		-
Multi-family		-		-		-		-		-
With Related Allowance Recorded:
Commercial		-		-		-		-		-
Consumer		17,441		17,201		1,718		18,021		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		-		-		-		-		-
Commercial Real Estate:
Owner occupied		2,031,400		2,763,323		599,658		2,076,443		-
Non-owner occupied		2,152,510		2,271,865		103,762		2,163,847		-
Residential:
1-4 family residential		797,495		848,767		157,910		794,560		-
Multi-family		4,168		55,440		1,058		4,168		-
Total:
Commercial		-		-		-		-		-
Consumer		17,441		17,201		1,718		18,021		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		359,827		556,817		-		355,789		-
Commercial Real Estate:
Owner occupied		2,031,400		2,763,323		599,658		2,076,443		-
Non-owner occupied		2,152,510		2,271,865		103,762		2,163,847		-
Residential:
1-4 family residential		1,392,003		1,412,640		157,910		1,391,223		-
Multi-family		4,168		55,440		1,058		4,168		-
	$	5,957,349	$	7,077,286	$	864,106	$	6,009,491	$	-

21

Impaired Loans

For Year Ended December 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Consumer		20,745		20,847		-		23,494		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		741,769		1,040,782		-		840,624		-
Commercial Real Estate:
Owner occupied		1,477,578		1,868,836		-		1,957,307		29,003
Non-owner occupied		-		-		-		-		-
Residential:
1-4 family residential		411,438		401,521		-		411,763		-
Multi-family		58,682		56,704		-		58,682		-
With Related Allowance Recorded:
Commercial		-		-		-		-		-
Consumer		-		-		2,228		-		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		-		-		-		-		-
Commercial Real Estate:
Owner occupied		740,137		1,042,235		303,750		1,115,619		15,855
Non-owner occupied		2,179,117		2,291,377		459,731		2,192,034		-
Residential:
1-4 family residential		147,105		138,549		55,456		155,430		-
Multi-family		3,757,228		4,235,361		1,624,705		4,193,116		-
Total:
Commercial		-		-		-		-		-
Consumer		20,745		20,847		2,228		23,494		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-
Other construction loans		741,769		1,040,782		-		840,624		-
Commercial Real Estate:
Owner occupied		2,217,715		2,911,071		303,750		3,072,926		44,858
Non-owner occupied		2,179,117		2,291,377		459,731		2,192,034		-
Residential:
1-4 family residential		558,543		540,070		55,456		567,193		-
Multi-family		3,815,910		4,292,065		1,624,705		4,251,798		-
	$	9,533,799	$	11,096,212	$	2,445,870	$	10,948,069	$	44,858

22

Modifications

As of

	June 30, 2012						December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Trouble Debt Restructurings
Commercial		-	$	-	$	-		-	$	-	$	-
Consumer		-		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-		-		-
Other construction loans		-		-		-		-		-		-
Commercial Real Estate:
Owner occupied		3		3,000,381		1,970,390		4		3,148,204		2,218,273
Non-owner occupied		1		2,323,335		2,152,511		1		2,323,335		2,179,117
Residential:
1-4 family residential		-		-		-		-		-		-
Multi-family		-		-		-		1		4,183,839		3,698,435
Total		4	$	5,323,716	$	4,122,901		6	$	9,655,378	$	8,095,825

	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Trouble Debt Restructurings
That Subsequently Defaulted
Commercial		-	$	-		-	$	-
Consumer		-		-		-		-
Real Estate:
Construction and Development:
1-4 family residential		-		-		-		-
Other construction loans		-		-		-		-
Commercial Real Estate:
Owner occupied		3		1,970,390		2		1,594,516
Non-owner occupied		-		-		-		-
Residential:
1-4 family residential		-		-		-		-
Multi-family		-		-		-		-
Total		3	$	1,970,390		2	$	1,594,516

23

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 June 30, 2012.  Gains on loans held-for-sale are recognized when realized and amounted to $91 thousand and $182 thousand for the three and six months ended June 30, 2012.  Loans held-for-sale increased from $2.9 million at December 31, 2011 to $3.9 million at June 30, 2012.

Loans held in the portfolio have been analyzed in the past 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 analysis will take place and acceptable loans will be 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 June 30, 2012, was 3.61%.   The securities are currently callable at the discretion of the Company on a quarterly basis.  Pursuant to resolutions recently adopted by the Company at the request of the Federal Reserve Bank of Atlanta, the Company must obtain the Federal Reserve Bank's approval prior to paying quarterly interest payments on these debentures. Such approval was granted with respect to the interest payment due on June 26, 2012, but there can be no assurance that the Federal Reserve Bank will grant this approval each quarter.

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 June 30, 2012, and December 31, 2011, were $3.6 million and $4.1 million, respectively.  As of June 30, 2012, the Company had entered into commercial and residential loan commitments with certain customers that had an aggregate unused balance of $32.4 million, compared to $34.9 million at December 31, 2011.  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 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 six  months ended June 30, 2012 and 2011.

24

	For the three months ended June 30,
	2012		2011
Basic weighted average shares outstanding		2,138,466		2,142,466
Dilutive effect of granted options		-		1,031
Diluted weighted average shares outstanding		2,138,466		2,143,497
Net income	$	69,384	$	229,111
Net income per share-basic	$	0.03	$	0.11
Net income per share-diluted	$	0.03	$	0.11

	For the six months ended June 30,
	2012		2011
Basic weighted average shares outstanding		2,138,466		2,139,643
Dilutive effect of granted options		-		1,071
Diluted weighted average shares outstanding		2,138,466		2,140,714
Net income	$	311,914	$	804,531
Net income per share-basic	$	0.15	$	0.38
Net income per share-diluted	$	0.15	$	0.38

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.

The following methods and assumptions are 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.

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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 in the market for advances of similar maturities.

Securities Sold Under Repurchase Agreements – The fair value is estimated using discounted cash flow analysis based on current rates for similar types of arrangements.

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.

Fair Value Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the particular financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of the Company’s entire holdings. Fair value estimates are subjective in nature and involve uncertainties and matters of significant judgment; therefore, the estimates cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments (and thus not subject to fair value disclosure requirements). Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

The following table presents estimated fair values of the Company’s financial instruments as of the dates indicated.

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			Fair Value Measurements at June 30, 2012
	Carrying
(dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	50,166	$	50,166	$	50,166	$	-	$	-
Investment securities:
Held-to-maturity		23,346		25,229		-		25,229		-
Available-for-sale		81,274		81,274		-		81,274		-
Equity securities		1,354		1,354		-		1,354		-
Cash surrender value of life insurance		1,214		1,214		1,214		-		-
Loans, net		164,686		168,861		-		-		168,861
Financial Liabilities:
Deposits		238,157		238,604		-		-		238,604
Short-term borrowings		-		-		-		-		-
Long-term borrowings		7,000		7,374		-		7,374		-
Securities sold under repurchase agreements:
Retail		9,215		9,214		-		9,214		-
Structured		40,000		42,378		-		42,378		-
Junior subordinated debentures		5,155		5,155		-		5,155		-

			Fair Value Measurements at December 31, 2011
	Carrying
(dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	48,623	$	48,623	$	48,623	$	-	$	-
Investment securities:
Held-to-maturity		25,829		27,647		-		27,647		-
Available-for-sale		91,528		91,528		-		91,528		-
Equity securities		1,637		1,637		-		1,637		-
Cash surrender value of life insurance		1,189		1,189		1,189		-		-
Loans, net		182,768		187,359		-		-		187,359
Financial Liabilities:
Deposits		263,058		263,616		-		-		263,616
Short-term borrowings		2,000		2,000		-		2,000		-
Long-term borrowings		7,000		7,446		-		7,446		-
Securities sold under repurchase agreements:
Retail		8,485		8,484		-		8,484		-
Structured		40,000		42,965		-		42,965		-
Junior subordinated debentures		5,155		5,155		-		5,155		-

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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 June 30, 2012 and December 31, 2011.  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)
June 30, 2012:
Mortgage Backed Securities	$	59,638,379	$	0.00	$	59,638,379	$	0.00
Obligation of State and Political Subdivision		9,499,045		0.00		9,499,045		0.00
Obligations of Other U.S. Government Sponsored Agencies		12,137,400		0.00		12,137,400		0.00
Total	$	81,274,824	$	0.00	$	81,274,824	$	0.00
December 31, 2011:
Mortgage-Backed Securities	$	70,006,510	$	0.00	$	70,006,510	$	0.00
Obligation of State and Political Subdivision		9,381,230		0.00		9,381,230		0.00
Obligations of Other U.S. Government Sponsored Agencies		12,140,120		0.00		12,140,120		0.00
Total	$	91,527,860	$	0.00	$	91,527,860	$	0.00

Nonrecurring Basis

In the table below, the Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis.  These financial assets and liabilities have been assigned to the most appropriate level within the fair value hierarchy based on the inputs used to determine their fair value at the measurement dates.  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 nonrecurring basis.

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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 nonrecurring basis as of June 30, 2012 and December 31, 2011.

Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2012:
Assets:
Impaired Loans	$	4,347,571	$	0.00	$	4,347,571	$	0.00
Repossessed Assets		7,489,002		0.00		7,489,002		0.00
Total	$	11,836,573	$	0.00	$	11,836,573	$	0.00
December 31, 2011:
Assets:
Impaired Loans	$	6,347,194	$	0.00	$	6,347,194	$	0.00
Repossessed Assets		3,701,392		0.00		3,701,392		0.00
Total	$	10,048,586	$	0.00	$	10,048,586	$	0.00

Note J. Subsequent Events

The Company evaluated events and transactions occurring subsequent to June 30, 2012 for potential recognition or disclosure in the financial statements included in this quarterly report.  As described by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 29, 2012, the Company notified the NASDAQ Stock Market of its intent to voluntarily delist its common stock from the NASDAQ Capital Market and to file a Form 25, Notification of Removal from Listing and/or Registration, with the SEC, which the Company filed on July 10, 2012.  As a result, and effective as of July 10, 2012, the Company’s common stock no longer trades on the NASDAQ Capital Market and now is quoted on OTC-QB and the OTC Bulletin Board.  Additionally, the Company is also taking the necessary action to deregister its common stock under Sections 12(g) and 15(d) of the Securities Exchange Act of 1934, as amended by the Jumpstart Our Business Startups Act.  The Company is eligible to deregister because it has fewer than 1,200 holders of record of its common stock.  The Company's obligation to file periodic reports with the SEC will be suspended after the deregistration of its common stock under Sections 12(g) and 15(d) is effective.

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

This discussion is intended to present a review of the major factors affecting the financial condition of Britton & Koontz Capital Corporation (the “Company”) and its wholly-owned subsidiary, Britton & Koontz Bank, N.A. (the “Bank”), as of June 30, 2012, as compared to the Company’s financial condition as of December 31, 2011, and the results of operations of the Company for the three and six month periods ended June 30, 2012, as compared to the corresponding periods in 2011.

Summary

Net income for the quarter ended June 30, 2012, was $69 thousand, or $.03 per diluted share, compared to $229 thousand, or $.11 per diluted share, for the quarter ended June 30, 2011.  For the six month period ended June 30, 2012, net income and diluted earnings per share was $312 thousand and $0.15, respectively, a decrease from $805 thousand and $0.38, respectively, for the same period in 2011.  The decrease in net income and diluted earnings per share for both periods resulted primarily from lower net interest income and from gains on the sales of investment securities recorded in 2011 compared to no such gains in 2012.  These factors were offset by no provision expense for loan losses and by a decline in personnel costs

Total assets were $340.7 million at June 30, 2012, a decrease of $25.4 million from December 31, 2011 due primarily to the decrease of $13.0 million in investment securities and an $18.1 million decrease in net loans offset by a $3.8 million increase in other real estate and a $1.5 million increase in Federal Reserve and other cash balances.  Total deposits decreased $24.9 million to $238.2 million at June 30, 2012 from $263.1 million at December 31, 2011, while total borrowings declined $1.3 million to $56.2 million.  Total stockholders’ equity increased $732 thousand to $39.6 million at June 30, 2012, from $38.8 million at December 31, 2011.

Overall assets quality remained relatively unchanged.  Non-performing assets (“NPA”), which include non-accrual loans, troubled debt restructurings, loans delinquent 90 days or more and other real estate, were relatively unchanged at $12.7 million, or 3.74% of total assets, at June 30, 2012, from $12.7 million, or 3.47% of total assets, at December 31, 2011.  The decline in total assets contributed to the increase in the ratio of NPA to total assets.  Net charge-offs for the six months ended June 30, 2012, were $348 thousand compared to $170 thousand for the six months ended June 30, 2011, and $2.8 million for the year ended December 31, 2011.  Even considering the increase in net charge-offs for the current year, the Company did not provide any expense for possible loan losses during the first six months of 2012 due to the level of the allowance for loan and lease account (“ALLL”) as of June 30, 2012.  The ALLL of $3.9 million, or 2.34% of total loans, at June 30, 2012, compares to $3.6 million, or 1.78% of total loans, at June 30, 2011 and $4.3 million, or 2.29% of total loans, at December 31, 2011.  Even with the charge-offs during 2012, the Company believes the ALLL is adequate as of June 30, 2012.

As described in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 21, 2012, as a result of the Report of Examination of the Bank as of July 6, 2011 by the Office of the Comptroller of the Currency (the “OCC”), on February 21, 2012, the Board of Directors of the Bank entered into the Formal Agreement with the OCC (the “Formal Agreement”).  In addition, the OCC established higher individual minimum capital ratios (the “IMCRs”) for the Bank, effective as of February 21, 2012.  Please refer to the Company’s Annual Report on Form 10-K (particularly, Item 1, Business, thereof) for more specific information regarding the Formal Agreement and the IMCRs.  As of June 30, 2012, the Company remained subject to, and in compliance with, the Formal Agreement and the IMCRs.

Furthermore, as described by the Company in a Current Report on Form 8-K filed with the SEC on May 18, 2012, the Board of Directors of the Company, at the request of the Federal Reserve Bank of Atlanta, adopted a resolution requiring the Board to obtain the approval of the Federal Reserve Bank at least 30 days prior to taking any of the following actions: (1) incurring any additional debt (including debt associated with trust preferred securities), or amending the terms of any existing debt; (2) declaring or paying dividends to the Company’s shareholders; (3) redeeming any of the Company’s stock; and (4) making any distribution of principal or interest on the Company’s outstanding trust preferred securities.

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As described by the Company in a Current Report on Form 8-K filed with the SEC on June 29, 2012, the Company notified the NASDAQ Stock Market of its intent to voluntarily delist its common stock from the NASDAQ Capital Market and to file a Form 25, Notification of Removal from Listing and/or Registration, with the SEC, which the Company filed on July 10, 2012.  As a result, and effective as of July 10, 2012, the Company’s common stock no longer trades on the NASDAQ Capital Market and now is quoted on OTC-QB and the OTC Bulletin Board.  Additionally, the Company is also taking the necessary action to deregister its common stock under Sections 12(g) and 15(d) of the Securities Exchange Act of 1934, as amended by the Jumpstart Our Business Startups Act.  The Company is eligible to deregister because it has fewer than 1,200 holders of record of its common stock.  The Company's obligation to file periodic reports with the SEC will be suspended after the deregistration of its common stock under Sections 12(g) and 15(d) is effective.

Financial Condition

Loans

Total loans decreased $18.4 million to $168.6 million at June 30, 2012, from $187.1 million at December 31, 2011.  The decrease in loans is due primarily to lower commercial real estate activity offset by increases in loans held-for-sale and 1-4 family residential loans held in the Company’s loan portfolio.  The depressed economic conditions affecting the United States generally continue to further weaken demand in all Company markets.  The Company has recently begun holding certain 10 and 15 year mortgage loans in the portfolio to slow down the decline in loans.  Even with the additional portfolio loans, it is expected that the portfolio will continue to show further declines throughout the year unless loan demand picks up in all markets.

The following table presents the Company’s loan portfolio composition at June 30, 2012, and December 31, 2011.

COMPOSITION OF LOAN PORTFOLIO

	06/30/12		12/31/11
Commercial, financial & agricultural	$	19,222,000	$	22,366,000
Real estate-construction		20,369,000		25,299,000
Real estate-residential		54,777,000		56,695,000
Real estate-other		69,226,000		78,689,000
Installment		4,925,000		3,912,000
Other		107,000		96,000
Total loans	$	168,626,000	$	187,057,000

The Company’s loan portfolio at June 30, 2012, had no significant concentrations of loans other than in the categories presented in the table above.

Investment Securities

The Company’s investment portfolio at June 30, 2012, 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 $12.7 million to $104.6 million at June 30, 2012 from $117.4 million at December 31, 2011.  Excluding investment purchases, sales and calls from agency and municipal securities, the decrease is due primarily to normal cash flow on the existing portfolio.  Equity securities declined during this period by $300 thousand to $1.4 million.   At June 30, 2012, equity securities were comprised primarily of Federal Reserve Bank stock of $522 thousand, Federal Home Loan Bank (“FHLB”) stock of $529 thousand, ECD Investments, LLC 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, 2011.

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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.

The OCC’s Report of Examination as of July 6, 2011, highlighted certain deficiencies in the Company’s policies and procedures for monitoring the loan portfolio and assessing asset quality.  In management’s opinion, the Bank has made measurable progress in rectifying the issues noted in the Report of Examination, and management will continue to work with the OCC to meet its obligations under the Formal Agreement.

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 remained relatively unchanged, increasing $62 thousand to $12.8 million at June 30, 2012 from $12.7 million at December 31, 2011.  The Company’s nonperforming assets consist of non-accrual loans of $5.2 million, other real estate of $7.5 million and loans 90 days or more delinquent of $54 thousand.  The increase in other real estate is primarily due to the transfer of one multi-family loan from non-accrual to other real estate owned in the 1st quarter of 2012.  Nonperforming loans as a percent of total loans, net of unearned income and loans held for sale (“LHFS”), decreased to 3.20% at June 30, 2012, compared to 4.88% at December 31, 2011.  Net charge-offs have increased for the six months ended June 30, 2012, to $348 thousand compared to $170 thousand for the six months ended June 30, 2011.

A breakdown of nonperforming assets at June 30, 2012, and December 31, 2011, is shown below.

BREAKDOWN OF NONPERFORMING ASSETS

	06/30/12			12/31/11
	(dollars in thousands)
Non-accrual loans by type:
Real estate	$	5,198		$	8,160
Installment		14			18
Commercial and all other loans		-			-
Total non-accrual loans		5,212			8,178
Loans past due 90 days or more		54			199
Troubled debt restructuring, still accruing		-			615
Total nonperforming loans		5,266			8,992
Other real estate owned (net)		7,489			3,701
Total nonperforming assets	$	12,755		$	12,693
Nonperforming loans to total loans, net of LHFS		3.20	%		4.88	%
Nonperforming loans to total assets		1.55	%		2.46	%
Nonperforming assets to total assets		3.74	%		3.47	%

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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 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.  Included in impaired loans are loans that management has deemed troubled debt restructurings.

Based upon this evaluation, management believes the allowance for loan losses of $3.9 million at June 30, 2012, which represents 2.39% of gross loans less unearned interest and LHFS, is adequate, under prevailing economic conditions, to absorb probable losses on existing loans.  At December 31, 2011, the allowance for loan loss was $4.3 million, or 2.33% of gross loans less unearned interest and LHFS.  The allowance includes a specific allocation of approximately $864 thousand on total impaired loans of $5.2 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 has not provided a provision for loan losses during the six month period ended June 30, 2012 compared to $1.3 million during the same period in 2011.  The decrease in provision expense for the comparative periods is primarily due to a higher, unallocated component determined in the ALLL at June 30, 2012.

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 year that may influence management to change its expected provision.  The following table details the allowance activity for the six months ended June 30, 2012 and 2011:

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ACTIVITY OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

	06/30/12			06/30/11
	(dollars in thousands)
Balance at beginning of period	$	4,288		$	2,420
Charge-offs:
Real Estate		(263	)		(181	)
Commercial		(200	)		(12	)
Installment and other		(20	)		(11	)
Recoveries:
Real Estate		21			16
Commercial		114			16
Installment and other		-			2
Net (charge-offs)/recoveries		(348	)		(170	)
Provision charged to operations		-			1,312
Balance at end of period	$	3,940		$	3,562
Allowance for loan losses as a percent of loans, net of LHFS		2.39	%		1.81	%
Net charge-offs as a percent of average loans1		.20	%		.08	%
Net charge-offs as a percent of average loans2		1.69	%		.32	%

1. Net charge-offs are year to date

2. Net charge-offs are trailing twelve months

Potential Problem Loans

At June 30, 2012, the Company had no loans, other than those balances incorporated in the above tables and summary discussion, which management had significant doubts as to the ability of the borrower to comply with current repayment terms.

Deposits

Total deposits decreased $24.9 million from $263.1 million at December 31, 2011, to $238.2 million at June 30, 2012.  The decrease is due primarily to the loss of public funds deposits which are considered non-core along with declines in the Bank’s rewards checking and money market accounts.

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

COMPOSITION OF DEPOSITS

	06/30/12		12/31/11
Non-Interest Bearing	$	50,771,545	$	53,097,241
NOW Accounts		56,052,164		71,282,519
Money Market Deposit Accounts		32,045,427		36,943,902
Savings Accounts		20,634,103		19,708,682
Certificates of Deposit		78,653,320		82,025,200
Total Deposits	$	238,156,559	$	263,057,544

Borrowings

Total Company borrowings, including FHLB advances, federal funds purchased, customer and structured repurchase agreements and junior subordinated debentures, decreased $1.3 million to $56.2 million at June 30, 2012, compared to $57.5 million at December 31, 2011.  The decrease in borrowed funds is due primarily to one fixed rate advance loan from the FHLB that matured in the 2nd quarter of 2012.  Additionally, borrowings the Company maintains pursuant to agreements with local depositors to sweep overnight funds from their commercial deposit accounts increased $730 thousand.  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 wholesale debt.

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Capital

Stockholders' equity increased $732 thousand to $39.6 million at June 30, 2012, compared to $38.8 million at December 31, 2011.  The increase consisted primarily of earnings of $312 thousand and a $387 thousand increase in accumulated other comprehensive income.

The Company and Bank maintained a total capital to risk weighted assets ratio of 22.12% and 21.07%, respectively, a Tier 1 capital to risk weighted assets ratio of 20.86% and 19.81%, respectively, and a leverage ratio of 12.34% and 11.77%, respectively, at June 30, 2012.  These levels substantially exceed the minimum quantitative 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.  However, there are also qualitative factors established under federal regulation that can affect a depositary institution’s capitalization status notwithstanding its actual capital amounts and ratios.  As discussed above, the Bank is required to maintain a total risk-based capital to risk-weighted assets ratio of 12.00% and a Tier I capital to adjusted total assets ratio of 8.00%.  The elevated IMCR ratios are not expected to contribute negatively to the Company’s well capitalized status.

On June 12, 2012, the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a joint press release announcing three notices of proposed rulemaking in connection with revised international regulatory framework for banks by the Basel Committee on Banking Supervision, including a proposal among other things, to implement a new common equity Tier 1 minimum capital requirement and a higher minimum Tier 1 capital requirement.  As proposed, the new common equity Tier 1 minimum capital requirement and the higher minimum Tier 1 capital requirement would apply only to U.S. bank holding companies with more than $500 million in assets and therefore would be currently inapplicable to the Company.  An assessment of the effects of these proposals on the Company is not provided in this quarterly report because such proposals even if they were applicable to the Company are subject to change through the comment and review process.  Even if the final rules become applicable to the Company, it is unclear at this time what the effect would be on the Company’s financial condition and results of operations

Off-Balance Sheet Arrangements

There have been no material changes in the Company’s off-balance sheet arrangements during the six months ended June 30, 2012.  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 for the three and six month periods ended June 30, 2012, decreased $618 thousand and $1.3 million, respectively, over the same periods in 2011.  Approximately 60% of the decrease during these comparative periods is the drop in the volume of average earning assets of $41 million and $34 million, respectively.  Low loan demand and a poor investment environment were the primary contributors to the decrease in volumes.  Even as average assets declined, a shift in the mix of assets occurred which added more negative pressure to earnings.  Cash flows from higher yielding assets to lower yielding assets occurred as loans and investment securities were paid down into higher levels of cash reserves.  As volume variance provided the majority of the decline in net interest income, lower interest rates were a major contributor as well.  The lower rate environment accounted for approximately 40% of the decline in net interest income.  Interest rate spread declined 30 and 39 basis points to 2.55% and 2.58% for the three and six month periods ended June 30, 2012, respectively.  Not only did the decline in interest rates have a significant negative effect to net interest income, but the decline also provided a disproportionate effect toward asset yields as opposed to funding cost.  Asset yields declined at a greater pace than did funding costs.  For the comparative periods, asset yields declined 67 and 76 basis points while funding costs declined only 37 and 36 basis points.  Interest rate margin declined 36 and 45 basis points to 2.84% and 2.87% for the same periods.

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Non-Interest Income/ Non-Interest Expense

Non-interest income decreased $355 thousand for the 2nd quarter of 2012 compared to the 2nd quarter of 2011, while non-interest income decreased $1.2 million for the first six months of 2012 compared to the corresponding period in 2011.  Both period decreases were primarily due to gains of $656 thousand and $1.3 million on the sale of investment securities during the comparative periods in 2011 and higher-mortgage related income.  Non-interest expense decreased $211 thousand for the 2nd quarter of 2012 compared to the 2nd quarter of 2011, while non-interest expense decreased $461 thousand for the first six months of 2012 compared to the corresponding period in 2011.  Both period decreases were due primarily to lower personnel costs. As the Company addresses the liquidation of Other Real Estate Owned, it anticipates continuing pressure on holding costs associated with foreclosed properties and lower fair value adjustments arising from periodic reappraisal of such properties.

Income Taxes

The Company recorded an income tax benefit of $127 thousand and $128 thousand for the three and six months ended June 30, 2012, compared to a tax benefit of $87 thousand and a tax expense of $61 thousand for the three and six months ended June 30, 2011.  The tax benefits are primarily on account of the interest the Company receives on tax-exempt municipal securities.

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 $1.5 million to $50.2 million at June 30, 2012, from $48.6 million at December 31, 2011.  Cash used by operating and financing activities of $416 thousand and $26.2 million, respectively, were offset by investing activities of $28.2 million during the six months ended June 30, 2012.

At June 30, 2012, the Company had unsecured federal funds lines with one correspondent bank of $6 million.  The Company maintains the ability to draw on its available line of credit with the FHLB in the amount of approximately $63 million.  In addition to these lines of credit, the Bank had approximately $61 million in liquid assets including unencumbered investment securities available for collateralized borrowing of $20 million, and cash available at the Federal Reserve Bank of $41 million.  Enhancing these liquidity levels, the Company has the ability to add $38 million 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 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.

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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 June 30, 2012.  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

Pursuant to Mississippi law, the Company’s Board of Directors may authorize the Company to pay cash dividends to its shareholders.  The only limitation on dividends under Mississippi law is that no distribution may be made if, after giving effect to the distribution, (1) the Company would not be able to pay its debts as they come due in the usual course of business, or (2) the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any shareholders whose preferential rights are superior to those receiving the distribution.

The principal source of the Company’s cash revenues are dividends from the Bank.  Federal banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company.  Under federal law, the directors of a national bank, after making proper deduction for all expenses and other deductions required by the OCC, 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 OCC 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 is also limited by prudence, statutory and regulatory guidelines, and a variety of other factors.

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In addition to these general restrictions, the Bank’s ability to pay a dividend is subject to additional restrictions imposed on the Bank pursuant to the Formal Agreement.  The Bank has completed a capital plan and has received no objection from the OCC.  The plan addresses, among other things, strategies for the maintenance of adequate capital, projections for growth and capital requirements and projections for the sources and timing of additional capital to satisfy the Bank’s capital needs.  The Bank may only pay a dividend if it is in compliance, and would remain in compliance after payment of the dividend, with this capital plan.  Additionally, the Bank must obtain prior written non-objection from the Assistant Deputy Comptroller of the OCC before the Bank can declare a dividend.

Furthermore, as noted above, the Board of Directors, at the request of the Federal Reserve Bank of Atlanta, adopted a resolution requiring the Board to obtain the approval of the Federal Reserve Bank at least 30 days prior to declaring or paying dividends to the Company’s shareholders.

Certain restrictions also exist on the ability of the Bank to transfer funds to the Company in the form of loans.  Federal Reserve regulations limit the amount the Bank may loan to the Company unless such loans are collateralized by specific obligations.  At June 30, 2012, the maximum amount available for transfer from the Bank to the Company in the form of loans on a secured basis was $1.9 million.  There were no loans outstanding from the Bank to the Company at June 30, 2012.

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
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

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

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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:      August 14, 2012	/s/ W. Page Ogden
	W. Page Ogden
	Chief Executive Officer

Date:      August 14, 2012	/s/ William M. Salters
	William M. Salters
	Chief Financial Officer

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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
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

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